MLC Audits & Renewal of its Government Mandate [Chris Castle]
The clock is ticking for copyright owners to audit The MLC, writes Chris Castle, and you can only audit “once in a year for any or all of the three calendar years preceding the year… and may not audit records for any calendar year more than once.”
by Chris Castle of Music Tech Policy
Well, it’s audit season at The MLC, Inc. Just to be clear, when I use the term of art “audit”, 99% of the time I am referring to what is more accurately called a “royalty compliance examination” which means that someone on behalf of a songwriter or publisher examines the books, records and systems of a payer of royalties to determine if they are getting accurate royalty statements and payments.
The lobbyists who wrote Title I of the Music Modernization Act call it neither–rather than pick the global industry standard terminology, instead they chose the word “verification” which sounds less toothy to me and use both “verification” and “audit” just for that extra bit of clarity. For those reading along at home, you’ll find the law on audits, such as it is, now piled into 17 U.S.C. Section 115. (Fun fact, after the lobbyists got through with it in Title I of MMA, the even more impenetrable Section 115 is longer than the entire 1909 Copyright Act.)
Remember that in a pre-MMA world, songwriters were not allowed to audit on a straight statutory license (although curiously the standard HFA license provided for quarterly accounting with an audit right). After a 100 years or so of this travesty, songwriters and publishers are still not allowed to audit streaming services directly–so don’t be getting uppity now. Title I of the MMA provides that songwriters and publishers may only audit The MLC and only The MLC is allowed to audit the streaming services that pay their salaries. No moral hazard there, of course.
If you find that bifurcation to be a bit strange and unfair, that’s because it is. You are correct. Ever since the Big Tech platforms became part of our lives, they have been fighting audits as though they were lawsuits and they appear to take a very litigious approach to what audits they did have (all under contract) based on an experience I had with the Copyright Office in 2011 on this very point. Mechanical royalty audits of record companies for the mechanical royalties they pay are absolutely routine. Big Tech’s reaction is quite different and positively Dickensian. Which may explain why they only deign to be questioned by their subjects at The MLC.
The clock has ticked over to that audit season again because copyright owners can audit The MLC, Inc. “only once in a year for any or all of the 3 calendar years preceding the year in which the audit is commenced, and may not audit records for any calendar year more than once.” Because The MLC started handling the blanket license under Title I of the MMA as of January 1, 2021 (the “license availability date”), three years is up on January 1, 2024. So why wait?
Of course, one of the first rules that the Copyright Office promulgated under Title I had to do with confidentiality of information in audits. This is a very Big Tech prioritization–Big Tech lives in a fearful and litigious universe where any criticism from the little people must be suppressed by protective orders and confidentiality agreements, NDAs and mobs of lawyers. No whistles can blow in Silicon Valley, don’t you know. There’s an atmospheric anomaly in Santa Clara County.
However, the Copyright Office took a nuanced approach to establishing rules for the treatment of confidential information. Anticipating that The MLC will use any confidentiality agreement as a protective shield as well as a sword (and the services definitely would if past is prologue), I commended the Copyright Office for this approach “in distinguishing what is commonly thought of as generic ‘confidential information’ and what ought to be confidential information for the DLC, [t]he MLC, their respective vendors and in particular the MLC’s three Statutory Committees.” (text accompanying fn 29)
For example, if The MLC has outsourced its royalty accounting and reporting to a third party vendor, it would be easy for any systems audit to be rejected on the grounds that it would essentially be an audit of the vendor and not The MLC. This could defeat the entire purpose of the audit. Given that The MLC’s principal vendor is HFA and to my knowledge HFA has never been the subject of a royalty compliance examination by a publisher principal under contract, limiting the audit to The MLC’s systems but excluding HFA might create an unjust result. This is particularly true given that the government has already taken away a copyright owner’s right to accept or reject terms of a mechanical license. So much for self-sovereignty.
It must also be said that auditors are the ones who have the best insight into how systems function at a music user’s accounting operations. Given that the Congress has directed that timely payment and a functioning musical works database to be primary goals of Title I, those goals are furthered by transparency of issues discovered in one audit that might lead to improvements in systems and better accountings in future. This could perhaps even apply to other ongoing inbound audits.
Such information and discoveries of systems flaws or inaccuracy should not be barred by “gotchas” in confidentiality agreements; in fact, that kind of ameliorative disclosure should be published in the Federal Register. This is of particular importance given that The MLC does not own the musical works database that may get transferred to a successor if The MLC, Inc. is not designated for another five years, another review process that is starting imminently.
It is particularly beneficial to the good of all songwriters that audit season coincides with the Copyright Office’s five year review of The MLC operations to determine if The MLC should be rewarded with another five year contract.
