Though the Mechanical Licensing Collective (“MLC”) has up to now held off on a market‑share distribution of its unmatched‑royalty or “black field” fund—now reported to exceed $1.2 billion—that restraint shouldn’t be mistaken for a sturdy authorized safeguard. The MLC’s authority to retain, make investments, and in the end privately distribute these funds on a market-share foundation relies upon solely on its statutory redesignation by the U.S. Copyright Workplace. As soon as redesignated, the MLC may have each statutory permission and highly effective institutional incentives to proceed with a market‑share distribution that completely extinguishes the rights of the unique songwriters and publishers whose works generated the royalties within the first place. At that time, the constitutional accidents will shift from contingent to realized. State attorneys normal due to this fact face a narrowing window to cease them in court docket earlier than unmatched royalties are irreversibly transferred to non-public events and conventional state custodial protections turn out to be unimaginable to revive.
The MMA, MLC and the Structure
There are a selection of constitutional points with Title I of the Music Modernization Act (“MMA”). One of many least examined—and most constitutionally troubling—options of just isn’t the obligatory mechanical licensing mandate itself. The federal government-mandated license for songs and all of its awkward rate-setting baggage has been with us since 1909 in a single type or one other, so it isn’t shocking that the lobbyists missed a possibility to ditch the mandate in favor of a free market answer or obtain one thing “modernized” with Title I of their “modernization” act. (HFA’s complete enterprise mannequin arguably is dependent upon the continued existence of the obligatory license nearly as a lot as ASCAP’s is dependent upon the consent decree.)
It’s additionally not Title I’s kludgy retroactive secure harbor that has been challenged as an unconstitutional taking earlier than (see Eight Mile Model, LLC v. Spotify USA Inc. (3:19-cv-00736) District Court docket, M.D. Tennessee). Sadly for the remainder of us, that constitutional problem was not made as a sole reason for motion however as a substitute was tacked onto an equally kludgy idea of hurt that in the end failed. Though the plaintiffs raised a constitutional problem to the retroactive secure harbor, the Decide Trauger expressly declined to succeed in that constitutional declare, resolving the case on different grounds and leaving the constitutional query open for future litigants (“…[T]he court docket will grant Spotify abstract judgment and will depart any resolution concerning the MMA for a future case involving an applicable plaintiff.”). Though the case was appealed, that enchantment was just lately voluntarily dismissed, which feels like some form of settlement. So there’s that. One other litigant is free to deliver the Takings Clause case on the attain again secure harbor.
Unconstitutional Federal Preemption
However what’s probably the following greatest change to U.S. constitutional legislation in Title I is its shiny federal preemption to stop unclaimed royalties within the black field from being handled as state unclaimed property. Not so quick. “Preemption” implies that state legal guidelines should give technique to federal legal guidelines overlaying the identical concern. However is it permissible preemption? I feel not.
The crucial distinction between conventional state unclaimed-property custody and the MMA “black field” is permanence of the songwriter/proprietor’s declare. State unclaimed-property places of work operate as custodians: they maintain funds indefinitely, keep searchable registries, and allow house owners and heirs to recuperate even a long time later. The Title I.black field mannequin does the alternative (one more reason why preemption is improper). After a statutory holding interval, unmatched royalties are distributed to non-public entities and the unique proprietor’s means to recuperate is successfully reduce off eternally—there isn’t any state custodian holding the principal for the absent proprietor, and no perpetual declare mechanism. That structural shift—from “maintain for the proprietor” to “redistribute to others”—is what converts an administrative matching downside right into a deprivation of property downside with apparent due course of and Takings Clause implications.
Abandoning the long-standing safeguards round “deserted” property, Title I merely makes a personal entity (the MLC) the choose, jury and assortment agent for the black field the MLC is answerable for creating with out a federal corollary to the state legal guidelines being preempted. That allowed the MLC to grab upon this loophole as the premise for an interpretation of Title I that enables it to deal with black field income as funding its funding accounts on the idea that Title I preempts long-standing state legislation protections.
Traditionally, the Copyright Act just about stayed out of the preemption enterprise. Neither the 1909 Copyright Act nor the 1976 revision contained a preemption clause for royalty funds (remembering the state legislation copyright and pre-72 copyright programs). Congress first adopted specific copyright preemption in §301 of the 1976 Act, however restricted preemption to state copyright legal guidelines and expressly left alone state legal guidelines that don’t “come inside the subject material of copyright.”
The lobbyists deserted this cautious drafting in Title I, making the MMA’s preemption of state unclaimed property legal guidelines (generally known as by its authorized identify “escheatment”) a traditionally novel and constitutionally vital departure. Title I’s federal preemption of state escheatment and corresponding unclaimed‑property legal guidelines failed to supply a comparable federal corollary and to my information there has by no means been a federal escheatment legislation till Title I (though there are some program-specific unclaimed advantages guidelines). That arguably means the preemption in Title I moderately legally suspect.
Title I basically displaced centuries of state‑legislation protections relationship again to the Pipe Rolls of 12th Century English widespread legislation governing deserted property and successfully transferred these protections to the MLC, a personal group to be regulated by those that stood to learn from controlling the “modernized” non-judicial escheatment. The Mechanical Licensing Collective (“MLC”), which now…predictably…controls a billion‑greenback pool of different individuals’s cash. A pool they possible knew was coming to them from the providers to the tune of $500 million as quickly because the lobbyists might get the MLC up and operating to obtain. It will not shock me if there have been some negotiations about this very level.
The Specter of Elliot Spitzer
So why would possibly there have been this hasty invocation of the talisman of preemption in what was arguably an unconstitutional overreach when the insiders very possible knew on the time that there was a whole lot of tens of millions of unclaimed royalties within the pipeline? In Might 2004, then-New York Legal professional Normal Eliot Spitzer introduced a settlement following a two‑12 months investigation into the music business’s dealing with of unclaimed royalties. The AG’s investigation centered on a typical observe amongst file labels, music publishers, and royalty directors of ceasing royalty funds after “dropping contact” with artists or songwriters, whereas persevering with to carry the accrued funds on their books possible in unsegregated accounts as a contingent obligation beneath GAAP, akin to “accrued royalty payable”. You realize, like in the event that they couldn’t discover “Daybreak Henley” or “Jimmy Hendricks”.
I can let you know anecdotally that the sensible individuals have been pissed, I imply pissed, that they obtained known as out by AG Spitzer on this one. And little question vowed to by no means let it occur once more.
The Spitzer settlement lined the foremost label and publishing teams and expressly included the Harry Fox Company (HFA), the music publishers’ central mechanical‑licensing and royalty‑assortment agent on the time—an vital institutional predecessor to right now’s Mechanical Licensing Collective (MLC). Spitzer’s workplace reported that almost $50 million in unclaimed recording and publishing royalties have been implicated. Greater than $25 million was paid out to rightful house owners through the investigation, with a further roughly $25 million anticipated to be distributed pursuant to the settlement.
Crucially, the AG’s enforcement idea rested on New York’s Deserted Property Regulation (now “preempted” beneath Title I of MMA so the MLC might scoop up and make investments the black field). The Legal professional Normal made clear that the place royalty payee artists and songwriters couldn’t be situated after the statutory three-year ready interval, the businesses doing enterprise in New York (i.e., all of them) have been obligated both to find and pay the house owners or to escheat the funds to the State’s unclaimed‑property custody system, the place house owners might later recuperate them. What they weren’t allowed to do was use the funds to commerce securities for their very own account.
With that in thoughts, you will need to recall that the AG’s settlement went past claiming funds for the unclaimed property accounts. It additionally required labels, publishers, and HFA to enhance royalty accounting programs, improve locate-and-pay procedures, and undertake ongoing administration oversight to stop the long run accumulation of unclaimed royalties. This end result was because of the advocacy efforts of New York legal professional Bob Donnelly and AFM Native 802.
This episode is broadly understood because the historic backdrop for later lobbying round Title I of the Music Modernization Act as a result of they positively didn’t want any skunks on the picnic. The MMA’s categorical preemption of state escheat and deserted‑property legal guidelines as utilized to MLC‑held unmatched royalties—with out making a comparable federal unclaimed‑property regime—displays a deliberate effort to stop state attorneys normal from replaying the Spitzer enforcement mannequin towards a centralized, business‑run royalty pool.
Beneath U.S. GAAP (and we all know how the Copyright Workplace loves them some GAAP), unclaimed or “unmatched” royalties aren’t income and can’t be handled as breakage just because the holder lacks present contact data. They continue to be a recorded legal responsibility—i.e., cash owed to an identifiable however unpaid claimant till the duty is legally extinguished by way of cost or a acknowledged authorized discharge akin to escheatment.
That accounting actuality is why the Spitzer-era New York enforcement marketing campaign had leverage: state abandoned-property legislation equipped the authorized “off-ramp” that GAAP itself doesn’t present, compelling holders to both find and pay house owners or remit the funds to the State’s unclaimed-property custody system as soon as dormancy intervals ran (three years in NY).
The MLC’s Ethical Hazard
Then there’s the ethical hazard concern. The MMA/MLC preemption regime severs that deserted property off-ramp for the unrivaled royalty pool by reducing off state escheat cures with out making a significant federal analog, successfully changing what GAAP classifies as custodial liabilities right into a long-duration, privately administered fund that may be retained and invested (in response to the MLC) whereas the underlying house owners stay unpaid. That construction tees up constitutional issues—not as a result of GAAP creates constitutional rights, however as a result of it crystallizes the underlying property character of the funds (owed liabilities moderately than earned revenue). It additionally highlights how Congress displaced conventional state police-power mechanisms for shielding absent house owners, whereas delegating custody, funding discretion, and distribution guidelines to a personal collective with restricted public-law constraints. These are traditional elements for due course of and nondelegation-style objections, and for a takings argument centered on the State’s displacement from its historic function as custodian of deserted property.
The legislative historical past for MMA tells us how the drafters modernized this vital downside (at 29): “Because of the distribution of unclaimed royalties to different copyright house owners, state legal guidelines on deserted property are preempted.” That tautological transfer is inconsistent with federalism, due course of, or fundamental widespread legislation property rights.
The constitutional concern sharpens if you have a look at the economics. The unequalled‑royalty pool has reached nicely over a billion {dollars} in response to the MLC’s 2023 Type 990. That cash just isn’t held in a court docket registry or held by a state company. It’s not administered by an elected state treasurer or secretary of state. It’s not topic to unclaimed‑property audits or dormancy statutes.
The MMA might have prevented a lot of the constitutional and governance mess by imposing an specific obligation of care on the MLC earlier than any unmatched royalties may very well be invested, retained, or redistributed. Congress might have required the MLC to undertake affordable, documented diligence to find the songwriter or writer—beginning with discover to the claimant’s final recognized deal with mirrored in odd business information: the author and writer contact data on file with ASCAP, BMI, SESAC, or GMR; the registration and clearance metadata supplied by publishers and directors; and the label/distributor data for the corresponding sound recording whose exploitation generated the mechanicals within the first place. At minimal, the statute might have required the MLC to ship written discover to these addresses, comply with up by way of obtainable digital channels, and keep an auditable log of outreach makes an attempt—particularly the place the identical compulsory-license ecosystem already incorporates the id of the sound recording payor and different events routinely transmitting royalty funds, akin to by way of SoundExchange and even the Copyright Workplace itself by way of its registration and recordation programs.
What’s Good for the Goose
States themselves can be constitutionally barred from working this manner. A state that seized non-public property, invested it, retained the earnings, and redistributed the principal to favored non-public events with out adjudication would face fast due course of and takings challenges. Or worse.
Federal preemption is authentic when Congress substitutes its personal regulatory regime for that of a state. Right here, Congress eliminated state protections with out supplying equal federal safeguards, making a constitutional vacuum moderately than a uniform system.
At backside, the MMA’s escheatment preemption violates a core precept older than the Structure itself: nobody might revenue themselves from unresolved possession. Till Congress provides functionally equal federal protections, the black field preemption stays a constitutional anomaly at greatest.
Title I is greatest understood as deregulatory preemption: it strips states of their conventional abandoned-property enforcement function with out supplying a federal authorities custodial regime, and it successfully substitutes non-public administration and redistribution for public-law safeguards. The MMA didn’t modernize mechanical licensing a lot as privatize escheatment—turning a centuries-old public custodial operate into a personal redistribution mechanism, with house owners’ restoration rights disappearing in the mean time their cash turns into most useful.
