Fenwick & West LLP

[co-author: Daniel Klaeren]

On July 8, 2021, the U.S. Copyright Office released a public report, Unclaimed Royalties: Best Practice Recommendations for the Mechanical Licensing Collective, as required by the Music Modernization Act (MMA). The passage of the MMA in 2018 created the Mechanical Licensing Collective (MLC), a nonprofit governing agency tasked with establishing blanket royalty rates, collecting royalties under a mechanical license and distributing royalties to copyright owners when their works are streamed by Digital Service Providers (DSPs).

While a copyright owner has exclusive rights to reproduction and distribution under 17 U.S.C. §§ 106 (1) and (3), these rights are subject to compulsory licensing requirements under 17 U.S.C. § 115. A compulsory mechanical license allows any party to reproduce and distribute nondramatic musical works by simply paying a set license fee determined by statute. Unlike most other intellectual property licenses, the compulsory mechanical license does not require the permission of the copyright owner.

The bulk of the Copyright Office’s new report focuses on recommendations for reducing the incidence of unclaimed accrued royalties—those royalties that have been collected by the MLC but remain unmatched with the proper copyright owners. For context, the MLC completed its first monthly royalty distribution in April of this year (for works streamed in January 2021), with approximately 80 percent of the royalty pool successfully matched to musical works registered in the MLC public database. To reduce the incidence of unclaimed accrued royalties, the Copyright Office recommends a robust educational campaign publicizing the existence of the MMA, the MLC, the blanket license and the public musical works database. The Office’s report also outlines steps to ensure that the MLC’s online claiming portal will allow copyright owners to easily register with the MLC, review data about their works, identify potential errors and claim unmatched usage. Other topics include technical operational recommendations for data quality, matching practices and transparency.

Notably, the Copyright Office recommends that the MLC schedule the first distribution of unclaimed accrued royalties beyond the statutory minimum of three years, withholding the first distribution “for at least five years from the date that the ability to claim in the portal is made available to the public.” The Office reasons that it will take more than three years to make the online database and online claiming portal operational, and to educate music stakeholders sufficiently. Noting that the MLC should value accuracy over expediency, the report states that, “if the MLC is going to err, it should err on the side of holding unclaimed royalties longer.” The Office’s recommended timeline is relevant because the MLC is required under the MMA to “carefully consider, and give substantial weight to, the Office’s recommendations when establishing procedures related to these issues.”

Looking to SoundExchange as a historical example, it may be difficult for the MLC to achieve a distribution of unclaimed accrued royalties on even a five-year time scale. SoundExchange is an organization that operates a musical repository of approximately 30 million sound recordings, all sourced from copyright owners, and was one of the organizations consulted in the course of the Copyright Office’s study. According to SoundExchange, the organization “waited about 10 years” before distributing unmatched royalties. The recent successful distribution of matched royalties, however, offers hope that the new system of mechanical licensing established by the MMA will provide a working solution to streaming services and music industry stakeholders alike.