Wired.com posted a comment today regarding alleged illegal lobbying by SoundExchange, a nonprofit that has been designated by Congress and the US Copyright Office as the collector of digital royalties (iTunes sales, for instance) for music artists and record labels. SoundExchange is a 501(c)(6) trade association (see GuideStar here, but you'll need an account) and, according to its site, has been granted the exclusive authority to collect these royalties under the Copyright Act.
Any 501(c)(6) has the right to engage in lobbying activity under the tax code (see Revenue Ruling 1961-177) (PDF). One normally sees a lot of lobbying activity by trade associations, particularly if they are based in DC as SoundExchange is. However, the Copyright Act specifies the uses for the royalty money, and lobbying is not one of those uses that got the thumbs up from Congress (see section 114(g)). Guess who is a major funder of the lobbying group, MusicFIRST Coalition? You guessed it... SoundExchange.
The Wired commentator, Eliot Van Buskirk, asserts that SoundExchange has violated the law by funding a lobbying organization... but that's wrong. My read of the statute says that SoundExchange can only use the royalty money for administration of royalty collection, dealing with disputes in royalties, and dealing with the narrow issue of recordings made by entities that have a license to broadcast a performance. That's it... lobbying's not on the list. But the key here is that the use of the royalty money is restricted. SoundExchange can use other sources of money and legally use that as the source for lobbying. SoundExhange's general counsel told Van Buskirk:
Funding provided by SoundExchange to musicFIRST is authorized by copyright owners and performers who have chosen to become members of SoundExchange. These contributions come only from our members and not from non-member royalties, and were unanimously approved by the SoundExchange board.So... the funds are coming from member dues, not from royalties, therefore the Copyright Act restrictions do not apply. Van Buskirk consulted an intellectual property professor and a music attorney to find out if there was specific legal authority for a nonprofit to lobby, and was told there is no specific statute authorizing the activity.
Of course, this is nonsense. Trade associations are free to lobby pursuant to their status under Section 501(c)(6) of the tax code, and have since 1961 (PDF). A little research, like googling "501(c)(6) lobbying" leads to a host of information on this legal point. The IRS has plenty of information in Political Campaign and Lobbying Activities of IRC 501(c)(4), (c)(5), and (c)(6) Organizations (PDF). On page 2. Asking an IP law professor and a music lawyer who don't look anyplace except one section of the Copyright Act won't give the right answer... Mr. Van Buskirk should have spoken with someone who knows nonprofit law, but more to the point, these two attorneys should have said they had no expertise in nonprofit law rather than lead Mr. Van Buskirk to believe SoundExchange was acting outside of the law.
Perhaps as a safety cushion on the point, Van Buskirk suggests that even if the lobbying was legal it was still out of bounds because "Congress intended to keep SoundExchange out of the lobbying business." That's simply not what the statute says. Congress clearly intended to keep SoundExchange out of the lobbying business with royalty money... and that's not semantics... it's what Congress said in the law.
Before I close out on this... don't take my post here as defense of the music industry or their trade associations on substantive issues or what they lobby for... I'll keep my thoughts on that to myself. However, the law's pretty clear on all of this, and I wish it had been reported correctly.
6 comments:
All SoundExchange has is royalty money. Nobody pays dues. It has no other source of revenue.
You could stand to brush up on your own research before trashing someone else's.
Fred, my criticism is largely aimed at the lawyers who gave the author poor takes on the law. That notwithstanding, if you read the general counsel's quote again, you'll see that he reports that the organization receives dues payments from member orgs. That is totally different from royalties, and can be used for lobbying.
I'm wondering how you definitively know that their revenues are solely from royalties? Was the general counsel lying? Do you have proof? I would be happy to post that here.
I know this stuff because I am an attorney who represents a number of artists who have registered with SoundExchange, and I have registered many more. I have been a persistent and vocal critic of the failure of SoundExchange to meet its obligations to artists and have spent more time than I care to mention trying to force them to live up to their promises. None of them pay dues.
No artists pay dues. No labels pay dues. None of them have been asked for dues, and there is nothing on the SoundExchange website that mentions dues. The only source of revenue SoundExchange has is revenue from licensees who are Internet and satellite broadcasters. Under section 114 of the Copyright Act, SoundExchange is entitled to deduct administrative costs incurred in the collection and distribution of those royalties, and that is it.
Because you are not familiar with the organization history, it might help to let you know that SoundExchange started as an entity completely within the RIAA. When it was "spun off" in 2002, it continued to share office space with the trade group and financed entirely by an interest free loan from the RIAA.
Now, as for the flaws in your own reasoning, if you go back and read Mr. Huppe's full quote, he never mentions "dues" at all, which you have now twice insisted he does.
Here's his quote - "Funding provided by SoundExchange to musicFIRST is authorized by copyright owners and performers who have chosen to become members of SoundExchange. These contributions come only from our members and not from non-member royalties, and were unanimously approved by the SoundExchange board,"
Please note He says the money doesn't come from non-member royalties. He never mentions where it actually comes from. You jumped to a conclusion there, and it turned out to be unwarranted.
He didn't lie to you, he just didn't tell you what you think he did.
Welcome to the music business, Tim.
I can also tell you without fear of contradiction that there has NEVER been permission asked of members to spend their money, despite what Mr. Huppe might have you believe, and, regardless of what he says, a unanimous vote of his board is not enough to make what they've done legal.
So, as the local non-profit maven, given the true state of affairs, what kind of penalty does SoundExchange face as a non-profit that have overstepped its bounds, and who is liable for it?
My read of what the GC said was that the funds used for lobbying were not from royalties. Rather, they were some form of non-royalty contributions from members. You say there is no such thing... a quick look at their Form 990s from 2004 and 2005 doesn't show a break-out of the revenues, so there's nothing to show non-royalty revenues in those years at least.
Assuming that SoundExchange doesn't take a cent of money other than royalties, then we have a potential violation of the Copyright Act for the 2007 payments to musicFIRST. Perhaps there would be a violation of tax law as well, but that would be dependent on the charter language.
However - and this is the only real point I'm trying to make here - if SoundExchange gets money from some other source than royalties... call them what you want... dues, contributions, apples, or oranges... SoundExchange can legally, as a tax exempt 501(c)(6) nonprofit use those funds to lobby.
So... what's left here? I'll concede that the GC never used the term "dues," however, I still have to note that the allegations against SoundExchange only hold water if it used royalty money for lobbying payments. If SoundExchange received money - any money - that was not a royalty, it could use it for purposes not included in Section 114(g)... including lobbying. Unless we have their 990 in front of us for FY2007 (which we won't have until about this time next year if SoundExchange goes for an extension as it did in 2005), there's no way to definitively know.
So much for a quiet Monday night, eh? Thanks for contributing Fred... I appreciate your insights on the music biz.
Hi guys,
What do you make of this reasoning, from the OrbitCast blog:
"SoundExchange sends royalty checks to all artists (members and non-members) whose songs have been played. Period. If an artist is a SoundExchange member, a portion of their royalties can be allocated to programs the organization believes in (such as musicFIRST). These members don't determine how these funds are used - that's why they have an executive board - and the SoundExchange board makes this decision. If you've ever been part of an organization, you know that the board makes decisions based on the interests of the organization and its members. Usually by a vote.
And the SoundExchange board unanimously approved the funding and participation in the musicFIRST Coalition. So, if musicFIRST is successful and the performance royalties for terrestrial radio are granted, this will obviously benefit SoundExchange's members. It all goes back to that "advocating for its members" concept."
full post here: http://www.orbitcast.com/archives/wired-gets-it-wrong-the-facts-on-soundexchange.html
Is SoundExchange, as this logic suggests, authorized to use member-only royalties for lobbying purposes?
I downloaded SoundExchange's artist member agreement, entitled 'Designation and Authorization for Featured Artists'. It states:
Deduction of Costs. To the extent not otherwise provided for under 17
U.S.C. § 114(g)(3) and any implementing regulations adopted pursuant thereto,
Artist hereby authorizes SoundExchange to deduct from any of its receipts, prior
to the distribution of such receipts to Artist, any costs that have been authorized
by the SoundExchange Board.
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