This week, the US House of Representatives passed the Music Modernization Act. While widely supported among many digital media companies providing on-demand subscription music services as well as by many in the music industry, the bill seemingly has not received the publicity that has been afforded to past music royalty legislation. That may be, in part, because there were few who adamantly opposed the provisions of the bill, as evidenced by a unanimous House vote – something that never would have happened had any significant portion of the music industry opposed the bill. But this moment of togetherness may be, in part, due to the somewhat limited (though nevertheless very important) issues that it addresses.

The Modernization of Music Act began as a legislative effort primarily to address the issues raised under Section 115 of the Copyright Act – the section dealing with what are often called “mechanical royalties” – the royalties paid to publishing companies for the copyright in the “musical work,” i.e. the musical composition. In other words, these royalties are paid to the copyright holder of the words and music to a song (sometimes the composer but more often a publishing company) – not to the artist who actually records that song. The provisions of Section 115 were first adopted to allow artists to record songs once a song has been recorded and publically released in the United States – to record a “cover” of the original recordings – provided that compensation set by agreement between the user and the copyright holder is paid or, absent a voluntary agreement, that a royalty set by the Copyright Royalty Board is paid to the copyright holder (see our post here on the last CRB decision on those rates). That mechanical royalty was later expanded to cover “digital phonorecord deliveries” (“DPDs”) – the making of digital copies of the musical composition made in the context of a distribution and delivery of the song to individual consumers. Through caselaw and industry practice, DPDs were interpreted to include the need for royalties not just when a digital download is made, but also when an on-demand or interactive stream of a song is delivered to a consumer.

These Section 115 royalties are paid to cover the “reproduction” and “distribution” of the musical work, separate rights under Copyright law from the “public performance” rights for which royalties are paid by broadcasters and “noninteractive” digital services like broadcasters who stream their signals online or true Internet radio services like the original Pandora service.   So broadcasters and noninteractive Internet radio services are not directly affected by the central provisions of the Music Modernization Act, though there were some incidental changes included in the legislation both to get the support of the performing rights organizations (like ASCAP and BMI which collect public performance royalties) and as part of separate bills that were rolled into this legislation (including provisions of the Classics Act and the AMP Act) that will affect the law governing these services. Those provisions are described below. The heart of the bill was designed to make it easier for on-demand or interactive streaming services (like those offered by Spotify, Tidal, Apple and Amazon Music, and the newer services offered by Pandora and iHeart radio) to pay the Section 115 royalty.

So why were changes in the law needed? Under the current provisions of Section 115, music users need to give notice to each copyright holder before they make use of the musical composition, and regularly pay the royalties to those copyright holders. When the law was originally enacted, this may have made sense, as an artist about to do a cover version of an already-recorded song had simply to reach out to the copyright holder of that one song to notify them that the artist was about to make a cover and then to pay the necessary royalty as copies of the cover version were sold. But the process breaks down in dealing with interactive streaming services trying to clear the rights to the hundreds of thousands of musical compositions underlying the songs in their catalog – especially as many of these compositions may have multiple composers and, as we have written before, as there is no central database that lists all the copyright holders in each musical composition. There is also no central collective for the payment of these royalties like there is for the payment of public performance rights (through PROs and, for the sound recording, to SoundExchange). While certain private companies have tried to fill these voids, there have been issues with the completeness of the databases and recordkeeping of these companies, or with the cost of their services, leading to problems including major lawsuits by songwriters and publishers against some of the digital music services.

The central thrust of the Music Modernization Act is to create a clearinghouse for such royalties. A collective would collect all the Section 115 royalties from digital services that choose to participate and distribute those royalties to the composers and publishers that hold the copyrights in these songs. The Act is quite detailed in setting out that the collective would need to be an organization recognized as representing the majority of the copyright holders, and establishing requirements for its decision-making and other operations. The Act would also create a consortium of music users to represent the digital music services in administering the process. These organizations would be funded by the services – leaving the royalties to be distributed to the copyright holders. But, unlike in the public performance arena, the collectives would not themselves participate in the rate-setting proceedings. Instead the services and copyright holders would seemingly have to fund their own litigation costs – perhaps encouraging settlements of these cases as no party is paying their litigation costs out of the collected royalties.

In addition, the legislation would provide for the creation of a central database for all copyrights in musical compositions. This database would be open to the public and accessible by the public at nominal cost. Not having a copyright registered in the database would limit the copyright holder’s ability to pursue infringement actions, so there is a real incentive to the copyright holder to accurately register their works.

While this process for paying copyright holders for the use of their works by digital music services is the central thrust of the legislation, the bill (which is over 150 pages long and not at all easy to read) has other provisions worthy of note. Section 115 proceedings are currently decided using the Section 801(b) standards (about which we wrote here and here) to set rates which, in addition to the marketplace value of the music, assess the impact of rate changes on the stability of the industry and other more policy-based issues. The bill would change the standard to the willing buyer, willing seller standard used in the Section 114 royalty proceeding to set public performance royalties for sound recordings used by noninteractive digital music services (i.e. the royalties paid to SoundExchange).

The PROs also would receive some items off their wish list in this legislation. ASCAP and BMI, covered by antitrust consent decrees, currently have their rates for the public performance of musical compositions set by US District Court Judges in the Southern District of New York (not by the Copyright Royalty Board as some trade press reports have suggested). ASCAP has one judge who is assigned to all of its cases, and BMI has another assigned to its cases. Under this legislation, there would no longer be a single judge who hears all of the cases for any PRO. Instead, these cases would rotate among all of the Judges on the Court. There are obviously positives and negatives to this change. Some judge with no copyright background would quite likely get assigned to some of these cases – which could be bad if it delays the process of the proceeding and results in a decision that ignores the customs and practices that have built up in the music industry. But, on the other hand, a new set of eyes might see things differently providing different perspectives on the issues (and whether that is good or bad may depend on the particular case).

If the legislation is ultimately adopted, these courts will also be able to take into account the amounts that music services pay to SoundExchange for the rights to use the sound recordings – evidence that is currently barred from consideration in rate-setting proceedings for the public performance right in musical works. It is interesting that the Copyright Royalty Board, in setting SoundExchange royalties, has ruled that the musical works royalties paid to ASCAP and BMI are not relevant as to what the sound recording royalty should be (the rates are not precluded as an evidentiary matter, but the CRB has found that the market value of the musical composition does not necessarily bear any relationship to the market value of the sound recording). It will be interesting to see if the rate courts, in setting the musical work royalty, reach a different conclusion. Note that, in rate court proceedings to set ASCAP and BMI royalties for broadcasters, the legislation says that sound recording performance royalty rates remain off limits as evidence, as broadcasters currently pay no such sound recording performance royalties.

In addition to these issues, the provisions of two other bills were grafted onto the legislation by the House of Representatives. The first of these bills was the Classics Act (about which we wrote here). This bill would give copyright holders in pre-1972 sound recordings a digital public performance royalty, just as all other sound recordings have. For services that pay the royalty, this would end the pre-1972 sound recording litigation that has attempted to find performance rights for such recordings under state laws (see our many articles on this subject, including those here and here). Note, though, that the Act would not totally preempt any state law performance rights in pre-1972 sound recordings, potentially leaving open issues for entities (like broadcasters) that don’t pay digital performance royalties. As we have written, most state courts have determined that such rights don’t exist, but there still is some ongoing litigation. The Act would also make clear that these recordings are covered by the DMCA safe harbor for user-generated content – resolving an issue that has come up in prior cases (see our summaries of some of those decisions here and here).

Finally, the Act adds the provisions of the AMP Act, which would allow a portion of the SoundExchange royalties to be distributed to producers of sound recordings if the copyright holders agree to such distributions. This does not change the amount of the royalties, it just allows for some changes in their distribution.

Before becoming law, this bill still needs to pass the Senate, which is supposed to consider the legislation in a hearing in mid-May, and be signed by the President. It is an important piece of legislation that interested parties in the music industry should read in detail, as in its many dense pages, there are no doubt other nuggets that will be of interest to particular players in the industry.