[Federal Register Volume 87, Number 61 (Wednesday, March 30, 2022)]
[Proposed Rules]
[Pages 18342-18349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-06691]
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LIBRARY OF CONGRESS
Copyright Royalty Board
37 CFR Part 385
[Docket No. 21-CRB-0001-PR (2023-2027)]
Determination of Royalty Rates and Terms for Making and
Distributing Phonorecords (Phonorecords IV)
AGENCY: Copyright Royalty Board, Library of Congress.
ACTION: Proposed rule; withdrawal.
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SUMMARY: The Copyright Royalty Judges withdraw a proposed rule that
would have set continued, unaltered rates and terms for subpart B
configurations subject to the statutory license to use nondramatic
musical works to make and distribute phonorecords of those works (the
Mechanical License).
DATES: The Copyright Royalty Board is withdrawing the proposed rule
published June 25, 2021 (86 FR 33601) as of March 24, 2022.
ADDRESSES: Docket: For access to the docket to read background
documents or comments received, go to eCRB at https://app.crb.gov and
perform a case search for docket 21-CRB-0001-PR (2023-2027).
FOR FURTHER INFORMATION CONTACT: Anita Brown, Program Specialist, (202)
707-7658, [email protected].
SUPPLEMENTARY INFORMATION:
Background
The Copyright Royalty Judges (Judges) received a Motion to Adopt
Settlement of Statutory Royalty Rates and Terms for Subpart B
Configurations (Motion) from National Music Publishers' Association,
Inc. and Nashville Songwriters Association International (together,
Licensors) and Sony Music Entertainment, UMG Recordings, Inc., and
Warner Music Group Corp. (together, Labels). The Licensors and Labels
(together, Moving Parties) sought approval of a partial settlement of
the license rate proceeding before the Judges titled Determination of
Royalty Rates and Terms for Making and Distributing Phonorecords
(Phonorecords IV), Docket No. 21-CRB-0001-PR (2023-2027). The Moving
Parties asserted that they had agreed to a settlement as to royalty
rates and applicable regulatory terms relating to physical
phonorecords, permanent downloads, ringtones, and music bundles
presently addressed in 37 CFR part 385, subpart B (Subpart B
Configurations). The Moving Parties' settlement agreement also
addressed payment of late fees relating to Subpart B Configurations.
[[Page 18343]]
Section 801(b)(7)(A) of the Copyright Act authorizes the Judges to
adopt rates and terms negotiated by ``some or all of the participants
in a proceeding at any time during the proceeding'' provided the
settling parties submit the negotiated rates and terms to the Judges
for approval. That provision directs the Judges to provide those who
would be bound by the negotiated rates and terms an opportunity to
comment on the agreement.
The Judges published the proposed settlement in the Federal
Register and requested comments from the public. 86 FR 40793 (Jun. 25,
2021). Comments were due by July 25, 2021. The Judges received comments
from 14 interested parties.\1\ One participant, George Johnson (GEO)
filed three motions opposing the proposed settlement.\2\ Because of
some technical issues with the CRB electronic filing system, the Judges
reopened the comment period with a new deadline of August 10, 2021. See
86 FR 40793 (Jul. 29, 2021). During the second comment period, the
Judges received comments from two interested parties \3\ and GEO.\4\ On
August 10, 2021, the closing date for comments, the Moving Parties
filed comments in further support of the proposed settlement.
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\1\ Songwriters and independent music publishers Anthony
Garnier, Abby North, David Poe, and Michelle Shocked filed
individual comments. Joint comments were filed by: Helienne
Lindvall, David Lowery, and Blake Morgan (Lindvall Comments);
Songwriters Guild of America, Inc., Society of Composers and
Lyricists, Music Creators North America, Rick Carnes, and Ashley
Irwin (together, SGA). Attorneys Gwendolyn Seale and Peter W.
DiZozza, Esq. filed comments as music industry lawyers but not on
behalf of any specific client/s.
\2\ GEO filed an Objection to Fraudulent Motion . . . on May 27,
2021. On the same day, GEO filed an Objection to Settlement . . .
.'' GEO filed these objections before the Judges published the
proposed rule for comment. GEO's filings did not seek relief and
were not proper motions. On July 20, 2021, the Judges therefore
denied GEO's motions and suggested GEO express his apparent
opposition to the settlement by way of a comment in response to the
published proposed rule. See Order Denying Three Motions . . . (Jul.
20, 2021).
\3\ Commenters were independent music publisher Monica Corton
and singer, songwriter, and teacher Rosanne Cash.
\4\ GEO styled his comment as ``George Johnson's Fourth
Opposition Motion Objecting to . . . Settlement . . . Also Filed as
Comments. (Aug. 10, 2021). Subsequently, GEO filed four notices
informing the Judges of inflation rates and a motion seeking
indexing of subpart B rates.
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In their comments, the Moving Parties reasserted their respective
``significant interest[s]'' in the proceeding.\5\ See Comments in
Further Support of the Settlement . . . for Subpart B Configurations
(Aug. 10, 2021) (Further Comments) at 1. The Moving Parties referred to
the Congressional encouragement of settlement of royalty rate issues.
Id. at 3. In the Motion seeking adoption of the settled rates and
terms, the Moving Parties averred that the settlement would continue
subpart B rates at their current levels and that the late fee
provisions in the current regulations would ``continue to be
applicable'' to the Labels ``and all other licensees'' of the
mechanical rights at issue in subpart B. Motion at 3. Immediately
preceding this synopsis of the settlement terms, however, in a section
headed ``Parties,'' the Moving Parties indicated ``[c]oncurrent with
the settlement, the Joint Record Company Participants and NMPA have
separately entered into a memorandum of understanding addressing
certain negotiated licensing processes and late fee waivers.'' Motion
at 3.
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\5\ The Moving Parties alleged that the Labels represent ``the
vast majority of the U.S. sound recording market.'' They also
asserted that NMPA ``protects and advances the interests of over 300
music publishers'' and that NSAI is a trade association with over
4,000 members ``dedicated to serving songwriters . . . .'' Further
Comments at 2.
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The Moving Parties' comment in support of adoption of the
settlement contained additional material, i.e., the memorandum of
understanding (MOU) as an attachment, the Judges reopened for a second
time the comment period on the proposed rule. See 86 FR 58626 (Oct. 22,
2021). This third comment period ended on November 22, 2021. Id.
Commenters expressed concern regarding this mention of an undefined MOU
between the Labels and NMPA. During the third comment period, the
Judges received seven comments.\6\ GEO also filed a ``Second Round of
Comments . . .'' opposing the settlement.\7\
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\6\ Lynne Robin Green filed an individual comment. Gwendolyn
Seale and Monica Corton augmented previous comments. Abby North
augmented her earlier comments in a joint filing with Erin McAnally
and Chelsea Crowell. Helienne Lindvall, David Lowery, and Blake
Morgan augmented their previous joint comment (Second Lindvall
Comments). The Songwriters Guild of America, Inc.; Society of
Composers & Lyricists; and Music Creators North America; along with
individuals Rick Carnes and Ashley Irwin filed a joint comment,
which was endorsed by Alliance for Women Film Composers, Alliance of
Latin American Composers & Authors, Asia-Pacific Music Creators
Alliance, European Composers and Songwriters Alliance, The Ivors
Academy, Music Answers, Pan-African Composers and Songwriters
Alliance, Screen Composers Guild of Canada, and Songwriters
Association of Canada (endorsers and second submission of commenters
together, Second SGA Comments). Attorney Kevin M. Casini commented
as an advocate, not for any particular client.
\7\ The deadline for comments was November 22. The CRB's
electronic filing system noted the date and time of GEO's filing as
November 23, 2021 at 12:04 a.m. The Judges accept this technically
late filing.
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Statutory Standard and Precedent
Section 801(b)(7)(A) of the Copyright Act is clear that the Judges
have the authority to adopt settlements between some or all of the
participants to a proceeding at any time during a proceeding, so long
as those that would be bound by the agreed rates and terms are given an
opportunity to comment. Id. at (b)(7)(A)(i). The Judges give notice by
publishing a settlement as a proposed rule in the Federal Register.
They are obliged to give notice and offer all interested parties an
opportunity to comment, but only participants have the opportunity to
comment and object to a proposed settlement. See id. (emphasis added).
Section 801(b)(7)(A)(ii) provides that the Judges ``may decline to
adopt the agreement as a basis for statutory terms and rates for
participants that are not parties to the agreement,'' only ``if any
participant [in the proceeding] objects to the agreement and the
[Judges] conclude, based on the record before them, if one exists, that
the agreement does not provide a reasonable basis for setting statutory
terms or rates.'' 17 U.S.C. 801(b)(7)(A)(ii).
Regardless of the comments of interested parties or participants,
the Judges are not compelled to adopt a settlement to the extent it
includes provisions that are inconsistent with the statutory license.
See Review of Copyright Royalty Judges Determination, 74 FR 4537, 4540
(Jan. 26, 2009) (error for Judges to adopt settlement without threshold
determination of legality); see also Review of Copyright Royalty Judges
Determination, 73 FR 9143, 9146 (Feb. 19, 2008) (error not to set
separate rates as required under Sec. 112 and 114 when parties'
unopposed settlement combined rates in contravention of those statutory
sections).\8\
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\8\ The Register found that a ``paucity of evidence'' in the
record to support a determination of separate rates for the separate
licenses ``does not dispatch the . . . Judges' statutory
obligations.'' Review of Copyright Royalty Judges Determination, 73
FR 9143, 9145 (Feb. 19, 2008). The Register noted that the Judges
have subpoena power to compel witnesses to appear and give
testimony. Id.
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As the Register of Copyrights (Register) observed in the 2009
review of the Judges' decision, nothing in the statute precludes
rejection of any portions of a settlement that would be contrary to
provisions of the applicable license or otherwise contrary to the
statute. Id. In the instance under review by the Register, the
settlement agreement purported to alter the date(s) for payment of
royalties granting licensees a longer period than section 115 provided.
74 FR at 4542. The Register also noted that nothing in the
[[Page 18344]]
statute relating to adoption of settlements precludes the Judges from
considering comments of non-participants ``which argue that proposed
[settlement] provisions are contrary to statutory law.'' Id. at 4540.
The Judges received a relatively large number of negative comments
from interested parties. The only participant who objected to the
proposed settlement was GEO. His objections tracked many of the
negative comments by other parties who are not participants but who
could be bound by the regulation. The Judges have also reviewed the
proposed settlement for consistency with the law and the statutory
license.
Synopsis of Related Non-Participant and Moving Parties' Comments
The comments of interested parties in this proceeding were
uniformly negative regarding the proposed settlement. Their comments
were largely overlapping and are summarized, along with the Moving
Parties' comments as follows.
Importance of Subpart B Configurations
The Moving Parties downplayed the importance of Subpart B
Configurations in the universe of music consumption. See Further
Comments at 3-4. The Moving Parties emphasized that 83% of the recorded
music market \9\ comes from streaming. See id. In the same paragraph,
however, they conceded that Subpart B Configurations account for 15% of
the market.\10\ Id. The Moving Parties acknowledged that the Subpart B
Configurations represent a ``not immaterial source of revenue'' for
songwriters and publishers. Id.
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\9\ The Moving Parties did not define ``recorded music market.''
The study to which they referred analyzed recorded music revenues.
\10\ The Moving Parties minimized the subpart B revenue by
splitting it between physical sales (9%) and digital downloads (6%),
glossing over the total for mechanical licenses, which was, in fact,
15%.
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More than one commenter cited publications of the Recording
Industry Association of America (RIAA) that give perspective to the
apparent diminution of Subpart B Configurations, both to the
rightsholders and to music consumers. See, e.g., Comments of Gwendolyn
Seale (Jul. 26, 2021) (Seale Comments) at 4; Comments of Michelle
Shocked (Jul. 26, 2021) (Shocked Comments) at 1; Comments of SGA (Jul.
26, 2021) (SGA Comments) at 10 \11\ (all citing ``Year-End 2020 RIAA
Revenue Statistics,'' https://www.riaa.com/wp-content/uploads/2021/02/2020-Year-End-Music-Industry-Revenue-Report.pdf (last visited 02/14/
2022) (RIAA Report)); Comments of Monica Corton (Nov. 22, 2021) (Second
Corton Comments) at 2 (vinyl ``seems to be surging . . .''). The RIAA
Report reflected near static sales of physical product (including
digital downloads) but noted that ``[f]or the first time since 1986,
revenues from vinyl records were larger than from CDs. . . . [V]inyl
grew by 28.7% by value year-over-year . . . .'' RIAA Report at 2.
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\11\ SGA also reported that physical phonorecords and permanent
downloads accounted for over 25% of total recorded music revenues
worldwide in 2020. SGA Comments at 10, citing International
Federation of the Phonographic Industry report of global recorded
music revenues for 2020, https://www.ifpi.org/our-industry/industry-data/ (last visited Mar. 16, 2022) (reporting 25.3% combined
revenue).
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Commenter Corton detailed the rightsholders' mechanical license
earnings from vinyl and CD albums as compared to downloading or
streaming individual tracks. See Second Corton Comments at 2. She
alleged that retailers are selling new vinyl releases for $25 to $50
(rounded). Assuming the wholesale price to be 50% of the retail price,
she calculated that retailers are paying $12.50 to $25 to the record
companies. Id. Corton contended that even in the surging market, under
standard publisher-record company contracts, the record label pays the
publisher $0.91 for a ten-track album ($.091 per track, limit ten,
regardless of the actual number of tracks on the album). Id. Corton
asserted that most labels enforce a ``controlled composition clause''
\12\ in their contracts with publishers, limiting their earnings on an
album to 75% of the statutory mechanical license rate and a standard
ten song cap, or $0.6825 per album, which the publisher generally
splits 50-50 with the songwriter. Id. The royalty that reaches the
songwriter is $0.3412 for all the protected works on the marketed
album. Id. Even after compensating performers, record labels appear to
be receiving over $10 per permanent album to the songwriters' $0.34.
Id.
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\12\ According to SGA, record labels introduced the ``controlled
composition clause'' in 1978 in response to the increase of the
statutory rate from $.02 per unit in effect between 1909 and 1978,
to $0.275 per unit. See SGA Comments at 3. The controlled
composition clause continues. In other words, the statutory royalty
rate of $.091 per unit translates to $.06825 per unit actually paid
by the subpart B licensor. Id.
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Commenter Roseanne Cash asserted that mechanical royalties are
``one of the most reliable ways a songwriter can still make a minimum-
to-decent wage . . . .'' Comments of Roseanne Cash at 1 (Aug. 2, 2021).
She asserted that the need for fair subpart B rates is ``more dire
because of the lack of fairness in compensation from streaming
services. Streaming services are not in the music business. They are in
the tech business, and they have built multi-billion dollar profit
machines on the back of songwriters and musicians whom they use as
loss-leader content.'' Id. at 2.
Rate ``Freeze''
Almost every commenter emphasized that the subpart B mechanical
rates have remained unchanged for well over a decade, since 2006. See,
e.g., Comments of Kevin M. Casini (Nov. 21, 2021) (Casini Comments) at
3 (``what has not been frozen since 2006: the cost of living.'').
According to SGA, from enactment of the governing statute in 1909 until
1978, mechanical royalties were set at $ 0.02 per unit. See Comments of
SGA (Jul. 26, 2021) (SGA Comments) at 3. In 1978, Congress raised the
rate to $ 0.0275 per unit, which was offset by a ``controlled
composition clause'' in sound recording contracts by which creators
were obliged to lower that new 1978 mechanical royalty rate by 25%. Id.
The statutory rate gradually increased until 2006, when the CRB
maintained the existing rate at $ 0.091 per unit in mechanical rate
proceedings commenced in 2006, 2011, and 2016. Id. The controlled
composition clause remains a feature of sound recording contracts.
Second Corton Comments at 2.
Commenters advocated application of an inflation adjustment
beginning, at a minimum, in 2006. See, e.g. SGA Comments at 4; Corton
Comments at 4; Casini Comments at 4. According to the proponents of a
cost of living adjustment (COLA) applied to the 2006 rates, that
adjustment would yield a 2021 royalty rate of $ 0.12 (an upward 31.9%
inflation adjustment over the sixteen-year period). See, e.g., SGA
Comments at 4. SGA conceded that the COLA extrapolation cannot be
considered dispositive on the issue of new rate-setting, but they
contended that it does ``starkly demonstrate the outrageous unfairness
that has been imposed on the music creator community over a period of
more than an entire century.'' Id.
Conflicts of Interest
More than one commenter questioned whether the underlying
negotiations could be, in fact, arm's length transactions because of
the vertical integration of music publishing and recording. The
proposed settlement at issue was negotiated by and among the ``three
major, multinational record conglomerates UMG, SME and WMG, the US
music publisher trade group NMPA (whose largest members include the
music publishing affiliates of those major record companies), and
[[Page 18345]]
inexplicably, the [NSAI] . . . the `Settling Parties'. . . .'' SGA
Comments at 4.
When the Settling Parties gave notice of their impending
settlement, they included reference to a separate memorandum of
understanding between NMPA and the record labels. Notice of Settlement
in Principle (Mar. 2, 2021) 1 (``NMPA, UMG, WMG and SME have also
reached an agreement in principle concerning a separate memorandum of
understanding addressing certain related issues.'') See, e.g., Second
Seale Comments at 6 (representative negotiators of subpart B settlement
and MOU ``represent `willing buyers' and `willing sellers' who are
effectively the same parties at the corporate level.''); Comments of
Anthony Garnier (Jul. 19, 2021) (``Vertical integration . . . between
the major labels and major publishers poses a serious conflict of
interest and engenders self-dealing among negotiators'').
Moving Parties stated, categorically, that no publisher would
negotiate a below-market mechanical royalty rate and extend that rate
to competitors of its ``sister record company.'' See Further Comments
at 5. The Moving Parties referred the Judges to their determination in
Phonorecords III wherein the Judges discounted claims of self-dealing,
noting that the negotiating parties--the same parties as are presenting
the present settlement for approval--``would not `engage[ ] in anti-
competitive price-fixing at below-market rates . . . .' '' Id. (citing
Final Determination, Determination of Royalty Rates and Terms for . . .
Phonorecords, Docket No. 16-CRB-0003-PR (Phonorecords III)).
Lack of Transparency Regarding MOU
In the Motion seeking adoption of the settled rates and terms, the
Moving Parties averred that the settlement would continue subpart B
rates at their current levels and that the late fee provisions in the
current regulations would ``continue to be applicable'' to the Labels
``and all other licensees'' of the mechanical rights at issue in
subpart B. Motion at 3. Immediately preceding their synopsis of the
settlement terms, however, in a section headed ``Parties,'' the Moving
Parties indicated ``[c]oncurrent with the settlement, the Joint Record
Company Participants and NMPA have separately entered into a memorandum
of understanding addressing certain negotiated licensing processes and
late fee waivers.'' Motion at 3.
Commenters assailed a lack of transparency in the settlement with
regard to the memorandum of understanding (MOU). They contended that
there must be a hidden quid pro quo unrevealed in the proposed
settlement or the Motion. In their Further Comments, the Moving Parties
explained the offhand revelation of the MOU: They viewed it as
``routine, and irrelevant to the Judges' decision-making concerning the
Settlement.'' Id. at 6. The Moving Parties further addressed this
purported oversight in the Motion by indicating that all but ``a low
single digit percentage'' of the music publishers have opted into the
MOUs of the past. They also opined that ``thousands of independent
publishers'' will voluntarily opt in to the latest iteration of the
MOU. Further Comments at 7.
The Moving Parties contended that the MOU is a private contract and
not something to be codified as it does not address statutory rates.
See id. at 8. As the commenters noted, however, the MOU is tied
directly to the rate determination. The current MOU is conditional and
was not effective until the parties to the MOU (the Moving Parties,
except NSAI) submitted a motion to adopt the proposed settlement in
Phonorecords IV as rates and terms for the subpart B configurations.
Id., at Exhibit C, 2.
Further, the MOU contains a late fee waiver provision, contrary to
published regulations, which add a late fee of up to 1.5% per month
until the rightsholder receives royalties that are due monthly. See 37
CFR 385.3. In their comments, Lindvall, Lowery, Morgan, and Castle
questioned who might receive the benefit of the waived late fees. See
Comments of Lindvall, Lowery, Morgan, Castle (Nov. 22, 2021) (Second
Lindvall Comments). The commenters in this proceeding, representing
songwriters and independent or self-publishers, object strenuously to
terms that they considered ``hidden'' and that would affect the amount
of remuneration they receive in exchange for licensing their protected
works.
Restating their particularized argument, the Moving Parties
maintained that the current MOU was the fourth such arrangement between
Labels and NMPA to address ``mechanical licensing process issues unique
to record companies.'' Id. at 6. Further, the Moving Parties asserted
that, in any event, the existence of MOUs has been public knowledge.
See Further Comments at 6-7 (citing E. Christman, ``NMPA, Major Labels
Sign on Terms of Agreement,'' Billboard (Oct. 7. 2009) and Exhibit B
Supplemental Statement in Phonorecords II (April 11, 2012).\13\
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\13\ The cited Billboard article describes a mechanism for
allocating unclaimed royalty funds among publishers based upon
market share. However, neither the Billboard article nor
Supplemental Statement in Phonorecords II reveal details of the
agreement.
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Several commenters professed no knowledge of the current MOU or the
history of MOUs. See SGA Comments at 9; Seale Comments at 3. Further,
as they pointed out, songwriters are not parties to the MOU. The
benefits of the agreement are alleged to accrue to the benefit of only
certain music publishers. See Seale Comments at 3. This benefit, some
asserted, is consideration for the publishers agreeing to continue the
freeze of subpart B rates. See Second Seale Comments at 3; Second
Lindvall Comments at 10-11. Songwriters cannot be said to have agreed
to a royalty late fee waiver if they are not parties to the ``private
contract'' that potentially deprives them of those late fees. See,
e.g., Lindvall Comments at 11 (settlement expressly refers to
undisclosed terms; those ``outside the insider group'' cannot agree
without knowledge of extent of consideration exchanged).
Lack of Representation by Negotiators
The Moving Parties asserted that the NMPA ``protects and advances
the interests of over 300 music publishers . . . and their songwriting
partners . . . .'' Further Comments at 2. They further asserted that
NSAI is a trade organization ``of over 4,000 members dedicated to
serving songwriters of all genres of music.'' Id. Commenters pointed
out several issues with the negotiating representatives, NMPA and NSAI.
Several commenters, comprising independent songwriters, independent
publishers, and music industry lawyers, challenged the validity of the
representatives. See, e.g., Corton Comments at 2 (many NSAI members
unaware that organization is agreeing to these rates; no mention on
NSAI website); Second Lindvall Comments at 19 (judges suggest unhappy
songwriters might ``seek representation elsewhere . . . .''; ``the
problem is that there was likely no `representation' in the first place
. . . .''); Seale Comments at 3 (NMPA, NSAI do not represent
``countless millions'' of owners); Comments of Anthony Garnier (Jul.
19, 2021) (NMPA, NSAI have not consulted with any other songwriter
organizations); Comments of Abby North (Jul. 26, 2021) (North Comments)
at 3 (NMPA, NSAI do not have broad authority they claim); Comments of
[[Page 18346]]
Abby North (Nov. 22, 2021) at 1 (Second North Comments) (rightsholders
that are not NMPA members cannot opt in to receive money under MOU);
SGA Comments at 5 (music creator community ``blindsided'' by
settlement). SGA asserts that its own membership numbers 4,500 and its
co-commenter SCL has over 2,000 members, but it was not included in the
negotiations of rates or the MOU. See SGA Comments at 5.
Claiming no voice in the negotiations that resulted in the proposed
settlement, the commenters asserted that the resulting rates are
contrary to statutory requirements inasmuch as they represent rates
negotiated by a willing buyer and imposed on an ``unwilling seller.''
See Comments of David Poe (Jul. 12, 2021); Corton Comments at 2 (NSAI
members unaware of organization's negotiating positions; nothing on
NSAI website about MOU; without knowledge, songwriter member cannot be
a willing seller).
Negotiating Strategy
The Moving Parties supported the negotiated settlement by reporting
that, in the period 2006 to 2008, they spent ``tens of millions of
dollars litigating'' the mechanical royalty rates only to have the
Judges adopt the rates in place at that time as reflective of the
marketplace. Further Comments at 3. They then projected that the
possibility of an adjudicated change in the current subpart B rates was
outweighed by the cost of litigating the rates and the uncertainty of
the outcome of litigation. Id. at 4. Building on the small market share
of Subpart B Configurations, the Moving Parties contended that
agreement to static subpart B rates was an important concession in the
context of the mechanical license proceeding. Id.
Commenters took umbrage at the conclusion by NMPA, the publisher
trade group, that ``the game is not worth the candle.'' See Seale
Comments at 6-7. Monica Corton, a veteran in the music publishing
business, noted that the negotiators' conclusion to freeze Subpart B
Configuration rates as a ``component'' of an overall negotiating
strategy to increase digital streaming rates is, after 15 years, ``no
longer justifiable.'' Second Corton Comments at 1.
Mr. Johnson's Objections to the Settlement
The only participant in the captioned proceeding to offer comments
on the notice of the proposed settlement was George Johnson (GEO). The
substance of his comments in opposition to adoption of the settlement
tracked with the negative comments of other interested parties detailed
above. GEO's filings include: GEO Fourth Opposition Motion (Aug. 10,
2021); Response and Further Opposition to Comments/Motion and
Fraudulent Settlement for Subpart B Configurations (Aug. 21, 2021)
(Further Opposition); Second Round of Comments (Nov. 23, 2021);
Corrected Second Round of Comments (Dec. 1, 2021) (Corrected Second
Comments).\14\
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\14\ GEO Fourth Opposition Motion was filed on the final day of
the second comment period (Fourth Opposition). GEO Response and
Further Opposition was filed August 21, 2021, after the close of the
second comment period (Further Opposition). Nonetheless, the Judges
reopened the matter for further comment and the Judges therefore
accept the August 21, 2021, filing as a timely comment during the
third comment period, which closed November 22, 2021. Though not a
comment in response to the Federal Register notices, GEO filed a
Written Direct Statement on October 13, 2021 (within the third
comment period), which included arguments opposing the proposed
subpart B settlement at issue. GEO filed a Second Round of Comments
on November 23, 2021. These comments were filed a day after the
close of the third comment period; GEO filed Corrected Second Round
of Comments on December 1, 2021 (Corrected Second Comments). The
Judges have occasionally afforded GEO limited leeway in these
proceedings, as Mr. Johnson is appearing pro se in this proceeding.
In this instance, the Judges accept the Second Round of Comments, as
amended on December 1, 2021.
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Importance of Subpart B Configurations
GEO pointed to the RIAA report cited by other commenters to
emphasize that Subpart B Configurations are a growing part of the music
business, comprising 15% of the market. See Further Opposition at 5. He
claimed the importance of subpart B royalties is clear because affected
parties ``are all perfectly willing to spend millions of dollars to
fight GEO's proposal to increase the 9.1 cents for lost inflation . . .
.'' Id. Other commenters indicated similar concerns.
Rate ``Freeze''
GEO has long advocated inclusion of an inflation index in royalty
rates set by the Judges, including the subpart B rates at issue here.
In support of his advocacy, GEO has filed 27 pleadings, including
motions seeking imposition of an inflation index on section 115 rates
\15\ and periodic notices of U.S. inflation rates. His plea is
bolstered by the many commenters who, almost unanimously, included this
suggestion.
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\15\ Rates are not set by motion, but by agreement or following
a full adjudication. While GEO's motions did not result in adoption
of an inflation index, GEO's position on this issue is, and has
been, clear.
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Conflicts of Interest
GEO has long assailed the apparent conflict of interests when
recording companies engage in negotiations with their related music
publishing houses to set royalty rates for the labels to pay to
publishers. In this proceeding, GEO further argued that major
negotiating parties, three record labels and three publishers, are
``just two hands of the same three foreign corporations negotiating
with themselves in an American rate proceeding, supposedly designed to
help American songwriters and music publishers.'' Corrected Second
Comments at 2 (emphasis in original).
Based upon his assumption of self-dealing in this instance, GEO
alleged fraud, undue influence, anti-trust violations, and
international intrigue. Id. at 8-9, 12-13.
Lack of Transparency Regarding MOU
In his analysis of the validity of the MOU, GEO invoked the same
conflicts of interest arguments. He referred to the ``No. 2 Same
Parties rule under willing buyer, willing seller . . . .'' Corrected
Second Comments at 1 (emphasis in original). GEO did not identify the
source of this ``rule'' and although the Judges are familiar with the
concept, they are unaware of any set of rules relating to the
determination of a willing buyer/willing seller market value.
GEO asserted, further, that the MOU ``seems to be a clear quid pro
quo'' to freeze subpart B rates in exchange for the late fee provisions
``and other substantial financial consideration only benefiting members
of NMPA . . .'' Id.; see id. at 8.
GEO also claimed that this MOU, although it is a fourth iteration
of side agreements among the parties, was formerly a secret and that it
only came to light after commenters raised questions about the
reference to it in the Motion.\16\ Id. at 3. GEO further ascribed
malevolent intent to the Moving Parties' timing--filing additional
information relating to the MOU on the last day of the comment period.
Id.
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\16\ A one-sentence paragraph in the Motion stated simply:
``Concurrent with the settlement, the Joint Record Company
Participants and NMPA have separately entered into a memorandum of
understanding addressing certain negotiated licensing processes and
late fee waivers.'' Motion at 3. This revelation was at the end of
the section entitled ``Parties,'' not in the following section
entitled ``Nature of the Settlement.''
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Lack of Representation by Negotiators
GEO claimed to speak for all songwriters and independent or self-
publishers. He contended he abandoned his membership in NSAI because he
felt NSAI did not represent his interests. Id. at 10. Without
representation by NSAI, GEO concluded that he had no choice but to
participate in this proceeding formally and advocate for his own
interests and those of others similarly
[[Page 18347]]
situated. Id. Citing all of the other reasons he objected to the
settlement (self-dealing, freezing the rate, using subpart B as a
bargaining chip in streaming negotiations, undisclosed MOU waiving
rights to late fees), GEO contended that NSAI and NMPA cannot possibly
be representing the interests of the section 115 rightsholders.
GEO's comments repeated the refrain of other commenters. He and
they disagree with the settlement proposed by trade organizations that
claim to represent their interests. They contended that they are not
willing sellers in this equation. Id. at 11.
Negotiating Strategy
Several commenters cited the negotiating parties' admission that
they considered the subpart B rates as insignificant in the context of
section 115 licenses. GEO echoed their concerns that the copyright
owners' negotiators used subpart B as a loss leader in their attempts
to negotiate higher streaming royalty rates. GEO argued further that
the streaming services use the frozen subpart B rates, to which NSAI
and NMPA agree, as a justification for maintaining or lowering section
115 streaming rates. Id at 14. He also opined that keeping subpart B
rates frozen, for yet another rate period, will provide a convincing
benchmark for the streaming services not only in this proceeding, but
in the next, Phonorecords V. Id. at 15.
GEO's General Objections
GEO asserted that the section 115 licenses were ``designed to help
American songwriters and . . . publishers.'' Id. at 2. Similarly, GEO
contended that the Judges' rate setting proceedings ``are designed to
help songwriters . . . .'' Id. at 5. In his objection, he argued that
the settlement is contrary to those asserted statutory purposes.
GEO argued that the Moving Parties failed to provide evidence that
the proposed settlement is reasonable. Id. In that way, he advocated
assigning a burden of proof to the Moving Parties.
GEO made several objections based on supposition, rumor, or
surmise. For example, he asserted that there is ``an issue of NMPA
possibly getting secret `donations' from . . . major publishers which
may amount to tens of millions of dollars going to NMPA.'' Id. at 2.
Judges' Analysis and Conclusions
The Judges note that each faction in this discussion has alleged
that the other side has failed to present evidence that the proposal is
or is not a reasonable foundation upon which to base mechanical license
rates and terms for subpart B musical works configurations. Although
chapter 8 of the Copyright Act encourages parties to enter into
settlement negotiations, ultimately the decision as to whether a
contested settlement \17\ should be approved on motion is subject to
the Judges' discretion, informed by the submissions of the moving
parties and the commenters, and by the Judges' application of the law
to the facts.
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\17\ It seems clear that the language of section 801(b)(7)(A)
inherently presumes that uncontested settlements are factually
reasonable, but, even then, the Judges must be satisfied that the
settlement is consistent with the law.
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Only one participant in this proceeding, GEO, objected to the
proposed settlement. As shown by the foregoing synopsis, however, GEO's
objections did not come to the Judges in a vacuum. The statute requires
publication of a settlement proposal and solicitation of comments from
interested parties--parties who would be bound by the proposed rates
and terms. Non-participants who commented on the proposal uniformly
objected to adoption of the proposed rates and terms and for reasons
that paralleled those stated by GEO. Interested parties' comments are
filed in the record of the proceeding and the Judges must analyze those
comments even though the Judges may not base rejection of a settlement
solely on negative comments from non-participants alone.
It is thus clear that the Judges' review of this or any proposed
rates and terms is not a routine matter. The Judges must analyze
carefully the terms of the settlement in light of the participant's
objections. They must also evaluate the settlement in view of the
requirements of section 115. The proposed settlement must not be
contrary to the statutory terms of the mechanical license.
Reasonableness
Weighing the objections of GEO and considering those objections in
the context of the record before them, the Judges make the following
conclusions.
Importance of Subpart B Configurations
Royalties from Subpart B Configurations are not inconsequential to
the rightsholders. Subpart B Configurations are qualitatively different
from the digital streaming configurations; consequently, the Judges can
and do set separate rates for the Subpart B Configurations. Even though
the physical and ``permanent'' download products are different in
character from streaming uses, the Judges cannot and do not treat them
with any less care and attention. Subpart B Configurations, in
particular vinyl recordings, are a significant source of income for
section 115 rightsholders. The royalties they generate should not be
treated as de minimis, or as a ``throw away'' negotiating chip to
encourage better terms for streaming configurations.
Rate ``Freeze''
In the dynamic music industry, there is insufficient reason to
conclude that a static musical works rate is reasonable. The
determination rendered in 2008, with an effective date of 2006, cannot
continue to bind the parties sixteen years later, absent sufficient
record evidence that the status quo remains grounded in current facts
and is a reasonable option. Since 2006, the retail marketplace for
music has changed dramatically with regard to the Subpart B
Configurations. From 2006 to 2008 (and, indeed, in years prior) the
Subpart B Configurations dominated the recorded music marketplace.
By 2020, industry data collected by the Recording Industry
Association of America showed that various forms of digital streaming
accounted for 83% of recorded music market revenues. Notwithstanding
the decrease in revenues attributable to Subpart B Configurations, in
2020, vinyl record sales surpassed the volume of CD album sales,
signaling a resurgence in vinyl as a music medium. Even if the sales
figures were otherwise, however, sixteen years at a static rate is
unreasonable under the current record, if for no other reason than the
continuous erosion of the value of the dollar by persistent inflation
that recently has increased significantly. In this regard, application
of a consumer price index cost of living increase, beginning in 2006,
would yield a statutory subpart B royalty rate for 2021 of
approximately $0.12 per unit as compared with the $0.091 that prevails,
which adjustment, as noted supra, represents a 31.9% increase.
The disparity between the static rate and the dynamic market is
even more stark when considering the ``controlled composition clause''
that contractually lowers the statutory rate by 25%. Add to that the
record labels' limit on album royalties to ten tracks, regardless of
the number of songs actually included in each album. In other words,
the statutory rate is not the effective rate record labels use in
compensating songwriters and publishers.
The proposed settlement did not include any adjustment to subpart B
rates, not even an indexed increase. Adjudication of rates may provide
the parties an opportunity to present
[[Page 18348]]
evidence of the advisability of such an indexed increase.
Conflicts of Interest
Conflicts are inherent if not inevitable in the composition of the
negotiating parties. Vertical integration linking music publishers and
record labels raises a warning flag. No party opposing the present
settlement has evinced actual or implied evidence of misconduct, other
than the corporate structure of the record labels on the one hand and
the publishers on the other. While corporate relationships alone do not
suffice as probative evidence of wrongdoing, they do provide smoke; the
Judges must therefore assure themselves that there is no fire. The
potential for self-dealing present in the negotiation of this proposed
settlement and the questionable effects of the MOU are sufficient to
question the reasonableness of the settlement at issue as a basis for
setting statutory rates and terms.
Lack of Transparency in MOU
The Moving Parties noted in passing that their agreement also
included a memorandum of understanding that did not have any impact on
the reasonableness of the settlement terms. Reasonableness, however, is
undermined by associated bargained-for provisions as to which the
Judges have an inadequate basis for evaluation.
The Moving Parties assertion that the MOU is ``irrelevant'' and
inconsequential to the settlement terms is facially invalid. First, the
MOU is a side agreement between recording companies and publishers,
which does not include participation by or agreement of either
songwriters or a significant number of owners of musical works subject
to the section 115 license. Second, the MOU grants a late fee waiver to
licensees that are party to the agreement. This waiver of fees seems to
have an indirect impact on proposed royalty returns to rightsholders.
Without more complete knowledge of the implications of the MOU,
however, the Judges are unable to evaluate the proposed settlement as a
whole.
The Moving Parties asserted that the MOU is a private contract
between private parties. It appears rather to be an attempt to modify
the application of the terms of statutory licenses they allegedly are
negotiating in the context of a rate-setting proceeding under the
Copyright Act. By its terms, the current MOU was conditional and was
not effective until the parties to the MOU (the Moving Parties, except
NSAI) submitted a motion to adopt the proposed settlement as rates and
terms for the Subpart B Configurations in Phonorecords IV.
Further, in their pleadings, the Moving Parties asserted that they
withheld information regarding the MOU because they considered it
``irrelevant'' to statutory rate setting. Determining relevance is a
judgment call reserved to the Judges. The contracting parties cannot
hide changed application of a statutory rate scheme behind a ``private
contract'' when that contract has implications for non-contracting
parties and the ``private contract'' details necessarily inform the
reasonableness of the proposed settlement. The Judges, not a
participant, can and will decide what is ``irrelevant'' to this rate
setting proceeding.
Finally, the Moving Parties justified the MOU by noting that it is
the fourth iteration of similar agreements. The fact that this MOU is
the fourth of its kind does not prove that it is appropriate or an
acceptable corollary to the statutory rates set by this tribunal.
Repetition alone does not make a practice advisable or fair. Nor does
it indicate that the practice or its details are universally known and
approved.
Parties have an undeniable right of contract. The Judges, however,
are not required to adopt the terms of any contract, particularly when
the contract at issue relates in part, albeit by reference, to
additional unknown terms that indicate additional unrevealed
consideration passing between the parties, which consideration might
have an impact on effective royalty rates.
Lack of Representation by Negotiators
The licensors in this proceeding are represented by their
respective trade associations. The commenters asserted that the trade
associations, NSAI in particular, did not appear to be representing the
best interests of the music creators. It is not within the purview of
the Judges to select or direct what parties file petitions to
participate in rate setting proceedings. Dissatisfaction with the
actions of a participant can only be contested by another participant,
presenting competent evidence to inform the Judges of a reasonable
outcome; it is not a proper or adequate basis to decline to adopt the
settlement.
Negotiating Strategy
The Moving Parties justified their negotiating strategy and the
outcome by asserting that the Judges previously continued existing
rates after the interested parties spent ``tens of millions'' of
dollars litigating the same rates in the mid-2000s. As the Moving
Parties noted, however, the Judges' decision at that time was
reflective of the conditions of that market. The Moving Parties seemed
to be projecting what actions the Judges might take on a new
evidentiary record. The 2022 recorded music marketplace is not the 2006
marketplace. The Judges' determination of current rates and terms
should be reflective of the current marketplace.
GEO's Other Objections
Contrary to GEO's assertions that the section 115 licenses were
``designed to help American songwriters,'' the statutory rates are
intended to benefit both rightsholders and licensees by permitting fair
and fairly compensated exploitation of copyrighted works in an
administratively manageable way. Until a recent statutory change, the
Judges were instructed to weigh various factors in setting mechanical
royalty rates to assure reasonable results, fair to both sides and of
benefit to the music-consuming public. The current statutory standard
for determining rates, the standard applicable in this proceeding, is
the willing buyer-willing seller standard, which is aimed at finding a
free and competitive market rate for the licenses. See 17 U.S.C. 115
(c)(1)(F).
GEO alleged that, under the MOU, NMPA might receive ``secret
`donations' from these major publishers which may amount to tens of
millions of dollars going to NMPA.'' Second Corrected Comments at 2.
Although GEO's revelation of an ``issue'' of ``secret donations'' might
initially seem lacking in factual bases, it is noteworthy that the MOU
contains the following language.
For the avoidance of doubt, as provided in Section 10.3 of MOU1,
it shall not be a breach of this MOU4 if NMPA chooses to seek a
donation from Participating Publishers as part of the enrollment
process. If, after the Administrator's final accounting and
resolution of any disputes, Participating Publisher claims for a
given Phase of Group 6 are for less than the 11 payments made by a
Participating Record Company for such Phase, then the Administrator
shall return any unclaimed monies to the Participating Record
Company, and Section 4.21 of MOU1 shall apply, unless RIAA and NMPA
agree to simplified procedures for the refund process.
Further Comments, Exhibit C (Memorandum of Understanding) at 10-11.
The provisions of Sections 10.3 and 4.21 of MOU 1 are not in the
record of this proceeding and remain unknown to the Judges. They may
support GEO's concerns regarding the provision condoning NMPA's
solicitation of a ``donation'' as part of an enrollment process. GEO
did not provide an
[[Page 18349]]
evidentiary basis for his claim that, under this provision of the MOU,
NMPA might benefit to the extent of ``tens of millions of dollars.''
The extent of NMPA's power to solicit donations ``as part of the
enrollment process'' and the potential value of those donations,
however, raised concerns with commenters who questioned the quid pro
quo of the MOU and concern the Judges.\18\
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\18\ Further, given the absence of any discovery in connection
with the procedures for review of a proposed settlement, the absence
of evidence at this stage of the proceeding cannot be a sufficient
basis to ignore an issue that the Judges find to be a matter of
concern.
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If adopted by the Judges, the proposed settlement is one that would
bind not only the parties to the MOU, but also songwriter licensors.
Songwriters, however, are not parties to the MOU and would apparently
not share in any benefit that might flow to licensors under the MOU.
Consistency With the Law and the Statutory License
The Judges reviewed the proposed settlement with regard to whether
any portions of the settlement would be contrary to provisions of the
applicable license or otherwise contrary to the statute, pursuant to
the Register's prior rulings. See e.g., Review of Copyright Royalty
Judges Determination, 74 FR 4537, 4540 (Jan 26, 2009). Upon such
review, the Judges see no basis to conclude the settlement is contrary
to law, except with regard to 801(b)(7)(A).
Conclusion
Rightsholders are free to choose their representation in these
proceedings. Admittedly, individual songwriters and self-publishers
have traditionally chosen not to expend the resources necessary to
participate in these proceedings at the same level as trade
organizations and major technology companies. Nonetheless, the outcomes
of these proceedings can have a significant impact on the lives of the
individual rightsholders. In this proceeding, the Judges received
lengthy comments from SGA, which claims to represent thousands of
songwriters. For SGA's comments to have independent influence, however,
SGA would have needed to join the proceeding as a participant.
Nonetheless, with regard to the present proposed settlement, the
comments of non-participants cumulatively served to amplify those of
the objecting participant.
Pursuant to section 801(b)(7)(A)(ii), based on the totality of the
present record--including the Judges' application of the law to that
record, as well as GEO's objections, which, as noted supra, are
consistent with the non-participant comments--the Judges find that the
proposed settlement does not provide a reasonable basis for setting
statutory rates and terms.\19\ Furthermore, the Judges find a paucity
of evidence regarding the terms, conditions, and effects of the MOU.
Based on the record, the Judges also find they are unable to determine
the value of consideration offered and accepted by each side in the
MOU. These unknown factors, as highlighted in the record comments,
provide the Judges with additional cause to conclude that the proposed
settlement does not provide a reasonable basis for setting statutory
rates and terms.
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\19\ Section 801(b)(7)(A) does not state which party--proponent
or objector--might bear a burden of proof in connection with the
Judges' evaluation of a proposed settlement and objections thereto.
The Judges do not believe that a ``burden of proof'' issue exists in
this settlement process, because evidence as described in the
Judges' Rules, 37 CFR 351.10, is not required. However, were a
burden of proof applicable in this proceeding, the Judges find that,
if the burden were placed on the proposers of this settlement, they
failed to meet that burden and, if the burden of proof were placed
on GEO and/or the other commenters referenced above, they have met
that burden.
Dated: March 24, 2022.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
[FR Doc. 2022-06691 Filed 3-29-22; 8:45 am]
BILLING CODE 1410-72-P