Determination of Royalty Rates and Terms for Making and Distributing Phonorecords (Phonorecords IV), 18342-18349 [2022-06691]

Agencies

• Copyright Royalty Board, Library of Congress
• Library of Congress

[Federal Register Volume 87, Number 61 (Wednesday, March 30, 2022)]
[Proposed Rules]
[Pages 18342-18349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-06691]


=======================================================================
-----------------------------------------------------------------------

LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 385

[Docket No. 21-CRB-0001-PR (2023-2027)]


Determination of Royalty Rates and Terms for Making and 
Distributing Phonorecords (Phonorecords IV)

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Proposed rule; withdrawal.

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

SUMMARY: The Copyright Royalty Judges withdraw a proposed rule that 
would have set continued, unaltered rates and terms for subpart B 
configurations subject to the statutory license to use nondramatic 
musical works to make and distribute phonorecords of those works (the 
Mechanical License).

DATES: The Copyright Royalty Board is withdrawing the proposed rule 
published June 25, 2021 (86 FR 33601) as of March 24, 2022.

ADDRESSES: Docket: For access to the docket to read background 
documents or comments received, go to eCRB at https://app.crb.gov and 
perform a case search for docket 21-CRB-0001-PR (2023-2027).

FOR FURTHER INFORMATION CONTACT: Anita Brown, Program Specialist, (202) 
707-7658, [email protected].

SUPPLEMENTARY INFORMATION: 

Background

    The Copyright Royalty Judges (Judges) received a Motion to Adopt 
Settlement of Statutory Royalty Rates and Terms for Subpart B 
Configurations (Motion) from National Music Publishers' Association, 
Inc. and Nashville Songwriters Association International (together, 
Licensors) and Sony Music Entertainment, UMG Recordings, Inc., and 
Warner Music Group Corp. (together, Labels). The Licensors and Labels 
(together, Moving Parties) sought approval of a partial settlement of 
the license rate proceeding before the Judges titled Determination of 
Royalty Rates and Terms for Making and Distributing Phonorecords 
(Phonorecords IV), Docket No. 21-CRB-0001-PR (2023-2027). The Moving 
Parties asserted that they had agreed to a settlement as to royalty 
rates and applicable regulatory terms relating to physical 
phonorecords, permanent downloads, ringtones, and music bundles 
presently addressed in 37 CFR part 385, subpart B (Subpart B 
Configurations). The Moving Parties' settlement agreement also 
addressed payment of late fees relating to Subpart B Configurations.

[[Page 18343]]

    Section 801(b)(7)(A) of the Copyright Act authorizes the Judges to 
adopt rates and terms negotiated by ``some or all of the participants 
in a proceeding at any time during the proceeding'' provided the 
settling parties submit the negotiated rates and terms to the Judges 
for approval. That provision directs the Judges to provide those who 
would be bound by the negotiated rates and terms an opportunity to 
comment on the agreement.
    The Judges published the proposed settlement in the Federal 
Register and requested comments from the public. 86 FR 40793 (Jun. 25, 
2021). Comments were due by July 25, 2021. The Judges received comments 
from 14 interested parties.\1\ One participant, George Johnson (GEO) 
filed three motions opposing the proposed settlement.\2\ Because of 
some technical issues with the CRB electronic filing system, the Judges 
reopened the comment period with a new deadline of August 10, 2021. See 
86 FR 40793 (Jul. 29, 2021). During the second comment period, the 
Judges received comments from two interested parties \3\ and GEO.\4\ On 
August 10, 2021, the closing date for comments, the Moving Parties 
filed comments in further support of the proposed settlement.
---------------------------------------------------------------------------

    \1\ Songwriters and independent music publishers Anthony 
Garnier, Abby North, David Poe, and Michelle Shocked filed 
individual comments. Joint comments were filed by: Helienne 
Lindvall, David Lowery, and Blake Morgan (Lindvall Comments); 
Songwriters Guild of America, Inc., Society of Composers and 
Lyricists, Music Creators North America, Rick Carnes, and Ashley 
Irwin (together, SGA). Attorneys Gwendolyn Seale and Peter W. 
DiZozza, Esq. filed comments as music industry lawyers but not on 
behalf of any specific client/s.
    \2\ GEO filed an Objection to Fraudulent Motion . . . on May 27, 
2021. On the same day, GEO filed an Objection to Settlement . . . 
.'' GEO filed these objections before the Judges published the 
proposed rule for comment. GEO's filings did not seek relief and 
were not proper motions. On July 20, 2021, the Judges therefore 
denied GEO's motions and suggested GEO express his apparent 
opposition to the settlement by way of a comment in response to the 
published proposed rule. See Order Denying Three Motions . . . (Jul. 
20, 2021).
    \3\ Commenters were independent music publisher Monica Corton 
and singer, songwriter, and teacher Rosanne Cash.
    \4\ GEO styled his comment as ``George Johnson's Fourth 
Opposition Motion Objecting to . . . Settlement . . . Also Filed as 
Comments. (Aug. 10, 2021). Subsequently, GEO filed four notices 
informing the Judges of inflation rates and a motion seeking 
indexing of subpart B rates.
---------------------------------------------------------------------------

    In their comments, the Moving Parties reasserted their respective 
``significant interest[s]'' in the proceeding.\5\ See Comments in 
Further Support of the Settlement . . . for Subpart B Configurations 
(Aug. 10, 2021) (Further Comments) at 1. The Moving Parties referred to 
the Congressional encouragement of settlement of royalty rate issues. 
Id. at 3. In the Motion seeking adoption of the settled rates and 
terms, the Moving Parties averred that the settlement would continue 
subpart B rates at their current levels and that the late fee 
provisions in the current regulations would ``continue to be 
applicable'' to the Labels ``and all other licensees'' of the 
mechanical rights at issue in subpart B. Motion at 3. Immediately 
preceding this synopsis of the settlement terms, however, in a section 
headed ``Parties,'' the Moving Parties indicated ``[c]oncurrent with 
the settlement, the Joint Record Company Participants and NMPA have 
separately entered into a memorandum of understanding addressing 
certain negotiated licensing processes and late fee waivers.'' Motion 
at 3.
---------------------------------------------------------------------------

    \5\ The Moving Parties alleged that the Labels represent ``the 
vast majority of the U.S. sound recording market.'' They also 
asserted that NMPA ``protects and advances the interests of over 300 
music publishers'' and that NSAI is a trade association with over 
4,000 members ``dedicated to serving songwriters . . . .'' Further 
Comments at 2.
---------------------------------------------------------------------------

    The Moving Parties' comment in support of adoption of the 
settlement contained additional material, i.e., the memorandum of 
understanding (MOU) as an attachment, the Judges reopened for a second 
time the comment period on the proposed rule. See 86 FR 58626 (Oct. 22, 
2021). This third comment period ended on November 22, 2021. Id. 
Commenters expressed concern regarding this mention of an undefined MOU 
between the Labels and NMPA. During the third comment period, the 
Judges received seven comments.\6\ GEO also filed a ``Second Round of 
Comments . . .'' opposing the settlement.\7\
---------------------------------------------------------------------------

    \6\ Lynne Robin Green filed an individual comment. Gwendolyn 
Seale and Monica Corton augmented previous comments. Abby North 
augmented her earlier comments in a joint filing with Erin McAnally 
and Chelsea Crowell. Helienne Lindvall, David Lowery, and Blake 
Morgan augmented their previous joint comment (Second Lindvall 
Comments). The Songwriters Guild of America, Inc.; Society of 
Composers & Lyricists; and Music Creators North America; along with 
individuals Rick Carnes and Ashley Irwin filed a joint comment, 
which was endorsed by Alliance for Women Film Composers, Alliance of 
Latin American Composers & Authors, Asia-Pacific Music Creators 
Alliance, European Composers and Songwriters Alliance, The Ivors 
Academy, Music Answers, Pan-African Composers and Songwriters 
Alliance, Screen Composers Guild of Canada, and Songwriters 
Association of Canada (endorsers and second submission of commenters 
together, Second SGA Comments). Attorney Kevin M. Casini commented 
as an advocate, not for any particular client.
    \7\ The deadline for comments was November 22. The CRB's 
electronic filing system noted the date and time of GEO's filing as 
November 23, 2021 at 12:04 a.m. The Judges accept this technically 
late filing.
---------------------------------------------------------------------------

Statutory Standard and Precedent

    Section 801(b)(7)(A) of the Copyright Act is clear that the Judges 
have the authority to adopt settlements between some or all of the 
participants to a proceeding at any time during a proceeding, so long 
as those that would be bound by the agreed rates and terms are given an 
opportunity to comment. Id. at (b)(7)(A)(i). The Judges give notice by 
publishing a settlement as a proposed rule in the Federal Register. 
They are obliged to give notice and offer all interested parties an 
opportunity to comment, but only participants have the opportunity to 
comment and object to a proposed settlement. See id. (emphasis added). 
Section 801(b)(7)(A)(ii) provides that the Judges ``may decline to 
adopt the agreement as a basis for statutory terms and rates for 
participants that are not parties to the agreement,'' only ``if any 
participant [in the proceeding] objects to the agreement and the 
[Judges] conclude, based on the record before them, if one exists, that 
the agreement does not provide a reasonable basis for setting statutory 
terms or rates.'' 17 U.S.C. 801(b)(7)(A)(ii).
    Regardless of the comments of interested parties or participants, 
the Judges are not compelled to adopt a settlement to the extent it 
includes provisions that are inconsistent with the statutory license. 
See Review of Copyright Royalty Judges Determination, 74 FR 4537, 4540 
(Jan. 26, 2009) (error for Judges to adopt settlement without threshold 
determination of legality); see also Review of Copyright Royalty Judges 
Determination, 73 FR 9143, 9146 (Feb. 19, 2008) (error not to set 
separate rates as required under Sec.  112 and 114 when parties' 
unopposed settlement combined rates in contravention of those statutory 
sections).\8\
---------------------------------------------------------------------------

    \8\ The Register found that a ``paucity of evidence'' in the 
record to support a determination of separate rates for the separate 
licenses ``does not dispatch the . . . Judges' statutory 
obligations.'' Review of Copyright Royalty Judges Determination, 73 
FR 9143, 9145 (Feb. 19, 2008). The Register noted that the Judges 
have subpoena power to compel witnesses to appear and give 
testimony. Id.
---------------------------------------------------------------------------

    As the Register of Copyrights (Register) observed in the 2009 
review of the Judges' decision, nothing in the statute precludes 
rejection of any portions of a settlement that would be contrary to 
provisions of the applicable license or otherwise contrary to the 
statute. Id. In the instance under review by the Register, the 
settlement agreement purported to alter the date(s) for payment of 
royalties granting licensees a longer period than section 115 provided. 
74 FR at 4542. The Register also noted that nothing in the

[[Page 18344]]

statute relating to adoption of settlements precludes the Judges from 
considering comments of non-participants ``which argue that proposed 
[settlement] provisions are contrary to statutory law.'' Id. at 4540.
    The Judges received a relatively large number of negative comments 
from interested parties. The only participant who objected to the 
proposed settlement was GEO. His objections tracked many of the 
negative comments by other parties who are not participants but who 
could be bound by the regulation. The Judges have also reviewed the 
proposed settlement for consistency with the law and the statutory 
license.

Synopsis of Related Non-Participant and Moving Parties' Comments

    The comments of interested parties in this proceeding were 
uniformly negative regarding the proposed settlement. Their comments 
were largely overlapping and are summarized, along with the Moving 
Parties' comments as follows.

Importance of Subpart B Configurations

    The Moving Parties downplayed the importance of Subpart B 
Configurations in the universe of music consumption. See Further 
Comments at 3-4. The Moving Parties emphasized that 83% of the recorded 
music market \9\ comes from streaming. See id. In the same paragraph, 
however, they conceded that Subpart B Configurations account for 15% of 
the market.\10\ Id. The Moving Parties acknowledged that the Subpart B 
Configurations represent a ``not immaterial source of revenue'' for 
songwriters and publishers. Id.
---------------------------------------------------------------------------

    \9\ The Moving Parties did not define ``recorded music market.'' 
The study to which they referred analyzed recorded music revenues.
    \10\ The Moving Parties minimized the subpart B revenue by 
splitting it between physical sales (9%) and digital downloads (6%), 
glossing over the total for mechanical licenses, which was, in fact, 
15%.
---------------------------------------------------------------------------

    More than one commenter cited publications of the Recording 
Industry Association of America (RIAA) that give perspective to the 
apparent diminution of Subpart B Configurations, both to the 
rightsholders and to music consumers. See, e.g., Comments of Gwendolyn 
Seale (Jul. 26, 2021) (Seale Comments) at 4; Comments of Michelle 
Shocked (Jul. 26, 2021) (Shocked Comments) at 1; Comments of SGA (Jul. 
26, 2021) (SGA Comments) at 10 \11\ (all citing ``Year-End 2020 RIAA 
Revenue Statistics,'' https://www.riaa.com/wp-content/uploads/2021/02/2020-Year-End-Music-Industry-Revenue-Report.pdf (last visited 02/14/
2022) (RIAA Report)); Comments of Monica Corton (Nov. 22, 2021) (Second 
Corton Comments) at 2 (vinyl ``seems to be surging . . .''). The RIAA 
Report reflected near static sales of physical product (including 
digital downloads) but noted that ``[f]or the first time since 1986, 
revenues from vinyl records were larger than from CDs. . . . [V]inyl 
grew by 28.7% by value year-over-year . . . .'' RIAA Report at 2.
---------------------------------------------------------------------------

    \11\ SGA also reported that physical phonorecords and permanent 
downloads accounted for over 25% of total recorded music revenues 
worldwide in 2020. SGA Comments at 10, citing International 
Federation of the Phonographic Industry report of global recorded 
music revenues for 2020, https://www.ifpi.org/our-industry/industry-data/ (last visited Mar. 16, 2022) (reporting 25.3% combined 
revenue).
---------------------------------------------------------------------------

    Commenter Corton detailed the rightsholders' mechanical license 
earnings from vinyl and CD albums as compared to downloading or 
streaming individual tracks. See Second Corton Comments at 2. She 
alleged that retailers are selling new vinyl releases for $25 to $50 
(rounded). Assuming the wholesale price to be 50% of the retail price, 
she calculated that retailers are paying $12.50 to $25 to the record 
companies. Id. Corton contended that even in the surging market, under 
standard publisher-record company contracts, the record label pays the 
publisher $0.91 for a ten-track album ($.091 per track, limit ten, 
regardless of the actual number of tracks on the album). Id. Corton 
asserted that most labels enforce a ``controlled composition clause'' 
\12\ in their contracts with publishers, limiting their earnings on an 
album to 75% of the statutory mechanical license rate and a standard 
ten song cap, or $0.6825 per album, which the publisher generally 
splits 50-50 with the songwriter. Id. The royalty that reaches the 
songwriter is $0.3412 for all the protected works on the marketed 
album. Id. Even after compensating performers, record labels appear to 
be receiving over $10 per permanent album to the songwriters' $0.34. 
Id.
---------------------------------------------------------------------------

    \12\ According to SGA, record labels introduced the ``controlled 
composition clause'' in 1978 in response to the increase of the 
statutory rate from $.02 per unit in effect between 1909 and 1978, 
to $0.275 per unit. See SGA Comments at 3. The controlled 
composition clause continues. In other words, the statutory royalty 
rate of $.091 per unit translates to $.06825 per unit actually paid 
by the subpart B licensor. Id.
---------------------------------------------------------------------------

    Commenter Roseanne Cash asserted that mechanical royalties are 
``one of the most reliable ways a songwriter can still make a minimum-
to-decent wage . . . .'' Comments of Roseanne Cash at 1 (Aug. 2, 2021). 
She asserted that the need for fair subpart B rates is ``more dire 
because of the lack of fairness in compensation from streaming 
services. Streaming services are not in the music business. They are in 
the tech business, and they have built multi-billion dollar profit 
machines on the back of songwriters and musicians whom they use as 
loss-leader content.'' Id. at 2.

Rate ``Freeze''

    Almost every commenter emphasized that the subpart B mechanical 
rates have remained unchanged for well over a decade, since 2006. See, 
e.g., Comments of Kevin M. Casini (Nov. 21, 2021) (Casini Comments) at 
3 (``what has not been frozen since 2006: the cost of living.''). 
According to SGA, from enactment of the governing statute in 1909 until 
1978, mechanical royalties were set at $ 0.02 per unit. See Comments of 
SGA (Jul. 26, 2021) (SGA Comments) at 3. In 1978, Congress raised the 
rate to $ 0.0275 per unit, which was offset by a ``controlled 
composition clause'' in sound recording contracts by which creators 
were obliged to lower that new 1978 mechanical royalty rate by 25%. Id. 
The statutory rate gradually increased until 2006, when the CRB 
maintained the existing rate at $ 0.091 per unit in mechanical rate 
proceedings commenced in 2006, 2011, and 2016. Id. The controlled 
composition clause remains a feature of sound recording contracts. 
Second Corton Comments at 2.
    Commenters advocated application of an inflation adjustment 
beginning, at a minimum, in 2006. See, e.g. SGA Comments at 4; Corton 
Comments at 4; Casini Comments at 4. According to the proponents of a 
cost of living adjustment (COLA) applied to the 2006 rates, that 
adjustment would yield a 2021 royalty rate of $ 0.12 (an upward 31.9% 
inflation adjustment over the sixteen-year period). See, e.g., SGA 
Comments at 4. SGA conceded that the COLA extrapolation cannot be 
considered dispositive on the issue of new rate-setting, but they 
contended that it does ``starkly demonstrate the outrageous unfairness 
that has been imposed on the music creator community over a period of 
more than an entire century.'' Id.

Conflicts of Interest

    More than one commenter questioned whether the underlying 
negotiations could be, in fact, arm's length transactions because of 
the vertical integration of music publishing and recording. The 
proposed settlement at issue was negotiated by and among the ``three 
major, multinational record conglomerates UMG, SME and WMG, the US 
music publisher trade group NMPA (whose largest members include the 
music publishing affiliates of those major record companies), and

[[Page 18345]]

inexplicably, the [NSAI] . . . the `Settling Parties'. . . .'' SGA 
Comments at 4.
    When the Settling Parties gave notice of their impending 
settlement, they included reference to a separate memorandum of 
understanding between NMPA and the record labels. Notice of Settlement 
in Principle (Mar. 2, 2021) 1 (``NMPA, UMG, WMG and SME have also 
reached an agreement in principle concerning a separate memorandum of 
understanding addressing certain related issues.'') See, e.g., Second 
Seale Comments at 6 (representative negotiators of subpart B settlement 
and MOU ``represent `willing buyers' and `willing sellers' who are 
effectively the same parties at the corporate level.''); Comments of 
Anthony Garnier (Jul. 19, 2021) (``Vertical integration . . . between 
the major labels and major publishers poses a serious conflict of 
interest and engenders self-dealing among negotiators'').
    Moving Parties stated, categorically, that no publisher would 
negotiate a below-market mechanical royalty rate and extend that rate 
to competitors of its ``sister record company.'' See Further Comments 
at 5. The Moving Parties referred the Judges to their determination in 
Phonorecords III wherein the Judges discounted claims of self-dealing, 
noting that the negotiating parties--the same parties as are presenting 
the present settlement for approval--``would not `engage[ ] in anti-
competitive price-fixing at below-market rates . . . .' '' Id. (citing 
Final Determination, Determination of Royalty Rates and Terms for . . . 
Phonorecords, Docket No. 16-CRB-0003-PR (Phonorecords III)).

Lack of Transparency Regarding MOU

    In the Motion seeking adoption of the settled rates and terms, the 
Moving Parties averred that the settlement would continue subpart B 
rates at their current levels and that the late fee provisions in the 
current regulations would ``continue to be applicable'' to the Labels 
``and all other licensees'' of the mechanical rights at issue in 
subpart B. Motion at 3. Immediately preceding their synopsis of the 
settlement terms, however, in a section headed ``Parties,'' the Moving 
Parties indicated ``[c]oncurrent with the settlement, the Joint Record 
Company Participants and NMPA have separately entered into a memorandum 
of understanding addressing certain negotiated licensing processes and 
late fee waivers.'' Motion at 3.
    Commenters assailed a lack of transparency in the settlement with 
regard to the memorandum of understanding (MOU). They contended that 
there must be a hidden quid pro quo unrevealed in the proposed 
settlement or the Motion. In their Further Comments, the Moving Parties 
explained the offhand revelation of the MOU: They viewed it as 
``routine, and irrelevant to the Judges' decision-making concerning the 
Settlement.'' Id. at 6. The Moving Parties further addressed this 
purported oversight in the Motion by indicating that all but ``a low 
single digit percentage'' of the music publishers have opted into the 
MOUs of the past. They also opined that ``thousands of independent 
publishers'' will voluntarily opt in to the latest iteration of the 
MOU. Further Comments at 7.
    The Moving Parties contended that the MOU is a private contract and 
not something to be codified as it does not address statutory rates. 
See id. at 8. As the commenters noted, however, the MOU is tied 
directly to the rate determination. The current MOU is conditional and 
was not effective until the parties to the MOU (the Moving Parties, 
except NSAI) submitted a motion to adopt the proposed settlement in 
Phonorecords IV as rates and terms for the subpart B configurations. 
Id., at Exhibit C, 2.
    Further, the MOU contains a late fee waiver provision, contrary to 
published regulations, which add a late fee of up to 1.5% per month 
until the rightsholder receives royalties that are due monthly. See 37 
CFR 385.3. In their comments, Lindvall, Lowery, Morgan, and Castle 
questioned who might receive the benefit of the waived late fees. See 
Comments of Lindvall, Lowery, Morgan, Castle (Nov. 22, 2021) (Second 
Lindvall Comments). The commenters in this proceeding, representing 
songwriters and independent or self-publishers, object strenuously to 
terms that they considered ``hidden'' and that would affect the amount 
of remuneration they receive in exchange for licensing their protected 
works.
    Restating their particularized argument, the Moving Parties 
maintained that the current MOU was the fourth such arrangement between 
Labels and NMPA to address ``mechanical licensing process issues unique 
to record companies.'' Id. at 6. Further, the Moving Parties asserted 
that, in any event, the existence of MOUs has been public knowledge. 
See Further Comments at 6-7 (citing E. Christman, ``NMPA, Major Labels 
Sign on Terms of Agreement,'' Billboard (Oct. 7. 2009) and Exhibit B 
Supplemental Statement in Phonorecords II (April 11, 2012).\13\
---------------------------------------------------------------------------

    \13\ The cited Billboard article describes a mechanism for 
allocating unclaimed royalty funds among publishers based upon 
market share. However, neither the Billboard article nor 
Supplemental Statement in Phonorecords II reveal details of the 
agreement.
---------------------------------------------------------------------------

    Several commenters professed no knowledge of the current MOU or the 
history of MOUs. See SGA Comments at 9; Seale Comments at 3. Further, 
as they pointed out, songwriters are not parties to the MOU. The 
benefits of the agreement are alleged to accrue to the benefit of only 
certain music publishers. See Seale Comments at 3. This benefit, some 
asserted, is consideration for the publishers agreeing to continue the 
freeze of subpart B rates. See Second Seale Comments at 3; Second 
Lindvall Comments at 10-11. Songwriters cannot be said to have agreed 
to a royalty late fee waiver if they are not parties to the ``private 
contract'' that potentially deprives them of those late fees. See, 
e.g., Lindvall Comments at 11 (settlement expressly refers to 
undisclosed terms; those ``outside the insider group'' cannot agree 
without knowledge of extent of consideration exchanged).

Lack of Representation by Negotiators

    The Moving Parties asserted that the NMPA ``protects and advances 
the interests of over 300 music publishers . . . and their songwriting 
partners . . . .'' Further Comments at 2. They further asserted that 
NSAI is a trade organization ``of over 4,000 members dedicated to 
serving songwriters of all genres of music.'' Id. Commenters pointed 
out several issues with the negotiating representatives, NMPA and NSAI.
    Several commenters, comprising independent songwriters, independent 
publishers, and music industry lawyers, challenged the validity of the 
representatives. See, e.g., Corton Comments at 2 (many NSAI members 
unaware that organization is agreeing to these rates; no mention on 
NSAI website); Second Lindvall Comments at 19 (judges suggest unhappy 
songwriters might ``seek representation elsewhere . . . .''; ``the 
problem is that there was likely no `representation' in the first place 
. . . .''); Seale Comments at 3 (NMPA, NSAI do not represent 
``countless millions'' of owners); Comments of Anthony Garnier (Jul. 
19, 2021) (NMPA, NSAI have not consulted with any other songwriter 
organizations); Comments of Abby North (Jul. 26, 2021) (North Comments) 
at 3 (NMPA, NSAI do not have broad authority they claim); Comments of

[[Page 18346]]

Abby North (Nov. 22, 2021) at 1 (Second North Comments) (rightsholders 
that are not NMPA members cannot opt in to receive money under MOU); 
SGA Comments at 5 (music creator community ``blindsided'' by 
settlement). SGA asserts that its own membership numbers 4,500 and its 
co-commenter SCL has over 2,000 members, but it was not included in the 
negotiations of rates or the MOU. See SGA Comments at 5.
    Claiming no voice in the negotiations that resulted in the proposed 
settlement, the commenters asserted that the resulting rates are 
contrary to statutory requirements inasmuch as they represent rates 
negotiated by a willing buyer and imposed on an ``unwilling seller.'' 
See Comments of David Poe (Jul. 12, 2021); Corton Comments at 2 (NSAI 
members unaware of organization's negotiating positions; nothing on 
NSAI website about MOU; without knowledge, songwriter member cannot be 
a willing seller).

Negotiating Strategy

    The Moving Parties supported the negotiated settlement by reporting 
that, in the period 2006 to 2008, they spent ``tens of millions of 
dollars litigating'' the mechanical royalty rates only to have the 
Judges adopt the rates in place at that time as reflective of the 
marketplace. Further Comments at 3. They then projected that the 
possibility of an adjudicated change in the current subpart B rates was 
outweighed by the cost of litigating the rates and the uncertainty of 
the outcome of litigation. Id. at 4. Building on the small market share 
of Subpart B Configurations, the Moving Parties contended that 
agreement to static subpart B rates was an important concession in the 
context of the mechanical license proceeding. Id.
    Commenters took umbrage at the conclusion by NMPA, the publisher 
trade group, that ``the game is not worth the candle.'' See Seale 
Comments at 6-7. Monica Corton, a veteran in the music publishing 
business, noted that the negotiators' conclusion to freeze Subpart B 
Configuration rates as a ``component'' of an overall negotiating 
strategy to increase digital streaming rates is, after 15 years, ``no 
longer justifiable.'' Second Corton Comments at 1.

Mr. Johnson's Objections to the Settlement

    The only participant in the captioned proceeding to offer comments 
on the notice of the proposed settlement was George Johnson (GEO). The 
substance of his comments in opposition to adoption of the settlement 
tracked with the negative comments of other interested parties detailed 
above. GEO's filings include: GEO Fourth Opposition Motion (Aug. 10, 
2021); Response and Further Opposition to Comments/Motion and 
Fraudulent Settlement for Subpart B Configurations (Aug. 21, 2021) 
(Further Opposition); Second Round of Comments (Nov. 23, 2021); 
Corrected Second Round of Comments (Dec. 1, 2021) (Corrected Second 
Comments).\14\
---------------------------------------------------------------------------

    \14\ GEO Fourth Opposition Motion was filed on the final day of 
the second comment period (Fourth Opposition). GEO Response and 
Further Opposition was filed August 21, 2021, after the close of the 
second comment period (Further Opposition). Nonetheless, the Judges 
reopened the matter for further comment and the Judges therefore 
accept the August 21, 2021, filing as a timely comment during the 
third comment period, which closed November 22, 2021. Though not a 
comment in response to the Federal Register notices, GEO filed a 
Written Direct Statement on October 13, 2021 (within the third 
comment period), which included arguments opposing the proposed 
subpart B settlement at issue. GEO filed a Second Round of Comments 
on November 23, 2021. These comments were filed a day after the 
close of the third comment period; GEO filed Corrected Second Round 
of Comments on December 1, 2021 (Corrected Second Comments). The 
Judges have occasionally afforded GEO limited leeway in these 
proceedings, as Mr. Johnson is appearing pro se in this proceeding. 
In this instance, the Judges accept the Second Round of Comments, as 
amended on December 1, 2021.
---------------------------------------------------------------------------

Importance of Subpart B Configurations

    GEO pointed to the RIAA report cited by other commenters to 
emphasize that Subpart B Configurations are a growing part of the music 
business, comprising 15% of the market. See Further Opposition at 5. He 
claimed the importance of subpart B royalties is clear because affected 
parties ``are all perfectly willing to spend millions of dollars to 
fight GEO's proposal to increase the 9.1 cents for lost inflation . . . 
.'' Id. Other commenters indicated similar concerns.

Rate ``Freeze''

    GEO has long advocated inclusion of an inflation index in royalty 
rates set by the Judges, including the subpart B rates at issue here. 
In support of his advocacy, GEO has filed 27 pleadings, including 
motions seeking imposition of an inflation index on section 115 rates 
\15\ and periodic notices of U.S. inflation rates. His plea is 
bolstered by the many commenters who, almost unanimously, included this 
suggestion.
---------------------------------------------------------------------------

    \15\ Rates are not set by motion, but by agreement or following 
a full adjudication. While GEO's motions did not result in adoption 
of an inflation index, GEO's position on this issue is, and has 
been, clear.
---------------------------------------------------------------------------

Conflicts of Interest

    GEO has long assailed the apparent conflict of interests when 
recording companies engage in negotiations with their related music 
publishing houses to set royalty rates for the labels to pay to 
publishers. In this proceeding, GEO further argued that major 
negotiating parties, three record labels and three publishers, are 
``just two hands of the same three foreign corporations negotiating 
with themselves in an American rate proceeding, supposedly designed to 
help American songwriters and music publishers.'' Corrected Second 
Comments at 2 (emphasis in original).
    Based upon his assumption of self-dealing in this instance, GEO 
alleged fraud, undue influence, anti-trust violations, and 
international intrigue. Id. at 8-9, 12-13.

Lack of Transparency Regarding MOU

    In his analysis of the validity of the MOU, GEO invoked the same 
conflicts of interest arguments. He referred to the ``No. 2 Same 
Parties rule under willing buyer, willing seller . . . .'' Corrected 
Second Comments at 1 (emphasis in original). GEO did not identify the 
source of this ``rule'' and although the Judges are familiar with the 
concept, they are unaware of any set of rules relating to the 
determination of a willing buyer/willing seller market value.
    GEO asserted, further, that the MOU ``seems to be a clear quid pro 
quo'' to freeze subpart B rates in exchange for the late fee provisions 
``and other substantial financial consideration only benefiting members 
of NMPA . . .'' Id.; see id. at 8.
    GEO also claimed that this MOU, although it is a fourth iteration 
of side agreements among the parties, was formerly a secret and that it 
only came to light after commenters raised questions about the 
reference to it in the Motion.\16\ Id. at 3. GEO further ascribed 
malevolent intent to the Moving Parties' timing--filing additional 
information relating to the MOU on the last day of the comment period. 
Id.
---------------------------------------------------------------------------

    \16\ A one-sentence paragraph in the Motion stated simply: 
``Concurrent with the settlement, the Joint Record Company 
Participants and NMPA have separately entered into a memorandum of 
understanding addressing certain negotiated licensing processes and 
late fee waivers.'' Motion at 3. This revelation was at the end of 
the section entitled ``Parties,'' not in the following section 
entitled ``Nature of the Settlement.''
---------------------------------------------------------------------------

Lack of Representation by Negotiators

    GEO claimed to speak for all songwriters and independent or self-
publishers. He contended he abandoned his membership in NSAI because he 
felt NSAI did not represent his interests. Id. at 10. Without 
representation by NSAI, GEO concluded that he had no choice but to 
participate in this proceeding formally and advocate for his own 
interests and those of others similarly

[[Page 18347]]

situated. Id. Citing all of the other reasons he objected to the 
settlement (self-dealing, freezing the rate, using subpart B as a 
bargaining chip in streaming negotiations, undisclosed MOU waiving 
rights to late fees), GEO contended that NSAI and NMPA cannot possibly 
be representing the interests of the section 115 rightsholders.
    GEO's comments repeated the refrain of other commenters. He and 
they disagree with the settlement proposed by trade organizations that 
claim to represent their interests. They contended that they are not 
willing sellers in this equation. Id. at 11.

Negotiating Strategy

    Several commenters cited the negotiating parties' admission that 
they considered the subpart B rates as insignificant in the context of 
section 115 licenses. GEO echoed their concerns that the copyright 
owners' negotiators used subpart B as a loss leader in their attempts 
to negotiate higher streaming royalty rates. GEO argued further that 
the streaming services use the frozen subpart B rates, to which NSAI 
and NMPA agree, as a justification for maintaining or lowering section 
115 streaming rates. Id at 14. He also opined that keeping subpart B 
rates frozen, for yet another rate period, will provide a convincing 
benchmark for the streaming services not only in this proceeding, but 
in the next, Phonorecords V. Id. at 15.

GEO's General Objections

    GEO asserted that the section 115 licenses were ``designed to help 
American songwriters and . . . publishers.'' Id. at 2. Similarly, GEO 
contended that the Judges' rate setting proceedings ``are designed to 
help songwriters . . . .'' Id. at 5. In his objection, he argued that 
the settlement is contrary to those asserted statutory purposes.
    GEO argued that the Moving Parties failed to provide evidence that 
the proposed settlement is reasonable. Id. In that way, he advocated 
assigning a burden of proof to the Moving Parties.
    GEO made several objections based on supposition, rumor, or 
surmise. For example, he asserted that there is ``an issue of NMPA 
possibly getting secret `donations' from . . . major publishers which 
may amount to tens of millions of dollars going to NMPA.'' Id. at 2.

Judges' Analysis and Conclusions

    The Judges note that each faction in this discussion has alleged 
that the other side has failed to present evidence that the proposal is 
or is not a reasonable foundation upon which to base mechanical license 
rates and terms for subpart B musical works configurations. Although 
chapter 8 of the Copyright Act encourages parties to enter into 
settlement negotiations, ultimately the decision as to whether a 
contested settlement \17\ should be approved on motion is subject to 
the Judges' discretion, informed by the submissions of the moving 
parties and the commenters, and by the Judges' application of the law 
to the facts.
---------------------------------------------------------------------------

    \17\ It seems clear that the language of section 801(b)(7)(A) 
inherently presumes that uncontested settlements are factually 
reasonable, but, even then, the Judges must be satisfied that the 
settlement is consistent with the law.
---------------------------------------------------------------------------

    Only one participant in this proceeding, GEO, objected to the 
proposed settlement. As shown by the foregoing synopsis, however, GEO's 
objections did not come to the Judges in a vacuum. The statute requires 
publication of a settlement proposal and solicitation of comments from 
interested parties--parties who would be bound by the proposed rates 
and terms. Non-participants who commented on the proposal uniformly 
objected to adoption of the proposed rates and terms and for reasons 
that paralleled those stated by GEO. Interested parties' comments are 
filed in the record of the proceeding and the Judges must analyze those 
comments even though the Judges may not base rejection of a settlement 
solely on negative comments from non-participants alone.
    It is thus clear that the Judges' review of this or any proposed 
rates and terms is not a routine matter. The Judges must analyze 
carefully the terms of the settlement in light of the participant's 
objections. They must also evaluate the settlement in view of the 
requirements of section 115. The proposed settlement must not be 
contrary to the statutory terms of the mechanical license.

Reasonableness

    Weighing the objections of GEO and considering those objections in 
the context of the record before them, the Judges make the following 
conclusions.

Importance of Subpart B Configurations

    Royalties from Subpart B Configurations are not inconsequential to 
the rightsholders. Subpart B Configurations are qualitatively different 
from the digital streaming configurations; consequently, the Judges can 
and do set separate rates for the Subpart B Configurations. Even though 
the physical and ``permanent'' download products are different in 
character from streaming uses, the Judges cannot and do not treat them 
with any less care and attention. Subpart B Configurations, in 
particular vinyl recordings, are a significant source of income for 
section 115 rightsholders. The royalties they generate should not be 
treated as de minimis, or as a ``throw away'' negotiating chip to 
encourage better terms for streaming configurations.

Rate ``Freeze''

    In the dynamic music industry, there is insufficient reason to 
conclude that a static musical works rate is reasonable. The 
determination rendered in 2008, with an effective date of 2006, cannot 
continue to bind the parties sixteen years later, absent sufficient 
record evidence that the status quo remains grounded in current facts 
and is a reasonable option. Since 2006, the retail marketplace for 
music has changed dramatically with regard to the Subpart B 
Configurations. From 2006 to 2008 (and, indeed, in years prior) the 
Subpart B Configurations dominated the recorded music marketplace.
    By 2020, industry data collected by the Recording Industry 
Association of America showed that various forms of digital streaming 
accounted for 83% of recorded music market revenues. Notwithstanding 
the decrease in revenues attributable to Subpart B Configurations, in 
2020, vinyl record sales surpassed the volume of CD album sales, 
signaling a resurgence in vinyl as a music medium. Even if the sales 
figures were otherwise, however, sixteen years at a static rate is 
unreasonable under the current record, if for no other reason than the 
continuous erosion of the value of the dollar by persistent inflation 
that recently has increased significantly. In this regard, application 
of a consumer price index cost of living increase, beginning in 2006, 
would yield a statutory subpart B royalty rate for 2021 of 
approximately $0.12 per unit as compared with the $0.091 that prevails, 
which adjustment, as noted supra, represents a 31.9% increase.
    The disparity between the static rate and the dynamic market is 
even more stark when considering the ``controlled composition clause'' 
that contractually lowers the statutory rate by 25%. Add to that the 
record labels' limit on album royalties to ten tracks, regardless of 
the number of songs actually included in each album. In other words, 
the statutory rate is not the effective rate record labels use in 
compensating songwriters and publishers.
    The proposed settlement did not include any adjustment to subpart B 
rates, not even an indexed increase. Adjudication of rates may provide 
the parties an opportunity to present

[[Page 18348]]

evidence of the advisability of such an indexed increase.

Conflicts of Interest

    Conflicts are inherent if not inevitable in the composition of the 
negotiating parties. Vertical integration linking music publishers and 
record labels raises a warning flag. No party opposing the present 
settlement has evinced actual or implied evidence of misconduct, other 
than the corporate structure of the record labels on the one hand and 
the publishers on the other. While corporate relationships alone do not 
suffice as probative evidence of wrongdoing, they do provide smoke; the 
Judges must therefore assure themselves that there is no fire. The 
potential for self-dealing present in the negotiation of this proposed 
settlement and the questionable effects of the MOU are sufficient to 
question the reasonableness of the settlement at issue as a basis for 
setting statutory rates and terms.

Lack of Transparency in MOU

    The Moving Parties noted in passing that their agreement also 
included a memorandum of understanding that did not have any impact on 
the reasonableness of the settlement terms. Reasonableness, however, is 
undermined by associated bargained-for provisions as to which the 
Judges have an inadequate basis for evaluation.
    The Moving Parties assertion that the MOU is ``irrelevant'' and 
inconsequential to the settlement terms is facially invalid. First, the 
MOU is a side agreement between recording companies and publishers, 
which does not include participation by or agreement of either 
songwriters or a significant number of owners of musical works subject 
to the section 115 license. Second, the MOU grants a late fee waiver to 
licensees that are party to the agreement. This waiver of fees seems to 
have an indirect impact on proposed royalty returns to rightsholders. 
Without more complete knowledge of the implications of the MOU, 
however, the Judges are unable to evaluate the proposed settlement as a 
whole.
    The Moving Parties asserted that the MOU is a private contract 
between private parties. It appears rather to be an attempt to modify 
the application of the terms of statutory licenses they allegedly are 
negotiating in the context of a rate-setting proceeding under the 
Copyright Act. By its terms, the current MOU was conditional and was 
not effective until the parties to the MOU (the Moving Parties, except 
NSAI) submitted a motion to adopt the proposed settlement as rates and 
terms for the Subpart B Configurations in Phonorecords IV.
    Further, in their pleadings, the Moving Parties asserted that they 
withheld information regarding the MOU because they considered it 
``irrelevant'' to statutory rate setting. Determining relevance is a 
judgment call reserved to the Judges. The contracting parties cannot 
hide changed application of a statutory rate scheme behind a ``private 
contract'' when that contract has implications for non-contracting 
parties and the ``private contract'' details necessarily inform the 
reasonableness of the proposed settlement. The Judges, not a 
participant, can and will decide what is ``irrelevant'' to this rate 
setting proceeding.
    Finally, the Moving Parties justified the MOU by noting that it is 
the fourth iteration of similar agreements. The fact that this MOU is 
the fourth of its kind does not prove that it is appropriate or an 
acceptable corollary to the statutory rates set by this tribunal. 
Repetition alone does not make a practice advisable or fair. Nor does 
it indicate that the practice or its details are universally known and 
approved.
    Parties have an undeniable right of contract. The Judges, however, 
are not required to adopt the terms of any contract, particularly when 
the contract at issue relates in part, albeit by reference, to 
additional unknown terms that indicate additional unrevealed 
consideration passing between the parties, which consideration might 
have an impact on effective royalty rates.

Lack of Representation by Negotiators

    The licensors in this proceeding are represented by their 
respective trade associations. The commenters asserted that the trade 
associations, NSAI in particular, did not appear to be representing the 
best interests of the music creators. It is not within the purview of 
the Judges to select or direct what parties file petitions to 
participate in rate setting proceedings. Dissatisfaction with the 
actions of a participant can only be contested by another participant, 
presenting competent evidence to inform the Judges of a reasonable 
outcome; it is not a proper or adequate basis to decline to adopt the 
settlement.

Negotiating Strategy

    The Moving Parties justified their negotiating strategy and the 
outcome by asserting that the Judges previously continued existing 
rates after the interested parties spent ``tens of millions'' of 
dollars litigating the same rates in the mid-2000s. As the Moving 
Parties noted, however, the Judges' decision at that time was 
reflective of the conditions of that market. The Moving Parties seemed 
to be projecting what actions the Judges might take on a new 
evidentiary record. The 2022 recorded music marketplace is not the 2006 
marketplace. The Judges' determination of current rates and terms 
should be reflective of the current marketplace.

GEO's Other Objections

    Contrary to GEO's assertions that the section 115 licenses were 
``designed to help American songwriters,'' the statutory rates are 
intended to benefit both rightsholders and licensees by permitting fair 
and fairly compensated exploitation of copyrighted works in an 
administratively manageable way. Until a recent statutory change, the 
Judges were instructed to weigh various factors in setting mechanical 
royalty rates to assure reasonable results, fair to both sides and of 
benefit to the music-consuming public. The current statutory standard 
for determining rates, the standard applicable in this proceeding, is 
the willing buyer-willing seller standard, which is aimed at finding a 
free and competitive market rate for the licenses. See 17 U.S.C. 115 
(c)(1)(F).
    GEO alleged that, under the MOU, NMPA might receive ``secret 
`donations' from these major publishers which may amount to tens of 
millions of dollars going to NMPA.'' Second Corrected Comments at 2. 
Although GEO's revelation of an ``issue'' of ``secret donations'' might 
initially seem lacking in factual bases, it is noteworthy that the MOU 
contains the following language.

    For the avoidance of doubt, as provided in Section 10.3 of MOU1, 
it shall not be a breach of this MOU4 if NMPA chooses to seek a 
donation from Participating Publishers as part of the enrollment 
process. If, after the Administrator's final accounting and 
resolution of any disputes, Participating Publisher claims for a 
given Phase of Group 6 are for less than the 11 payments made by a 
Participating Record Company for such Phase, then the Administrator 
shall return any unclaimed monies to the Participating Record 
Company, and Section 4.21 of MOU1 shall apply, unless RIAA and NMPA 
agree to simplified procedures for the refund process.

    Further Comments, Exhibit C (Memorandum of Understanding) at 10-11.
    The provisions of Sections 10.3 and 4.21 of MOU 1 are not in the 
record of this proceeding and remain unknown to the Judges. They may 
support GEO's concerns regarding the provision condoning NMPA's 
solicitation of a ``donation'' as part of an enrollment process. GEO 
did not provide an

[[Page 18349]]

evidentiary basis for his claim that, under this provision of the MOU, 
NMPA might benefit to the extent of ``tens of millions of dollars.'' 
The extent of NMPA's power to solicit donations ``as part of the 
enrollment process'' and the potential value of those donations, 
however, raised concerns with commenters who questioned the quid pro 
quo of the MOU and concern the Judges.\18\
---------------------------------------------------------------------------

    \18\ Further, given the absence of any discovery in connection 
with the procedures for review of a proposed settlement, the absence 
of evidence at this stage of the proceeding cannot be a sufficient 
basis to ignore an issue that the Judges find to be a matter of 
concern.
---------------------------------------------------------------------------

    If adopted by the Judges, the proposed settlement is one that would 
bind not only the parties to the MOU, but also songwriter licensors. 
Songwriters, however, are not parties to the MOU and would apparently 
not share in any benefit that might flow to licensors under the MOU.

Consistency With the Law and the Statutory License

    The Judges reviewed the proposed settlement with regard to whether 
any portions of the settlement would be contrary to provisions of the 
applicable license or otherwise contrary to the statute, pursuant to 
the Register's prior rulings. See e.g., Review of Copyright Royalty 
Judges Determination, 74 FR 4537, 4540 (Jan 26, 2009). Upon such 
review, the Judges see no basis to conclude the settlement is contrary 
to law, except with regard to 801(b)(7)(A).

Conclusion

    Rightsholders are free to choose their representation in these 
proceedings. Admittedly, individual songwriters and self-publishers 
have traditionally chosen not to expend the resources necessary to 
participate in these proceedings at the same level as trade 
organizations and major technology companies. Nonetheless, the outcomes 
of these proceedings can have a significant impact on the lives of the 
individual rightsholders. In this proceeding, the Judges received 
lengthy comments from SGA, which claims to represent thousands of 
songwriters. For SGA's comments to have independent influence, however, 
SGA would have needed to join the proceeding as a participant. 
Nonetheless, with regard to the present proposed settlement, the 
comments of non-participants cumulatively served to amplify those of 
the objecting participant.
    Pursuant to section 801(b)(7)(A)(ii), based on the totality of the 
present record--including the Judges' application of the law to that 
record, as well as GEO's objections, which, as noted supra, are 
consistent with the non-participant comments--the Judges find that the 
proposed settlement does not provide a reasonable basis for setting 
statutory rates and terms.\19\ Furthermore, the Judges find a paucity 
of evidence regarding the terms, conditions, and effects of the MOU. 
Based on the record, the Judges also find they are unable to determine 
the value of consideration offered and accepted by each side in the 
MOU. These unknown factors, as highlighted in the record comments, 
provide the Judges with additional cause to conclude that the proposed 
settlement does not provide a reasonable basis for setting statutory 
rates and terms.
---------------------------------------------------------------------------

    \19\ Section 801(b)(7)(A) does not state which party--proponent 
or objector--might bear a burden of proof in connection with the 
Judges' evaluation of a proposed settlement and objections thereto. 
The Judges do not believe that a ``burden of proof'' issue exists in 
this settlement process, because evidence as described in the 
Judges' Rules, 37 CFR 351.10, is not required. However, were a 
burden of proof applicable in this proceeding, the Judges find that, 
if the burden were placed on the proposers of this settlement, they 
failed to meet that burden and, if the burden of proof were placed 
on GEO and/or the other commenters referenced above, they have met 
that burden.

    Dated: March 24, 2022.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
[FR Doc. 2022-06691 Filed 3-29-22; 8:45 am]
BILLING CODE 1410-72-P