Part Two: §115 of the U.S. Copyright Act Overrides Controlled Composition Clause? - The Evolution of the Mechanical Royalty.

Disclaimer: The materials contained in this blog posting have been prepared by Beame & Mencher LLP for informational purposes only and are not legal advice or counsel. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship. Online readers should not act upon any information in this posting without seeking professional counsel. The information contained in this posting is provided only as general information, which may or may not reflect the most current legal developments.

This is a multi-part blog series, “§115 of the U.S. Copyright Act Overrides Controlled Composition Clause?”

Read Part One: §115 of the U.S. Copyright Act Overrides Controlled Composition Clause? Welcome to the Digital Revolution.

In Part One, we explored a brief history of songwriters and songs in the record business, and introduced the potential impact that §115 of the U.S. Copyright Act may have on the application of record labels’ Controlled Composition Clause to “digital phonorecord delivery”.

Songwriters have always been an integral part of the recording process – most performing artists relied on the talents of songwriters to bring them hit songs. Songwriters (and their publishers that usually owned the songs) were the gatekeepers. They owned the songs, so they could control which performing artists recorded their songs. Then, with the enactment of the Copyright Act of 1909, Congress took that control away. Going forward, any third party could obtain the right to record a song (via a license through the U.S. Copyright Office) after the owner of that particular song made a “first use” – the compulsory or mechanical license was born. Along with this forced license (though the parties could still negotiate directly, sidestepping the government process) came a mechanical royalty rate fixed by the U.S. Copyright Office. From 1909 until the enactment of the 1976 Act (on January 1, 1978), the mechanical royalty rate was 2.0¢ per song made and distributed. When the 1976 Act took effect, the mechanical royalty rate increased for the first time to 2.75¢. Not wanting to pay the increased mechanical royalty rate, record labels drafted a clause in their artist contracts limiting the amount of mechanical royalties they paid to 75% of the then-current rate. This clause became industry standard, and is widely known as the Controlled Composition Clause (let’s call it a “Controlled Comp” for short).

In Part Two, “The Evolution of the Mechanical Royalty”, we’ll dig deeper into the evolution of the compulsory license and mechanical royalty rate and then look at how a Controlled Comp circumvents the royalty structure established by the Copyright Royalty Board (CRB). Part Three, “A Closer look at the Controlled Composition Clause”, we’ll discuss the details of this contractual restraint on mechanical royalties and ultimately, identify the effects it has on recording artists (and songwriters/producers that agree to it).

  1. The Right of Reproduction.
  2. When a copyrightable work is created, it automatically is copyrighted. Literally, lyrics written on to a napkin would qualify as a protected copyright. A song was traditionally created on sheet music – musical notation and accompanying lyrics; and now it is more commonplace for a song to be created simultaneously with the recording of the song. However created, it becomes a protected work. Under United States copyright law, songs are referred to as a “musical works”. And under the Copyright Act of both 1909 and 1976, the author of a musical work has rights over the reproduction and subsequent distribution of that work.

    Prior to the enactment of the 1909 Act, however, protection of a musical work generally extended only to the right of performance and a narrowly defined reproduction right (i.e. copies of sheet music). The scope of the reproduction right was tested in 1908, when the U.S. Supreme Court ruled that a piano roll did not constitute a reproduction of the musical work since it could not be “read” similar to that of traditional notation – it was simply part of a device enabling a mechanical performance of a musical work.[1] The 1909 Act closed this loophole by granting authors of musical works the right of reproduction, including the right to make “mechanical” reproductions (such as the piano roll, and placement of a song onto “phonorecords”[2] such as vinyl, cassette tapes, and compact discs).

    This right was not absolute. An absolute right would have prohibited piano roll manufacturers and recording companies from reproducing songs without songwriter authorization. Congress feared that this would grant songwriters (and those that owned songwriter catalogs) monopolistic control over the mechanical reproduction to their musical works.  The 1909 Act carved out a major limitation to this reproduction right: once the owner of a musical work “made or authorized the recording” of a song – a first use – the owner no longer controlled the right of mechanical reproduction to that work. Alas, the compulsory license was born.

  3. The Compulsory License to Mechanical Reproductions.
  4. The compulsory license (also known as a “mechanical license”) remained intact with the enactment of the 1976 Act. The new act did, however, revise the meaning of “first use” to include any distribution of the song to the public embodied in a phonorecord (this was primarily to prevent the treatment of a demo recording not distributed to the public as a first use, as was the case under the 1909 Act). So while song owners still controlled all other reproductions of a particular song (sheet music, synchronization licenses, etc…), once an authorized and qualifying first use was made, any third party could obtain a compulsory license to reproduce that song and distribute it via a phonorecord (mechanical reproduction).

    In exchange for granting this licensing opportunity to interested third parties, Congress ensured that song owners would be compensated for the use in the form of a royalty – a mechanical royalty. As discussed above, the mechanical royalty set by the then-empowered Copyright Royalty Tribunal (CRT) was 2.0¢ per song per phonorecord made and distributed. This rate endured for 68 years[3], until the 1976 Act increased the rate to 2.75¢. Through a series of administrative proceedings, first by the CRT then the Copyright Arbitration Royalty Panel (CARP), the mechanical royalty rate increased periodically.[4] The current rate is 9.1¢.

    When the compulsory license was first enacted, Congress also included a mechanism by which third parties could provide song owners with notice of the intended mechanical reproduction and make the applicable royalty payments. While the mechanism by-passed the need to license directly with the song owner, it was (and still is) a fairly complex and bureaucratic process nonetheless. Most parties interested in obtaining a compulsory license would likely be better off seeking it directly from the song owner, or the song owner’s representative (such as the Harry Fox Agency, established in 1927 by the National Music Publisher’s Association (NMPA) for the purpose of granting mechanical licenses).

    But a direct license from the song owner or its authorized agent did not have to match the royalty rates established by the CRT and CARP. The song owner could agree to a lesser rate (and could even ask for a greater rate, but in that case, the requesting party could bypass a direct license by obtaining it at the then-current rate through the compulsory license process). Of course, a song owner would likely never voluntarily agree to a lesser rate unless the requesting party had the upper hand…

  5. Sources of Publishing Income.
    1. Public Performance. The public performance right in musical works grants song owners expansive rights to collect monies for numerous performances of those works. Most notably, the public performance right includes broadcast on terrestrial radio (AM/FM), television, and certain qualifying online performances. The right to collect these monies has been traditionally delegated (for good reason) to performance rights societies – in the United States, this includes the American Society of Composers, Authors, and Publishers (ASCAP), Broadcast Music, Inc. (BMI), and SESAC (originally known as the Society of European Stage Authors & Composers, but now no longer applicable). The monies paid directly to songwriters and their affiliated publishers can be substantial.
    2. Synchronization. The placement of music over visual images is known as synchronization, and the license a synchronization license. The most common placements are in films, television productions, and commercials. And like public performance royalties, the monies earned can be substantial.
    3. Mechanical Reproduction. From the piano roll to the modern-day digital phonorecord delivery (which is treated as a mechanical reproduction), songs have always played an integral role in the recording industry. Each reproduction offered song owners a guaranteed payment. Perhaps piano rolls didn’t bring inspiring amounts of mechanical royalties, but the more popular vinyl, cassette tape, and compact disc was a boon to the publishing industry. Place a song with a recording artist, sit back, and wait for royalties to begin rolling in. The mechanical reproduction really drove other sources of publishing income – get a song recorded, and then it will be played on the radio and licensed for synchronization rights.
  6. The music publishing industry is a very lucrative business.[5] The U.S. Copyright Act grants the owners of musical works a number of exclusive rights – most importantly, the rights to public performance and reproduction – which enable them to assign value to their copyrights and accordingly, charge for the use of those copyrights. Sheet music reprints and mechanical reproductions of musical works onto piano rolls were some of the earliest “exploitations”[6] of musical works. And while there are various ways in which to exploit a musical work, the three major sources of income today include:

  7. Mechanical Royalty. Meet the Controlled Composition Clause.
  8. Songwriters and their songs were highly sought after by recording artists and their record labels that were looking for the next hits. At 2.0¢ per song contained on each phonorecord, this was a small price to pay by a record label that stood to earns thousands (if not millions) of dollars on the recorded version of that song. To be clear, the party producing the recording (primarily a record label) had to pay the mechanical royalty rate.

    When the mechanical royalty rate increased, for the first time in nearly 67 years, record labels didn’t want to absorb this additional expense. But, a song owner was never obligated to negotiate a license for mechanical reproduction at less than the statutory rate. Record labels couldn’t force the song owners’ hand. If a song owner refused to negotiate for less, the record label was stuck with the compulsory license process, at the then-applicable rate.

    Record labels still had a few tricks up their sleeves… A recording contract is between a record label and a performing artist (or band). In return for recording a song, the artist was paid a record royalty. Simultaneously, the record label paid a song owner the mechanical royalty. While the record label couldn’t lessen the mechanical royalty rate ultimately paid to a third party song owner, it could insist on a lesser rate for a performing artist that was also a songwriter. If a performer/songwriter wanted a recording contract, they’d have to agree to a decreased mechanical royalty rate for the songs controlled by the artist. When the rate increased from 2.0¢ to 2.75¢, the record labels asked for a 25% reduction to the mechanical royalty rate (“75% of statutory” or whatever amount agreed to) for all songs controlled by the artist. This contractual power grab has become industry standard, and is commonly referred to as the Controlled Compositions Clause. And the “controlled” part extended beyond songs written merely by the artist – it included songs written or controlled by producers, co-writers, and any other parties wherein artist had a direct or indirect ownership interest.

    But, the Controlled Comp didn’t necessarily impact an artist that wasn’t a songwriter or couldn’t get a “non-controlled” song owner to agree to the reduced rate. The record label still had to pay the full statutory rate. The Controlled Comp, while it couldn’t force a complete override of the mechanical royalty, could limit the amount of royalties a record label was prepared to pay out on behalf of an artist. Any amount above the limit set by the label would be the responsibility of the artist. And if the artist was not prepared to pay the overage up-front, the record label would simply reduce it from the record royalty otherwise payable (or add it to the unrecouped advance if the artist wasn’t entitled to a record royalty yet).

    The recording industry successfully found a way to limit the impact of the increased mechanical royalty rate. It seemed as if the tables reversed between song owners and record producers. Songs are still highly sought after (especially for the first use), but record labels have the luxury of shopping around for a song owner that will agree to the reduced rate. And, if a song is already recorded and set for release (no turning back), the record label can always shift the liability for the mechanical royalty above the Controlled Comp rate back to the artist.

The Copyright Act grants recording companies the right to supersede the provisions of the compulsory license through contractual agreement. Hence the Controlled Comp. But what if Congress, through the Copyright Act, precluded such a practice for mechanical reproductions made by “digital phonorecord delivery”?

In Part Three, we’ll explore the intricacies of the Controlled Comp as it applies to traditional forms of mechanical reproductions. And then Part Four will introduce §115(c)(3)(E) – a provision buried in the Copyright Act purporting to prevent contractual agreements that reduce the mechanical royalty rate for digital phonorecord deliveries.

Part Three: §115 of the U.S. Copyright Act Overrides Controlled Composition Clause? – An In-Depth Examination of the Controlled Composition Clause.

[1] White-Smith Music Publishing Company v. Apollo Company, 209 U.S. 1 (1908).

[2] A “phonorecord” is defined as “re material objects in which sounds, other than those accompanying a motion picture or other audiovisual work, are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The term “phonorecords” includes the material object in which the sounds are first fixed”, and generally understood to include vinyl, cassette tapes, compact discs, and even hard drives. 17 U.S.C. §101

[3] The 1909 Act took effect on July 1, 1909 and the 1976 Act took effect on January 1, 1978.

[4] 37 CFR Part 385 – Federal Register Vol. 74, No. 15 Pg. 4509

[5] It remains even now, though current profits appear to be flat lining among the major publishing companies in the United States.

[6] The use of the word “exploitation” is an industry term with a positive connotation.

Brian Mencher is a partner in the law firm of Beame & Mencher LLP. He is one of the foremost experts on §115(c)(3)(E) of the U.S. Copyright Act of 1976 (among many other areas of the law!). Beame & Mencher LLP is a boutique law practice based in New York City providing legal advice and counsel primarily in the entertainment industries. We are forward-thinking, outside of the box, attorneys. Our firm focuses on the representation of creative and entrepreneurial people and companies involved in music, tv/film, theatre, dance, entertainment, new media, and technology.

2 comments to Part Two: §115 of the U.S. Copyright Act Overrides Controlled Composition Clause? – The Evolution of the Mechanical Royalty.

Leave a Reply




You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>