BLANCHE Whoever you are…I have always depended on the kindness of strangers. From A Streetcar Named Desire, by Tennessee Williams

Songwriters earn a sizable percentage of their ever decreasing income from mechanical royalties. Until the last few years, mechanical royalties were almost always licensed under direct licenses to record companies that incorporated by reference the statutory license provisions of Section 115 of the 1976 U.S. Copyright Act and the corresponding regulations. Section 115 is a direct–and almost word for word–descendant of Section 1(e) of the 1909 U.S. Copyright Act.

Why so little change in nearly 70 years? Until 2000 or so, nobody used statutory licenses except in the rarest of circumstances. Instead, the statutory license became something like the Uniform Partnership Act or the Uniform Commercial Code. It could be used for reference but was often–almost always–modified in a direct license.

The main point that was added in these modifications was the right of songwriters and publishers to conduct an audit of the licensee, usually a record company (more properly, audits are called “royalty compliance examinations”). Why did that provision need to be added?

Because it is not in Section 115 of the 1976 Act and it is also not in Section 1(e) of the 1909 Act.

The statutory substitute for an audit is frequent accountings–monthly accountings to the copyright owner certified by an officer of the record company and an annual statement certified by the record company‘s CPA. Since the entire record company royalty accounting systems are designed to account for record royalties on a semi-annual basis or quarterly at best, the threat of monthly accountings for mechanical licenses drove record companies to direct licenses with an audit right. (Not to mention that it became increasingly common for artists to write their own songs and monthly accountings for mechanicals paid to those artists would inevitably lead to an argument about monthly record royalties, too.)

Enter the Internet. Starting around 2000 or so and at an increasing rate ever since, online retailers began using statutory mechanical licenses for streaming services. (Of course, there was no rate for streaming mechanicals until 2009, but that’s another story.) Online retailers discovered something very important about statutory licenses for streaming mechanicals–nobody could audit them if they complied with the license. Fast forward to 2014–digital services send hundreds of thousands if not millions of statements under Section 115 statutory licenses and Ebenezer Scrooge, CPA signs annual statements of account for every one of them with the certification that no one believes.

And no one can ever check whether the service has given songwriters a straight count. So like Blanche Dubois, songwriters are forced to depend on the kindness of strangers. They can’t opt out because the government forces them to license, but they can’t check if they are paid properly because the government won’t let them.

What is odd about this is that there are several other statutory licenses in the U.S. Copyright Act and guess what? All of them require a royalty compliance examination of the licensee. Here’s a high level thumbnail guide to those provisions–as you’ll see, songwriters are the only ones asked to depend on the kindness of strangers.

Royalty Audits For Statutory Royalties Under the U.S. Copyright Act US Audit Rights Mechanical Webcasting Cable Audio Home Recording Act Copyright Act Code Section 115 114 111(d)(6) 1003(c)(3) Code of Federal Regulations Sections 37 CFR 201.19 37 CFR 380 37 CFR 201.16 [Interim Rule] 37 CFR 201.30 Who can audit? No one SoundExchange (“the Collective”) Copyright owner or a designated agent that represents a group or multiple groups of copyright owners An interested copyright party or an authorized representative Who can be audited? No one A person who has obtained a statutory license under 17 U.S.C. 114 or 17 U.S.C. 112(e), but who is not a Broadcaster or a Noncommercial Educational Webcaster A cable system whose secondary transmissions have been subject to licensing under 17 U.S.C. 111(c) “Filer” – a manufacturer or importer of digital devices or media who is required by 17 U.S.C. 1003 to file Statements of Account with the Copyright Office Does the statute of limitations apply (how far back can they audit)? Not applicable Three years Not specified Three years Who bears the cost of the audit? Not applicable SoundExchange, unless the final determination reveals an underpayment of 10% or more Not specified Copyright owners, unless there is an underpayment of 5% or more. Cost is paid from amount owed when less than 5% underpayment What are the record keeping requirements? Compulsory licensees must keep their records for three years from the date of service of an Annual Statement of Account Licensees and the Collective must keep books and records relating to royalties for three calendar years Not specified Statements of Account must be filed with the Register of Copyrights Office quarterly and annually