The Mechanical Licensing Collective (MLC) was created by the Music Modernization Act (MMA) to do one factor above all else: determine and pay the rightful homeowners of mechanical royalties for musical works. Congress gave the MLC slender statutory authority to carry unmatched royalties in an interest-bearing account on the federal short-term charge till these homeowners might be situated. The aim was easy—protect worth for the rightful homeowners, not speculate with their cash.
A Private Lesson on Fiduciary Duties
The seriousness of fiduciary legislation was impressed on me early in my profession. The primary analysis task I ever acquired as a summer time affiliate was an ERISA case. Our shopper was a trustee of his firm’s ERISA plan who had loaned himself cash from the plan. He had full board approval. He paid a aggressive rate of interest. He repaid the mortgage on time and in full. On paper, every part seemed correct.
Then an audit caught the mortgage. The issue? It was unlawful earlier than it began. ERISA flatly prohibited such self-dealing.
I nonetheless bear in mind using within the automobile with the late James C. Krieg, one of many nice litigators in California, on the way in which to fulfill the shopper. I defined to him that I assumed our shopper had carried out nothing incorrect as a result of he was clear, well-intentioned, and had repaid the plan. Jim checked out me over his glasses and requested, “What if he didn’t?” Shocked, I mentioned, “However then our shopper could be mendacity!” He laughed that unforgettable snicker, pinched my cheek, and mentioned: “You might be so cute.”
That was the day I discovered that in fiduciary legislation, good intentions don’t prevent. Breach the responsibility, and also you’re in violation, full cease.
It might have appeared like an odd case for an aspiring music lawyer, however actually it was the right preparation for understanding the MLC’s present predicament.
The Downside: An Funding Coverage With out Statutory Authority
As a substitute of sticking to the statute, the MLC has adopted an “funding coverage” that deploys unmatched royalties within the securities markets. As of its 2023 tax return, the MLC reported over $1.2 billion invested in publicly traded securities. Nothing within the MMA authorizes this exercise. Congress required curiosity at a specified charge; it didn’t empower the MLC to chase returns, settle for losses, or act like a hedge fund.
Simply as my ERISA shopper couldn’t excuse a prohibited mortgage with good intentions and full disclosure, the MLC can’t excuse unauthorized investments with imprecise assurances of “prudence” or “advisor steering.” Fiduciary legislation doesn’t work that manner.
Distinguishing the Buckets: Who In the end Will get What
The MLC sits on three very completely different buckets of cash, and every has a definite fiduciary path:
1. Unmatched Royalties (the “black field”)
– These funds legally belong to copyright homeowners (publishers and, by them, songwriters, topic to statutory minimal songwriter shares).
– Any buying and selling earnings from unmatched royalties have to be held in belief for copyright homeowners and distributed both when matches are discovered or, in the end, by the statutory market share allocation.
– Any losses from unauthorized funding have to be surcharged to the MLC (or the licensees by way of the executive evaluation), to not absent homeowners.
2. Accrued however Unpaid Matched Royalties
– These funds are already linked to particular rightsholders.
– Beneficial properties on such royalties belong to the recognized homeowners (once more, writer/songwriter allocations apply).
– Delays or funding losses right here expose the MLC to legal responsibility, as a result of it’s holding recognized events’ cash with out authority.
3. Administrative Assessments Unspent
– These funds come from licensees (digital companies) and are meant solely to cowl MLC working bills.
– If there are unspent assessments, or if these funds are invested, any positive aspects have to be returned professional rata to the licensees or offset towards future assessments.
– Retaining such positive aspects would quantity to unjust enrichment and breach of fiduciary responsibility, as a result of these funds by no means belonged to copyright homeowners within the first place.
Failing to tell apart these buckets blurs fiduciary obligations and creates conflicts. The MLC can’t deal with all funds as a single funding pot:
– Copyright homeowners should obtain the fruits of their royalties, matched or unmatched.
– Songwriters are entitled to minimal shares inside that construction.
– Licensees should get again or be credited for positive aspects on the executive assessments they alone funded.
How Belief Regulation Applies
Courts way back developed the doctrine of the trustee de son tort: if somebody takes management of property belonging to a different, even with out formal authority, they assume fiduciary duties as in the event that they have been a trustee. These duties embrace:
– Loyalty – no self-dealing, no conflicts of curiosity.
– Prudence – make investments conservatively, protect principal.
– Disclosure – present clear accountings to beneficiaries.
– Segregation – hold completely different funds separate and keep away from commingling.
The MLC’s funding exercise, absent statutory authorization, is a textbook case for making use of trustee ideas. If losses happen, the MLC and probably its board might be personally liable. If positive aspects happen, these earnings are held in fairness for the beneficiaries—not the MLC.
What About Penalties?
Beneath belief legislation, breaching fiduciary duties carries harsh cures:
– Restitution of earnings – any buying and selling earnings have to be disgorged for the good thing about the rightful homeowners.
– Surcharge for losses – trustees should make the belief entire for losses attributable to unauthorized funding.
– Removing of the trustee – courts (or on this case, the Copyright Workplace) can exchange the fiduciary.
The MMA’s legal responsibility protections wouldn’t insulate the MLC right here regardless of the most effective efforts of the lobbyists, as a result of the exercise is extremely vires—past statutory authority.
Winding Up the Corpus
If unmatched royalties stay unidentified, the MMA offers for market share distribution after a holding interval. However what corpus is distributed? If the MLC has invested funds with out authority, the corpus might embrace buying and selling positive aspects or losses that have been by no means imagined to exist. Belief legislation suggests:
– The unique principal (the unequalled royalties themselves) ought to stream by the statutory market share allocation.
– Buying and selling earnings needs to be segregated and distributed professional rata to all copyright homeowners—not simply market share recipients—because the earnings arose from utilizing cash that belonged to all unknown homeowners.
– Buying and selling losses needs to be surcharged to the MLC (or the licensees by way of the executive evaluation), to not the lacking songwriters.
The Larger Image: Oversight and Reform
Congress created the MLC as an experiment, and the Copyright Workplace now faces the primary five-year redesignation overview. If the MLC is working as an unauthorized funding fund, the experiment is failing on fiduciary grounds. The Workplace has ample regulatory authority to:
– Prohibit additional funding exercise past the statutory curiosity requirement.
– Require detailed disclosure of all funding accounts and earnings.
– Situation redesignation on clear segregation of unmatched, accrued, and evaluation funds.
– Seek the advice of with the SEC on whether or not the MLC has inadvertently develop into an unregistered funding firm below the Funding Firm Act of 1940.
Now What?
The MLC’s core job is to search out and pay songwriters—to not gamble with their cash. By stepping outdoors the MMA’s slender authorization, the MLC has assumed fiduciary duties below belief legislation and uncovered itself to legal responsibility with out the statute’s protections. As ERISA trustees have discovered the exhausting manner, breaching fiduciary duties shouldn’t be excused by good intentions. The Copyright Workplace, Congress, and rightsholders ought to act now to unwind the observe, safeguard royalties, and make sure that buying and selling earnings and losses are pretty allotted. Something much less leaves songwriters and licensees funding an unauthorized experiment in securities buying and selling.
