Judges in the US have hinted that the mechanical royalty rate paid to publishers and songwriters for vinyl sales should rise. The major labels’ lawyers have come out swinging.

Written By Tim Ingham

The MBW Review is where we aim our microscope towards some of the music biz’s biggest recent goings-on. This time, we walk our readers across one of the most interesting (if complicated) stories of 2022 so far. The MBW Review is supported by Instrumental.

It’s a process awash with legalese – to the point of tedium.

But there’s a very important debate going on in the US over certain types of mechanical royalty rates paid to songwriters right now, and you need to know about it.

That’s partly because it’s pretty fascinating stuff, and partly because it prods at some tender areas of the power balance dominating the modern music industry.

Fear not: You won’t have to wade through all the paperwork; MBW has done that for you. (So. Much. Paperwork.)

But trust us, there are some startling nuggets in this story.

For example, last Tuesday (April 5) the three major record companies jointly filed an EMERGENCY MOTION with the Copyright Royalty Board in the US.

The trigger for that EMERGENCY MOTION: the CRB is currently mulling whether or not to raise the amount songwriters get paid in mechanical royalties from the sale of physical music (CD and vinyl) and downloads in the States.

Filing an EMERGENCY MOTION in a process like this is the legal equivalent of waving one’s arms around and shouting, “Whoa! Whoa!”. So:

What were the record companies “whoa-ing” about?
Why has it left some songwriter advocates reeling?
And will composers ultimately get paid more in royalties for CD, vinyl and download sales in the US?

Here, MBW does our best to fill you in, and answer these questions…

What’s the background here?

MBW readers will remember well that the NMPA (National Music Publishers Association) is currently locked in a legal battle with Spotify and other streaming services to increase the pay (via mechanical royalties) songwriters get from these platforms in the US.

Locked in two battles, to be more precise.

The Copyright Royalty Board (CRB) ultimately sets the percentage of a streaming companies’ revenues that it must pay out in royalties to songwriters in the US, and does so every few years.

Four years ago, the CRB ruled that streaming services should up that percentage from 10.5% to 15.1% for the years 2018-2022.

The likes of Spotify appealed that ruling; a final post-appeal decision from the CRB is expected in the coming months.

The NMPA is also battling Spotify et al. when it comes to the mechanical rates paid to songwriters by streaming services for the years 2023-2027. That legal tussle – Phonorecords IV – got underway only recently.

But here’s the thing: As a separate part of Phonorecords IV, not involving the streaming services, the CRB is also deciding what mechanical royalty rate publishers and songwriters should receive from sales of physical music in the US, as well as downloads.

(For reference: The CRB considers this physical/download rate under ‘Subpart B’ of its Phonorecords IV decision-making.)

Since 2006, the mechanical rate paid to publishers/songwriters for music purchased on a physical disc (or a download) has been set at 9.1 cents per track. (We’ll get on to how and why shortly.)

For now, here’s the crucial quirk at the center of this story:

If the mechanical rate for streaming rises via a CRB ruling, the streaming services (Spotify et al) have to find this extra money and pay it out to songwriters;
But on physical formats in the US, mechanical royalties are paid on to publishers and songwriters by the record companies. Which means if the CRB was to increase the mechanical rate on physical music… the record companies would have to find this extra money, and pay it out to songwriters.

Now, consider that the three largest music publishers are owned by the same parent companies that own the three largest recorded music companies.

Things just got interesting, right?

Source: MusicBusinessWorldwide

What is the NMPA arguing in the CRB’s physical/download proceedings?

That’s another big part of this story: The NMPA isn’t really arguing anything.

The org has chosen not to litigate in the physical/download mechanical rights proceedings (‘Subpart B’), and is instead concentrating all of its resources on the (separate) streaming side of the CRB’s hearings.

NMPA President/CEO, David Israelite, justifies this strategy thusly: litigating on CRB processes is expensive, and physical music is – percentage-wise – a declining piece of publishers’ turnover. So if it’s not careful, the NMPA could end up spending more of its (member-funded) resources on legal costs here than they stand to gain from a bump in royalties from these formats.

“It is too low, it is not fair, it is not enough,” said Israelite of the 9.1 cent rate in a recent interview, adding: “We are not minimizing the importance of physical, but let’s say we get a 10% increase, we would spend more on [litigation] to get that rate. So the decision was made to focus on streaming rates where the real fight is and not get into a fight on 9.1 cents.”

According to Billboard, the NMPA estimates that royalties from physical/download sales make up just 5% of US publishing royalties.

There is an additional benefit to the NMPA from not litigating the physical/download side: it means that the org doesn’t have to get into a direct legal spat with the record companies (who would, what with being on the hook for any increase in mechanical royalties for publishers and songwriters, surely fight the opposite corner on this issue).

This stalemate on physical/download makes ‘speaking with one voice’ in the streaming side of the CRB process easier, with the publishers (via the NMPA) leading the charge against Spotify and co., and the record companies supporting their efforts.

So are the publishers even asking the CRB for better physical mechanical royalties at all?

It’s here that things get a little controversial.

The three major record companies have reached a “Settlement Agreement” with two key trade groups: The NMPA (representing its publisher members) and the NSAI (Nashville Songwriters Association International, representing its songwriter members).

This Settlement Agreement, which was submitted to the CRB last year, suggests that the US physical/download mechanical royalty rate (9.1 cents per track) should remain where it is, and no higher, for the years in question (2023-2027).

It’s essentially a do-over of other Settlement Agreements between these parties (publishers x record companies) that were previously submitted to the CRB in Phonorecords III (regarding 2018-2022), as well as Phonorecords II (2013-2017).

In Phonorecords I (2008-2012, agreed in 2006) the NMPA did litigate for a higher mechanical royalty from the record companies, but the result was the same: a 9.1 cent rate.

In each of these proceedings, therefore, spanning 16 years (inclusive of 2006 onwards), the 9.1 cents per-track rate held firm at the CRB.

That’s not the case this time, though.

This time, the CRB has taken issue with the NMPA / major record company Settlement Agreement, raising concerns both over the freezing of the 9.1 cents rate, and the fact it’s remained frozen since 2006.

In a shock rejection of the Settlement Agreement, issued on March 30, the CRB’s Chief Copyright Royalty Judge, Suzanne Barnett, wrote: “[Sixteen] years at a static rate [9.1 cents] is unreasonable… if for no other reason than the continuous erosion of the value of the dollar by persistent inflation that recently has increased significantly.”

Barnett added: “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.”

In other words: if government-measured US inflation from 2006 to 2021 was applied to the 9.1 cents rate, songwriters (and publishers) today would be getting paid $0.12 (12 cents) for each track that appears on a purchased physical disc or download.

“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.”

Suzanne Barnett, Copyright Royalty Board

The CRB’s Barnett also made note in her Determination on March 30 of the growth of US market vinyl sales, which, according to the RIAA, generated (for recorded music rights-holders) just over $1 billion in 2021, increasing YoY revenues for the 15th year in a row.

Additionally, Barnett and her two fellow CRB judges raised potential issues with the fact that some of the NMPA’s largest members (namely Sony Music Publishing, Universal Music Publishing, and Warner Chappell Music) are part of the same corporate groups (via Sony Music Group, Universal Music Group, and Warner Music Group) as the three major record companies with whom they inked the Settlement Agreement.

Wrote Barnett: “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.”

Barnett expressed the CRB judges’ concern that – with the major publishers effectively negotiating with their sister record companies via the NMPA – there was “potential for self-dealing present in the negotiation of this proposed settlement”.

Blimey. Did anything else get the CRB worked up?

Yup: a confidential element of the Settlement Agreement between the major record companies and the NMPA, referred to as the “memorandum of understanding” (MOU).

Although details are scarce, Suzanne Barnett’s Determination suggested that this MOU involves a waiver deal for the record companies to escape late payment fees. “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,” she wrote.

Judging by previous MOUs agreed between the NMPA and record companies, these late fees are charged to record companies that fail to pay through their mechanical royalties to the correct music publisher within an agreed timeframe. Said record companies can instead pay a waiver to protect themselves against individual late fee claims from music publishers.

During the CRB’s consideration of the NMPA/record companies’ Settlement Agreement, three independent songwriters – Helienne Lindvall, David Lowery and Blake Morgan – wrote to the CRB, via attorney Chris Castle, to state their concerns over the MOU.

“Without more complete knowledge of the implications of the MOU… the Judges are unable to evaluate the proposed settlement as a whole.”
Suzanne Barnett, Copyright royalty board

They wrote: “While [songwriters] will focus… on the frozen mechanicals [rate] issue… it must be said that the decade-plus MOU agreements are a backward looking and inequitable insider arrangement that permits a mindset of sloppiness and a ‘kick the can down the road’ mentality that debilitates the entire music publishing business.”

Lindvall, Lowery and Morgan raised concerns that any amount of money paid to publishers via the NMPA related to the late fee waivers wouldn’t necessarily have to be accounted to songwriters by their music publishers. The trio requested that the record companies and NMPA disclose more key details of their MOU.

The CRB agreed. Judge Suzanne Barnett wrote in her rejection of the Settlement Agreement: “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.”

She added: “[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… the Judges are unable to evaluate the proposed settlement as a whole.”

And it was this rejection that triggered the ‘EMERGENCY MOTION’ from the record companies?

Oh yes.

But to explain this fully, we’re first going to have to tell you a bit about George Johnson.

George Johnson is a songwriter from Nashville. He is also the only legal ‘Participant’ – as in, someone paying money to litigate on behalf of himself – in the physical/download-related part (‘Subpart B’) of the CRB’s Phonorecords IV proceedings.

As the only legal ‘Participant’ fighting against the Settlement Agreement, Johnson opened the door for other songwriters to submit their criticisms to the CRB, and, ultimately, made it possible for the CRB to reject the NMPA/major record company proposal.

The major record companies may well view George Johnson as an irritant. His fellow songwriters may well view him as a hero.

His written statements to the CRB over the Settlement Agreement are waspish, to say the least.

He refers to the major record companies via his own acronym: 3FHRL (“3 Foreign Headquartered Record Labels”).

He flat-out alleges that the Settlement Agreement is “fraudulent” and “phony”.

He has a song called Still Pissed At Yoko.

“[The majors and the NMPA] provide no evidence of a bonafide deal between a separate willing-buyer and willing-seller since all parties are all literally negotiating with themselves,” claims Johnson in his CRB filings.

“[It’s] the same self-interested parties negotiating with themselves to keep their costs low and constant and to keep all America[n] songwriters as indentured servants,” he adds.

George Johnson – and this will become important later – doesn’t believe a mechanical rate rise from 9.1 cents per track to 12 cents per track (for physical and download sales) will cut the mustard.

He wants 56 cents per track.

Which brings us, finally, to the major record companies’ EMERGENCY MOTION.

Once the CRB judges rejected the NMPA / major record company Settlement Agreement, some subsequent media reports (reasonably) suggested that it could ultimately lead to the future US mechanical rate for downloads / physical music sales rising for all songwriters and publishers.

(Remember what Judge Barnett said about a frozen 9.1 cent rate since 2006 being “unreasonable”).

The majors didn’t like this one bit.

Their EMERGENCY MOTION, issued on April 5, calls on the CRB to confirm that, in fact, those music publishers (and the songwriters signed to them) who entered into the Settlement Agreement (via the NMPA) would not be affected by any rate rise the CRB decides upon for 2023-2027.

“Non-participants take a calculated risk when they choose to sit out a proceeding. Specifically, they decide that to save the expense and burden of participating in a proceeding, they will live with the outcome of the proceeding whatever it is.”
Major record companies on songwriters who didn’t pay to participate in latest CRB proceedings

“There is no reason to think the Judges need to save settling parties from themselves by negating an agreement that they have voluntarily reached, and certainly no basis in [the US Copyright Act] to think that the Judges have the power to upset contractual expectations by giving a party to a settlement a better deal than the one it voluntarily accepted,” write the majors in their EMERGENCY MOTION.

But that’s not the end of the majors record companies’ strong assertions.

As well as ‘Participants’ who have signed the Settlement Agreement (via the NMPA), the major record companies also state that any rate rise decided upon by the CRB shouldn’t legally affect any ‘non-participants’ in the Phonorecords IV Subpart B proceedings.

Yup: The majors are arguing that, whatever the CRB decides, it can ultimately only affect one man: George Johnson.

Because, they argue, no other songwriter or publisher has paid to be a unilateral Participant in the CRB process, and therefore can’t be affected by its outcome.

“[There is no] basis for the Judges to reject the Settlement as to non-participants,” write the majors. “Non-participants take a calculated risk when they choose to sit out a proceeding.

“Specifically, they decide that to save the expense and burden of participating in a proceeding, they will live with the outcome of the proceeding whatever it is.”

Oof.

could this really all end up just affecting one songwriter?!

George Johnson. Remember the name!

Look, it’s possible. Then again, the majors’ well-funded legal minds say they are ready to skewer Mr Johnson’s arguments the first chance they get.

In particular, they’re primed to attack Johnson’s suggestion that the mechanical rate for physical and downloads should rise to 56 cents per track, more than six times its current size (9.1 cents per track).

“The Joint Record Company Participants are certainly able to explain why Mr. Johnson’s rate proposal is untethered from marketplace reality,” they confidently write in that EMERGENCY MOTION. (They also ask for additional time – and “clarity about matters of scope and procedure” – from the CRB).

Suffice to say, some songwriters out there aren’t exactly impressed by the major record companies’ “non-participants take a calculated risk when they choose to sit out a proceeding” angle.

A joint letter was sent to Judge Suzanne Barnett on Saturday (April 9) by Music Creators North America (MCNA) – a group that says it represents “hundreds of thousands of songwriters, composers and lyricists” globally, via a number of affiliated orgs.

“The arguments framed by some record labels literally amount to ‘if you’re too poor to fully participate in proceedings, your opinion is as worthless as your economic status and welfare’.”
MCNA letter to the CRB

In that letter, directly written in response to the EMERGENCY MOTION, MCNA informs the CRB that it intends to launch an initiative that aims to tweak the US Copyright Act.

That tweak, MCNA explains, would make it easier (and presumably less expensive) for music creator groups to actively participate in future CRB proceedings “despite the enormous gap in resources between multi-national recording and publishing conglomerates on the one hand, and creator groups on the other”.

Referencing the major record companies’ EMERGENCY MOTION directly, the MCNA adds: “Judging from the reaction of those who disagree with the CRB’s decision on the frozen rates proposal, and the arguments framed by some record labels which literally amount to ‘if you’re too poor to fully participate in proceedings, your opinion is as worthless as your economic status and welfare’, we expect to find at least some sympathetic ears on Capitol Hill.”

This seems like an awful lot of drama; how much money is actually at stake?

Good question: This takes us back to the NMPA’s justification for not litigating this (‘Subpart B’) in the first place.

Last week, Billboard made a (deliberately) generous estimate of what US publishers/songwriters might stand to gain from an inflation-mirroring rise in mechanical royalties from physical and download.

If the CRB’s suggestion was followed, and a 12 cent rate was applied to the mechanicals on these formats across last year in the US (as opposed to the 9.1 cent rate that was actually paid in that year) Billboard calculated that record labels would have paid an additional $42.4 million to songwriters and music publishers in 2021.

On the one hand, in a market where Universal Music Group is generating over $10 billion across its global business annually – and total US publishing revenues topped $4 billion in 2020 (see below) – this amount seems smaller than small fry.

Then again, it’s easy to think of two parties in particular who would surely notice a significant difference: (a) Non-touring songwriters reliant on their royalties to pay the rent, and (b) Funds, managed by the likes of Hipgnosis, Round Hill etc., that have invested aggressively in publishing rights – and whose catalog valuations would instantly receive a modest bump as a result.

For its part, the NMPA said in a statement: “We are encouraged that the Copyright Royalty Board is open to higher digital download and physical product rates for songwriters and music publishers.

“While we continue to focus on fighting the largest tech companies in the world in the trial for higher digital streaming rates which make up the growing majority of songwriter income, NMPA and its members always support higher royalties that reflect the important contributions of songwriters.

“We appreciate the grassroots efforts of songwriter advocates across the country and we stand with those who are pushing for more equitable songwriter payments.”

What happens now?

Who knows! We’re in unchartered territory.

As mentioned, in prior equivalent Phonorecords proceedings, the CRB quietly accepted the Settlement Agreements offered by the NMPA and the major record companies without quibbling. We’re a long way from that in Phonorecords IV right now.

Could the NMPA/major record companies/NSAI somehow submit an all-new Settlement Agreement that addresses the CRB’s key concerns? In particular, one offering more transparency on that confidential ‘MOU’ agreement?

Are we about to witness George Johnson take his final one-man-stand against the combined might of music’s biggest multi-nationals?

Or will things go in an even more unexpected direction?

Chris Castle is the aforementioned attorney representing independent songwriters who have submitted filings to the CRB over the past year. (Castle also runs his own blog, Music Tech Policy, which features regular and perceptive updates on the progress of Phonorecords IV – Subpart B.)

Castle argues that the CRB may ultimately decide it has a headache on its hands when it comes to the vertical integration of publishing and records within the same three major corporate groups. (As Castle puts it: “What do you do when a ‘willing buyer and a willing seller’ are the same person?”)

For that reason, Castle believes the CRB may end up referring some of its decision-making on this point to the US Copyright Office. And if that process doesn’t go the way of the majors, he suspects, The Big Three will appeal.

“I just don’t understand why the major record companies would do this, because they’ve built up so much goodwill lately.”
Chris Castle, songwriter attorney

Castle suggests there’s also a chance that the CRB might instead just announce a new statutory physical/download rate, with or without the support of the major music companies.

“They might say, ‘It’s within our purview to establish cost of living adjustments,’” he comments. “I don’t think they need to have experts [for that] because they’re not saying: ‘This is the value of songs.’

“Rather, they’re just saying, ‘We already went through all this in 2006. So now we can go on to the government’s website and look up the cost of [inflation], and do it that way.’”

Discussing the EMERGENCY MOTION and the potential for the major record companies to end up on the other side of a legal divide against songwriters, Castle adds: “I just don’t understand why the major record companies would do this, because they’ve built up so much goodwill lately.

“I’m not one of those guys that sees major labels under the bed, but when you look at the way they’re thought of in this country, they’ve done a lot of [positive] things lately, like passing through royalties without regard to unrecouped balances, this world of ESG [Environmental, Social, and Governance].

“With regards to that, this is a slam on the brakes from the majors, a whip-that-wheel kind of maneuver. It’s baffling to me. They’re taking a chance with this strategy that could really end up backfiring.”

This week, in the wake of the EMERGENCY MOTION, the CRB published a refreshed timeline for Phonorecords IV (Subpart B), with the next moment of drama – a hearing – pencilled in for the week of July 5.

Whatever happens in the months ahead, Chris Castle says he’s keen on the idea of a designated representative, perhaps an ombudsman, to specifically represent songwriters and songwriter groups in any future CRB proceedings whose outcome affects how composers are paid.

Comments Castle: “Obviously, you can’t expect there will always be a George Johnson.

“One of these days, you know, George is gonna say, ‘I’ve had enough of this.’ And who could blame him?”