US Copyright Office report: The MLC should hold unclaimed mechanical royalties for longer than the statutory minimum periods

 

By Emmanuel Legrand

The US Copyright Office has issued a series of recommendations regarding the way the Mechanical Licensing Collective (MLC), created by the 2018 Orrin G. Hatch–Bob Goodlatte Music Modernisation Act (MMA) to license and administer mechanical royalties for the digital use of music in the United States, should deal with unclaimed royalties, in particular that they "should be held for longer than the statutory minimum periods where appropriate." 

  In case the message was not clear enough, the Office doubles down and recommends that "if the MLC is going to err, it should err on the side of holding unclaimed royalties longer." The recommendation would ensure that as many unclaimed musical works as possible get the chance to be matched and therefore reduce the volume of non-distributed royalties.

  The issue is important, since hundreds of millions of dollars are at stake. At the start of the year, music streaming services handed to The MLC some $426 million dollars worth of unmatched royalties from the past.

Reduce the incidence of unclaimed royalties

  The 107-page report of the Register of Copyrights titled 'Unclaimed Royalties: Best Practice Recommendations for the Mechanical Licensing Collective' is based on a series of contributions from stakeholders, round-tables, as well as internal research. It outlines the framework under which The MLC operates and provides guidelines on a wide range of topics, from transparency to outreach.

  The Office was requested to produce a report recommending best practices that the MLC may implement in order to identify and locate musical work copyright owners with unclaimed accrued royalties held by the MLC, encourage musical work copyright owners to claim their royalties, and reduce the incidence of unclaimed royalties.

  The Office's recommendations are no cast in iron, but the MMA requires the MLC to "carefully consider, and give substantial weight to, the Office’s recommendations when establishing procedures related to these issues."

Engage in efforts to match usage to musical works

  The MLC, which started operating on January 1, 2021, collects mechanical royalties under the new compulsory blanket license applicable to digital music providers (DMP) for mechanical royalties applied to permanent downloads, limited downloads, or interactive streams.

  Among The MLC's duties – aside from the core task of receiving and processing reports of usage from DMPs, collecting and distributing royalties associated with those uses, identifying the the copyright owners of musical works, and distributing royalties – is the necessity to hold, for a minimum period, royalties associated with reported uses of sound recordings embodying musical works for which the copyright owners of such musical works (or shares of such works) have not been identified or located.

  During the holding period, the MLC is expected to engage in efforts to match usage to musical works and their copyright owners. At the end of the statutory minimum holding period, accrued royalties for musical works (and shares) that remain unmatched become eligible for distribution by relative market share to copyright owners identified in the MLC’s records, at which point they become “unclaimed accrued royalties.”

Hold unclaimed royalties for longer

  The Office said it agrees with "many of the views" expressed by many stakeholders that unclaimed royalties should be held for longer than the statutory minimum periods where appropriate, and that the length of the extended holding periods should be tied to whether specific criteria have been satisfied."

  The Office goes even further by asserting that in the case of the first distribution, it recommends "that it not occur for at least five years from the date that the ability to claim in the portal is made available to the public with complete and full functionality and populated with all unmatched usage from periods prior to the license availability date."

  For example, the Office notes that the release of a beta version of the claiming portal or a version with only basic functionality and minimal tools "should not trigger the start of the five-year period." The Office adds that after five years, the MLC "should apply relevant criteria to determine whether the first distribution should be further deferred."

Ensuring the claiming portal is operational

  The Office said this minimum fixed extension "is advisable in light of the MLC’s understandable need for a multiyear ramp-up period, the claiming portal not yet being available, and time needed to educate copyright owners about the existence of the MLC and the blanket license so they know to come forward to register and claim."

  Additionally, the MLC has been drowning in data since it started operating, with enough volume to be kept busy. The Office noted that DMP reporting of pre-2021 unmatched usage “contain[s] in excess of 1.3 terabytes and nine billion lines of data,” signifying, according to the Office, that there is "much for the MLC and copyright owners to work through in attempting to match and claim, and ample time should be provided to do so."

  The Office notes that its recommendation is "a floor, not a ceiling," and that the minimum fixed period should not be so long that it would "harm the industry as a whole or lead to the indefinite procrastination some commenters sought to avoid."

A minimum of three full years to claim

  For subsequent distributions, although the statute says that the minimum three-year period begins to run from when the “funds were received by the [MLC],” the Office recommends that the MLC, in practice, apply the minimum three-year period from the date that the unmatched usage associated with those funds is made available in the claiming portal. The Office believes "the spirit of the statute counsels that owners should have a minimum of three full years to claim."

  The Office recommends that criteria taken into consideration to determine if royalties become “unclaimed accrued royalties” should include, at minimum:
  > Attainment of reasonable match rates, using appropriate confidence levels, for each relevant reporting period;  
  > Attainment of reasonable engagement metrics tied both to claiming in the portal and the MLC’s outreach activities for each relevant reporting period;
  > Exhaustion of reasonable outreach efforts;
  > Exhaustion of reasonable matching efforts (both automated and manual), including repetitions at appropriate intervals throughout the holding period;
  > Whether metrics indicate significant diminishing returns in that the degree of success in matching has dropped below reasonable threshold levels for each relevant reporting period;
  > Whether the particular work is missing key metadata such that the likelihood of further holding resulting in a match is remote; and
  > Whether the value of the usage of a particular work (or share) from each relevant reporting period and the overall unclaimed royalty value for each relevant reporting period are below reasonable threshold amounts.

Consider additional metrics

  For the first distribution, the Office further recommends that the MLC consider "additional metrics" related to engagement to ensure its education and outreach efforts have been successful and that a critical mass of copyright owners have registered their works and are using the portal to make claims.

  The report also lists a series of further recommendations for the MLC, in particular in the areas of outreach and transparency.

  >  Education and Outreach:
  The MLC should engage "to the broadest extent reasonably practicable" in conducting its education and outreach activities.

  > Usability:
 The public musical works database and the MLC’s online system for claiming and other purposes (the “portal”) should be "simple, accessible, well-organised, and user-friendly, with flexible and robust tools, features, and functionality."

  The portal should "enable users to, among other things, easily and efficiently register with the MLC, provide information, review and interact with the data about their works held by the MLC, identify, flag, and address potential errors and other issues, flag and manage disputes and resolve data conflicts, and claim unmatched usage."

  > Data Quality:
  The MLC should "take reasonable steps to ensure that its data is of the highest possible quality." The goal is to have data that it is "as complete, accurate, up-to-date, and de-conflicted as possible, and is obtained from authoritative sources." In addition, the MLC should provide "user-friendly mechanisms to enable copyright owners, regardless of size or sophistication, to identify, review, verify, and take appropriate actions (e.g., flagging potential issues, making corrections, engaging in data conflict resolution, etc.) with respect to the MLC-held data for their works, including any related matches the MLC has made."

  > Matching Practices:
  The MLC should "employ both automated and manual matching processes that rely on standard unique identifiers." The MLC should use "top-notch" automated processes and should have "the capacity to deploy a broad array of manual activities, including online and offline research, individual look-ups in public and private third-party databases, and leveraging its membership and network of industry partners (including by sharing real-time lists of unmatched works (and shares)."

  > Holding and Distributing Unclaimed Accrued Royalties:
  The MLC should adopt "transparent, practical, and equitable policies, practices, and procedures, especially with respect to holding and distributing unclaimed royalties." (see above)

  > Measuring Success:
  The MLC should "closely monitor and track a wide variety of metrics and continually review and analyse them both to evaluate its level of success and relative effectiveness over time in reducing the incidence of unclaimed royalties and to identify areas for improvement going forward." Such metrics should include, for example, various measurements and breakdowns of engagement levels and match rates.

  > Transparency:
  The MLC should "be transparent about its activities and should continue to engage regularly with stakeholders."

  In its conclusion, the report states that the MLC "does not act in a vacuum, and its ultimate success will depend upon the cooperation of others in the music industry — including not only publishers, administrators, and songwriters, but also DMPs, artists, producers, record labels, distributors, and aggregators — working toward generating, maintaining, and passing on the best possible data. It will also depend on the industry as a whole contributing to the MLC’s education and outreach efforts to help ensure that all creators and licensors of musical works know about the MMA, the MLC, the blanket license, and their associated rights and responsibilities.

  "By coming together, the industry can put the MLC in the best possible position to succeed in reducing the incidence of unclaimed royalties."