Music Modernization Act Transition Period Transfer and Reporting of Royalties to the Mechanical Licensing Collective, 2176-2208 [2020-29190]

Download as PDF 2176 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations LIBRARY OF CONGRESS U.S. Copyright Office 37 CFR Part 210 [Docket No. 2020–12] Music Modernization Act Transition Period Transfer and Reporting of Royalties to the Mechanical Licensing Collective U.S. Copyright Office, Library of Congress. ACTION: Final rule. AGENCY: Pursuant to title I of the Orrin G. Hatch-Bob Goodlatte Music Modernization Act, and following extensive solicitation of public comments, the U.S. Copyright Office is issuing a final rule addressing digital music providers’ obligations to transfer and report accrued royalties for the use of unmatched musical works (or shares thereof) to the mechanical licensing collective for purposes of eligibility for the Act’s limitation on liability for prior unlicensed uses. DATES: The rule is effective February 10, 2021. FOR FURTHER INFORMATION CONTACT: Regan A. Smith, General Counsel and Associate Register of Copyrights, by email at regans@copyright.gov, John R. Riley, Assistant General Counsel, by email at jril@copyright.gov, or Jason E. Sloan, Assistant General Counsel, by email at jslo@copyright.gov. Each can be contacted by telephone by calling (202) 707–8350. SUPPLEMENTARY INFORMATION: jbell on DSKJLSW7X2PROD with RULES5 SUMMARY: I. Background On October 11, 2018, the president signed into law the Orrin G. Hatch-Bob Goodlatte Music Modernization Act (‘‘MMA’’) which, among other things, substantially modifies the compulsory ‘‘mechanical’’ license for making and distributing phonorecords of nondramatic musical works under 17 U.S.C. 115.1 It does so by switching from a song-by-song licensing system to a blanket licensing regime administered by a mechanical licensing collective (‘‘MLC’’) that becomes available on January 1, 2021 (the ‘‘license availability date’’). In July 2019, the Copyright Office (the ‘‘Office’’) designated an entity to serve as the MLC, as required by the MMA.2 Digital music providers (‘‘DMPs’’) can obtain the new blanket license to make digital phonorecord deliveries (‘‘DPDs’’) of musical works, including in the form of permanent 1 Public 2 84 Law 115–264, 132 Stat. 3676 (2018). FR 32274 (July 8, 2019). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 downloads, limited downloads, or interactive streams (referred to in the statute as ‘‘covered activity,’’ where such activity qualifies for a compulsory license), subject to compliance with various requirements.3 As was true before the MMA, DMPs may enter into privately negotiated voluntary licenses with copyright owners in lieu of using the compulsory license. Prior to the MMA, DMPs obtained a section 115 compulsory license on a per-work, song-by-song basis, by serving a notice of intention to obtain a compulsory license (‘‘NOI’’) on the copyright owner (or filing it with the Office if the Office’s public records did not identify the copyright owner) and then paying applicable royalties accompanied by accounting statements.4 The MMA includes a ‘‘transition period’’ covering the period following its October 2018 enactment and before the blanket license becomes available in January 2021.5 During this transition period, anyone seeking to obtain a compulsory license to make DPDs must continue to do so on a songby-song basis by serving NOIs on copyright owners ‘‘if the identity and location of the musical work copyright owner is known,’’ and paying them applicable royalties accompanied by statements of account.6 If the musical work copyright owner is unknown, a DMP can no longer file an NOI with the Office, but instead may rely on a limitation on liability that requires the DMP to, among other things, ‘‘continue[ ] to search for the musical work copyright owner’’ using goodfaith, commercially reasonable efforts and bulk electronic matching processes.7 The DMP must either account for and pay accrued royalties to the relevant musical work copyright owner(s) when found or, if they are not found before the end of the transition period, account for and transfer accrued royalties to the MLC at that time.8 Congress believed that the liability limitation, which limits recovery in lawsuits commenced on or after January 3 As permitted under the MMA, the Office designated a digital licensee coordinator (‘‘DLC’’) to represent licensees in proceedings before the Copyright Royalty Judges (‘‘CRJs’’) and the Office, to serve as a non-voting member of the MLC, and to carry out other functions. 17 U.S.C. 115(d)(5)(B); 84 FR 32274 (July 8, 2019); see also 17 U.S.C. 115(d)(3)(D)(i)(IV), (d)(5)(C). 4 See 17 U.S.C. 115(b)(1), (c)(5) (2017). 5 H.R. Rep. No. 115–651, at 10 (2018); S. Rep. No. 115–339, at 10 (2018). 6 17 U.S.C. 115(b)(2)(A), (c)(2)(I); see H.R. Rep. No. 115–651, at 4; S. Rep. No. 115–339, at 3. 7 17 U.S.C. 115(b)(2)(A), (d)(9)(D)(i), (d)(10)(A)– (B); see H.R. Rep. No. 115–651, at 4, 10; S. Rep. No. 115–339, at 3, 10, 22. 8 17 U.S.C. 115(d)(10)(B); see H.R. Rep. No. 115– 651, at 4, 10; S. Rep. No. 115–339, at 3, 10. PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 1, 2018 to the statutory royalty that would be due, would ‘‘ensure that more artist royalties will be paid than otherwise would be the case through continual litigation,’’ 9 and also viewed this provision as a ‘‘key component that was necessary’’ to ensure support for legislative change.10 With respect to reporting and payment requirements for eligibility for the limitation on liability, the statute details three scenarios. First, if the DMP is successful in identifying and locating a copyright owner of a musical work (or share) by the end of the calendar month in which the DMP first makes use of the work, it must provide statements of account and pay royalties to that copyright owner in accordance with section 115 and applicable regulations.11 The second and third scenarios apply if the copyright owner is not identified or located by that date.12 In such cases, the DMP must accrue and hold applicable statutory royalties in accordance with usage of the work, from the initial use of the work until the royalties can be paid to the copyright owner or are required to be transferred to the MLC at the end of the transition period.13 If a copyright owner of an unmatched musical work (or share) is identified and located before the license availability date, the DMP must pay the copyright owner all accrued royalties accompanied by a cumulative statement of account that includes the information that would have been provided had the DMP been providing monthly statements of account to the copyright owner from its initial use of the work in accordance with section 115 and applicable regulations.14 If a copyright owner of an unmatched musical work (or share) is not identified and located by the license availability date, the DMP must, among other things, transfer, no later than 45 calendar days after the license availability date, ‘‘all accrued royalties’’ to the MLC ‘‘accompanied by a cumulative statement of account that includes all of the information that would have been provided to the copyright owner had the [DMP] been serving monthly statements of account on the copyright owner from initial use 9 H.R. Rep. No. 115–651, at 14; S. Rep. No. 115– 339, at 14–15; Report and Section-by-Section Analysis of H.R. 1551 by the Chairmen and Ranking Members of Senate and House Judiciary Committees, at 12 (2018), https:// www.copyright.gov/legislation/mma_conference_ report.pdf (‘‘Conf. Rep.’’). 10 H.R. Rep. No. 115–651, at 13; S. Rep. No. 115– 339, at 14; Conf. Rep. at 12. 11 17 U.S.C. 115(d)(10)(B)(iii). 12 Id. at 115(d)(10)(B)(iv). 13 Id. 14 Id. at 115(d)(10)(B)(iv)(II). E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations of the work in accordance with [section 115] and applicable regulations,’’ including the certification that would have been provided to an identified copyright owner 15 as well as an additional certification attesting to the DMP’s matching efforts during the transition period.16 In December 2018, the Office published an interim rule and requested comments to address payment and reporting obligations during the transition period.17 That interim rule specified that DMPs must pay royalties and provide cumulative statements of account to copyright owners and the MLC in compliance with the Office’s preexisting regulations regarding monthly statements of account.18 The Office received no comments in response to this public rulemaking and finalized the rule in March 2019.19 In September 2019, the Office issued a notification of inquiry regarding various topics related to MMA implementation.20 Observing the ‘‘persistent concern about the ‘black box’ of unclaimed royalties, including its amount and treatment by digital music providers and the MLC,’’ this notice provided additional opportunity for public comment on, among other things, ‘‘any issues that should be considered relating to the transfer and reporting of unclaimed royalties by digital music providers to the MLC.’’ 21 Both the MLC and DLC provided comments in response to this later inquiry, as discussed further below. The MLC generally sought to expand the reporting and formatting requirements in a manner that approximated its requests for monthly reporting by blanket licensees on a prospective basis, to better facilitate its matching activities (which the DLC opposed).22 The DLC specifically sought regulatory certainty to ensure that monies previously paid by DMPs to copyright owners pursuant to privately negotiated, pre-MMA agreements need not also be paid a second time to the MLC to maintain DMP eligibility for the limitation on liability (which the MLC opposed).23 In July 2020, the Office issued a notice of proposed rulemaking jbell on DSKJLSW7X2PROD with RULES5 15 See 37 CFR 210.6(f)(1)(v). 16 17 U.S.C. 115(d)(10)(B)(iv)(III). 17 83 FR 63061 (Dec. 7, 2018). 18 See 37 CFR 210.10. 19 See 84 FR 10685 (Mar. 22, 2019). 20 84 FR 49966 (Sept. 24, 2019). 21 Id. at 49971. 22 See MLC Initial NOI Comment at 22–23; MLC Reply NOI Comment at 27–30, App. D at 19; MLC Ex Parte Letter at 2–4 (June 17, 2020). 23 See DLC Initial NOI Comment at 18–19; DLC Reply NOI Comment at 24–25, Add. A–24. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 (‘‘NPRM’’) to address these comments.24 It proposed expanding the reporting requirements to accommodate the MLC’s request for additional information. The NPRM also offered initial guidance regarding the potential relationship of pre-MMA agreements to the cumulative statement reporting obligations, but did not propose specific regulatory language concerning the issue of potential ‘‘double payments’’ in connection with such agreements; the Office invited further comment on the issue. The MLC’s comments to the NPRM were largely supportive of the NPRM’s proposed approach.25 The DLC supported some aspects of the proposed rule, but expressed concern with some of the proposed reporting requirements and urged the Office to promulgate regulations addressing privately negotiated pre-MMA agreements and their interaction with the limitation on liability requirements.26 Through the Office’s permitted ex parte meeting option, those parties, as well as individual DMPs, music publishers, and songwriter groups provided additional views regarding these issues, as summarized on the Office’s ex parte communications web page.27 24 85 FR 43517 (July 17, 2020) (‘‘NPRM’’). All rulemaking activity, including public comments, as well as educational material regarding the MMA, can currently be accessed via navigation from https://www.copyright.gov/music-modernization. Comments received in response to the September 2019 notification of inquiry are available at https:// www.regulations.gov/docket?D=COLC-2019-0002, comments received in response to the NPRM and supplemental notice of proposed rulemaking (‘‘SNPRM’’) are available at https:// www.regulations.gov/docket?D=COLC-2020-0011. Guidelines for ex parte communications, along with records of such communications, are available at https://www.copyright.gov/rulemaking/mmaimplementation/ex-parte-communications.html. References to these comments are by party name (abbreviated where appropriate), followed by ‘‘Initial NOI Comment,’’ ‘‘Reply NOI Comment,’’ ‘‘NPRM Comment,’’ ‘‘SNPRM Comment,’’ or ‘‘Ex Parte Letter,’’ as appropriate. 25 See MLC NPRM Comment at 1 (‘‘The Proposed Regulation considers the aims and goals of the MMA in creating the new mechanical licensing system, and works to empower the MLC to improve the matching of DMP usage to musical works and the owners thereof and thereby reduce unmatched and unclaimed royalties. The MLC agrees with the bulk of the language in the Proposed Regulation.’’). 26 See DLC NPRM Comment at 2–3. 27 See, e.g., Artist Rights Alliance (‘‘ARA’’), Music Artists Coal. (‘‘MAC’’), Nashville Songwriters Ass’n Int’l (‘‘NSAI’’), Google Ex Parte Letter (Oct. 23, 2020); MediaNet Ex Parte Letter (Oct. 28, 2020); MLC Ex Parte Letter (Oct. 16, 2020); Nat’l Music Publishers’ Ass’n (‘‘NMPA’’) Ex Parte Letter (Nov. 3, 2020); Recording Acad. & Songwriters of N. Am. (‘‘SONA’’) Ex Parte Letter (Sept. 22, 2020); DLC Ex Parte Letter (Oct. 14, 2020); Songwriters Guild of Am. (‘‘SGA’’), Soc’y of Composers & Lyricists (‘‘SCL’’), All. for Women Film Composers (‘‘AWFC’’) & Music Creators N. Am. (‘‘MCNA’’) Ex Parte Letter (Sept. 15, 2020); SATV Music Publ’g (‘‘SATV’’) Ex Parte Letter (Oct. 28, 2020); Spotify Ex Parte Letter (Oct. 9, 2020); Universal Music PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 2177 In November 2020, the Office issued an SNPRM after determining that the public process would benefit from soliciting comments on alternative regulatory language to ensure that further views could be duly considered on the issues raised in the proceeding.28 The Office noted that the SNPRM resulted from then-received public comments, a letter from Senate Judiciary Committee Chairman Lindsey O. Graham specifically raising the issue of pre-MMA agreements between DMPs and music publishers and the payment of unclaimed accrued royalties, and the D.C. Circuit’s partial vacatur and remand of the Copyright Royalty Judges’ (‘‘CRJs’’) Phonorecords III determination.29 The Office explained that although it had not reached any final conclusions, it was issuing the SNPRM to provide interested parties with adequate notice and opportunity to comment in advance of the February 2021 deadline for DMPs to be able to submit cumulative statements of account to the MLC. The SNPRM presented two main potential modifications to the NPRM. First, to address the DLC’s comments, the requirements governing reporting of sound recording and musical work information would more closely track existing regulations, with an added requirement that DMPs report certain additional information if requested by the MLC.30 Second, the circumstances under which a DMP may estimate and adjust the computation of its accrued royalties would be expanded where such computation depends upon an input that is unable to be finally determined at the time the cumulative statement of account is due.31 In response to the SNPRM, the MLC and DLC largely reached consensus on the data reporting issue, except with respect to partially matched works.32 On the second issue, the MLC and DLC both supported the SNPRM’s approach to more closely track the December 2018 interim rule on estimates and adjustments adopted for reports of usage Publ’g Grp. (‘‘UMPG’’) Ex Parte Letter (Oct. 30, 2020); Warner Music Grp. (‘‘WMG’’) Ex Parte Letter (Oct. 21, 2020). 28 85 FR 70544, 70546 (Nov. 5, 2020) (‘‘SNPRM’’). 29 Id. at 70545–46; Letter from Senator Lindsey O. Graham, Chairman, Senate Committee on the Judiciary, to U.S. Copyright Office 1 (Sept. 30, 2020); Johnson v. Copyright Royalty Bd., 969 F.3d 363 (D.C. Cir. 2020). 30 SNPRM at 70547. 31 Id. at 70546–47. 32 See DLC SNPRM Comment at 12–13; MLC SNPRM Comment at 15–17; DLC & MLC Ex Parte Letter (Dec. 9, 2020). E:\FR\FM\11JAR5.SGM 11JAR5 2178 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 under the blanket license.33 They disagreed, however, on the SNPRM’s proposed approach to address reporting with respect to any applicable pre-MMA agreements. The DLC supported the SNPRM’s approach 34 while the MLC did not,35 and songwriter groups were split.36 At Chairman Graham’s request, the Office also convened a joint meeting to discuss their views on the treatment of certain pre-MMA agreements in connection with the limitation on liability requirements. Although it became clear that no significant consensus had emerged, the Office found it helpful for the parties to engage with each other directly, and believes that the record has benefited from the input of a variety of perspectives, each of which the Office has carefully considered in moving forward with a rule regarding cumulative statements consistent with the MMA’s statutory deadline.37 Having reviewed and considered all relevant comments received in response to the notification of inquiry, NPRM, and SNPRM, including through a number of permitted ex parte communications as detailed under the Office’s procedures, the Office has weighed the legal, business, and practical implications and equities that have been raised. Pursuant to its authority under 17 U.S.C. 115 and 702, it is adopting final regulations with respect to DMP obligations to transfer and report accrued royalties for unmatched musical works (or shares) to the MLC for purposes of eligibility for the MMA’s limitation on liability for prior unlicensed uses, which it believes best reflect the statutory language and its animating goals in light of the rulemaking’s record.38 In doing so, the 33 See DLC SNPRM Comment at 2; MLC SNPRM Comment at 13–14, App. A at v, ix–x. 34 See DLC SNPRM Comment at 1–12. 35 See MLC SNPRM Comment at 2–13. 36 See ARA, Future of Music Coal. (‘‘FMC’’) & MusicAnswers SNPRM Comment at 2–4 (supporting); MAC, Recording Acad. & SONA SNPRM Comment at 2–3 (opposing); SGA, SCL & MCNA SNPRM Comment at 5–6 (declining ‘‘to speak directly in these Comments regarding the USCO’s proposed Supplemental USCO Rules’’ due to underlying concerns with DMP and publisher transparency surrounding pre-MMA agreements). 37 See Letter from Senator Lindsey O. Graham, Chairman, Senate Committee on the Judiciary, to U.S. Copyright Office 1 (Sept. 30, 2020). 38 See H.R. Rep. No. 115–651, at 14; S. Rep. No. 115–339, at 15; Conf. Rep. at 12 (‘‘The Copyright Office has the knowledge and expertise regarding music licensing through its past rulemakings and recent assistance to the Committee[s] during the drafting of this legislation.’’); 17 U.S.C. 115(d)(12)(A) (‘‘The Register of Copyrights may conduct such proceedings and adopt such regulations as may be necessary or appropriate to effectuate the provisions of this subsection.’’); VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 Office has exercised its ‘‘broad regulatory authority’’ and ‘‘use[d] its best judgement in determining the appropriate steps’’ as Congress directed.39 II. Final Rule Several aspects of the proposed rule were not opposed. Where parties objected to other aspects of the proposed rule, the Office has considered those comments and resolved the issues as discussed below. If not otherwise discussed, the Office has concluded that the relevant proposed provision should be adopted as final for the reasons stated in the NPRM (though in some such cases, the adopted language reflects minor technical edits). In promulgating this rule, the Office has endeavored to ensure that the MLC receives the information and royalties it needs to fulfill its statutory duties, that copyright owners and songwriters are accurately paid any royalties they are owed, and that DMPs can realistically and practicably obtain the limitation on liability by complying with the statutory requirements. A. Cumulative Statements of Account Content and Format This section of the preamble discusses the final rule’s content and format requirements for cumulative statements of account delivered to the MLC, except with respect to requirements connected to the reliance upon estimates, adjustments, and reconciliation of statements, which are addressed below. 1. Sound Recording and Musical Work Information The NPRM proposed requiring DMPs to provide additional information concerning sound recording and musical work metadata beyond what is required by existing regulations governing cumulative statements of Alliance of Artists & Recording Cos. v. DENSO Int’l Am., Inc., 947 F.3d 849, 863 (D.C. Cir. 2020) (‘‘[T]he best evidence of a law’s purpose is the statutory text, and most certainly when that text is the result of carefully negotiated compromise among the stakeholders who will be directly affected by the legislation.’’) (internal quotation marks, brackets, and citations omitted); 84 FR at 49967–68. 39 H.R. Rep. No. 115–651, at 5–6, 14; S. Rep. No. 115–339, at 5, 15; Conf. Rep. at 4, 12 (acknowledging that ‘‘it is to be expected that situations will arise that were not contemplated by the legislation,’’ and that ‘‘[t]he Office is expected to use its best judgement in determining the appropriate steps in those situations’’); see 17 U.S.C. 115(d)(12)(A); Nat’l Cable & Telecomms. Ass’n v. Brand X internet Servs., 545 U.S. 967, 980 (2005) (‘‘[A]mbiguities in the statutes within an agency’s jurisdiction to administer are delegations of authority to the agency to fill the statutory gap in reasonable fashion.’’) (citing Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)). PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 account.40 The proposed requirements largely mirrored the content requirements the Office had proposed in a parallel rulemaking (and has recently adopted) for monthly reports of usage under the blanket license.41 This general approach was recommended by the MLC but disfavored by the DLC, which called it ‘‘impractical’’ and explained that ‘‘digital music providers have maintained usage information . . . with the existing statement of account regulations in mind.’’ 42 The Office sought to address the DLC’s concerns by including a practicability standard: DMPs would only be required to report information that would not have been reported to copyright owners in monthly statements of account, ‘‘to the extent practicable.’’ 43 In response, the DLC ‘‘emphatically opposed’’ the NPRM, and described the requirement to report additional information as ‘‘impossible,’’ explaining that some of the information had not been collected by DMPs in the past and could not be collected in time to include in cumulative statements of account.44 The DLC further stated that the addition of a ‘‘practicability’’ standard did not alleviate its concerns, and implied that the reporting requirement as proposed might cause DMPs to forgo taking advantage of the limitation on liability.45 The SNPRM sought additional comments on this issue, stating the Office was considering adopting alternative language ‘‘to reflect the DLC’s comments and incentivize optional participation in th[e] transition period reporting for cumulative statements of account.’’ 46 The Office proposed a baseline reporting requirement for sound recording and musical work information that was closer to the existing requirements for transition period cumulative statements of account, but added a requirement that DMPs additionally ‘‘report information 40 NPRM at 43519; see 37 CFR 210.20. at 43519; the interim rule regarding monthly reports of usage was published in 85 FR 58114 (Sept. 17, 2020). 42 NPRM at 43519 (quoting DLC NPRM Reply at 24). 43 Id. at 43525. 44 DLC NPRM Comment at Add. 21; DLC Ex Parte Letter at 2 (Aug. 11, 2020). 45 DLC NPRM Comment at 8 (‘‘This uncertainty and ambiguity undermines the central bargain of the statute by eroding DMPs’ confidence in their ability to rely on the limitation on liability, thus decreasing their incentive to pay accrued royalties to the MLC if they cannot provide certain data included in the new rules.’’); see also DiMA NPRM Comment at 6–7 (saying the NPRM’s reporting amendments would create ‘‘massive operational hurdles’’ and would ‘‘jeopardize[ ] every [DMP’s] eligibility for the limitation on liability’’). 46 SNPRM at 70547. 41 NPRM E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations referenced in 17 U.S.C. 115(d)(10)(B)(i)(I)(aa) or (bb) that was acquired by the DMP in connection with its efforts to obtain such information under 17 U.S.C. 115(d)(10)(B)(i)(I), or a DMP-assigned identifier, if such information is requested by the MLC.’’ 47 It sought comment on the feasibility and adequacy of this proposal or whether, as an alternative to DMPs providing such information upon the MLC’s request, the regulations should require submission of such supplementary information by a set date.48 The Office encouraged ‘‘continued dialogue between the MLC and DLC as to this aspect of the reporting regulations, as well as submission of any joint proposals that may result from discussions.’’ 49 The MLC and DLC did engage in continued discussions on this issue, which proved fruitful. In a December 2020 ex parte meeting, the organizations reported that they had reached agreement ‘‘on an operational framework that ensures the MLC obtains all reasonably available metadata for unmatched works via a simplified format that DLC members are wellprepared to operationalize,’’ along with proposed regulatory language.50 Their proposal would require DMPs to provide to the MLC by February 2021 a cumulative statement of account ‘‘containing all metadata information that would have been delivered to copyright owners under the pre-MMA monthly statements of account,’’ similar to the present transition period requirement for cumulative statement of account.51 DMPs would also be required to submit a supplemental metadata report to the MLC by June 15, 2021 containing ‘‘(1) available and up-to-date track-level metadata that has been obtained by the services and (2) in the event copyright owners of partial shares of particular works were identified and paid, information regarding those paid parties and the amounts that were paid.’’ 52 The cumulative statement of jbell on DSKJLSW7X2PROD with RULES5 47 Id.; see also 17 U.S.C. 115(d)(10)(B)(i)(I)(aa) (‘‘Sound recording name, featured artist, sound recording copyright owner, producer, international standard recording code, and other information commonly used in the industry to identify sound recordings and match them to the musical works they embody.’’); id. at 115(d)(10)(B)(i)(I)(bb) (‘‘Any available musical work ownership information, including each songwriter and publisher name, percentage ownership share, and international standard musical work code.’’). 48 SNPRM at 70547. 49 Id. 50 DLC & MLC Ex Parte Letter at 1 (Dec. 9, 2020). 51 Id. 52 Id. at 2. The MLC and DLC’s proposed regulations do not require reporting of publisher or copyright owner information in the supplemental metadata report. This absence makes sense given that the data applies to unmatched royalties. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 account would also contain both a DMPprovided track identifier and a unique identifier for each individual ‘‘usage’’ line that the MLC will use to index to the later-delivered supplemental metadata report.53 The Office appreciates the cooperative efforts of the MLC and DLC in crafting this joint proposal and generally agrees with their approach and list of information to be reported. The Office believes the proposal constitutes a reasonable approach that provides legal certainty and effectuates the intent of the MMA in light of the operational realities DMPs face at this time.54 The supplemental metadata provided by DMPs beyond what they are required to report under existing cumulative statement of account regulations should benefit the MLC in executing its matching duties, and the inclusion of a unique identifier will further enable the MLC to link data received through usage reports and the supplemental metadata report with sound recording and musical work information it receives in cumulative statements of account. At the same time, this pragmatic approach mitigates the risk that DMPs would forgo the statutory limitation on liability, which would ultimately harm songwriters, copyright owners, and DMPs by incentivizing continued litigation. The joint proposal provides that ‘‘failure to deliver the supplemental metadata report would not result in the loss of limitation of liability or the blanket license.’’ 55 The MLC and DLC additionally propose that the MLC could enforce the supplemental metadata report delivery requirement by bringing an action in federal court against a DMP for ‘‘injunctive relief requiring delivery of that report, plus costs and attorney’s fees and, potentially, a penalty on the amount of accrued royalties paid to the MLC.’’ 56 Reporting requirements for partially matched tracks are discussed below. 53 Id. The Office presumes that the DLC’s support of this joint proposal moots any concerns it voiced regarding the NPRM. 54 In an ex parte meeting subsequent to the publication of the DLC & MLC joint proposal, Music Reports (a vendor of various DMPs) raised concerns regarding the introduction of new reporting requirements for cumulative statements of account so close to the required delivery date. Music Reports Ex Parte Letter at 2 (Dec. 15, 2020). While the Office does not discount the validity of these concerns, it notes that it is the DMPs, not Music Reports, who bear the risk, since they are subject to this requirement to maintain the statutory limitation on liability. Given that the DLC, which represents DMP interests, believes the reporting requirements are appropriate, the Office declines to deviate from the proposal. 55 DLC & MLC Ex Parte Letter at 2 (Dec. 9, 2020). 56 Id. The proposed language states, inter alia, that in the event injunctive relief is granted, ‘‘the PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 2179 During the ex parte meeting, the Office asked the MLC and DLC about the Office’s authority to adopt language prescribing these enforcement remedies.57 The MLC and DLC responded that they believed the Office’s general regulatory authority under section 115(d) was broad enough to cover this enforcement mechanism.58 They explained that the proposal ‘‘is intended to fill a gap in the statutory scheme,’’ saying that while the statute requires collection of such metadata by DMPs, it does not explicitly require delivery of the metadata to the MLC.59 The Office agrees with the MLC and DLC that failure to provide the additional metadata should not result in loss of the limitation on liability or default of the blanket license.60 This result is consistent with the statute, which premises the limitation on liability on a requirement to report only ‘‘all of the information that would have been provided to the copyright owner had the digital music provider been providing monthly statements of account to the copyright owner from initial use of the work in accordance with this section and applicable regulations.’’ 61 The Office declines, however, to adopt the enforcement mechanism provisions proposed by the MLC and DLC. The Office has accommodated concerns regarding a gap in the statute by requiring, via regulation, that DMPs report the requested supplemental metadata. Multiple reasons compel the Office not to prescribe penalties for noncompliance to a federal court (which would also construct an entirely new monetary damages scheme for the MLC to administer). First, the timing of the proposal came too late in the rulemaking process to provide adequate notice to other potentially interested parties. Second, the establishment of such a penalty provision via regulations would be a significant departure from court shall award, notwithstanding anything to the contrary in section 505, reasonable attorney’s fees and costs, as well as such other relief as the court determines appropriate,’’ or, in the event the court finds that the DMP acted unreasonably or in bad faith, ‘‘damages in the amount of 1.5% per month on the amount of royalties transferred pursuant to subsection (b)(3)(i), or the highest lawful rate, whichever is lower, for the period from June 15, 2021 until the supplemental metadata report is provided to the mechanical licensing collective.’’ Id. at 10. 57 Id. at 3. 58 Id. 59 Id. 60 Id. at 2–3 (‘‘As an initial matter, DLC and MLC agree that loss of the limitation of liability or the blanket license would be an inappropriate means of enforcing the format and supplemental metadata report requirements proposed herein.’’). 61 17 U.S.C. 115(d)(10)(B)(iv)(II)(aa). E:\FR\FM\11JAR5.SGM 11JAR5 2180 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations historical practice: The Office is not aware of analogous provisions elsewhere in its regulations. Finally, the Office notes that multiple provisions in the MMA provide that a ‘‘district court shall determine the matter de novo.’’ 62 The statute provides the MLC with the authority to enforce rights and obligations, including regulatory obligations, through the courts, which are well-positioned to determine appropriate remedies. The MLC and DLC also requested that, ‘‘if the Office is disinclined to adopt the particular enforcement mechanisms proposed herein, . . . [it] revert to the MLC and DLC for discussion of potential alternatives.’’ 63 In light of the advanced stage of this process and fastapproaching statutory deadline, however, the Office declines further discussion.64 jbell on DSKJLSW7X2PROD with RULES5 2. Partially Matched and Paid Works Next, the Office addresses conflicting proposals from the MLC and DLC regarding the level of information that must be provided with respect to partially matched musical works. As discussed in the NPRM, the MLC initially requested that cumulative statements of account include information about matched shares of a musical work where unmatched shares for the work are reported, it expressed the concern that if a DMP paid one copyright owner its royalty share and held accrued royalties for any remaining unmatched share(s), then upon transfer of such unmatched royalties, if the paid share is not properly identified, the a paid co-owner might be able to collect a portion of an unpaid co-owner’s share.65 The NPRM noted that the DLC did not appear to disagree with the MLC’s description of the issue, but had suggested that DMPs’ third-party vendors, who it said are subject to ‘‘strict contractual confidentiality 62 E.g., id. at 115(d)(2)(A)(v) (improper rejection of notice of license); id. at 115(d)(4)(E)(iv) (improper termination of blanket license). 63 Id. at 115(d)(3)(C)(i)(VIII); DLC & MLC Ex Parte Letter at 3 (Dec. 9, 2020). 64 The SNPRM itself was the latest formal call for public comment on an issue that has been open to public comment through various mechanisms since December 2018. See 83 FR 63061 (interim rule); see also 84 FR 49966 (notification of inquiry); NPRM; SNPRM. 65 NPRM at 43521; see MLC Reply NOI Comment App. D at 19; MLC Ex Parte Letter at 3 (June 17, 2020) (giving the example of an identified 50% coowner being paid their 50% share by a DMP, and then subsequently being paid half of the remaining share by the MLC due to lack of record of the first payment; stating that ‘‘reporting on partiallymatched works and the respective shares that the DMP already paid is essential to allow the MLC to properly credit share owners who have been paid and avoid double payments’’). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 restrictions,’’ may have this information and not the DMPs themselves.66 The DLC asked that the Office ‘‘account for these [confidentiality] restrictions and protect digital music providers from any liability related to their breach.’’ 67 In response, the MLC offered to amend its proposal to limit share reporting ‘‘to the share percentage and the owner of the share that was paid, [and] omit[ ] the precise amount of royalties paid under the voluntary license terms,’’ presuming that the DLC’s confidentiality concern ‘‘relates to the amounts of royalties paid under voluntary licenses.’’ 68 The NPRM largely adopted the MLC’s amended proposal, stating that for each track for which a share of a musical work has been matched and for which accrued royalties for that share have been paid, but for which one or more shares remains unmatched and unpaid, the DMP must provide a clear identification of the share(s) that have been matched, the owner(s) of such matched shares, and, for shares other than those paid pursuant to a voluntary license, the amount of the accrued royalties paid.69 The Office tentatively concluded that the MLC’s proposal was reasonable in light of the statutory function of cumulative statements of account, noting that the situation the MLC anticipated seems likely to occur and that having the matched share information will be important.70 In response, the MLC generally agreed with the NPRM’s proposal but asked for two clarifications: 71 First, that the identification of the matched share(s) explicitly be of the ‘‘percentage’’ share(s); 72 and second, that unique party identifiers known by the DMP be provided for the owner(s) of the matched shares being reported, as they ‘‘are very valuable for efficiency and accuracy.’’ 73 The Office agreed that having these identifiers will be helpful to the MLC in processing cumulative statements and proposed these clarifications as part of the SNPRM.74 Having received no comments in opposition, the Office incorporates these changes into the final rule. The DLC’s response to the NPRM confirmed its agreement that the treatment of partially matched works is ‘‘a legitimate issue that needs to be 66 NPRM at 43521; see DLC Reply NOI Comment at 25. 67 DLC Reply NOI Comment at 25. 68 MLC Ex Parte Letter at 4 (June 17, 2020). 69 NPRM at 43525. 70 Id. at 43521. 71 MLC NPRM Comment at 6. 72 Id. at 6, App. A at v. 73 Id. at 6–7, App. A at v–vi. 74 See SNPRM at 70550. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 resolved.’’ 75 It noted that it ‘‘support[s] providing information regarding partially matched works to ensure that the appropriate copyright owners are paid,’’ but only ‘‘as long as [DMPs] that do not have that information because of confidentiality restrictions in contracts with third-party vendors are not required to provide it in order to claim the benefits of the MMA’s limitation on liability.’’ 76 The DLC expanded on its vendor-related concerns, claiming that one such vendor, Music Reports, ‘‘has notified its client DMPs that it is unwilling to share any musical work ownership share information with the MLC or the DMPs, as it regards that information to be proprietary.’’ 77 The DLC expressed concern that other vendors could take a similar position.78 The DLC additionally stated that ‘‘there is also an issue related to voluntary licenses, in that the information that publishers provide about their share splits are subject to their own confidentiality restrictions.’’ 79 The DLC ultimately proposed that DMPs provide, on a per-track basis, a clear identification of the total aggregate percentage share that has been matched and the owner(s) of that share, without identifying the specific shares owned by each owner or the actual amount paid (which, the DLC argued, would be unnecessary and potentially problematic). It proposed that this requirement would be further subject to the limitation that if the information is maintained by a third-party vendor that the information is made available to the DMP on commercially reasonable and non-discriminatory terms.80 In response to the DLC’s assertions, Music Reports informed the Office that it ‘‘has never said it will not release information about partially matched works—only that such data has independent commercial value given the twenty-five years of effort the company has invested in curating that data.’’ 81 Despite initial speculation, the DLC has not informed the Office of any other vendors who have expressed an 75 DLC NPRM Comment at 6. at 2. 77 Id. at 6. 78 Id. 79 Id. at 7 n.15. 80 DLC Ex Parte Letter at 5, 14–15 (Oct. 14, 2020); see DLC NPRM Comment at 7. 81 Music Reports Ex Parte Letter at 2 (Sept. 29, 2020) (‘‘We are currently working with our clients to understand and support their needs, on commercially reasonable terms, with respect to these needs. . . .’’); see DLC Ex Parte Letter at 5 (Oct. 14, 2020) (‘‘Music Reports, Inc., has recently expressed willingness to provide this information to the MLC on behalf of its clients, although the commercial terms are still being discussed, and any regulatory provision here should ensure that vendors are not given undue bargaining power.’’). 76 Id. E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations unwillingness to provide share information. The MLC objected to the DLC’s proposal, stating that it ‘‘would not provide the MLC with adequate information to ensure proper payment allocation.’’ 82 The MLC disputed that copyright owner splits are subject to publisher confidentiality restrictions, noting that ‘‘[c]opyright owners will be providing their claimed splits to the MLC to receive royalty distributions and the MMA directs that such splits be included in the MLC’s public database.’’ 83 The MLC further stated that ‘‘the logical conclusion of the DLC’s argument is that it could not report any partially-paid royalty information where there was only one partially-paid copyright owner, since the aggregate percentage paid would of course reveal the percentage of the single copyright owner that was paid.’’ 84 The DLC countered that, with respect to the issue of ‘‘some copyright owners regard[ing] the splits of musical works they control as confidential,’’ ‘‘the MLC is not a party to these agreements, and does not purport to represent any parties to these agreements,’’ and that ‘‘there is no reason that the MLC would need detailed matched share information in order to find the owners of unmatched shares.’’ 85 As with requirements to report certain sound recording and musical work information discussed above, the DLC also asserted that split information should be included in a supplemental report provided to the MLC at some point in time after the cumulative statement of account and that such reporting should not be tied to eligibility for the limitation on liability.86 To obtain additional public input, the SNPRM noticed an alternative approach that more closely resembled the DLC’s proposal than the MLC’s proposal, which had been largely embodied in the NPRM. The SNPRM proposed that DMPs provide ‘‘a clear identification of the total aggregate percentage share that has been matched and paid and the owner(s) of the aggregate matched and paid share (including any unique party identifiers for such known owner(s)), so long as, in the event such information is maintained by a third-party vendor, that information is made available to the digital music provider on commercially reasonable terms.’’ 87 The SNPRM was informed by the DLC’s explanation that the MLC did not necessarily need payment amounts and non-aggregated splits to perform its duties, and concern about DMPs potentially losing eligibility for the limitation on liability in the event of a legitimate inability to provide this information. The SNPRM did not include the DLC’s proposal about thirdparty vendor terms needing to be ‘‘nondiscriminatory,’’ as a vendor may well have commercially reasonable reasons for not treating differently situated DMPs the same. The DLC fully supported the SNPRM’s proposed provision,88 as did Music Reports, which said it ‘‘nicely draws a difficult line.’’ 89 The MLC, however, expressed concern, stating that ‘‘the reporting of only aggregate share information would make it impossible for the MLC to determine with confidence what partial payments have been made, where multiple shares have been paid.’’ 90 The MLC provided an example to illustrate: [I]f a DMP reports on a partial match only that Publishers A and B were paid an aggregate 75%, and the MLC’s records show Publisher A owning 50% and Publisher B owning 50%, how can the MLC possibly determine how to fairly allocate the remaining 25% between Publisher A and B? The MLC needs the breakdown that Publisher A received 50% and Publisher B received 25%, instead of merely the aggregated 75% payment, in order to properly allocate the remaining royalties.91 The MLC also reiterated its previous argument that the DLC’s position on confidentiality restrictions is ‘‘illogical’’ because ‘‘[t]he DLC has no objection to reporting ‘aggregate’ shares paid when there has been only one share paid, which is of course equivalent to reporting the individual share paid.’’ 92 With respect to the SNPRM’s proposal to excuse reporting where the information is maintained by a thirdparty vendor and not made available to the DMP on commercially reasonable terms, the MLC agreed that ‘‘[i]f there truly was a situation where a digital music provider was somehow legally and commercially unable to obtain its own historical royalty payment information, then the rule could accommodate this,’’ but contended that because the information is ‘‘so critical to jbell on DSKJLSW7X2PROD with RULES5 87 SNPRM 82 MLC Ex Parte Letter at 6 (Oct. 5, 2020). 83 Id. 84 Id. 85 DLC Ex Parte Letter at 5 n.9 (Oct. 14, 2020). Ex Parte Letter at 2 (Nov. 10, 2020) (‘‘[T]here are significant operational and commercial obstacles to producing and submitting the reports by February 15.’’). 86 DLC VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 at 70550. 88 DLC SNPRM Comment at 13 n.35. 89 Music Reports SNPRM Comment at 1. 90 MLC SNPRM Comment at 16. 91 Id. 92 Id. at 15–16 (‘‘[I]t is not conceivable that there exists a reasonable restriction on disclosing individual shares that only applies when multiple shares are being disclosed together.’’). PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 2181 ensuring that royalties are paid to the correct parties,’’ the exception should be stricter.93 The MLC proposed the following conditions: (1) The information is maintained only by a third-party vendor; (2) the DMP does not have any contractual or other rights to access the information; (3) the DMP is unable to compile the information from records in its possession; and (4) the vendor refuses to make the information available to the DMP on commercially reasonable terms.94 The MLC further proposed that a DMP relying on the exception must provide the MLC with a certification, under penalty of perjury, that the conditions apply, and include a description of any terms on which the vendor offered to provide access to the information.95 Although the MLC and DLC continued to disagree about what should be reported, they agreed that the reporting itself should be contained in a supplemental report separate from the cumulative statement of account and delivered to the MLC by June 15, 2021, rather than by February 2021; they also agreed, as discussed above, that the supplemental report should not be a condition of the limitation on liability or the blanket license.96 Having considered this issue, the Office agrees with aspects of both the MLC’s and DLC’s respective positions and has adopted a final rule that is essentially a hybrid approach. The Office is persuaded by the MLC’s new example that there are at least some plausible situations where nonaggregated share information will need to be known.97 At the same time, while the Office is not in a position to opine on the legitimacy of asserted confidentiality concerns, it declines to issue a rule that may interfere with alleged confidentiality restrictions that may exist. And as the MLC agrees, to the extent there is a legitimate inability to report the information, the rule should accommodate it.98 Consequently, the adopted rule requires a DMP to provide a clear identification of the percentage share(s) that have been matched and paid and the owner(s) of such matched and paid share(s). If this information cannot be 93 Id. 94 Id. at 16. App. A at xiii. 95 Id. 96 DLC SNPRM Comment at 12–13, 13 n.35; MLC SNPRM Comment at 15; DLC & MLC Ex Parte Letter at 2, Add. A (Dec. 9, 2020). 97 While the DLC asserted that this scenario ‘‘is not one that tends to occur in reality,’’ it did not dispute the possibility that it could arise or that the MLC would need non-aggregated information in such cases, even if they are relatively rare. DLC Ex Parte Letter at 3 (Dec. 11, 2020). 98 See MLC SNPRM Comment at 16. E:\FR\FM\11JAR5.SGM 11JAR5 2182 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 reported for a particular track because it is subject to a contractual confidentiality restriction, the DMP, for each such track, must certify to the confidentiality restriction and instead provide a clear identification of the total aggregate percentage share that has been matched and paid and the owner(s) of the aggregate matched and paid share. Both scenarios are subject to the SNPRM’s proposed exception for vendor-held information, which the Office agrees should be made stricter, along the lines of the MLC’s proposal. Subject to a slight modification, the MLC’s four proposed conditions are reasonably focused to ensure that the exception only applies where there is a legitimate issue without foreclosing practical reliance on the exception. The final rule adjusts the proposed third condition to limit it to where the DMP cannot compile the information using commercially reasonable efforts within the required reporting timeframe. A DMP relying on the exception must certify that the conditions apply, but the Office disagrees that it is necessary to provide the MLC with a description of any terms on which the vendor offered to provide access to the information. The certification is adequate. The Office also agrees with the MLC and DLC that it is sufficient for partially matched work information to be delivered to the MLC in a subsequent supplemental report by June 15, 2021, and that delivery of this supplemental report should not be a condition of the limitation on liability. This is reflected in the final rule. 3. Format The final rule includes adjusted language regarding the formatting of cumulative statements that may be submitted to the MLC. To facilitate efficient and accurate reporting and processing of cumulative statements of account, as supported by the MLC, the NPRM proposed carrying over the existing provision reports of usage format, which requires delivery to the MLC in a machine-readable format that is compatible with its information technology systems, as reasonably determined by the MLC and taking into consideration relevant industry standards.99 The DLC expressed concern with this provision, asserting that ‘‘the records at issue are very old in many instances, and therefore reflect the formats of their time,’’ and that, for at least some DMPs, ‘‘it would be impossible to produce historical records in the DDEX standard 99 NPRM at 43520; see MLC NPRM Comment at 2 (supporting the proposed format provision). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 that the MLC has indicated it will use for these purposes.’’ 100 (Elsewhere in the record, this DDEX standard is disclosed as DSRF.) 101 The DLC further stated that ‘‘the alternative to a DDEX report—a so-called ‘flat file’ spreadsheet—is smaller and more manageable,’’ is something ‘‘DMPs generally use,’’ and ‘‘can be converted by the MLC into a uniform format with some simple computer programming.’’ 102 The DLC also said that ‘‘while there are many DMPs, there are not many different formats (even within flat files),’’ so the MLC ‘‘will not be significantly burdened by the DMPs’ use of formats that are not 100% consistent.’’ 103 The DLC also proposed including a qualification that compliance with format requirements be conditioned ‘‘[t]o the extent practicable’’ to ‘‘allow some flexibility to [DMPs], which is particularly necessary given the relatively short amount of time left to produce the required report.’’ 104 While noting the DLC’s concerns, Music Reports, a major DMP vendor, said that using the MLC’s initially intended DDEX format will not be a problem and ‘‘all of Music Reports’ current clients are certainly capable of reporting to the MLC in DDEX format, because Music Reports has stored their historical records of use and is capable of transcoding these into the MLC’s required DSRF format when necessary.’’ 105 In December 2020, the MLC and DLC reported that they had reached agreement on format requirements.106 The negotiated proposal would require the MLC to accept both the cumulative 100 DLC Ex Parte Letter at 3 (Aug. 27, 2020); see also DiMA NPRM Comment at 6; DLC NPRM Comment at 10. Music Reports takes issue with the DLC’s further assertion that ‘‘[t]he vendors who maintain [historical records of use] are also unlikely to be familiar with DDEX,’’ stating that, at least with respect to Music Reports, this is ‘‘inaccurate.’’ Music Reports Ex Parte Letter at 2 (Sept. 29, 2020) (alterations in original) (quoting DLC Ex Parte Letter at 3 n.6 (Aug. 27, 2020)). 101 See, e.g., MLC Ex Parte Letter at 3 (June 17, 2020) (noting the MLC will employ the DDEX DSRF format for reports of usage); see generally DDEX, DSRF Royalty Reporting Profile, https:// kb.ddex.net/display/3mil/ DSRF+Royalty+Reporting+Profile (last visited Dec. 20, 2020). 102 DLC Ex Parte Letter at 3 (Aug. 27, 2020). 103 Id. 104 DLC NPRM Comment at 10, Add. 23. 105 Music Reports Ex Parte Letter at 2 (Sept. 29, 2020) (‘‘[W]e are in communication with the MLC at senior levels and are already working with them on the DDEX integration and testing process to ensure both sides are ready to exchange the necessary files. It appears to Music Reports that the time available for this task is adequate, and that commencement of operations on (or, where applicable, before) the License Availability Date is reasonably on track to occur.’’). 106 DLC & MLC Ex Parte Letter at 2 (Dec. 9, 2020). PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 statement of account and supplemental metadata report in a simplified format, which the MLC and DLC refer to as the ‘‘simplified usage reporting format’’ (‘‘SURF’’), a format developed by the MLC in consultation with the DLC and its members.107 They proposed regulations that would permit the MLC to accept reports from DMPs in alternative formats, but require a DMP to pay to the MLC costs incurred for accepting the alternative format.108 Music Reports subsequently expressed concern that the announcement of this ‘‘simplified framework’’ ‘‘fails to take into account the development lead times necessary to process and present billions of rows of data (per service) in a new format.’’ 109 The Office adopts the format requirements proposed by the MLC and DLC with two modifications. First, although the Office understands the preference for most parties to accept a simplified usage reporting format, it wishes to avoid discouraging submission of reports in alternate, but still acceptable formats, where this may be necessary for a DMP to comply with the statutory timeframe for reporting and transfer of royalties to the MLC, to the ultimate benefit of copyright owners.110 Thus, the Office has modified the proposed language to require submission of cumulative statements of account in SURF to the extent practicable, but otherwise allow submission of an alternative format by agreement. As a part of this proceeding, the Office is adopting provisions that permit voluntary agreements to alter particular reporting procedures, similar to the one adopted for reports of usage.111 The Office does not anticipate that the MLC will generally rebuff requests to report in alternative formats—indeed, there appears to be little authority for it to reject a cumulative statement of account and accompanying transfer of royalties in different formats. Nevertheless, the rule provides that the MLC’s consent to such requests should not be unreasonably withheld. For example, given the MLC’s previous signaling of the intention to require reporting in the more complex DSRF format, which apparently generated some reliance interests, the 107 Id.; see also Music Reports Ex Parte Letter at 2 (Sept. 29, 2020) 108 DLC & MLC Ex Parte Letter at 2, Add. A–8 (Dec. 9, 2020); see also Music Reports Ex Parte Letter at 2 (Sept. 29, 2020) 109 Music Reports Ex Parte Letter at 2 (Dec. 15, 2020) 110 See also, e.g., 37 CFR 210.27(h)(1) (requiring the MLC to offer at least two formatting methods for submitting reports of usage). 111 See id. at 210.27(n). E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations Office assumes that it would be reasonable for the MLC to accept a report submitted in that format. Although the Office appreciates the joint proposal’s intention behind requiring DMPs to incur incremental costs of submitting reports in alternative formats, thereby encouraging standard reporting formats and reducing the potential MLC burden, the Office declines to require this by regulation. Funding of the total costs of the MLC is already provided for in the statute, including covering any unanticipated shortfalls.112 The Office is reluctant to establish a precedent whereby the MLC can directly charge individual DMPs; such a proposal may be more appropriately considered under the aegis of the Copyright Royalty Judges in connection with their establishment of the administrative assessment.113 The Office notes, however, that the statute permits voluntary contributions from DMPs to fund the collective total costs of the MLC.114 The parties could consider whether this provision, along with the ability to enter into voluntary agreements to alter process, might accomplish the same goal as their proposal to require payment of incremental costs. B. Estimates, Adjustments, and Reconciliation of Cumulative Statements This section of the preamble discusses requirements connected to the reliance upon estimates, adjustments, and reconciliation of statements, with respect to royalty calculation inputs as well as the relationship between voluntary agreements and the obligation to transfer accrued royalties to the MLC. 1. Estimates and Adjustments Relating to Royalty Pool Calculation Inputs The Office is adopting a rule that establishes a mechanism for DMPs to employ necessary estimates and adjustments, including to account for unknown royalty pool calculation inputs, in a manner similar to the recently adopted rule governing submission of reports of usage under the blanket license. Under the cumulative statement of account regulations initially adopted in December 2018, DMPs could make estimates to the extent permitted by 37 CFR 210.6(d)(3)(i) (where the final public performance royalty has not yet been determined), and there would be no adjustment mechanism.115 The NPRM proposed to retain this status quo, except to allow any overpayment (whether resulting from an estimate or otherwise) to be credited to a DMP’s account, or refunded upon request.116 The Office tentatively declined to conform the proposed provision to the estimates and adjustments provisions for reports of usage given the one-time nature of the cumulative statements as compared to the regulatory structure designed for the ongoing reporting of reports of usage.117 Both the MLC and DLC sought modification to this aspect of the rule. While they gave different reasons and offered different proposed modifications in their comments to the NPRM,118 more recent submissions revealed concurrence that the most prudent approach is for the Office to adopt a final rule that more closely tracks the estimates and adjustments provisions adopted for reports of usage under the blanket license.119 The Office agrees and, following notice in the SNPRM and due consideration of the public comments, has revised the rule accordingly. On reflection, the Office acknowledges that while cumulative statements of account are a one-time filing, the need to estimate inputs that cannot be finally determined at the time reporting is due, and to make adjustments in the future, is no less critical here than in the context of reports of usage. Although the NPRM would have narrowly allowed estimates where the final public performance royalty is unknown, the Office has concluded that broadening this provision and allowing DMPs to make estimates and adjustments more generally as necessary, such as based on the discovery of fraudulent streams after algorithms are applied, and also accounting for the possibility of both underpayments and overpayments, best fulfills the statutory objectives of facilitating accurate royalty payment.120 115 NPRM jbell on DSKJLSW7X2PROD with RULES5 112 17 U.S.C. 115(d)(7). 113 In December 2020, the DLC and MLC jointly petitioned the CRJs to modify the terms of implementation of the initial administrative assessment. See Joint Motion to Modify the Terms of Implementation of the Initial Administrative Assessment, Determination and Allocation of Initial Administrative Assessment to Fund Mechanical Licensing Collective (No. 19–CRB–0009–AA) (filed Dec. 18, 2020), https://app.crb.gov/document/ download/23405. 114 17 U.S.C. 115(d)(7)(A)(ii). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 at 43520. 116 Id. 117 Id. 118 DLC NPRM Comment at 5–6, Add. 24; MLC NPRM Comment at 4–5, App. A at vi. 119 DLC SNPRM Comment at 2; MLC SNPRM Comment at 13–14, App. A at v, ix–x; DLC Ex Parte Letter at 3–4, 12–14 (Oct. 14, 2020); MLC Ex Parte Letter at 2 (Oct. 5, 2020). 120 See DLC NPRM Comment at 5–6 (supporting approach); DLC Ex Parte Letter at 2–3 (Nov. 10, 2020) (providing examples of various estimates and adjustments). PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 2183 The recent remand of the CRJs’ Phonorecords III determination by the D.C. Circuit further illustrates why this provision should be expanded.121 The CRJs’ Phonorecords III determination was intended to set rates and terms for the section 115 mechanical license for the period from January 1, 2018 through December 31, 2022, but the D.C. Circuit’s decision means that ultimate rates for this time period have not yet been finalized. As a result, when DMPs are required to deliver their cumulative statements of account to the MLC in February they will not know what the final operative royalty rate is for the compulsory license for the period going back to 2018. Without changes to the NPRM’s proposal, there would be no mechanism for DMPs to make adjustments after the CRJs eventually establish final rates and terms, meaning that a DMP acting in good faith could, through no fault of its own, end up with an incurable underpayment and be rendered ineligible for the limitation on liability.122 The Office does not believe Congress could have intended for a DMP’s limitation on liability to depend on how well it predicts what the CRJs may do on remand. The statutory language requiring that ‘‘all accrued royalties’’ be transferred 45 days after the license availability date does not restrict the Office’s authority or discretion to adopt the rule’s system of estimates and adjustments.123 Estimates and adjustments have long been a part of the section 115 reporting and payment structure,124 and Congress was surely aware of that when it adopted the further statutory language requiring related reporting to include ‘‘information . . . provided . . . in accordance with . . . applicable regulations.’’ 125 The tension between these two phrases in the same statutory provision creates an ambiguity that the Office concludes to be properly within its authority to resolve in its reasonable discretion.126 Moreover, given the degree of importance Congress placed 121 See Johnson v. Copyright Royalty Bd., 969 F.3d 363. 122 See DLC NPRM Comment at 6 (‘‘[A]s a result, the cumulative statements will undoubtedly need to be adjusted to account for the new rates when they come into force.’’); DLC Ex Parte Letter at 3 (Oct. 14, 2020) (‘‘[D]igital music providers may require significant retroactive adjustments to the amount of accrued royalties during the relevant time period depending on the resolution of that proceeding.’’). 123 See 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa) (emphasis added). 124 See 37 CFR 210.6, 210.7. 125 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa). 126 See, e.g., id. at 115(d)(12)(A); City of Arlington v. FCC, 569 U.S. 290, 296 (2013); Brand X internet Servs., 545 U.S. at 980, 982. E:\FR\FM\11JAR5.SGM 11JAR5 2184 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 upon the limitation on liability,127 it would be unreasonable to believe Congress intended that, where the precise royalty owed cannot be ascertained at the time it is due to the MLC, the DMP must guess and hope that subsequent events outside of its control do not render that amount too low.128 Accordingly, the Office is adopting language that allows DMPs to use certain estimates where the computation of attributable royalties depends on an input that cannot be finally determined at the time the cumulative statement of account is due, and the reason is outside of the DMP’s control.129 The rule also permits DMPs to subsequently adjust cumulative statements in five situations: 130 First, where a previously estimated input becomes finally determined, such as a determination of the final public performance royalty; second, where an audit of a DMP reveals a need to adjust a payment; third, in response to a change in applicable rates or terms by the CRJs; fourth, where the DMP discovers or is notified of an inaccuracy in the cumulative statement of account, or in the amounts of royalties owed, based on information that was not previously known to the DMP despite its good-faith efforts; and finally, as the DLC requested in response to the SNPRM,131 to ensure consistency with any adjustments made in an annual statement of account generated under 37 CFR 210.7 for the most recent fiscal year. The Office finds this additional scenario to reasonably further the aims of accuracy and consistency. To ensure promptness, the final rule provides that where more than 127 See H.R. Rep. No. 115–651, at 13–14; S. Rep. No. 115–339, at 14–15; Conf. Rep. at 12–13 (‘‘[C]ontinued litigation generates unnecessary administrative costs, diverting royalties from artists. . . . The imposition of detailed statutory requirements for obtaining [the] limitation of liability ensure that more artist royalties will be paid than otherwise would be the case through continual litigation.’’; provision is a ‘‘key component that was necessary to bring the various parties together in an effort to reach common ground’’); Letter from Senator Lindsey O. Graham, Chairman, Senate Committee on the Judiciary, to U.S. Copyright Office 1 (Sept. 30, 2020) (stating that ‘‘the intent of the MMA was to provide legal certainty for past, present, and future usage’’). 128 See, e.g., Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 1068 (D.C. Cir. 1998) (‘‘If the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters, the intention of the drafters, rather than the strict language, controls. The rule that statutes are to be read to avoid absurd results allows an agency to establish that seemingly clear statutory language does not reflect the unambiguously expressed intent of Congress, and thus to overcome the first step of the Chevron analysis.’’ (internal citations omitted)). 129 See SNPRM at 70549. 130 Id. at 70550–51. 131 See DLC SNPRM Comment at 14–15. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 one scenario necessitates the same adjustment, the six-month period to make the adjustment begins to run from the occurrence of the earliest triggering event. The MLC and DLC both signaled support for the SNPRM’s approach, and the Office received no comments opposing it.132 The MLC maintained that this provision should be limited to information outside a given DMP’s control and expressed concern that the use of the word ‘‘attributable’’ before ‘‘royalties’’ may be read to allow a DMP to report ‘‘something less’’ than total royalties.133 The Office does not intend the use of the word ‘‘attributable’’ to allow a casual approach to royalty calculations; the royalty calculation requirements of paragraph (d), including the estimate provision in paragraph (d)(2), are tied to the requirement in paragraph (c)(4) to report on all unmatched usage, meaning these provisions require reporting of the total potential royalties, calculated at the applicable rate under 37 CFR part 385, that could be owed for all such usage. 2. Estimates and Adjustments Relating to Private Agreements Relatedly, the Office is resolving requests by DMPs that the rule address the treatment of payments made pursuant to agreements that required the distribution of unmatched royalties that predate the MMA’s enactment, to avoid a scenario that DMPs contend could result in ‘‘double payment’’ of royalties to musical work copyright owners for uses covered under these agreements. As explained below, the rule resolves this request by establishing conditions under which a DMP may in good faith employ estimates in calculating total accrued royalties, subject to subsequent adjustments, to reflect the effect of these agreements upon the DMP’s cumulative reporting obligations. A relevant copyright owner may notify the MLC of a dispute in good faith over a DMP’s reliance on such an agreement. If so, once the MLC would otherwise be ready to distribute the disputed royalties, the MLC will invoice the DMP for the disputed royalty amounts and hold those amounts until the dispute is resolved. 132 Id. at 2; MLC SNPRM Comment at 14, App. A at v, ix–x; see also MLC Ex Parte Letter at 2 (Oct. 5, 2020); DLC Ex Parte Letter at 3–4, 12–14 (Oct. 14, 2020). 133 MLC SNPRM Comment at 14 n.7. As noted above, it is separately possible that computation errors could be corrected under the adjustment provisions, for example, following an audit. See DLC NPRM Comment at 5; DLC SNPRM Comment at 2 (supporting the Office’s approach). PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 i. Factual Background Although the Office received no comments in 2018 when it solicited public input on the transition rule that is currently in place, the DLC and individual DMPs subsequently requested that the Office update its rule to address the interrelationship between statutory obligations and certain private agreements.134 The DLC initially proposed that the Office adopt a provision stating: Notwithstanding anything in this section to the contrary, digital music providers are not required to accrue any royalties that are required to be paid to copyright owners of musical works pursuant to any agreements entered into prior to the effective date of the Music Modernization Act, and such royalties shall not be treated as ‘‘accrued royalties’’ for purposes of this section or 17 U.S.C. 115(d)(10).135 The Office declined to adopt this initial proposal, in part over concerns that it was overbroad, noting that the Office ‘‘must be careful to avoid speaking over either the statute or private transactions.’’ 136 The Office noted that if these agreements were, as the DLC suggested, in ‘‘conflict’’ with ‘‘the MMA’s directions in section 115(d)(10) regarding the accrual of unmatched royalties,’’’ 137 the statute ‘‘could not yield to such agreements.’’ 138 To address the DLC’s concerns, however, the Office provided preliminary guidance regarding the statutory obligations to report all accrued royalties while preserving the effectiveness of existing voluntary agreements, noting that the proposed rule included a provision that would require the MLC to credit or refund any overpayment back to the DMP, and offered to have a further dialogue.139 A number of parties took the Office up on this offer, and the record now benefits from this enriched dialogue. While the Office reiterates its view that matters regarding the specific interpretation of various private contracts should be resolved by the relevant parties rather than a blanket rule, additional information has been provided that narrows the focus of the 134 See 84 FR 10685, 10686 (noting the Office received no comments in Dkt. 2018–10); see also, e.g., DLC Initial NOI Comment at 3 (‘‘Rulemaking will be necessary to clarify the relationship between these preexisting deals and the MMA’s provisions regarding accrual of unmatched royalties during the transition period leading to the license availability date.’’). 135 DLC Initial NOI Comment at 18–19. 136 NPRM at 43522–23. 137 DLC Initial NOI Comment at 18. 138 NPRM at 43523 (citing DLC Initial NOI Comment at 19). 139 Id. E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations DLC’s request.140 The DLC, NMPA, and individual DMPs and publishers disclosed details regarding agreements that certain DMPs apparently entered into with the NMPA and the ‘‘vast majority’’ of the U.S. music publishing industry.141 These agreements have been referred to using various terms by the parties, including as liquidation agreements, pending and unmatched agreements, or NMPA settlement agreements, but it has become clear that the issue centers on sets of agreements with four signatory services.142 The DLC represented that these services are Spotify,143 YouTube,144 MediaNet, and Rhapsody; the first three met with the Office individually, generally corroborating the DLC’s position and providing specifics as to their individual circumstances.145 The Office also met with the NMPA and certain individual publishers.146 From the information provided, the Office has gleaned a general sense of the shared understandings between the interested parties, as well as areas of disagreement. It appears undisputed that these agreements were generally structured 140 See id. DLC quotes an NMPA statement claiming that one agreement covered ‘‘virtually the entire commercially relevant publishing community.’’ DLC NPRM Comment at 15 (quoting Tim Ingham, Hunt for US Streaming Publishing Settlements Won’t Stop at Spotify, Music Business Worldwide (Mar. 20, 2016), https:// www.musicbusinessworldwide.com/hunt-for-usstreaming-publishing-settlements-wont-stop-atspotify); see also Ed Christman, Vast Majority Join Royalties Settlement Between Spotify and Publishing Group, Billboard (July 11, 2016), https:// www.billboard.com/articles/business/7431272/ nmpa-spotify-settlement-most-members-join. 142 To inform its background analysis, and by the consent of the contracting parties, the Office has received three of the agreements between the NMPA and individual services on a confidential basis, which has been duly noted in this rulemaking docket. See DLC NPRM Comment at 13 (‘‘We urge the Office to request copies of these NMPA agreements, subject to appropriate confidentiality protections.’’); Google Ex Parte Letter at 1 (Oct. 23, 2020); MediaNet Ex Parte Letter at 1–2 (Oct. 28, 2020); NMPA Ex Parte Letter at 1 (Aug. 25, 2020); Spotify Ex Parte Letter at 1–3 (Oct. 9, 2020); see also 5 U.S.C. 552(b)(4). 143 NMPA and Spotify Announce Landmark Industry Agreement for Unmatched U.S. Publishing and Songwriting Royalties (Mar. 17, 2016), https:// nmpa.org/press_release/nmpa-and-spotifyannounce-landmark-industry-agreement-forunmatched-u-s-publishing-and-songwritingroyalties. 144 NMPA and YouTube Reach Agreement to Distribute Unclaimed Royalties (Dec. 8, 2016), https://nmpa.org/press_release/nmpa-and-youtubereach-agreement-to-distribute-unclaimed-royalties. 145 DLC Ex Parte Letter at 1–2 (Oct. 14, 2020); Google Ex Parte Letter at 1–3 (Oct. 23, 2020); MediaNet Ex Parte Letter at 2 (Oct. 28, 2020); Spotify Ex Parte Letter at 2 (Oct. 9, 2020). 146 NMPA Ex Parte Letter at 1–2 (Aug. 24, 2020); SATV Ex Parte Letter at 1–2 (Oct. 28, 2020); UMPG Ex Parte Letter at 1–2 (Oct. 30, 2020); WMG Ex Parte Letter at 1 (Oct. 21, 2020). The Office also offered to meet with additional publishers. jbell on DSKJLSW7X2PROD with RULES5 141 The VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 through an umbrella agreement between the NMPA and the relevant service, where publishers were subsequently able to, and did, enter into individual agreements with such DSPs.147 The DLC characterizes these agreements as forming the framework for the idea of the MMA, and factual reports of the time support this characterization.148 As reported with respect to two of these agreements, publishers released claims against the relevant service for a relevant period of time of usage in exchange for payments, including (i) for works that were claimed and (ii) for a market-share based distribution of unclaimed royalties after a subsequent period of time.149 For example, under its agreement, Spotify agreed to hold back amounts required to pay nonparticipating publishers, which was represented to the Office as calculated conservatively to account for the risk that the participating parties had undercounted the royalties accrued for non-participating copyright owners.150 147 See, e.g., DLC Initial NOI Comment at 17; MediaNet Ex Parte Letter at 2 (Oct. 28, 2020); Spotify Ex Parte Letter at 1 (Sept. 1, 2020); see also Ed Christman, Vast Majority Join Royalties Settlement Between Spotify and Publishing Group, Billboard (July 11, 2016), https:// www.billboard.com/articles/business/7431272/ nmpa-spotify-settlement-most-members-join (‘‘The vast majority of our members have opted into our settlement,’’ NMPA president and CEO David Israelite tells Billboard, saying the agreement has ‘‘one of our highest opt-in rates ever.’’). 148 DLC NPRM Comment at 13 (‘‘[A]t issue are specific industry-wide accrued royalty liquidation agreements that the NMPA . . . structured with DMPs with the specific purpose of distributing accrued royalties to copyright owners, based on a claiming and market-share distribution model that was later essentially codified in the MMA. These landmark agreements were aimed at solving the exact same problem that the MMA address: Ensuring that accrued royalties for unmatched works are paid out promptly to copyright owners.’’); DLC Ex Parte Letter at 1 (Aug. 11, 2020) (‘‘We discussed industry-wide agreements between certain digital services (Spotify, Google, MediaNet, and Napster/Rhapsody) and the [NMPA] that predated the enactment of the [MMA] and facilitated distribution of historic accrued royalties to copyright owners. As we explained, those agreements were the model for the MMA.’’). 149 Ed Christman, Spotify and Publishing Group Reach $30 Million Settlement Agreement Over Unpaid Royalties, Billboard (Mar. 17, 2016), https:// www.billboard.com/articles/business/7263747/ spotify-nmpa-publishing-30-million-settlementunpaid-royalties (‘‘In exchange for participating in the settlement, publishers release Spotify from any claims related to the identified pool of pending and unmatched works.’’); Ed Christman, YouTube Strikes Settlement Deal Over Unpaid Royalties with National Music Publishers Assoc., Billboard (Dec. 8, 2016) https://www.billboard.com/articles/business/ 7616409/youtube-settlement-unpaid-royaltiesnational-music-publishers-association. 150 NMPA and Spotify Announce Landmark Industry Agreement for Unmatched U.S. Publishing and Songwriting Royalties (Mar. 17, 2016), https:// nmpa.org/press_release/nmpa-and-spotifyannounce-landmark-industry-agreement-forunmatched-u-s-publishing-and-songwriting- PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 2185 As described by NMPA at the time of agreement in 2016, the NMPA-Spotify agreement established ‘‘a large bonus compensation fund that is a substantial percentage of what is currently being held by Spotify for unmatched royalties, and creates a better path forward for finding the owners of publishing rights who should receive streaming royalties.’’ 151 As a result, the NMPA and Spotify announced that: The deal will allow copyright owners to identify their works and receive the money Spotify has set aside for the past usage of unmatched works. It will allow the entire industry to benefit by filling in the gaps in ownership information, which help to ensure that royalties are promptly paid to their rightful owners in the future. Any royalties associated with works that remain unmatched after each claiming period will be distributed to publishers and songwriters who participate in the settlement, but the agreement will not affect the royalties owed to any publisher or writer who does not choose to participate. The agreement is a key step in improving transparency in the music community and ensuring that music’s creators receive royalties when their music is used.152 NMPA’s President and CEO further explained, ‘‘we have found a way for Spotify to quickly get royalties to the right people.’’ 153 Spotify represented that as it turned out, the transaction costs associated with claiming musical works, coupled with the assurance of a market-share based distribution for unclaimed works, resulted in a low level of publisher participation in claiming ownership of musical works.154 As a result, most payments were made pursuant to the unmatched royalties (‘‘the agreement will not affect the royalties owed to any publisher or writer who does not choose to participate’’); Spotify Ex Parte Letter at 2 (Oct. 9, 2020) (‘‘Spotify confirmed that this ‘holdback’ reflects the portion of the market that NMPA and Spotify estimated as a conservative amount designed to cover the market share of nonparticipating publishers—and that Spotify’s data reflected that the non-covered streaming during the relevant usage periods is likely even smaller than that.’’). 151 NMPA and Spotify Announce Landmark Industry Agreement for Unmatched U.S. Publishing and Songwriting Royalties (Mar. 17, 2016), https:// nmpa.org/press_release/nmpa-and-spotifyannounce-landmark-industry-agreement-forunmatched-u-s-publishing-and-songwritingroyalties (emphasis added). 152 Id. 153 Id. 154 Spotify Ex Parte Letter at 2–3 (Oct. 9, 2020) (‘‘The effect of this was that publishers did not need to claim unmatched works—and, for the most part, did not do so—in order to participate in the market share distribution of unclaimed royalties at the conclusion of each claiming period.’’); id. at 2 n.2 (noting ‘‘[the] tremendous difficulty in identifying works embodied in particular tracks’’). E:\FR\FM\11JAR5.SGM 11JAR5 2186 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 liquidation provision of the agreement.155 Contemporary statements surrounding the NMPA-Google/YouTube agreement made similar claims that the agreement structure would represent a breakthrough path ‘‘to help pay out millions of dollars in previously unclaimed royalties to publishers and songwriters.’’ 156 The Google/YouTube agreement was reported to be structured slightly differently, with an initial fourmonth claiming period, followed by three-month claiming periods that were open for respective twelve-month usage periods.157 The Office was also informed that it covered more than just uses eligible for the section 115 license, e.g., broader access to YouTube’s Content ID claiming platform.158 Similar to the MMA structure, payment for unmatched uses based on market share occurred only after an additional holdback period, two years for the Google/YouTube program.159 Like Spotify, Google disclosed that participation in claiming activities was relatively low, with ‘‘about 18% to 20%’’ of unmatched works ‘‘eventually claimed, with the remainder distributed on a market share basis.’’ 160 Participation by publishers in these agreements for the relevant time periods was apparently extremely high.161 For example, NMPA reported that 96% of its members participated in the Spotify agreement.162 As a result, for the time 155 Google Ex Parte Letter at 2 (Oct. 23, 2020); Spotify Ex Parte Letter at 2–3 (Oct. 9, 2020). 156 NMPA and YouTube Reach Agreement to Distribute Unclaimed Royalties (Dec. 8, 2016), https://nmpa.org/press_release/nmpa-and-youtubereach-agreement-to-distribute-unclaimed-royalties. 157 Id.; Google Ex Parte Letter at 1–2 (Oct. 23, 2020). 158 See Google Ex Parte Letter at 2–3, 2 n.2 (Oct. 23, 2020) (noting that the agreement ‘‘encompasses more than section-115-eligible uses; rather, it covers usage on YouTube more generally’’). 159 See id. at 2. 160 Id. 161 DLC NPRM Comment at 13 (quoting Lowery et al. v. Rhapsody Int’l Inc., No. 4:16-cv-01135–JSW (N.D. Cal. filed Mar. 7, 2016), Dkt. No. 175 at 3) (‘‘Rhapsody has been advised by the NMPA that the aggregate market share of the NMPA members who opted-in to the NMPA[-Rhapsody] agreement is approximately 97.13%.’’); Spotify Ex Parte Letter at 5 (Oct. 9, 2020) (projecting that ‘‘an estimated 5– 10% of the market of non-participating publishers’’ were not part of Spotify’s agreement); see DLC NPRM Comment at 14 (‘‘These agreements have all operated in essentially the same way. . . . [F]or each period covered by the agreement, the vast majority of the pool of accrued unmatched royalties (e.g., 90%) was distributed to participating copyright owners based on their respective market shares’’ and ‘‘[t]he remaining, smaller share of royalties (e.g., 10%) was left in the accrued pool as reserve funds.’’). 162 Ed Christman, Vast Majority Join Royalties Settlement Between Spotify and Publishing Group, Billboard (July 11, 2016), https:// www.billboard.com/articles/business/7431272/ nmpa-spotify-settlement-most-members-join. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 periods these agreements were respectively in effect, the services in question paid ‘‘tens of millions of dollars’’ to copyright owners that the DLC describes as payments to release claims for accrued royalties based on usage that was unmatched to a particular musical work.163 In describing the landscape, the Office also credits NMPA’s assertion that the ‘‘pending and unmatched agreements’’ varied with respect to material provisions and market coverage, as well as with respect to performance by the relevant services.164 The Office does not, however, understand any party to dispute the general contours of these agreement structures as described herein. The relevant parties agree that these agreements, to the extent they are valid, performed, and relevant, do not address the entire obligations for the participating services. First, as noted, they do not account for royalties accrued by DSPs for uses owed to nonparticipating music publishers or other copyright owners (e.g., selfadministered songwriters). The Office does not understand any party, including the DLC, to contend that these agreements may be used to alleviate a DMP’s obligation under the limitation on liability to transfer royalties for usages of musical works that are not subject to a valid agreement. Second, these agreements only cover a portion of the period DMPs need to report on to obtain the statutory limitation on liability, meaning that the DMP would need to transfer unclaimed accrued royalties for any uncovered periods.165 After conducting ‘‘a limited survey of a subset of DLC members,’’ the DLC estimates ‘‘that several hundred million dollars were available to be transferred to the MLC as accrued royalties’’ by the relevant services, not including amounts that those DMPs maintain do not constitute accrued royalties as a result 163 DLC Ex Parte Letter at 2 (Nov. 17, 2020). The Office understands that this amount does not encompass the smaller subset of royalties paid pursuant to ‘‘claimed’’ uses of works. Google Ex Parte Letter at 2 (Oct. 23, 2020); Spotify Ex Parte Letter at 2–3 (Oct. 9, 2020) 164 NMPA Ex Parte Letter at 1–2 (Aug. 24, 2020). 165 See, e.g., NMPA and YouTube Reach Agreement to Distribute Unclaimed Royalties (Dec. 8, 2016), https://nmpa.org/press_release/nmpa-andyoutube-reach-agreement-to-distribute-unclaimedroyalties (noting initial claiming period covering uses from ‘‘August 1, 2012 through December 31, 2015’’ and that the claiming process ‘‘will be repeated for future twelve-month usage periods beginning on January 1, 2016 and ending on December 31, 2019’’); MediaNet Ex Parte Letter at 2 (Oct. 28, 2020) (noting performance periods for MediaNet agreements); Spotify Ex Parte Letter at 5 (Oct. 9, 2020) (noting that Spotify terminated its agreement). PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 of the operation of pending and unmatched agreements.166 DMPs repeatedly reminded the Office that submission of cumulative statements and payment of accrued royalties is a condition for DMPs to make use of the optional limitation on liability, and not a condition of the ongoing blanket license.167 From their perspective, an obtainable limitation on liability was a critical piece of the MMA’s core compromise, intended to short-circuit an inefficient and costly pattern of litigation so long as a DMP complied with the relevant provisions.168 The DLC thus sought clarity surrounding this reporting obligation, suggesting that absent regulatory certainty, ‘‘DMPs may be forced to retain accrued royalties to fund’’ ensuing infringement litigation, ‘‘precisely what the MMA was supposed to prevent.’’ 169 It further suggested that if regulations ‘‘increase[] the risk that a court would deem a DMP to not have complied with the requirements in section 115(d)(10), a DMP could make the rational choice to forego the payment of accrued royalties entirely, and save that money to use in defending itself against any infringement suits.’’ 170 Given the DLC’s statement that ‘‘several hundred million’’ dollars are otherwise ‘‘available to be transferred to the MLC as accrued royalties,’’ a DMP’s election to retain accrued royalties for litigation expenses would have the troubling result of withholding from copyright owners—those who did not participate in the agreements at issue (or for time periods outside such valid agreements)—compensation that all agree they are otherwise entitled to receive.171 Accordingly, the Office concludes that regulations, to the extent appropriate and permissible under the statute, should maintain the calibration intended by Congress to incentivize DMPs to participate in transferring over accrued royalties, without prejudicing the entitlements of music publishers or songwriters to receive compensation for past usages of their works. As Chairman 166 DLC Ex Parte Letter at 2 (Nov. 17, 2020) (‘‘DLC also explained that the accruals that were derecognized because copyright owners were paid and provided releases were a fraction of that amount [of several hundred million dollars]—on the order of tens of millions of dollars.’’). 167 See, e.g., DiMA NPRM Comment at 3; DLC Ex Parte Letter at 4 (Oct. 14, 2020); DLC & MLC Ex Parte Letter at 2 (Dec. 9, 2020). 168 DiMA NPRM Comment at 3; see also H.R. Rep. No. 115–651, at 13; S. Rep. No. 115–339, at 14; Conf. Rep. at 12. 169 DLC NPRM Comment at 3–4. 170 Id. at 4; see also MediaNet Ex Parte Comment at 3 (Oct. 28, 2020). 171 DLC Ex Parte Letter at 2 (Nov. 17, 2020). E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations Graham explained in a letter to the Register: The legislative history makes clear that . . . ‘‘continued litigation generates unnecessary administrative costs, diverting royalties from artists.’’ . . . Since the intent of the MMA was to provide legal certainty for past, present, and future usage, it is critical that this issue be resolved in a manner that protects copyright owner interests while ensuring that songwriters are paid their splits and services are not burdened with double payments. If the parties are unable to address this current dispute on their own in the immediate future, I urge the Copyright Office to bring them together in order to prevent a return to the inefficient litigation that featured prominently in the prior licensing regime.172 jbell on DSKJLSW7X2PROD with RULES5 In response, the Office convened a multi-stakeholder call to address the substance of this rulemaking, and this rule reflects the comments from that discussion.173 The crux of the dispute concerns the statutory requirement to accrue and hold royalties, and to maintain them in accordance with GAAP principles. While there is agreement that the statute requires ‘‘all accrued royalties’’ 174 to be reported and paid over to the MLC, there is disagreement regarding the meaning of this requirement in light of these industry-wide agreements and surrounding statutory language. The DLC and individual DMPs contend that the requirement to maintain accrued royalties in accordance with GAAP has resulted in the derecognition of obligations extinguished by these agreements, such that these previous liabilities are not part of what must be transferred to the MLC to be eligible for the limitation on liability.175 172 Letter from Senator Lindsey O. Graham, Chairman, Senate Committee on the Judiciary, to U.S. Copyright Office 1 (Sept. 30, 2020). 173 Summaries of that October 30, 2020 discussion are available here: https:// www.copyright.gov/rulemaking/mmaimplementation/ex-parte-communications.html. The Office invited every party who had submitted comments on this issue in this rulemaking docket to participate in the discussion. 174 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa). 175 DLC SNPRM Comment at 9–10 (stating ‘‘the statute specifically incorporates [GAAP], which specifically contemplate de-recognition of liabilities when they have been extinguished’’ and ‘‘it is the incorporation of [GAAP] that, when given meaning (as they must be), provide that once a liability has been extinguished, it is not accrued’’); see also ARA, FMC & MusicAnswers SNPRM Comment at 3 (‘‘GAAP clearly allows for ‘derecognition’ of liabilities if certain conditions are met—conditions that these agreements and the releases they include apparently satisfy.’’); DLC NPRM Comment at 17 n.45; DLC Ex Parte Letter at 2 (Nov. 10, 2020); Spotify Ex Parte Letter at 2 (Oct. 9, 2020) (noting that ‘‘the [Spotify] Agreement extinguished such [copyright owner] rights for the periods of time covered by the Agreement—not only because the copyright owner had already received unmatched royalties for those periods, but because the VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 Participating DMPs also suggest that an alternate reading would penalize those companies that entered into voluntary agreements to ensure royalties were paid to publishers and songwriters, in comparison to DMPs who did not enter into such agreements to settle pre-MMA disputes.176 As the DLC put it, ‘‘these agreements were designed to, and did, put tens of millions of dollars in statutory royalties in the hands of copyright owners—money that they had been unable to access due to the broken pre-MMA statutory royalty system.’’ 177 The DLC also noted that ‘‘some DMPs simply do not have the financial resources to make duplicate payments’’ under both their agreements and the limitation on liability, which would force them to forgo the benefit of the limitation on liability.178 In contrast, the MLC stated that ‘‘[w]hile prior to the enactment of the MMA, certain DMPs entered into settlement agreements with certain music publishers in connection with disputes arising from their failure to license, match and/or pay royalties due, such settlement payments were definitively not the proper payment of royalties to copyright owners of unmatched uses,’’ and were ‘‘more likely consideration for releases from liability for copyright infringement or covenants not to sue.’’ 179 As discussed below, the MLC contends that the clear directive of the statute precludes the DLC’s interpretation and that services must transfer over all royalties (calculated at the statutory rate) for all unmatched uses without regard for these agreements. The MLC and various music publishers acknowledge, however, that there may be a need for some resolution with respect to the effect of past payments related to usage of unmatched works. Strikingly, despite much discussion on this matter, the administrative record contains no statement by any music publisher or other copyright owner professing entitlement to royalty payments related to usages for which they have entered into a valid liquidation agreement. copyright owner had released any and all claims to such royalties’’). 176 DLC Initial NOI Comment at 19; Spotify Ex Parte Letter at 1 (Sept. 1, 2020) (‘‘Congress certainly did not intend for double payment of royalties paid to publishers who released claims under those [preMMA] agreements’’); Google Ex Parte Letter at 3 (Oct. 23, 2020) (Google asserts that its YouTube agreement ‘‘was not established to resolve any pending or even threatened litigation. Rather, it was born out of a joint effort by Google and NMPA to ensure that royalties flowed to copyright owners.’’). 177 DLC NPRM Comment at 3. 178 Id. at 11. 179 MLC Reply NOI Comment at 29. PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 2187 Warner Music Group, for example, explained, ‘‘[f]or those DSPs with which we have already settled claims for the distribution of royalties owed before the enactment of the MMA, we consider these claims closed.’’ 180 Universal Music Publishing Group (‘‘UMPG’’) ‘‘believes that any issues relating to payments under private settlements can and should be dealt with between the contracting parties’’ and ‘‘intends to assist and facilitate voluntary procedures for doing so with the digital services, to the extent applicable.’’ 181 And Sony/ATV Publishing (‘‘SATV’’) ‘‘is open to discussing letters of direction and other potential solutions that would ensure that the requirements of the MMA are satisfied and also address the concerns raised by the digital services regarding payments made pursuant to private settlements.’’ 182 SATV prefers ‘‘that any potential reimbursements to digital services be made by the MLC rather than music publishers.’’ 183 Representing the marketplace at large, NMPA indicated a preference that the issue ‘‘be addressed through state contract law and discussions between the contracting parties.’’ 184 The MLC and others suggested that one potential solution could be to rely upon letters of direction. Although this approach was not entirely fleshed out, as the Office understands it, the idea is that disputes could be resolved by letters of direction sent by a copyright owner directing the MLC to return royalties that would otherwise go to the copyright owner to the DMP with whom the copyright owner had contracted.185 The MLC opined that DMPs participating in these agreements would be able to ‘‘sit in the position of an entity that has acquired rights through a license or sale’’ and that ‘‘payments can be redirected to the new owner pursuant to the explicit or implicit terms of the private contract.’’ 186 Apart from its proffered statutory interpretation addressed below, the MLC did not address how a scheme requiring a DMP to transfer funds to the MLC with an expectation by both the DMP and copyright owner that those funds will ultimately just be returned to that DMP would effectuate Congress’s 180 WMG Ex Parte Letter at 1 (Oct. 21, 2020). Ex Parte Letter at 1 (Oct. 30, 2020). 182 SATV Ex Parte Letter at 1–2 (Oct. 28, 2020). 183 Id. 184 NMPA Ex Parte Letter at 2 (August 24, 2020). 185 MLC Ex Parte Letter at 5 (Oct. 16, 2020) (reflecting NSAI’s comments); MLC Ex Parte Letter at 5 (Oct. 5, 2020); NMPA Ex Parte Letter at 2 (Nov. 3, 2020). 186 MLC SNPRM Comment at 10. 181 UMPG E:\FR\FM\11JAR5.SGM 11JAR5 2188 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 intention that the MLC operate efficiently and fairly.187 DMPs disagreed that reliance upon letters of direction to the MLC would be workable, with Google explaining that a DMP would be unlikely to get complete coverage via letters of direction and, to address any gaps, would ‘‘need to file a significant number of separate declaratory judgment actions in courts around the country.’’ 188 The DLC strongly objected to the MLC’s suggestion that DMPs should first pay the contested amounts, then seek redress for ‘‘double payments’’ by ‘‘proving the existence of a release’’ or ‘‘clawing back’’ overpayments, contending that ‘‘the DMP does not get any benefit from the transfer of royalties that might be matched (or paid via market share distribution) by the MLC to those same owners pursuant to the limitation on liability provision in the MMA; it already has a limitation on liability pursuant to the release.’’ 189 Separately, the MLC clarified that in the event of a relevant dispute between a DMP and a copyright owner, it intended to ‘‘hold such unmatched royalties pending the resolution of the dispute,’’ accruing interest until the dispute was resolved.190 The MLC reasoned that ‘‘Congress intended for the MLC to be that trusted party to receive unmatched royalties and ensure that they are paid to the right parties.’’ 191 Spotify objected to this position, stating that the MLC’s proposal to require all funds at issue under these agreements to be immediately paid to the MLC would create a dispute ‘‘in the first instance,’’ as they are not aware of any participating copyright owner who 187 See Conf. Rep. at 4 (noting that the MLC should engage in an ‘‘efficient and fair administration of the collective in a manner that respects varying interests and concerns’’). 188 Google Ex Parte Letter at 3 (Oct. 23, 2020); see also DLC SNPRM Comment at 11 (‘‘the MLC’s invitation for DMPs to rely on self-help and battle it out in court later is contrary to the spirit of the statute . . . and may lead some DMPs to simply withhold all the royalties in order to fund such litigation’’); SGA SNPRM Comment at 8. 189 DLC SNPRM Comment at 5; see also Spotify Ex Parte Letter at 4–5 (Oct. 9, 2020) (‘‘[W]e are aware of no copyright owner who has released their claims to the royalties covered by the Agreement that is now demanding, or at any time since the Agreement has demanded, a double payment of those royalties.’’). 190 MLC Ex Parte Letter at 5 (Oct. 5, 2020). The MLC’s proposal would not fall under the MLC’s Dispute Resolution Committee and related provisions, as the dispute is not between copyright owners. See 17 U.S.C. 115(d)(3)(G)(i)(III)(bb), (K); see also DLC Ex Parte Letter at 2, n.2 (Oct. 14, 2020) (‘‘The dispute resolution process required by the MMA is aimed at resolving disagreements among copyright owners. . . . Thus, even the solution that the MLC has proposed would require regulatory action by the Office.’’). 191 MLC Ex Parte Letter at 5 (Oct. 5, 2020). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 claims they are entitled to additional funds.192 In light of this additional information, the SNPRM proposed a solution that would allow for participating DMPs to pay their accrued royalties in accordance with GAAP, permitting reliance on certain temporary estimations and subject to detailed adjustment provisions. And the SNPRM explained that, ‘‘[u]nder no circumstances could this [noticed] provision be used to shortchange payment of accrued royalties for musical work copyright owners who did not participate in such agreements.’’ 193 The Office received many comments opining on Congress’s intent and the statutory payment and reporting requirements for the limitation on liability contained in 17 U.S.C. 115(d)(10)(B)(iv). Some commenters, including the Artists Rights Alliance, the Future of Music Coalition, and MusicAnswers, opined that the statute was ambiguous on this point.194 Others, including the DLC, DiMA, individual DMPs, the MLC, and representatives of copyright owners and songwriters, suggested that the applicable statutory language is unambiguous,195 although they offered conflicting interpretations of the relevant requirements. Because of these disparate views, the DLC suggested that parties would benefit from a ‘‘regulatory clarification.’’ 196 As discussed below, there was considerable disagreement regarding the meaning of section 115(d)(10)(B)(iv)’s requirement that ‘‘[a]ccrued royalties shall be maintained by the digital music provider in accordance with [GAAP],’’ whether this provision would benefit from a regulatory clarification, and whether the Office had authority to promulgate the rule proposed in the SNPRM (or alternate proposals suggested by the DLC).197 192 Spotify Ex Parte Letter at 4–5 (Oct. 9, 2020). at 70546–47. 194 ARA, FMC & MusicAnswers SNPRM Comment at 2; ARA Ex Parte Letter at 1 (Nov. 17, 2020); see also DLC NPRM Comment at 16 (noting that Office ‘‘regulation is plainly necessary to provide unambiguous guidance to DMPs and the MLC’’). 195 See, e.g., DiMA NPRM Comment at 5–6; MLC SNPRM Comment at 3; SGA & SCL SNPRM Comment at 2; NSAI Ex Parte Letter at 1 (Nov. 17, 2020); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020). 196 DLC Initial NOI Comment at 18; DLC Reply NOI Comment at 24 (requesting that the Office ‘‘clarify that agreements under which accrued royalties for unmatched musical works were paid to rightsowners, are not ‘accrued royalties’ subject to transfer to the MLC’’); DLC SNPRM Comment at 3 (‘‘the proposed rule provides the clarity needed to preserve the core bargain struck in the MMA’’). 197 MLC SNPRM Comment at 5–8, App. A at i; see also NMPA Ex Parte Letter at 1 (Nov. 17, 2020); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 193 SNPRM PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 In brief, the MLC believes that section 115(d)(10)(B)(iv) ‘‘sets out a statutory accrual and payment obligation that identifies precisely what must be accrued, the time frame for holding and the two accepted ways the accrued royalties can be paid,’’ that is, to a matched copyright owner or the MLC.198 DMPs contend that the aforementioned agreements extinguished their statutory duties to transfer royalties to the MLC, ‘‘not only because the copyright owner had already received unmatched royalties for those periods, but because the copyright owner had released any and all claims to such royalties.’’ 199 The DLC stated that a ‘‘regulatory clarification . . . may help music industry participants understand the proper treatment of unclaimed royalties under the MMA.’’ 200 Beyond the liquidation agreements at issue, the services contended that the MLC’s reading would prohibit reliance upon voluntary agreements generally, despite other statutory provisions guaranteeing that such agreements would remain in effect.201 The Artist Rights Alliance commented that the proposed rule ‘‘creates a workable, practical system that serves the foundational statutory goal of ensuring songwriters and publishers are accurately, completely, and fairly paid for all uses of their work . . . while providing business certainty needed to ensure the broadest number of digital music providers possible participate in the transfer of unmatched royalty funds contemplated by the MMA.’’ 202 The DLC concurred with this assessment and ‘‘strongly supports the proposed rule noticed in the SNPRM.’’ 203 ii. Statutory Analysis Having considered these comments and examined the relevant statutory text, the Office concludes that the MMA ‘‘ ‘is silent or ambiguous with respect to the specific issue’ ’’ at hand, i.e., the DMP payment and reporting requirements for the limitation on 17, 2020); SGA, SCL & MCNA Ex Parte Letter at 3 (Nov. 18, 2020). 198 MLC Ex Parte Letter at 3 (Oct. 16, 2020); see also NSAI Ex Parte Letter at 1 (Nov. 17, 2020); MAC, Recording Acad. & SONA SNPRM Comment at 4; SGA, SCL & MCNA Ex Parte Letter at 3 (Nov. 18, 2020). 199 Spotify Ex Parte Letter at 2–4 (Oct. 9, 2020). 200 DLC Initial NOI Comment at 18; see also DLC Reply NOI Comment at 24; DLC SNPRM Comment at 4. 201 See, e.g., Spotify Ex Parte Letter at 3–4 (Oct. 9, 2020); DLC Ex Parte Letter at 3 (Oct. 14, 2020). 202 ARA Ex Parte Letter at 1 (Nov. 17, 2020). 203 DLC SNPRM Comment at 1–3 (quoting ARA Ex Parte Letter at 1 (Nov. 17, 2020)). E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 liability contained in 17 U.S.C. 115(d)(10)(B)(iv) and its subclauses (I) through (III)—particularly the treatment during the transition period of voluntary licenses and other agreements whereby copyright owners may have released certain royalty claims such that a DMP’s obligation to pay royalties for related uses has been extinguished, and the related possibility that some portion of unmatched musical work uses may not have accrued royalties associated with them.204 First, the statute is not clear about what happens if a DMP legitimately cannot determine what accrued royalties are owed by the required date of transfer to the MLC under section 115(d)(10)(B)(iv)(III). At first glance, the statute presumes this amount will be a final and ascertainable figure by the deadline, directing that DMPs ‘‘not later than 45 calendar days after the license availability date, transfer all accrued royalties to the mechanical licensing collective.’’ 205 But, as discussed above, both the MLC and DLC acknowledge that this may not be possible, particularly in light of the Phonorecords III remand, and agree that a regulatory scheme of estimates and adjustments is necessary in at least some instances, such as where the computation of accrued royalties depends upon one or more then-unknown royalty pool inputs outside the DMP’s control (such as applicable performance royalties), or where the applicable statutory royalty rates or terms change retroactively after the cumulative statement of account has been delivered to the MLC.206 Commenters disagree, however, as to whether an estimate and adjustment mechanism should also be applied where certain usage of certain unmatched works may be subject to a voluntary license or other agreement containing an appropriate release of royalty claims. Under such a scenario, because the specific works are unmatched and cannot be identified as being subject to the agreement at the time of delivery of the cumulative statement, the amount of accrued royalties is predicated upon estimating certain usages for which royalties have 204 See City of Arlington, 569 U.S. at 296 (quoting Chevron, 467 U.S. at 843); see also ARA, FMC & MusicAnswers SNPRM Comment at 2–3 (opining that the statute is ambiguous); ARA Ex Parte Letter at 1 (Nov. 17, 2020). 205 See 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa). 206 See DLC NPRM Comment at 5–6; DLC SNPRM Comment at 2; MLC SNPRM Comment at 13–14, App. A at v, ix–x; DLC Ex Parte Letter at 3–4, 12– 14 (Oct. 14, 2020); MLC Ex Parte Letter at 2 (Oct. 5, 2020). In addition, the DLC has suggested that an adjustment scheme is appropriate to address subsequent discoveries of fraudulent stream counts. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 already been paid or otherwise are not considered accrued.207 The statute is no less unclear in the contested scenario (where a voluntary agreement may affect accrued royalties) than the agreed-upon scenario (where an unknown royalty pool input may affect accrued royalties); both involve the statutory reference to ‘‘all accrued royalties,’’ which, as discussed above, is ambiguous.208 Under both scenarios, the purported need to estimate and adjust stems from a DMP’s need to pay all accrued royalties by the statutory payment due date when the precise accrued royalties is not yet calculable.209 Second, the limitation on liability provision does not address the application of voluntary licenses, making no explicit acknowledgement of their existence. The MLC argues that for ‘‘works initially unmatched that are later matched to voluntary licenses, . . . for periods prior to the license availability date, the MMA provides for payments of matched royalties to be made to copyright owners, and does not provide for the MLC to carve out voluntary agreements,’’ further contending that ‘‘the distinction between blanket license coverage and voluntary license coverage only exists 207 See, e.g., ARA, FMC & MusicAnswers SNPRM Comment at 2–4; DLC NPRM Comment at 3–4, 11– 18; DLC SNPRM Comment at 1–12; MAC, Recording Acad. & SONA SNPRM Comment at 2– 3; MLC NPRM Comment at 8; MLC SNPRM Comment at 2–13; SGA, SCL & MCNA SNPRM Comment at 9; ARA Ex Parte Letter at 1 (Nov. 17, 2020); DLC Ex Parte Letter at 2 (Oct. 14, 2020); Google Ex Parte Letter at 2 (Oct. 23, 2020); MLC Ex Parte Letter at 2–3 (Oct. 16, 2020); MLC Ex Parte Letter at 2–5 (Oct. 5, 2020); MLC Ex Parte Letter at 2–7 (Nov. 17, 2020); NMPA Ex Parte Letter at 1 (Nov. 17, 2020); NSAI Ex Parte Letter at 1 (Nov. 17, 2020); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020); SATV Ex Parte Letter at 1 (Oct. 28, 2020); Spotify Ex Parte Letter at 2–5 (Oct. 9, 2020); UMPG Ex Parte Letter at 1 (Oct. 30, 2020); WMG Ex Parte Letter at 1 (Oct. 21, 2020). 208 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa); see supra section II(B)(1). 209 The Office finds the MLC’s assertion that ‘‘[a] DMP does not estimate its total accrued royalties’’ unpersuasive, as it begs the question of how a DMP can know its accrued royalties with certainty and finality if, as the MLC agrees, a DMP can estimate its royalty pool inputs where unknown, or where, as is the case presently, no ultimate royalty rates have even been set. MLC SNPRM Comment at 8– 10. Compare id. with DLC SNPRM Comment at 12 n.33 (referring to ‘‘the necessary estimates that GAAP requires—not just to account for the release of claims prior to the MMA, but for other estimates, including royalty rates and inputs,’’ and noting that ‘‘[a]s a result of the D.C. Circuit’s vacatur and remand of the Copyright Royalty Board’s determination of the relevant statutory royalty rates, it is a given that all DSPs will need to use estimates when calculating accrued royalties pursuant to this provision’’). The rule discussed herein simply clarifies that certain good-faith estimates, subject to adjustments, are permitted for purposes of the payment and reporting requirements of the limitation on liability. PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 2189 after the license availability date.’’ 210 The MLC also argues that for a DMP to be eligible for the limitation on liability, after royalties have been accrued in accordance with section 115(d)(10)(B)(iv), they must ‘‘be held through the date when the royalties are either (a) matched and distributed to the proper copyright owner pursuant to subsection II or (b) transferred to the MLC pursuant to subsection III.’’ 211 Given that neither section 115(d)(10)(B)(iv)(II) nor (III) references voluntary licenses, this interpretation would seem to result in such licenses not being given effect, whether entered into before the MMA or after. Taken literally, this would seem to mean, for example, that if a DMP uses a work that is not matched by the end of the calendar month of first usage, even if its efforts later result in a match subject to an existing voluntary license (such as delayed matching of new releases), the DMP must pay the copyright owner pursuant to the statutory payment and reporting requirements instead of the terms of the existing agreement in order to retain eligibility for the limitation on liability.212 The MLC tries to avoid this conclusion by arguing that ‘‘Section 115(d)(10)(B)(iv)(II) is fully consistent on its face with the payment of royalties under voluntary license terms’’ because ‘‘[t]he subsection provides that, when a DMP matches an unmatched work, it shall pay all respective accrued royalties to the identified copyright owner ‘in accordance with this section and applicable regulations.’ ’’ 213 But, as the DLC observes, this is a misreading of the statute.214 The language quoted by the MLC concerns ‘‘the information’’ that must be ‘‘include[d]’’ in the required cumulative statement of account; it does not relate to the payment of royalties or other aspects of the reporting.215 The DMPs contend that section 115(d)(10)(B)(iv)(I) speaks to this issue by requiring that ‘‘[a]ccrued royalties shall be maintained by the digital music provider in accordance with generally accepted accounting principles.’’ 216 They argue that this provision covers how accrued liabilities can be extinguished, asserting that GAAP permits this in ways not provided for in 210 MLC Ex Parte Letter at 5 (Oct. 5, 2020) (citing 17 U.S.C. 115(d)(3)(I)). 211 MLC Ex Parte Letter at 2–4 (Oct. 16, 2020); see MLC SNPRM Comment at 3; MLC Ex Parte Letter at 2–3 (Nov. 17, 2020); see also MAC, Recording Acad. & SONA SNPRM Comment at 2; Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020). 212 See 17 U.S.C. 115(d)(10)(B)(iv)(II). 213 MLC Ex Parte Letter at 7 (Nov. 17, 2020) (quoting 17 U.S.C. 115(d)(10)(B)(iv)(II)(aa)). 214 See DLC SNPRM Comment at 10. 215 See 17 U.S.C. 115(d)(10)(B)(iv)(II)(aa). 216 See id. at 115(d)(10)(B)(iv)(I). E:\FR\FM\11JAR5.SGM 11JAR5 2190 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 section 115(d)(10)(B)(iv)(II) or (III), such as pursuant to agreement.217 They argue that ‘‘this is how Subclause (I) has to work, in order to account for voluntary licenses’’ because subclause (II) ‘‘does not address voluntary licenses at all’’ and instead ‘‘requires—regardless of the terms of any contrary agreement— payment of ‘all accrued royalties’ on a specific timetable, accompanied by a statutorily mandated ‘cumulative statement of account.’ ’’ 218 The Office concludes that the limitation on liability provision is not clear about the treatment of voluntary licenses. The MLC’s formulation assumes that any amount transferred to the MLC must necessarily be ‘‘accrued,’’ failing to recognize that some portion of what is transferred may instead constitute an overpayment subject to credit or refund.219 Additionally, neither the MLC’s nor the DMPs’ interpretations resolve conflicts between section 115(d)(10)(B)(iv) and at least two other related provisions in section 115 intended to preserve the effect of existing voluntary transactions.220 The first provision states that ‘‘[l]icense agreements voluntarily negotiated at any time between one or more copyright owners of nondramatic musical works and one or more persons entitled to obtain a compulsory license . . . shall be given effect in lieu of any determination by the Copyright Royalty Judges.’’ 221 The second provides that 217 See DLC NPRM Comment at 17 (‘‘[U]nder GAAP, accrued royalties that were paid to participating publishers, who released all entitlement to royalties for such usage, would cease being ‘maintained’ in accordance with GAAP; only those royalties expected to be due to third parties who had not released such royalty claims would be accrued.’’); DLC SNPRM Comment at 10; DLC Ex Parte Letter at 2 (Oct. 14, 2020); Spotify Ex Parte Letter at 3–4 (Oct. 9, 2020). 218 Spotify Ex Parte Letter at 4 (Oct. 9, 2020); see DLC SNPRM Comment at 10; DLC Ex Parte Letter at 2 (Oct. 14, 2020) (‘‘[T]he MLC’s proffered statutory argument . . . would improperly read the GAAP requirement out of the law, and fail to account for voluntary licenses.’’). 219 See 17 U.S.C. 115(d)(3)(I)(ii), (d)(10)(B)(iv)(II)– (III) (all referring to the payment of ‘‘accrued royalties’’). For example, where a DMP transferred over royalties for an unmatched work that, when later matched by the MLC, turns out to be subject to a catalog-based voluntary license where payment for the relevant usage was already made to the copyright owner under the terms of that agreement. 220 See, e.g., R–S–C v. Sessions, 869 F.3d 1176, 1183–85 (10th Cir. 2017) (finding statute ambiguous where it was ‘‘apparent’’ that statutory provisions were ‘‘at odds with one another,’’ such that the ‘‘intra-statutory conflict obscure[d] any clear command from Congress’’ on the subject at issue). 221 17 U.S.C. 115(c)(2)(A)(i); see also id. at 801(b)(7)(A), (C); H.R. Rep. No. 115–651, at 4; S. Rep. No. 115–339, at 4; Conf. Rep. at 3 (‘‘Consistent with the current 115 compulsory license, subsection (c)(2)(A) makes clear that voluntary licenses entered into between musical work copyright owners and digital music providers are VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 ‘‘[a] voluntary license for a covered activity in effect on the license availability date will remain in effect unless and until the voluntary license expires according to the terms of the voluntary license, or the parties agree to amend or terminate the voluntary license.’’ 222 Both in essence require that voluntary licenses be given effect in lieu of compulsory licenses, and yet by the MLC’s read (despite its attempts to suggest otherwise), section 115(d)(10)(B)(iv)(II) and (III) would require the opposite.223 It seems highly unlikely that Congress, without being explicit about what it was doing, would have adopted a statutory scheme that broadly encourages and gives effect to the common practice of voluntary licenses (including by preserving existing agreements), only to override them and risk marketplace confusion for purposes of the limitation on liability requirements. It is possible that Congress may have assumed that an unmatched work would not be subject to a voluntary license, but that appears to be factually untrue, as it has been represented to the Office that many voluntary licenses operate on a participating-party or musical work catalog or library basis, rather than a per-matched-work (or ‘‘title-bound’’) basis.224 given effect in lieu of the rates established for the blanket license.’’). 222 17 U.S.C. 115(d)(9)(C); see also id. at 115(d)(1)(C); H.R. Rep. No. 115–651, at 10; S. Rep. No. 115–339, at 10–11; Conf. Rep. at 8–9 (‘‘[A]ny voluntary license agreement between a digital music provider and a musical work copyright owner continues to be effective and takes precedence over the blanket license until such license expires according to its own terms.’’). 223 See U.S. Copyright Office, Views of the United States Copyright Office Concerning PRO Licensing of Jointly Owned Works, at 20 (Jan. 2016), https:// www.copyright.gov/policy/pro-licensing.pdf (‘‘Congress established [compulsory licenses] to address specific market conditions, and they are narrowly construed in their application.’’) (citing Fame Publ’g Co. v. Alabama Custom Tape, Inc., 507 F.2d 667, 670 (5th Cir. 1975) and WPIX, Inc. v. ivi, Inc., 691 F.3d 275, 281 (2d Cir. 2012)); see also DLC SNPRM Comment at 10 (observing that ‘‘other references to voluntary agreements in the statute say nothing about how those agreements should be applied to the issues posed by accrued unmatched royalties’’). 224 See 85 FR 22518, 22528 (Apr. 22, 2020) (‘‘The DLC is specifically concerned with the handling of voluntary licenses, explaining that because such licenses are often procured through blanket deals covering all musical works in a publisher’s catalog, the DMP usually does not know which specific musical works are covered, and will be reliant on the MLC to make that determination based on its statutorily directed matching efforts; this in turn affects the amount of royalties the DMP owes under the blanket license.’’); DLC SNPRM Comment at 9 (‘‘[I]t is common in the industry, if not standard, for full-catalog licenses not to identify each work covered, and for the list of covered works to change from time to time. . . . [I]t is precisely for this PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 The DMPs’ reliance on the GAAP provision in subclause (I) does not resolve the matter, however. Even if the provision encompassed derecognition of liabilities, including by agreement, in certain contexts, it would still be in conflict with subclause (II). For example, where a previously unmatched work becomes matched prior to the license availability date, if the work is matched to a copyright owner with whom the DMP has a voluntary license, then under subclause (I), that license could be given effect, or, if there is no such license, the DMP and copyright owner could agree to one at that time to extinguish the liability. But under subclause (II), in the exact same situation, the DMP is told to undertake certain acts that could be contrary to any such agreement.225 Even if a voluntary license was structured so that no further accrued royalties would be due, to the extent further reporting is still required under the agreement, there could be a conflict with the reporting requirements of subclause (II). Congress has given no indication as to whether subclause (I) or (II) should control in these types of situations. Third, the Office finds section 115(d)(10)(B)(iv) to be ambiguous on its face. The MLC argues that the provision is clear and requires that ‘‘on enactment of the MMA, DMPs must accrue and hold royalties for all of their historical and ongoing unmatched uses, with such accrued royalties to be calculated at the statutory rate and to cover all uses from initial use of the work, with such accrued royalties to be held through the date when the royalties are either (a) matched and distributed to the proper copyright owner pursuant to subsection II or (b) transferred to the MLC pursuant to subsection III.’’ 226 The MLC contends that the ‘‘first clause’’ of section 115(d)(10)(B)(iv) 227 ‘‘serves to identify what is being addressed by the provision, namely all unmatched works and associated royalties;’’ the ‘‘second clause’’ 228 ‘‘sets forth the unambiguous reason that the MLC must provide a response file identifying the works covered by a voluntary license, in order to allow the licensee to calculate the royalties owed pursuant to the blanket license for the remaining works.’’); see also, e.g., Steven Winogradsky & David Lowery, Music Publishing: The Complete Guide 267 (2nd ed. 2019) (discussing production music library licenses on a non-title basis). 225 See 17 U.S.C. 115(d)(10)(B)(iv)(II). 226 MLC Ex Parte Letter at 2–3 (Oct. 16, 2020); see MLC SNPRM Comment at 3. 227 The first clause reads, ‘‘[i]f the copyright owner is not identified or located by the end of the calendar month in which the digital music provider first makes use of the work.’’ 17 U.S.C. 115(d)(10)(B)(iv). 228 The second clause reads, ‘‘the digital music provider shall accrue and hold royalties calculated E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 obligation to accrue and hold royalties at the statutory rate,’’ with ‘‘[t]he statutory obligation to accrue and hold these royalties begin[ning] on the enactment date;’’ and the ‘‘third clause’’ 229 ‘‘details the scope of the accrual to be made, the time frame for holding, and the ultimate payment obligation.’’ 230 Based on this analysis, the MLC disagrees with the DMPs’ position on the meaning of the GAAP provision in section 115(d)(10)(B)(iv)(I), asserting that ‘‘[r]eading the generic direction to ‘maintain’ royalties in accordance with GAAP as overriding the detailed statutory instructions and producing a result where the DMP in fact does not maintain the accrued royalties and does not transfer them under either subsection II or III—the exact opposite of the explicit statutory directive—does not appear reasonable.’’ 231 The DMPs disagree, arguing that ‘‘the MLC’s proffered statutory argument . . . would improperly read the GAAP requirement out of the law, and fail to account for voluntary licenses.’’ 232 Instead, they contend that the phrase ‘‘as follows’’ at the end of clause (iv) must mean that ‘‘the subsequent Subclauses (I)–(III) describe how and when the royalties are accrued, paid to copyright owners, or transferred to the MLC.’’ 233 They further explain that ‘‘Subclause (I) provides a general instruction that the royalties ‘shall be maintained’ in accordance with GAAP—which means that GAAP standards apply to the initial calculation of the accrual as well as to any under the applicable statutory rate in accordance with usage of the work.’’ Id. 229 The third clause reads, ‘‘from initial use of the work until the accrued royalties can be paid to the copyright owner or are required to be transferred to the mechanical licensing collective.’’ Id. 230 MLC Ex Parte Letter at 3 (Oct. 16, 2020). 231 Id. at 3–4; see MLC SNPRM Comment at 5– 10; MLC Ex Parte Letter at 2–4 (Nov. 17, 2020); see also, e.g., Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020) (‘‘[The GAAP provision] is meant to safeguard the royalties until they can be successfully matched to the owner or transferred to the MLC. It is not intended to provide a trap door through which accrued royalties can be disposed of in a way not prescribed in the statute.’’); NMPA Ex Parte Letter at 1 (Nov. 17, 2020); SGA, SCL & MCNA Ex Parte Letter at 3 (Nov. 17, 2020). 232 DLC Ex Parte Letter at 2 (Oct. 14, 2020); see also, e.g., ARA, FMC & MusicAnswers SNPRM Comment at 3 (non-DMP organizations agreeing that ‘‘Congress clearly intended the . . . [relevant] provisions to cover usages of musical works for which rightsholders had not yet received payment at all—not usages for which a corresponding payment had been negotiated and made,’’ and that ‘‘[t]he financial structures and allowances of GAAP are incorporated in their entirety by a plain reading of the statute’’); DLC SNPRM Comment at 9; Spotify Ex Parte Letter at 3–4 (Oct. 9, 2020). 233 Spotify Ex Parte Letter at 3 (Oct. 9, 2020); see also DLC Ex Parte Letter at 2 (Oct. 14, 2020). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 adjustment of that initial calculation in light of new facts. That is made clear by the fact that Clause (iv) ends with the phrase ‘as follows,’ which links the initial accrual determination described in Clause (iv) to the application of GAAP standards specified in Subclause (I).’’ 234 The Office finds that neither of these interpretations eliminates the ambiguities in clause (iv). A key uncertainty lies in what the MLC refers to as the ‘‘third clause’’ of clause (iv): ‘‘from initial use of the work until the accrued royalties can be paid to the copyright owner or are required to be transferred to the mechanical licensing collective.’’ 235 It is not clear what that phrase is referencing. Looking at the immediately preceding phrase (‘‘the digital music provider shall accrue and hold royalties calculated under the applicable statutory rate in accordance with usage of the work’’), it seems that two possibilities are most likely. First, the ‘‘third clause’’ of clause (iv) could be referencing ‘‘accrue and hold royalties calculated under the applicable statutory rate.’’ Under that reading, it would direct when the DMP must accrue statutory royalties for an unmatched usage of the work and for how long it must hold them. For example, if first use of a work occurred in May 2015 and that work remained unmatched at the license availability date, the DMP must have started accruing statutory royalties in May 2015 and must be holding all such royalties until they are transferred to the MLC in early 2021. Second, the ‘‘third clause’’ could be referencing ‘‘in accordance with usage of the work.’’ Under that reading, it would define the lookback period for the unmatched usage of the work that may be subject to accrual and holding of statutory royalties, but would not speak to when royalties must actually be accrued by the DMP or for how long they must be held. For example, if first use of a work occurred in May 2015 and that work remained unmatched at the license availability date, those uses occurring between May 2015 and the date of transfer to the MLC in early 2021 would be subject to royalty accrual requirements for purposes of cumulative reporting and transfer to the MLC (but this clause would not speak to what those requirements are, including when or for how long royalties must be accrued and held; e.g., following enactment in October 2018, a DMP could first accrue royalties for the period of use stretching 234 Spotify Ex Parte Letter at 3–4 (Oct. 9, 2020); see also DLC Ex Parte Letter at 2 (Oct. 14, 2020). 235 See 17 U.S.C. 115(d)(10)(B)(iv). PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 2191 back to May 2015). The ‘‘third clause’’ could perhaps also be referring to both the royalty accrual and holding period and usage lookback period, but that formulation would not resolve the issues identified below. The first construction, which would construe this phrase as a set holding period for accrued royalties, mostly aligning with the MLC’s interpretation, is problematic in multiple ways. One obvious issue is that it causes significant friction with the structure of the overall provision. Clause (iv) ends with the phrase ‘‘as follows:’’ after which detailed requirements are provided under subclauses (I) through (III). Thus, the most natural reading is that DMPs ‘‘shall accrue and hold royalties’’ as specified in subclauses (I) through (III). But if the ‘‘third clause’’ of clause (iv) is construed as speaking to the accrual and holding of royalties in absolute terms, it would essentially act as an exception to the operation of subclauses (I) through (III). There is no indication that the ‘‘third clause’’ is meant to function this way, to undercut the subclauses in the very same provision. As the DMPs argue, treating it in such a manner would significantly diminish the scope and application of the GAAP provision in subclause (I). If Congress had meant to further delineate the requirements of subclauses (I) through (III), it would likely have done so within that framework of subclauses, or by at least using verbiage indicative of an exception. Further, subclauses (II) and (III) do not merely dictate the initial bulk historical payment and cumulative statement of account requirements,236 but also the ongoing payment and reporting obligations for subsequent reporting periods,237 making it even less likely that the ‘‘third clause’’ is meant as an overarching exception to the whole of subclauses (I) through (III). Another problem is that to read the ‘‘third clause’’ as referring to the royalty holding period, it would have to define both the beginning and end points of that period—i.e., starting with the ‘‘initial use of the work’’ and ending when ‘‘the accrued royalties can be paid to the copyright owner or are required to be transferred to the mechanical licensing collective.’’ 238 If understood this way, to qualify for the limitation on liability, a DMP would have needed to ‘‘accrue and hold royalties . . . from initial use of the work,’’ no matter how many years ago that may have been and regardless of whether the DMP addresses any historic bookkeeping or 236 Id. at 115(d)(10)(B)(iv)(II)(aa), (III)(aa). at 115(d)(10)(B)(iv)(II)(bb)–(cc), (III)(bb). 238 See id. at 115(d)(10)(B)(iv). 237 Id. E:\FR\FM\11JAR5.SGM 11JAR5 2192 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 accounting issues by reporting on and paying all properly accrued royalties as required under subclauses (II) and (III).239 It seems unlikely that Congress would have intended something so sweepingly retroactive and incurable given its clear intent to encourage participation in the limitation on liability and concerns about imposing potentially retroactive obligations on DMPs to qualify for this limitation. Even the MLC does not go this far, instead stating that ‘‘[t]he statutory obligation to accrue and hold these royalties begins on the [MMA’s] enactment date.’’ 240 It is not clear why the MLC believes this to be the case, since it contends that the ‘‘third clause’’ details ‘‘the time frame for holding.’’ 241 The MLC’s view would only give effect to the half of the provision purportedly detailing the end date. To the extent the MLC qualifies its reading by the overall direction that the requirements for the limitation on liability ‘‘shall apply on the enactment date and through the end of the period that expires 90 days after the license availability date,’’ the Office finds that provision to be yet another reason why the ‘‘third clause’’ of clause (iv)—with its conflicting reference to the starting point of ‘‘initial use of the work’’ (at least where initial use predates the MMA’s enactment)— cannot be construed as the royalty holding period, or at minimum adds a layer of ambiguity.242 The second construction, which would construe this phrase as defining the applicable usage lookback period, despite avoiding most of the problems plaguing the first construction is also problematic. As noted above, the details of subclauses (II) and (III) do not merely dictate the initial bulk historical payment and cumulative statement of account requirements,243 but also the ongoing payment and reporting obligations for subsequent reporting periods.244 Understanding the ‘‘third clause’’ of clause (iv) to be defining the usage lookback period does not resolve that tension. The main issue, though, concerns the end points of the usage lookback period. Defining the end of the period as the dates when ‘‘the accrued royalties can be paid to the copyright owner [under subclause (II)(aa)] or are required to be transferred to the mechanical licensing collective [under subclause (III)(aa)]’’ 245 239 See id. Ex Parte Letter at 3 (Oct. 16, 2020). 240 MLC 241 Id. 242 See 17 U.S.C. 115(d)(10)(B). at 115(d)(10)(B)(iv)(II)(aa), (III)(aa). 244 Id. at 115(d)(10)(B)(iv)(II)(bb)–(cc), (III)(bb). 245 See id. at 115(d)(10)(B)(iv). 243 Id. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 creates tension with the usage periods defined in those subclauses, which in both cases end 45 calendar days earlier.246 This discrepancy means that the ‘‘third clause’’ of clause (iv) does not refer to an unambiguous usage lookback period. The foregoing demonstrates that Congress’s intent cannot be clearly divined, and ‘‘ ‘Congress has [not] directly spoken to the precise question at issue’ ’’ 247 or prescribed a ‘‘precise course of conduct.’’ 248 Therefore, the Office may proceed to fill the statutory gap in a reasonable fashion.249 Specifically with respect to the MMA, Congress ‘‘expected that situations will arise that were not contemplated by the legislation’’ and imbued the Office with ‘‘broad regulatory authority’’ to act, directing that ‘‘[t]he Office is expected to use its best judgement in determining the appropriate steps in those situations.’’ 250 iii. Appropriateness of Regulatory Action In light of the statutory ambiguities identified above in the limitation on liability provision, including those raised when reading it in connection with the provisions preserving voluntary licensing, the Office 246 See id. at 115(d)(10)(B)(iv)(II)(aa)–(bb), (III)(aa)–(bb). 247 See City of Arlington, 569 U.S. at 296 (quoting Chevron, 467 U.S. at 842–43). 248 See Vill. of Barrington v. Surface Transp. Bd., 636 F.3d 650, 659 (D.C. Cir. 2011). 249 See Brand X Internet Servs., 545 U.S. at 980 (‘‘[A]mbiguities in statutes within an agency’s jurisdiction to administer are delegations of authority to the agency to fill the statutory gap in reasonable fashion.’’). 250 H.R. Rep. No. 115–651, at 5–6, 14; S. Rep. No. 115–339, at 5, 15; Conf. Rep. at 4, 12; see 17 U.S.C. 115(d)(12)(A); see also AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 397 (1999) (‘‘Congress is well aware that the ambiguities it chooses to produce in a statute will be resolved by the implementing agency.’’); Brand X Internet Servs., 545 U.S. at 982. The Office is not persuaded by the MLC’s invocation of expressio unius est exclusio alterius to argue that because there is a provision in the MMA relating to private agreements in the context of pre-1972 sound recordings, weight should be given to the assertion that with respect to the limitation on liability requirements, ‘‘the MMA could have easily included language providing for the deduction of moneys paid in private settlements, but it did not.’’ MLC SNPRM Comment at 4–5 (discussing 17 U.S.C. 1401(d)). The provision about pre-1972 sound recordings is in a separate section of title 17, was enacted in a separate title of the MMA that originated from a completely different bill, and is unrelated to the section 115 compulsory license. It is difficult to see how in such circumstances silence can be construed as dispositive of Congress’s intent, especially in light of the other ambiguities identified above and Congress’s express cautioning to the Office with respect to the portions of the MMA relating to section 115 that uncontemplated issues will arise and need to be addressed. See H.R. Rep. No. 115– 651, at 5–6, 14; S. Rep. No. 115–339, at 5, 15; Conf. Rep. at 4, 12. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 concludes that the most reasonable interpretation is one that does not disrupt the existing marketplace for licensing on a participating-party or musical work catalog or library basis, as opposed to a title-bound basis. An alternative conclusion that disfavors transactions not based on song-by-song licenses would be at odds with animating legislative desires to facilitate large scale licensed uses of musical works and avoid disrupting the marketplace that has arisen around the compulsory license.251 Accordingly, the Office finds that it is necessary and appropriate to promulgate a rule that accounts for voluntary agreements (whether considered licenses, settlements, liquidations, releases, or otherwise) during the transition period, and the corresponding possibility that the royalties a DMP has accrued may not associate with all unmatched musical work usages because some of those usages may be subject to relevant agreements.252 Beyond the broad statutory grant of authority bestowed upon the Office as part of the MMA and the authority delegated to the Office by virtue of the ambiguities identified above, it has long been recognized to be well within the ambit of the Office’s authority to promulgate rules governing processes for reporting and paying royalties, including reliance upon estimates and adjustments.253 Indeed, the Office’s longstanding pre-MMA statement of account regulations, and the more-recently enacted reports of usage regulations under the blanket license, employ a system of estimates and adjustments.254 251 See U.S. Copyright Office, Copyright & the Music Marketplace 30–31 (2015), https:// www.copyright.gov/policy/musiclicensingstudy/ copyright-and-the-music-marketplace.pdf (noting that pre-MMA, the statutory license served as a ‘‘ghost in the attic’’ while voluntary licensing facilitated the majority of licensed uses). 252 See 17 U.S.C. 115(d)(12)(A) (‘‘The Register of Copyrights may conduct such proceedings and adopt such regulations as may be necessary or appropriate to effectuate the provisions of this subsection.’’); see also ARA, FMC & MusicAnswers SNPRM Comment at 2–4; ARA Ex Parte Letter at 1 (Nov. 17, 2020) (noting ambiguity and asserting that ‘‘[a]s a consequence of this ambiguity, we believe the Copyright Office has discretion to interpret the MMA’s terms and the authority to promulgate a rule that creates a workable, practical system’’); SGA, SCL & MCNA Ex Parte Letter at 1 (Nov. 17, 2020) (‘‘[R]eject[ing] the assertion by some music publisher representatives (backed by at least one of their affiliated songwriter groups) that the USCO’s oversight and rulemaking authority concerning matters related to 2020–12 should be viewed as being narrowly limited.’’). 253 See 17 U.S.C. 115(d)(4)(A)(iv) (directing Office to adopt regulations ‘‘regarding adjustments to reports of usage by digital music providers, including mechanisms to account for overpayment and underpayment of royalties in prior periods’’). 254 See 37 CFR 210.6, 210.7, 210.27. E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 Concluding otherwise would be at odds with Congress’s intent to create certainty and discourage litigation over historical usage.255 The Office did give thought to remaining silent on the issue, as some commenters urged. In particular, the MLC and others contended that a regulation is unnecessary, essentially opining that since the DMPs believe the statute is clear, they should simply rely on their asserted interpretation.256 in contrast, the DLC and DMPs asserted that ‘‘[t]he need for [a] rule is critical’’ because ‘‘the MLC’s very insistence that the statute doesn’t square with the interpretation advanced by the DLC confirms that clarifying regulation is imperative, and that a lack of such clarification is likely to provoke litigation—which will be a burden not just for DMPs, but also for the copyright owners who would have to bring those infringement suits.’’ 257 The Office concludes that the better approach is to provide regulatory guidance to address what most parties seem to agree will be inevitable situations where usage that certain DMPs could not match is subsequently determined by the MLC to be owned by copyright owners who may be party to a valid agreement covering the relevant period. Contrary to the MLC’s and others’ statements, the rule’s approach is in many ways aligned with the original NPRM, as it seeks to give effect to voluntary agreements, where appropriate, without opining on any particular individual agreements.258 At its heart, the rule detailed below simply creates a mechanism through which the MMA’s limitation on liability requirements can accommodate voluntary agreements (including those adopted on a non-title-bound basis) to the extent they may be appropriately 255 See H.R. Rep. No. 115–651, at 13–14; S. Rep. No. 115–339, at 14–15; Conf. Rep. at 12; Letter from Senator Lindsey O. Graham, Chairman, Senate Committee on the Judiciary, to U.S. Copyright Office 1 (Sept. 30, 2020). 256 See, e.g., MAC, Recording Acad. & SONA SNPRM Comment at 2–3 (‘‘The original NPRM, which remained silent on how the Agreements should be treated, is the better approach. If the DMP interpretation of GAAP is correct and can be justified, the Office does not need to explicitly ratify it in the regulations. The DMPs can simply comply with the statute and transfer their accrued royalties as they understand them along with the usage data.’’) MLC SNPRM Comment at 2, 10–11. 257 DLC SNPRM Comment at 11; see DLC NPRM Comment at 16–17 (‘‘[R]egulation is plainly necessary to provide unambiguous guidance to DMPs and the MLC. . . . [L]eaving this provision open ended will undoubtedly invite litigation that second-guesses DMPs’ accounting determinations and render the limitation on liability illusory. . . . Regulatory clarification to guard against that result is warranted.’’); DLC Ex Parte Letter at 2 (Oct. 14, 2020); Spotify Ex Parte Letter at 4 n.5 (Oct. 9, 2020). 258 See NPRM at 43523. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 relied upon in computing accrued royalties. Moreover, in the event that a court found the statute unambiguously to require the DLC’s and DMPs’ interpretation, a rule would still be necessary to prescribe conditions under which their interpretation could be given effect, including by articulating how estimates and adjustments as well as underpayments and overpayments should operate.259 In this respect, the Office believes regulatory guidance will help guide DMP compliance, and provide a mechanism for additional royalty monies to be payable to copyright owners entitled to such payment, in the event obligations have been underestimated. Without the uniformity in application that a regulatory scheme brings, it could negatively impact the MLC’s ability to process cumulative statements of account. Importantly, the Office also concludes that regulatory action will best limit the risk of DMPs choosing to forego the limitation on liability by providing added certainty, helping to ensure that accrued royalties owed to copyright owners and songwriters are transferred to the MLC and eventually matched and distributed accurately without resorting to litigation, as Congress intended.260 The transfer of cumulative statements and royalties is an optional condition to the limitation on liability and not otherwise required for DMPs to use the blanket license. As explained below, the adopted rule acknowledges, without endorsing, the DMPs’ proffered interpretation of relevant agreements by establishing a process that leaves room for such issues to be litigated if necessary.261 DMP participation is particularly important for smaller 259 See DLC SNPRM Comment at 12 (‘‘[E]ven if the DMPs are to employ the self-help invited by the MLC with respect to the GAAP treatment of preMMA releases, the Office would still need to issue regulations clarifying the manner in which DMPs reconcile the cumulative statement of account with the necessary estimates that GAAP requires—not just to account for the release of claims prior to the MMA, but for other estimates, including royalty rates and inputs.’’). 260 See H.R. Rep. No. 115–651, at 13–14; S. Rep. No. 115–339, at 14; Conf. Rep. at 12 (noting concerns over continued litigation, including how it diverts royalties from artists); Letter from Senator Lindsey O. Graham, Chairman, Senate Committee on the Judiciary, to U.S. Copyright Office 1 (Sept. 30, 2020) (noting that the MMA was intended to provide legal certainty and that it is ‘‘critical’’ to resolve the issue, considering copyright owner, songwriter, and DMP interests). 261 See ARA, FMC & MusicAnswers SNPRM Comment at 3–4 (agreeing that the ‘‘structure seems to accomplish exactly what Congress intended’’ and ‘‘resolves the current controversy in a way that best serves the interest of independent and working songwriters who have a strong interest in bringing as much money as possible into the MLC matching and payment process for pre-MMA uses’’). PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 2193 publishers and self-published songwriters who may not have the means to engage in the litigation that could otherwise be necessary to obtain royalty payments.262 That loss could be significant; as noted, the DLC ‘‘estimated that several hundred million dollars were available to be transferred to the MLC as accrued royalties, even after accounting for the derecognition of accruals based on preexisting agreements containing releases to claims for accrued royalties.’’ 263 Indeed, regulatory action seems particularly appropriate to ensure that those copyright owners who did not participate in voluntary agreements will see the money to which they are entitled for uses of their works transferred to the MLC and ultimately paid without needing to resort to litigation. The adopted final rule is a practical solution to a complex issue. It is a permissible construction of the statute that best effectuates Congress’s intent and is within the Office’s authority to adopt. Other practical considerations weigh in favor of adopting the rule. Most notably, it would be a waste of resources to require DMPs to transfer ‘‘tens of millions of dollars’’ 264 to the MLC, which the MLC and music publishers seem to agree, may have to circuitously make their way back to the DMPs in cases where valid releases apply.265 The 262 See Am. Intellectual Prop. Law Ass’n, 2019 Report of the Economic Survey 54 (2019) (median cost in 2019 for a party to litigate a copyright infringement lawsuit with less than $1 million at risk through to appeal was $550,000; median cost to reach the close of discovery was $150,000). 263 DLC Ex Parte Letter at 2 (Nov. 17, 2020); see ARA, FMC & MusicAnswers SNPRM Comment at 4 (stating that ‘‘potentially hundreds of millions of dollars for songwriters and publishers are at stake’’ because the risk of DMPs foregoing the limitation on liability ‘‘is real’’). 264 DLC Ex Parte Letter at 2 (Nov. 17, 2020). 265 See, e.g., NMPA Ex Parte Letter at 2 (Nov. 3, 2020) (discussing the ability of DMPs to get letters of direction from relevant publishers and potential litigation to enforce contract rights); MLC Ex Parte Letter at 5 (Oct. 5, 2020) (noting that ‘‘in the event of any such legal dispute between a DMP and a copyright owner concerning the right to receive unmatched royalties that the DMP had turned over under the MMA, the MLC would hold such unmatched royalties pending the resolution of the dispute,’’ and that the MLC would ‘‘follow[ ] the direction of the parties or appropriate courts as to how royalties should be distributed pursuant to private agreements’’); SATV Ex Parte Letter at 2 (Oct. 28, 2020) (‘‘SATV is open to discussing letters of direction and other potential solutions that would ensure that the requirements of the MMA are satisfied and also address the concerns raised by the digital services regarding payments made pursuant to private settlements.’’); UMPG Ex Parte Letter at 1 (Oct. 30, 2020) (‘‘UMPG believes that any issues relating to payments under private settlements can and should be dealt with between the contracting parties. UMPG intends to assist and facilitate voluntary procedures for doing so with the digital services, to the extent applicable.’’); WMG Ex Parte E:\FR\FM\11JAR5.SGM Continued 11JAR5 2194 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations Office is mindful that Congress expects the MLC to operate in an ‘‘efficient and fair’’ manner without engaging in ‘‘waste’’ or the ‘‘unreasonable use of funds.’’ 266 Unnecessary reimbursement would be an inefficiency and waste to be avoided. Music publishers may also not want to incur their own administrative costs if funds distributed to them by the MLC are ultimately returnable to DMPs, such as those relating to legal review and accounting processes.267 There is no practical purpose to this exercise, especially if it is correct, as appears uncontested, that a large portion of the music publishing industry (in terms of market share) is subject to relevant releases for relevant reporting periods.268 jbell on DSKJLSW7X2PROD with RULES5 iv. Regulatory Approach The Office declines to adopt the DLC’s initial proposal, made in response to the NPRM, which would have the Office establish a blanket rule that draws conclusions about private contracts.269 Instead, the Office concludes that a reasonable and appropriate approach is to promulgate a rule that: (1) Incorporates the statutory reference to GAAP in section 115(d)(10)(B)(iv)(I) and confirms this includes principles with respect to derecognition of liabilities where appropriate; (2) clarifies that the requirements of section 115(d)(10)(B)(iv)(II) do not supersede a relevant voluntary agreement to the contrary; and (3) with respect to section Letter at 1 (Oct. 21, 2020) (‘‘For those DSPs with which we have already settled claims for the distribution of royalties owed before the enactment of the MMA, we consider these claims closed.’’). 266 H.R. Rep. No. 115–651, at 6; S. Rep. No. 115– 339, at 5; Conf. Rep. at 4, 6. 267 See SATV Ex Parte Letter at 2 (Oct. 28, 2020) (noting, in the context of market-based solutions, a preference for ‘‘any potential reimbursements to digital services be made by the MLC rather than music publishers’’). 268 See, e.g., DLC NPRM Comment at 14–15 (‘‘The NMPA has represented that 90%-plus of all usage was covered by the NMPA agreements: It would be absurd to require DMPs to make an acknowledged duplicate payment of tens of millions of dollars to cover payments that are merely around 10%, or less, of that amount.’’); id. at 13 (quoting Ed Christman, Vast Majority Join Royalties Settlement Between Spotify and Publishing Group, Billboard (July 11, 2016), https://www.billboard.com/articles/ business/7431272/nmpa-spotify-settlement-mostmembers-join (stating that participation was ‘‘96% of [NMPA’s] market share’’)); id. (quoting Lowery et al. v. Rhapsody Int’l Inc., No. 4:16–cv–01135–JSW (N.D. Cal. filed Mar. 7, 2016), Dkt. No. 175 at 3) (noting opt in market share of 97.13%). 269 Id. Add. at 22; see also NPRM at 43523; NMPA Ex Parte Letter at 2 (Aug. 25, 2020) (‘‘[R]esolution of issues and disputes concerning privately negotiated agreements such as the pending and unmatched settlement agreements . . . is to be addressed through state contract law and discussions between the contracting parties.’’); MLC NPRM Comment at 8–9 (accord). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 115(d)(10)(B)(iv)(III), adopts an estimate and adjustment mechanism for cases where certain usage of certain unmatched works is believed to be subject to a voluntary agreement, but because the specific works are unmatched, the DMP’s accrued royalties do not fully identify which works are subject to such an agreement at the time of delivery of the cumulative statement to the MLC and the amount of accrued royalties may need to be adjusted in response to matching. GAAP treatment. To address, in part, the discussed ambiguities in section 115(d)(10)(B)(iv) and to clarify the operation of subclause (I), the SNPRM proposed language stating that ‘‘[a]ccrued royalties shall be maintained by the digital music provider in accordance with generally accepted accounting principles, including those concerning derecognition of liabilities.’’ 270 The SNPRM also stated that ‘‘[a]ccrued royalties can cease being accrued royalties within the meaning of 17 U.S.C. 115(e)(2) if the digital music provider’s payment obligation is extinguished, such as pursuant to a voluntary license or other agreement whereby the digital music provider is legally released from the liability by the relevant creditor copyright owner.’’ 271 The MLC and other commenters object, contending that this language conflicts with the statute and blesses an incorrect interpretation of GAAP.272 On the first point, as discussed, the Office has concluded that the regulatory clarification to address an area of ambiguity is appropriate. On the second, the Office is unconvinced that incorporating the statutory directive to maintain accrued royalties in accordance with GAAP can be read as blessing a specific interpretation of GAAP.273 To the extent the proposed language expressly acknowledges a GAAP provision that DMPs indicate is relevant to their reporting, and to the extent that copyright owners disagree that this provision is, in fact, relevant, copyright owners may contest whether a DMP has appropriately applied GAAP, but the Office will not presume that 270 SNPRM at 70548; see id. at 70546 (citing Fed. Acct. Standards Bd. (‘‘FASB’’) Acct. Standards Codification (‘‘ASC’’), titled ‘‘Derecognition’’). 271 Id. at 70548. 272 See, e.g., MAC, Recording Acad., & SONA SNPRM Comment at 2–3; MLC SNPRM Comment at 2–10; NMPA Ex Parte Letter at 1–2 (Nov. 17, 2020); MLC Ex Parte Letter at 2–5 (Nov. 17, 2020); SGA, SCL & MCNA Ex Parte Letter at 3 (Nov. 17, 2020). 273 See 17 U.S.C. 115(d)(10)(B)(iv)(I) (‘‘Accrued royalties shall be maintained by the digital musical provider in accordance with generally accepted accounting principles.’’). PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 DMPs may not rely upon this provision.274 Nor is the Office convinced by the MLC’s contention that ‘‘since the copyright owners of unmatched works are by definition not known or located, there cannot be private agreements that dispose of these unmatched royalties prior to the required transfer to the MLC.’’ 275 The MLC does not adequately support this assertion or point to relevant principles of contract law. While the DLC does not cite clear authority either, its reasoning is more persuasive: [These assertions are] patently wrong: It is common in the industry, if not standard, for full-catalog licenses not to identify each work covered, and for the list of covered works to change from time to time. . . . [I]t is precisely for this reason that the MLC must provide a response file identifying the works covered by a voluntary license, in order to allow the licensee to calculate the royalties owed pursuant to the blanket license for the remaining works. To suggest that the license simply does not exist or is ineffective until that matching takes place is contrary to the law and is inconsistent with long-standing industry practice. Moreover, the notion that derecognizing liability for unmatched royalties can never be appropriate unless and until all royalties are matched ignores the reality of the market. If the owners of the works that generated over 90% of the royalties have released their claims, there is no need to know exactly which owner released which royalties to know that there is not an outstanding liability of 100% of the royalties.276 Indeed, a public version of an agreement purporting to be one of the agreements referenced by the DMPs includes a broadly worded release provision that would apply to claims ‘‘whether disclosed or undisclosed, whether known or unknown, whether asserted or unasserted, whether determined, determinable or otherwise, whether strict, absolute or continent, whether accrued or unaccrued, whether liquidated or unliquidated, whether in law, in equity, or otherwise, whether incurred or consequential, whether due or to become due, and of any kind or 274 See MLC SNPRM Comment at 2–10. The MLC’s approach seems to assume that the principle that derecognition is only appropriate if there is payment to the creditor or a release ‘‘judicially or by the creditor’’ cannot be used to reflect payments to, and/or releases by, creditors that are made on a creditor basis as opposed to a title-bound basis. See id. at 7. The MLC does not fully explain the basis for its assumption, which the DLC does not share. See DLC NPRM Comment at 17. Neither party submitted statements from any accounting authority in support of their respective contentions. 275 See MLC Ex Parte Letter at 2–3 (Nov. 17, 2020); see also MLC SNPRM Comment at 6–8; MLC Ex Parte Letter at 3–4 (Oct. 16, 2020); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020). 276 See DLC SNPRM Comment at 9. E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 nature whatsoever.’’ 277 If a relevant voluntary agreement were worded appropriately, it would be difficult to see how a work would not be subject to the agreement just because it is not matched at a particular point in time by a particular DMP; a work belonging to a copyright owner under the relevant period of agreement still belongs to that owner regardless of whether the DMP knows it. Moreover, if the DMPs’ assertions about GAAP are correct, the MLC’s position seems to read the word ‘‘accrued’’ out of subclause (III).278 Only ‘‘accrued royalties’’ for uses of unmatched works must be transferred to the MLC, and these may not necessarily be the same as the royalties that would otherwise be attributable to such usage under the statutory rate in the absence of any voluntary agreements that may extinguish or alter such royalty obligations for certain uses of certain works.279 The Office also disagrees that the requirement for accrued royalties to be ‘‘maintained’’ in accordance with GAAP must be read to prohibit royalties from ceasing to be maintained.280 It is far more logical that relevant principles governing maintenance of such royalties may dictate how and under what circumstances or conditions such maintenance may conclude prior to the events of subclauses (II) and (III). In light of the foregoing, the Office is adopting as final the proposed language clarifying that GAAP treatment can include its derecognition principles where appropriate, to make clear that ‘‘[t]he financial structures and 277 See Participating Publisher Pending and Unmatched Usage Agreement 15 (2016) (embedded in Paul Resnikoff, Exclusive: This Is the Contract Songwriters Are Signing With Spotify, Digital Music News (Apr. 27, 2016) https://www.digital musicnews.com/2016/04/27/exclusivespotifyestablishing-direct-publisher-contracts-to-solvemechanicals-issues (document is embedded in article)). The Office again emphasizes that it is not in any way opining on the meaning of this or any other relevant private agreement, but noting the language used as a potential example. No party disputes the DLC’s suggestion that this public version of the agreement is authentic, although the MLC and others note that there exist supplemental agreements and other documentation concerning negotiation or performance. See, e.g., MLC SNPRM Comment at 9. 278 See DLC SNPRM Comment at 10. 279 See MLC SNPRM Comment at 8–9. 280 See id. at 5–6, 8 (‘‘Maintaining an accrued liability under GAAP means maintaining accounting records and financial statements that reflect the details of the accrual.’’); MLC Ex Parte Letter at 3–4 (Oct. 16, 2020) (arguing it ‘‘does not appear reasonable’’ if ‘‘producing a result where the DMP in fact does not maintain the accrued royalties’’); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020) (‘‘The provision to ‘maintain’ accrued royalties in accordance with GAAP is meant to safeguard the royalties until they can be successfully matched to the owner or transferred to the MLC.’’). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 allowances of GAAP are incorporated in their entirety.’’ 281 With respect to the MLC’s assertion that the SNPRM blesses an incorrect interpretation of GAAP, the Office does not concur. The Office agrees, however, that it can clarify that it is not opining on what GAAP may or may not allow. Accordingly, the final rule omits the second sentence of the proposed provision, relating to the interaction between GAAP and the statute. The Office intends for this deletion to make clear that to the extent something (e.g., the potential extinguishment of a DMP’s payment obligation pursuant to a voluntary license or other agreement whereby the DMP is legally released from the liability by the relevant creditor copyright owner) is permitted under GAAP, it is also permitted under the statute and regulations. While the rule does not opine on whether royalty payment liabilities were appropriately extinguished and derecognized by DMPs pursuant to GAAP, the final rule accommodates that possibility within the MMA’s transitional cumulative reporting and payment structure if DMPs are correct in their assertions about GAAP with respect to their relevant agreements. The Office believes this approach is reasonable particularly in light of the asserted purpose of certain voluntary agreements at issue.282 Voluntary agreements and works matched during the transition period. As noted, the limitation on liability provision makes no explicit acknowledgement of the existence of voluntary licenses or other agreements, while Congress has elsewhere broadly encouraged and given effect to voluntary licenses (including by preserving existing licenses). In the absence of clear congressional intent otherwise, to harmonize these provisions and ensure that such agreements are given effect in the context of the limitation on liability as well, the SNPRM proposed to limit the application of the requirements in section 115(d)(10)(B)(iv)(II) where a voluntary license or other relevant agreement, entered into before the statutory reporting and payment deadline, applies to the relevant musical work (or share) that the DMP has 281 ARA, FMC, & MusicAnswers SNPRM Comment at 3; see DLC SNPRM Comment at 9. 282 See NMPA and Spotify Announce Landmark Industry Agreement for Unmatched U.S. Publishing and Songwriting Royalties (Mar. 17, 2016), https:// nmpa.org/press_release/nmpa-and-spotifyannounce-landmark-industry-agreement-forunmatched-u-s-publishing-and-songwritingroyalties (noting ‘‘the agreement establishes a large bonus compensation fund that is a substantial percentage of what is currently being held by Spotify for unmatched royalties’’). PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 2195 matched during the transition period.283 That way, the DMP can pay and report, and the copyright owner can receive royalties and reporting, in accordance with their preexisting or a newlyentered-into mutual agreement. Notably, even the MLC seems to concur that voluntary agreements should apply in lieu of the requirements detailed in section 115(d)(10)(B)(iv)(II).284 This aspect of the proposed rule is being adopted as final, as a necessary and appropriate clarification. Estimating and adjusting accrued royalties reported and transferred to the MLC. All agree that, at a minimum, the total accrued royalties owed by a DMP at the end of the transition period may not be a finally calculable figure because of the need to estimate certain royalty pool inputs that are unknown at that point in time. At present, because of the Phonorecords III remand, no final operative rates have been set; not even a rate structure has been finally established. This means that, even in the absence of any other need to estimate and adjust, whatever amount is transferred to the MLC in February is unlikely to align with what a DMP will ultimate owe under the finally determined rates and terms. Because of this need to make estimates and adjustments, the Office concluded, as discussed above, that the statutory reference in section 115(d)(10)(B)(iv)(III)(aa) to ‘‘all accrued royalties’’ cannot be read to prohibit a regulatory structure permitting DMPs to make estimates and subsequent adjustments. Anticipating this conclusion, the SNPRM omitted the word ‘‘all’’ from the proposed regulatory language to alleviate any ambiguity.285 The MLC opposed the deletion, stating that ‘‘the SNPRM’s provisions for less than all accrued royalties to be transferred conflicts with the MMA,’’ which seems inconsistent with its agreement that royalty pool inputs should be subject to estimation and adjustment, including regulations specifically addressing the ‘‘underpayment of royalties’’ (i.e., some amount less than ‘‘all’’).286 The MLC appears to believe that allowing for potential underpayment is appropriate where the reason is due to an unknown royalty pool input, but not where the reason is due to the unknown applicability of a voluntary agreement; 283 See SNPRM at 70548. MLC Ex Parte Letter at 7 (Nov. 17, 2020) (‘‘Section 115(d)(10)(B)(iv)(II) is fully consistent on its face with the payment of royalties under voluntary license terms.’’). 285 See SNPRM at 70548. 286 See MLC SNPRM Comment at 3–4, 13–14, App. A at v, ix–x. 284 See E:\FR\FM\11JAR5.SGM 11JAR5 2196 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 it does not adequately explain its basis for this distinction.287 Nevertheless, to address the MLC’s comment, the final rule restores the word ‘‘all’’ and resolves any ambiguity by adding clarifying language that it is subject to the ability to estimate and adjust pursuant to other regulatory provisions. In addition to identifying the possibility of needing to estimate and adjust royalty pool inputs, the SNPRM recognized another type of unknown variable that could affect the calculation of accrued royalties: whether an unmatched work is subject to a voluntary agreement whereby the DMP’s payment obligations have been extinguished, whether by blanket or advance payment, release of claims, or otherwise (to the extent permitted by GAAP and thereby the statute). The SNPRM proposed an estimate and adjustment mechanism to cover this scenario as well, as follows:288 • Under paragraph (c)(4), a DMP would have to report on all unmatched usage, meaning that the royalty calculation provisions in paragraph (d), which are tied to paragraph (c)(4), would require reporting of the total potential royalties, calculated at the applicable rate under 37 CFR part 385, that could be owed for all such usage. Such calculations would be subject to potential estimation of royalty pool inputs under paragraph (d)(2). • Under paragraph (c)(5)(i), a DMP would be permitted to report total accrued royalties that employ reasonable estimations if it has a reasonable good-faith belief that the total accrued royalties are less than the total potential royalties calculated under paragraph (c)(4), and the unmatched status of relevant musical works at the end of the transition period requires reliance upon estimations in calculation of such accrued royalties. • Under paragraph (c)(5)(ii), DMPs reporting and transferring accrued royalties that employ estimations would have to provide detailed information 287 This distinction is striking given that the MLC did not oppose the inclusion of a provision in regulations governing reports of usage under the MMA’s blanket license that permits DMPs in similar circumstances to, subject to later adjustment, ‘‘compute the royalties payable by the blanket licensee under the blanket license using a reasonable estimation of the amount of payment for [usage subject to applicable voluntary licenses and individual download licenses] to be deducted from royalties that would otherwise be due under the blanket license, determined in accordance with GAAP.’’ See 37 CFR 210.27(d)(2)(ii); MLC NPRM Comment at 34–35, U.S. Copyright Office Dkt. No. 2020–5, https://www.regulations.gov/ document?D=COLC-2020-0005-0014 (acknowledging the need for estimates in this context). 288 See SNPRM at 70548–49. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 about any voluntary agreement being relied on in making a (c)(5)(i) estimation so that the MLC is able to confirm uses of musical works subject to such an agreement. The required information largely tracks information about voluntary licenses required to be reported to the MLC under the blanket license for similar purposes.289 • Under paragraph (c)(5)(iii), the MLC would have to engage in efforts to confirm uses of musical works that are subject to any identified agreement, and may notify relevant copyright owners about the DMP’s reliance. Where the MLC confirms that a reported use of a musical work is subject to an identified agreement, the MLC would be required to presume that the DMP appropriately relied on the agreement, and during the pendency of any dispute between a DMP and copyright owner over the DMP’s reliance, the MLC would not be permitted to make a corresponding distribution to the copyright owner or treat the amount at issue as an overpayment unless directed to do so by agreement of the parties or by order. • Under paragraph (c)(5)(iv), if a DMP’s estimate turns out to be insufficient to cover a required distribution to a copyright owner, the MLC would deliver an invoice and/or response file to the DMP for the additional amount outstanding (including interest) along with the basis for the MLC’s conclusion that such amount is due. The DMP would have 14 business days to pay the invoiced amount or dispute the bill. If the bill were disputed, the MLC would notify the relevant copyright owner. If a DMP were ultimately found by an appropriate adjudicative body to have erroneously withheld any accrued royalties— whether as part of its estimate or in response to an MLC bill—it would be able to potentially remain in compliance with the regulations for purposes of retaining its limitation on liability if the other requirements for the limitation have been satisfied, the additional amount due is paid, and the DMP did not withhold the royalties unreasonably or in bad faith. • Under paragraph (c)(5)(v), an overpayment based on a (c)(5)(i) estimate would be subject to credit or refund like any other overpayment. • Under paragraph (c)(5)(vi), any underpayment of royalties would have to be remedied by a DMP without regard for the relevant statute of limitations, and by using an estimate—whether under (c)(5)(i) or (d)(2)—the DMP would be deemed to have agreed to waive any statute-of-limitations-based defenses 289 See PO 00000 37 CFR 210.24(b)(8). Frm 00022 Fmt 4701 Sfmt 4700 with respect to any asserted underpayment of royalties connected to the use of the estimate. To provide a workable estimate and adjustment mechanism that is consistent with the statute and congressional aims, and that appropriately balances the flexibility DMPs need to help ensure they participate in the limitation on liability against the right of copyright owners to receive complete and prompt payment of accrued royalties (to the extent a DMP participates), the Office is adopting many core aspects of the proposed rule as final, while making significant modifications in response to various stakeholder concerns, as discussed below. The MLC and others oppose the SNPRM’s proposed rule primarily on the grounds that it would allow DMPs to improperly deduct accrued royalties, that it would improperly shift burdens from DMPs to copyright owners and otherwise prejudice copyright owners, and that it will lead to the increased litigation the proposed rule sought to avoid.290 The Office addresses each in turn. With respect to deductions, commenters seem to misunderstand the SNPRM’s proposal, and therefore no changes are being made in the final rule with respect to this concern. To be clear, the final rule does not permit deductions of accrued royalties; all accrued royalties must be transferred to the MLC. The rule merely allows DMPs, in transferring such accrued royalties by the statutory deadline, to rely upon temporary estimates, subject to later adjustment, where that precise figure of all accrued royalties is not otherwise ascertainable at that time. For example, if the total potential royalties (calculated at the statutory rate) attributable to all of a DMP’s unmatched usage is $20 million, the rule does not permit the DMP to deduct $5 million because that is what it previously paid out under certain preMMA agreements. Instead, the rule acknowledges that DMPs may be correct that because of such agreements— whether due to previous payment, claim release, or otherwise—some portion of the $20 million may not constitute accrued royalties at the time of required transfer to the MLC in February.291 In 290 See, e.g., MLC SNPRM Comment at 11–13; SGA, SCL & MCNA SNPRM Comment at 9; MAC, Recording Acad., & SONA SNPRM Comment at 2; MLC Ex Parte Letter at 5–6 (Nov. 17, 2020); NMPA Ex Parte Letter at 1–2 (Nov. 17, 2020); NSAI Ex Parte Letter at 1 (Nov. 17, 2020). 291 It may not matter how much was paid or whether the payment constituted royalties under relevant voluntary agreements. See MLC NOI Reply E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 other words, certain unmatched usage may no longer have outstanding accrued royalties associated with it at the time of transfer because, to the extent permitted under GAAP, those liabilities may have been appropriately derecognized by the DMP. The rule allows the DMP to employ reasonable estimations, subject to adjustment, where the unmatched status of the work prevents the DMP from definitively confirming whether or not it is subject to a relevant voluntary agreement.292 If the DMP appropriately calculates that $15 million are accrued royalties, then that is what it must transfer in February. If, after the MLC later engages in its matching activities,293 it is discovered that the DMP’s estimate was off because it mistakenly, but in good faith, believed certain usage of works to be subject to certain agreements when in fact the opposite turns out to be true once they have been identified, the DMP will either need to make a true-up payment for any shortfall or may be entitled to credit or refund for any surplus. Thus, this is not a question of whether copyright owners will or will not see the money owed to them. It is only a question of when, and even then, that question only becomes relevant to the extent the DMP’s February 2021 payment—which must be reasonable, determined in accordance with GAAP, made in good faith and on the basis of the best knowledge, information, and belief of the DMP at the time—ends up Comment at 29 (‘‘Simply paying lump sums of money to publishers who threaten to sue for copyright infringement is in no sense the equivalent of paying unclaimed accrued royalties. . . . Rather, settlement payments are more likely consideration for releases from liability for copyright infringement or covenants not to sue.’’); MAC, Recording Acad., & SONA SNPRM Comment at 3; MLC Ex Parte Letter at 3 (Oct. 5, 2020). As a legal principle, it is not clear why the amount of consideration or how the consideration is classified should be material if the result is still an appropriately worded full and complete release of relevant royalty claims for a given period. Moreover, a voluntary license could theoretically, for example, be structured as a blanket license for all of an owner’s works (without listing them) for which a one-time flat fee was paid for a covered period. Regardless of how common such an arrangement may be, the possibility of its existence highlights flaws in commenters’ argument on this point. 292 See, e.g., DLC SNPRM Comment at 9 (‘‘If the owners of the works that generated over 90% of the royalties have released their claims, there is no need to know exactly which owner released which royalties to know that there is not an outstanding liability of 100% of the royalties.’’). 293 The MLC has ‘‘confirmed that its goal is to match all unmatched uses, including all historical unmatched uses for which accrued royalties are transferred to the MLC, and to minimize the incidence of unclaimed accrued royalties. The MLC’s position has always been, and remains, that it can and will hold unmatched royalties for longer than the required minimum statutory period where appropriate in service of this goal.’’ MLC Ex Parte Letter at 2 (Nov. 17, 2020). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 being an inadvertent underpayment. While some commenters raised statute of limitations concerns,294 as noted, the rule anticipates and accounts for this explicitly, so it should not impede the recovery of any underpaid royalties.295 To the extent some commenters also raise concerns about possible delayed payments to copyright owners, these are unfounded.296 Copyright owners receive royalty distributions from the MLC either when the MLC matches usage to the owner or when the MLC makes a distribution of unclaimed accrued royalties to identified owners after a prescribed holding period. No money can be distributed until one of these events occurs, and a potential distribution of unclaimed accrued royalties cannot occur until 2023 at the earliest, and may well be later.297 If there is a shortfall due to a DMP’s estimate, the rule requires DMPs to pay the difference (with interest) within 14 business days after being billed by the MLC. That is hardly an undue delay when weighed against the reasons for permitting estimates. With respect to burden shifting and prejudice to copyright owners, the Office finds commenter concerns to be largely overstated, but has made some adjustments to the final rule. As background, the proposed rule would not ‘‘improperly shift the burden of proving compliance with the statutory requirements for the limitation on liability from the DMPs, who are seeking the limitation, to copyright owners.’’ 298 In an infringement action, the limitation on liability would be an affirmative defense, and, as such, the DMP would bear the burden of proving compliance with its requirements.299 294 See SGA, SCL & MCNA SNPRM Comment at 10. 295 While the DLC ‘‘agrees with the aspect of the proposed rule that builds in protection for copyright owners by preserving their legal claims in the event that a DMP fails to remedy an underpayment of royalties,’’ it proposes certain modifications ‘‘to clarify that the defense is waived where the underpayment is one that is determined pursuant to the procedures in the rule, and is not remedied.’’ DLC SNPRM Comment at 16; see DLC Ex Parte Letter at 2 n.7 (Dec. 11, 2020). The Office declines this request. The waiver provision is meant to be broad and not limited merely to the MLC invoice process provided for in the rule. On the contrary, this provision must also cover litigation surrounding an alleged underpayment where it is connected to the DMP’s use of an estimate. 296 See, e.g., MAC, Recording Acad., & SONA SNPRM Comment at 4; MAC Ex Parte Letter at 1 (Nov. 17, 2020). 297 See 17 U.S.C. 115(d)(3)(J)(i)(I); MLC Ex Parte Letter at 2 (Nov. 17, 2020). 298 See NMPA Ex Parte Letter at 2 (Nov. 17, 2020). 299 See Fed. R. Civ. P. 8(c)(1); cf. Capitol Records, LLC v. Vimeo, LLC, 826 F.3d 78, 94 (2d Cir. 2016) (describing the section 512 safe harbor as ‘‘an affirmative defense’’ that the ‘‘defendant undoubtedly bears the burden of raising entitlement PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 2197 The rule does not change this. Second, the proposed rule would not, as the MLC suggested, ‘‘allow[ ] DMPs to unilaterally withhold unmatched royalties in their discretion.’’ 300 Rather, it would have allowed a DMP to dispute a bill from the MLC on a reasonable, good-faith basis, not merely because it hoped to avoid paying by forcing a copyright owner to sue for the money— which would clearly be bad faith. Third, although the Office has calibrated this rulemaking to discouraging litigation within relevant statutory parameters, copyright owners are inherently in the position of potentially needing to bring an infringement suit to obtain royalties if a DMP does not transfer accrued royalties to the MLC. the Office also disagrees that allowing a DMP to potentially retain its limitation on liability if it is adjudged to have erroneously in good faith withheld accrued royalties would necessarily significantly ‘‘impede[ ] the ability of copyright owners to enforce their rights’’ 301 or otherwise deprive them of a ‘‘just remedy.’’ 302 The Office also notes the proposed rule limited the effect to compliance with the Office’s regulations, not all statutory requirements. Finally, the record provides no basis for asserted fears of DMP insolvency.303 Nevertheless, to alleviate some of these concerns, the final rule has been adjusted to reach a better balance between copyright owners and DMPs. A significant change is how the final rule handles a dispute between a DMP and a copyright owner over the DMP’s reliance on an agreement in connection with its estimation and adjustment of accrued royalties. Although, as noted, the available record suggests such disputes may be uncommon,304 the final rule establishes a better-dispute mechanism for this eventuality, to’’ and showing that it ‘‘has taken the steps necessary for eligibility’’). 300 See MLC Ex Parte Letter at 6 (Nov. 17, 2020); see also NSAI Ex Parte Letter at 1 (Nov. 17, 2020). 301 See NSAI Ex Parte Letter at 1 (Nov. 17, 2020); see also NMPA Ex Parte Letter at 2 (Nov. 17, 2020) (citing 17 U.S.C. 115(d)(10)(D)). 302 See MLC Ex Parte Letter at 6 (Nov. 17, 2020). 303 Compare id. at 5–6 and MLC SNPRM Comment at 12 n. 4 with DLC SNPRM Comment at 11–12 n.32 (‘‘Just because a DMP cannot re-pay millions of dollars of accrued royalties for nearly the entire market of usage for certain time periods does not suggest it would not be able to pay a potential shortfall to one or more copyright owners if it were to have incorrectly estimated the accrued royalties. . . .’’). 304 See, e.g., DLC SNPRM Comment at 5 (‘‘[T]here is nothing in the record to assume or even suggest that any DMP is likely to rely on a release improperly.’’); SATV Ex Parte Letter at 2 (Oct. 28, 2020); Spotify Ex Parte Letter at 4–5 (Oct. 9, 2020); WMG Ex Parte Letter at 1 (Oct. 21, 2020); UMPG Ex Parte Letter at 1 (Oct. 30, 2020). E:\FR\FM\11JAR5.SGM 11JAR5 2198 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 whereby the MLC will hold disputed funds, as the MLC and others argue it should.305 After receiving the detailed information about any voluntary agreement being relied upon by the DMP in making its estimation, the MLC will be required to promptly notify relevant copyright owners of such reliance. A notified copyright owner may then dispute the appropriateness of the DMP’s reliance by notifying the MLC within one year.306 The copyright owner’s notification must describe its basis with particularity and must be certified as being made in reasonable good faith. The notice must also specify whether the owner is disputing reliance with respect to potential distributions based on matched usage or of unclaimed accrued royalties under section 115(d)(3)(J), or both. The MLC must then promptly provide the DMP with any such notification it receives. If the MLC has received a notice of dispute from a copyright owner, then at or around the point in time that the MLC would otherwise make a particular distribution to that copyright owner but for the DMP’s reliance on the disputed agreement, the MLC must send an invoice and/or response file to the DMP for the amount that would otherwise be distributed at that time (including interest), accompanied by an appropriate explanation. Depending on the scope of the notice of dispute, this may include distributions based on matched usage and/or distributions of unclaimed accrued royalties under section 115(d)(3)(J).307 In the case of the 305 See MAC, Recording Acad., & SONA SNPRM Comment at 4 (‘‘[T]he MLC should be viewed as a trusted party to hold the disputed funds for the benefit of both copyright owners and digital services.’’); MLC Ex Parte Letter at 5 (Oct. 5, 2020) (‘‘[I]n the event of any such legal dispute between a DMP and a copyright owner concerning the right to receive unmatched royalties that the DMP had turned over under the MMA, the MLC would hold such unmatched royalties pending the resolution of the dispute.’’); MLC Ex Parte Letter at 6 (Nov. 17, 2020) (suggesting the MLC would hold funds in dispute); MLC SNPRM Comment at 11, 13 (same). 306 This time limit is only for the administrative process described in the rule involving the MLC holding disputed funds and is without prejudice to a copyright owner’s rights to otherwise dispute a DMP’s reliance outside of this process, such as in court. 307 The Office declines at this time to opine on statutory requirements surrounding distributions of unclaimed accrued royalties under section 115(d)(3)(J); that issue is not within the scope of this proceeding. See ARA, FMC, & MusicAnswers SNPRM Comment at 4–5 (addressing this issue); MAC, Recording Acad., & SONA SNPRM Comment at 4–5 (same). The statute provides that the MLC’s unclaimed royalties oversight committee will establish relevant policies and procedures, 17 U.S.C. 115(d)(3)(J)(ii), and Congress has made clear that ‘‘it is expected that such policies and procedures will be thoroughly reviewed by the Register to ensure the fair treatment of interested VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 latter, the relevant approximate date to bill the DMP is the date the MLC provides the notice required under section 115(d)(3)(J)(iii)(II)(dd). To be clear, this means that the MLC may be in a position to invoice the DMP for usages that it has matched to a disputing copyright owner, while not yet able to invoice for unmatched remaining usages. Where a copyright owner delivers a notice of dispute after the relevant point in time has passed for a particular distribution, the MLC should bill the DMP promptly after receiving the notification. Upon receiving the bill, the DMP has 14 business days to pay the invoiced amount, which is then held by the MLC pending resolution of the dispute. Because the holding of such funds would not be pursuant to policies and procedures that the MLC’s dispute resolution committee is empowered to adopt to govern ownership disputes,308 the final rule dictates how the MLC must hold the disputed funds. The MLC must hold the newly transferred funds in accordance with section 115(d)(3)(H)(ii) (e.g., with interest) without regard for whether or not the funds are in fact accrued royalties. The MLC must not make a distribution of the funds or treat them as an overpayment unless directed to do so pursuant to the agreement of the relevant parties or by order of an appropriate adjudicative body. If the MLC has not been so directed within one year after the DMP transfers the disputed funds, and if there is no active dispute resolution occurring at that time (e.g., litigation, arbitration, mediation, private settlement discussions), then the MLC shall credit or refund the disputed funds back to the DMP. Any resolution of the dispute should be reflected in the MLC’s ongoing administration activities. The Office believes these changes are a reasonable accommodation to help allay concerns about DMP insolvency and ensure that disputed funds are held somewhere that copyright owners trust and that is subject to public disclosure and oversight. At the same time, several features built into this dispute framework (e.g., that it has to be triggered by the copyright owner, the certification requirement, the timing of when a DMP may need to transfer disputed funds, the limited holding period if there are no active efforts at resolution) should quell concerns about it becoming a back door compelling parties,’’ S. Rep. No. 115–339, at 5. As there will be no such distribution until 2023 at the earliest, there is ample time for the Office to provide guidance if necessary. 308 See 17 U.S.C. 115(d)(3)(G)(i)(III)(bb), (K). PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 DMPs to make large potential double payments up front whenever an unfounded general dispute is raised. With respect to the MLC’s presumption that the DMP has appropriately relied upon the relevant agreement, that aspect of the proposed rule is retained in the final rule, with the clarification that the presumption applies where there is no dispute raised by the relevant copyright owner. It is unclear why the MLC should object to this,309 as it should not be exercising independent judgment or discretion with respect to a DMP’s asserted reliance on a voluntary agreement.310 That is a private matter between the parties to the agreement. As with the proposed rule, the final rule requires that if the amount transferred to the MLC ends up being insufficient to cover any required distributions to copyright owners, the MLC must send an invoice and/or response file to the DMP for the amount outstanding (including interest) that includes an explanation of the basis for the MLC’s conclusion that such amount is due. The key change to this provision is that unlike the proposed rule, the final rule does not permit a DMP to dispute such a bill. The DMP must pay the invoiced amount within 14 business days or it will not be in compliance with the rule and will risk loss of the limitation on liability. The inability to dispute such a bill cuts off a potential avenue for misuse of the rule’s estimate and adjustment mechanism, and should help alleviate concerns with the SNPRM’s proposed approach. The Office does not believe this change should cause alarm among DMPs. The practical effect is that a DMP cannot challenge a bill with respect to amounts that bear no relation to voluntary agreements that the DMP relied upon in estimating its accrued royalties, e.g., a bill that concerns time periods not covered by such an agreement or copyright owners who are 309 See MLC SNPRM Comment at 11–12 (‘‘[T]he SNPRM would place the MLC in the middle, requiring the MLC to administer the agreements, and further to ‘presume’ that DMPs ‘appropriately relied’ on agreements (which would not even be provided to the MLC). Requiring the MLC to make presumptions in favor of certain disputing parties, let alone presumptions unconnected to knowledge or accuracy, is unreasonable and inconsistent with its mandate.’’) (internal citation omitted). 310 This is somewhat similar to what is required of the MLC in the context of the blanket license. There, the MLC will receive a similar level of information about voluntary licenses, see 37 CFR 210.24(b)(8), and then must use that information to ‘‘confirm uses of musical works subject to voluntary licenses . . . , and, if applicable, the corresponding amounts to be deducted from royalties that would otherwise be due under the blanket license,’’ 37 CFR 210.27(g)(2)(ii). E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 not parties. This approach is consistent with the DLC’s proposal made in response to the NPRM 311 and aligns with statements that ‘‘the DLC and its members agree that copyright owners that did not participate in such an agreement should receive the full amount of royalties they may be owed.’’ 312 In disputes involving copyright owners who are allegedly parties to an effective agreement for relevant time periods, no such bill can be sent via this provision; either the MLC is prohibited from doing so because it is required to presume that the DMP relied appropriately, or if the copyright owner has raised a dispute, the separate above-discussed dispute mechanism would control. The final rule retains the provision that would permit a DMP to keep its limitation on liability even if it is adjudged to have erroneously withheld accrued royalties, so long as all other requirements for the limitation are satisfied, the additional amount due is paid, and the DMP is not found to have withheld the royalties unreasonably or in bad faith. With the final rule restricting a DMP’s ability to dispute a bill from the MLC in the event of shortfall, challenges should generally be limited to circumstances where a copyright owner is allegedly party to an agreement relied upon by the DMP and the owner disputes the appropriateness of the DMP’s reliance (assuming the DMP is otherwise in compliance with the limitation on liability). As noted, there is no evidence in the record that participating musical work copyright owners will necessarily dispute DMP reliance on voluntary agreements with respect to accrued royalties.313 Lastly, the Office has added a savings clause to make plain that nothing in the final rule should be construed as prejudicing a copyright owner’s ability to challenge whether a DMP has 311 See DLC NPRM Comment at 16, Add. at 22 (proposing that where there are ‘‘insufficient funds . . . to pay royalties that are owed to a copyright owner who has not previously released claims to such royalties pursuant to an [identified] agreement . . . , the mechanical licensing collective shall issue an invoice and/or response file . . . , and the digital music provider shall pay the additional royalties to the MLC within 45 days of receipt of such invoice’’). 312 See, e.g., DLC SNPRM Comment at 3 (‘‘Copyright owners who did not participate in any pre-MMA agreements that released royalty obligations are not impacted by this proposed rule; they will still get all the royalties to which they are entitled.’’); DLC NPRM Comment at 15–16; DLC Ex Parte Letter at 2 (Oct. 14, 2020). 313 See, e.g., WMG Ex Parte Letter at 1 (Oct. 21, 2020); SATV Ex Parte Letter at 2 (Oct. 28, 2020); UMPG Ex Parte Letter at 1 (Oct. 30, 2020); DLC SNPRM Comment at 5; Spotify Ex Parte Letter at 4–5 (Oct. 9, 2020). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 2199 satisfied the requirements for the limitation on liability. With respect to suggestions of potential increased litigation, the Office is not persuaded to further adjust the rule. Commenters’ arguments are based on a speculative comparison between the volume and complexity of litigation they believe might ensue under the rule for copyright owners to rectify underpayments, and the litigation that DMPs might engage in without a rule to rectify overpayments and enforce their voluntary agreements.314 That is the wrong comparison. The main litigation the rule seeks to avoid is that which may be brought if DMPs choose to forego the limitation on liability and transfer nothing to the MLC. Indeed, the limitation on liability was enacted precisely to prevent such litigation. The rule provides the certainty DMPs have told the Office is necessary for them to participate in the limitation on liability instead of holding back the money as a litigation war chest. Potential litigation over the estimated tens of millions of dollars at issue with respect to these voluntary agreements pales in comparison to potential litigation over the estimated several hundred million dollars in unpaid royalties that may otherwise be withheld, including payments to those copyright owners who did not opt into the voluntary agreements at issue. By establishing a default posture that accommodates potential private agreements but cabins reliance upon those agreements—as well as disputes about those agreements—through goodfaith certifications of the very parties who allegedly entered into them, the rule should forestall further litigation and foster resolution of disagreements. Perhaps no regulation can secure against parties engaging in litigation in an area so contentious that it generated historic copyright legislation. Certainly, the rule does not curtail the ability of a copyright owner or DMP to seek judicial recourse. But to the extent there is a legitimate dispute, the rule seeks to incentivize DMPs and relevant copyright owners to privately resolve these issues. A DMP’s risk of losing its limitation on liability entirely if found to have acted unreasonably or in bad faith should be powerful motivation to try to avoid being sued, and the prospect of not being able to recover costs or statutory damages may make such a suit unappealing to a copyright owner. As noted several times, there is no evidence in the record that musical work copyright owners will necessarily dispute DMP reliance on voluntary agreements with respect to accrued royalties.315 As the MLC points out, ‘‘there is no basis to think that copyright owners would spend time or money on frivolous litigation over their contracts with DMPs.’’ 316 Likewise, there is no basis to think that DMPs would act differently, such as by inappropriately using voluntary agreements (including those that may have been terminated, breached, or have performance issues), to avoid paying accrued royalties, or by employing unreasonable or inaccurate GAAP interpretations to try to rationalize a spurious underpayment. 314 See, e.g., MLC Ex Parte Letter at 6 (Nov. 17, 2020) (‘‘[The proposed rule] appears likely to generate far more litigation activity than a DMP simply enforcing its claimed unambiguous contractual right to be repaid royalties that match to copyright owners with who it has private agreements.’’); NMPA Ex Parte Letter at 2 (Nov. 3, 2020) (arguing that if the regulations ‘‘permit DSPs to not pay all of the accrued unmatched royalties that songwriters and copyright owners are expecting to be paid to the MLC, that will undoubtedly result in litigation that is far broader and more fundamental than an action to simply enforce a contract right’’). 315 See, e.g., DLC SNPRM Comment at 5; Spotify Ex Parte Letter at 4–5 (Oct. 9, 2020); SATV Ex Parte Letter at 2 (Oct. 28, 2020); WMG Ex Parte Letter at 1 (Oct. 21, 2020); UMPG Ex Parte Letter at 1 (Oct. 30, 2020). 316 MLC SNPRM Comment at 11 (‘‘There is no history presented of copyright owners acting unreasonably with respect to private agreements with DMPs.’’). 317 See, e.g., ARA, MAC, NSAI, Recording Acad. & SONA Ex Parte Letter at 1–3 (Sept. 22, 2020); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020); SGA, SCL, AWFC & MCNA Ex Parte Letter at 1–2 (Sept. 15, 2020). PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 3. Songwriter Concerns and Transparency Considerations Upon publication of the NPRM, the Office heard from a variety of creator groups expressing unfamiliarity with the contours of these agreements or confusion regarding whether payments had been passed through to songwriters.317 While the record contains some factual information regarding such practices, the Office notes that payment questions with respect to the operation of private agreements between publishers and songwriters are separate from this rulemaking’s required focus on DMP obligations to transfer royalties and report information to satisfy the eligibility conditions for the limitation on liability. The MMA does not regulate the terms by which publishers (or administrators) and songwriters may enter into contractual arrangements— and certainly not on a retroactive basis, insofar as these questions may implicate payments passed through (or not) to E:\FR\FM\11JAR5.SGM 11JAR5 2200 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 songwriters prior to enactment.318 Further, even if DMPs were to transfer royalties for uses subject to pre-MMA agreements, it is not clear whether songwriters would be entitled to any of these funds, due to releases provided by copyright owners to whom they have assigned rights. In any event, even if those agreements’ details were widely public, it could not change the Office’s analysis.319 Even when the MLC distributes matched royalties and related statements to musical work copyright owners (e.g., music publishers), the MMA does not further restrict the conditions, typically spelled out by contract, for how those copyright owners subsequently pay songwriters. This is true regardless whether the MLC is matching works connected to preMMA usages reported and payments made for purposes of eligibility for the limitation of liability or in connection with future usages authorized under the blanket license. To be sure, for those usages that the MLC cannot reasonably match after the prescribed holding period, the MMA specifies that copyright owners receiving future distributions of unclaimed accrued royalties by the MLC must pay or credit individual songwriters in accordance with applicable contractual terms, and in no case less than 50% of the payment received by the copyright owner attributable to usage of musical works.320 But this rulemaking is focused on the separate, predicate obligation for DMPs to report unmatched usages and transfer accrued royalties to the MLC, which in turn will match usages and pay copyright owners, who will pay songwriters (either in accordance with contract for payments connected to matched uses, or in accordance with contract subject to the 50% floor for payments for unmatched uses). Notwithstanding this clarification, and while the Office believes that the rule offers a reasonable and workable compromise to concerns raised by the MLC, DMPs, and songwriters in a manner consistent with the statutory language and congressional intent, the Office also recognizes that multiple 318 In contrast, the section 114 license, currently administered by SoundExchange, does specify the percentage of statutory royalties that are payable to sound recording copyright owners, recording artists, nonfeatured musicians, and nonfeatured vocalists, respectively. 17 U.S.C. 114(g)(2). The MMA did not amend the section 115 license to adopt a similar approach. 319 See NMPA Ex Parte Letter at 2 (Nov. 17, 2020) (‘‘settlements entered into prior to the enactment date of the MMA, in some cases even years before, could not be considered to be subject to the requirements of the MMA’’). 320 17 U.S.C. 115(d)(3)(J)(iv). VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 creator groups expressed uncertainty regarding the substance of these preMMA agreements. At the core of these concerns is a perceived lack of transparency concerning the existence and terms of these agreements,321 the amount of these agreements,322 and whether songwriters received payments under these agreements (and if so, upon what terms).323 The Office appreciates that the music publishers who met with the Office each confirmed individually that they followed their respective business practices in sharing payments received through these agreements with songwriters affiliated with their publishing houses. For example, SATV stated that ‘‘payments made by DSPs to SATV under private agreements, as well as any other distribution of unmatched funds, whether title bound or not, are always paid through to our songwriters’’ and offered ‘‘to explain to our writers who inquire how these royalties are distributed and reflected on their statements.’’ 324 UMPG provided similar assurances, noting ‘‘UMPG does so as a matter of policy, notwithstanding the fact that applicable contracts may not require payment for non-title-bound revenues.’’ 325 The Office does not know whether individual songwriters or creator groups have made inquiries to publishers in response to these letters.326 To be sure, the Office continues to support greater transparency in the music industry. In its 2015 report, the Office identified the ‘‘key principle’’ that ‘‘[u]sage and payment information should be transparent and accessible to rightsowners.’’ 327 Following this report, 321 See, e.g., ARA, MAC, NSAI, Recording Acad. & SONA Ex Parte Letter at 1–3 (Sept. 22, 2020); MAC Ex Parte Letter at 1 (Nov. 17, 2020); Recording Acad. & SONA Ex Parte Letter at 3 (Nov. 17, 2020); SGA, SCL, AWFC & MCNA Ex Parte Letter at 1 (Sept. 15, 2020). 322 See, e.g., SGA & SCL NPRM Comment at 3; see also Cas Martin SNPRM Comment at 3; Rayn Jackson NPRM Comment at 1; Sophie Korpics SNPRM Comment at 2. 323 Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020) (‘‘Many songwriter groups expressed continued frustration that so little is known about the agreements, including how much money was involved, how the money was accounted for, and whether songwriters benefited from it.’’). 324 SATV Ex Parte Letter at 2 (Oct. 28, 2020); see also WMG Ex Parte Letter at 1 (Oct. 21, 2020) (accord). 325 UMPG Ex Parte Letter at 2 (Oct. 30, 2020). 326 No creator group has reported the results of reaching out to publishers on this issue. See SGA, SCL & MCNA Ex Parte Letter at 1–2 (Dec. 14, 2020) (acknowledging Office recommendation to contact publishers directly). 327 U.S. Copyright Office, Copyright and the Music Marketplace 1 (2015), https:// www.copyright.gov/docs/musiclicensingstudy/ copyright-and-the-music-marketplace.pdf. PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 the Office is gratified that Congress clearly intended the MLC to operate ‘‘in a transparent and accountable manner.’’ 328 And it appears that this rulemaking process has resulted in the voluntary public disclosure of additional information regarding these agreements, including with respect to the aggregate monies paid under the pre-MMA agreements.329 The Office cannot, however, compel publishers or DMPs to disclose the terms of private deals to songwriters.330 The Office encourages the interested parties to continue to engage on this matter and can make itself available to assist in facilitating dialogue. While the MMA addresses some longstanding complaints over transparency, the Office will keep creators’ concerns in mind as it continues its implementation work and advises Congress on future potential improvements to the music ecosystem. The Office also notes that creator groups will have the opportunity to offer additional views on this issue at the upcoming Unclaimed Royalties policy study roundtables.331 4. Reconciliation Relatedly, the Office proposed language that would address situations where the total amount of royalties transferred does not match the corresponding report. Although the MLC and DLC both supported the NPRM’s proposed reconciliation provision—whereby if the total royalties turned over to the MLC do not reconcile with the corresponding cumulative statement of account, the DMP should include a clear and detailed explanation of the deviation—the DLC sought two 328 S. Rep. 115–339 at 17. To that end, the Office has separately conducted a rulemaking aimed at furthering appropriate transparency of the MLC. 85 FR 58170 (Sept. 17, 2020). 329 Compare SGA & SCL NPRM Comment at 3 (suggesting unmatched royalties encompassing a range ‘‘from a few hundred million dollars to over $1.5 billion’’) (citation omitted) with SGA, SCL & MCNA Ex Parte Letter at 2 (Nov. 18, 2020) (reflecting understanding that ‘‘while there remain hundreds of millions of dollars in accrued, unmatched royalties in the possession of the Digital Music Providers, tens of millions of dollars in accrued unmatched royalties were indeed turned over directly to music publishers pursuant to the terms of the confidential, private negotiated agreements’’ (emphasis omitted)). 330 ARA, FMC & MusicAnswers SNPRM Comment at 3 n.2 (‘‘urg[ing] the [O]ffice to use all levers available to it’’); SGA & SCL SNPRM Comment at 8 (stating that the Office ‘‘has sufficient authority to compel disclosure of the details of the private and confidential agreements between DSPs and music publishers’’). 331 These roundtables have not been scheduled at the time of this rule’s publication. For more information on the policy study, visit https:// www.copyright.gov/policy/unclaimed-royalties. E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations minor modifications.332 First, the DLC ‘‘suggest[ed] changing the phrase ‘total royalty payable’ to ‘total royalty reported,’ to avoid any suggestion that the amount reflected on the cumulative statement of account is necessarily ‘payable’ to the MLC.’’ 333 The Office incorporated this technical edit into the SNPRM, proposing the phrase ‘‘total accrued royalty reported’’ (inserting ‘‘accrued’’ for added precision), which it now adopts as final.334 Second, the DLC’s regulatory proposal added an illustrative clause referring to discrepancies ‘‘due to the GAAP treatment of previously-distributed royalties or for any other reason.’’ 335 Just as the Office did not include the MLC’s previously proposed language about interest, deductions, and adjustments in the NPRM, the Office did not include the DLC’s language in the SNPRM and declines to include it in the final rule, as any discrepancy of any kind should be explained.336 The DLC did not oppose this in its comments to the SNPRM. The SNPRM further proposed that a clear and detailed explanation also be required if the royalties reported include use of an estimate permitted for computing accrued royalties in paragraph (c)(5)(i).337 This would be required whether or not there is also a discrepancy between the total accrued royalty reported and the actual amount transferred, and should describe the basis for the total accrued royalty reported including any deviation from the total potential statutory royalty attributable to all unmatched usage reported under paragraph (c)(4)(i). With the Office having concluded that it should adopt a version of this SNPRM structure as final, this corresponding proposal is being adopted as well. It was not opposed (other than in connection with certain commenters’ overall opposition to this proposed framework), and should be helpful to the MLC in processing cumulative statements of account that contain any such estimates, and will result in MLC-held records of how any such estimates were employed. C. Period of Reporting Next, the Office addresses an issue raised by MediaNet related to required information that may not be able to be located or recreated. The SNPRM jbell on DSKJLSW7X2PROD with RULES5 332 See DLC NPRM Comment at 4–5, Add. 23; MLC NPRM Comment at 7–8; see also NPRM at 43522. 333 DLC NPRM Comment at 4–5. 334 SNPRM at 70549; see MLC SNPRM Comment App. A at v (not opposing this phrase). 335 DLC NPRM Comment at Add. 23. 336 See NPRM at 43522; SNPRM at 70549. 337 SNPRM at 70549. VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 solicited comments regarding whether the rule should include language addressing MediaNet’s concern that it may be unable to provide pre-2013 usage data, as such data may be unavailable or inaccessible because it is not in the DMP’s possession and may no longer be held by its former vendor.338 In operation for nearly 20 years, MediaNet carries a potentially greater burden to report past unmatched usages than newer services.339 MediaNet explained that it previously used vendors to maintain its royalty and usage data, but once those agreements were terminated ‘‘the relevant data was not transferred to MediaNet,’’ and it was unsure whether those vendors with whom it has terminated its relationships continued to maintain that data.340 MediaNet requested regulatory language requiring provision of all available data, subject to an exception addressing the circumstance when such information relates to usage that is over five years old and was held by a third-party vendor who no longer has a business relationship with the DMP, and such vendor cannot or will not provide such historic information.341 MediaNet explained that, without such an exemption, it ‘‘may decline to take advantage of the limitation on liability, which may deprive copyright owners of additional accrued royalties.’’ 342 MediaNet further suggested that such a regulation would be ‘‘consistent with the overall statutory scheme,’’ because the statute requires reporting to be pursuant to ‘‘applicable regulations,’’ and the relevant reporting regulations at the time required that documentation related to royalties and usages needed to be preserved for only five years.343 Commenter Jeff Price challenged MediaNet’s assertion that royalty and usage information would not have been retained by MediaNet and also suggested that, even if this information was not retained, it could be recreated.344 In Mr. Price’s experience, DMPs who used vendors to match works and pay mechanical royalties engaged in a workflow that sent output and return files between the vendor and the DMP several times. A DMP would send sound recording data to the vendor who would try to match works, the vendor would reply by sending a file 338 Id. at 70547 (citing MediaNet Ex Parte Letter at 2–3 (Oct. 28, 2020)). 339 See MediaNet Ex Parte Letter at 3 (Oct. 28, 2020). 340 Id. at 2–3. 341 Id. at 3. 342 Id. 343 Id. (citing 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa)). 344 Jeff Price Ex Parte Letter at 1, 2, 10 (Nov. 23, 2020). PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 2201 listing matched works and whether they were licensed, the DMP would then send usage and metadata inputs to the vendor, and the vendor would send back mechanical royalty calculations addressing the total time period, each publisher, and each individual work.345 Mr. Price believes that, based on this workflow, ‘‘some or all of the original elements necessary to calculate the mechanicals still exist.’’ 346 Mr. Price also suggested that other data presumably residing with MediaNet concerning monthly revenue, monthly subscribers, eligible streams, and total streams for sound recordings could be used with other known royalty calculation inputs to ‘‘possibly recreate the missing mechanical statements.’’ 347 The Office noticed this issue and requested public comment, but ‘‘[g]iven the timing of MediaNet’s request’’ did not propose its own regulatory language and instead requested comments on MediaNet’s proposal.348 In response, only MediaNet addressed this issue. MediaNet affirmed that it is ‘‘committed to ensuring that all creators are paid for the use of their works,’’ but stated that it remained unclear ‘‘whether such data exists, and can be reported to the MLC.’’ 349 MediaNet did not comment on either Mr. Price’s assertion that MediaNet may still have this royalty and usage data, or the feasibility of Mr. Price’s suggested alternative solution of recreating the necessary reporting information, as discussed above. The Office understands MediaNet’s concern and hopes it is able to locate or recreate such data to take advantage of the limitation on liability, but must decline to promulgate its proposed rule. As an initial matter, MediaNet has not confirmed whether this information currently exists with its former vendors or can be recreated. The Office is reluctant to promulgate MediaNet’s requested exemption without a showing confirming its necessity. Further, the request appears to depart from statutory requirements. The operative statutory language contemplates that to obtain the limitation on liability a DMP will report ‘‘all of the information that would have been provided to the copyright owner’’ to the MLC.350 Based on the applicable regulations, such information would have included, for example, the number of phonorecords made during a reporting period, phonorecord identification information such as titles, 345 Id. at 1–2. at 1. 347 Id. at 2–7. 348 SNPRM at 70547. 349 MediaNet SNPRM Comment at 2. 350 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa). 346 Id. E:\FR\FM\11JAR5.SGM 11JAR5 2202 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations ISRCs, catalog numbers, ISWCs, and UPCs, and, importantly, detailed information on how per-work royalty allocations for these works were calculated.351 MediaNet’s broad proposed exemption would deprive the MLC of all of this information. The information-related reporting requirement is intended to facilitate the MLC in appropriately accounting for the previously unreported usage.352 This information would allow the MLC to confirm that the appropriate royalties are being turned over, confirm which matched and unmatched works have been paid, pay for any matched works, and consider whether to make an eventual distribution of unclaimed accrued royalties by market share for this period.353 Based on the above considerations, the Office declines MediaNet’s proposed amendment. D. Other Provisions and Additional Clarifications In this section, the Office addresses additional matters raised in this rulemaking, including those relating to record retention requirements, harmless errors, certifications, and voluntary agreements between the MLC and a DMP to alter certain procedures. Records of use. The SNPRM proposed to impose a ‘‘records of use’’ provision on DMPs for cumulative statements of account, modeled in part after the records of use provision that applies to DMPs under the reports of usage regulations.354 A DMP would be required to ‘‘keep and retain in [their] possession all records and documents necessary and appropriate to support fully the information set forth in [cumulative statements of account and/ or statements of adjustment]’’ for at least seven years after delivering the statement to the MLC.355 Unlike the reports of usage records of use provision, the SNPRM did not include language allowing the MLC ‘‘reasonable access’’ to the DMPs’ records or accompanying access limitation provisions.356 351 See 37 CFR 210.6(c)(3), 210.10(d), (e). response to the Office’s NOI, the MLC asked for even more information to support its matching efforts. NPRM at 43518–19 (citing MLC Reply NOI Comment App. D at 19; MLC Ex Parte Letter at 2 n.1 (June 17, 2020)). 353 See 17 U.S.C. 115(d)(3)(E), (G), (J). 354 SNPRM at 70547; 37 CFR 210.27(m) (reports of usage records of use provision). 355 SNPRM at 70551 (‘‘except that such records and documents that relate to an estimated input permitted under paragraph (d)(2) of this section must be kept and retained for a period of at least seven years from the date of delivery of the statement containing the final adjustment of such input’’). 356 37 CFR 210.27(m)(2). jbell on DSKJLSW7X2PROD with RULES5 352 In VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 The Office received comments supporting its proposed records of use provision and no comments in opposition.357 But the MLC asserted that ‘‘the value of the provision is largely lost without a provision for reasonable access to the records,’’ and proposed adding the following language: The mechanical licensing collective or its agent shall be entitled to reasonable access to records and documents described in this section, which shall be provided promptly and arranged for no later than 30 calendar days after the mechanical licensing collective’s reasonable request, subject to any confidentiality to which they may be entitled.358 In response, the DLC disputed the MLC’s needs for these records, stating that while these records may be relevant for copyright owners bringing related legal challenges, ‘‘the MLC has no role in enforcing the accuracy of the cumulative statement of account— which is a feature of the limitation on liability, and not the blanket license.’’ 359 The Office appreciates the MLC’s suggestion, but is not including its proposed access-related language. While the statute requires that the records of use provision that applies to reports of usage, contain an MLC-access provision, there is no such requirement for cumulative statement of account reporting.360 The Office previously declined to promulgate access rules for pre-MMA mechanical license reporting, stating that ‘‘we believe that rules governing access to business records . . . are beyond our authority to establish. In any event, judicial discovery procedures—and possible other alternatives—are available to copyright owners to secure such access.’’ 361 The Office concludes that given the lack of congressional direction and the ability for litigants to secure access to these records via judicial order, it does not need to promulgate a ‘‘reasonable access’’ regulation.362 Activity or offering clarification. The DLC asked for a clarification to reflect that, when a DMP reports on historic activities and offerings as a part of a cumulative statement of account, such reporting ‘‘is to be of service offerings at the time of the usage, and that there is 357 MLC SNPRM Comment at 14 n.6; Cas Martin SNPRM Comment at 2; see also MLC Ex Parte Letter at 2 (Oct. 5, 2020). 358 MLC SNPRM Comment at App. xi. 359 DLC Ex Parte Letter at 1–2 (Dec. 11, 2020). 360 See 17 U.S.C. 115(d)(4)(A)(iii), (iv)(I). 361 43 FR 44511, 44515 (Sept. 28, 1978). 362 Similarly, the record retention requirement under the non-blanket compulsory license does not have a ‘‘reasonable access’’ requirement. See 37 CFR 210.8. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 no expectation to map old categories of offerings onto the most recent categories of offerings.’’ 363 The Office confirms that it shares this understanding. In light of the DLC’s request, it has clarified section 210.10(g) accordingly to expressly state that reporting requirements are related to the applicable activity or offering at the time of the usage. Voluntary agreements to alter process. In the NPRM, the Office solicited comments ‘‘regarding whether the rule should . . . permit the MLC and individual DMPs to enter into agreements to alter [the cumulative statement of account reporting] process’’ and noted that, at that time, it was proposing ‘‘a similar provision with respect to monthly reports of usage.’’ 364 The Office subsequently adopted such a rule for monthly reports of usage.365 The MLC supports including a similar provision for cumulative reporting, stating ‘‘while the reporting required under the [NPRM] should be the baseline, every circumstance cannot be anticipated, and allowing the MLC the flexibility to address specific considerations attendant to a particular DMP is appropriate.’’ 366 The SNPRM proposed a provision modelled after that recently adopted in connection with monthly reports of usage, including clarification that certification procedures could not be altered by agreement and that any flexibility ‘‘does not empower the mechanical licensing collective to agree to alter any substantive requirements described in this section, including but not limited to the required royalty payment and accounting information and sound recording and musical work information.’’ 367 Non-substantive procedures, such as reporting formats, could be altered by agreement, ‘‘provided that any such alteration does not materially prejudice copyright owners owed royalties required to be transferred to the MLC or for the DMP’s eligibility for the 17 U.S.C. 115(d)(10) limitation on liability.’’ 368 Neither the MLC nor DLC directly addressed the SNPRM’s proposal, although the MLC included this language in its proposed regulatory language and the DLC signaled general support for the Office’s SNPRM.369 An 363 DLC SNPRM Comment at 13. at 43521–22 (citing 85 FR at 22518, 364 NPRM 22546). 365 37 CFR 210.27(n). 366 MLC NPRM Comment at 7. 367 SNPRM at 70551. 368 Id. at 70547, 70551. 369 DLC SNPRM Comment at 1 (‘‘DLC strongly supports the proposed rule noticed in the SNPRM.’’); MLC SNPRM Comment at App. x. E:\FR\FM\11JAR5.SGM 11JAR5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations jbell on DSKJLSW7X2PROD with RULES5 individual commenter also indicated support for this provision.370 The Office has incorporated this aspect of the SNPRM into the final rule. Harmless errors. In the SNPRM, the Office asked parties whether it should adopt a harmless error provision ‘‘similar to the provision adopted for reporting by significant nonblanket licensees’’ and noted that pre-MMA regulations did contain a harmless error rule pertaining to monthly and annual statements of account.371 The DLC supported this provision, and proposed alternate regulatory language based upon pre-MMA regulations governing monthly and annual statements of account: ‘‘Errors in a Cumulative Statement of Account or Statement of Adjustment that do not materially prejudice the rights of the copyright owner shall be deemed harmless, and shall not render that statement of account invalid.’’ 372 The DLC explained that cumulative, monthly, and annual statements of account are ‘‘prepared using at least some of the same processes’’ and ‘‘include specifically the information that would have been included at the time of the use,’’ in arguing that harmless errors should be treated in the same manner.373 It suggested that the inclusion of an estimate and adjustment provision would not ‘‘obviate the need for a harmless error provision’’ as ‘‘some harmless errors might not result from the use of an estimate, and/or might not be appropriate for adjustment.’’ 374 The Office accepts the DLC’s suggestion to promulgate a harmless error rule for cumulative statements of account, based on the current harmless error regulations governing monthly and annual statements of account. As the Office previously noted in the context of the monthly and annual statement of account harmless error rule, ‘‘[i]t would be unduly severe to treat . . . inconsequential mistakes as equal to errors that result in material prejudice to the copyright owner.’’ 375 Certification requirements. With respect to the proposed certification requirement for cumulative statements of account, which no party opposes, the DLC says its members ‘‘have interpreted the reference to using ‘processes and internal controls that were subject to an examination, during the past year, by a licensed certified public accountant,’ to refer to the CPA examination that has happened for the 2019 annual statements of account, which were distributed to publishers earlier this calendar year, rather than to a new CPA certification related to the cumulative statement of account.’’ 376 The Office cautions DMPs to consider the scope of the relevant CPA examination, and be sure that the processes and internal controls that were examined previously are the same processes and controls relevant to preparing the cumulative statement of account. If not, a DMP may need a separate examination for the processes and controls applicable to the cumulative statement of account, or it can use the alternative certification option that does not involve a CPA examination. The DLC also requested changes to the signature requirements in provisions addressing certifications in cumulative statements of account. The statute requires a DMP to submit the certification that would have been provided to an identified copyright owner (i.e., the pre-existing statement of account certification) as well as ‘‘an additional certification by a duly authorized officer of the digital music provider that the digital music provider has fulfilled the [statutory good-faith matching] requirements’’ during the transition period.377 The NPRM proposed ‘‘a technical change to include the actual language for clarity’’ and moved both required certifications into the same paragraph.378 The DLC initially ‘‘welcomed’’ this clarification, calling it ‘‘reasonable and appropriate.’’ 379 Subsequently, however, the DLC proposed edits to both certification provisions.380 It explained that the proposed regulation ‘‘may unintentionally be read to limit the corporate personnel who can sign and certify the cumulative statement of account and the facts therein,’’ as ‘‘officer’’ has a specific meaning under corporate law.381 The Office declines to adopt the DLC’s proposed edits. It is not clear that the pre-existing statement of account certification, which is mirrored in the cumulative statement of account rule and was similarly just adopted as a requirement in connection with future reports of usage, has caused DMPs any issues since it was implemented years 376 DLC NPRM Comment at 5, 9. U.S.C. 115(d)(10)(B)(iv)(III)(aa). 378 NPRM at 43520. 379 DLC NPRM Comment at 2, 4. 380 DLC SNPRM Comment at 15 (suggesting revision parallel requirements for submission of notices of license; quoting 37 CFR 210.24(c)). 381 Id. 377 17 370 Cas Martin SNPRM Comment at 2–3. at 70547 n.33; see 37 CFR 210.9. 372 DLC Ex Parte Letter at 3 (Dec. 11, 2020). 373 Id. at 2. 374 Id. 375 79 FR 56190, 56205 (Sept. 18, 2014). 371 SNPRM VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 2203 ago.382 Further, the cumulative statement of account certification language for good-faith matching is dictated by statute, which references ‘‘officer’’ and not ‘‘representative.’’ Finally, the Office has not received additional input from other potentially interested parties, such as the MLC, confirming they also understand this to be a technical clarification. For these reasons, the Office believes that it is better to maintain consistency for cumulative statements of account certifications and respectfully declines the DLC’s proposal. List of Subjects in 37 CFR Part 210 Copyright, Phonorecords, Recordings. For the reasons set forth in the preamble, the Copyright Office amends 37 CFR part 210 as follows: PART 210—COMPULSORY LICENSE FOR MAKING AND DISTRIBUTING PHYSICAL AND DIGITAL PHONORECORDS OF NONDRAMATIC MUSICAL WORKS 1. The authority citation for part 210 continues to read as follows: ■ Authority: 17 U.S.C. 115, 702. 2. Amend § 210.2 by revising paragraph (k) and removing paragraphs (l) through (o). The revision reads as follows: ■ § 210.2 Definitions. * * * * * (k) Any terms not otherwise defined in this section shall have the meanings set forth in 17 U.S.C. 115(e). ■ 3. Amend § 210.10 by revising paragraphs (b) introductory text, (b)(1), (b)(2) introductory text, and (b)(3)(i) and adding paragraphs (c) through (m) to read as follows: § 210.10 Statements required for limitation on liability for digital music providers for the transition period prior to the license availability date. * * * * * (b) If the copyright owner is not identified or located by the end of the calendar month in which the digital music provider first makes use of the work, the digital music provider shall accrue and hold royalties calculated under the applicable statutory rate in accordance with usage of the work, from initial use of the work until the accrued royalties can be paid to the copyright owner or are required to be transferred to the mechanical licensing collective, as follows: 382 85 FR at 58152–53; see 37 CFR 210.16(f) (2015). E:\FR\FM\11JAR5.SGM 11JAR5 jbell on DSKJLSW7X2PROD with RULES5 2204 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations (1) Accrued royalties shall be maintained by the digital music provider in accordance with generally accepted accounting principles, including those concerning derecognition of liabilities. (2) If a copyright owner of an unmatched musical work (or share thereof) is identified and located by or to the digital music provider before the license availability date, the digital music provider shall, unless a voluntary license or other relevant agreement entered into prior to the time period specified in paragraph (b)(2)(i) of this section applies to such musical work (or share thereof)— * * * * * (3) * * * (i) Not later than 45 calendar days after the license availability date, transfer all accrued royalties to the mechanical licensing collective (as required by paragraph (i)(2) of this section and subject to paragraphs (c)(5) and (k) of this section), such payment to be accompanied by a cumulative statement of account that: (A) Includes all of the information required by paragraphs (c) through (e) of this section covering the period starting from initial use of the work; (B) Is delivered to the mechanical licensing collective as required by paragraph (i)(1) of this section; and (C) Is certified as required by paragraph (j) of this section; and * * * * * (c) Each cumulative statement of account delivered to the mechanical licensing collective under paragraph (b)(3)(i) of this section shall be clearly and prominently identified as a ‘‘Cumulative Statement of Account for Making and Distributing Phonorecords,’’ and shall include a clear statement of the following information: (1) The period (months and years) covered by the cumulative statement of account. (2) The full legal name of the digital music provider and, if different, the trade or consumer-facing brand name(s) of the service(s), including any specific offering(s) (including as may be defined in part 385 of this title), through which the digital music provider engages, or has engaged at any time during the period identified in paragraph (c)(1) of this section, in covered activities. If the digital music provider has a unique DDEX identifier number, it must also be provided. (3) The full address, including a specific number and street name or rural route, of the place of business of the digital music provider. A post office box or similar designation will not be VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 sufficient except where it is the only address that can be used in that geographic location. (4) For each sound recording embodying a musical work that is used by the digital music provider in covered activities during the period identified in paragraph (c)(1) of this section and for which a copyright owner of such musical work (or share thereof) is not identified and located by the license availability date, a detailed cumulative statement, from which the mechanical licensing collective may separate reported information for each month and year for each applicable activity or offering including as may be defined in part 385 of this title, of all of: (i) The royalty payment and accounting information required by paragraph (d) of this section; and (ii) The sound recording and musical work information required by paragraph (e) of this section. (5) The total accrued royalty payable by the digital music provider for the period identified in paragraph (c)(1) of this section, computed in accordance with the requirements of this section and part 385 of this title, and including detailed information regarding how the royalty was computed, with such total accrued royalty payable broken down by month and year and by each applicable activity or offering including as may be defined in part 385 of this title. (i) Where a digital music provider has a reasonable good-faith belief that the total accrued royalties payable are less than the total of the amounts reported under paragraph (c)(4)(i) of this section, and the precise amount of such accrued royalties cannot be calculated at the time the cumulative statement of account is delivered to the mechanical licensing collective because of the unmatched status of relevant musical works embodied in sound recordings reported under paragraph (c)(4)(ii) of this section, the total accrued royalties reported and transferred may make use of reasonable estimations, determined in accordance with GAAP and broken down by month and year and by each applicable activity or offering including as may be defined in part 385 of this title. Any such estimate shall be made in good faith and on the basis of the best knowledge, information, and belief of the digital music provider at the time the cumulative statement of account is delivered to the mechanical licensing collective, and subject to any additional accounting and certification requirements under 17 U.S.C. 115 and this section. In no case shall the failure to match a musical work by the license availability date be construed as prohibiting or limiting a digital music PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 provider’s entitlement to use such an estimate if the digital music provider has satisfied its obligations under 17 U.S.C. 115(d)(10)(B) to engage in required matching efforts. (ii) A digital music provider reporting and transferring accrued royalties that make use of reasonable estimations must provide a description of any voluntary license or other agreement containing an appropriate release of royalty claims relied upon by the digital music provider in making its estimation that is sufficient for the mechanical licensing collective to engage in efforts to confirm uses of musical works subject to any such agreement. Such description shall be sufficient if it includes at least the following information: (A) An identification of each of the digital music provider’s services, including by reference to any applicable types of activities or offerings that may be defined in part 385 of this title, relevant to any such agreement. If such an agreement pertains to all of the digital music provider’s applicable services, it may state so without identifying each service. (B) The start and end dates of each covered period of time. (C) Each applicable musical work copyright owner, identified by name and any known and appropriate unique identifiers, and appropriate contact information for each such musical work copyright owner or for an administrator or other representative who has entered into an applicable agreement on behalf of the relevant copyright owner. (D) A satisfactory identification of any applicable catalog exclusions. (E) At the digital music provider’s option, and in lieu of providing the information listed in paragraph (c)(5)(ii)(D) of this section, a list of all covered musical works, identified by appropriate unique identifiers. (F) A unique identifier for each such agreement. (iii)(A) After receiving the information required by paragraph (c)(5)(ii) of this section, the mechanical licensing collective shall, among any other actions required of it, engage in efforts to confirm uses of musical works embodied in sound recordings reported under paragraph (c)(4)(ii) of this section that are subject to any identified agreement, and shall promptly notify relevant copyright owners of the digital music provider’s reliance on such identified agreement(s). (B)(1) A notified copyright owner may dispute whether a digital music provider has appropriately relied upon an identified agreement by delivering a notice of dispute to the mechanical licensing collective no later than one E:\FR\FM\11JAR5.SGM 11JAR5 jbell on DSKJLSW7X2PROD with RULES5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations year after being notified. A notice of dispute must describe the basis for the copyright owner’s dispute with particularity and specify whether the copyright owner is disputing the digital music provider’s reliance with respect to potential distributions based on matched usage or of unclaimed accrued royalties under 17 U.S.C. 115(d)(3)(J), or both. The notice must contain a certification by the copyright owner that its dispute is reasonable and made in good faith. The mechanical licensing collective shall promptly provide the digital music provider with a copy of any notice of dispute it receives. Nothing in this paragraph (c)(5)(iii)(B)(1) shall be construed as prejudicing a copyright owner’s right or ability to otherwise dispute a digital music provider’s reliance on an identified agreement outside of this process. (2) If the mechanical licensing collective receives a notice of dispute from an appropriate copyright owner in compliance with paragraph (c)(5)(iii)(B)(1) of this section, then at or around the point in time that the mechanical licensing collective would otherwise make a particular distribution to that copyright owner but for the digital music provider’s reliance on the disputed agreement, the mechanical licensing collective shall deliver an invoice and/or response file to the digital music provider consistent with paragraph (h) of this section that includes the amount that would otherwise be distributed at that time (which shall include the interest that would have accrued on such amount had it been held by the mechanical licensing collective pursuant to 17 U.S.C. 115(d)(3)(H)(ii) from the original date of transfer) and an explanation of how that amount was determined. Depending on the scope of the notice of dispute, this may include distributions based on matched usage and/or distributions of unclaimed accrued royalties under 17 U.S.C. 115(d)(3)(J). In the case of the latter, the relevant approximate date to deliver the invoice and/or response file to the digital music provider shall be the date on which the mechanical licensing collective provides the notice required under 17 U.S.C. 115(d)(3)(J)(iii)(II)(dd). Where a copyright owner delivers a notice of dispute after the relevant point in time has passed for a particular distribution, the mechanical licensing collective shall deliver the invoice and/or response file to the digital music provider promptly after receiving the notice of dispute. No later than 14 business days after receipt of the invoice and/or response file, the VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 digital music provider must pay the invoiced amount. (3) All amounts delivered to the mechanical licensing collective by a digital music provider pursuant to paragraph (c)(5)(iii)(B)(2) of this section shall be held by the mechanical licensing collective pending resolution of the dispute, in accordance with 17 U.S.C. 115(d)(3)(H)(ii)(I) without regard for whether or not the funds are in fact accrued royalties. The mechanical licensing collective shall not make a distribution of the funds (or any part thereof), treat the funds (or any part thereof) as an overpayment, or otherwise release the funds (or any part thereof), unless directed to do so by mutual agreement of the relevant parties or by order of an adjudicative body with appropriate authority. If the mechanical licensing collective has not been so directed within one year after the funds have been received from the digital music provider, and if there is no active dispute resolution occurring at that time, the mechanical licensing collective shall treat the funds as an overpayment which shall be handled in accordance with paragraph (k)(5) of this section. (C) The mechanical licensing collective shall presume that a digital music provider has appropriately relied upon an identified agreement, except with respect to a relevant copyright owner who has delivered a valid notice of dispute for such agreement pursuant to paragraph (c)(5)(iii)(B)(1) of this section. Notwithstanding the preceding sentence, any resolution of a dispute shall be reflected in the mechanical licensing collective’s ongoing administration activities. (iv)(A) Subject to paragraph (c)(5)(iii) of this section, if the amount transferred to the mechanical licensing collective by a digital music provider with its cumulative statement of account is insufficient to cover any required distributions to copyright owners, the mechanical licensing collective shall deliver an invoice and/or response file to the digital music provider consistent with paragraph (h) of this section that includes the amount outstanding (which shall include the interest that would have accrued on such amount had it been held by the mechanical licensing collective pursuant to 17 U.S.C. 115(d)(3)(H)(ii) from the original date of transfer) and the basis for the mechanical licensing collective’s conclusion that such amount is due. No later than 14 business days after receipt of such notice, the digital music provider must pay the invoiced amount. (B) In the event a digital music provider is found by an adjudicative PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 2205 body with appropriate authority to have erroneously, but not unreasonably or in bad faith, withheld accrued royalties, the digital music provider may remain in compliance with this section for purposes of retaining its limitation on liability if the digital music provider has otherwise satisfied the requirements for the limitation on liability described in 17 U.S.C. 115(d)(10) and this section and if the additional amount due is paid in accordance with a relevant order. (v) Any overpayment of royalties based upon an estimate permitted by paragraph (c)(5)(i) of this section shall be handled in accordance with paragraph (k)(5) of this section. (vi) Any underpayment of royalties shall be remedied by a digital music provider without regard for the adjusted statute of limitations described in 17 U.S.C. 115(d)(10)(C). By using an estimate permitted by either paragraph (c)(5)(i) or (d)(2) of this section, a digital music provider agrees to waive any statute-of-limitations-based defenses with respect to any asserted underpayment of royalties connected to the use of such an estimate. (vii) Nothing in this section shall be construed as prejudicing a copyright owner’s ability to challenge whether a digital music provider has satisfied the requirements for the limitation on liability. (6) If the total accrued royalty reported under paragraph (c)(5) of this section does not reconcile with the royalties actually transferred to the mechanical licensing collective, or if the royalties reported employ an estimate as permitted under paragraph (c)(5)(i) of this section, a clear and detailed explanation of the difference and the basis for it. (d) The royalty payment and accounting information called for by paragraph (c)(4)(i) of this section shall consist of the following: (1) A detailed and step-by-step accounting of the calculation of attributable royalties under applicable provisions of this section and part 385 of this title, sufficient to allow the mechanical licensing collective to assess the manner in which the digital music provider determined the royalty and the accuracy of the royalty calculations, including but not limited to the number of payable units, including, as applicable, permanent downloads, plays, and constructive plays, for each reported sound recording. (2) Where computation of the attributable royalties depends on an input that is unable to be finally determined at the time the cumulative statement of account is delivered to the mechanical licensing collective and E:\FR\FM\11JAR5.SGM 11JAR5 jbell on DSKJLSW7X2PROD with RULES5 2206 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations where the reason the input cannot be finally determined is outside of the digital music provider’s control (e.g., the amount of applicable public performance royalties and the amount of applicable consideration for sound recording copyright rights), a reasonable estimation of such input, determined in accordance with GAAP, may be used or provided by the digital music provider. Royalty payments based on such estimates shall be adjusted pursuant to paragraph (k) of this section after being finally determined. A cumulative statement of account containing an estimate permitted by this paragraph (d)(2) should identify each input that has been estimated, and provide the reason(s) why such input(s) needed to be estimated and an explanation as to the basis for the estimate(s). (3) All information and calculations provided pursuant to paragraph (d) of this section shall be made in good faith and on the basis of the best knowledge, information, and belief of the digital music provider at the time the cumulative statement of account is delivered to the mechanical licensing collective, and subject to any additional accounting and certification requirements under 17 U.S.C. 115 and this section. (e) For each sound recording embodying a musical work required to be reported under paragraph (c)(4)(ii) of this section, the digital music provider shall provide the information referenced in § 210.6(c)(3) that would have been provided to the copyright owner had the digital music provider been serving Monthly Statements of Account as a compulsory licensee in accordance with this subpart on the copyright owner from initial use of the work, plus the unique identifier assigned by the digital music provider to the sound recording and a unique identifier assigned by the digital music provider to each individual usage line. (f) The information required by paragraphs (c), (d), (e), (k), and (o) of this section requires intelligible, legible, and unambiguous statements in the cumulative statements of account, without incorporation of facts or information contained in other documents or records. (g) References to part 385 of this title, as used in paragraphs (c), (d), and (k) of this section, refer to the rates and terms of royalty payments, including any defined activities or offerings, as in effect as to each particular reported use based on when the use occurred. (h) If requested by a digital music provider, the mechanical licensing collective shall deliver an invoice and/ or a response file to the digital music VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 provider within a reasonable period of time after the cumulative statement of account and related royalties are received. The response file shall contain such information as is common in the industry to be reported in response files, backup files, and any other similar such files provided to digital music providers by applicable third-party administrators. (i)(1) To the extent practicable, each cumulative statement of account delivered to the mechanical licensing collective under paragraph (b)(3)(i) of this section, and each supplemental metadata report delivered to the mechanical licensing collective under paragraph (o) of this section, shall be delivered in a machine-readable format that is compatible with the information technology systems of the mechanical licensing collective as reasonably determined by the mechanical licensing collective and set forth on its website, taking into consideration relevant industry standards and the potential for different degrees of sophistication among digital music providers. The mechanical licensing collective must offer an option that is accessible to smaller digital music providers that may not be reasonably capable of complying with the requirements of a sophisticated reporting or data standard or format. Nothing in this section shall be construed as prohibiting the mechanical licensing collective from adopting more than one reporting or data standard or format. A digital music provider may use an alternative reporting or data standard or format pursuant to an agreement with the mechanical licensing collective under paragraph (l) of this section, consent to which shall not be unreasonably withheld by the mechanical licensing collective. (2) Royalty payments shall be delivered to the mechanical licensing collective in such manner and form as the mechanical licensing collective may reasonably determine and set forth on its website. A cumulative statement of account and its related royalty payment may be delivered together or separately, but if delivered separately, the payment must include information reasonably sufficient to allow the mechanical licensing collective to match the cumulative statement of account to the payment. (j) Each cumulative statement of account delivered to the mechanical licensing collective under paragraph (b)(3)(i) of this section shall be accompanied by: (1) The name of the person who is signing and certifying the cumulative statement of account. (2) A signature, which in the case of a digital music provider that is a PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 corporation or partnership, shall be the signature of a duly authorized officer of the corporation or of a partner. (3) The date of signature and certification. (4) If the digital music provider is a corporation or partnership, the title or official position held in the partnership or corporation by the person who is signing and certifying the cumulative statement of account. (5) One of the following statements: (i) Statement one: I certify that (1) I am duly authorized to sign this cumulative statement of account on behalf of the digital music provider, (2) I have examined this cumulative statement of account, and (3) all statements of fact contained herein are true, complete, and correct to the best of my knowledge, information, and belief, and are made in good faith. (ii) Statement two: I certify that (1) I am duly authorized to sign this cumulative statement of account on behalf of the digital music provider, (2) I have prepared or supervised the preparation of the data used by the digital music provider and/ or its agent to generate this cumulative statement of account, (3) such data is true, complete, and correct to the best of my knowledge, information, and belief, and was prepared in good faith, and (4) this cumulative statement of account was prepared by the digital music provider and/or its agent using processes and internal controls that were subject to an examination, during the past year, by a licensed certified public accountant in accordance with the attestation standards established by the American Institute of Certified Public Accountants, the opinion of whom was that the processes and internal controls were suitably designed to generate monthly statements that accurately reflect, in all material respects, the digital music provider’s usage of musical works, the statutory royalties applicable thereto, and any other data that is necessary for the proper calculation of the statutory royalties in accordance with 17 U.S.C. 115 and applicable regulations. (6) A certification by a duly authorized officer of the digital music provider that the digital music provider has fulfilled the requirements of 17 U.S.C. 115(d)(10)(B)(i) and (ii) but has not been successful in locating or identifying the copyright owner. (k)(1) A digital music provider may adjust its previously delivered cumulative statement of account, including related royalty payments, by delivering to the mechanical licensing collective a statement of adjustment. E:\FR\FM\11JAR5.SGM 11JAR5 jbell on DSKJLSW7X2PROD with RULES5 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations (2) A statement of adjustment shall be clearly and prominently identified as a ‘‘Statement of Adjustment of a Cumulative Statement of Account.’’ (3) A statement of adjustment shall include a clear statement of the following information: (i) The previously delivered cumulative statement of account, including related royalty payments, to which the adjustment applies. (ii) The specific change(s) to the previously delivered cumulative statement of account, including a detailed description of any changes to any of the inputs upon which computation of the royalties payable by the digital music provider depends. Such description shall include the adjusted royalties payable and all information used to compute the adjusted royalties payable, in accordance with the requirements of this section and part 385 of this title, such that the mechanical licensing collective can provide a detailed and step-by-step accounting of the calculation of the adjustment under applicable provisions of this section and part 385 of this title, sufficient to allow each applicable copyright owner to assess the manner in which the digital music provider determined the adjustment and the accuracy of the adjustment. As appropriate, an adjustment may be calculated using estimates permitted under paragraph (d)(2) of this section. (iii) Where applicable, the particular sound recordings and uses to which the adjustment applies. (iv) A description of the reason(s) for the adjustment. (4) In the case of an underpayment of royalties, the digital music provider shall pay the difference to the mechanical licensing collective contemporaneously with delivery of the statement of adjustment or promptly after being notified by the mechanical licensing collective of the amount due. A statement of adjustment and its related royalty payment may be delivered together or separately, but if delivered separately, the payment must include information reasonably sufficient to allow the mechanical licensing collective to match the statement of adjustment to the payment. (5) In the case of an overpayment of royalties, the mechanical licensing collective shall appropriately credit or offset the excess payment amount and apply it to the digital music provider’s account, or upon request, issue a refund within a reasonable period of time. (6)(i) A statement of adjustment must be delivered to the mechanical licensing collective no later than 6 months after VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 the occurrence of any of the scenarios specified by paragraph (k)(6)(ii) of this section, where such an event necessitates an adjustment. Where more than one scenario applies to the same cumulative statement of account at different points in time, a separate 6month period runs for each such triggering event. Where more than one scenario necessitates the same particular adjustment, the 6-month deadline to make the adjustment begins to run from the occurrence of the earliest triggering event. (ii) A statement of adjustment may only be made: (A) Except as otherwise provided for by paragraph (c)(5) of this section, where the digital music provider discovers, or is notified of by the mechanical licensing collective or a copyright owner, licensor, or author (or their respective representatives, including by an administrator or a collective management organization) of a relevant sound recording or musical work that is embodied in such a sound recording, an inaccuracy in the cumulative statement of account, or in the amounts of royalties owed, based on information that was not previously known to the digital music provider despite its good-faith efforts; (B) When making an adjustment to a previously estimated input under paragraph (d)(2) of this section; (C) Following an audit of a digital music provider that concludes after the cumulative statement of account is delivered and that has the result of affecting the computation of the royalties payable by the digital music provider (e.g., as applicable, an audit by a sound recording copyright owner concerning the amount of applicable consideration paid for sound recording copyright rights); or (D) In response to a change in applicable rates or terms under part 385 of this title. (E) To ensure consistency with any adjustments made in an Annual Statement of Account generated under § 210.7 for the most recent fiscal year. (7) A statement of adjustment must be certified in the same manner as a cumulative statement of account under paragraph (j) of this section. (l)(1) Subject to the provisions of 17 U.S.C. 115, a digital music provider and the mechanical licensing collective may agree in writing to vary or supplement the procedures described in this section, including but not limited to pursuant to an agreement to administer a voluntary license, provided that any such change does not materially prejudice copyright owners owed royalties required to be transferred to the mechanical licensing PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 2207 collective for the digital music provider to be eligible for the limitation on liability described in 17 U.S.C. 115(d)(10). The procedures surrounding the certification requirements of paragraph (j) of this section may not be altered by agreement. This paragraph (l)(1) does not empower the mechanical licensing collective to agree to alter any substantive requirements described in this section, including but not limited to the required royalty payment and accounting information and sound recording and musical work information. (2) The mechanical licensing collective shall maintain a current, free, and publicly accessible online list of all agreements made pursuant to paragraph (l)(1) of this section that includes the name of the digital music provider (and, if different, the trade or consumer-facing brand name(s) of the services(s), including any specific offering(s), through which the digital music provider engages, or has engaged at any time during the period identified in paragraph (c)(1) of this section, in covered activities) and the start and end dates of the agreement. Any such agreement shall be considered a record that a copyright owner may access in accordance with 17 U.S.C. 115(d)(3)(M)(ii). Where an agreement made pursuant to paragraph (l)(1) of this section is made pursuant to an agreement to administer a voluntary license or any other agreement, only those portions that vary or supplement the procedures described in this section and that pertain to the administration of a requesting copyright owner’s musical works must be made available to that copyright owner. (m) Each digital music provider shall, for a period of at least seven years from the date of delivery of a cumulative statement of account or statement of adjustment to the mechanical licensing collective, keep and retain in its possession all records and documents necessary and appropriate to support fully the information set forth in such statement (except that such records and documents that relate to an estimated input permitted under paragraph (d)(2) of this section must be kept and retained for a period of at least seven years from the date of delivery of the statement containing the final adjustment of such input). (n) Errors in a cumulative statement of account or statement of adjustment that do not materially prejudice the rights of the copyright owner shall be deemed harmless, and shall not render that statement invalid. (o)(1) By June 15, 2021, the digital music provider must submit a E:\FR\FM\11JAR5.SGM 11JAR5 jbell on DSKJLSW7X2PROD with RULES5 2208 Federal Register / Vol. 86, No. 6 / Monday, January 11, 2021 / Rules and Regulations supplemental metadata report that includes all of the information provided in the cumulative statement of account pursuant to paragraph (c) of this section, as well as, separately or together with such information, the following information for each sound recording embodying a musical work that was reported under paragraph (c)(4)(ii) of this section: (i) Identifying information for the sound recording, including but not limited to: (A) Sound recording name(s), including, to the extent practicable, all known alternative and parenthetical titles for the sound recording; (B) Featured artist(s); (C) Unique identifier assigned by the digital music provider, if any, including to the extent practicable, any code(s) that can be used to locate and listen to the sound recording through the digital music provider’s public-facing service; (D) Actual playing time measured from the sound recording audio file, where available; and (E) To the extent acquired by the digital music provider in connection with its use of sound recordings of musical works to engage in covered activities, and to the extent practicable: (1) Sound recording copyright owner(s); (2) Producer(s); (3) International standard recording code(s) (ISRC); (4) Any other unique identifier(s) for or associated with the sound recording, including any unique identifier(s) for any associated album, including but not limited to: (i) Catalog number(s); (ii) Universal product code(s) (UPC); and (iii) Unique identifier(s) assigned by any distributor; (5) Version(s); (6) Release date(s); (7) Album title(s); (8) Label name(s); and (9) Distributor(s). (ii) Identifying information for the musical work embodied in the reported sound recording, to the extent acquired by the digital music provider in the metadata provided by sound recording copyright owners or other licensors of sound recordings in connection with the use of sound recordings of musical works to engage in covered activities, and to the extent practicable: (A) Information concerning authorship of the applicable rights in the musical work embodied in the sound recording, including but not limited to: (1) Songwriter(s); and (2) International standard name identifier(s) (ISNI) and interested parties VerDate Sep<11>2014 00:28 Jan 09, 2021 Jkt 253001 information code(s) (IPI) for each such songwriter; (B) International standard musical work code(s) (ISWC) for the musical work embodied in the sound recording; and (C) Musical work name(s) for the musical work embodied in the sound recording, including any alternative or parenthetical titles for the musical work. (iii)(A) For each track for which a share of a musical work has been matched and for which accrued royalties for such share have been paid, but for which one or more shares of the musical work remains unmatched and unpaid, the digital music provider must provide, for each usage line for such track, a reference to the specific unique identifier for the usage line reported under paragraph (e) of this section, and a clear identification of the percentage share(s) that have been matched and paid and the owner(s) of such matched and paid share(s) (including any unique party identifiers for such owner(s) that are known by the digital music provider). (B) If, for a particular track, a digital music provider cannot provide a clear identification of the percentage share(s) that have been matched and paid and the owner(s) of such share(s) because this information is subject to a contractual confidentiality restriction or the conditions of paragraph (o)(1)(iii)(C) of this section apply with respect to such information, the digital music provider must provide alternate information for the track, namely, a clear identification of the total aggregate percentage share that has been matched and paid and the owner(s) of the aggregate matched and paid share (including any unique party identifiers for such owner(s) that are known by the digital music provider). If the digital music provider still cannot provide such alternate information because of the conditions of paragraph (o)(1)(iii)(C) of this section, the information required by this paragraph (o)(1)(iii)(B) may be omitted for the track from the supplemental metadata report. A digital music provider reporting under this paragraph (o)(1)(iii)(B) must deliver a certification to the mechanical licensing collective stating that the conditions of being permitted to report under this paragraph (o)(1)(iii)(B) apply with respect to the provision of alternate information or omission of percentage share(s) information entirely, as specified in the certification. (C) The conditions referred to in paragraph (o)(1)(iii)(B) of this section are: (1) The information is maintained only by a third-party vendor; PO 00000 Frm 00034 Fmt 4701 Sfmt 9990 (2) The digital music provider does not have any contractual or other rights to access the information; (3) The digital music provider is unable to compile the information from records in its possession using commercially reasonable efforts within the required reporting timeframe; and (4) The vendor refuses to make the information available to the digital music provider on commercially reasonable terms. (2) Any obligation under paragraph (o)(1) of this section concerning information about sound recording copyright owners may be satisfied by reporting the information for applicable sound recordings provided to the digital music provider by sound recording copyright owners or other licensors of sound recordings (or their representatives) contained in each of the following DDEX fields: LabelName and PLine. Where a digital music provider acquires this information in addition to other information identifying a relevant sound recording copyright owner, all such information must be reported to the extent practicable. (3) As used in this paragraph (o), it is practicable to provide the enumerated information if: (i) It belongs to a category of information expressly required to be reported by the enumerated list of information contained in § 210.6(c)(3); (ii) It belongs to a category of information that has been reported, or is required to be reported, by the particular digital music provider to the mechanical licensing collective under the blanket license; or (iii) It belongs to a category of information that is reported by the particular digital music provider to the mechanical licensing collective under a voluntary license or individual download license. (4) The supplemental metadata report provided for in this paragraph (o) is not a condition for eligibility for the limitation on liability in 17 U.S.C. 115(d)(10), or a condition of the blanket license. Dated: December 23, 2020. Shira Perlmutter, Register of Copyrights and Director of the U.S. Copyright Office. Approved by: Carla D. Hayden, Librarian of Congress. [FR Doc. 2020–29190 Filed 1–7–21; 8:45 am] BILLING CODE 1410–30–P E:\FR\FM\11JAR5.SGM 11JAR5

Agencies

Library of Congress
U.S. Copyright Office

[Federal Register Volume 86, Number 6 (Monday, January 11, 2021)]
[Rules and Regulations]
[Pages 2176-2208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-29190]



[[Page 2175]]

Vol. 86

Monday,

No. 6

January 11, 2021

Part V





Library of Congress





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U.S. Copyright Office





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37 CFR Part 210





Music Modernization Act Transition Period Transfer and Reporting of 
Royalties to the Mechanical Licensing Collective; Final Rule

Federal Register / Vol. 86 , No. 6 / Monday, January 11, 2021 / Rules 
and Regulations

[[Page 2176]]


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LIBRARY OF CONGRESS

U.S. Copyright Office

37 CFR Part 210

[Docket No. 2020-12]


Music Modernization Act Transition Period Transfer and Reporting 
of Royalties to the Mechanical Licensing Collective

AGENCY: U.S. Copyright Office, Library of Congress.

ACTION: Final rule.

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SUMMARY: Pursuant to title I of the Orrin G. Hatch-Bob Goodlatte Music 
Modernization Act, and following extensive solicitation of public 
comments, the U.S. Copyright Office is issuing a final rule addressing 
digital music providers' obligations to transfer and report accrued 
royalties for the use of unmatched musical works (or shares thereof) to 
the mechanical licensing collective for purposes of eligibility for the 
Act's limitation on liability for prior unlicensed uses.

DATES: The rule is effective February 10, 2021.

FOR FURTHER INFORMATION CONTACT: Regan A. Smith, General Counsel and 
Associate Register of Copyrights, by email at [email protected], 
John R. Riley, Assistant General Counsel, by email at 
[email protected], or Jason E. Sloan, Assistant General Counsel, by 
email at [email protected]. Each can be contacted by telephone by 
calling (202) 707-8350.

SUPPLEMENTARY INFORMATION:

I. Background

    On October 11, 2018, the president signed into law the Orrin G. 
Hatch-Bob Goodlatte Music Modernization Act (``MMA'') which, among 
other things, substantially modifies the compulsory ``mechanical'' 
license for making and distributing phonorecords of nondramatic musical 
works under 17 U.S.C. 115.\1\ It does so by switching from a song-by-
song licensing system to a blanket licensing regime administered by a 
mechanical licensing collective (``MLC'') that becomes available on 
January 1, 2021 (the ``license availability date''). In July 2019, the 
Copyright Office (the ``Office'') designated an entity to serve as the 
MLC, as required by the MMA.\2\ Digital music providers (``DMPs'') can 
obtain the new blanket license to make digital phonorecord deliveries 
(``DPDs'') of musical works, including in the form of permanent 
downloads, limited downloads, or interactive streams (referred to in 
the statute as ``covered activity,'' where such activity qualifies for 
a compulsory license), subject to compliance with various 
requirements.\3\ As was true before the MMA, DMPs may enter into 
privately negotiated voluntary licenses with copyright owners in lieu 
of using the compulsory license.
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    \1\ Public Law 115-264, 132 Stat. 3676 (2018).
    \2\ 84 FR 32274 (July 8, 2019).
    \3\ As permitted under the MMA, the Office designated a digital 
licensee coordinator (``DLC'') to represent licensees in proceedings 
before the Copyright Royalty Judges (``CRJs'') and the Office, to 
serve as a non-voting member of the MLC, and to carry out other 
functions. 17 U.S.C. 115(d)(5)(B); 84 FR 32274 (July 8, 2019); see 
also 17 U.S.C. 115(d)(3)(D)(i)(IV), (d)(5)(C).
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    Prior to the MMA, DMPs obtained a section 115 compulsory license on 
a per-work, song-by-song basis, by serving a notice of intention to 
obtain a compulsory license (``NOI'') on the copyright owner (or filing 
it with the Office if the Office's public records did not identify the 
copyright owner) and then paying applicable royalties accompanied by 
accounting statements.\4\ The MMA includes a ``transition period'' 
covering the period following its October 2018 enactment and before the 
blanket license becomes available in January 2021.\5\ During this 
transition period, anyone seeking to obtain a compulsory license to 
make DPDs must continue to do so on a song-by-song basis by serving 
NOIs on copyright owners ``if the identity and location of the musical 
work copyright owner is known,'' and paying them applicable royalties 
accompanied by statements of account.\6\ If the musical work copyright 
owner is unknown, a DMP can no longer file an NOI with the Office, but 
instead may rely on a limitation on liability that requires the DMP to, 
among other things, ``continue[ ] to search for the musical work 
copyright owner'' using good-faith, commercially reasonable efforts and 
bulk electronic matching processes.\7\ The DMP must either account for 
and pay accrued royalties to the relevant musical work copyright 
owner(s) when found or, if they are not found before the end of the 
transition period, account for and transfer accrued royalties to the 
MLC at that time.\8\ Congress believed that the liability limitation, 
which limits recovery in lawsuits commenced on or after January 1, 2018 
to the statutory royalty that would be due, would ``ensure that more 
artist royalties will be paid than otherwise would be the case through 
continual litigation,'' \9\ and also viewed this provision as a ``key 
component that was necessary'' to ensure support for legislative 
change.\10\
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    \4\ See 17 U.S.C. 115(b)(1), (c)(5) (2017).
    \5\ H.R. Rep. No. 115-651, at 10 (2018); S. Rep. No. 115-339, at 
10 (2018).
    \6\ 17 U.S.C. 115(b)(2)(A), (c)(2)(I); see H.R. Rep. No. 115-
651, at 4; S. Rep. No. 115-339, at 3.
    \7\ 17 U.S.C. 115(b)(2)(A), (d)(9)(D)(i), (d)(10)(A)-(B); see 
H.R. Rep. No. 115-651, at 4, 10; S. Rep. No. 115-339, at 3, 10, 22.
    \8\ 17 U.S.C. 115(d)(10)(B); see H.R. Rep. No. 115-651, at 4, 
10; S. Rep. No. 115-339, at 3, 10.
    \9\ H.R. Rep. No. 115-651, at 14; S. Rep. No. 115-339, at 14-15; 
Report and Section-by-Section Analysis of H.R. 1551 by the Chairmen 
and Ranking Members of Senate and House Judiciary Committees, at 12 
(2018), https://www.copyright.gov/legislation/mma_conference_report.pdf (``Conf. Rep.'').
    \10\ H.R. Rep. No. 115-651, at 13; S. Rep. No. 115-339, at 14; 
Conf. Rep. at 12.
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    With respect to reporting and payment requirements for eligibility 
for the limitation on liability, the statute details three scenarios. 
First, if the DMP is successful in identifying and locating a copyright 
owner of a musical work (or share) by the end of the calendar month in 
which the DMP first makes use of the work, it must provide statements 
of account and pay royalties to that copyright owner in accordance with 
section 115 and applicable regulations.\11\ The second and third 
scenarios apply if the copyright owner is not identified or located by 
that date.\12\ In such cases, the DMP must accrue and hold applicable 
statutory royalties in accordance with usage of the work, from the 
initial use of the work until the royalties can be paid to the 
copyright owner or are required to be transferred to the MLC at the end 
of the transition period.\13\ If a copyright owner of an unmatched 
musical work (or share) is identified and located before the license 
availability date, the DMP must pay the copyright owner all accrued 
royalties accompanied by a cumulative statement of account that 
includes the information that would have been provided had the DMP been 
providing monthly statements of account to the copyright owner from its 
initial use of the work in accordance with section 115 and applicable 
regulations.\14\ If a copyright owner of an unmatched musical work (or 
share) is not identified and located by the license availability date, 
the DMP must, among other things, transfer, no later than 45 calendar 
days after the license availability date, ``all accrued royalties'' to 
the MLC ``accompanied by a cumulative statement of account that 
includes all of the information that would have been provided to the 
copyright owner had the [DMP] been serving monthly statements of 
account on the copyright owner from initial use

[[Page 2177]]

of the work in accordance with [section 115] and applicable 
regulations,'' including the certification that would have been 
provided to an identified copyright owner \15\ as well as an additional 
certification attesting to the DMP's matching efforts during the 
transition period.\16\
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    \11\ 17 U.S.C. 115(d)(10)(B)(iii).
    \12\ Id. at 115(d)(10)(B)(iv).
    \13\ Id.
    \14\ Id. at 115(d)(10)(B)(iv)(II).
    \15\ See 37 CFR 210.6(f)(1)(v).
    \16\ 17 U.S.C. 115(d)(10)(B)(iv)(III).
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    In December 2018, the Office published an interim rule and 
requested comments to address payment and reporting obligations during 
the transition period.\17\ That interim rule specified that DMPs must 
pay royalties and provide cumulative statements of account to copyright 
owners and the MLC in compliance with the Office's preexisting 
regulations regarding monthly statements of account.\18\ The Office 
received no comments in response to this public rulemaking and 
finalized the rule in March 2019.\19\ In September 2019, the Office 
issued a notification of inquiry regarding various topics related to 
MMA implementation.\20\ Observing the ``persistent concern about the 
`black box' of unclaimed royalties, including its amount and treatment 
by digital music providers and the MLC,'' this notice provided 
additional opportunity for public comment on, among other things, ``any 
issues that should be considered relating to the transfer and reporting 
of unclaimed royalties by digital music providers to the MLC.'' \21\ 
Both the MLC and DLC provided comments in response to this later 
inquiry, as discussed further below. The MLC generally sought to expand 
the reporting and formatting requirements in a manner that approximated 
its requests for monthly reporting by blanket licensees on a 
prospective basis, to better facilitate its matching activities (which 
the DLC opposed).\22\ The DLC specifically sought regulatory certainty 
to ensure that monies previously paid by DMPs to copyright owners 
pursuant to privately negotiated, pre-MMA agreements need not also be 
paid a second time to the MLC to maintain DMP eligibility for the 
limitation on liability (which the MLC opposed).\23\
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    \17\ 83 FR 63061 (Dec. 7, 2018).
    \18\ See 37 CFR 210.10.
    \19\ See 84 FR 10685 (Mar. 22, 2019).
    \20\ 84 FR 49966 (Sept. 24, 2019).
    \21\ Id. at 49971.
    \22\ See MLC Initial NOI Comment at 22-23; MLC Reply NOI Comment 
at 27-30, App. D at 19; MLC Ex Parte Letter at 2-4 (June 17, 2020).
    \23\ See DLC Initial NOI Comment at 18-19; DLC Reply NOI Comment 
at 24-25, Add. A-24.
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    In July 2020, the Office issued a notice of proposed rulemaking 
(``NPRM'') to address these comments.\24\ It proposed expanding the 
reporting requirements to accommodate the MLC's request for additional 
information. The NPRM also offered initial guidance regarding the 
potential relationship of pre-MMA agreements to the cumulative 
statement reporting obligations, but did not propose specific 
regulatory language concerning the issue of potential ``double 
payments'' in connection with such agreements; the Office invited 
further comment on the issue. The MLC's comments to the NPRM were 
largely supportive of the NPRM's proposed approach.\25\ The DLC 
supported some aspects of the proposed rule, but expressed concern with 
some of the proposed reporting requirements and urged the Office to 
promulgate regulations addressing privately negotiated pre-MMA 
agreements and their interaction with the limitation on liability 
requirements.\26\ Through the Office's permitted ex parte meeting 
option, those parties, as well as individual DMPs, music publishers, 
and songwriter groups provided additional views regarding these issues, 
as summarized on the Office's ex parte communications web page.\27\
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    \24\ 85 FR 43517 (July 17, 2020) (``NPRM''). All rulemaking 
activity, including public comments, as well as educational material 
regarding the MMA, can currently be accessed via navigation from 
https://www.copyright.gov/music-modernization. Comments received in 
response to the September 2019 notification of inquiry are available 
at https://www.regulations.gov/docket?D=COLC-2019-0002, comments 
received in response to the NPRM and supplemental notice of proposed 
rulemaking (``SNPRM'') are available at https://www.regulations.gov/docket?D=COLC-2020-0011. Guidelines for ex parte communications, 
along with records of such communications, are available at https://www.copyright.gov/rulemaking/mma-implementation/ex-parte-communications.html. References to these comments are by party name 
(abbreviated where appropriate), followed by ``Initial NOI 
Comment,'' ``Reply NOI Comment,'' ``NPRM Comment,'' ``SNPRM 
Comment,'' or ``Ex Parte Letter,'' as appropriate.
    \25\ See MLC NPRM Comment at 1 (``The Proposed Regulation 
considers the aims and goals of the MMA in creating the new 
mechanical licensing system, and works to empower the MLC to improve 
the matching of DMP usage to musical works and the owners thereof 
and thereby reduce unmatched and unclaimed royalties. The MLC agrees 
with the bulk of the language in the Proposed Regulation.'').
    \26\ See DLC NPRM Comment at 2-3.
    \27\ See, e.g., Artist Rights Alliance (``ARA''), Music Artists 
Coal. (``MAC''), Nashville Songwriters Ass'n Int'l (``NSAI''), 
Google Ex Parte Letter (Oct. 23, 2020); MediaNet Ex Parte Letter 
(Oct. 28, 2020); MLC Ex Parte Letter (Oct. 16, 2020); Nat'l Music 
Publishers' Ass'n (``NMPA'') Ex Parte Letter (Nov. 3, 2020); 
Recording Acad. & Songwriters of N. Am. (``SONA'') Ex Parte Letter 
(Sept. 22, 2020); DLC Ex Parte Letter (Oct. 14, 2020); Songwriters 
Guild of Am. (``SGA''), Soc'y of Composers & Lyricists (``SCL''), 
All. for Women Film Composers (``AWFC'') & Music Creators N. Am. 
(``MCNA'') Ex Parte Letter (Sept. 15, 2020); SATV Music Publ'g 
(``SATV'') Ex Parte Letter (Oct. 28, 2020); Spotify Ex Parte Letter 
(Oct. 9, 2020); Universal Music Publ'g Grp. (``UMPG'') Ex Parte 
Letter (Oct. 30, 2020); Warner Music Grp. (``WMG'') Ex Parte Letter 
(Oct. 21, 2020).
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    In November 2020, the Office issued an SNPRM after determining that 
the public process would benefit from soliciting comments on 
alternative regulatory language to ensure that further views could be 
duly considered on the issues raised in the proceeding.\28\ The Office 
noted that the SNPRM resulted from then-received public comments, a 
letter from Senate Judiciary Committee Chairman Lindsey O. Graham 
specifically raising the issue of pre-MMA agreements between DMPs and 
music publishers and the payment of unclaimed accrued royalties, and 
the D.C. Circuit's partial vacatur and remand of the Copyright Royalty 
Judges' (``CRJs'') Phonorecords III determination.\29\ The Office 
explained that although it had not reached any final conclusions, it 
was issuing the SNPRM to provide interested parties with adequate 
notice and opportunity to comment in advance of the February 2021 
deadline for DMPs to be able to submit cumulative statements of account 
to the MLC.
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    \28\ 85 FR 70544, 70546 (Nov. 5, 2020) (``SNPRM'').
    \29\ Id. at 70545-46; Letter from Senator Lindsey O. Graham, 
Chairman, Senate Committee on the Judiciary, to U.S. Copyright 
Office 1 (Sept. 30, 2020); Johnson v. Copyright Royalty Bd., 969 
F.3d 363 (D.C. Cir. 2020).
---------------------------------------------------------------------------

    The SNPRM presented two main potential modifications to the NPRM. 
First, to address the DLC's comments, the requirements governing 
reporting of sound recording and musical work information would more 
closely track existing regulations, with an added requirement that DMPs 
report certain additional information if requested by the MLC.\30\ 
Second, the circumstances under which a DMP may estimate and adjust the 
computation of its accrued royalties would be expanded where such 
computation depends upon an input that is unable to be finally 
determined at the time the cumulative statement of account is due.\31\ 
In response to the SNPRM, the MLC and DLC largely reached consensus on 
the data reporting issue, except with respect to partially matched 
works.\32\ On the second issue, the MLC and DLC both supported the 
SNPRM's approach to more closely track the December 2018 interim rule 
on estimates and adjustments adopted for reports of usage

[[Page 2178]]

under the blanket license.\33\ They disagreed, however, on the SNPRM's 
proposed approach to address reporting with respect to any applicable 
pre-MMA agreements. The DLC supported the SNPRM's approach \34\ while 
the MLC did not,\35\ and songwriter groups were split.\36\
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    \30\ SNPRM at 70547.
    \31\ Id. at 70546-47.
    \32\ See DLC SNPRM Comment at 12-13; MLC SNPRM Comment at 15-17; 
DLC & MLC Ex Parte Letter (Dec. 9, 2020).
    \33\ See DLC SNPRM Comment at 2; MLC SNPRM Comment at 13-14, 
App. A at v, ix-x.
    \34\ See DLC SNPRM Comment at 1-12.
    \35\ See MLC SNPRM Comment at 2-13.
    \36\ See ARA, Future of Music Coal. (``FMC'') & MusicAnswers 
SNPRM Comment at 2-4 (supporting); MAC, Recording Acad. & SONA SNPRM 
Comment at 2-3 (opposing); SGA, SCL & MCNA SNPRM Comment at 5-6 
(declining ``to speak directly in these Comments regarding the 
USCO's proposed Supplemental USCO Rules'' due to underlying concerns 
with DMP and publisher transparency surrounding pre-MMA agreements).
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    At Chairman Graham's request, the Office also convened a joint 
meeting to discuss their views on the treatment of certain pre-MMA 
agreements in connection with the limitation on liability requirements. 
Although it became clear that no significant consensus had emerged, the 
Office found it helpful for the parties to engage with each other 
directly, and believes that the record has benefited from the input of 
a variety of perspectives, each of which the Office has carefully 
considered in moving forward with a rule regarding cumulative 
statements consistent with the MMA's statutory deadline.\37\
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    \37\ See Letter from Senator Lindsey O. Graham, Chairman, Senate 
Committee on the Judiciary, to U.S. Copyright Office 1 (Sept. 30, 
2020).
---------------------------------------------------------------------------

    Having reviewed and considered all relevant comments received in 
response to the notification of inquiry, NPRM, and SNPRM, including 
through a number of permitted ex parte communications as detailed under 
the Office's procedures, the Office has weighed the legal, business, 
and practical implications and equities that have been raised. Pursuant 
to its authority under 17 U.S.C. 115 and 702, it is adopting final 
regulations with respect to DMP obligations to transfer and report 
accrued royalties for unmatched musical works (or shares) to the MLC 
for purposes of eligibility for the MMA's limitation on liability for 
prior unlicensed uses, which it believes best reflect the statutory 
language and its animating goals in light of the rulemaking's 
record.\38\ In doing so, the Office has exercised its ``broad 
regulatory authority'' and ``use[d] its best judgement in determining 
the appropriate steps'' as Congress directed.\39\
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    \38\ See H.R. Rep. No. 115-651, at 14; S. Rep. No. 115-339, at 
15; Conf. Rep. at 12 (``The Copyright Office has the knowledge and 
expertise regarding music licensing through its past rulemakings and 
recent assistance to the Committee[s] during the drafting of this 
legislation.''); 17 U.S.C. 115(d)(12)(A) (``The Register of 
Copyrights may conduct such proceedings and adopt such regulations 
as may be necessary or appropriate to effectuate the provisions of 
this subsection.''); Alliance of Artists & Recording Cos. v. DENSO 
Int'l Am., Inc., 947 F.3d 849, 863 (D.C. Cir. 2020) (``[T]he best 
evidence of a law's purpose is the statutory text, and most 
certainly when that text is the result of carefully negotiated 
compromise among the stakeholders who will be directly affected by 
the legislation.'') (internal quotation marks, brackets, and 
citations omitted); 84 FR at 49967-68.
    \39\ H.R. Rep. No. 115-651, at 5-6, 14; S. Rep. No. 115-339, at 
5, 15; Conf. Rep. at 4, 12 (acknowledging that ``it is to be 
expected that situations will arise that were not contemplated by 
the legislation,'' and that ``[t]he Office is expected to use its 
best judgement in determining the appropriate steps in those 
situations''); see 17 U.S.C. 115(d)(12)(A); Nat'l Cable & Telecomms. 
Ass'n v. Brand X internet Servs., 545 U.S. 967, 980 (2005) 
(``[A]mbiguities in the statutes within an agency's jurisdiction to 
administer are delegations of authority to the agency to fill the 
statutory gap in reasonable fashion.'') (citing Chevron, U.S.A., 
Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)).
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II. Final Rule

    Several aspects of the proposed rule were not opposed. Where 
parties objected to other aspects of the proposed rule, the Office has 
considered those comments and resolved the issues as discussed below. 
If not otherwise discussed, the Office has concluded that the relevant 
proposed provision should be adopted as final for the reasons stated in 
the NPRM (though in some such cases, the adopted language reflects 
minor technical edits). In promulgating this rule, the Office has 
endeavored to ensure that the MLC receives the information and 
royalties it needs to fulfill its statutory duties, that copyright 
owners and songwriters are accurately paid any royalties they are owed, 
and that DMPs can realistically and practicably obtain the limitation 
on liability by complying with the statutory requirements.

A. Cumulative Statements of Account Content and Format

    This section of the preamble discusses the final rule's content and 
format requirements for cumulative statements of account delivered to 
the MLC, except with respect to requirements connected to the reliance 
upon estimates, adjustments, and reconciliation of statements, which 
are addressed below.
1. Sound Recording and Musical Work Information
    The NPRM proposed requiring DMPs to provide additional information 
concerning sound recording and musical work metadata beyond what is 
required by existing regulations governing cumulative statements of 
account.\40\ The proposed requirements largely mirrored the content 
requirements the Office had proposed in a parallel rulemaking (and has 
recently adopted) for monthly reports of usage under the blanket 
license.\41\ This general approach was recommended by the MLC but 
disfavored by the DLC, which called it ``impractical'' and explained 
that ``digital music providers have maintained usage information . . . 
with the existing statement of account regulations in mind.'' \42\
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    \40\ NPRM at 43519; see 37 CFR 210.20.
    \41\ NPRM at 43519; the interim rule regarding monthly reports 
of usage was published in 85 FR 58114 (Sept. 17, 2020).
    \42\ NPRM at 43519 (quoting DLC NPRM Reply at 24).
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    The Office sought to address the DLC's concerns by including a 
practicability standard: DMPs would only be required to report 
information that would not have been reported to copyright owners in 
monthly statements of account, ``to the extent practicable.'' \43\ In 
response, the DLC ``emphatically opposed'' the NPRM, and described the 
requirement to report additional information as ``impossible,'' 
explaining that some of the information had not been collected by DMPs 
in the past and could not be collected in time to include in cumulative 
statements of account.\44\ The DLC further stated that the addition of 
a ``practicability'' standard did not alleviate its concerns, and 
implied that the reporting requirement as proposed might cause DMPs to 
forgo taking advantage of the limitation on liability.\45\
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    \43\ Id. at 43525.
    \44\ DLC NPRM Comment at Add. 21; DLC Ex Parte Letter at 2 (Aug. 
11, 2020).
    \45\ DLC NPRM Comment at 8 (``This uncertainty and ambiguity 
undermines the central bargain of the statute by eroding DMPs' 
confidence in their ability to rely on the limitation on liability, 
thus decreasing their incentive to pay accrued royalties to the MLC 
if they cannot provide certain data included in the new rules.''); 
see also DiMA NPRM Comment at 6-7 (saying the NPRM's reporting 
amendments would create ``massive operational hurdles'' and would 
``jeopardize[ ] every [DMP's] eligibility for the limitation on 
liability'').
---------------------------------------------------------------------------

    The SNPRM sought additional comments on this issue, stating the 
Office was considering adopting alternative language ``to reflect the 
DLC's comments and incentivize optional participation in th[e] 
transition period reporting for cumulative statements of account.'' 
\46\ The Office proposed a baseline reporting requirement for sound 
recording and musical work information that was closer to the existing 
requirements for transition period cumulative statements of account, 
but added a requirement that DMPs additionally ``report information

[[Page 2179]]

referenced in 17 U.S.C. 115(d)(10)(B)(i)(I)(aa) or (bb) that was 
acquired by the DMP in connection with its efforts to obtain such 
information under 17 U.S.C. 115(d)(10)(B)(i)(I), or a DMP-assigned 
identifier, if such information is requested by the MLC.'' \47\ It 
sought comment on the feasibility and adequacy of this proposal or 
whether, as an alternative to DMPs providing such information upon the 
MLC's request, the regulations should require submission of such 
supplementary information by a set date.\48\ The Office encouraged 
``continued dialogue between the MLC and DLC as to this aspect of the 
reporting regulations, as well as submission of any joint proposals 
that may result from discussions.'' \49\
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    \46\ SNPRM at 70547.
    \47\ Id.; see also 17 U.S.C. 115(d)(10)(B)(i)(I)(aa) (``Sound 
recording name, featured artist, sound recording copyright owner, 
producer, international standard recording code, and other 
information commonly used in the industry to identify sound 
recordings and match them to the musical works they embody.''); id. 
at 115(d)(10)(B)(i)(I)(bb) (``Any available musical work ownership 
information, including each songwriter and publisher name, 
percentage ownership share, and international standard musical work 
code.'').
    \48\ SNPRM at 70547.
    \49\ Id.
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    The MLC and DLC did engage in continued discussions on this issue, 
which proved fruitful. In a December 2020 ex parte meeting, the 
organizations reported that they had reached agreement ``on an 
operational framework that ensures the MLC obtains all reasonably 
available metadata for unmatched works via a simplified format that DLC 
members are well-prepared to operationalize,'' along with proposed 
regulatory language.\50\ Their proposal would require DMPs to provide 
to the MLC by February 2021 a cumulative statement of account 
``containing all metadata information that would have been delivered to 
copyright owners under the pre-MMA monthly statements of account,'' 
similar to the present transition period requirement for cumulative 
statement of account.\51\ DMPs would also be required to submit a 
supplemental metadata report to the MLC by June 15, 2021 containing 
``(1) available and up-to-date track-level metadata that has been 
obtained by the services and (2) in the event copyright owners of 
partial shares of particular works were identified and paid, 
information regarding those paid parties and the amounts that were 
paid.'' \52\ The cumulative statement of account would also contain 
both a DMP-provided track identifier and a unique identifier for each 
individual ``usage'' line that the MLC will use to index to the later-
delivered supplemental metadata report.\53\
---------------------------------------------------------------------------

    \50\ DLC & MLC Ex Parte Letter at 1 (Dec. 9, 2020).
    \51\ Id.
    \52\ Id. at 2. The MLC and DLC's proposed regulations do not 
require reporting of publisher or copyright owner information in the 
supplemental metadata report. This absence makes sense given that 
the data applies to unmatched royalties. Reporting requirements for 
partially matched tracks are discussed below.
    \53\ Id. The Office presumes that the DLC's support of this 
joint proposal moots any concerns it voiced regarding the NPRM.
---------------------------------------------------------------------------

    The Office appreciates the cooperative efforts of the MLC and DLC 
in crafting this joint proposal and generally agrees with their 
approach and list of information to be reported. The Office believes 
the proposal constitutes a reasonable approach that provides legal 
certainty and effectuates the intent of the MMA in light of the 
operational realities DMPs face at this time.\54\ The supplemental 
metadata provided by DMPs beyond what they are required to report under 
existing cumulative statement of account regulations should benefit the 
MLC in executing its matching duties, and the inclusion of a unique 
identifier will further enable the MLC to link data received through 
usage reports and the supplemental metadata report with sound recording 
and musical work information it receives in cumulative statements of 
account. At the same time, this pragmatic approach mitigates the risk 
that DMPs would forgo the statutory limitation on liability, which 
would ultimately harm songwriters, copyright owners, and DMPs by 
incentivizing continued litigation.
---------------------------------------------------------------------------

    \54\ In an ex parte meeting subsequent to the publication of the 
DLC & MLC joint proposal, Music Reports (a vendor of various DMPs) 
raised concerns regarding the introduction of new reporting 
requirements for cumulative statements of account so close to the 
required delivery date. Music Reports Ex Parte Letter at 2 (Dec. 15, 
2020). While the Office does not discount the validity of these 
concerns, it notes that it is the DMPs, not Music Reports, who bear 
the risk, since they are subject to this requirement to maintain the 
statutory limitation on liability. Given that the DLC, which 
represents DMP interests, believes the reporting requirements are 
appropriate, the Office declines to deviate from the proposal.
---------------------------------------------------------------------------

    The joint proposal provides that ``failure to deliver the 
supplemental metadata report would not result in the loss of limitation 
of liability or the blanket license.'' \55\ The MLC and DLC 
additionally propose that the MLC could enforce the supplemental 
metadata report delivery requirement by bringing an action in federal 
court against a DMP for ``injunctive relief requiring delivery of that 
report, plus costs and attorney's fees and, potentially, a penalty on 
the amount of accrued royalties paid to the MLC.'' \56\ During the ex 
parte meeting, the Office asked the MLC and DLC about the Office's 
authority to adopt language prescribing these enforcement remedies.\57\ 
The MLC and DLC responded that they believed the Office's general 
regulatory authority under section 115(d) was broad enough to cover 
this enforcement mechanism.\58\ They explained that the proposal ``is 
intended to fill a gap in the statutory scheme,'' saying that while the 
statute requires collection of such metadata by DMPs, it does not 
explicitly require delivery of the metadata to the MLC.\59\
---------------------------------------------------------------------------

    \55\ DLC & MLC Ex Parte Letter at 2 (Dec. 9, 2020).
    \56\ Id. The proposed language states, inter alia, that in the 
event injunctive relief is granted, ``the court shall award, 
notwithstanding anything to the contrary in section 505, reasonable 
attorney's fees and costs, as well as such other relief as the court 
determines appropriate,'' or, in the event the court finds that the 
DMP acted unreasonably or in bad faith, ``damages in the amount of 
1.5% per month on the amount of royalties transferred pursuant to 
subsection (b)(3)(i), or the highest lawful rate, whichever is 
lower, for the period from June 15, 2021 until the supplemental 
metadata report is provided to the mechanical licensing 
collective.'' Id. at 10.
    \57\ Id. at 3.
    \58\ Id.
    \59\ Id.
---------------------------------------------------------------------------

    The Office agrees with the MLC and DLC that failure to provide the 
additional metadata should not result in loss of the limitation on 
liability or default of the blanket license.\60\ This result is 
consistent with the statute, which premises the limitation on liability 
on a requirement to report only ``all of the information that would 
have been provided to the copyright owner had the digital music 
provider been providing monthly statements of account to the copyright 
owner from initial use of the work in accordance with this section and 
applicable regulations.'' \61\
---------------------------------------------------------------------------

    \60\ Id. at 2-3 (``As an initial matter, DLC and MLC agree that 
loss of the limitation of liability or the blanket license would be 
an inappropriate means of enforcing the format and supplemental 
metadata report requirements proposed herein.'').
    \61\ 17 U.S.C. 115(d)(10)(B)(iv)(II)(aa).
---------------------------------------------------------------------------

    The Office declines, however, to adopt the enforcement mechanism 
provisions proposed by the MLC and DLC. The Office has accommodated 
concerns regarding a gap in the statute by requiring, via regulation, 
that DMPs report the requested supplemental metadata. Multiple reasons 
compel the Office not to prescribe penalties for noncompliance to a 
federal court (which would also construct an entirely new monetary 
damages scheme for the MLC to administer). First, the timing of the 
proposal came too late in the rulemaking process to provide adequate 
notice to other potentially interested parties. Second, the 
establishment of such a penalty provision via regulations would be a 
significant departure from

[[Page 2180]]

historical practice: The Office is not aware of analogous provisions 
elsewhere in its regulations. Finally, the Office notes that multiple 
provisions in the MMA provide that a ``district court shall determine 
the matter de novo.'' \62\ The statute provides the MLC with the 
authority to enforce rights and obligations, including regulatory 
obligations, through the courts, which are well-positioned to determine 
appropriate remedies. The MLC and DLC also requested that, ``if the 
Office is disinclined to adopt the particular enforcement mechanisms 
proposed herein, . . . [it] revert to the MLC and DLC for discussion of 
potential alternatives.'' \63\ In light of the advanced stage of this 
process and fast-approaching statutory deadline, however, the Office 
declines further discussion.\64\
---------------------------------------------------------------------------

    \62\ E.g., id. at 115(d)(2)(A)(v) (improper rejection of notice 
of license); id. at 115(d)(4)(E)(iv) (improper termination of 
blanket license).
    \63\ Id. at 115(d)(3)(C)(i)(VIII); DLC & MLC Ex Parte Letter at 
3 (Dec. 9, 2020).
    \64\ The SNPRM itself was the latest formal call for public 
comment on an issue that has been open to public comment through 
various mechanisms since December 2018. See 83 FR 63061 (interim 
rule); see also 84 FR 49966 (notification of inquiry); NPRM; SNPRM.
---------------------------------------------------------------------------

2. Partially Matched and Paid Works
    Next, the Office addresses conflicting proposals from the MLC and 
DLC regarding the level of information that must be provided with 
respect to partially matched musical works. As discussed in the NPRM, 
the MLC initially requested that cumulative statements of account 
include information about matched shares of a musical work where 
unmatched shares for the work are reported, it expressed the concern 
that if a DMP paid one copyright owner its royalty share and held 
accrued royalties for any remaining unmatched share(s), then upon 
transfer of such unmatched royalties, if the paid share is not properly 
identified, the a paid co-owner might be able to collect a portion of 
an unpaid co-owner's share.\65\
---------------------------------------------------------------------------

    \65\ NPRM at 43521; see MLC Reply NOI Comment App. D at 19; MLC 
Ex Parte Letter at 3 (June 17, 2020) (giving the example of an 
identified 50% co-owner being paid their 50% share by a DMP, and 
then subsequently being paid half of the remaining share by the MLC 
due to lack of record of the first payment; stating that ``reporting 
on partially-matched works and the respective shares that the DMP 
already paid is essential to allow the MLC to properly credit share 
owners who have been paid and avoid double payments'').
---------------------------------------------------------------------------

    The NPRM noted that the DLC did not appear to disagree with the 
MLC's description of the issue, but had suggested that DMPs' third-
party vendors, who it said are subject to ``strict contractual 
confidentiality restrictions,'' may have this information and not the 
DMPs themselves.\66\ The DLC asked that the Office ``account for these 
[confidentiality] restrictions and protect digital music providers from 
any liability related to their breach.'' \67\ In response, the MLC 
offered to amend its proposal to limit share reporting ``to the share 
percentage and the owner of the share that was paid, [and] omit[ ] the 
precise amount of royalties paid under the voluntary license terms,'' 
presuming that the DLC's confidentiality concern ``relates to the 
amounts of royalties paid under voluntary licenses.'' \68\
---------------------------------------------------------------------------

    \66\ NPRM at 43521; see DLC Reply NOI Comment at 25.
    \67\ DLC Reply NOI Comment at 25.
    \68\ MLC Ex Parte Letter at 4 (June 17, 2020).
---------------------------------------------------------------------------

    The NPRM largely adopted the MLC's amended proposal, stating that 
for each track for which a share of a musical work has been matched and 
for which accrued royalties for that share have been paid, but for 
which one or more shares remains unmatched and unpaid, the DMP must 
provide a clear identification of the share(s) that have been matched, 
the owner(s) of such matched shares, and, for shares other than those 
paid pursuant to a voluntary license, the amount of the accrued 
royalties paid.\69\ The Office tentatively concluded that the MLC's 
proposal was reasonable in light of the statutory function of 
cumulative statements of account, noting that the situation the MLC 
anticipated seems likely to occur and that having the matched share 
information will be important.\70\
---------------------------------------------------------------------------

    \69\ NPRM at 43525.
    \70\ Id. at 43521.
---------------------------------------------------------------------------

    In response, the MLC generally agreed with the NPRM's proposal but 
asked for two clarifications: \71\ First, that the identification of 
the matched share(s) explicitly be of the ``percentage'' share(s); \72\ 
and second, that unique party identifiers known by the DMP be provided 
for the owner(s) of the matched shares being reported, as they ``are 
very valuable for efficiency and accuracy.'' \73\ The Office agreed 
that having these identifiers will be helpful to the MLC in processing 
cumulative statements and proposed these clarifications as part of the 
SNPRM.\74\ Having received no comments in opposition, the Office 
incorporates these changes into the final rule.
---------------------------------------------------------------------------

    \71\ MLC NPRM Comment at 6.
    \72\ Id. at 6, App. A at v.
    \73\ Id. at 6-7, App. A at v-vi.
    \74\ See SNPRM at 70550.
---------------------------------------------------------------------------

    The DLC's response to the NPRM confirmed its agreement that the 
treatment of partially matched works is ``a legitimate issue that needs 
to be resolved.'' \75\ It noted that it ``support[s] providing 
information regarding partially matched works to ensure that the 
appropriate copyright owners are paid,'' but only ``as long as [DMPs] 
that do not have that information because of confidentiality 
restrictions in contracts with third-party vendors are not required to 
provide it in order to claim the benefits of the MMA's limitation on 
liability.'' \76\ The DLC expanded on its vendor-related concerns, 
claiming that one such vendor, Music Reports, ``has notified its client 
DMPs that it is unwilling to share any musical work ownership share 
information with the MLC or the DMPs, as it regards that information to 
be proprietary.'' \77\ The DLC expressed concern that other vendors 
could take a similar position.\78\ The DLC additionally stated that 
``there is also an issue related to voluntary licenses, in that the 
information that publishers provide about their share splits are 
subject to their own confidentiality restrictions.'' \79\ The DLC 
ultimately proposed that DMPs provide, on a per-track basis, a clear 
identification of the total aggregate percentage share that has been 
matched and the owner(s) of that share, without identifying the 
specific shares owned by each owner or the actual amount paid (which, 
the DLC argued, would be unnecessary and potentially problematic). It 
proposed that this requirement would be further subject to the 
limitation that if the information is maintained by a third-party 
vendor that the information is made available to the DMP on 
commercially reasonable and non-discriminatory terms.\80\
---------------------------------------------------------------------------

    \75\ DLC NPRM Comment at 6.
    \76\ Id. at 2.
    \77\ Id. at 6.
    \78\ Id.
    \79\ Id. at 7 n.15.
    \80\ DLC Ex Parte Letter at 5, 14-15 (Oct. 14, 2020); see DLC 
NPRM Comment at 7.
---------------------------------------------------------------------------

    In response to the DLC's assertions, Music Reports informed the 
Office that it ``has never said it will not release information about 
partially matched works--only that such data has independent commercial 
value given the twenty-five years of effort the company has invested in 
curating that data.'' \81\ Despite initial speculation, the DLC has not 
informed the Office of any other vendors who have expressed an

[[Page 2181]]

unwillingness to provide share information.
---------------------------------------------------------------------------

    \81\ Music Reports Ex Parte Letter at 2 (Sept. 29, 2020) (``We 
are currently working with our clients to understand and support 
their needs, on commercially reasonable terms, with respect to these 
needs. . . .''); see DLC Ex Parte Letter at 5 (Oct. 14, 2020) 
(``Music Reports, Inc., has recently expressed willingness to 
provide this information to the MLC on behalf of its clients, 
although the commercial terms are still being discussed, and any 
regulatory provision here should ensure that vendors are not given 
undue bargaining power.'').
---------------------------------------------------------------------------

    The MLC objected to the DLC's proposal, stating that it ``would not 
provide the MLC with adequate information to ensure proper payment 
allocation.'' \82\ The MLC disputed that copyright owner splits are 
subject to publisher confidentiality restrictions, noting that 
``[c]opyright owners will be providing their claimed splits to the MLC 
to receive royalty distributions and the MMA directs that such splits 
be included in the MLC's public database.'' \83\ The MLC further stated 
that ``the logical conclusion of the DLC's argument is that it could 
not report any partially-paid royalty information where there was only 
one partially-paid copyright owner, since the aggregate percentage paid 
would of course reveal the percentage of the single copyright owner 
that was paid.'' \84\
---------------------------------------------------------------------------

    \82\ MLC Ex Parte Letter at 6 (Oct. 5, 2020).
    \83\ Id.
    \84\ Id.
---------------------------------------------------------------------------

    The DLC countered that, with respect to the issue of ``some 
copyright owners regard[ing] the splits of musical works they control 
as confidential,'' ``the MLC is not a party to these agreements, and 
does not purport to represent any parties to these agreements,'' and 
that ``there is no reason that the MLC would need detailed matched 
share information in order to find the owners of unmatched shares.'' 
\85\ As with requirements to report certain sound recording and musical 
work information discussed above, the DLC also asserted that split 
information should be included in a supplemental report provided to the 
MLC at some point in time after the cumulative statement of account and 
that such reporting should not be tied to eligibility for the 
limitation on liability.\86\
---------------------------------------------------------------------------

    \85\ DLC Ex Parte Letter at 5 n.9 (Oct. 14, 2020).
    \86\ DLC Ex Parte Letter at 2 (Nov. 10, 2020) (``[T]here are 
significant operational and commercial obstacles to producing and 
submitting the reports by February 15.'').
---------------------------------------------------------------------------

    To obtain additional public input, the SNPRM noticed an alternative 
approach that more closely resembled the DLC's proposal than the MLC's 
proposal, which had been largely embodied in the NPRM. The SNPRM 
proposed that DMPs provide ``a clear identification of the total 
aggregate percentage share that has been matched and paid and the 
owner(s) of the aggregate matched and paid share (including any unique 
party identifiers for such known owner(s)), so long as, in the event 
such information is maintained by a third-party vendor, that 
information is made available to the digital music provider on 
commercially reasonable terms.'' \87\ The SNPRM was informed by the 
DLC's explanation that the MLC did not necessarily need payment amounts 
and non-aggregated splits to perform its duties, and concern about DMPs 
potentially losing eligibility for the limitation on liability in the 
event of a legitimate inability to provide this information. The SNPRM 
did not include the DLC's proposal about third-party vendor terms 
needing to be ``non-discriminatory,'' as a vendor may well have 
commercially reasonable reasons for not treating differently situated 
DMPs the same.
---------------------------------------------------------------------------

    \87\ SNPRM at 70550.
---------------------------------------------------------------------------

    The DLC fully supported the SNPRM's proposed provision,\88\ as did 
Music Reports, which said it ``nicely draws a difficult line.'' \89\ 
The MLC, however, expressed concern, stating that ``the reporting of 
only aggregate share information would make it impossible for the MLC 
to determine with confidence what partial payments have been made, 
where multiple shares have been paid.'' \90\ The MLC provided an 
example to illustrate:
---------------------------------------------------------------------------

    \88\ DLC SNPRM Comment at 13 n.35.
    \89\ Music Reports SNPRM Comment at 1.
    \90\ MLC SNPRM Comment at 16.

[I]f a DMP reports on a partial match only that Publishers A and B 
were paid an aggregate 75%, and the MLC's records show Publisher A 
owning 50% and Publisher B owning 50%, how can the MLC possibly 
determine how to fairly allocate the remaining 25% between Publisher 
A and B? The MLC needs the breakdown that Publisher A received 50% 
and Publisher B received 25%, instead of merely the aggregated 75% 
payment, in order to properly allocate the remaining royalties.\91\
---------------------------------------------------------------------------

    \91\ Id.

The MLC also reiterated its previous argument that the DLC's position 
on confidentiality restrictions is ``illogical'' because ``[t]he DLC 
has no objection to reporting `aggregate' shares paid when there has 
been only one share paid, which is of course equivalent to reporting 
the individual share paid.'' \92\
---------------------------------------------------------------------------

    \92\ Id. at 15-16 (``[I]t is not conceivable that there exists a 
reasonable restriction on disclosing individual shares that only 
applies when multiple shares are being disclosed together.'').
---------------------------------------------------------------------------

    With respect to the SNPRM's proposal to excuse reporting where the 
information is maintained by a third-party vendor and not made 
available to the DMP on commercially reasonable terms, the MLC agreed 
that ``[i]f there truly was a situation where a digital music provider 
was somehow legally and commercially unable to obtain its own 
historical royalty payment information, then the rule could accommodate 
this,'' but contended that because the information is ``so critical to 
ensuring that royalties are paid to the correct parties,'' the 
exception should be stricter.\93\ The MLC proposed the following 
conditions: (1) The information is maintained only by a third-party 
vendor; (2) the DMP does not have any contractual or other rights to 
access the information; (3) the DMP is unable to compile the 
information from records in its possession; and (4) the vendor refuses 
to make the information available to the DMP on commercially reasonable 
terms.\94\ The MLC further proposed that a DMP relying on the exception 
must provide the MLC with a certification, under penalty of perjury, 
that the conditions apply, and include a description of any terms on 
which the vendor offered to provide access to the information.\95\
---------------------------------------------------------------------------

    \93\ Id. at 16.
    \94\ Id. App. A at xiii.
    \95\ Id.
---------------------------------------------------------------------------

    Although the MLC and DLC continued to disagree about what should be 
reported, they agreed that the reporting itself should be contained in 
a supplemental report separate from the cumulative statement of account 
and delivered to the MLC by June 15, 2021, rather than by February 
2021; they also agreed, as discussed above, that the supplemental 
report should not be a condition of the limitation on liability or the 
blanket license.\96\
---------------------------------------------------------------------------

    \96\ DLC SNPRM Comment at 12-13, 13 n.35; MLC SNPRM Comment at 
15; DLC & MLC Ex Parte Letter at 2, Add. A (Dec. 9, 2020).
---------------------------------------------------------------------------

    Having considered this issue, the Office agrees with aspects of 
both the MLC's and DLC's respective positions and has adopted a final 
rule that is essentially a hybrid approach. The Office is persuaded by 
the MLC's new example that there are at least some plausible situations 
where non-aggregated share information will need to be known.\97\ At 
the same time, while the Office is not in a position to opine on the 
legitimacy of asserted confidentiality concerns, it declines to issue a 
rule that may interfere with alleged confidentiality restrictions that 
may exist. And as the MLC agrees, to the extent there is a legitimate 
inability to report the information, the rule should accommodate 
it.\98\
---------------------------------------------------------------------------

    \97\ While the DLC asserted that this scenario ``is not one that 
tends to occur in reality,'' it did not dispute the possibility that 
it could arise or that the MLC would need non-aggregated information 
in such cases, even if they are relatively rare. DLC Ex Parte Letter 
at 3 (Dec. 11, 2020).
    \98\ See MLC SNPRM Comment at 16.
---------------------------------------------------------------------------

    Consequently, the adopted rule requires a DMP to provide a clear 
identification of the percentage share(s) that have been matched and 
paid and the owner(s) of such matched and paid share(s). If this 
information cannot be

[[Page 2182]]

reported for a particular track because it is subject to a contractual 
confidentiality restriction, the DMP, for each such track, must certify 
to the confidentiality restriction and instead provide a clear 
identification of the total aggregate percentage share that has been 
matched and paid and the owner(s) of the aggregate matched and paid 
share. Both scenarios are subject to the SNPRM's proposed exception for 
vendor-held information, which the Office agrees should be made 
stricter, along the lines of the MLC's proposal. Subject to a slight 
modification, the MLC's four proposed conditions are reasonably focused 
to ensure that the exception only applies where there is a legitimate 
issue without foreclosing practical reliance on the exception. The 
final rule adjusts the proposed third condition to limit it to where 
the DMP cannot compile the information using commercially reasonable 
efforts within the required reporting timeframe. A DMP relying on the 
exception must certify that the conditions apply, but the Office 
disagrees that it is necessary to provide the MLC with a description of 
any terms on which the vendor offered to provide access to the 
information. The certification is adequate.
    The Office also agrees with the MLC and DLC that it is sufficient 
for partially matched work information to be delivered to the MLC in a 
subsequent supplemental report by June 15, 2021, and that delivery of 
this supplemental report should not be a condition of the limitation on 
liability. This is reflected in the final rule.
3. Format
    The final rule includes adjusted language regarding the formatting 
of cumulative statements that may be submitted to the MLC. To 
facilitate efficient and accurate reporting and processing of 
cumulative statements of account, as supported by the MLC, the NPRM 
proposed carrying over the existing provision reports of usage format, 
which requires delivery to the MLC in a machine-readable format that is 
compatible with its information technology systems, as reasonably 
determined by the MLC and taking into consideration relevant industry 
standards.\99\
---------------------------------------------------------------------------

    \99\ NPRM at 43520; see MLC NPRM Comment at 2 (supporting the 
proposed format provision).
---------------------------------------------------------------------------

    The DLC expressed concern with this provision, asserting that ``the 
records at issue are very old in many instances, and therefore reflect 
the formats of their time,'' and that, for at least some DMPs, ``it 
would be impossible to produce historical records in the DDEX standard 
that the MLC has indicated it will use for these purposes.'' \100\ 
(Elsewhere in the record, this DDEX standard is disclosed as DSRF.) 
\101\ The DLC further stated that ``the alternative to a DDEX report--a 
so-called `flat file' spreadsheet--is smaller and more manageable,'' is 
something ``DMPs generally use,'' and ``can be converted by the MLC 
into a uniform format with some simple computer programming.'' \102\ 
The DLC also said that ``while there are many DMPs, there are not many 
different formats (even within flat files),'' so the MLC ``will not be 
significantly burdened by the DMPs' use of formats that are not 100% 
consistent.'' \103\ The DLC also proposed including a qualification 
that compliance with format requirements be conditioned ``[t]o the 
extent practicable'' to ``allow some flexibility to [DMPs], which is 
particularly necessary given the relatively short amount of time left 
to produce the required report.'' \104\
---------------------------------------------------------------------------

    \100\ DLC Ex Parte Letter at 3 (Aug. 27, 2020); see also DiMA 
NPRM Comment at 6; DLC NPRM Comment at 10. Music Reports takes issue 
with the DLC's further assertion that ``[t]he vendors who maintain 
[historical records of use] are also unlikely to be familiar with 
DDEX,'' stating that, at least with respect to Music Reports, this 
is ``inaccurate.'' Music Reports Ex Parte Letter at 2 (Sept. 29, 
2020) (alterations in original) (quoting DLC Ex Parte Letter at 3 
n.6 (Aug. 27, 2020)).
    \101\ See, e.g., MLC Ex Parte Letter at 3 (June 17, 2020) 
(noting the MLC will employ the DDEX DSRF format for reports of 
usage); see generally DDEX, DSRF Royalty Reporting Profile, https://kb.ddex.net/display/3mil/DSRF+Royalty+Reporting+Profile (last 
visited Dec. 20, 2020).
    \102\ DLC Ex Parte Letter at 3 (Aug. 27, 2020).
    \103\ Id.
    \104\ DLC NPRM Comment at 10, Add. 23.
---------------------------------------------------------------------------

    While noting the DLC's concerns, Music Reports, a major DMP vendor, 
said that using the MLC's initially intended DDEX format will not be a 
problem and ``all of Music Reports' current clients are certainly 
capable of reporting to the MLC in DDEX format, because Music Reports 
has stored their historical records of use and is capable of 
transcoding these into the MLC's required DSRF format when necessary.'' 
\105\
---------------------------------------------------------------------------

    \105\ Music Reports Ex Parte Letter at 2 (Sept. 29, 2020) 
(``[W]e are in communication with the MLC at senior levels and are 
already working with them on the DDEX integration and testing 
process to ensure both sides are ready to exchange the necessary 
files. It appears to Music Reports that the time available for this 
task is adequate, and that commencement of operations on (or, where 
applicable, before) the License Availability Date is reasonably on 
track to occur.'').
---------------------------------------------------------------------------

    In December 2020, the MLC and DLC reported that they had reached 
agreement on format requirements.\106\ The negotiated proposal would 
require the MLC to accept both the cumulative statement of account and 
supplemental metadata report in a simplified format, which the MLC and 
DLC refer to as the ``simplified usage reporting format'' (``SURF''), a 
format developed by the MLC in consultation with the DLC and its 
members.\107\ They proposed regulations that would permit the MLC to 
accept reports from DMPs in alternative formats, but require a DMP to 
pay to the MLC costs incurred for accepting the alternative 
format.\108\ Music Reports subsequently expressed concern that the 
announcement of this ``simplified framework'' ``fails to take into 
account the development lead times necessary to process and present 
billions of rows of data (per service) in a new format.'' \109\
---------------------------------------------------------------------------

    \106\ DLC & MLC Ex Parte Letter at 2 (Dec. 9, 2020).
    \107\ Id.; see also Music Reports Ex Parte Letter at 2 (Sept. 
29, 2020)
    \108\ DLC & MLC Ex Parte Letter at 2, Add. A-8 (Dec. 9, 2020); 
see also Music Reports Ex Parte Letter at 2 (Sept. 29, 2020)
    \109\ Music Reports Ex Parte Letter at 2 (Dec. 15, 2020)
---------------------------------------------------------------------------

    The Office adopts the format requirements proposed by the MLC and 
DLC with two modifications. First, although the Office understands the 
preference for most parties to accept a simplified usage reporting 
format, it wishes to avoid discouraging submission of reports in 
alternate, but still acceptable formats, where this may be necessary 
for a DMP to comply with the statutory timeframe for reporting and 
transfer of royalties to the MLC, to the ultimate benefit of copyright 
owners.\110\ Thus, the Office has modified the proposed language to 
require submission of cumulative statements of account in SURF to the 
extent practicable, but otherwise allow submission of an alternative 
format by agreement. As a part of this proceeding, the Office is 
adopting provisions that permit voluntary agreements to alter 
particular reporting procedures, similar to the one adopted for reports 
of usage.\111\ The Office does not anticipate that the MLC will 
generally rebuff requests to report in alternative formats--indeed, 
there appears to be little authority for it to reject a cumulative 
statement of account and accompanying transfer of royalties in 
different formats. Nevertheless, the rule provides that the MLC's 
consent to such requests should not be unreasonably withheld. For 
example, given the MLC's previous signaling of the intention to require 
reporting in the more complex DSRF format, which apparently generated 
some reliance interests, the

[[Page 2183]]

Office assumes that it would be reasonable for the MLC to accept a 
report submitted in that format.
---------------------------------------------------------------------------

    \110\ See also, e.g., 37 CFR 210.27(h)(1) (requiring the MLC to 
offer at least two formatting methods for submitting reports of 
usage).
    \111\ See id. at 210.27(n).
---------------------------------------------------------------------------

    Although the Office appreciates the joint proposal's intention 
behind requiring DMPs to incur incremental costs of submitting reports 
in alternative formats, thereby encouraging standard reporting formats 
and reducing the potential MLC burden, the Office declines to require 
this by regulation. Funding of the total costs of the MLC is already 
provided for in the statute, including covering any unanticipated 
shortfalls.\112\ The Office is reluctant to establish a precedent 
whereby the MLC can directly charge individual DMPs; such a proposal 
may be more appropriately considered under the aegis of the Copyright 
Royalty Judges in connection with their establishment of the 
administrative assessment.\113\ The Office notes, however, that the 
statute permits voluntary contributions from DMPs to fund the 
collective total costs of the MLC.\114\ The parties could consider 
whether this provision, along with the ability to enter into voluntary 
agreements to alter process, might accomplish the same goal as their 
proposal to require payment of incremental costs.
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    \112\ 17 U.S.C. 115(d)(7).
    \113\ In December 2020, the DLC and MLC jointly petitioned the 
CRJs to modify the terms of implementation of the initial 
administrative assessment. See Joint Motion to Modify the Terms of 
Implementation of the Initial Administrative Assessment, 
Determination and Allocation of Initial Administrative Assessment to 
Fund Mechanical Licensing Collective (No. 19-CRB-0009-AA) (filed 
Dec. 18, 2020), https://app.crb.gov/document/download/23405.
    \114\ 17 U.S.C. 115(d)(7)(A)(ii).
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B. Estimates, Adjustments, and Reconciliation of Cumulative Statements

    This section of the preamble discusses requirements connected to 
the reliance upon estimates, adjustments, and reconciliation of 
statements, with respect to royalty calculation inputs as well as the 
relationship between voluntary agreements and the obligation to 
transfer accrued royalties to the MLC.
1. Estimates and Adjustments Relating to Royalty Pool Calculation 
Inputs
    The Office is adopting a rule that establishes a mechanism for DMPs 
to employ necessary estimates and adjustments, including to account for 
unknown royalty pool calculation inputs, in a manner similar to the 
recently adopted rule governing submission of reports of usage under 
the blanket license. Under the cumulative statement of account 
regulations initially adopted in December 2018, DMPs could make 
estimates to the extent permitted by 37 CFR 210.6(d)(3)(i) (where the 
final public performance royalty has not yet been determined), and 
there would be no adjustment mechanism.\115\ The NPRM proposed to 
retain this status quo, except to allow any overpayment (whether 
resulting from an estimate or otherwise) to be credited to a DMP's 
account, or refunded upon request.\116\ The Office tentatively declined 
to conform the proposed provision to the estimates and adjustments 
provisions for reports of usage given the one-time nature of the 
cumulative statements as compared to the regulatory structure designed 
for the ongoing reporting of reports of usage.\117\
---------------------------------------------------------------------------

    \115\ NPRM at 43520.
    \116\ Id.
    \117\ Id.
---------------------------------------------------------------------------

    Both the MLC and DLC sought modification to this aspect of the 
rule. While they gave different reasons and offered different proposed 
modifications in their comments to the NPRM,\118\ more recent 
submissions revealed concurrence that the most prudent approach is for 
the Office to adopt a final rule that more closely tracks the estimates 
and adjustments provisions adopted for reports of usage under the 
blanket license.\119\ The Office agrees and, following notice in the 
SNPRM and due consideration of the public comments, has revised the 
rule accordingly. On reflection, the Office acknowledges that while 
cumulative statements of account are a one-time filing, the need to 
estimate inputs that cannot be finally determined at the time reporting 
is due, and to make adjustments in the future, is no less critical here 
than in the context of reports of usage. Although the NPRM would have 
narrowly allowed estimates where the final public performance royalty 
is unknown, the Office has concluded that broadening this provision and 
allowing DMPs to make estimates and adjustments more generally as 
necessary, such as based on the discovery of fraudulent streams after 
algorithms are applied, and also accounting for the possibility of both 
underpayments and overpayments, best fulfills the statutory objectives 
of facilitating accurate royalty payment.\120\
---------------------------------------------------------------------------

    \118\ DLC NPRM Comment at 5-6, Add. 24; MLC NPRM Comment at 4-5, 
App. A at vi.
    \119\ DLC SNPRM Comment at 2; MLC SNPRM Comment at 13-14, App. A 
at v, ix-x; DLC Ex Parte Letter at 3-4, 12-14 (Oct. 14, 2020); MLC 
Ex Parte Letter at 2 (Oct. 5, 2020).
    \120\ See DLC NPRM Comment at 5-6 (supporting approach); DLC Ex 
Parte Letter at 2-3 (Nov. 10, 2020) (providing examples of various 
estimates and adjustments).
---------------------------------------------------------------------------

    The recent remand of the CRJs' Phonorecords III determination by 
the D.C. Circuit further illustrates why this provision should be 
expanded.\121\ The CRJs' Phonorecords III determination was intended to 
set rates and terms for the section 115 mechanical license for the 
period from January 1, 2018 through December 31, 2022, but the D.C. 
Circuit's decision means that ultimate rates for this time period have 
not yet been finalized. As a result, when DMPs are required to deliver 
their cumulative statements of account to the MLC in February they will 
not know what the final operative royalty rate is for the compulsory 
license for the period going back to 2018. Without changes to the 
NPRM's proposal, there would be no mechanism for DMPs to make 
adjustments after the CRJs eventually establish final rates and terms, 
meaning that a DMP acting in good faith could, through no fault of its 
own, end up with an incurable underpayment and be rendered ineligible 
for the limitation on liability.\122\ The Office does not believe 
Congress could have intended for a DMP's limitation on liability to 
depend on how well it predicts what the CRJs may do on remand.
---------------------------------------------------------------------------

    \121\ See Johnson v. Copyright Royalty Bd., 969 F.3d 363.
    \122\ See DLC NPRM Comment at 6 (``[A]s a result, the cumulative 
statements will undoubtedly need to be adjusted to account for the 
new rates when they come into force.''); DLC Ex Parte Letter at 3 
(Oct. 14, 2020) (``[D]igital music providers may require significant 
retroactive adjustments to the amount of accrued royalties during 
the relevant time period depending on the resolution of that 
proceeding.'').
---------------------------------------------------------------------------

    The statutory language requiring that ``all accrued royalties'' be 
transferred 45 days after the license availability date does not 
restrict the Office's authority or discretion to adopt the rule's 
system of estimates and adjustments.\123\ Estimates and adjustments 
have long been a part of the section 115 reporting and payment 
structure,\124\ and Congress was surely aware of that when it adopted 
the further statutory language requiring related reporting to include 
``information . . . provided . . . in accordance with . . . applicable 
regulations.'' \125\ The tension between these two phrases in the same 
statutory provision creates an ambiguity that the Office concludes to 
be properly within its authority to resolve in its reasonable 
discretion.\126\ Moreover, given the degree of importance Congress 
placed

[[Page 2184]]

upon the limitation on liability,\127\ it would be unreasonable to 
believe Congress intended that, where the precise royalty owed cannot 
be ascertained at the time it is due to the MLC, the DMP must guess and 
hope that subsequent events outside of its control do not render that 
amount too low.\128\
---------------------------------------------------------------------------

    \123\ See 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa) (emphasis added).
    \124\ See 37 CFR 210.6, 210.7.
    \125\ 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa).
    \126\ See, e.g., id. at 115(d)(12)(A); City of Arlington v. FCC, 
569 U.S. 290, 296 (2013); Brand X internet Servs., 545 U.S. at 980, 
982.
    \127\ See H.R. Rep. No. 115-651, at 13-14; S. Rep. No. 115-339, 
at 14-15; Conf. Rep. at 12-13 (``[C]ontinued litigation generates 
unnecessary administrative costs, diverting royalties from artists. 
. . . The imposition of detailed statutory requirements for 
obtaining [the] limitation of liability ensure that more artist 
royalties will be paid than otherwise would be the case through 
continual litigation.''; provision is a ``key component that was 
necessary to bring the various parties together in an effort to 
reach common ground''); Letter from Senator Lindsey O. Graham, 
Chairman, Senate Committee on the Judiciary, to U.S. Copyright 
Office 1 (Sept. 30, 2020) (stating that ``the intent of the MMA was 
to provide legal certainty for past, present, and future usage'').
    \128\ See, e.g., Mova Pharm. Corp. v. Shalala, 140 F.3d 1060, 
1068 (D.C. Cir. 1998) (``If the literal application of a statute 
will produce a result demonstrably at odds with the intentions of 
its drafters, the intention of the drafters, rather than the strict 
language, controls. The rule that statutes are to be read to avoid 
absurd results allows an agency to establish that seemingly clear 
statutory language does not reflect the unambiguously expressed 
intent of Congress, and thus to overcome the first step of the 
Chevron analysis.'' (internal citations omitted)).
---------------------------------------------------------------------------

    Accordingly, the Office is adopting language that allows DMPs to 
use certain estimates where the computation of attributable royalties 
depends on an input that cannot be finally determined at the time the 
cumulative statement of account is due, and the reason is outside of 
the DMP's control.\129\ The rule also permits DMPs to subsequently 
adjust cumulative statements in five situations: \130\ First, where a 
previously estimated input becomes finally determined, such as a 
determination of the final public performance royalty; second, where an 
audit of a DMP reveals a need to adjust a payment; third, in response 
to a change in applicable rates or terms by the CRJs; fourth, where the 
DMP discovers or is notified of an inaccuracy in the cumulative 
statement of account, or in the amounts of royalties owed, based on 
information that was not previously known to the DMP despite its good-
faith efforts; and finally, as the DLC requested in response to the 
SNPRM,\131\ to ensure consistency with any adjustments made in an 
annual statement of account generated under 37 CFR 210.7 for the most 
recent fiscal year. The Office finds this additional scenario to 
reasonably further the aims of accuracy and consistency. To ensure 
promptness, the final rule provides that where more than one scenario 
necessitates the same adjustment, the six-month period to make the 
adjustment begins to run from the occurrence of the earliest triggering 
event.
---------------------------------------------------------------------------

    \129\ See SNPRM at 70549.
    \130\ Id. at 70550-51.
    \131\ See DLC SNPRM Comment at 14-15.
---------------------------------------------------------------------------

    The MLC and DLC both signaled support for the SNPRM's approach, and 
the Office received no comments opposing it.\132\ The MLC maintained 
that this provision should be limited to information outside a given 
DMP's control and expressed concern that the use of the word 
``attributable'' before ``royalties'' may be read to allow a DMP to 
report ``something less'' than total royalties.\133\ The Office does 
not intend the use of the word ``attributable'' to allow a casual 
approach to royalty calculations; the royalty calculation requirements 
of paragraph (d), including the estimate provision in paragraph (d)(2), 
are tied to the requirement in paragraph (c)(4) to report on all 
unmatched usage, meaning these provisions require reporting of the 
total potential royalties, calculated at the applicable rate under 37 
CFR part 385, that could be owed for all such usage.
---------------------------------------------------------------------------

    \132\ Id. at 2; MLC SNPRM Comment at 14, App. A at v, ix-x; see 
also MLC Ex Parte Letter at 2 (Oct. 5, 2020); DLC Ex Parte Letter at 
3-4, 12-14 (Oct. 14, 2020).
    \133\ MLC SNPRM Comment at 14 n.7. As noted above, it is 
separately possible that computation errors could be corrected under 
the adjustment provisions, for example, following an audit. See DLC 
NPRM Comment at 5; DLC SNPRM Comment at 2 (supporting the Office's 
approach).
---------------------------------------------------------------------------

2. Estimates and Adjustments Relating to Private Agreements
    Relatedly, the Office is resolving requests by DMPs that the rule 
address the treatment of payments made pursuant to agreements that 
required the distribution of unmatched royalties that predate the MMA's 
enactment, to avoid a scenario that DMPs contend could result in 
``double payment'' of royalties to musical work copyright owners for 
uses covered under these agreements. As explained below, the rule 
resolves this request by establishing conditions under which a DMP may 
in good faith employ estimates in calculating total accrued royalties, 
subject to subsequent adjustments, to reflect the effect of these 
agreements upon the DMP's cumulative reporting obligations. A relevant 
copyright owner may notify the MLC of a dispute in good faith over a 
DMP's reliance on such an agreement. If so, once the MLC would 
otherwise be ready to distribute the disputed royalties, the MLC will 
invoice the DMP for the disputed royalty amounts and hold those amounts 
until the dispute is resolved.
i. Factual Background
    Although the Office received no comments in 2018 when it solicited 
public input on the transition rule that is currently in place, the DLC 
and individual DMPs subsequently requested that the Office update its 
rule to address the interrelationship between statutory obligations and 
certain private agreements.\134\ The DLC initially proposed that the 
Office adopt a provision stating:
---------------------------------------------------------------------------

    \134\ See 84 FR 10685, 10686 (noting the Office received no 
comments in Dkt. 2018-10); see also, e.g., DLC Initial NOI Comment 
at 3 (``Rulemaking will be necessary to clarify the relationship 
between these preexisting deals and the MMA's provisions regarding 
accrual of unmatched royalties during the transition period leading 
to the license availability date.'').

    Notwithstanding anything in this section to the contrary, 
digital music providers are not required to accrue any royalties 
that are required to be paid to copyright owners of musical works 
pursuant to any agreements entered into prior to the effective date 
of the Music Modernization Act, and such royalties shall not be 
treated as ``accrued royalties'' for purposes of this section or 17 
U.S.C. 115(d)(10).\135\
---------------------------------------------------------------------------

    \135\ DLC Initial NOI Comment at 18-19.

    The Office declined to adopt this initial proposal, in part over 
concerns that it was overbroad, noting that the Office ``must be 
careful to avoid speaking over either the statute or private 
transactions.'' \136\ The Office noted that if these agreements were, 
as the DLC suggested, in ``conflict'' with ``the MMA's directions in 
section 115(d)(10) regarding the accrual of unmatched royalties,''' 
\137\ the statute ``could not yield to such agreements.'' \138\ To 
address the DLC's concerns, however, the Office provided preliminary 
guidance regarding the statutory obligations to report all accrued 
royalties while preserving the effectiveness of existing voluntary 
agreements, noting that the proposed rule included a provision that 
would require the MLC to credit or refund any overpayment back to the 
DMP, and offered to have a further dialogue.\139\
---------------------------------------------------------------------------

    \136\ NPRM at 43522-23.
    \137\ DLC Initial NOI Comment at 18.
    \138\ NPRM at 43523 (citing DLC Initial NOI Comment at 19).
    \139\ Id.
---------------------------------------------------------------------------

    A number of parties took the Office up on this offer, and the 
record now benefits from this enriched dialogue. While the Office 
reiterates its view that matters regarding the specific interpretation 
of various private contracts should be resolved by the relevant parties 
rather than a blanket rule, additional information has been provided 
that narrows the focus of the

[[Page 2185]]

DLC's request.\140\ The DLC, NMPA, and individual DMPs and publishers 
disclosed details regarding agreements that certain DMPs apparently 
entered into with the NMPA and the ``vast majority'' of the U.S. music 
publishing industry.\141\ These agreements have been referred to using 
various terms by the parties, including as liquidation agreements, 
pending and unmatched agreements, or NMPA settlement agreements, but it 
has become clear that the issue centers on sets of agreements with four 
signatory services.\142\ The DLC represented that these services are 
Spotify,\143\ YouTube,\144\ MediaNet, and Rhapsody; the first three met 
with the Office individually, generally corroborating the DLC's 
position and providing specifics as to their individual 
circumstances.\145\ The Office also met with the NMPA and certain 
individual publishers.\146\ From the information provided, the Office 
has gleaned a general sense of the shared understandings between the 
interested parties, as well as areas of disagreement.
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    \140\ See id.
    \141\ The DLC quotes an NMPA statement claiming that one 
agreement covered ``virtually the entire commercially relevant 
publishing community.'' DLC NPRM Comment at 15 (quoting Tim Ingham, 
Hunt for US Streaming Publishing Settlements Won't Stop at Spotify, 
Music Business Worldwide (Mar. 20, 2016), https://www.musicbusinessworldwide.com/hunt-for-us-streaming-publishing-settlements-wont-stop-at-spotify); see also Ed Christman, Vast 
Majority Join Royalties Settlement Between Spotify and Publishing 
Group, Billboard (July 11, 2016), https://www.billboard.com/articles/business/7431272/nmpa-spotify-settlement-most-members-join.
    \142\ To inform its background analysis, and by the consent of 
the contracting parties, the Office has received three of the 
agreements between the NMPA and individual services on a 
confidential basis, which has been duly noted in this rulemaking 
docket. See DLC NPRM Comment at 13 (``We urge the Office to request 
copies of these NMPA agreements, subject to appropriate 
confidentiality protections.''); Google Ex Parte Letter at 1 (Oct. 
23, 2020); MediaNet Ex Parte Letter at 1-2 (Oct. 28, 2020); NMPA Ex 
Parte Letter at 1 (Aug. 25, 2020); Spotify Ex Parte Letter at 1-3 
(Oct. 9, 2020); see also 5 U.S.C. 552(b)(4).
    \143\ NMPA and Spotify Announce Landmark Industry Agreement for 
Unmatched U.S. Publishing and Songwriting Royalties (Mar. 17, 2016), 
https://nmpa.org/press_release/nmpa-and-spotify-announce-landmark-industry-agreement-for-unmatched-u-s-publishing-and-songwriting-royalties.
    \144\ NMPA and YouTube Reach Agreement to Distribute Unclaimed 
Royalties (Dec. 8, 2016), https://nmpa.org/press_release/nmpa-and-youtube-reach-agreement-to-distribute-unclaimed-royalties.
    \145\ DLC Ex Parte Letter at 1-2 (Oct. 14, 2020); Google Ex 
Parte Letter at 1-3 (Oct. 23, 2020); MediaNet Ex Parte Letter at 2 
(Oct. 28, 2020); Spotify Ex Parte Letter at 2 (Oct. 9, 2020).
    \146\ NMPA Ex Parte Letter at 1-2 (Aug. 24, 2020); SATV Ex Parte 
Letter at 1-2 (Oct. 28, 2020); UMPG Ex Parte Letter at 1-2 (Oct. 30, 
2020); WMG Ex Parte Letter at 1 (Oct. 21, 2020). The Office also 
offered to meet with additional publishers.
---------------------------------------------------------------------------

    It appears undisputed that these agreements were generally 
structured through an umbrella agreement between the NMPA and the 
relevant service, where publishers were subsequently able to, and did, 
enter into individual agreements with such DSPs.\147\ The DLC 
characterizes these agreements as forming the framework for the idea of 
the MMA, and factual reports of the time support this 
characterization.\148\ As reported with respect to two of these 
agreements, publishers released claims against the relevant service for 
a relevant period of time of usage in exchange for payments, including 
(i) for works that were claimed and (ii) for a market-share based 
distribution of unclaimed royalties after a subsequent period of 
time.\149\ For example, under its agreement, Spotify agreed to hold 
back amounts required to pay non-participating publishers, which was 
represented to the Office as calculated conservatively to account for 
the risk that the participating parties had undercounted the royalties 
accrued for non-participating copyright owners.\150\
---------------------------------------------------------------------------

    \147\ See, e.g., DLC Initial NOI Comment at 17; MediaNet Ex 
Parte Letter at 2 (Oct. 28, 2020); Spotify Ex Parte Letter at 1 
(Sept. 1, 2020); see also Ed Christman, Vast Majority Join Royalties 
Settlement Between Spotify and Publishing Group, Billboard (July 11, 
2016), https://www.billboard.com/articles/business/7431272/nmpa-spotify-settlement-most-members-join (``The vast majority of our 
members have opted into our settlement,'' NMPA president and CEO 
David Israelite tells Billboard, saying the agreement has ``one of 
our highest opt-in rates ever.'').
    \148\ DLC NPRM Comment at 13 (``[A]t issue are specific 
industry-wide accrued royalty liquidation agreements that the NMPA . 
. . structured with DMPs with the specific purpose of distributing 
accrued royalties to copyright owners, based on a claiming and 
market-share distribution model that was later essentially codified 
in the MMA. These landmark agreements were aimed at solving the 
exact same problem that the MMA address: Ensuring that accrued 
royalties for unmatched works are paid out promptly to copyright 
owners.''); DLC Ex Parte Letter at 1 (Aug. 11, 2020) (``We discussed 
industry-wide agreements between certain digital services (Spotify, 
Google, MediaNet, and Napster/Rhapsody) and the [NMPA] that predated 
the enactment of the [MMA] and facilitated distribution of historic 
accrued royalties to copyright owners. As we explained, those 
agreements were the model for the MMA.'').
    \149\ Ed Christman, Spotify and Publishing Group Reach $30 
Million Settlement Agreement Over Unpaid Royalties, Billboard (Mar. 
17, 2016), https://www.billboard.com/articles/business/7263747/spotify-nmpa-publishing-30-million-settlement-unpaid-royalties (``In 
exchange for participating in the settlement, publishers release 
Spotify from any claims related to the identified pool of pending 
and unmatched works.''); Ed Christman, YouTube Strikes Settlement 
Deal Over Unpaid Royalties with National Music Publishers Assoc., 
Billboard (Dec. 8, 2016) https://www.billboard.com/articles/business/7616409/youtube-settlement-unpaid-royalties-national-music-publishers-association.
    \150\ NMPA and Spotify Announce Landmark Industry Agreement for 
Unmatched U.S. Publishing and Songwriting Royalties (Mar. 17, 2016), 
https://nmpa.org/press_release/nmpa-and-spotify-announce-landmark-industry-agreement-for-unmatched-u-s-publishing-and-songwriting-royalties (``the agreement will not affect the royalties owed to any 
publisher or writer who does not choose to participate''); Spotify 
Ex Parte Letter at 2 (Oct. 9, 2020) (``Spotify confirmed that this 
`holdback' reflects the portion of the market that NMPA and Spotify 
estimated as a conservative amount designed to cover the market 
share of non-participating publishers--and that Spotify's data 
reflected that the non-covered streaming during the relevant usage 
periods is likely even smaller than that.'').
---------------------------------------------------------------------------

    As described by NMPA at the time of agreement in 2016, the NMPA-
Spotify agreement established ``a large bonus compensation fund that is 
a substantial percentage of what is currently being held by Spotify for 
unmatched royalties, and creates a better path forward for finding the 
owners of publishing rights who should receive streaming royalties.'' 
\151\ As a result, the NMPA and Spotify announced that:
---------------------------------------------------------------------------

    \151\ NMPA and Spotify Announce Landmark Industry Agreement for 
Unmatched U.S. Publishing and Songwriting Royalties (Mar. 17, 2016), 
https://nmpa.org/press_release/nmpa-and-spotify-announce-landmark-industry-agreement-for-unmatched-u-s-publishing-and-songwriting-royalties (emphasis added).

    The deal will allow copyright owners to identify their works and 
receive the money Spotify has set aside for the past usage of 
unmatched works. It will allow the entire industry to benefit by 
filling in the gaps in ownership information, which help to ensure 
that royalties are promptly paid to their rightful owners in the 
future. Any royalties associated with works that remain unmatched 
after each claiming period will be distributed to publishers and 
songwriters who participate in the settlement, but the agreement 
will not affect the royalties owed to any publisher or writer who 
does not choose to participate. The agreement is a key step in 
improving transparency in the music community and ensuring that 
music's creators receive royalties when their music is used.\152\
---------------------------------------------------------------------------

    \152\ Id.

    NMPA's President and CEO further explained, ``we have found a way 
for Spotify to quickly get royalties to the right people.'' \153\ 
Spotify represented that as it turned out, the transaction costs 
associated with claiming musical works, coupled with the assurance of a 
market-share based distribution for unclaimed works, resulted in a low 
level of publisher participation in claiming ownership of musical 
works.\154\ As a result, most payments were made pursuant to the 
unmatched

[[Page 2186]]

liquidation provision of the agreement.\155\
---------------------------------------------------------------------------

    \153\ Id.
    \154\ Spotify Ex Parte Letter at 2-3 (Oct. 9, 2020) (``The 
effect of this was that publishers did not need to claim unmatched 
works--and, for the most part, did not do so--in order to 
participate in the market share distribution of unclaimed royalties 
at the conclusion of each claiming period.''); id. at 2 n.2 (noting 
``[the] tremendous difficulty in identifying works embodied in 
particular tracks'').
    \155\ Google Ex Parte Letter at 2 (Oct. 23, 2020); Spotify Ex 
Parte Letter at 2-3 (Oct. 9, 2020).
---------------------------------------------------------------------------

    Contemporary statements surrounding the NMPA-Google/YouTube 
agreement made similar claims that the agreement structure would 
represent a breakthrough path ``to help pay out millions of dollars in 
previously unclaimed royalties to publishers and songwriters.'' \156\ 
The Google/YouTube agreement was reported to be structured slightly 
differently, with an initial four-month claiming period, followed by 
three-month claiming periods that were open for respective twelve-month 
usage periods.\157\ The Office was also informed that it covered more 
than just uses eligible for the section 115 license, e.g., broader 
access to YouTube's Content ID claiming platform.\158\ Similar to the 
MMA structure, payment for unmatched uses based on market share 
occurred only after an additional holdback period, two years for the 
Google/YouTube program.\159\ Like Spotify, Google disclosed that 
participation in claiming activities was relatively low, with ``about 
18% to 20%'' of unmatched works ``eventually claimed, with the 
remainder distributed on a market share basis.'' \160\
---------------------------------------------------------------------------

    \156\ NMPA and YouTube Reach Agreement to Distribute Unclaimed 
Royalties (Dec. 8, 2016), https://nmpa.org/press_release/nmpa-and-youtube-reach-agreement-to-distribute-unclaimed-royalties.
    \157\ Id.; Google Ex Parte Letter at 1-2 (Oct. 23, 2020).
    \158\ See Google Ex Parte Letter at 2-3, 2 n.2 (Oct. 23, 2020) 
(noting that the agreement ``encompasses more than section-115-
eligible uses; rather, it covers usage on YouTube more generally'').
    \159\ See id. at 2.
    \160\ Id.
---------------------------------------------------------------------------

    Participation by publishers in these agreements for the relevant 
time periods was apparently extremely high.\161\ For example, NMPA 
reported that 96% of its members participated in the Spotify 
agreement.\162\ As a result, for the time periods these agreements were 
respectively in effect, the services in question paid ``tens of 
millions of dollars'' to copyright owners that the DLC describes as 
payments to release claims for accrued royalties based on usage that 
was unmatched to a particular musical work.\163\ In describing the 
landscape, the Office also credits NMPA's assertion that the ``pending 
and unmatched agreements'' varied with respect to material provisions 
and market coverage, as well as with respect to performance by the 
relevant services.\164\ The Office does not, however, understand any 
party to dispute the general contours of these agreement structures as 
described herein.
---------------------------------------------------------------------------

    \161\ DLC NPRM Comment at 13 (quoting Lowery et al. v. Rhapsody 
Int'l Inc., No. 4:16-cv-01135-JSW (N.D. Cal. filed Mar. 7, 2016), 
Dkt. No. 175 at 3) (``Rhapsody has been advised by the NMPA that the 
aggregate market share of the NMPA members who opted-in to the 
NMPA[-Rhapsody] agreement is approximately 97.13%.''); Spotify Ex 
Parte Letter at 5 (Oct. 9, 2020) (projecting that ``an estimated 5-
10% of the market of non-participating publishers'' were not part of 
Spotify's agreement); see DLC NPRM Comment at 14 (``These agreements 
have all operated in essentially the same way. . . . [F]or each 
period covered by the agreement, the vast majority of the pool of 
accrued unmatched royalties (e.g., 90%) was distributed to 
participating copyright owners based on their respective market 
shares'' and ``[t]he remaining, smaller share of royalties (e.g., 
10%) was left in the accrued pool as reserve funds.'').
    \162\ Ed Christman, Vast Majority Join Royalties Settlement 
Between Spotify and Publishing Group, Billboard (July 11, 2016), 
https://www.billboard.com/articles/business/7431272/nmpa-spotify-settlement-most-members-join.
    \163\ DLC Ex Parte Letter at 2 (Nov. 17, 2020). The Office 
understands that this amount does not encompass the smaller subset 
of royalties paid pursuant to ``claimed'' uses of works. Google Ex 
Parte Letter at 2 (Oct. 23, 2020); Spotify Ex Parte Letter at 2-3 
(Oct. 9, 2020)
    \164\ NMPA Ex Parte Letter at 1-2 (Aug. 24, 2020).
---------------------------------------------------------------------------

    The relevant parties agree that these agreements, to the extent 
they are valid, performed, and relevant, do not address the entire 
obligations for the participating services. First, as noted, they do 
not account for royalties accrued by DSPs for uses owed to non-
participating music publishers or other copyright owners (e.g., self-
administered songwriters). The Office does not understand any party, 
including the DLC, to contend that these agreements may be used to 
alleviate a DMP's obligation under the limitation on liability to 
transfer royalties for usages of musical works that are not subject to 
a valid agreement. Second, these agreements only cover a portion of the 
period DMPs need to report on to obtain the statutory limitation on 
liability, meaning that the DMP would need to transfer unclaimed 
accrued royalties for any uncovered periods.\165\ After conducting ``a 
limited survey of a subset of DLC members,'' the DLC estimates ``that 
several hundred million dollars were available to be transferred to the 
MLC as accrued royalties'' by the relevant services, not including 
amounts that those DMPs maintain do not constitute accrued royalties as 
a result of the operation of pending and unmatched agreements.\166\
---------------------------------------------------------------------------

    \165\ See, e.g., NMPA and YouTube Reach Agreement to Distribute 
Unclaimed Royalties (Dec. 8, 2016), https://nmpa.org/press_release/nmpa-and-youtube-reach-agreement-to-distribute-unclaimed-royalties 
(noting initial claiming period covering uses from ``August 1, 2012 
through December 31, 2015'' and that the claiming process ``will be 
repeated for future twelve-month usage periods beginning on January 
1, 2016 and ending on December 31, 2019''); MediaNet Ex Parte Letter 
at 2 (Oct. 28, 2020) (noting performance periods for MediaNet 
agreements); Spotify Ex Parte Letter at 5 (Oct. 9, 2020) (noting 
that Spotify terminated its agreement).
    \166\ DLC Ex Parte Letter at 2 (Nov. 17, 2020) (``DLC also 
explained that the accruals that were derecognized because copyright 
owners were paid and provided releases were a fraction of that 
amount [of several hundred million dollars]--on the order of tens of 
millions of dollars.'').
---------------------------------------------------------------------------

    DMPs repeatedly reminded the Office that submission of cumulative 
statements and payment of accrued royalties is a condition for DMPs to 
make use of the optional limitation on liability, and not a condition 
of the ongoing blanket license.\167\ From their perspective, an 
obtainable limitation on liability was a critical piece of the MMA's 
core compromise, intended to short-circuit an inefficient and costly 
pattern of litigation so long as a DMP complied with the relevant 
provisions.\168\ The DLC thus sought clarity surrounding this reporting 
obligation, suggesting that absent regulatory certainty, ``DMPs may be 
forced to retain accrued royalties to fund'' ensuing infringement 
litigation, ``precisely what the MMA was supposed to prevent.'' \169\ 
It further suggested that if regulations ``increase[] the risk that a 
court would deem a DMP to not have complied with the requirements in 
section 115(d)(10), a DMP could make the rational choice to forego the 
payment of accrued royalties entirely, and save that money to use in 
defending itself against any infringement suits.'' \170\
---------------------------------------------------------------------------

    \167\ See, e.g., DiMA NPRM Comment at 3; DLC Ex Parte Letter at 
4 (Oct. 14, 2020); DLC & MLC Ex Parte Letter at 2 (Dec. 9, 2020).
    \168\ DiMA NPRM Comment at 3; see also H.R. Rep. No. 115-651, at 
13; S. Rep. No. 115-339, at 14; Conf. Rep. at 12.
    \169\ DLC NPRM Comment at 3-4.
    \170\ Id. at 4; see also MediaNet Ex Parte Comment at 3 (Oct. 
28, 2020).
---------------------------------------------------------------------------

    Given the DLC's statement that ``several hundred million'' dollars 
are otherwise ``available to be transferred to the MLC as accrued 
royalties,'' a DMP's election to retain accrued royalties for 
litigation expenses would have the troubling result of withholding from 
copyright owners--those who did not participate in the agreements at 
issue (or for time periods outside such valid agreements)--compensation 
that all agree they are otherwise entitled to receive.\171\ 
Accordingly, the Office concludes that regulations, to the extent 
appropriate and permissible under the statute, should maintain the 
calibration intended by Congress to incentivize DMPs to participate in 
transferring over accrued royalties, without prejudicing the 
entitlements of music publishers or songwriters to receive compensation 
for past usages of their works. As Chairman

[[Page 2187]]

Graham explained in a letter to the Register:
---------------------------------------------------------------------------

    \171\ DLC Ex Parte Letter at 2 (Nov. 17, 2020).

    The legislative history makes clear that . . . ``continued 
litigation generates unnecessary administrative costs, diverting 
royalties from artists.'' . . . Since the intent of the MMA was to 
provide legal certainty for past, present, and future usage, it is 
critical that this issue be resolved in a manner that protects 
copyright owner interests while ensuring that songwriters are paid 
their splits and services are not burdened with double payments. If 
the parties are unable to address this current dispute on their own 
in the immediate future, I urge the Copyright Office to bring them 
together in order to prevent a return to the inefficient litigation 
that featured prominently in the prior licensing regime.\172\
---------------------------------------------------------------------------

    \172\ Letter from Senator Lindsey O. Graham, Chairman, Senate 
Committee on the Judiciary, to U.S. Copyright Office 1 (Sept. 30, 
2020).
---------------------------------------------------------------------------

    In response, the Office convened a multi-stakeholder call to 
address the substance of this rulemaking, and this rule reflects the 
comments from that discussion.\173\
---------------------------------------------------------------------------

    \173\ Summaries of that October 30, 2020 discussion are 
available here: https://www.copyright.gov/rulemaking/mma-implementation/ex-parte-communications.html. The Office invited 
every party who had submitted comments on this issue in this 
rulemaking docket to participate in the discussion.
---------------------------------------------------------------------------

    The crux of the dispute concerns the statutory requirement to 
accrue and hold royalties, and to maintain them in accordance with GAAP 
principles. While there is agreement that the statute requires ``all 
accrued royalties'' \174\ to be reported and paid over to the MLC, 
there is disagreement regarding the meaning of this requirement in 
light of these industry-wide agreements and surrounding statutory 
language. The DLC and individual DMPs contend that the requirement to 
maintain accrued royalties in accordance with GAAP has resulted in the 
derecognition of obligations extinguished by these agreements, such 
that these previous liabilities are not part of what must be 
transferred to the MLC to be eligible for the limitation on 
liability.\175\ Participating DMPs also suggest that an alternate 
reading would penalize those companies that entered into voluntary 
agreements to ensure royalties were paid to publishers and songwriters, 
in comparison to DMPs who did not enter into such agreements to settle 
pre-MMA disputes.\176\ As the DLC put it, ``these agreements were 
designed to, and did, put tens of millions of dollars in statutory 
royalties in the hands of copyright owners--money that they had been 
unable to access due to the broken pre-MMA statutory royalty system.'' 
\177\ The DLC also noted that ``some DMPs simply do not have the 
financial resources to make duplicate payments'' under both their 
agreements and the limitation on liability, which would force them to 
forgo the benefit of the limitation on liability.\178\
---------------------------------------------------------------------------

    \174\ 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa).
    \175\ DLC SNPRM Comment at 9-10 (stating ``the statute 
specifically incorporates [GAAP], which specifically contemplate de-
recognition of liabilities when they have been extinguished'' and 
``it is the incorporation of [GAAP] that, when given meaning (as 
they must be), provide that once a liability has been extinguished, 
it is not accrued''); see also ARA, FMC & MusicAnswers SNPRM Comment 
at 3 (``GAAP clearly allows for `derecognition' of liabilities if 
certain conditions are met--conditions that these agreements and the 
releases they include apparently satisfy.''); DLC NPRM Comment at 17 
n.45; DLC Ex Parte Letter at 2 (Nov. 10, 2020); Spotify Ex Parte 
Letter at 2 (Oct. 9, 2020) (noting that ``the [Spotify] Agreement 
extinguished such [copyright owner] rights for the periods of time 
covered by the Agreement--not only because the copyright owner had 
already received unmatched royalties for those periods, but because 
the copyright owner had released any and all claims to such 
royalties'').
    \176\ DLC Initial NOI Comment at 19; Spotify Ex Parte Letter at 
1 (Sept. 1, 2020) (``Congress certainly did not intend for double 
payment of royalties paid to publishers who released claims under 
those [pre-MMA] agreements''); Google Ex Parte Letter at 3 (Oct. 23, 
2020) (Google asserts that its YouTube agreement ``was not 
established to resolve any pending or even threatened litigation. 
Rather, it was born out of a joint effort by Google and NMPA to 
ensure that royalties flowed to copyright owners.'').
    \177\ DLC NPRM Comment at 3.
    \178\ Id. at 11.
---------------------------------------------------------------------------

    In contrast, the MLC stated that ``[w]hile prior to the enactment 
of the MMA, certain DMPs entered into settlement agreements with 
certain music publishers in connection with disputes arising from their 
failure to license, match and/or pay royalties due, such settlement 
payments were definitively not the proper payment of royalties to 
copyright owners of unmatched uses,'' and were ``more likely 
consideration for releases from liability for copyright infringement or 
covenants not to sue.'' \179\ As discussed below, the MLC contends that 
the clear directive of the statute precludes the DLC's interpretation 
and that services must transfer over all royalties (calculated at the 
statutory rate) for all unmatched uses without regard for these 
agreements.
---------------------------------------------------------------------------

    \179\ MLC Reply NOI Comment at 29.
---------------------------------------------------------------------------

    The MLC and various music publishers acknowledge, however, that 
there may be a need for some resolution with respect to the effect of 
past payments related to usage of unmatched works. Strikingly, despite 
much discussion on this matter, the administrative record contains no 
statement by any music publisher or other copyright owner professing 
entitlement to royalty payments related to usages for which they have 
entered into a valid liquidation agreement. Warner Music Group, for 
example, explained, ``[f]or those DSPs with which we have already 
settled claims for the distribution of royalties owed before the 
enactment of the MMA, we consider these claims closed.'' \180\ 
Universal Music Publishing Group (``UMPG'') ``believes that any issues 
relating to payments under private settlements can and should be dealt 
with between the contracting parties'' and ``intends to assist and 
facilitate voluntary procedures for doing so with the digital services, 
to the extent applicable.'' \181\ And Sony/ATV Publishing (``SATV'') 
``is open to discussing letters of direction and other potential 
solutions that would ensure that the requirements of the MMA are 
satisfied and also address the concerns raised by the digital services 
regarding payments made pursuant to private settlements.'' \182\ SATV 
prefers ``that any potential reimbursements to digital services be made 
by the MLC rather than music publishers.'' \183\ Representing the 
marketplace at large, NMPA indicated a preference that the issue ``be 
addressed through state contract law and discussions between the 
contracting parties.'' \184\
---------------------------------------------------------------------------

    \180\ WMG Ex Parte Letter at 1 (Oct. 21, 2020).
    \181\ UMPG Ex Parte Letter at 1 (Oct. 30, 2020).
    \182\ SATV Ex Parte Letter at 1-2 (Oct. 28, 2020).
    \183\ Id.
    \184\ NMPA Ex Parte Letter at 2 (August 24, 2020).
---------------------------------------------------------------------------

    The MLC and others suggested that one potential solution could be 
to rely upon letters of direction. Although this approach was not 
entirely fleshed out, as the Office understands it, the idea is that 
disputes could be resolved by letters of direction sent by a copyright 
owner directing the MLC to return royalties that would otherwise go to 
the copyright owner to the DMP with whom the copyright owner had 
contracted.\185\ The MLC opined that DMPs participating in these 
agreements would be able to ``sit in the position of an entity that has 
acquired rights through a license or sale'' and that ``payments can be 
redirected to the new owner pursuant to the explicit or implicit terms 
of the private contract.'' \186\ Apart from its proffered statutory 
interpretation addressed below, the MLC did not address how a scheme 
requiring a DMP to transfer funds to the MLC with an expectation by 
both the DMP and copyright owner that those funds will ultimately just 
be returned to that DMP would effectuate Congress's

[[Page 2188]]

intention that the MLC operate efficiently and fairly.\187\
---------------------------------------------------------------------------

    \185\ MLC Ex Parte Letter at 5 (Oct. 16, 2020) (reflecting 
NSAI's comments); MLC Ex Parte Letter at 5 (Oct. 5, 2020); NMPA Ex 
Parte Letter at 2 (Nov. 3, 2020).
    \186\ MLC SNPRM Comment at 10.
    \187\ See Conf. Rep. at 4 (noting that the MLC should engage in 
an ``efficient and fair administration of the collective in a manner 
that respects varying interests and concerns'').
---------------------------------------------------------------------------

    DMPs disagreed that reliance upon letters of direction to the MLC 
would be workable, with Google explaining that a DMP would be unlikely 
to get complete coverage via letters of direction and, to address any 
gaps, would ``need to file a significant number of separate declaratory 
judgment actions in courts around the country.'' \188\ The DLC strongly 
objected to the MLC's suggestion that DMPs should first pay the 
contested amounts, then seek redress for ``double payments'' by 
``proving the existence of a release'' or ``clawing back'' 
overpayments, contending that ``the DMP does not get any benefit from 
the transfer of royalties that might be matched (or paid via market 
share distribution) by the MLC to those same owners pursuant to the 
limitation on liability provision in the MMA; it already has a 
limitation on liability pursuant to the release.'' \189\
---------------------------------------------------------------------------

    \188\ Google Ex Parte Letter at 3 (Oct. 23, 2020); see also DLC 
SNPRM Comment at 11 (``the MLC's invitation for DMPs to rely on 
self-help and battle it out in court later is contrary to the spirit 
of the statute . . . and may lead some DMPs to simply withhold all 
the royalties in order to fund such litigation''); SGA SNPRM Comment 
at 8.
    \189\ DLC SNPRM Comment at 5; see also Spotify Ex Parte Letter 
at 4-5 (Oct. 9, 2020) (``[W]e are aware of no copyright owner who 
has released their claims to the royalties covered by the Agreement 
that is now demanding, or at any time since the Agreement has 
demanded, a double payment of those royalties.'').
---------------------------------------------------------------------------

    Separately, the MLC clarified that in the event of a relevant 
dispute between a DMP and a copyright owner, it intended to ``hold such 
unmatched royalties pending the resolution of the dispute,'' accruing 
interest until the dispute was resolved.\190\ The MLC reasoned that 
``Congress intended for the MLC to be that trusted party to receive 
unmatched royalties and ensure that they are paid to the right 
parties.'' \191\ Spotify objected to this position, stating that the 
MLC's proposal to require all funds at issue under these agreements to 
be immediately paid to the MLC would create a dispute ``in the first 
instance,'' as they are not aware of any participating copyright owner 
who claims they are entitled to additional funds.\192\
---------------------------------------------------------------------------

    \190\ MLC Ex Parte Letter at 5 (Oct. 5, 2020). The MLC's 
proposal would not fall under the MLC's Dispute Resolution Committee 
and related provisions, as the dispute is not between copyright 
owners. See 17 U.S.C. 115(d)(3)(G)(i)(III)(bb), (K); see also DLC Ex 
Parte Letter at 2, n.2 (Oct. 14, 2020) (``The dispute resolution 
process required by the MMA is aimed at resolving disagreements 
among copyright owners. . . . Thus, even the solution that the MLC 
has proposed would require regulatory action by the Office.'').
    \191\ MLC Ex Parte Letter at 5 (Oct. 5, 2020).
    \192\ Spotify Ex Parte Letter at 4-5 (Oct. 9, 2020).
---------------------------------------------------------------------------

    In light of this additional information, the SNPRM proposed a 
solution that would allow for participating DMPs to pay their accrued 
royalties in accordance with GAAP, permitting reliance on certain 
temporary estimations and subject to detailed adjustment provisions. 
And the SNPRM explained that, ``[u]nder no circumstances could this 
[noticed] provision be used to shortchange payment of accrued royalties 
for musical work copyright owners who did not participate in such 
agreements.'' \193\
---------------------------------------------------------------------------

    \193\ SNPRM at 70546-47.
---------------------------------------------------------------------------

    The Office received many comments opining on Congress's intent and 
the statutory payment and reporting requirements for the limitation on 
liability contained in 17 U.S.C. 115(d)(10)(B)(iv). Some commenters, 
including the Artists Rights Alliance, the Future of Music Coalition, 
and MusicAnswers, opined that the statute was ambiguous on this 
point.\194\ Others, including the DLC, DiMA, individual DMPs, the MLC, 
and representatives of copyright owners and songwriters, suggested that 
the applicable statutory language is unambiguous,\195\ although they 
offered conflicting interpretations of the relevant requirements. 
Because of these disparate views, the DLC suggested that parties would 
benefit from a ``regulatory clarification.'' \196\ As discussed below, 
there was considerable disagreement regarding the meaning of section 
115(d)(10)(B)(iv)'s requirement that ``[a]ccrued royalties shall be 
maintained by the digital music provider in accordance with [GAAP],'' 
whether this provision would benefit from a regulatory clarification, 
and whether the Office had authority to promulgate the rule proposed in 
the SNPRM (or alternate proposals suggested by the DLC).\197\
---------------------------------------------------------------------------

    \194\ ARA, FMC & MusicAnswers SNPRM Comment at 2; ARA Ex Parte 
Letter at 1 (Nov. 17, 2020); see also DLC NPRM Comment at 16 (noting 
that Office ``regulation is plainly necessary to provide unambiguous 
guidance to DMPs and the MLC'').
    \195\ See, e.g., DiMA NPRM Comment at 5-6; MLC SNPRM Comment at 
3; SGA & SCL SNPRM Comment at 2; NSAI Ex Parte Letter at 1 (Nov. 17, 
2020); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020).
    \196\ DLC Initial NOI Comment at 18; DLC Reply NOI Comment at 24 
(requesting that the Office ``clarify that agreements under which 
accrued royalties for unmatched musical works were paid to 
rightsowners, are not `accrued royalties' subject to transfer to the 
MLC''); DLC SNPRM Comment at 3 (``the proposed rule provides the 
clarity needed to preserve the core bargain struck in the MMA'').
    \197\ MLC SNPRM Comment at 5-8, App. A at i; see also NMPA Ex 
Parte Letter at 1 (Nov. 17, 2020); Recording Acad. & SONA Ex Parte 
Letter at 2 (Nov. 17, 2020); SGA, SCL & MCNA Ex Parte Letter at 3 
(Nov. 18, 2020).
---------------------------------------------------------------------------

    In brief, the MLC believes that section 115(d)(10)(B)(iv) ``sets 
out a statutory accrual and payment obligation that identifies 
precisely what must be accrued, the time frame for holding and the two 
accepted ways the accrued royalties can be paid,'' that is, to a 
matched copyright owner or the MLC.\198\
---------------------------------------------------------------------------

    \198\ MLC Ex Parte Letter at 3 (Oct. 16, 2020); see also NSAI Ex 
Parte Letter at 1 (Nov. 17, 2020); MAC, Recording Acad. & SONA SNPRM 
Comment at 4; SGA, SCL & MCNA Ex Parte Letter at 3 (Nov. 18, 2020).
---------------------------------------------------------------------------

    DMPs contend that the aforementioned agreements extinguished their 
statutory duties to transfer royalties to the MLC, ``not only because 
the copyright owner had already received unmatched royalties for those 
periods, but because the copyright owner had released any and all 
claims to such royalties.'' \199\ The DLC stated that a ``regulatory 
clarification . . . may help music industry participants understand the 
proper treatment of unclaimed royalties under the MMA.'' \200\ Beyond 
the liquidation agreements at issue, the services contended that the 
MLC's reading would prohibit reliance upon voluntary agreements 
generally, despite other statutory provisions guaranteeing that such 
agreements would remain in effect.\201\
---------------------------------------------------------------------------

    \199\ Spotify Ex Parte Letter at 2-4 (Oct. 9, 2020).
    \200\ DLC Initial NOI Comment at 18; see also DLC Reply NOI 
Comment at 24; DLC SNPRM Comment at 4.
    \201\ See, e.g., Spotify Ex Parte Letter at 3-4 (Oct. 9, 2020); 
DLC Ex Parte Letter at 3 (Oct. 14, 2020).
---------------------------------------------------------------------------

    The Artist Rights Alliance commented that the proposed rule 
``creates a workable, practical system that serves the foundational 
statutory goal of ensuring songwriters and publishers are accurately, 
completely, and fairly paid for all uses of their work . . . while 
providing business certainty needed to ensure the broadest number of 
digital music providers possible participate in the transfer of 
unmatched royalty funds contemplated by the MMA.'' \202\ The DLC 
concurred with this assessment and ``strongly supports the proposed 
rule noticed in the SNPRM.'' \203\
---------------------------------------------------------------------------

    \202\ ARA Ex Parte Letter at 1 (Nov. 17, 2020).
    \203\ DLC SNPRM Comment at 1-3 (quoting ARA Ex Parte Letter at 1 
(Nov. 17, 2020)).
---------------------------------------------------------------------------

ii. Statutory Analysis
    Having considered these comments and examined the relevant 
statutory text, the Office concludes that the MMA `` `is silent or 
ambiguous with respect to the specific issue' '' at hand, i.e., the DMP 
payment and reporting requirements for the limitation on

[[Page 2189]]

liability contained in 17 U.S.C. 115(d)(10)(B)(iv) and its subclauses 
(I) through (III)--particularly the treatment during the transition 
period of voluntary licenses and other agreements whereby copyright 
owners may have released certain royalty claims such that a DMP's 
obligation to pay royalties for related uses has been extinguished, and 
the related possibility that some portion of unmatched musical work 
uses may not have accrued royalties associated with them.\204\
---------------------------------------------------------------------------

    \204\ See City of Arlington, 569 U.S. at 296 (quoting Chevron, 
467 U.S. at 843); see also ARA, FMC & MusicAnswers SNPRM Comment at 
2-3 (opining that the statute is ambiguous); ARA Ex Parte Letter at 
1 (Nov. 17, 2020).
---------------------------------------------------------------------------

    First, the statute is not clear about what happens if a DMP 
legitimately cannot determine what accrued royalties are owed by the 
required date of transfer to the MLC under section 
115(d)(10)(B)(iv)(III). At first glance, the statute presumes this 
amount will be a final and ascertainable figure by the deadline, 
directing that DMPs ``not later than 45 calendar days after the license 
availability date, transfer all accrued royalties to the mechanical 
licensing collective.'' \205\ But, as discussed above, both the MLC and 
DLC acknowledge that this may not be possible, particularly in light of 
the Phonorecords III remand, and agree that a regulatory scheme of 
estimates and adjustments is necessary in at least some instances, such 
as where the computation of accrued royalties depends upon one or more 
then-unknown royalty pool inputs outside the DMP's control (such as 
applicable performance royalties), or where the applicable statutory 
royalty rates or terms change retroactively after the cumulative 
statement of account has been delivered to the MLC.\206\ Commenters 
disagree, however, as to whether an estimate and adjustment mechanism 
should also be applied where certain usage of certain unmatched works 
may be subject to a voluntary license or other agreement containing an 
appropriate release of royalty claims. Under such a scenario, because 
the specific works are unmatched and cannot be identified as being 
subject to the agreement at the time of delivery of the cumulative 
statement, the amount of accrued royalties is predicated upon 
estimating certain usages for which royalties have already been paid or 
otherwise are not considered accrued.\207\
---------------------------------------------------------------------------

    \205\ See 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa).
    \206\ See DLC NPRM Comment at 5-6; DLC SNPRM Comment at 2; MLC 
SNPRM Comment at 13-14, App. A at v, ix-x; DLC Ex Parte Letter at 3-
4, 12-14 (Oct. 14, 2020); MLC Ex Parte Letter at 2 (Oct. 5, 2020). 
In addition, the DLC has suggested that an adjustment scheme is 
appropriate to address subsequent discoveries of fraudulent stream 
counts.
    \207\ See, e.g., ARA, FMC & MusicAnswers SNPRM Comment at 2-4; 
DLC NPRM Comment at 3-4, 11-18; DLC SNPRM Comment at 1-12; MAC, 
Recording Acad. & SONA SNPRM Comment at 2-3; MLC NPRM Comment at 8; 
MLC SNPRM Comment at 2-13; SGA, SCL & MCNA SNPRM Comment at 9; ARA 
Ex Parte Letter at 1 (Nov. 17, 2020); DLC Ex Parte Letter at 2 (Oct. 
14, 2020); Google Ex Parte Letter at 2 (Oct. 23, 2020); MLC Ex Parte 
Letter at 2-3 (Oct. 16, 2020); MLC Ex Parte Letter at 2-5 (Oct. 5, 
2020); MLC Ex Parte Letter at 2-7 (Nov. 17, 2020); NMPA Ex Parte 
Letter at 1 (Nov. 17, 2020); NSAI Ex Parte Letter at 1 (Nov. 17, 
2020); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020); 
SATV Ex Parte Letter at 1 (Oct. 28, 2020); Spotify Ex Parte Letter 
at 2-5 (Oct. 9, 2020); UMPG Ex Parte Letter at 1 (Oct. 30, 2020); 
WMG Ex Parte Letter at 1 (Oct. 21, 2020).
---------------------------------------------------------------------------

    The statute is no less unclear in the contested scenario (where a 
voluntary agreement may affect accrued royalties) than the agreed-upon 
scenario (where an unknown royalty pool input may affect accrued 
royalties); both involve the statutory reference to ``all accrued 
royalties,'' which, as discussed above, is ambiguous.\208\ Under both 
scenarios, the purported need to estimate and adjust stems from a DMP's 
need to pay all accrued royalties by the statutory payment due date 
when the precise accrued royalties is not yet calculable.\209\
---------------------------------------------------------------------------

    \208\ 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa); see supra section 
II(B)(1).
    \209\ The Office finds the MLC's assertion that ``[a] DMP does 
not estimate its total accrued royalties'' unpersuasive, as it begs 
the question of how a DMP can know its accrued royalties with 
certainty and finality if, as the MLC agrees, a DMP can estimate its 
royalty pool inputs where unknown, or where, as is the case 
presently, no ultimate royalty rates have even been set. MLC SNPRM 
Comment at 8-10. Compare id. with DLC SNPRM Comment at 12 n.33 
(referring to ``the necessary estimates that GAAP requires--not just 
to account for the release of claims prior to the MMA, but for other 
estimates, including royalty rates and inputs,'' and noting that 
``[a]s a result of the D.C. Circuit's vacatur and remand of the 
Copyright Royalty Board's determination of the relevant statutory 
royalty rates, it is a given that all DSPs will need to use 
estimates when calculating accrued royalties pursuant to this 
provision''). The rule discussed herein simply clarifies that 
certain good-faith estimates, subject to adjustments, are permitted 
for purposes of the payment and reporting requirements of the 
limitation on liability.
---------------------------------------------------------------------------

    Second, the limitation on liability provision does not address the 
application of voluntary licenses, making no explicit acknowledgement 
of their existence. The MLC argues that for ``works initially unmatched 
that are later matched to voluntary licenses, . . . for periods prior 
to the license availability date, the MMA provides for payments of 
matched royalties to be made to copyright owners, and does not provide 
for the MLC to carve out voluntary agreements,'' further contending 
that ``the distinction between blanket license coverage and voluntary 
license coverage only exists after the license availability date.'' 
\210\ The MLC also argues that for a DMP to be eligible for the 
limitation on liability, after royalties have been accrued in 
accordance with section 115(d)(10)(B)(iv), they must ``be held through 
the date when the royalties are either (a) matched and distributed to 
the proper copyright owner pursuant to subsection II or (b) transferred 
to the MLC pursuant to subsection III.'' \211\ Given that neither 
section 115(d)(10)(B)(iv)(II) nor (III) references voluntary licenses, 
this interpretation would seem to result in such licenses not being 
given effect, whether entered into before the MMA or after. Taken 
literally, this would seem to mean, for example, that if a DMP uses a 
work that is not matched by the end of the calendar month of first 
usage, even if its efforts later result in a match subject to an 
existing voluntary license (such as delayed matching of new releases), 
the DMP must pay the copyright owner pursuant to the statutory payment 
and reporting requirements instead of the terms of the existing 
agreement in order to retain eligibility for the limitation on 
liability.\212\ The MLC tries to avoid this conclusion by arguing that 
``Section 115(d)(10)(B)(iv)(II) is fully consistent on its face with 
the payment of royalties under voluntary license terms'' because 
``[t]he subsection provides that, when a DMP matches an unmatched work, 
it shall pay all respective accrued royalties to the identified 
copyright owner `in accordance with this section and applicable 
regulations.' '' \213\ But, as the DLC observes, this is a misreading 
of the statute.\214\ The language quoted by the MLC concerns ``the 
information'' that must be ``include[d]'' in the required cumulative 
statement of account; it does not relate to the payment of royalties or 
other aspects of the reporting.\215\
---------------------------------------------------------------------------

    \210\ MLC Ex Parte Letter at 5 (Oct. 5, 2020) (citing 17 U.S.C. 
115(d)(3)(I)).
    \211\ MLC Ex Parte Letter at 2-4 (Oct. 16, 2020); see MLC SNPRM 
Comment at 3; MLC Ex Parte Letter at 2-3 (Nov. 17, 2020); see also 
MAC, Recording Acad. & SONA SNPRM Comment at 2; Recording Acad. & 
SONA Ex Parte Letter at 2 (Nov. 17, 2020).
    \212\ See 17 U.S.C. 115(d)(10)(B)(iv)(II).
    \213\ MLC Ex Parte Letter at 7 (Nov. 17, 2020) (quoting 17 
U.S.C. 115(d)(10)(B)(iv)(II)(aa)).
    \214\ See DLC SNPRM Comment at 10.
    \215\ See 17 U.S.C. 115(d)(10)(B)(iv)(II)(aa).
---------------------------------------------------------------------------

    The DMPs contend that section 115(d)(10)(B)(iv)(I) speaks to this 
issue by requiring that ``[a]ccrued royalties shall be maintained by 
the digital music provider in accordance with generally accepted 
accounting principles.'' \216\ They argue that this provision covers 
how accrued liabilities can be extinguished, asserting that GAAP 
permits this in ways not provided for in

[[Page 2190]]

section 115(d)(10)(B)(iv)(II) or (III), such as pursuant to 
agreement.\217\ They argue that ``this is how Subclause (I) has to 
work, in order to account for voluntary licenses'' because subclause 
(II) ``does not address voluntary licenses at all'' and instead 
``requires--regardless of the terms of any contrary agreement--payment 
of `all accrued royalties' on a specific timetable, accompanied by a 
statutorily mandated `cumulative statement of account.' '' \218\
---------------------------------------------------------------------------

    \216\ See id. at 115(d)(10)(B)(iv)(I).
    \217\ See DLC NPRM Comment at 17 (``[U]nder GAAP, accrued 
royalties that were paid to participating publishers, who released 
all entitlement to royalties for such usage, would cease being 
`maintained' in accordance with GAAP; only those royalties expected 
to be due to third parties who had not released such royalty claims 
would be accrued.''); DLC SNPRM Comment at 10; DLC Ex Parte Letter 
at 2 (Oct. 14, 2020); Spotify Ex Parte Letter at 3-4 (Oct. 9, 2020).
    \218\ Spotify Ex Parte Letter at 4 (Oct. 9, 2020); see DLC SNPRM 
Comment at 10; DLC Ex Parte Letter at 2 (Oct. 14, 2020) (``[T]he 
MLC's proffered statutory argument . . . would improperly read the 
GAAP requirement out of the law, and fail to account for voluntary 
licenses.'').
---------------------------------------------------------------------------

    The Office concludes that the limitation on liability provision is 
not clear about the treatment of voluntary licenses. The MLC's 
formulation assumes that any amount transferred to the MLC must 
necessarily be ``accrued,'' failing to recognize that some portion of 
what is transferred may instead constitute an overpayment subject to 
credit or refund.\219\ Additionally, neither the MLC's nor the DMPs' 
interpretations resolve conflicts between section 115(d)(10)(B)(iv) and 
at least two other related provisions in section 115 intended to 
preserve the effect of existing voluntary transactions.\220\ The first 
provision states that ``[l]icense agreements voluntarily negotiated at 
any time between one or more copyright owners of nondramatic musical 
works and one or more persons entitled to obtain a compulsory license . 
. . shall be given effect in lieu of any determination by the Copyright 
Royalty Judges.'' \221\ The second provides that ``[a] voluntary 
license for a covered activity in effect on the license availability 
date will remain in effect unless and until the voluntary license 
expires according to the terms of the voluntary license, or the parties 
agree to amend or terminate the voluntary license.'' \222\ Both in 
essence require that voluntary licenses be given effect in lieu of 
compulsory licenses, and yet by the MLC's read (despite its attempts to 
suggest otherwise), section 115(d)(10)(B)(iv)(II) and (III) would 
require the opposite.\223\
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    \219\ See 17 U.S.C. 115(d)(3)(I)(ii), (d)(10)(B)(iv)(II)-(III) 
(all referring to the payment of ``accrued royalties''). For 
example, where a DMP transferred over royalties for an unmatched 
work that, when later matched by the MLC, turns out to be subject to 
a catalog-based voluntary license where payment for the relevant 
usage was already made to the copyright owner under the terms of 
that agreement.
    \220\ See, e.g., R-S-C v. Sessions, 869 F.3d 1176, 1183-85 (10th 
Cir. 2017) (finding statute ambiguous where it was ``apparent'' that 
statutory provisions were ``at odds with one another,'' such that 
the ``intra-statutory conflict obscure[d] any clear command from 
Congress'' on the subject at issue).
    \221\ 17 U.S.C. 115(c)(2)(A)(i); see also id. at 801(b)(7)(A), 
(C); H.R. Rep. No. 115-651, at 4; S. Rep. No. 115-339, at 4; Conf. 
Rep. at 3 (``Consistent with the current 115 compulsory license, 
subsection (c)(2)(A) makes clear that voluntary licenses entered 
into between musical work copyright owners and digital music 
providers are given effect in lieu of the rates established for the 
blanket license.'').
    \222\ 17 U.S.C. 115(d)(9)(C); see also id. at 115(d)(1)(C); H.R. 
Rep. No. 115-651, at 10; S. Rep. No. 115-339, at 10-11; Conf. Rep. 
at 8-9 (``[A]ny voluntary license agreement between a digital music 
provider and a musical work copyright owner continues to be 
effective and takes precedence over the blanket license until such 
license expires according to its own terms.'').
    \223\ See U.S. Copyright Office, Views of the United States 
Copyright Office Concerning PRO Licensing of Jointly Owned Works, at 
20 (Jan. 2016), https://www.copyright.gov/policy/pro-licensing.pdf 
(``Congress established [compulsory licenses] to address specific 
market conditions, and they are narrowly construed in their 
application.'') (citing Fame Publ'g Co. v. Alabama Custom Tape, 
Inc., 507 F.2d 667, 670 (5th Cir. 1975) and WPIX, Inc. v. ivi, Inc., 
691 F.3d 275, 281 (2d Cir. 2012)); see also DLC SNPRM Comment at 10 
(observing that ``other references to voluntary agreements in the 
statute say nothing about how those agreements should be applied to 
the issues posed by accrued unmatched royalties'').
---------------------------------------------------------------------------

    It seems highly unlikely that Congress, without being explicit 
about what it was doing, would have adopted a statutory scheme that 
broadly encourages and gives effect to the common practice of voluntary 
licenses (including by preserving existing agreements), only to 
override them and risk marketplace confusion for purposes of the 
limitation on liability requirements. It is possible that Congress may 
have assumed that an unmatched work would not be subject to a voluntary 
license, but that appears to be factually untrue, as it has been 
represented to the Office that many voluntary licenses operate on a 
participating-party or musical work catalog or library basis, rather 
than a per-matched-work (or ``title-bound'') basis.\224\
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    \224\ See 85 FR 22518, 22528 (Apr. 22, 2020) (``The DLC is 
specifically concerned with the handling of voluntary licenses, 
explaining that because such licenses are often procured through 
blanket deals covering all musical works in a publisher's catalog, 
the DMP usually does not know which specific musical works are 
covered, and will be reliant on the MLC to make that determination 
based on its statutorily directed matching efforts; this in turn 
affects the amount of royalties the DMP owes under the blanket 
license.''); DLC SNPRM Comment at 9 (``[I]t is common in the 
industry, if not standard, for full-catalog licenses not to identify 
each work covered, and for the list of covered works to change from 
time to time. . . . [I]t is precisely for this reason that the MLC 
must provide a response file identifying the works covered by a 
voluntary license, in order to allow the licensee to calculate the 
royalties owed pursuant to the blanket license for the remaining 
works.''); see also, e.g., Steven Winogradsky & David Lowery, Music 
Publishing: The Complete Guide 267 (2nd ed. 2019) (discussing 
production music library licenses on a non-title basis).
---------------------------------------------------------------------------

    The DMPs' reliance on the GAAP provision in subclause (I) does not 
resolve the matter, however. Even if the provision encompassed 
derecognition of liabilities, including by agreement, in certain 
contexts, it would still be in conflict with subclause (II). For 
example, where a previously unmatched work becomes matched prior to the 
license availability date, if the work is matched to a copyright owner 
with whom the DMP has a voluntary license, then under subclause (I), 
that license could be given effect, or, if there is no such license, 
the DMP and copyright owner could agree to one at that time to 
extinguish the liability. But under subclause (II), in the exact same 
situation, the DMP is told to undertake certain acts that could be 
contrary to any such agreement.\225\ Even if a voluntary license was 
structured so that no further accrued royalties would be due, to the 
extent further reporting is still required under the agreement, there 
could be a conflict with the reporting requirements of subclause (II). 
Congress has given no indication as to whether subclause (I) or (II) 
should control in these types of situations.
---------------------------------------------------------------------------

    \225\ See 17 U.S.C. 115(d)(10)(B)(iv)(II).
---------------------------------------------------------------------------

    Third, the Office finds section 115(d)(10)(B)(iv) to be ambiguous 
on its face. The MLC argues that the provision is clear and requires 
that ``on enactment of the MMA, DMPs must accrue and hold royalties for 
all of their historical and ongoing unmatched uses, with such accrued 
royalties to be calculated at the statutory rate and to cover all uses 
from initial use of the work, with such accrued royalties to be held 
through the date when the royalties are either (a) matched and 
distributed to the proper copyright owner pursuant to subsection II or 
(b) transferred to the MLC pursuant to subsection III.'' \226\ The MLC 
contends that the ``first clause'' of section 115(d)(10)(B)(iv) \227\ 
``serves to identify what is being addressed by the provision, namely 
all unmatched works and associated royalties;'' the ``second clause'' 
\228\ ``sets forth the unambiguous

[[Page 2191]]

obligation to accrue and hold royalties at the statutory rate,'' with 
``[t]he statutory obligation to accrue and hold these royalties 
begin[ning] on the enactment date;'' and the ``third clause'' \229\ 
``details the scope of the accrual to be made, the time frame for 
holding, and the ultimate payment obligation.'' \230\ Based on this 
analysis, the MLC disagrees with the DMPs' position on the meaning of 
the GAAP provision in section 115(d)(10)(B)(iv)(I), asserting that 
``[r]eading the generic direction to `maintain' royalties in accordance 
with GAAP as overriding the detailed statutory instructions and 
producing a result where the DMP in fact does not maintain the accrued 
royalties and does not transfer them under either subsection II or 
III--the exact opposite of the explicit statutory directive--does not 
appear reasonable.'' \231\
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    \226\ MLC Ex Parte Letter at 2-3 (Oct. 16, 2020); see MLC SNPRM 
Comment at 3.
    \227\ The first clause reads, ``[i]f the copyright owner is not 
identified or located by the end of the calendar month in which the 
digital music provider first makes use of the work.'' 17 U.S.C. 
115(d)(10)(B)(iv).
    \228\ The second clause reads, ``the digital music provider 
shall accrue and hold royalties calculated under the applicable 
statutory rate in accordance with usage of the work.'' Id.
    \229\ The third clause reads, ``from initial use of the work 
until the accrued royalties can be paid to the copyright owner or 
are required to be transferred to the mechanical licensing 
collective.'' Id.
    \230\ MLC Ex Parte Letter at 3 (Oct. 16, 2020).
    \231\ Id. at 3-4; see MLC SNPRM Comment at 5-10; MLC Ex Parte 
Letter at 2-4 (Nov. 17, 2020); see also, e.g., Recording Acad. & 
SONA Ex Parte Letter at 2 (Nov. 17, 2020) (``[The GAAP provision] is 
meant to safeguard the royalties until they can be successfully 
matched to the owner or transferred to the MLC. It is not intended 
to provide a trap door through which accrued royalties can be 
disposed of in a way not prescribed in the statute.''); NMPA Ex 
Parte Letter at 1 (Nov. 17, 2020); SGA, SCL & MCNA Ex Parte Letter 
at 3 (Nov. 17, 2020).
---------------------------------------------------------------------------

    The DMPs disagree, arguing that ``the MLC's proffered statutory 
argument . . . would improperly read the GAAP requirement out of the 
law, and fail to account for voluntary licenses.'' \232\ Instead, they 
contend that the phrase ``as follows'' at the end of clause (iv) must 
mean that ``the subsequent Subclauses (I)-(III) describe how and when 
the royalties are accrued, paid to copyright owners, or transferred to 
the MLC.'' \233\ They further explain that ``Subclause (I) provides a 
general instruction that the royalties `shall be maintained' in 
accordance with GAAP--which means that GAAP standards apply to the 
initial calculation of the accrual as well as to any adjustment of that 
initial calculation in light of new facts. That is made clear by the 
fact that Clause (iv) ends with the phrase `as follows,' which links 
the initial accrual determination described in Clause (iv) to the 
application of GAAP standards specified in Subclause (I).'' \234\
---------------------------------------------------------------------------

    \232\ DLC Ex Parte Letter at 2 (Oct. 14, 2020); see also, e.g., 
ARA, FMC & MusicAnswers SNPRM Comment at 3 (non-DMP organizations 
agreeing that ``Congress clearly intended the . . . [relevant] 
provisions to cover usages of musical works for which rightsholders 
had not yet received payment at all--not usages for which a 
corresponding payment had been negotiated and made,'' and that 
``[t]he financial structures and allowances of GAAP are incorporated 
in their entirety by a plain reading of the statute''); DLC SNPRM 
Comment at 9; Spotify Ex Parte Letter at 3-4 (Oct. 9, 2020).
    \233\ Spotify Ex Parte Letter at 3 (Oct. 9, 2020); see also DLC 
Ex Parte Letter at 2 (Oct. 14, 2020).
    \234\ Spotify Ex Parte Letter at 3-4 (Oct. 9, 2020); see also 
DLC Ex Parte Letter at 2 (Oct. 14, 2020).
---------------------------------------------------------------------------

    The Office finds that neither of these interpretations eliminates 
the ambiguities in clause (iv). A key uncertainty lies in what the MLC 
refers to as the ``third clause'' of clause (iv): ``from initial use of 
the work until the accrued royalties can be paid to the copyright owner 
or are required to be transferred to the mechanical licensing 
collective.'' \235\ It is not clear what that phrase is referencing. 
Looking at the immediately preceding phrase (``the digital music 
provider shall accrue and hold royalties calculated under the 
applicable statutory rate in accordance with usage of the work''), it 
seems that two possibilities are most likely.
---------------------------------------------------------------------------

    \235\ See 17 U.S.C. 115(d)(10)(B)(iv).
---------------------------------------------------------------------------

    First, the ``third clause'' of clause (iv) could be referencing 
``accrue and hold royalties calculated under the applicable statutory 
rate.'' Under that reading, it would direct when the DMP must accrue 
statutory royalties for an unmatched usage of the work and for how long 
it must hold them. For example, if first use of a work occurred in May 
2015 and that work remained unmatched at the license availability date, 
the DMP must have started accruing statutory royalties in May 2015 and 
must be holding all such royalties until they are transferred to the 
MLC in early 2021. Second, the ``third clause'' could be referencing 
``in accordance with usage of the work.'' Under that reading, it would 
define the lookback period for the unmatched usage of the work that may 
be subject to accrual and holding of statutory royalties, but would not 
speak to when royalties must actually be accrued by the DMP or for how 
long they must be held. For example, if first use of a work occurred in 
May 2015 and that work remained unmatched at the license availability 
date, those uses occurring between May 2015 and the date of transfer to 
the MLC in early 2021 would be subject to royalty accrual requirements 
for purposes of cumulative reporting and transfer to the MLC (but this 
clause would not speak to what those requirements are, including when 
or for how long royalties must be accrued and held; e.g., following 
enactment in October 2018, a DMP could first accrue royalties for the 
period of use stretching back to May 2015). The ``third clause'' could 
perhaps also be referring to both the royalty accrual and holding 
period and usage lookback period, but that formulation would not 
resolve the issues identified below.
    The first construction, which would construe this phrase as a set 
holding period for accrued royalties, mostly aligning with the MLC's 
interpretation, is problematic in multiple ways. One obvious issue is 
that it causes significant friction with the structure of the overall 
provision. Clause (iv) ends with the phrase ``as follows:'' after which 
detailed requirements are provided under subclauses (I) through (III). 
Thus, the most natural reading is that DMPs ``shall accrue and hold 
royalties'' as specified in subclauses (I) through (III). But if the 
``third clause'' of clause (iv) is construed as speaking to the accrual 
and holding of royalties in absolute terms, it would essentially act as 
an exception to the operation of subclauses (I) through (III). There is 
no indication that the ``third clause'' is meant to function this way, 
to undercut the subclauses in the very same provision. As the DMPs 
argue, treating it in such a manner would significantly diminish the 
scope and application of the GAAP provision in subclause (I). If 
Congress had meant to further delineate the requirements of subclauses 
(I) through (III), it would likely have done so within that framework 
of subclauses, or by at least using verbiage indicative of an 
exception. Further, subclauses (II) and (III) do not merely dictate the 
initial bulk historical payment and cumulative statement of account 
requirements,\236\ but also the ongoing payment and reporting 
obligations for subsequent reporting periods,\237\ making it even less 
likely that the ``third clause'' is meant as an overarching exception 
to the whole of subclauses (I) through (III).
---------------------------------------------------------------------------

    \236\ Id. at 115(d)(10)(B)(iv)(II)(aa), (III)(aa).
    \237\ Id. at 115(d)(10)(B)(iv)(II)(bb)-(cc), (III)(bb).
---------------------------------------------------------------------------

    Another problem is that to read the ``third clause'' as referring 
to the royalty holding period, it would have to define both the 
beginning and end points of that period--i.e., starting with the 
``initial use of the work'' and ending when ``the accrued royalties can 
be paid to the copyright owner or are required to be transferred to the 
mechanical licensing collective.'' \238\ If understood this way, to 
qualify for the limitation on liability, a DMP would have needed to 
``accrue and hold royalties . . . from initial use of the work,'' no 
matter how many years ago that may have been and regardless of whether 
the DMP addresses any historic bookkeeping or

[[Page 2192]]

accounting issues by reporting on and paying all properly accrued 
royalties as required under subclauses (II) and (III).\239\ It seems 
unlikely that Congress would have intended something so sweepingly 
retroactive and incurable given its clear intent to encourage 
participation in the limitation on liability and concerns about 
imposing potentially retroactive obligations on DMPs to qualify for 
this limitation.
---------------------------------------------------------------------------

    \238\ See id. at 115(d)(10)(B)(iv).
    \239\ See id.
---------------------------------------------------------------------------

    Even the MLC does not go this far, instead stating that ``[t]he 
statutory obligation to accrue and hold these royalties begins on the 
[MMA's] enactment date.'' \240\ It is not clear why the MLC believes 
this to be the case, since it contends that the ``third clause'' 
details ``the time frame for holding.'' \241\ The MLC's view would only 
give effect to the half of the provision purportedly detailing the end 
date. To the extent the MLC qualifies its reading by the overall 
direction that the requirements for the limitation on liability ``shall 
apply on the enactment date and through the end of the period that 
expires 90 days after the license availability date,'' the Office finds 
that provision to be yet another reason why the ``third clause'' of 
clause (iv)--with its conflicting reference to the starting point of 
``initial use of the work'' (at least where initial use predates the 
MMA's enactment)--cannot be construed as the royalty holding period, or 
at minimum adds a layer of ambiguity.\242\
---------------------------------------------------------------------------

    \240\ MLC Ex Parte Letter at 3 (Oct. 16, 2020).
    \241\ Id.
    \242\ See 17 U.S.C. 115(d)(10)(B).
---------------------------------------------------------------------------

    The second construction, which would construe this phrase as 
defining the applicable usage lookback period, despite avoiding most of 
the problems plaguing the first construction is also problematic. As 
noted above, the details of subclauses (II) and (III) do not merely 
dictate the initial bulk historical payment and cumulative statement of 
account requirements,\243\ but also the ongoing payment and reporting 
obligations for subsequent reporting periods.\244\ Understanding the 
``third clause'' of clause (iv) to be defining the usage lookback 
period does not resolve that tension.
---------------------------------------------------------------------------

    \243\ Id. at 115(d)(10)(B)(iv)(II)(aa), (III)(aa).
    \244\ Id. at 115(d)(10)(B)(iv)(II)(bb)-(cc), (III)(bb).
---------------------------------------------------------------------------

    The main issue, though, concerns the end points of the usage 
lookback period. Defining the end of the period as the dates when ``the 
accrued royalties can be paid to the copyright owner [under subclause 
(II)(aa)] or are required to be transferred to the mechanical licensing 
collective [under subclause (III)(aa)]'' \245\ creates tension with the 
usage periods defined in those subclauses, which in both cases end 45 
calendar days earlier.\246\ This discrepancy means that the ``third 
clause'' of clause (iv) does not refer to an unambiguous usage lookback 
period.
---------------------------------------------------------------------------

    \245\ See id. at 115(d)(10)(B)(iv).
    \246\ See id. at 115(d)(10)(B)(iv)(II)(aa)-(bb), (III)(aa)-(bb).
---------------------------------------------------------------------------

    The foregoing demonstrates that Congress's intent cannot be clearly 
divined, and `` `Congress has [not] directly spoken to the precise 
question at issue' '' \247\ or prescribed a ``precise course of 
conduct.'' \248\ Therefore, the Office may proceed to fill the 
statutory gap in a reasonable fashion.\249\ Specifically with respect 
to the MMA, Congress ``expected that situations will arise that were 
not contemplated by the legislation'' and imbued the Office with 
``broad regulatory authority'' to act, directing that ``[t]he Office is 
expected to use its best judgement in determining the appropriate steps 
in those situations.'' \250\
---------------------------------------------------------------------------

    \247\ See City of Arlington, 569 U.S. at 296 (quoting Chevron, 
467 U.S. at 842-43).
    \248\ See Vill. of Barrington v. Surface Transp. Bd., 636 F.3d 
650, 659 (D.C. Cir. 2011).
    \249\ See Brand X Internet Servs., 545 U.S. at 980 
(``[A]mbiguities in statutes within an agency's jurisdiction to 
administer are delegations of authority to the agency to fill the 
statutory gap in reasonable fashion.'').
    \250\ H.R. Rep. No. 115-651, at 5-6, 14; S. Rep. No. 115-339, at 
5, 15; Conf. Rep. at 4, 12; see 17 U.S.C. 115(d)(12)(A); see also 
AT&T Corp. v. Iowa Utils. Bd., 525 U.S. 366, 397 (1999) (``Congress 
is well aware that the ambiguities it chooses to produce in a 
statute will be resolved by the implementing agency.''); Brand X 
Internet Servs., 545 U.S. at 982. The Office is not persuaded by the 
MLC's invocation of expressio unius est exclusio alterius to argue 
that because there is a provision in the MMA relating to private 
agreements in the context of pre-1972 sound recordings, weight 
should be given to the assertion that with respect to the limitation 
on liability requirements, ``the MMA could have easily included 
language providing for the deduction of moneys paid in private 
settlements, but it did not.'' MLC SNPRM Comment at 4-5 (discussing 
17 U.S.C. 1401(d)). The provision about pre-1972 sound recordings is 
in a separate section of title 17, was enacted in a separate title 
of the MMA that originated from a completely different bill, and is 
unrelated to the section 115 compulsory license. It is difficult to 
see how in such circumstances silence can be construed as 
dispositive of Congress's intent, especially in light of the other 
ambiguities identified above and Congress's express cautioning to 
the Office with respect to the portions of the MMA relating to 
section 115 that uncontemplated issues will arise and need to be 
addressed. See H.R. Rep. No. 115-651, at 5-6, 14; S. Rep. No. 115-
339, at 5, 15; Conf. Rep. at 4, 12.
---------------------------------------------------------------------------

iii. Appropriateness of Regulatory Action
    In light of the statutory ambiguities identified above in the 
limitation on liability provision, including those raised when reading 
it in connection with the provisions preserving voluntary licensing, 
the Office concludes that the most reasonable interpretation is one 
that does not disrupt the existing marketplace for licensing on a 
participating-party or musical work catalog or library basis, as 
opposed to a title-bound basis. An alternative conclusion that 
disfavors transactions not based on song-by-song licenses would be at 
odds with animating legislative desires to facilitate large scale 
licensed uses of musical works and avoid disrupting the marketplace 
that has arisen around the compulsory license.\251\ Accordingly, the 
Office finds that it is necessary and appropriate to promulgate a rule 
that accounts for voluntary agreements (whether considered licenses, 
settlements, liquidations, releases, or otherwise) during the 
transition period, and the corresponding possibility that the royalties 
a DMP has accrued may not associate with all unmatched musical work 
usages because some of those usages may be subject to relevant 
agreements.\252\ Beyond the broad statutory grant of authority bestowed 
upon the Office as part of the MMA and the authority delegated to the 
Office by virtue of the ambiguities identified above, it has long been 
recognized to be well within the ambit of the Office's authority to 
promulgate rules governing processes for reporting and paying 
royalties, including reliance upon estimates and adjustments.\253\ 
Indeed, the Office's longstanding pre-MMA statement of account 
regulations, and the more-recently enacted reports of usage regulations 
under the blanket license, employ a system of estimates and 
adjustments.\254\
---------------------------------------------------------------------------

    \251\ See U.S. Copyright Office, Copyright & the Music 
Marketplace 30-31 (2015), https://www.copyright.gov/policy/musiclicensingstudy/copyright-and-the-music-marketplace.pdf (noting 
that pre-MMA, the statutory license served as a ``ghost in the 
attic'' while voluntary licensing facilitated the majority of 
licensed uses).
    \252\ See 17 U.S.C. 115(d)(12)(A) (``The Register of Copyrights 
may conduct such proceedings and adopt such regulations as may be 
necessary or appropriate to effectuate the provisions of this 
subsection.''); see also ARA, FMC & MusicAnswers SNPRM Comment at 2-
4; ARA Ex Parte Letter at 1 (Nov. 17, 2020) (noting ambiguity and 
asserting that ``[a]s a consequence of this ambiguity, we believe 
the Copyright Office has discretion to interpret the MMA's terms and 
the authority to promulgate a rule that creates a workable, 
practical system''); SGA, SCL & MCNA Ex Parte Letter at 1 (Nov. 17, 
2020) (``[R]eject[ing] the assertion by some music publisher 
representatives (backed by at least one of their affiliated 
songwriter groups) that the USCO's oversight and rulemaking 
authority concerning matters related to 2020-12 should be viewed as 
being narrowly limited.'').
    \253\ See 17 U.S.C. 115(d)(4)(A)(iv) (directing Office to adopt 
regulations ``regarding adjustments to reports of usage by digital 
music providers, including mechanisms to account for overpayment and 
underpayment of royalties in prior periods'').
    \254\ See 37 CFR 210.6, 210.7, 210.27.

---------------------------------------------------------------------------

[[Page 2193]]

    Concluding otherwise would be at odds with Congress's intent to 
create certainty and discourage litigation over historical usage.\255\ 
The Office did give thought to remaining silent on the issue, as some 
commenters urged. In particular, the MLC and others contended that a 
regulation is unnecessary, essentially opining that since the DMPs 
believe the statute is clear, they should simply rely on their asserted 
interpretation.\256\ in contrast, the DLC and DMPs asserted that 
``[t]he need for [a] rule is critical'' because ``the MLC's very 
insistence that the statute doesn't square with the interpretation 
advanced by the DLC confirms that clarifying regulation is imperative, 
and that a lack of such clarification is likely to provoke litigation--
which will be a burden not just for DMPs, but also for the copyright 
owners who would have to bring those infringement suits.'' \257\
---------------------------------------------------------------------------

    \255\ See H.R. Rep. No. 115-651, at 13-14; S. Rep. No. 115-339, 
at 14-15; Conf. Rep. at 12; Letter from Senator Lindsey O. Graham, 
Chairman, Senate Committee on the Judiciary, to U.S. Copyright 
Office 1 (Sept. 30, 2020).
    \256\ See, e.g., MAC, Recording Acad. & SONA SNPRM Comment at 2-
3 (``The original NPRM, which remained silent on how the Agreements 
should be treated, is the better approach. If the DMP interpretation 
of GAAP is correct and can be justified, the Office does not need to 
explicitly ratify it in the regulations. The DMPs can simply comply 
with the statute and transfer their accrued royalties as they 
understand them along with the usage data.'') MLC SNPRM Comment at 
2, 10-11.
    \257\ DLC SNPRM Comment at 11; see DLC NPRM Comment at 16-17 
(``[R]egulation is plainly necessary to provide unambiguous guidance 
to DMPs and the MLC. . . . [L]eaving this provision open ended will 
undoubtedly invite litigation that second-guesses DMPs' accounting 
determinations and render the limitation on liability illusory. . . 
. Regulatory clarification to guard against that result is 
warranted.''); DLC Ex Parte Letter at 2 (Oct. 14, 2020); Spotify Ex 
Parte Letter at 4 n.5 (Oct. 9, 2020).
---------------------------------------------------------------------------

    The Office concludes that the better approach is to provide 
regulatory guidance to address what most parties seem to agree will be 
inevitable situations where usage that certain DMPs could not match is 
subsequently determined by the MLC to be owned by copyright owners who 
may be party to a valid agreement covering the relevant period. 
Contrary to the MLC's and others' statements, the rule's approach is in 
many ways aligned with the original NPRM, as it seeks to give effect to 
voluntary agreements, where appropriate, without opining on any 
particular individual agreements.\258\ At its heart, the rule detailed 
below simply creates a mechanism through which the MMA's limitation on 
liability requirements can accommodate voluntary agreements (including 
those adopted on a non-title-bound basis) to the extent they may be 
appropriately relied upon in computing accrued royalties. Moreover, in 
the event that a court found the statute unambiguously to require the 
DLC's and DMPs' interpretation, a rule would still be necessary to 
prescribe conditions under which their interpretation could be given 
effect, including by articulating how estimates and adjustments as well 
as underpayments and overpayments should operate.\259\ In this respect, 
the Office believes regulatory guidance will help guide DMP compliance, 
and provide a mechanism for additional royalty monies to be payable to 
copyright owners entitled to such payment, in the event obligations 
have been underestimated. Without the uniformity in application that a 
regulatory scheme brings, it could negatively impact the MLC's ability 
to process cumulative statements of account.
---------------------------------------------------------------------------

    \258\ See NPRM at 43523.
    \259\ See DLC SNPRM Comment at 12 (``[E]ven if the DMPs are to 
employ the self-help invited by the MLC with respect to the GAAP 
treatment of pre-MMA releases, the Office would still need to issue 
regulations clarifying the manner in which DMPs reconcile the 
cumulative statement of account with the necessary estimates that 
GAAP requires--not just to account for the release of claims prior 
to the MMA, but for other estimates, including royalty rates and 
inputs.'').
---------------------------------------------------------------------------

    Importantly, the Office also concludes that regulatory action will 
best limit the risk of DMPs choosing to forego the limitation on 
liability by providing added certainty, helping to ensure that accrued 
royalties owed to copyright owners and songwriters are transferred to 
the MLC and eventually matched and distributed accurately without 
resorting to litigation, as Congress intended.\260\ The transfer of 
cumulative statements and royalties is an optional condition to the 
limitation on liability and not otherwise required for DMPs to use the 
blanket license. As explained below, the adopted rule acknowledges, 
without endorsing, the DMPs' proffered interpretation of relevant 
agreements by establishing a process that leaves room for such issues 
to be litigated if necessary.\261\ DMP participation is particularly 
important for smaller publishers and self-published songwriters who may 
not have the means to engage in the litigation that could otherwise be 
necessary to obtain royalty payments.\262\ That loss could be 
significant; as noted, the DLC ``estimated that several hundred million 
dollars were available to be transferred to the MLC as accrued 
royalties, even after accounting for the derecognition of accruals 
based on preexisting agreements containing releases to claims for 
accrued royalties.'' \263\ Indeed, regulatory action seems particularly 
appropriate to ensure that those copyright owners who did not 
participate in voluntary agreements will see the money to which they 
are entitled for uses of their works transferred to the MLC and 
ultimately paid without needing to resort to litigation. The adopted 
final rule is a practical solution to a complex issue. It is a 
permissible construction of the statute that best effectuates 
Congress's intent and is within the Office's authority to adopt.
---------------------------------------------------------------------------

    \260\ See H.R. Rep. No. 115-651, at 13-14; S. Rep. No. 115-339, 
at 14; Conf. Rep. at 12 (noting concerns over continued litigation, 
including how it diverts royalties from artists); Letter from 
Senator Lindsey O. Graham, Chairman, Senate Committee on the 
Judiciary, to U.S. Copyright Office 1 (Sept. 30, 2020) (noting that 
the MMA was intended to provide legal certainty and that it is 
``critical'' to resolve the issue, considering copyright owner, 
songwriter, and DMP interests).
    \261\ See ARA, FMC & MusicAnswers SNPRM Comment at 3-4 (agreeing 
that the ``structure seems to accomplish exactly what Congress 
intended'' and ``resolves the current controversy in a way that best 
serves the interest of independent and working songwriters who have 
a strong interest in bringing as much money as possible into the MLC 
matching and payment process for pre-MMA uses'').
    \262\ See Am. Intellectual Prop. Law Ass'n, 2019 Report of the 
Economic Survey 54 (2019) (median cost in 2019 for a party to 
litigate a copyright infringement lawsuit with less than $1 million 
at risk through to appeal was $550,000; median cost to reach the 
close of discovery was $150,000).
    \263\ DLC Ex Parte Letter at 2 (Nov. 17, 2020); see ARA, FMC & 
MusicAnswers SNPRM Comment at 4 (stating that ``potentially hundreds 
of millions of dollars for songwriters and publishers are at stake'' 
because the risk of DMPs foregoing the limitation on liability ``is 
real'').
---------------------------------------------------------------------------

    Other practical considerations weigh in favor of adopting the rule. 
Most notably, it would be a waste of resources to require DMPs to 
transfer ``tens of millions of dollars'' \264\ to the MLC, which the 
MLC and music publishers seem to agree, may have to circuitously make 
their way back to the DMPs in cases where valid releases apply.\265\ 
The

[[Page 2194]]

Office is mindful that Congress expects the MLC to operate in an 
``efficient and fair'' manner without engaging in ``waste'' or the 
``unreasonable use of funds.'' \266\ Unnecessary reimbursement would be 
an inefficiency and waste to be avoided. Music publishers may also not 
want to incur their own administrative costs if funds distributed to 
them by the MLC are ultimately returnable to DMPs, such as those 
relating to legal review and accounting processes.\267\ There is no 
practical purpose to this exercise, especially if it is correct, as 
appears uncontested, that a large portion of the music publishing 
industry (in terms of market share) is subject to relevant releases for 
relevant reporting periods.\268\
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    \264\ DLC Ex Parte Letter at 2 (Nov. 17, 2020).
    \265\ See, e.g., NMPA Ex Parte Letter at 2 (Nov. 3, 2020) 
(discussing the ability of DMPs to get letters of direction from 
relevant publishers and potential litigation to enforce contract 
rights); MLC Ex Parte Letter at 5 (Oct. 5, 2020) (noting that ``in 
the event of any such legal dispute between a DMP and a copyright 
owner concerning the right to receive unmatched royalties that the 
DMP had turned over under the MMA, the MLC would hold such unmatched 
royalties pending the resolution of the dispute,'' and that the MLC 
would ``follow[ ] the direction of the parties or appropriate courts 
as to how royalties should be distributed pursuant to private 
agreements''); SATV Ex Parte Letter at 2 (Oct. 28, 2020) (``SATV is 
open to discussing letters of direction and other potential 
solutions that would ensure that the requirements of the MMA are 
satisfied and also address the concerns raised by the digital 
services regarding payments made pursuant to private 
settlements.''); UMPG Ex Parte Letter at 1 (Oct. 30, 2020) (``UMPG 
believes that any issues relating to payments under private 
settlements can and should be dealt with between the contracting 
parties. UMPG intends to assist and facilitate voluntary procedures 
for doing so with the digital services, to the extent 
applicable.''); WMG Ex Parte Letter at 1 (Oct. 21, 2020) (``For 
those DSPs with which we have already settled claims for the 
distribution of royalties owed before the enactment of the MMA, we 
consider these claims closed.'').
    \266\ H.R. Rep. No. 115-651, at 6; S. Rep. No. 115- 339, at 5; 
Conf. Rep. at 4, 6.
    \267\ See SATV Ex Parte Letter at 2 (Oct. 28, 2020) (noting, in 
the context of market-based solutions, a preference for ``any 
potential reimbursements to digital services be made by the MLC 
rather than music publishers'').
    \268\ See, e.g., DLC NPRM Comment at 14-15 (``The NMPA has 
represented that 90%-plus of all usage was covered by the NMPA 
agreements: It would be absurd to require DMPs to make an 
acknowledged duplicate payment of tens of millions of dollars to 
cover payments that are merely around 10%, or less, of that 
amount.''); id. at 13 (quoting Ed Christman, Vast Majority Join 
Royalties Settlement Between Spotify and Publishing Group, Billboard 
(July 11, 2016), https://www.billboard.com/articles/business/7431272/nmpa-spotify-settlement-most-members-join (stating that 
participation was ``96% of [NMPA's] market share'')); id. (quoting 
Lowery et al. v. Rhapsody Int'l Inc., No. 4:16-cv-01135-JSW (N.D. 
Cal. filed Mar. 7, 2016), Dkt. No. 175 at 3) (noting opt in market 
share of 97.13%).
---------------------------------------------------------------------------

iv. Regulatory Approach
    The Office declines to adopt the DLC's initial proposal, made in 
response to the NPRM, which would have the Office establish a blanket 
rule that draws conclusions about private contracts.\269\ Instead, the 
Office concludes that a reasonable and appropriate approach is to 
promulgate a rule that: (1) Incorporates the statutory reference to 
GAAP in section 115(d)(10)(B)(iv)(I) and confirms this includes 
principles with respect to derecognition of liabilities where 
appropriate; (2) clarifies that the requirements of section 
115(d)(10)(B)(iv)(II) do not supersede a relevant voluntary agreement 
to the contrary; and (3) with respect to section 
115(d)(10)(B)(iv)(III), adopts an estimate and adjustment mechanism for 
cases where certain usage of certain unmatched works is believed to be 
subject to a voluntary agreement, but because the specific works are 
unmatched, the DMP's accrued royalties do not fully identify which 
works are subject to such an agreement at the time of delivery of the 
cumulative statement to the MLC and the amount of accrued royalties may 
need to be adjusted in response to matching.
---------------------------------------------------------------------------

    \269\ Id. Add. at 22; see also NPRM at 43523; NMPA Ex Parte 
Letter at 2 (Aug. 25, 2020) (``[R]esolution of issues and disputes 
concerning privately negotiated agreements such as the pending and 
unmatched settlement agreements . . . is to be addressed through 
state contract law and discussions between the contracting 
parties.''); MLC NPRM Comment at 8-9 (accord).
---------------------------------------------------------------------------

    GAAP treatment. To address, in part, the discussed ambiguities in 
section 115(d)(10)(B)(iv) and to clarify the operation of subclause 
(I), the SNPRM proposed language stating that ``[a]ccrued royalties 
shall be maintained by the digital music provider in accordance with 
generally accepted accounting principles, including those concerning 
derecognition of liabilities.'' \270\ The SNPRM also stated that 
``[a]ccrued royalties can cease being accrued royalties within the 
meaning of 17 U.S.C. 115(e)(2) if the digital music provider's payment 
obligation is extinguished, such as pursuant to a voluntary license or 
other agreement whereby the digital music provider is legally released 
from the liability by the relevant creditor copyright owner.'' \271\
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    \270\ SNPRM at 70548; see id. at 70546 (citing Fed. Acct. 
Standards Bd. (``FASB'') Acct. Standards Codification (``ASC''), 
titled ``Derecognition'').
    \271\ Id. at 70548.
---------------------------------------------------------------------------

    The MLC and other commenters object, contending that this language 
conflicts with the statute and blesses an incorrect interpretation of 
GAAP.\272\ On the first point, as discussed, the Office has concluded 
that the regulatory clarification to address an area of ambiguity is 
appropriate. On the second, the Office is unconvinced that 
incorporating the statutory directive to maintain accrued royalties in 
accordance with GAAP can be read as blessing a specific interpretation 
of GAAP.\273\ To the extent the proposed language expressly 
acknowledges a GAAP provision that DMPs indicate is relevant to their 
reporting, and to the extent that copyright owners disagree that this 
provision is, in fact, relevant, copyright owners may contest whether a 
DMP has appropriately applied GAAP, but the Office will not presume 
that DMPs may not rely upon this provision.\274\
---------------------------------------------------------------------------

    \272\ See, e.g., MAC, Recording Acad., & SONA SNPRM Comment at 
2-3; MLC SNPRM Comment at 2-10; NMPA Ex Parte Letter at 1-2 (Nov. 
17, 2020); MLC Ex Parte Letter at 2-5 (Nov. 17, 2020); SGA, SCL & 
MCNA Ex Parte Letter at 3 (Nov. 17, 2020).
    \273\ See 17 U.S.C. 115(d)(10)(B)(iv)(I) (``Accrued royalties 
shall be maintained by the digital musical provider in accordance 
with generally accepted accounting principles.'').
    \274\ See MLC SNPRM Comment at 2-10. The MLC's approach seems to 
assume that the principle that derecognition is only appropriate if 
there is payment to the creditor or a release ``judicially or by the 
creditor'' cannot be used to reflect payments to, and/or releases 
by, creditors that are made on a creditor basis as opposed to a 
title-bound basis. See id. at 7. The MLC does not fully explain the 
basis for its assumption, which the DLC does not share. See DLC NPRM 
Comment at 17. Neither party submitted statements from any 
accounting authority in support of their respective contentions.
---------------------------------------------------------------------------

    Nor is the Office convinced by the MLC's contention that ``since 
the copyright owners of unmatched works are by definition not known or 
located, there cannot be private agreements that dispose of these 
unmatched royalties prior to the required transfer to the MLC.'' \275\ 
The MLC does not adequately support this assertion or point to relevant 
principles of contract law. While the DLC does not cite clear authority 
either, its reasoning is more persuasive:
---------------------------------------------------------------------------

    \275\ See MLC Ex Parte Letter at 2-3 (Nov. 17, 2020); see also 
MLC SNPRM Comment at 6-8; MLC Ex Parte Letter at 3-4 (Oct. 16, 
2020); Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 2020).

    [These assertions are] patently wrong: It is common in the 
industry, if not standard, for full-catalog licenses not to identify 
each work covered, and for the list of covered works to change from 
time to time. . . . [I]t is precisely for this reason that the MLC 
must provide a response file identifying the works covered by a 
voluntary license, in order to allow the licensee to calculate the 
royalties owed pursuant to the blanket license for the remaining 
works. To suggest that the license simply does not exist or is 
ineffective until that matching takes place is contrary to the law 
and is inconsistent with long-standing industry practice. Moreover, 
the notion that derecognizing liability for unmatched royalties can 
never be appropriate unless and until all royalties are matched 
ignores the reality of the market. If the owners of the works that 
generated over 90% of the royalties have released their claims, 
there is no need to know exactly which owner released which 
royalties to know that there is not an outstanding liability of 100% 
of the royalties.\276\
---------------------------------------------------------------------------

    \276\ See DLC SNPRM Comment at 9.

    Indeed, a public version of an agreement purporting to be one of 
the agreements referenced by the DMPs includes a broadly worded release 
provision that would apply to claims ``whether disclosed or 
undisclosed, whether known or unknown, whether asserted or unasserted, 
whether determined, determinable or otherwise, whether strict, absolute 
or continent, whether accrued or unaccrued, whether liquidated or 
unliquidated, whether in law, in equity, or otherwise, whether incurred 
or consequential, whether due or to become due, and of any kind or

[[Page 2195]]

nature whatsoever.'' \277\ If a relevant voluntary agreement were 
worded appropriately, it would be difficult to see how a work would not 
be subject to the agreement just because it is not matched at a 
particular point in time by a particular DMP; a work belonging to a 
copyright owner under the relevant period of agreement still belongs to 
that owner regardless of whether the DMP knows it. Moreover, if the 
DMPs' assertions about GAAP are correct, the MLC's position seems to 
read the word ``accrued'' out of subclause (III).\278\ Only ``accrued 
royalties'' for uses of unmatched works must be transferred to the MLC, 
and these may not necessarily be the same as the royalties that would 
otherwise be attributable to such usage under the statutory rate in the 
absence of any voluntary agreements that may extinguish or alter such 
royalty obligations for certain uses of certain works.\279\
---------------------------------------------------------------------------

    \277\ See Participating Publisher Pending and Unmatched Usage 
Agreement 15 (2016) (embedded in Paul Resnikoff, Exclusive: This Is 
the Contract Songwriters Are Signing With Spotify, Digital Music 
News (Apr. 27, 2016) https://www.digitalmusicnews.com/2016/04/27/exclusivespotify-establishing-direct-publisher-contracts-to-solve-mechanicals-issues (document is embedded in article)). The Office 
again emphasizes that it is not in any way opining on the meaning of 
this or any other relevant private agreement, but noting the 
language used as a potential example. No party disputes the DLC's 
suggestion that this public version of the agreement is authentic, 
although the MLC and others note that there exist supplemental 
agreements and other documentation concerning negotiation or 
performance. See, e.g., MLC SNPRM Comment at 9.
    \278\ See DLC SNPRM Comment at 10.
    \279\ See MLC SNPRM Comment at 8-9.
---------------------------------------------------------------------------

    The Office also disagrees that the requirement for accrued 
royalties to be ``maintained'' in accordance with GAAP must be read to 
prohibit royalties from ceasing to be maintained.\280\ It is far more 
logical that relevant principles governing maintenance of such 
royalties may dictate how and under what circumstances or conditions 
such maintenance may conclude prior to the events of subclauses (II) 
and (III). In light of the foregoing, the Office is adopting as final 
the proposed language clarifying that GAAP treatment can include its 
derecognition principles where appropriate, to make clear that ``[t]he 
financial structures and allowances of GAAP are incorporated in their 
entirety.'' \281\
---------------------------------------------------------------------------

    \280\ See id. at 5-6, 8 (``Maintaining an accrued liability 
under GAAP means maintaining accounting records and financial 
statements that reflect the details of the accrual.''); MLC Ex Parte 
Letter at 3-4 (Oct. 16, 2020) (arguing it ``does not appear 
reasonable'' if ``producing a result where the DMP in fact does not 
maintain the accrued royalties''); Recording Acad. & SONA Ex Parte 
Letter at 2 (Nov. 17, 2020) (``The provision to `maintain' accrued 
royalties in accordance with GAAP is meant to safeguard the 
royalties until they can be successfully matched to the owner or 
transferred to the MLC.'').
    \281\ ARA, FMC, & MusicAnswers SNPRM Comment at 3; see DLC SNPRM 
Comment at 9.
---------------------------------------------------------------------------

    With respect to the MLC's assertion that the SNPRM blesses an 
incorrect interpretation of GAAP, the Office does not concur. The 
Office agrees, however, that it can clarify that it is not opining on 
what GAAP may or may not allow. Accordingly, the final rule omits the 
second sentence of the proposed provision, relating to the interaction 
between GAAP and the statute. The Office intends for this deletion to 
make clear that to the extent something (e.g., the potential 
extinguishment of a DMP's payment obligation pursuant to a voluntary 
license or other agreement whereby the DMP is legally released from the 
liability by the relevant creditor copyright owner) is permitted under 
GAAP, it is also permitted under the statute and regulations. While the 
rule does not opine on whether royalty payment liabilities were 
appropriately extinguished and derecognized by DMPs pursuant to GAAP, 
the final rule accommodates that possibility within the MMA's 
transitional cumulative reporting and payment structure if DMPs are 
correct in their assertions about GAAP with respect to their relevant 
agreements. The Office believes this approach is reasonable 
particularly in light of the asserted purpose of certain voluntary 
agreements at issue.\282\
---------------------------------------------------------------------------

    \282\ See NMPA and Spotify Announce Landmark Industry Agreement 
for Unmatched U.S. Publishing and Songwriting Royalties (Mar. 17, 
2016), https://nmpa.org/press_release/nmpa-and-spotify-announce-landmark-industry-agreement-for-unmatched-u-s-publishing-and-songwriting-royalties (noting ``the agreement establishes a large 
bonus compensation fund that is a substantial percentage of what is 
currently being held by Spotify for unmatched royalties'').
---------------------------------------------------------------------------

    Voluntary agreements and works matched during the transition 
period. As noted, the limitation on liability provision makes no 
explicit acknowledgement of the existence of voluntary licenses or 
other agreements, while Congress has elsewhere broadly encouraged and 
given effect to voluntary licenses (including by preserving existing 
licenses). In the absence of clear congressional intent otherwise, to 
harmonize these provisions and ensure that such agreements are given 
effect in the context of the limitation on liability as well, the SNPRM 
proposed to limit the application of the requirements in section 
115(d)(10)(B)(iv)(II) where a voluntary license or other relevant 
agreement, entered into before the statutory reporting and payment 
deadline, applies to the relevant musical work (or share) that the DMP 
has matched during the transition period.\283\ That way, the DMP can 
pay and report, and the copyright owner can receive royalties and 
reporting, in accordance with their preexisting or a newly-entered-into 
mutual agreement. Notably, even the MLC seems to concur that voluntary 
agreements should apply in lieu of the requirements detailed in section 
115(d)(10)(B)(iv)(II).\284\ This aspect of the proposed rule is being 
adopted as final, as a necessary and appropriate clarification.
---------------------------------------------------------------------------

    \283\ See SNPRM at 70548.
    \284\ See MLC Ex Parte Letter at 7 (Nov. 17, 2020) (``Section 
115(d)(10)(B)(iv)(II) is fully consistent on its face with the 
payment of royalties under voluntary license terms.'').
---------------------------------------------------------------------------

    Estimating and adjusting accrued royalties reported and transferred 
to the MLC. All agree that, at a minimum, the total accrued royalties 
owed by a DMP at the end of the transition period may not be a finally 
calculable figure because of the need to estimate certain royalty pool 
inputs that are unknown at that point in time. At present, because of 
the Phonorecords III remand, no final operative rates have been set; 
not even a rate structure has been finally established. This means 
that, even in the absence of any other need to estimate and adjust, 
whatever amount is transferred to the MLC in February is unlikely to 
align with what a DMP will ultimate owe under the finally determined 
rates and terms. Because of this need to make estimates and 
adjustments, the Office concluded, as discussed above, that the 
statutory reference in section 115(d)(10)(B)(iv)(III)(aa) to ``all 
accrued royalties'' cannot be read to prohibit a regulatory structure 
permitting DMPs to make estimates and subsequent adjustments. 
Anticipating this conclusion, the SNPRM omitted the word ``all'' from 
the proposed regulatory language to alleviate any ambiguity.\285\
---------------------------------------------------------------------------

    \285\ See SNPRM at 70548.
---------------------------------------------------------------------------

    The MLC opposed the deletion, stating that ``the SNPRM's provisions 
for less than all accrued royalties to be transferred conflicts with 
the MMA,'' which seems inconsistent with its agreement that royalty 
pool inputs should be subject to estimation and adjustment, including 
regulations specifically addressing the ``underpayment of royalties'' 
(i.e., some amount less than ``all'').\286\ The MLC appears to believe 
that allowing for potential underpayment is appropriate where the 
reason is due to an unknown royalty pool input, but not where the 
reason is due to the unknown applicability of a voluntary agreement;

[[Page 2196]]

it does not adequately explain its basis for this distinction.\287\ 
Nevertheless, to address the MLC's comment, the final rule restores the 
word ``all'' and resolves any ambiguity by adding clarifying language 
that it is subject to the ability to estimate and adjust pursuant to 
other regulatory provisions.
---------------------------------------------------------------------------

    \286\ See MLC SNPRM Comment at 3-4, 13-14, App. A at v, ix-x.
    \287\ This distinction is striking given that the MLC did not 
oppose the inclusion of a provision in regulations governing reports 
of usage under the MMA's blanket license that permits DMPs in 
similar circumstances to, subject to later adjustment, ``compute the 
royalties payable by the blanket licensee under the blanket license 
using a reasonable estimation of the amount of payment for [usage 
subject to applicable voluntary licenses and individual download 
licenses] to be deducted from royalties that would otherwise be due 
under the blanket license, determined in accordance with GAAP.'' See 
37 CFR 210.27(d)(2)(ii); MLC NPRM Comment at 34-35, U.S. Copyright 
Office Dkt. No. 2020-5, https://www.regulations.gov/document?D=COLC-2020-0005-0014 (acknowledging the need for estimates in this 
context).
---------------------------------------------------------------------------

    In addition to identifying the possibility of needing to estimate 
and adjust royalty pool inputs, the SNPRM recognized another type of 
unknown variable that could affect the calculation of accrued 
royalties: whether an unmatched work is subject to a voluntary 
agreement whereby the DMP's payment obligations have been extinguished, 
whether by blanket or advance payment, release of claims, or otherwise 
(to the extent permitted by GAAP and thereby the statute). The SNPRM 
proposed an estimate and adjustment mechanism to cover this scenario as 
well, as follows:\288\
---------------------------------------------------------------------------

    \288\ See SNPRM at 70548-49.
---------------------------------------------------------------------------

     Under paragraph (c)(4), a DMP would have to report on all 
unmatched usage, meaning that the royalty calculation provisions in 
paragraph (d), which are tied to paragraph (c)(4), would require 
reporting of the total potential royalties, calculated at the 
applicable rate under 37 CFR part 385, that could be owed for all such 
usage. Such calculations would be subject to potential estimation of 
royalty pool inputs under paragraph (d)(2).
     Under paragraph (c)(5)(i), a DMP would be permitted to 
report total accrued royalties that employ reasonable estimations if it 
has a reasonable good-faith belief that the total accrued royalties are 
less than the total potential royalties calculated under paragraph 
(c)(4), and the unmatched status of relevant musical works at the end 
of the transition period requires reliance upon estimations in 
calculation of such accrued royalties.
     Under paragraph (c)(5)(ii), DMPs reporting and 
transferring accrued royalties that employ estimations would have to 
provide detailed information about any voluntary agreement being relied 
on in making a (c)(5)(i) estimation so that the MLC is able to confirm 
uses of musical works subject to such an agreement. The required 
information largely tracks information about voluntary licenses 
required to be reported to the MLC under the blanket license for 
similar purposes.\289\
---------------------------------------------------------------------------

    \289\ See 37 CFR 210.24(b)(8).
---------------------------------------------------------------------------

     Under paragraph (c)(5)(iii), the MLC would have to engage 
in efforts to confirm uses of musical works that are subject to any 
identified agreement, and may notify relevant copyright owners about 
the DMP's reliance. Where the MLC confirms that a reported use of a 
musical work is subject to an identified agreement, the MLC would be 
required to presume that the DMP appropriately relied on the agreement, 
and during the pendency of any dispute between a DMP and copyright 
owner over the DMP's reliance, the MLC would not be permitted to make a 
corresponding distribution to the copyright owner or treat the amount 
at issue as an overpayment unless directed to do so by agreement of the 
parties or by order.
     Under paragraph (c)(5)(iv), if a DMP's estimate turns out 
to be insufficient to cover a required distribution to a copyright 
owner, the MLC would deliver an invoice and/or response file to the DMP 
for the additional amount outstanding (including interest) along with 
the basis for the MLC's conclusion that such amount is due. The DMP 
would have 14 business days to pay the invoiced amount or dispute the 
bill. If the bill were disputed, the MLC would notify the relevant 
copyright owner. If a DMP were ultimately found by an appropriate 
adjudicative body to have erroneously withheld any accrued royalties--
whether as part of its estimate or in response to an MLC bill--it would 
be able to potentially remain in compliance with the regulations for 
purposes of retaining its limitation on liability if the other 
requirements for the limitation have been satisfied, the additional 
amount due is paid, and the DMP did not withhold the royalties 
unreasonably or in bad faith.
     Under paragraph (c)(5)(v), an overpayment based on a 
(c)(5)(i) estimate would be subject to credit or refund like any other 
overpayment.
     Under paragraph (c)(5)(vi), any underpayment of royalties 
would have to be remedied by a DMP without regard for the relevant 
statute of limitations, and by using an estimate--whether under 
(c)(5)(i) or (d)(2)--the DMP would be deemed to have agreed to waive 
any statute-of-limitations-based defenses with respect to any asserted 
underpayment of royalties connected to the use of the estimate.
    To provide a workable estimate and adjustment mechanism that is 
consistent with the statute and congressional aims, and that 
appropriately balances the flexibility DMPs need to help ensure they 
participate in the limitation on liability against the right of 
copyright owners to receive complete and prompt payment of accrued 
royalties (to the extent a DMP participates), the Office is adopting 
many core aspects of the proposed rule as final, while making 
significant modifications in response to various stakeholder concerns, 
as discussed below.
    The MLC and others oppose the SNPRM's proposed rule primarily on 
the grounds that it would allow DMPs to improperly deduct accrued 
royalties, that it would improperly shift burdens from DMPs to 
copyright owners and otherwise prejudice copyright owners, and that it 
will lead to the increased litigation the proposed rule sought to 
avoid.\290\ The Office addresses each in turn.
---------------------------------------------------------------------------

    \290\ See, e.g., MLC SNPRM Comment at 11-13; SGA, SCL & MCNA 
SNPRM Comment at 9; MAC, Recording Acad., & SONA SNPRM Comment at 2; 
MLC Ex Parte Letter at 5-6 (Nov. 17, 2020); NMPA Ex Parte Letter at 
1-2 (Nov. 17, 2020); NSAI Ex Parte Letter at 1 (Nov. 17, 2020).
---------------------------------------------------------------------------

    With respect to deductions, commenters seem to misunderstand the 
SNPRM's proposal, and therefore no changes are being made in the final 
rule with respect to this concern. To be clear, the final rule does not 
permit deductions of accrued royalties; all accrued royalties must be 
transferred to the MLC. The rule merely allows DMPs, in transferring 
such accrued royalties by the statutory deadline, to rely upon 
temporary estimates, subject to later adjustment, where that precise 
figure of all accrued royalties is not otherwise ascertainable at that 
time.
    For example, if the total potential royalties (calculated at the 
statutory rate) attributable to all of a DMP's unmatched usage is $20 
million, the rule does not permit the DMP to deduct $5 million because 
that is what it previously paid out under certain pre-MMA agreements. 
Instead, the rule acknowledges that DMPs may be correct that because of 
such agreements--whether due to previous payment, claim release, or 
otherwise--some portion of the $20 million may not constitute accrued 
royalties at the time of required transfer to the MLC in February.\291\ 
In

[[Page 2197]]

other words, certain unmatched usage may no longer have outstanding 
accrued royalties associated with it at the time of transfer because, 
to the extent permitted under GAAP, those liabilities may have been 
appropriately derecognized by the DMP. The rule allows the DMP to 
employ reasonable estimations, subject to adjustment, where the 
unmatched status of the work prevents the DMP from definitively 
confirming whether or not it is subject to a relevant voluntary 
agreement.\292\ If the DMP appropriately calculates that $15 million 
are accrued royalties, then that is what it must transfer in February. 
If, after the MLC later engages in its matching activities,\293\ it is 
discovered that the DMP's estimate was off because it mistakenly, but 
in good faith, believed certain usage of works to be subject to certain 
agreements when in fact the opposite turns out to be true once they 
have been identified, the DMP will either need to make a true-up 
payment for any shortfall or may be entitled to credit or refund for 
any surplus.
---------------------------------------------------------------------------

    \291\ It may not matter how much was paid or whether the payment 
constituted royalties under relevant voluntary agreements. See MLC 
NOI Reply Comment at 29 (``Simply paying lump sums of money to 
publishers who threaten to sue for copyright infringement is in no 
sense the equivalent of paying unclaimed accrued royalties. . . . 
Rather, settlement payments are more likely consideration for 
releases from liability for copyright infringement or covenants not 
to sue.''); MAC, Recording Acad., & SONA SNPRM Comment at 3; MLC Ex 
Parte Letter at 3 (Oct. 5, 2020). As a legal principle, it is not 
clear why the amount of consideration or how the consideration is 
classified should be material if the result is still an 
appropriately worded full and complete release of relevant royalty 
claims for a given period. Moreover, a voluntary license could 
theoretically, for example, be structured as a blanket license for 
all of an owner's works (without listing them) for which a one-time 
flat fee was paid for a covered period. Regardless of how common 
such an arrangement may be, the possibility of its existence 
highlights flaws in commenters' argument on this point.
    \292\ See, e.g., DLC SNPRM Comment at 9 (``If the owners of the 
works that generated over 90% of the royalties have released their 
claims, there is no need to know exactly which owner released which 
royalties to know that there is not an outstanding liability of 100% 
of the royalties.'').
    \293\ The MLC has ``confirmed that its goal is to match all 
unmatched uses, including all historical unmatched uses for which 
accrued royalties are transferred to the MLC, and to minimize the 
incidence of unclaimed accrued royalties. The MLC's position has 
always been, and remains, that it can and will hold unmatched 
royalties for longer than the required minimum statutory period 
where appropriate in service of this goal.'' MLC Ex Parte Letter at 
2 (Nov. 17, 2020).
---------------------------------------------------------------------------

    Thus, this is not a question of whether copyright owners will or 
will not see the money owed to them. It is only a question of when, and 
even then, that question only becomes relevant to the extent the DMP's 
February 2021 payment--which must be reasonable, determined in 
accordance with GAAP, made in good faith and on the basis of the best 
knowledge, information, and belief of the DMP at the time--ends up 
being an inadvertent underpayment. While some commenters raised statute 
of limitations concerns,\294\ as noted, the rule anticipates and 
accounts for this explicitly, so it should not impede the recovery of 
any underpaid royalties.\295\ To the extent some commenters also raise 
concerns about possible delayed payments to copyright owners, these are 
unfounded.\296\ Copyright owners receive royalty distributions from the 
MLC either when the MLC matches usage to the owner or when the MLC 
makes a distribution of unclaimed accrued royalties to identified 
owners after a prescribed holding period. No money can be distributed 
until one of these events occurs, and a potential distribution of 
unclaimed accrued royalties cannot occur until 2023 at the earliest, 
and may well be later.\297\ If there is a shortfall due to a DMP's 
estimate, the rule requires DMPs to pay the difference (with interest) 
within 14 business days after being billed by the MLC. That is hardly 
an undue delay when weighed against the reasons for permitting 
estimates.
---------------------------------------------------------------------------

    \294\ See SGA, SCL & MCNA SNPRM Comment at 10.
    \295\ While the DLC ``agrees with the aspect of the proposed 
rule that builds in protection for copyright owners by preserving 
their legal claims in the event that a DMP fails to remedy an 
underpayment of royalties,'' it proposes certain modifications ``to 
clarify that the defense is waived where the underpayment is one 
that is determined pursuant to the procedures in the rule, and is 
not remedied.'' DLC SNPRM Comment at 16; see DLC Ex Parte Letter at 
2 n.7 (Dec. 11, 2020). The Office declines this request. The waiver 
provision is meant to be broad and not limited merely to the MLC 
invoice process provided for in the rule. On the contrary, this 
provision must also cover litigation surrounding an alleged 
underpayment where it is connected to the DMP's use of an estimate.
    \296\ See, e.g., MAC, Recording Acad., & SONA SNPRM Comment at 
4; MAC Ex Parte Letter at 1 (Nov. 17, 2020).
    \297\ See 17 U.S.C. 115(d)(3)(J)(i)(I); MLC Ex Parte Letter at 2 
(Nov. 17, 2020).
---------------------------------------------------------------------------

    With respect to burden shifting and prejudice to copyright owners, 
the Office finds commenter concerns to be largely overstated, but has 
made some adjustments to the final rule. As background, the proposed 
rule would not ``improperly shift the burden of proving compliance with 
the statutory requirements for the limitation on liability from the 
DMPs, who are seeking the limitation, to copyright owners.'' \298\ In 
an infringement action, the limitation on liability would be an 
affirmative defense, and, as such, the DMP would bear the burden of 
proving compliance with its requirements.\299\ The rule does not change 
this. Second, the proposed rule would not, as the MLC suggested, 
``allow[ ] DMPs to unilaterally withhold unmatched royalties in their 
discretion.'' \300\ Rather, it would have allowed a DMP to dispute a 
bill from the MLC on a reasonable, good-faith basis, not merely because 
it hoped to avoid paying by forcing a copyright owner to sue for the 
money--which would clearly be bad faith. Third, although the Office has 
calibrated this rulemaking to discouraging litigation within relevant 
statutory parameters, copyright owners are inherently in the position 
of potentially needing to bring an infringement suit to obtain 
royalties if a DMP does not transfer accrued royalties to the MLC. the 
Office also disagrees that allowing a DMP to potentially retain its 
limitation on liability if it is adjudged to have erroneously in good 
faith withheld accrued royalties would necessarily significantly 
``impede[ ] the ability of copyright owners to enforce their rights'' 
\301\ or otherwise deprive them of a ``just remedy.'' \302\ The Office 
also notes the proposed rule limited the effect to compliance with the 
Office's regulations, not all statutory requirements. Finally, the 
record provides no basis for asserted fears of DMP insolvency.\303\
---------------------------------------------------------------------------

    \298\ See NMPA Ex Parte Letter at 2 (Nov. 17, 2020).
    \299\ See Fed. R. Civ. P. 8(c)(1); cf. Capitol Records, LLC v. 
Vimeo, LLC, 826 F.3d 78, 94 (2d Cir. 2016) (describing the section 
512 safe harbor as ``an affirmative defense'' that the ``defendant 
undoubtedly bears the burden of raising entitlement to'' and showing 
that it ``has taken the steps necessary for eligibility'').
    \300\ See MLC Ex Parte Letter at 6 (Nov. 17, 2020); see also 
NSAI Ex Parte Letter at 1 (Nov. 17, 2020).
    \301\ See NSAI Ex Parte Letter at 1 (Nov. 17, 2020); see also 
NMPA Ex Parte Letter at 2 (Nov. 17, 2020) (citing 17 U.S.C. 
115(d)(10)(D)).
    \302\ See MLC Ex Parte Letter at 6 (Nov. 17, 2020).
    \303\ Compare id. at 5-6 and MLC SNPRM Comment at 12 n. 4 with 
DLC SNPRM Comment at 11-12 n.32 (``Just because a DMP cannot re-pay 
millions of dollars of accrued royalties for nearly the entire 
market of usage for certain time periods does not suggest it would 
not be able to pay a potential shortfall to one or more copyright 
owners if it were to have incorrectly estimated the accrued 
royalties. . . .'').
---------------------------------------------------------------------------

    Nevertheless, to alleviate some of these concerns, the final rule 
has been adjusted to reach a better balance between copyright owners 
and DMPs. A significant change is how the final rule handles a dispute 
between a DMP and a copyright owner over the DMP's reliance on an 
agreement in connection with its estimation and adjustment of accrued 
royalties. Although, as noted, the available record suggests such 
disputes may be uncommon,\304\ the final rule establishes a better-
dispute mechanism for this eventuality,

[[Page 2198]]

whereby the MLC will hold disputed funds, as the MLC and others argue 
it should.\305\
---------------------------------------------------------------------------

    \304\ See, e.g., DLC SNPRM Comment at 5 (``[T]here is nothing in 
the record to assume or even suggest that any DMP is likely to rely 
on a release improperly.''); SATV Ex Parte Letter at 2 (Oct. 28, 
2020); Spotify Ex Parte Letter at 4-5 (Oct. 9, 2020); WMG Ex Parte 
Letter at 1 (Oct. 21, 2020); UMPG Ex Parte Letter at 1 (Oct. 30, 
2020).
    \305\ See MAC, Recording Acad., & SONA SNPRM Comment at 4 
(``[T]he MLC should be viewed as a trusted party to hold the 
disputed funds for the benefit of both copyright owners and digital 
services.''); MLC Ex Parte Letter at 5 (Oct. 5, 2020) (``[I]n the 
event of any such legal dispute between a DMP and a copyright owner 
concerning the right to receive unmatched royalties that the DMP had 
turned over under the MMA, the MLC would hold such unmatched 
royalties pending the resolution of the dispute.''); MLC Ex Parte 
Letter at 6 (Nov. 17, 2020) (suggesting the MLC would hold funds in 
dispute); MLC SNPRM Comment at 11, 13 (same).
---------------------------------------------------------------------------

    After receiving the detailed information about any voluntary 
agreement being relied upon by the DMP in making its estimation, the 
MLC will be required to promptly notify relevant copyright owners of 
such reliance. A notified copyright owner may then dispute the 
appropriateness of the DMP's reliance by notifying the MLC within one 
year.\306\ The copyright owner's notification must describe its basis 
with particularity and must be certified as being made in reasonable 
good faith. The notice must also specify whether the owner is disputing 
reliance with respect to potential distributions based on matched usage 
or of unclaimed accrued royalties under section 115(d)(3)(J), or both. 
The MLC must then promptly provide the DMP with any such notification 
it receives.
---------------------------------------------------------------------------

    \306\ This time limit is only for the administrative process 
described in the rule involving the MLC holding disputed funds and 
is without prejudice to a copyright owner's rights to otherwise 
dispute a DMP's reliance outside of this process, such as in court.
---------------------------------------------------------------------------

    If the MLC has received a notice of dispute from a copyright owner, 
then at or around the point in time that the MLC would otherwise make a 
particular distribution to that copyright owner but for the DMP's 
reliance on the disputed agreement, the MLC must send an invoice and/or 
response file to the DMP for the amount that would otherwise be 
distributed at that time (including interest), accompanied by an 
appropriate explanation. Depending on the scope of the notice of 
dispute, this may include distributions based on matched usage and/or 
distributions of unclaimed accrued royalties under section 
115(d)(3)(J).\307\ In the case of the latter, the relevant approximate 
date to bill the DMP is the date the MLC provides the notice required 
under section 115(d)(3)(J)(iii)(II)(dd). To be clear, this means that 
the MLC may be in a position to invoice the DMP for usages that it has 
matched to a disputing copyright owner, while not yet able to invoice 
for unmatched remaining usages. Where a copyright owner delivers a 
notice of dispute after the relevant point in time has passed for a 
particular distribution, the MLC should bill the DMP promptly after 
receiving the notification. Upon receiving the bill, the DMP has 14 
business days to pay the invoiced amount, which is then held by the MLC 
pending resolution of the dispute.
---------------------------------------------------------------------------

    \307\ The Office declines at this time to opine on statutory 
requirements surrounding distributions of unclaimed accrued 
royalties under section 115(d)(3)(J); that issue is not within the 
scope of this proceeding. See ARA, FMC, & MusicAnswers SNPRM Comment 
at 4-5 (addressing this issue); MAC, Recording Acad., & SONA SNPRM 
Comment at 4-5 (same). The statute provides that the MLC's unclaimed 
royalties oversight committee will establish relevant policies and 
procedures, 17 U.S.C. 115(d)(3)(J)(ii), and Congress has made clear 
that ``it is expected that such policies and procedures will be 
thoroughly reviewed by the Register to ensure the fair treatment of 
interested parties,'' S. Rep. No. 115-339, at 5. As there will be no 
such distribution until 2023 at the earliest, there is ample time 
for the Office to provide guidance if necessary.
---------------------------------------------------------------------------

    Because the holding of such funds would not be pursuant to policies 
and procedures that the MLC's dispute resolution committee is empowered 
to adopt to govern ownership disputes,\308\ the final rule dictates how 
the MLC must hold the disputed funds. The MLC must hold the newly 
transferred funds in accordance with section 115(d)(3)(H)(ii) (e.g., 
with interest) without regard for whether or not the funds are in fact 
accrued royalties. The MLC must not make a distribution of the funds or 
treat them as an overpayment unless directed to do so pursuant to the 
agreement of the relevant parties or by order of an appropriate 
adjudicative body. If the MLC has not been so directed within one year 
after the DMP transfers the disputed funds, and if there is no active 
dispute resolution occurring at that time (e.g., litigation, 
arbitration, mediation, private settlement discussions), then the MLC 
shall credit or refund the disputed funds back to the DMP. Any 
resolution of the dispute should be reflected in the MLC's ongoing 
administration activities.
---------------------------------------------------------------------------

    \308\ See 17 U.S.C. 115(d)(3)(G)(i)(III)(bb), (K).
---------------------------------------------------------------------------

    The Office believes these changes are a reasonable accommodation to 
help allay concerns about DMP insolvency and ensure that disputed funds 
are held somewhere that copyright owners trust and that is subject to 
public disclosure and oversight. At the same time, several features 
built into this dispute framework (e.g., that it has to be triggered by 
the copyright owner, the certification requirement, the timing of when 
a DMP may need to transfer disputed funds, the limited holding period 
if there are no active efforts at resolution) should quell concerns 
about it becoming a back door compelling DMPs to make large potential 
double payments up front whenever an unfounded general dispute is 
raised.
    With respect to the MLC's presumption that the DMP has 
appropriately relied upon the relevant agreement, that aspect of the 
proposed rule is retained in the final rule, with the clarification 
that the presumption applies where there is no dispute raised by the 
relevant copyright owner. It is unclear why the MLC should object to 
this,\309\ as it should not be exercising independent judgment or 
discretion with respect to a DMP's asserted reliance on a voluntary 
agreement.\310\ That is a private matter between the parties to the 
agreement.
---------------------------------------------------------------------------

    \309\ See MLC SNPRM Comment at 11-12 (``[T]he SNPRM would place 
the MLC in the middle, requiring the MLC to administer the 
agreements, and further to `presume' that DMPs `appropriately 
relied' on agreements (which would not even be provided to the MLC). 
Requiring the MLC to make presumptions in favor of certain disputing 
parties, let alone presumptions unconnected to knowledge or 
accuracy, is unreasonable and inconsistent with its mandate.'') 
(internal citation omitted).
    \310\ This is somewhat similar to what is required of the MLC in 
the context of the blanket license. There, the MLC will receive a 
similar level of information about voluntary licenses, see 37 CFR 
210.24(b)(8), and then must use that information to ``confirm uses 
of musical works subject to voluntary licenses . . . , and, if 
applicable, the corresponding amounts to be deducted from royalties 
that would otherwise be due under the blanket license,'' 37 CFR 
210.27(g)(2)(ii).
---------------------------------------------------------------------------

    As with the proposed rule, the final rule requires that if the 
amount transferred to the MLC ends up being insufficient to cover any 
required distributions to copyright owners, the MLC must send an 
invoice and/or response file to the DMP for the amount outstanding 
(including interest) that includes an explanation of the basis for the 
MLC's conclusion that such amount is due. The key change to this 
provision is that unlike the proposed rule, the final rule does not 
permit a DMP to dispute such a bill. The DMP must pay the invoiced 
amount within 14 business days or it will not be in compliance with the 
rule and will risk loss of the limitation on liability. The inability 
to dispute such a bill cuts off a potential avenue for misuse of the 
rule's estimate and adjustment mechanism, and should help alleviate 
concerns with the SNPRM's proposed approach.
    The Office does not believe this change should cause alarm among 
DMPs. The practical effect is that a DMP cannot challenge a bill with 
respect to amounts that bear no relation to voluntary agreements that 
the DMP relied upon in estimating its accrued royalties, e.g., a bill 
that concerns time periods not covered by such an agreement or 
copyright owners who are

[[Page 2199]]

not parties. This approach is consistent with the DLC's proposal made 
in response to the NPRM \311\ and aligns with statements that ``the DLC 
and its members agree that copyright owners that did not participate in 
such an agreement should receive the full amount of royalties they may 
be owed.'' \312\ In disputes involving copyright owners who are 
allegedly parties to an effective agreement for relevant time periods, 
no such bill can be sent via this provision; either the MLC is 
prohibited from doing so because it is required to presume that the DMP 
relied appropriately, or if the copyright owner has raised a dispute, 
the separate above-discussed dispute mechanism would control.
---------------------------------------------------------------------------

    \311\ See DLC NPRM Comment at 16, Add. at 22 (proposing that 
where there are ``insufficient funds . . . to pay royalties that are 
owed to a copyright owner who has not previously released claims to 
such royalties pursuant to an [identified] agreement . . . , the 
mechanical licensing collective shall issue an invoice and/or 
response file . . . , and the digital music provider shall pay the 
additional royalties to the MLC within 45 days of receipt of such 
invoice'').
    \312\ See, e.g., DLC SNPRM Comment at 3 (``Copyright owners who 
did not participate in any pre-MMA agreements that released royalty 
obligations are not impacted by this proposed rule; they will still 
get all the royalties to which they are entitled.''); DLC NPRM 
Comment at 15-16; DLC Ex Parte Letter at 2 (Oct. 14, 2020).
---------------------------------------------------------------------------

    The final rule retains the provision that would permit a DMP to 
keep its limitation on liability even if it is adjudged to have 
erroneously withheld accrued royalties, so long as all other 
requirements for the limitation are satisfied, the additional amount 
due is paid, and the DMP is not found to have withheld the royalties 
unreasonably or in bad faith. With the final rule restricting a DMP's 
ability to dispute a bill from the MLC in the event of shortfall, 
challenges should generally be limited to circumstances where a 
copyright owner is allegedly party to an agreement relied upon by the 
DMP and the owner disputes the appropriateness of the DMP's reliance 
(assuming the DMP is otherwise in compliance with the limitation on 
liability). As noted, there is no evidence in the record that 
participating musical work copyright owners will necessarily dispute 
DMP reliance on voluntary agreements with respect to accrued 
royalties.\313\
---------------------------------------------------------------------------

    \313\ See, e.g., WMG Ex Parte Letter at 1 (Oct. 21, 2020); SATV 
Ex Parte Letter at 2 (Oct. 28, 2020); UMPG Ex Parte Letter at 1 
(Oct. 30, 2020); DLC SNPRM Comment at 5; Spotify Ex Parte Letter at 
4-5 (Oct. 9, 2020).
---------------------------------------------------------------------------

    Lastly, the Office has added a savings clause to make plain that 
nothing in the final rule should be construed as prejudicing a 
copyright owner's ability to challenge whether a DMP has satisfied the 
requirements for the limitation on liability.
    With respect to suggestions of potential increased litigation, the 
Office is not persuaded to further adjust the rule. Commenters' 
arguments are based on a speculative comparison between the volume and 
complexity of litigation they believe might ensue under the rule for 
copyright owners to rectify underpayments, and the litigation that DMPs 
might engage in without a rule to rectify overpayments and enforce 
their voluntary agreements.\314\ That is the wrong comparison. The main 
litigation the rule seeks to avoid is that which may be brought if DMPs 
choose to forego the limitation on liability and transfer nothing to 
the MLC. Indeed, the limitation on liability was enacted precisely to 
prevent such litigation. The rule provides the certainty DMPs have told 
the Office is necessary for them to participate in the limitation on 
liability instead of holding back the money as a litigation war chest. 
Potential litigation over the estimated tens of millions of dollars at 
issue with respect to these voluntary agreements pales in comparison to 
potential litigation over the estimated several hundred million dollars 
in unpaid royalties that may otherwise be withheld, including payments 
to those copyright owners who did not opt into the voluntary agreements 
at issue.
---------------------------------------------------------------------------

    \314\ See, e.g., MLC Ex Parte Letter at 6 (Nov. 17, 2020) 
(``[The proposed rule] appears likely to generate far more 
litigation activity than a DMP simply enforcing its claimed 
unambiguous contractual right to be repaid royalties that match to 
copyright owners with who it has private agreements.''); NMPA Ex 
Parte Letter at 2 (Nov. 3, 2020) (arguing that if the regulations 
``permit DSPs to not pay all of the accrued unmatched royalties that 
songwriters and copyright owners are expecting to be paid to the 
MLC, that will undoubtedly result in litigation that is far broader 
and more fundamental than an action to simply enforce a contract 
right'').
---------------------------------------------------------------------------

    By establishing a default posture that accommodates potential 
private agreements but cabins reliance upon those agreements--as well 
as disputes about those agreements--through good-faith certifications 
of the very parties who allegedly entered into them, the rule should 
forestall further litigation and foster resolution of disagreements. 
Perhaps no regulation can secure against parties engaging in litigation 
in an area so contentious that it generated historic copyright 
legislation. Certainly, the rule does not curtail the ability of a 
copyright owner or DMP to seek judicial recourse. But to the extent 
there is a legitimate dispute, the rule seeks to incentivize DMPs and 
relevant copyright owners to privately resolve these issues.
    A DMP's risk of losing its limitation on liability entirely if 
found to have acted unreasonably or in bad faith should be powerful 
motivation to try to avoid being sued, and the prospect of not being 
able to recover costs or statutory damages may make such a suit 
unappealing to a copyright owner. As noted several times, there is no 
evidence in the record that musical work copyright owners will 
necessarily dispute DMP reliance on voluntary agreements with respect 
to accrued royalties.\315\ As the MLC points out, ``there is no basis 
to think that copyright owners would spend time or money on frivolous 
litigation over their contracts with DMPs.'' \316\ Likewise, there is 
no basis to think that DMPs would act differently, such as by 
inappropriately using voluntary agreements (including those that may 
have been terminated, breached, or have performance issues), to avoid 
paying accrued royalties, or by employing unreasonable or inaccurate 
GAAP interpretations to try to rationalize a spurious underpayment.
---------------------------------------------------------------------------

    \315\ See, e.g., DLC SNPRM Comment at 5; Spotify Ex Parte Letter 
at 4-5 (Oct. 9, 2020); SATV Ex Parte Letter at 2 (Oct. 28, 2020); 
WMG Ex Parte Letter at 1 (Oct. 21, 2020); UMPG Ex Parte Letter at 1 
(Oct. 30, 2020).
    \316\ MLC SNPRM Comment at 11 (``There is no history presented 
of copyright owners acting unreasonably with respect to private 
agreements with DMPs.'').
---------------------------------------------------------------------------

3. Songwriter Concerns and Transparency Considerations
    Upon publication of the NPRM, the Office heard from a variety of 
creator groups expressing unfamiliarity with the contours of these 
agreements or confusion regarding whether payments had been passed 
through to songwriters.\317\ While the record contains some factual 
information regarding such practices, the Office notes that payment 
questions with respect to the operation of private agreements between 
publishers and songwriters are separate from this rulemaking's required 
focus on DMP obligations to transfer royalties and report information 
to satisfy the eligibility conditions for the limitation on liability. 
The MMA does not regulate the terms by which publishers (or 
administrators) and songwriters may enter into contractual 
arrangements--and certainly not on a retroactive basis, insofar as 
these questions may implicate payments passed through (or not) to

[[Page 2200]]

songwriters prior to enactment.\318\ Further, even if DMPs were to 
transfer royalties for uses subject to pre-MMA agreements, it is not 
clear whether songwriters would be entitled to any of these funds, due 
to releases provided by copyright owners to whom they have assigned 
rights.
---------------------------------------------------------------------------

    \317\ See, e.g., ARA, MAC, NSAI, Recording Acad. & SONA Ex Parte 
Letter at 1-3 (Sept. 22, 2020); Recording Acad. & SONA Ex Parte 
Letter at 2 (Nov. 17, 2020); SGA, SCL, AWFC & MCNA Ex Parte Letter 
at 1-2 (Sept. 15, 2020).
    \318\ In contrast, the section 114 license, currently 
administered by SoundExchange, does specify the percentage of 
statutory royalties that are payable to sound recording copyright 
owners, recording artists, nonfeatured musicians, and nonfeatured 
vocalists, respectively. 17 U.S.C. 114(g)(2). The MMA did not amend 
the section 115 license to adopt a similar approach.
---------------------------------------------------------------------------

    In any event, even if those agreements' details were widely public, 
it could not change the Office's analysis.\319\ Even when the MLC 
distributes matched royalties and related statements to musical work 
copyright owners (e.g., music publishers), the MMA does not further 
restrict the conditions, typically spelled out by contract, for how 
those copyright owners subsequently pay songwriters. This is true 
regardless whether the MLC is matching works connected to pre-MMA 
usages reported and payments made for purposes of eligibility for the 
limitation of liability or in connection with future usages authorized 
under the blanket license. To be sure, for those usages that the MLC 
cannot reasonably match after the prescribed holding period, the MMA 
specifies that copyright owners receiving future distributions of 
unclaimed accrued royalties by the MLC must pay or credit individual 
songwriters in accordance with applicable contractual terms, and in no 
case less than 50% of the payment received by the copyright owner 
attributable to usage of musical works.\320\ But this rulemaking is 
focused on the separate, predicate obligation for DMPs to report 
unmatched usages and transfer accrued royalties to the MLC, which in 
turn will match usages and pay copyright owners, who will pay 
songwriters (either in accordance with contract for payments connected 
to matched uses, or in accordance with contract subject to the 50% 
floor for payments for unmatched uses).
---------------------------------------------------------------------------

    \319\ See NMPA Ex Parte Letter at 2 (Nov. 17, 2020) 
(``settlements entered into prior to the enactment date of the MMA, 
in some cases even years before, could not be considered to be 
subject to the requirements of the MMA'').
    \320\ 17 U.S.C. 115(d)(3)(J)(iv).
---------------------------------------------------------------------------

    Notwithstanding this clarification, and while the Office believes 
that the rule offers a reasonable and workable compromise to concerns 
raised by the MLC, DMPs, and songwriters in a manner consistent with 
the statutory language and congressional intent, the Office also 
recognizes that multiple creator groups expressed uncertainty regarding 
the substance of these pre-MMA agreements. At the core of these 
concerns is a perceived lack of transparency concerning the existence 
and terms of these agreements,\321\ the amount of these 
agreements,\322\ and whether songwriters received payments under these 
agreements (and if so, upon what terms).\323\
---------------------------------------------------------------------------

    \321\ See, e.g., ARA, MAC, NSAI, Recording Acad. & SONA Ex Parte 
Letter at 1-3 (Sept. 22, 2020); MAC Ex Parte Letter at 1 (Nov. 17, 
2020); Recording Acad. & SONA Ex Parte Letter at 3 (Nov. 17, 2020); 
SGA, SCL, AWFC & MCNA Ex Parte Letter at 1 (Sept. 15, 2020).
    \322\ See, e.g., SGA & SCL NPRM Comment at 3; see also Cas 
Martin SNPRM Comment at 3; Rayn Jackson NPRM Comment at 1; Sophie 
Korpics SNPRM Comment at 2.
    \323\ Recording Acad. & SONA Ex Parte Letter at 2 (Nov. 17, 
2020) (``Many songwriter groups expressed continued frustration that 
so little is known about the agreements, including how much money 
was involved, how the money was accounted for, and whether 
songwriters benefited from it.'').
---------------------------------------------------------------------------

    The Office appreciates that the music publishers who met with the 
Office each confirmed individually that they followed their respective 
business practices in sharing payments received through these 
agreements with songwriters affiliated with their publishing houses. 
For example, SATV stated that ``payments made by DSPs to SATV under 
private agreements, as well as any other distribution of unmatched 
funds, whether title bound or not, are always paid through to our 
songwriters'' and offered ``to explain to our writers who inquire how 
these royalties are distributed and reflected on their statements.'' 
\324\ UMPG provided similar assurances, noting ``UMPG does so as a 
matter of policy, notwithstanding the fact that applicable contracts 
may not require payment for non-title-bound revenues.'' \325\ The 
Office does not know whether individual songwriters or creator groups 
have made inquiries to publishers in response to these letters.\326\
---------------------------------------------------------------------------

    \324\ SATV Ex Parte Letter at 2 (Oct. 28, 2020); see also WMG Ex 
Parte Letter at 1 (Oct. 21, 2020) (accord).
    \325\ UMPG Ex Parte Letter at 2 (Oct. 30, 2020).
    \326\ No creator group has reported the results of reaching out 
to publishers on this issue. See SGA, SCL & MCNA Ex Parte Letter at 
1-2 (Dec. 14, 2020) (acknowledging Office recommendation to contact 
publishers directly).
---------------------------------------------------------------------------

    To be sure, the Office continues to support greater transparency in 
the music industry. In its 2015 report, the Office identified the ``key 
principle'' that ``[u]sage and payment information should be 
transparent and accessible to rightsowners.'' \327\ Following this 
report, the Office is gratified that Congress clearly intended the MLC 
to operate ``in a transparent and accountable manner.'' \328\ And it 
appears that this rulemaking process has resulted in the voluntary 
public disclosure of additional information regarding these agreements, 
including with respect to the aggregate monies paid under the pre-MMA 
agreements.\329\ The Office cannot, however, compel publishers or DMPs 
to disclose the terms of private deals to songwriters.\330\ The Office 
encourages the interested parties to continue to engage on this matter 
and can make itself available to assist in facilitating dialogue. While 
the MMA addresses some longstanding complaints over transparency, the 
Office will keep creators' concerns in mind as it continues its 
implementation work and advises Congress on future potential 
improvements to the music ecosystem. The Office also notes that creator 
groups will have the opportunity to offer additional views on this 
issue at the upcoming Unclaimed Royalties policy study 
roundtables.\331\
---------------------------------------------------------------------------

    \327\ U.S. Copyright Office, Copyright and the Music Marketplace 
1 (2015), https://www.copyright.gov/docs/musiclicensingstudy/copyright-and-the-music-marketplace.pdf.
    \328\ S. Rep. 115-339 at 17. To that end, the Office has 
separately conducted a rulemaking aimed at furthering appropriate 
transparency of the MLC. 85 FR 58170 (Sept. 17, 2020).
    \329\ Compare SGA & SCL NPRM Comment at 3 (suggesting unmatched 
royalties encompassing a range ``from a few hundred million dollars 
to over $1.5 billion'') (citation omitted) with SGA, SCL & MCNA Ex 
Parte Letter at 2 (Nov. 18, 2020) (reflecting understanding that 
``while there remain hundreds of millions of dollars in accrued, 
unmatched royalties in the possession of the Digital Music 
Providers, tens of millions of dollars in accrued unmatched 
royalties were indeed turned over directly to music publishers 
pursuant to the terms of the confidential, private negotiated 
agreements'' (emphasis omitted)).
    \330\ ARA, FMC & MusicAnswers SNPRM Comment at 3 n.2 (``urg[ing] 
the [O]ffice to use all levers available to it''); SGA & SCL SNPRM 
Comment at 8 (stating that the Office ``has sufficient authority to 
compel disclosure of the details of the private and confidential 
agreements between DSPs and music publishers'').
    \331\ These roundtables have not been scheduled at the time of 
this rule's publication. For more information on the policy study, 
visit https://www.copyright.gov/policy/unclaimed-royalties.
---------------------------------------------------------------------------

4. Reconciliation
    Relatedly, the Office proposed language that would address 
situations where the total amount of royalties transferred does not 
match the corresponding report. Although the MLC and DLC both supported 
the NPRM's proposed reconciliation provision--whereby if the total 
royalties turned over to the MLC do not reconcile with the 
corresponding cumulative statement of account, the DMP should include a 
clear and detailed explanation of the deviation--the DLC sought two

[[Page 2201]]

minor modifications.\332\ First, the DLC ``suggest[ed] changing the 
phrase `total royalty payable' to `total royalty reported,' to avoid 
any suggestion that the amount reflected on the cumulative statement of 
account is necessarily `payable' to the MLC.'' \333\ The Office 
incorporated this technical edit into the SNPRM, proposing the phrase 
``total accrued royalty reported'' (inserting ``accrued'' for added 
precision), which it now adopts as final.\334\
---------------------------------------------------------------------------

    \332\ See DLC NPRM Comment at 4-5, Add. 23; MLC NPRM Comment at 
7-8; see also NPRM at 43522.
    \333\ DLC NPRM Comment at 4-5.
    \334\ SNPRM at 70549; see MLC SNPRM Comment App. A at v (not 
opposing this phrase).
---------------------------------------------------------------------------

    Second, the DLC's regulatory proposal added an illustrative clause 
referring to discrepancies ``due to the GAAP treatment of previously-
distributed royalties or for any other reason.'' \335\ Just as the 
Office did not include the MLC's previously proposed language about 
interest, deductions, and adjustments in the NPRM, the Office did not 
include the DLC's language in the SNPRM and declines to include it in 
the final rule, as any discrepancy of any kind should be 
explained.\336\ The DLC did not oppose this in its comments to the 
SNPRM.
---------------------------------------------------------------------------

    \335\ DLC NPRM Comment at Add. 23.
    \336\ See NPRM at 43522; SNPRM at 70549.
---------------------------------------------------------------------------

    The SNPRM further proposed that a clear and detailed explanation 
also be required if the royalties reported include use of an estimate 
permitted for computing accrued royalties in paragraph (c)(5)(i).\337\ 
This would be required whether or not there is also a discrepancy 
between the total accrued royalty reported and the actual amount 
transferred, and should describe the basis for the total accrued 
royalty reported including any deviation from the total potential 
statutory royalty attributable to all unmatched usage reported under 
paragraph (c)(4)(i). With the Office having concluded that it should 
adopt a version of this SNPRM structure as final, this corresponding 
proposal is being adopted as well. It was not opposed (other than in 
connection with certain commenters' overall opposition to this proposed 
framework), and should be helpful to the MLC in processing cumulative 
statements of account that contain any such estimates, and will result 
in MLC-held records of how any such estimates were employed.
---------------------------------------------------------------------------

    \337\ SNPRM at 70549.
---------------------------------------------------------------------------

C. Period of Reporting

    Next, the Office addresses an issue raised by MediaNet related to 
required information that may not be able to be located or recreated. 
The SNPRM solicited comments regarding whether the rule should include 
language addressing MediaNet's concern that it may be unable to provide 
pre-2013 usage data, as such data may be unavailable or inaccessible 
because it is not in the DMP's possession and may no longer be held by 
its former vendor.\338\ In operation for nearly 20 years, MediaNet 
carries a potentially greater burden to report past unmatched usages 
than newer services.\339\ MediaNet explained that it previously used 
vendors to maintain its royalty and usage data, but once those 
agreements were terminated ``the relevant data was not transferred to 
MediaNet,'' and it was unsure whether those vendors with whom it has 
terminated its relationships continued to maintain that data.\340\ 
MediaNet requested regulatory language requiring provision of all 
available data, subject to an exception addressing the circumstance 
when such information relates to usage that is over five years old and 
was held by a third-party vendor who no longer has a business 
relationship with the DMP, and such vendor cannot or will not provide 
such historic information.\341\ MediaNet explained that, without such 
an exemption, it ``may decline to take advantage of the limitation on 
liability, which may deprive copyright owners of additional accrued 
royalties.'' \342\ MediaNet further suggested that such a regulation 
would be ``consistent with the overall statutory scheme,'' because the 
statute requires reporting to be pursuant to ``applicable 
regulations,'' and the relevant reporting regulations at the time 
required that documentation related to royalties and usages needed to 
be preserved for only five years.\343\
---------------------------------------------------------------------------

    \338\ Id. at 70547 (citing MediaNet Ex Parte Letter at 2-3 (Oct. 
28, 2020)).
    \339\ See MediaNet Ex Parte Letter at 3 (Oct. 28, 2020).
    \340\ Id. at 2-3.
    \341\ Id. at 3.
    \342\ Id.
    \343\ Id. (citing 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa)).
---------------------------------------------------------------------------

    Commenter Jeff Price challenged MediaNet's assertion that royalty 
and usage information would not have been retained by MediaNet and also 
suggested that, even if this information was not retained, it could be 
recreated.\344\ In Mr. Price's experience, DMPs who used vendors to 
match works and pay mechanical royalties engaged in a workflow that 
sent output and return files between the vendor and the DMP several 
times. A DMP would send sound recording data to the vendor who would 
try to match works, the vendor would reply by sending a file listing 
matched works and whether they were licensed, the DMP would then send 
usage and metadata inputs to the vendor, and the vendor would send back 
mechanical royalty calculations addressing the total time period, each 
publisher, and each individual work.\345\ Mr. Price believes that, 
based on this workflow, ``some or all of the original elements 
necessary to calculate the mechanicals still exist.'' \346\ Mr. Price 
also suggested that other data presumably residing with MediaNet 
concerning monthly revenue, monthly subscribers, eligible streams, and 
total streams for sound recordings could be used with other known 
royalty calculation inputs to ``possibly recreate the missing 
mechanical statements.'' \347\
---------------------------------------------------------------------------

    \344\ Jeff Price Ex Parte Letter at 1, 2, 10 (Nov. 23, 2020).
    \345\ Id. at 1-2.
    \346\ Id. at 1.
    \347\ Id. at 2-7.
---------------------------------------------------------------------------

    The Office noticed this issue and requested public comment, but 
``[g]iven the timing of MediaNet's request'' did not propose its own 
regulatory language and instead requested comments on MediaNet's 
proposal.\348\ In response, only MediaNet addressed this issue. 
MediaNet affirmed that it is ``committed to ensuring that all creators 
are paid for the use of their works,'' but stated that it remained 
unclear ``whether such data exists, and can be reported to the MLC.'' 
\349\ MediaNet did not comment on either Mr. Price's assertion that 
MediaNet may still have this royalty and usage data, or the feasibility 
of Mr. Price's suggested alternative solution of recreating the 
necessary reporting information, as discussed above.
---------------------------------------------------------------------------

    \348\ SNPRM at 70547.
    \349\ MediaNet SNPRM Comment at 2.
---------------------------------------------------------------------------

    The Office understands MediaNet's concern and hopes it is able to 
locate or recreate such data to take advantage of the limitation on 
liability, but must decline to promulgate its proposed rule. As an 
initial matter, MediaNet has not confirmed whether this information 
currently exists with its former vendors or can be recreated. The 
Office is reluctant to promulgate MediaNet's requested exemption 
without a showing confirming its necessity. Further, the request 
appears to depart from statutory requirements. The operative statutory 
language contemplates that to obtain the limitation on liability a DMP 
will report ``all of the information that would have been provided to 
the copyright owner'' to the MLC.\350\ Based on the applicable 
regulations, such information would have included, for example, the 
number of phonorecords made during a reporting period, phonorecord 
identification information such as titles,

[[Page 2202]]

ISRCs, catalog numbers, ISWCs, and UPCs, and, importantly, detailed 
information on how per-work royalty allocations for these works were 
calculated.\351\ MediaNet's broad proposed exemption would deprive the 
MLC of all of this information.
---------------------------------------------------------------------------

    \350\ 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa).
    \351\ See 37 CFR 210.6(c)(3), 210.10(d), (e).
---------------------------------------------------------------------------

    The information-related reporting requirement is intended to 
facilitate the MLC in appropriately accounting for the previously 
unreported usage.\352\ This information would allow the MLC to confirm 
that the appropriate royalties are being turned over, confirm which 
matched and unmatched works have been paid, pay for any matched works, 
and consider whether to make an eventual distribution of unclaimed 
accrued royalties by market share for this period.\353\ Based on the 
above considerations, the Office declines MediaNet's proposed 
amendment.
---------------------------------------------------------------------------

    \352\ In response to the Office's NOI, the MLC asked for even 
more information to support its matching efforts. NPRM at 43518-19 
(citing MLC Reply NOI Comment App. D at 19; MLC Ex Parte Letter at 2 
n.1 (June 17, 2020)).
    \353\ See 17 U.S.C. 115(d)(3)(E), (G), (J).
---------------------------------------------------------------------------

D. Other Provisions and Additional Clarifications

    In this section, the Office addresses additional matters raised in 
this rulemaking, including those relating to record retention 
requirements, harmless errors, certifications, and voluntary agreements 
between the MLC and a DMP to alter certain procedures.
    Records of use. The SNPRM proposed to impose a ``records of use'' 
provision on DMPs for cumulative statements of account, modeled in part 
after the records of use provision that applies to DMPs under the 
reports of usage regulations.\354\ A DMP would be required to ``keep 
and retain in [their] possession all records and documents necessary 
and appropriate to support fully the information set forth in 
[cumulative statements of account and/or statements of adjustment]'' 
for at least seven years after delivering the statement to the 
MLC.\355\ Unlike the reports of usage records of use provision, the 
SNPRM did not include language allowing the MLC ``reasonable access'' 
to the DMPs' records or accompanying access limitation provisions.\356\
---------------------------------------------------------------------------

    \354\ SNPRM at 70547; 37 CFR 210.27(m) (reports of usage records 
of use provision).
    \355\ SNPRM at 70551 (``except that such records and documents 
that relate to an estimated input permitted under paragraph (d)(2) 
of this section must be kept and retained for a period of at least 
seven years from the date of delivery of the statement containing 
the final adjustment of such input'').
    \356\ 37 CFR 210.27(m)(2).
---------------------------------------------------------------------------

    The Office received comments supporting its proposed records of use 
provision and no comments in opposition.\357\ But the MLC asserted that 
``the value of the provision is largely lost without a provision for 
reasonable access to the records,'' and proposed adding the following 
language:
---------------------------------------------------------------------------

    \357\ MLC SNPRM Comment at 14 n.6; Cas Martin SNPRM Comment at 
2; see also MLC Ex Parte Letter at 2 (Oct. 5, 2020).

    The mechanical licensing collective or its agent shall be 
entitled to reasonable access to records and documents described in 
this section, which shall be provided promptly and arranged for no 
later than 30 calendar days after the mechanical licensing 
collective's reasonable request, subject to any confidentiality to 
which they may be entitled.\358\
---------------------------------------------------------------------------

    \358\ MLC SNPRM Comment at App. xi.

In response, the DLC disputed the MLC's needs for these records, 
stating that while these records may be relevant for copyright owners 
bringing related legal challenges, ``the MLC has no role in enforcing 
the accuracy of the cumulative statement of account--which is a feature 
of the limitation on liability, and not the blanket license.'' \359\
---------------------------------------------------------------------------

    \359\ DLC Ex Parte Letter at 1-2 (Dec. 11, 2020).
---------------------------------------------------------------------------

    The Office appreciates the MLC's suggestion, but is not including 
its proposed access-related language. While the statute requires that 
the records of use provision that applies to reports of usage, contain 
an MLC-access provision, there is no such requirement for cumulative 
statement of account reporting.\360\ The Office previously declined to 
promulgate access rules for pre-MMA mechanical license reporting, 
stating that ``we believe that rules governing access to business 
records . . . are beyond our authority to establish. In any event, 
judicial discovery procedures--and possible other alternatives--are 
available to copyright owners to secure such access.'' \361\ The Office 
concludes that given the lack of congressional direction and the 
ability for litigants to secure access to these records via judicial 
order, it does not need to promulgate a ``reasonable access'' 
regulation.\362\
---------------------------------------------------------------------------

    \360\ See 17 U.S.C. 115(d)(4)(A)(iii), (iv)(I).
    \361\ 43 FR 44511, 44515 (Sept. 28, 1978).
    \362\ Similarly, the record retention requirement under the non-
blanket compulsory license does not have a ``reasonable access'' 
requirement. See 37 CFR 210.8.
---------------------------------------------------------------------------

    Activity or offering clarification. The DLC asked for a 
clarification to reflect that, when a DMP reports on historic 
activities and offerings as a part of a cumulative statement of 
account, such reporting ``is to be of service offerings at the time of 
the usage, and that there is no expectation to map old categories of 
offerings onto the most recent categories of offerings.'' \363\ The 
Office confirms that it shares this understanding. In light of the 
DLC's request, it has clarified section 210.10(g) accordingly to 
expressly state that reporting requirements are related to the 
applicable activity or offering at the time of the usage.
---------------------------------------------------------------------------

    \363\ DLC SNPRM Comment at 13.
---------------------------------------------------------------------------

    Voluntary agreements to alter process. In the NPRM, the Office 
solicited comments ``regarding whether the rule should . . . permit the 
MLC and individual DMPs to enter into agreements to alter [the 
cumulative statement of account reporting] process'' and noted that, at 
that time, it was proposing ``a similar provision with respect to 
monthly reports of usage.'' \364\ The Office subsequently adopted such 
a rule for monthly reports of usage.\365\ The MLC supports including a 
similar provision for cumulative reporting, stating ``while the 
reporting required under the [NPRM] should be the baseline, every 
circumstance cannot be anticipated, and allowing the MLC the 
flexibility to address specific considerations attendant to a 
particular DMP is appropriate.'' \366\
---------------------------------------------------------------------------

    \364\ NPRM at 43521-22 (citing 85 FR at 22518, 22546).
    \365\ 37 CFR 210.27(n).
    \366\ MLC NPRM Comment at 7.
---------------------------------------------------------------------------

    The SNPRM proposed a provision modelled after that recently adopted 
in connection with monthly reports of usage, including clarification 
that certification procedures could not be altered by agreement and 
that any flexibility ``does not empower the mechanical licensing 
collective to agree to alter any substantive requirements described in 
this section, including but not limited to the required royalty payment 
and accounting information and sound recording and musical work 
information.'' \367\ Non-substantive procedures, such as reporting 
formats, could be altered by agreement, ``provided that any such 
alteration does not materially prejudice copyright owners owed 
royalties required to be transferred to the MLC or for the DMP's 
eligibility for the 17 U.S.C. 115(d)(10) limitation on liability.'' 
\368\
---------------------------------------------------------------------------

    \367\ SNPRM at 70551.
    \368\ Id. at 70547, 70551.
---------------------------------------------------------------------------

    Neither the MLC nor DLC directly addressed the SNPRM's proposal, 
although the MLC included this language in its proposed regulatory 
language and the DLC signaled general support for the Office's 
SNPRM.\369\ An

[[Page 2203]]

individual commenter also indicated support for this provision.\370\ 
The Office has incorporated this aspect of the SNPRM into the final 
rule.
---------------------------------------------------------------------------

    \369\ DLC SNPRM Comment at 1 (``DLC strongly supports the 
proposed rule noticed in the SNPRM.''); MLC SNPRM Comment at App. x.
    \370\ Cas Martin SNPRM Comment at 2-3.
---------------------------------------------------------------------------

    Harmless errors. In the SNPRM, the Office asked parties whether it 
should adopt a harmless error provision ``similar to the provision 
adopted for reporting by significant nonblanket licensees'' and noted 
that pre-MMA regulations did contain a harmless error rule pertaining 
to monthly and annual statements of account.\371\ The DLC supported 
this provision, and proposed alternate regulatory language based upon 
pre-MMA regulations governing monthly and annual statements of account: 
``Errors in a Cumulative Statement of Account or Statement of 
Adjustment that do not materially prejudice the rights of the copyright 
owner shall be deemed harmless, and shall not render that statement of 
account invalid.'' \372\ The DLC explained that cumulative, monthly, 
and annual statements of account are ``prepared using at least some of 
the same processes'' and ``include specifically the information that 
would have been included at the time of the use,'' in arguing that 
harmless errors should be treated in the same manner.\373\ It suggested 
that the inclusion of an estimate and adjustment provision would not 
``obviate the need for a harmless error provision'' as ``some harmless 
errors might not result from the use of an estimate, and/or might not 
be appropriate for adjustment.'' \374\
---------------------------------------------------------------------------

    \371\ SNPRM at 70547 n.33; see 37 CFR 210.9.
    \372\ DLC Ex Parte Letter at 3 (Dec. 11, 2020).
    \373\ Id. at 2.
    \374\ Id.
---------------------------------------------------------------------------

    The Office accepts the DLC's suggestion to promulgate a harmless 
error rule for cumulative statements of account, based on the current 
harmless error regulations governing monthly and annual statements of 
account. As the Office previously noted in the context of the monthly 
and annual statement of account harmless error rule, ``[i]t would be 
unduly severe to treat . . . inconsequential mistakes as equal to 
errors that result in material prejudice to the copyright owner.'' 
\375\
---------------------------------------------------------------------------

    \375\ 79 FR 56190, 56205 (Sept. 18, 2014).
---------------------------------------------------------------------------

    Certification requirements. With respect to the proposed 
certification requirement for cumulative statements of account, which 
no party opposes, the DLC says its members ``have interpreted the 
reference to using `processes and internal controls that were subject 
to an examination, during the past year, by a licensed certified public 
accountant,' to refer to the CPA examination that has happened for the 
2019 annual statements of account, which were distributed to publishers 
earlier this calendar year, rather than to a new CPA certification 
related to the cumulative statement of account.'' \376\ The Office 
cautions DMPs to consider the scope of the relevant CPA examination, 
and be sure that the processes and internal controls that were examined 
previously are the same processes and controls relevant to preparing 
the cumulative statement of account. If not, a DMP may need a separate 
examination for the processes and controls applicable to the cumulative 
statement of account, or it can use the alternative certification 
option that does not involve a CPA examination.
---------------------------------------------------------------------------

    \376\ DLC NPRM Comment at 5, 9.
---------------------------------------------------------------------------

    The DLC also requested changes to the signature requirements in 
provisions addressing certifications in cumulative statements of 
account. The statute requires a DMP to submit the certification that 
would have been provided to an identified copyright owner (i.e., the 
pre-existing statement of account certification) as well as ``an 
additional certification by a duly authorized officer of the digital 
music provider that the digital music provider has fulfilled the 
[statutory good-faith matching] requirements'' during the transition 
period.\377\ The NPRM proposed ``a technical change to include the 
actual language for clarity'' and moved both required certifications 
into the same paragraph.\378\ The DLC initially ``welcomed'' this 
clarification, calling it ``reasonable and appropriate.'' \379\ 
Subsequently, however, the DLC proposed edits to both certification 
provisions.\380\ It explained that the proposed regulation ``may 
unintentionally be read to limit the corporate personnel who can sign 
and certify the cumulative statement of account and the facts 
therein,'' as ``officer'' has a specific meaning under corporate 
law.\381\
---------------------------------------------------------------------------

    \377\ 17 U.S.C. 115(d)(10)(B)(iv)(III)(aa).
    \378\ NPRM at 43520.
    \379\ DLC NPRM Comment at 2, 4.
    \380\ DLC SNPRM Comment at 15 (suggesting revision parallel 
requirements for submission of notices of license; quoting 37 CFR 
210.24(c)).
    \381\ Id.
---------------------------------------------------------------------------

    The Office declines to adopt the DLC's proposed edits. It is not 
clear that the pre-existing statement of account certification, which 
is mirrored in the cumulative statement of account rule and was 
similarly just adopted as a requirement in connection with future 
reports of usage, has caused DMPs any issues since it was implemented 
years ago.\382\ Further, the cumulative statement of account 
certification language for good-faith matching is dictated by statute, 
which references ``officer'' and not ``representative.'' Finally, the 
Office has not received additional input from other potentially 
interested parties, such as the MLC, confirming they also understand 
this to be a technical clarification. For these reasons, the Office 
believes that it is better to maintain consistency for cumulative 
statements of account certifications and respectfully declines the 
DLC's proposal.
---------------------------------------------------------------------------

    \382\ 85 FR at 58152-53; see 37 CFR 210.16(f) (2015).
---------------------------------------------------------------------------

List of Subjects in 37 CFR Part 210

    Copyright, Phonorecords, Recordings.

    For the reasons set forth in the preamble, the Copyright Office 
amends 37 CFR part 210 as follows:

PART 210--COMPULSORY LICENSE FOR MAKING AND DISTRIBUTING PHYSICAL 
AND DIGITAL PHONORECORDS OF NONDRAMATIC MUSICAL WORKS

0
1. The authority citation for part 210 continues to read as follows:

    Authority: 17 U.S.C. 115, 702.


0
2. Amend Sec.  210.2 by revising paragraph (k) and removing paragraphs 
(l) through (o).
    The revision reads as follows:


Sec.  210.2  Definitions.

* * * * *
    (k) Any terms not otherwise defined in this section shall have the 
meanings set forth in 17 U.S.C. 115(e).

0
3. Amend Sec.  210.10 by revising paragraphs (b) introductory text, 
(b)(1), (b)(2) introductory text, and (b)(3)(i) and adding paragraphs 
(c) through (m) to read as follows:


Sec.  210.10  Statements required for limitation on liability for 
digital music providers for the transition period prior to the license 
availability date.

* * * * *
    (b) If the copyright owner is not identified or located by the end 
of the calendar month in which the digital music provider first makes 
use of the work, the digital music provider shall accrue and hold 
royalties calculated under the applicable statutory rate in accordance 
with usage of the work, from initial use of the work until the accrued 
royalties can be paid to the copyright owner or are required to be 
transferred to the mechanical licensing collective, as follows:

[[Page 2204]]

    (1) Accrued royalties shall be maintained by the digital music 
provider in accordance with generally accepted accounting principles, 
including those concerning derecognition of liabilities.
    (2) If a copyright owner of an unmatched musical work (or share 
thereof) is identified and located by or to the digital music provider 
before the license availability date, the digital music provider shall, 
unless a voluntary license or other relevant agreement entered into 
prior to the time period specified in paragraph (b)(2)(i) of this 
section applies to such musical work (or share thereof)--
* * * * *
    (3) * * *
    (i) Not later than 45 calendar days after the license availability 
date, transfer all accrued royalties to the mechanical licensing 
collective (as required by paragraph (i)(2) of this section and subject 
to paragraphs (c)(5) and (k) of this section), such payment to be 
accompanied by a cumulative statement of account that:
    (A) Includes all of the information required by paragraphs (c) 
through (e) of this section covering the period starting from initial 
use of the work;
    (B) Is delivered to the mechanical licensing collective as required 
by paragraph (i)(1) of this section; and
    (C) Is certified as required by paragraph (j) of this section; and
* * * * *
    (c) Each cumulative statement of account delivered to the 
mechanical licensing collective under paragraph (b)(3)(i) of this 
section shall be clearly and prominently identified as a ``Cumulative 
Statement of Account for Making and Distributing Phonorecords,'' and 
shall include a clear statement of the following information:
    (1) The period (months and years) covered by the cumulative 
statement of account.
    (2) The full legal name of the digital music provider and, if 
different, the trade or consumer-facing brand name(s) of the 
service(s), including any specific offering(s) (including as may be 
defined in part 385 of this title), through which the digital music 
provider engages, or has engaged at any time during the period 
identified in paragraph (c)(1) of this section, in covered activities. 
If the digital music provider has a unique DDEX identifier number, it 
must also be provided.
    (3) The full address, including a specific number and street name 
or rural route, of the place of business of the digital music provider. 
A post office box or similar designation will not be sufficient except 
where it is the only address that can be used in that geographic 
location.
    (4) For each sound recording embodying a musical work that is used 
by the digital music provider in covered activities during the period 
identified in paragraph (c)(1) of this section and for which a 
copyright owner of such musical work (or share thereof) is not 
identified and located by the license availability date, a detailed 
cumulative statement, from which the mechanical licensing collective 
may separate reported information for each month and year for each 
applicable activity or offering including as may be defined in part 385 
of this title, of all of:
    (i) The royalty payment and accounting information required by 
paragraph (d) of this section; and
    (ii) The sound recording and musical work information required by 
paragraph (e) of this section.
    (5) The total accrued royalty payable by the digital music provider 
for the period identified in paragraph (c)(1) of this section, computed 
in accordance with the requirements of this section and part 385 of 
this title, and including detailed information regarding how the 
royalty was computed, with such total accrued royalty payable broken 
down by month and year and by each applicable activity or offering 
including as may be defined in part 385 of this title.
    (i) Where a digital music provider has a reasonable good-faith 
belief that the total accrued royalties payable are less than the total 
of the amounts reported under paragraph (c)(4)(i) of this section, and 
the precise amount of such accrued royalties cannot be calculated at 
the time the cumulative statement of account is delivered to the 
mechanical licensing collective because of the unmatched status of 
relevant musical works embodied in sound recordings reported under 
paragraph (c)(4)(ii) of this section, the total accrued royalties 
reported and transferred may make use of reasonable estimations, 
determined in accordance with GAAP and broken down by month and year 
and by each applicable activity or offering including as may be defined 
in part 385 of this title. Any such estimate shall be made in good 
faith and on the basis of the best knowledge, information, and belief 
of the digital music provider at the time the cumulative statement of 
account is delivered to the mechanical licensing collective, and 
subject to any additional accounting and certification requirements 
under 17 U.S.C. 115 and this section. In no case shall the failure to 
match a musical work by the license availability date be construed as 
prohibiting or limiting a digital music provider's entitlement to use 
such an estimate if the digital music provider has satisfied its 
obligations under 17 U.S.C. 115(d)(10)(B) to engage in required 
matching efforts.
    (ii) A digital music provider reporting and transferring accrued 
royalties that make use of reasonable estimations must provide a 
description of any voluntary license or other agreement containing an 
appropriate release of royalty claims relied upon by the digital music 
provider in making its estimation that is sufficient for the mechanical 
licensing collective to engage in efforts to confirm uses of musical 
works subject to any such agreement. Such description shall be 
sufficient if it includes at least the following information:
    (A) An identification of each of the digital music provider's 
services, including by reference to any applicable types of activities 
or offerings that may be defined in part 385 of this title, relevant to 
any such agreement. If such an agreement pertains to all of the digital 
music provider's applicable services, it may state so without 
identifying each service.
    (B) The start and end dates of each covered period of time.
    (C) Each applicable musical work copyright owner, identified by 
name and any known and appropriate unique identifiers, and appropriate 
contact information for each such musical work copyright owner or for 
an administrator or other representative who has entered into an 
applicable agreement on behalf of the relevant copyright owner.
    (D) A satisfactory identification of any applicable catalog 
exclusions.
    (E) At the digital music provider's option, and in lieu of 
providing the information listed in paragraph (c)(5)(ii)(D) of this 
section, a list of all covered musical works, identified by appropriate 
unique identifiers.
    (F) A unique identifier for each such agreement.
    (iii)(A) After receiving the information required by paragraph 
(c)(5)(ii) of this section, the mechanical licensing collective shall, 
among any other actions required of it, engage in efforts to confirm 
uses of musical works embodied in sound recordings reported under 
paragraph (c)(4)(ii) of this section that are subject to any identified 
agreement, and shall promptly notify relevant copyright owners of the 
digital music provider's reliance on such identified agreement(s).
    (B)(1) A notified copyright owner may dispute whether a digital 
music provider has appropriately relied upon an identified agreement by 
delivering a notice of dispute to the mechanical licensing collective 
no later than one

[[Page 2205]]

year after being notified. A notice of dispute must describe the basis 
for the copyright owner's dispute with particularity and specify 
whether the copyright owner is disputing the digital music provider's 
reliance with respect to potential distributions based on matched usage 
or of unclaimed accrued royalties under 17 U.S.C. 115(d)(3)(J), or 
both. The notice must contain a certification by the copyright owner 
that its dispute is reasonable and made in good faith. The mechanical 
licensing collective shall promptly provide the digital music provider 
with a copy of any notice of dispute it receives. Nothing in this 
paragraph (c)(5)(iii)(B)(1) shall be construed as prejudicing a 
copyright owner's right or ability to otherwise dispute a digital music 
provider's reliance on an identified agreement outside of this process.
    (2) If the mechanical licensing collective receives a notice of 
dispute from an appropriate copyright owner in compliance with 
paragraph (c)(5)(iii)(B)(1) of this section, then at or around the 
point in time that the mechanical licensing collective would otherwise 
make a particular distribution to that copyright owner but for the 
digital music provider's reliance on the disputed agreement, the 
mechanical licensing collective shall deliver an invoice and/or 
response file to the digital music provider consistent with paragraph 
(h) of this section that includes the amount that would otherwise be 
distributed at that time (which shall include the interest that would 
have accrued on such amount had it been held by the mechanical 
licensing collective pursuant to 17 U.S.C. 115(d)(3)(H)(ii) from the 
original date of transfer) and an explanation of how that amount was 
determined. Depending on the scope of the notice of dispute, this may 
include distributions based on matched usage and/or distributions of 
unclaimed accrued royalties under 17 U.S.C. 115(d)(3)(J). In the case 
of the latter, the relevant approximate date to deliver the invoice 
and/or response file to the digital music provider shall be the date on 
which the mechanical licensing collective provides the notice required 
under 17 U.S.C. 115(d)(3)(J)(iii)(II)(dd). Where a copyright owner 
delivers a notice of dispute after the relevant point in time has 
passed for a particular distribution, the mechanical licensing 
collective shall deliver the invoice and/or response file to the 
digital music provider promptly after receiving the notice of dispute. 
No later than 14 business days after receipt of the invoice and/or 
response file, the digital music provider must pay the invoiced amount.
    (3) All amounts delivered to the mechanical licensing collective by 
a digital music provider pursuant to paragraph (c)(5)(iii)(B)(2) of 
this section shall be held by the mechanical licensing collective 
pending resolution of the dispute, in accordance with 17 U.S.C. 
115(d)(3)(H)(ii)(I) without regard for whether or not the funds are in 
fact accrued royalties. The mechanical licensing collective shall not 
make a distribution of the funds (or any part thereof), treat the funds 
(or any part thereof) as an overpayment, or otherwise release the funds 
(or any part thereof), unless directed to do so by mutual agreement of 
the relevant parties or by order of an adjudicative body with 
appropriate authority. If the mechanical licensing collective has not 
been so directed within one year after the funds have been received 
from the digital music provider, and if there is no active dispute 
resolution occurring at that time, the mechanical licensing collective 
shall treat the funds as an overpayment which shall be handled in 
accordance with paragraph (k)(5) of this section.
    (C) The mechanical licensing collective shall presume that a 
digital music provider has appropriately relied upon an identified 
agreement, except with respect to a relevant copyright owner who has 
delivered a valid notice of dispute for such agreement pursuant to 
paragraph (c)(5)(iii)(B)(1) of this section. Notwithstanding the 
preceding sentence, any resolution of a dispute shall be reflected in 
the mechanical licensing collective's ongoing administration 
activities.
    (iv)(A) Subject to paragraph (c)(5)(iii) of this section, if the 
amount transferred to the mechanical licensing collective by a digital 
music provider with its cumulative statement of account is insufficient 
to cover any required distributions to copyright owners, the mechanical 
licensing collective shall deliver an invoice and/or response file to 
the digital music provider consistent with paragraph (h) of this 
section that includes the amount outstanding (which shall include the 
interest that would have accrued on such amount had it been held by the 
mechanical licensing collective pursuant to 17 U.S.C. 115(d)(3)(H)(ii) 
from the original date of transfer) and the basis for the mechanical 
licensing collective's conclusion that such amount is due. No later 
than 14 business days after receipt of such notice, the digital music 
provider must pay the invoiced amount.
    (B) In the event a digital music provider is found by an 
adjudicative body with appropriate authority to have erroneously, but 
not unreasonably or in bad faith, withheld accrued royalties, the 
digital music provider may remain in compliance with this section for 
purposes of retaining its limitation on liability if the digital music 
provider has otherwise satisfied the requirements for the limitation on 
liability described in 17 U.S.C. 115(d)(10) and this section and if the 
additional amount due is paid in accordance with a relevant order.
    (v) Any overpayment of royalties based upon an estimate permitted 
by paragraph (c)(5)(i) of this section shall be handled in accordance 
with paragraph (k)(5) of this section.
    (vi) Any underpayment of royalties shall be remedied by a digital 
music provider without regard for the adjusted statute of limitations 
described in 17 U.S.C. 115(d)(10)(C). By using an estimate permitted by 
either paragraph (c)(5)(i) or (d)(2) of this section, a digital music 
provider agrees to waive any statute-of-limitations-based defenses with 
respect to any asserted underpayment of royalties connected to the use 
of such an estimate.
    (vii) Nothing in this section shall be construed as prejudicing a 
copyright owner's ability to challenge whether a digital music provider 
has satisfied the requirements for the limitation on liability.
    (6) If the total accrued royalty reported under paragraph (c)(5) of 
this section does not reconcile with the royalties actually transferred 
to the mechanical licensing collective, or if the royalties reported 
employ an estimate as permitted under paragraph (c)(5)(i) of this 
section, a clear and detailed explanation of the difference and the 
basis for it.
    (d) The royalty payment and accounting information called for by 
paragraph (c)(4)(i) of this section shall consist of the following:
    (1) A detailed and step-by-step accounting of the calculation of 
attributable royalties under applicable provisions of this section and 
part 385 of this title, sufficient to allow the mechanical licensing 
collective to assess the manner in which the digital music provider 
determined the royalty and the accuracy of the royalty calculations, 
including but not limited to the number of payable units, including, as 
applicable, permanent downloads, plays, and constructive plays, for 
each reported sound recording.
    (2) Where computation of the attributable royalties depends on an 
input that is unable to be finally determined at the time the 
cumulative statement of account is delivered to the mechanical 
licensing collective and

[[Page 2206]]

where the reason the input cannot be finally determined is outside of 
the digital music provider's control (e.g., the amount of applicable 
public performance royalties and the amount of applicable consideration 
for sound recording copyright rights), a reasonable estimation of such 
input, determined in accordance with GAAP, may be used or provided by 
the digital music provider. Royalty payments based on such estimates 
shall be adjusted pursuant to paragraph (k) of this section after being 
finally determined. A cumulative statement of account containing an 
estimate permitted by this paragraph (d)(2) should identify each input 
that has been estimated, and provide the reason(s) why such input(s) 
needed to be estimated and an explanation as to the basis for the 
estimate(s).
    (3) All information and calculations provided pursuant to paragraph 
(d) of this section shall be made in good faith and on the basis of the 
best knowledge, information, and belief of the digital music provider 
at the time the cumulative statement of account is delivered to the 
mechanical licensing collective, and subject to any additional 
accounting and certification requirements under 17 U.S.C. 115 and this 
section.
    (e) For each sound recording embodying a musical work required to 
be reported under paragraph (c)(4)(ii) of this section, the digital 
music provider shall provide the information referenced in Sec.  
210.6(c)(3) that would have been provided to the copyright owner had 
the digital music provider been serving Monthly Statements of Account 
as a compulsory licensee in accordance with this subpart on the 
copyright owner from initial use of the work, plus the unique 
identifier assigned by the digital music provider to the sound 
recording and a unique identifier assigned by the digital music 
provider to each individual usage line.
    (f) The information required by paragraphs (c), (d), (e), (k), and 
(o) of this section requires intelligible, legible, and unambiguous 
statements in the cumulative statements of account, without 
incorporation of facts or information contained in other documents or 
records.
    (g) References to part 385 of this title, as used in paragraphs 
(c), (d), and (k) of this section, refer to the rates and terms of 
royalty payments, including any defined activities or offerings, as in 
effect as to each particular reported use based on when the use 
occurred.
    (h) If requested by a digital music provider, the mechanical 
licensing collective shall deliver an invoice and/or a response file to 
the digital music provider within a reasonable period of time after the 
cumulative statement of account and related royalties are received. The 
response file shall contain such information as is common in the 
industry to be reported in response files, backup files, and any other 
similar such files provided to digital music providers by applicable 
third-party administrators.
    (i)(1) To the extent practicable, each cumulative statement of 
account delivered to the mechanical licensing collective under 
paragraph (b)(3)(i) of this section, and each supplemental metadata 
report delivered to the mechanical licensing collective under paragraph 
(o) of this section, shall be delivered in a machine-readable format 
that is compatible with the information technology systems of the 
mechanical licensing collective as reasonably determined by the 
mechanical licensing collective and set forth on its website, taking 
into consideration relevant industry standards and the potential for 
different degrees of sophistication among digital music providers. The 
mechanical licensing collective must offer an option that is accessible 
to smaller digital music providers that may not be reasonably capable 
of complying with the requirements of a sophisticated reporting or data 
standard or format. Nothing in this section shall be construed as 
prohibiting the mechanical licensing collective from adopting more than 
one reporting or data standard or format. A digital music provider may 
use an alternative reporting or data standard or format pursuant to an 
agreement with the mechanical licensing collective under paragraph (l) 
of this section, consent to which shall not be unreasonably withheld by 
the mechanical licensing collective.
    (2) Royalty payments shall be delivered to the mechanical licensing 
collective in such manner and form as the mechanical licensing 
collective may reasonably determine and set forth on its website. A 
cumulative statement of account and its related royalty payment may be 
delivered together or separately, but if delivered separately, the 
payment must include information reasonably sufficient to allow the 
mechanical licensing collective to match the cumulative statement of 
account to the payment.
    (j) Each cumulative statement of account delivered to the 
mechanical licensing collective under paragraph (b)(3)(i) of this 
section shall be accompanied by:
    (1) The name of the person who is signing and certifying the 
cumulative statement of account.
    (2) A signature, which in the case of a digital music provider that 
is a corporation or partnership, shall be the signature of a duly 
authorized officer of the corporation or of a partner.
    (3) The date of signature and certification.
    (4) If the digital music provider is a corporation or partnership, 
the title or official position held in the partnership or corporation 
by the person who is signing and certifying the cumulative statement of 
account.
    (5) One of the following statements:
    (i) Statement one:
    I certify that (1) I am duly authorized to sign this cumulative 
statement of account on behalf of the digital music provider, (2) I 
have examined this cumulative statement of account, and (3) all 
statements of fact contained herein are true, complete, and correct to 
the best of my knowledge, information, and belief, and are made in good 
faith.
    (ii) Statement two:
    I certify that (1) I am duly authorized to sign this cumulative 
statement of account on behalf of the digital music provider, (2) I 
have prepared or supervised the preparation of the data used by the 
digital music provider and/or its agent to generate this cumulative 
statement of account, (3) such data is true, complete, and correct to 
the best of my knowledge, information, and belief, and was prepared in 
good faith, and (4) this cumulative statement of account was prepared 
by the digital music provider and/or its agent using processes and 
internal controls that were subject to an examination, during the past 
year, by a licensed certified public accountant in accordance with the 
attestation standards established by the American Institute of 
Certified Public Accountants, the opinion of whom was that the 
processes and internal controls were suitably designed to generate 
monthly statements that accurately reflect, in all material respects, 
the digital music provider's usage of musical works, the statutory 
royalties applicable thereto, and any other data that is necessary for 
the proper calculation of the statutory royalties in accordance with 17 
U.S.C. 115 and applicable regulations.
    (6) A certification by a duly authorized officer of the digital 
music provider that the digital music provider has fulfilled the 
requirements of 17 U.S.C. 115(d)(10)(B)(i) and (ii) but has not been 
successful in locating or identifying the copyright owner.
    (k)(1) A digital music provider may adjust its previously delivered 
cumulative statement of account, including related royalty payments, by 
delivering to the mechanical licensing collective a statement of 
adjustment.

[[Page 2207]]

    (2) A statement of adjustment shall be clearly and prominently 
identified as a ``Statement of Adjustment of a Cumulative Statement of 
Account.''
    (3) A statement of adjustment shall include a clear statement of 
the following information:
    (i) The previously delivered cumulative statement of account, 
including related royalty payments, to which the adjustment applies.
    (ii) The specific change(s) to the previously delivered cumulative 
statement of account, including a detailed description of any changes 
to any of the inputs upon which computation of the royalties payable by 
the digital music provider depends. Such description shall include the 
adjusted royalties payable and all information used to compute the 
adjusted royalties payable, in accordance with the requirements of this 
section and part 385 of this title, such that the mechanical licensing 
collective can provide a detailed and step-by-step accounting of the 
calculation of the adjustment under applicable provisions of this 
section and part 385 of this title, sufficient to allow each applicable 
copyright owner to assess the manner in which the digital music 
provider determined the adjustment and the accuracy of the adjustment. 
As appropriate, an adjustment may be calculated using estimates 
permitted under paragraph (d)(2) of this section.
    (iii) Where applicable, the particular sound recordings and uses to 
which the adjustment applies.
    (iv) A description of the reason(s) for the adjustment.
    (4) In the case of an underpayment of royalties, the digital music 
provider shall pay the difference to the mechanical licensing 
collective contemporaneously with delivery of the statement of 
adjustment or promptly after being notified by the mechanical licensing 
collective of the amount due. A statement of adjustment and its related 
royalty payment may be delivered together or separately, but if 
delivered separately, the payment must include information reasonably 
sufficient to allow the mechanical licensing collective to match the 
statement of adjustment to the payment.
    (5) In the case of an overpayment of royalties, the mechanical 
licensing collective shall appropriately credit or offset the excess 
payment amount and apply it to the digital music provider's account, or 
upon request, issue a refund within a reasonable period of time.
    (6)(i) A statement of adjustment must be delivered to the 
mechanical licensing collective no later than 6 months after the 
occurrence of any of the scenarios specified by paragraph (k)(6)(ii) of 
this section, where such an event necessitates an adjustment. Where 
more than one scenario applies to the same cumulative statement of 
account at different points in time, a separate 6-month period runs for 
each such triggering event. Where more than one scenario necessitates 
the same particular adjustment, the 6-month deadline to make the 
adjustment begins to run from the occurrence of the earliest triggering 
event.
    (ii) A statement of adjustment may only be made:
    (A) Except as otherwise provided for by paragraph (c)(5) of this 
section, where the digital music provider discovers, or is notified of 
by the mechanical licensing collective or a copyright owner, licensor, 
or author (or their respective representatives, including by an 
administrator or a collective management organization) of a relevant 
sound recording or musical work that is embodied in such a sound 
recording, an inaccuracy in the cumulative statement of account, or in 
the amounts of royalties owed, based on information that was not 
previously known to the digital music provider despite its good-faith 
efforts;
    (B) When making an adjustment to a previously estimated input under 
paragraph (d)(2) of this section;
    (C) Following an audit of a digital music provider that concludes 
after the cumulative statement of account is delivered and that has the 
result of affecting the computation of the royalties payable by the 
digital music provider (e.g., as applicable, an audit by a sound 
recording copyright owner concerning the amount of applicable 
consideration paid for sound recording copyright rights); or
    (D) In response to a change in applicable rates or terms under part 
385 of this title.
    (E) To ensure consistency with any adjustments made in an Annual 
Statement of Account generated under Sec.  210.7 for the most recent 
fiscal year.
    (7) A statement of adjustment must be certified in the same manner 
as a cumulative statement of account under paragraph (j) of this 
section.
    (l)(1) Subject to the provisions of 17 U.S.C. 115, a digital music 
provider and the mechanical licensing collective may agree in writing 
to vary or supplement the procedures described in this section, 
including but not limited to pursuant to an agreement to administer a 
voluntary license, provided that any such change does not materially 
prejudice copyright owners owed royalties required to be transferred to 
the mechanical licensing collective for the digital music provider to 
be eligible for the limitation on liability described in 17 U.S.C. 
115(d)(10). The procedures surrounding the certification requirements 
of paragraph (j) of this section may not be altered by agreement. This 
paragraph (l)(1) does not empower the mechanical licensing collective 
to agree to alter any substantive requirements described in this 
section, including but not limited to the required royalty payment and 
accounting information and sound recording and musical work 
information.
    (2) The mechanical licensing collective shall maintain a current, 
free, and publicly accessible online list of all agreements made 
pursuant to paragraph (l)(1) of this section that includes the name of 
the digital music provider (and, if different, the trade or consumer-
facing brand name(s) of the services(s), including any specific 
offering(s), through which the digital music provider engages, or has 
engaged at any time during the period identified in paragraph (c)(1) of 
this section, in covered activities) and the start and end dates of the 
agreement. Any such agreement shall be considered a record that a 
copyright owner may access in accordance with 17 U.S.C. 
115(d)(3)(M)(ii). Where an agreement made pursuant to paragraph (l)(1) 
of this section is made pursuant to an agreement to administer a 
voluntary license or any other agreement, only those portions that vary 
or supplement the procedures described in this section and that pertain 
to the administration of a requesting copyright owner's musical works 
must be made available to that copyright owner.
    (m) Each digital music provider shall, for a period of at least 
seven years from the date of delivery of a cumulative statement of 
account or statement of adjustment to the mechanical licensing 
collective, keep and retain in its possession all records and documents 
necessary and appropriate to support fully the information set forth in 
such statement (except that such records and documents that relate to 
an estimated input permitted under paragraph (d)(2) of this section 
must be kept and retained for a period of at least seven years from the 
date of delivery of the statement containing the final adjustment of 
such input).
    (n) Errors in a cumulative statement of account or statement of 
adjustment that do not materially prejudice the rights of the copyright 
owner shall be deemed harmless, and shall not render that statement 
invalid.
    (o)(1) By June 15, 2021, the digital music provider must submit a

[[Page 2208]]

supplemental metadata report that includes all of the information 
provided in the cumulative statement of account pursuant to paragraph 
(c) of this section, as well as, separately or together with such 
information, the following information for each sound recording 
embodying a musical work that was reported under paragraph (c)(4)(ii) 
of this section:
    (i) Identifying information for the sound recording, including but 
not limited to:
    (A) Sound recording name(s), including, to the extent practicable, 
all known alternative and parenthetical titles for the sound recording;
    (B) Featured artist(s);
    (C) Unique identifier assigned by the digital music provider, if 
any, including to the extent practicable, any code(s) that can be used 
to locate and listen to the sound recording through the digital music 
provider's public-facing service;
    (D) Actual playing time measured from the sound recording audio 
file, where available; and
    (E) To the extent acquired by the digital music provider in 
connection with its use of sound recordings of musical works to engage 
in covered activities, and to the extent practicable:
    (1) Sound recording copyright owner(s);
    (2) Producer(s);
    (3) International standard recording code(s) (ISRC);
    (4) Any other unique identifier(s) for or associated with the sound 
recording, including any unique identifier(s) for any associated album, 
including but not limited to:
    (i) Catalog number(s);
    (ii) Universal product code(s) (UPC); and
    (iii) Unique identifier(s) assigned by any distributor;
    (5) Version(s);
    (6) Release date(s);
    (7) Album title(s);
    (8) Label name(s); and
    (9) Distributor(s).
    (ii) Identifying information for the musical work embodied in the 
reported sound recording, to the extent acquired by the digital music 
provider in the metadata provided by sound recording copyright owners 
or other licensors of sound recordings in connection with the use of 
sound recordings of musical works to engage in covered activities, and 
to the extent practicable:
    (A) Information concerning authorship of the applicable rights in 
the musical work embodied in the sound recording, including but not 
limited to:
    (1) Songwriter(s); and
    (2) International standard name identifier(s) (ISNI) and interested 
parties information code(s) (IPI) for each such songwriter;
    (B) International standard musical work code(s) (ISWC) for the 
musical work embodied in the sound recording; and
    (C) Musical work name(s) for the musical work embodied in the sound 
recording, including any alternative or parenthetical titles for the 
musical work.
    (iii)(A) For each track for which a share of a musical work has 
been matched and for which accrued royalties for such share have been 
paid, but for which one or more shares of the musical work remains 
unmatched and unpaid, the digital music provider must provide, for each 
usage line for such track, a reference to the specific unique 
identifier for the usage line reported under paragraph (e) of this 
section, and a clear identification of the percentage share(s) that 
have been matched and paid and the owner(s) of such matched and paid 
share(s) (including any unique party identifiers for such owner(s) that 
are known by the digital music provider).
    (B) If, for a particular track, a digital music provider cannot 
provide a clear identification of the percentage share(s) that have 
been matched and paid and the owner(s) of such share(s) because this 
information is subject to a contractual confidentiality restriction or 
the conditions of paragraph (o)(1)(iii)(C) of this section apply with 
respect to such information, the digital music provider must provide 
alternate information for the track, namely, a clear identification of 
the total aggregate percentage share that has been matched and paid and 
the owner(s) of the aggregate matched and paid share (including any 
unique party identifiers for such owner(s) that are known by the 
digital music provider). If the digital music provider still cannot 
provide such alternate information because of the conditions of 
paragraph (o)(1)(iii)(C) of this section, the information required by 
this paragraph (o)(1)(iii)(B) may be omitted for the track from the 
supplemental metadata report. A digital music provider reporting under 
this paragraph (o)(1)(iii)(B) must deliver a certification to the 
mechanical licensing collective stating that the conditions of being 
permitted to report under this paragraph (o)(1)(iii)(B) apply with 
respect to the provision of alternate information or omission of 
percentage share(s) information entirely, as specified in the 
certification.
    (C) The conditions referred to in paragraph (o)(1)(iii)(B) of this 
section are:
    (1) The information is maintained only by a third-party vendor;
    (2) The digital music provider does not have any contractual or 
other rights to access the information;
    (3) The digital music provider is unable to compile the information 
from records in its possession using commercially reasonable efforts 
within the required reporting timeframe; and
    (4) The vendor refuses to make the information available to the 
digital music provider on commercially reasonable terms.
    (2) Any obligation under paragraph (o)(1) of this section 
concerning information about sound recording copyright owners may be 
satisfied by reporting the information for applicable sound recordings 
provided to the digital music provider by sound recording copyright 
owners or other licensors of sound recordings (or their 
representatives) contained in each of the following DDEX fields: 
LabelName and PLine. Where a digital music provider acquires this 
information in addition to other information identifying a relevant 
sound recording copyright owner, all such information must be reported 
to the extent practicable.
    (3) As used in this paragraph (o), it is practicable to provide the 
enumerated information if:
    (i) It belongs to a category of information expressly required to 
be reported by the enumerated list of information contained in Sec.  
210.6(c)(3);
    (ii) It belongs to a category of information that has been 
reported, or is required to be reported, by the particular digital 
music provider to the mechanical licensing collective under the blanket 
license; or
    (iii) It belongs to a category of information that is reported by 
the particular digital music provider to the mechanical licensing 
collective under a voluntary license or individual download license.
    (4) The supplemental metadata report provided for in this paragraph 
(o) is not a condition for eligibility for the limitation on liability 
in 17 U.S.C. 115(d)(10), or a condition of the blanket license.

    Dated: December 23, 2020.
Shira Perlmutter,
Register of Copyrights and Director of the U.S. Copyright Office.

    Approved by:
Carla D. Hayden,
Librarian of Congress.
[FR Doc. 2020-29190 Filed 1-7-21; 8:45 am]
BILLING CODE 1410-30-P

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