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On October 11, 2018, President Trump signed into law the long-anticipated Music Modernization Act (“MMA”), legislation focused on shepherding the existing music licensing system into the digital age.  Among the highlights, the MMA provides for blanket mechanical licensing and a licensing collective charged with managing mechanical license royalty payments to composers and publishers. The MMA is divided into three major titles, each focused on addressing certain perceived gaps in the existing structure.  Some highlights are discussed below.

Title I of the MMA (Music Licensing Modernization) establishes a blanket, statutory mechanical license for digital music providers to be administered by a non-profit organization called the Mechanical Licensing Collective (the “MLC”).  The MLC is charged with establishing  a publicly accessible database of copyright ownership information for musical compositions.  A digital music provider wishing to obtain a blanket mechanical license must file a notice of license with the MLC specifying, among other things, the covered activities.  The MLC will have 30 calendar days to review that notice, and a provider whose application for a license is rejected will have an opportunity to cure or seek further review in federal district court

Title II of the MMA (Classics Protection and Access) extends federal copyright protection to pre-1972 sound recordings previously excluded from the copyright protection.  The duration of protection for such works is set as follows:

  • For recordings published before 1923, the term of protection ends on December 31, 2021;
  • For recordings published between 1923 and 1946, the term of protection continues until December 31 of the year 100 years after publication;
  • For recordings published between 1947 and 1956, the term of protection continues until December 31 of the year 110 years after publication; and
  • For all other recordings (including unpublished recordings and ones published after 1956), the term of protection ends on February 15, 2067.

Title III of the MMA (Allocation for Music Producers) grants music producers a share of royalties collected when their sound recordings are played through online and satellite radio providers.  Such producer payments are to be allocated from the share of streaming royalties allocated to recording artists under the current statutory scheme.

One little-publicized part of the new tax law (Tax Cuts and Jobs Act of 2017) may negatively affect the value of some patents and other intellectual property.  It does so by changing the tax treatment of income from sales of “patents, models and secret formulas or processes” from capital gains to ordinary income.

Prior to the amendment of Tax Code Section 1221(a)(3), income from sales of (1) “patents, models and secret formulas or processes,” (2) held by the IP creator, (3) for more than one year, was taxed at the capital gains rate.  This resulted in lower tax than the ordinary income tax rate that applied to other types of IP, such as copyrights, literary, musical, and artistic compositions.  Congress has now taken this tax advantage away.

The change in the law affects those that sell or license IP in the “primary market” only —in other words, the original creators of the IP.  It generally does not affect those that have paid to own the IP, including the IP creators’ employers.

There still remains an exception under Tax Code Section 1235 providing for lower tax on sales and licensing of all rights to patents, secret formulas and trade names (but only these types of IP).  For other types of IP, adjustments in sale prices and license royalties will need to compensate for the higher tax under the new law.

Our tax and IP groups can help you assess the new law’s impact on these valuable assets.