U.S. Copyright Office Finalizes ‘Scaled-Down’ Solution to ‘Termination Rights’ Under Mechanical Licensing Payouts

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Washington, D.C.’s James Madison Memorial Building, which houses the U.S. Copyright Office. Photo Credit: UpstateNYer

The U.S. Copyright Office has finalized a major update to “termination rights” for mechanical licensing payouts under the MMA-established blanket license.

The Office today published its final rule on the subject, close to two years after first taking up the highly complex matter. Subsequently, all manner of organizations, from the National Music Publishers’ Association (NMPA) to the Mechanical Licensing Collective (MLC) itself and many in between, forwarded comments in support of their respective interests.

Predictably, scratching the surface of this back-and-forth (let alone the multifaceted arguments at hand) would require thousands of words – with even a brass-tacks breakdown proving lengthy in its own right.

Running with the latter in any event, many know that the initially mentioned Music Modernization Act (MMA), among other things, established the Mechanical Licensing Collective-administered “blanket license.” In keeping with its name, the license affords on-demand streaming players like Spotify the ability to utilize compositions on a blanket basis as opposed to use-by-use.

Perhaps similarly well-known is the “recapture” right established under Section 203 of the Copyright Act. In short, after 35 years, certain entertainment professionals (not solely in the music space) can potentially terminate copyright transfers to third parties like labels and publishers, thereby recapturing ownership of the works.

Less frequently discussed is Section 203’s inclusion of a “derivative work” clause, encompassing all creations stemming from the initially protected media (such as a recording of a composition).

“A derivative work prepared under authority of the grant before its termination may continue to be utilized under the terms of the grant after its termination,” the derivative work specifics read in whole, “but this privilege does not extend to the preparation after the termination of other derivative works based upon the copyrighted work covered by the terminated grant.”

Bringing that over four-decade-old legal text into the present, when a songwriter recaptures his or her rights from a music publisher, how is the blanket license affected? At the outset, the MLC called on streaming platforms like Spotify to make note of when recordings were first reproduced on their servers.

From there, the derivatives’ mechanical royalties would be paid to pre-termination owners if the blanket license was issued before the recapture notice and to post-termination owners otherwise. Expectedly, that was controversial, and because of the date-based payout approach adopted by the MLC (which didn’t “follow the Office’s rulemaking guidance”), the USCO sought to provide clarity at the intersection of recaptures, derivatives, and the blanket license.

Out of the gate, the Copyright Office didn’t hesitate to drive home its belief that recaptured works should deliver revenue to the party or parties responsible for the termination.

“Whether or not the [derivative] Exception applies to a DMP’s [digital music provider’s] blanket license (and the Office concludes that the Exception does not),” the Copyright Office penned back in October of 2022, “the statute entitles the current copyright owner to the royalties under the blanket license, whether pre- or post-termination.

“In other words, the post-termination copyright owner (i.e., the author, the author’s heirs, or their successors, such as a subsequent publisher grantee) is due the post-termination royalties paid by the DMP to the MLC,” the USCO spelled out.

Now, with the MLC having seemingly held all related royalties in the interim, the Copyright Office addressed the issue (and adjacent considerations) today with the aforesaid final rule.

Effective August 8th (though the MLC will have “until the first distribution of royalties based on the first payee snapshot taken after October 7” to comply), the rule “is a scaled-down version of the” solution floated in September of 2023, per the Office.

This scaled-down nature presumably resulted from arguments made by the NMPA and film-studio representatives, with the Office having dissected the positions in detail today. Looking beyond that interesting-but-secondary information, the MLC is under the new rule supposed “to distribute royalties based on its records and to assume that whoever is in its records is legally entitled to the distribution.”

In short, the party listed as the royalties recipient is the recipient, an approach that will ostensibly prevent the MLC from being backlogged with paused payments. However, said approach won’t prove satisfactory to those owed compensation that was incorrectly forwarded elsewhere.

And on this front, “any distribution made by the MLC is not a determination of a party’s legal entitlement to the royalties and does not prejudice any such party’s legal claim,” the Office emphasized for good measure.

Plus, the so-called default distribution provision doesn’t apply when there’s an ongoing rightsholder dispute or an MLC investigation; the appropriate royalties will be paused in the instances. Also excluded from the provision are “circumstances where the MLC receives information that would indicate to a reasonable person that the payee identified in its records is not in fact entitled to the royalty distribution.”

Moving forward, the MLC must keep on making “reasonable efforts to verify the information provided to it and to combat against fraudulent registrations and claims,” the Office stated, driving home that termination notices can extend to multiple works apiece. If one or more of these works’ status is at issue, it shouldn’t affect the others pinpointed in the same notice.