Copyright Office Says Streamers on the Hook for Late Fees

The U.S. Copyright Office recently addressed when fees for late royalty payments should be assessed under the Music Modernization Act’s blanket mechanical license. Under the Office’s Interpretive Rule, effective September 5, 2023, digital music royalty late fees begin accruing for digital music providers 45 days after the end of a monthly reporting period, even if the underpayment is discovered only after subsequent adjustments.

Music Modernization Act’s Blanket Mechanical License

Enacted in 2018, the Music Modernization Act significantly altered the licensing scheme for music streaming services, such as Spotify, Apple, Pandora, YouTube, and Amazon, by switching from a song-by-song licensing system to a blanket licensing regime. Under the new system, which became available on January 1, 2021, music services may obtain a blanket license for interactive streaming or digital downloads of musical works through the newly established Mechanical Licensing Collective (MLC), subject to various payment and reporting obligations.

In implementing the Music Modernization Act, Congress granted the Copyright Royalty Judges the responsibility to set the blanket license’s royalty rates and terms, which may include late fees. Of relevance to the latest rule, the Music Modernization Act provides that ‘‘monthly reporting shall be due on the date that is 45 calendar days . . . after the end of the monthly reporting period.’’ The statute further provides that ‘‘[l]ate fees for past due royalty payments shall accrue from the due date for payment until payment is received by the [MLC].’’

On September 17, 2020, the Office issued an interim rule adopting regulations concerning reporting and payment requirements under the blanket license. The rule addressed the ability of digital music providers to make adjustments to monthly and annual reports and related royalty payments, including correcting errors and replacing estimated royalty calculation inputs (such as the amount of applicable public performance royalties) with finally determined figures. The interim regulations authorize digital music providers to make adjustments in other situations as well, such as in exceptional circumstances, following an audit, or in response to a change in the applicable statutory rates or terms adopted by the Copyright Royalty Board.

U.S. Copyright Office Asked to Provide Clarity

In adopting the interim rule, the Copyright Office did not address how adjustments would impact late fee assessments. In February 2023, it agreed to address the issue in response to requests by both the MLC and the digital licensee coordinator (DLC), which was designated to represent digital music providers in proceedings before the Copyright Royalty Board.

Not surprisingly, the MLC and DLC submitted very different responses to the Office’s notification of inquiry soliciting public comments regarding when royalty payments should be considered late, thereby triggering late fee assessments. The DLC requested that the Office ‘‘specify that when both the initial estimated payments and the later adjustment of such payments to account for the updated and finalized information are made according to the timelines established in the regulations, such payments are proper and have been made by the ‘due date for payment’ as outlined in 17 U.S.C. [sec.] 115(d)(8)(B)(i).’’

The MLC disagreed and instead proposed regulatory language providing that nothing in the adjustment provisions ‘‘shall change a blanket licensee’s liability for late fees, where applicable.’’ Interested parties, including the National Music Publishers’ Association (NMPA), publishers, groups representing songwriters, and others also submitted comments responding to the Office’s notice of inquiry.

Interpretive Rule Regarding Assessment of Late Fees

In an interpretive rule published on September 5, 2023, the Office ultimately adopted the interpretation argued by artists and music publishers. “The Office concludes that the statute’s due date provisions are unambiguous,” the Office stated in its ruling. “The statute’s reference to ‘due date for payment’ clearly refers to the date on which monthly royalty payments are required to be delivered to the MLC.”

In support of its decision, the Office largely relied on the statutory text. It wrote:

[T]he plain and natural meaning of the statute is that ‘‘all royalties’’ for a given monthly reporting period are ‘‘due’’ no later than 45 days after the end of the monthly reporting period. Thus, any royalties received by the MLC for such reporting period after this ‘‘due date for payment’’ are late. They are ‘‘past due royalty payments’’ that are subject to such ‘‘late fees’’ as the CRJs may adopt.

The Office also noted that Congress could have created an exemption for when late fees accrue, as it did for royalty payments under the optional statutory limitation on liability for certain unlicensed uses before the license availability date, but it did not do so. After concluding that the statutory text was unambiguous, the agency declined to issue any regulations.

How We Can Help

The Music Modernization Act represents a significant change in the way streaming royalties are calculated. As evidenced by the Copyright Office’s latest ruling, implementation of the new regime is still ongoing. We encourage impacted entities, including both online streaming services and music publishers, to stay on top of legal updates and work with experienced counsel in navigating the new system.