a compulsory license exists, believes that the licensees benefit most from the reduction in transaction
costs. The Committee rejects statements that copyright owners benefit from paying for the costs of
collectives to administer compulsory licenses in lieu of a free market. Therefore, the legislation
directs that licensees should bear the reasonable costs of establishing and operating the new
mechanical licensing collective. This transfer of costs is not unlimited, however, since it is strongly
cabined by the term ‘‘reasonable.’’
The legislation directs the Copyright Royalty Judges to undertake a proceeding to determine
the amount of an administrative assessment fee to be paid by blanket and significant nonblanket
licensees for the reasonable costs of starting up and continuing to operate the new mechanical
licensing collective. There are several other licensing collectives, such as SoundExchange, American
Society of Composers, Authors and Publishers (ASCAP), and Broadcast Music Inc. (BMI), that the
Copyright Royalty Judges should look to for comparison points, although their expenditures are
simply comparison points. The Copyright Royalty Judges shall make their own determination(s)
based upon the evidence provided to them about the appropriate administrative assessment for such
reasonable costs that are identified with specificity.
It is expected that not all reasonable expenditures in the first years of the collective may be
identifiable in advance, especially as they relate to startup costs, but that future reasonable costs are
more likely to be able to be determined in advance with some certainty. When anticipated startup
and operational costs are different than anticipated, the Copyright Royalty Judges are expected to
use their best judgement as to what has or has not been a reasonable expenditure of the collective
and use their authority to adjust the fee subject to prior under or over collection of fees for reasonable
costs, as well as lesser or greater reasonable costs than anticipated.
The legislation is focused on the transfer of the collective’s reasonable startup and operating
costs to blanket and nonblanket licensees. It is expected that the collective will only accrue
reasonable costs and not expend unreasonable costs either on a one-off or continuing basis. It is not
the responsibility of any other party other than the collective to ensure that it only expends reasonable
amounts of funds for its activities. Although other parties such as the digital licensee coordinator
may choose to notify the collective of any concerns of unreasonable spending, they do not have the
legal burden to do so and do not waive their right to object to the Copyright Royalty Judges or a
federal court of any unreasonable spending by not notifying them of it when suspected or discovered.
Although the licensees are free to voluntarily pay some or all unreasonable costs of the collective if
they so choose, the legislation does not require that and makes clear that all such unreasonable costs
as determined by the Copyright Royalty Judges are not the responsibility of the licensees. Any such
unreasonable costs, to the extent that they are accrued, should be borne by either the collective itself
and/or the copyright owners that benefit from the collective. Nor should any unreasonable costs be
offset by unmatched royalties or taken from artist revenue. The legislation requires that the collective
pay out accrued royalties under a set schedule. With the exception of future adjustments to the
administrative assessment, if so determined by the Copyright Royalty Judges, once the licensees
meet the terms of the legislation in paying the applicable royalties with the administrative assessment
and providing the accompanying usage data for the covered activities, their obligation ends for any
additional payments for such usage. This includes any need to pay replacement royalties should the
collective engage in waste, fraud, or abuse of such royalties. In the event that an employee of the
collective engages in fraud by diverting royalty payments, it is not the responsibility of the licensee(s)
to replace these stolen royalties.
Because of the importance to the music community that the collective begin operating as
soon as possible, even before any administrative assessment fees are collected, the legislation
includes provisions to allow voluntary contributions by digital music providers to the collective to