Termination Rights, Royalty Distributions, Ownership Transfers, Disputes, and the Music Modernization Act

On July 9, 2024, the U.S. Copyright Office published a final rule confirming that the derivative works exception to termination rights under the Copyright Act does not apply to the statutory blanket mechanical license (“blanket license”) established under the Music Modernization Act (“MMA”) and directing the Mechanical Licensing Collective (“MLC”) to distribute royalties in a manner consistent with the Copyright Act.


Background

The Copyright Act permits authors or their heirs, under certain circumstances and within certain windows of time, to terminate copyright grants, including transfers or licenses. At the same time, the Act provides that termination is subject to an exception that allows derivative works prepared under the authority of a grant before termination to continue to be utilized under the terms of the grant after termination (the “Exception”).


The MLC, the entity responsible for administering the MMA’s blanket license, adopted a termination dispute policy based on an erroneous interpretation of the Exception. This mistaken understanding of the Exception resulted in overpayments to pre-termination copyright owners.


Final Rule

Application of the Exception

This rule confirms that Exception does not apply in the context of the blanket license. It also directs the MLC to make future royalty distributions in accordance with the Office’s guidance and to correct prior overpayments that were made based on an incorrect interpretation of the Exception.


Corrective Royalty Adjustment

To address prior overpayments made due to an erroneous application of the Exception, this rule directs the MLC to engage in a “corrective adjustment” process. Under this process, relevant parties (i.e., pre- and post-termination copyright owners) will first have an opportunity to engage in a voluntary self-administered corrective adjustment. To help them engage in this adjustment, the MLC will notify relevant parties of any overpayments no later than September 9, 2024. The MLC’s notification will include the following information:

  1. A summary of the Office’s conclusions regarding the Exception;
  2. Description of the final rule’s corrective adjustment process, including the options for a self-administered corrective adjustment in lieu of one administered by the MLC;
  3. For each musical work at issue, the amount of the overpayment; and
  4. Each party’s contact information, as contained in the MLC’s records.

Parties will have until October 9, 2024 to agree to a self-administered corrective adjustment and notify the MLC of that decision. That timeframe can be extended up to March 11, 2026, by notifying the MLC. The MLC will administer a mandatory corrective adjustment if the interested parties do not agree to a self-administered one (or if they fail to notify the MLC of any such agreement by October 9, 2024).


The Office encourages relevant parties to attempt to resolve corrective adjustments directly with each other.


If the parties are unable to do so, they can elect to engage in an MLC-administered corrective adjustment. This process involves the MLC recovering improperly distributed royalties, then distributing them to the proper payees, i.e., those entitled to such royalties under the correct application of the Exception.


Under the rule, the parties may request an extension of the time for deciding whether to resolve the corrective adjustment between themselves. Please note, however, that they must make a final decision on whether to engage in a self-administered or MLC-administered corrective adjustment by March 11, 2026 and notify the MLC of this decision. After this date, the MLC will not be required to initiate an MLC-administered corrective adjustment.


Clarification of the Appropriate Payee in Time

This rule also recognizes that, under the blanket license, the copyright owner who is entitled to blanket license royalties is the owner at the time a musical work is used by a digital music provider, and not necessarily the owner at the time the MLC makes a royalty distribution.


To address certain administrative concerns, the rule contains a default provision that allows the MLC to treat the copyright owner of a musical work in its records as the party entitled to royalty distributions for that work, unless:

  1. There is a dispute or investigation covering the applicable works or payees; or
  2. The MLC receives reliable information that it should not be applying the default provision, e.g., where the MLC has been provided reliable information that the copyright owner identified in its records is not legally entitled to the royalty distribution.

Finally, the rule states that any royalty distribution made in reliance on this default provision is without prejudice to any party’s legal entitlement to the royalties.


Implementing Payee Changes

The final rule includes requirements related to notifying the MLC of a termination but does not address non-termination-related notice requirements, as proposed in this rule’s supplemental notice of proposed rulemaking. Instead, the Office has directed the MLC to adopt requirements related to those other notices.