Wednesday, February 1, 2012

Cover Songs, Compulsory Licenses, and CPAs

Dear Rich: We decided to take the compulsory license route for seven songs on our fourth album. We were comfortable with the idea of paying monthly royalties to seven music publishers, because we only made 150 CDs and we thought the monthly task probably wouldn't last too long. We also thought it would minimize some of our initial costs in making and releasing a new album. However one music publisher sent us a letter stating that since we chose the compulsory license route, we must furnish an annual statement certified by a CPA; otherwise, we "would be in default with respect to the Compulsory License guidelines." I knew that an annual statement needed to be furnished, but I didn't know it had to be certified by a CPA. We phoned and e-mailed the other six music corporations and asked if they wanted an annual statement certified by a CPA, and all six were very nice and told us they didn't want the CPA certification and that the monthly statements were enough. We started conversations with the CPA who does my business partner's taxes, but he didn't want to take any risk of signing his name on a piece of paper that confirmed the number of CDs we sold in 2011 matched the amount of royalties we paid to Bourne. I spent about ten hours preparing clear instructions and documentation (receipts, evidence, etc.) that prove we only made 150 CDs in 2011, sold 71 in 2011, and have 79 remaining, but the CPA was only willing to sign his name if the language on the annual statement said he can't provide any assurance or guarantee that our payments and inventory are correct. To us, this seemed ridiculous, especially since we agreed to sign a waiver of liability. Do you happen to know of a CPA who speaks our language and who can probably certify our simple annual statement?  Sorry about the agony (or "ag" as the young people say). Considering that the total sum at issue appears to be $6.46 (9.1 cents per song per pressing x 71 copies = $6.46), we think there's got to be a simple solution.
What happens if you don't include a CPA statement? Congress (in 17 U.S.C. Sec. 115) empowered the Register of Copyrights to create CPA regulations (found at  37 CFR 201.19,) for compulsory licensing accounting. (And yes, Annual Accountings under compulsory licenses must be accompanied by the CPA's statement, shown way at the bottom of this blog entry). Sec. 115 (6) provides that:
"If the copyright owner does not receive the monthly payment and the monthly and annual statements of account when due, the owner may give written notice to the licensee that, unless the default is remedied within thirty days from the date of the notice, the compulsory license will be automatically terminated. Such termination renders either the making or the distribution, or both, of all phonorecords for which the royalty has not been paid, actionable as acts of infringement ... "
So, if we assume that failing to include a CPA notice places you in default, you would only be liable for any future sales (after receiving a notice of default). So perhaps an easy solution would be to pay off the remaining 79 CDs ($7.19). Once the publisher cashes that check (and assuming you don't press any more CDs), it appears that the CPA issue would be moot. Alternatively, if you don't want to pay it off and you want to continue pressing and selling the cover song, you could send a letter to the publisher explaining the situation and furnishing all of the documentation asking them to please release you from the onerous CPA requirement.
What's up with your CPA? We're lawyers so we can relate to the CYA mentality exhibited by the CPA. Standard accounting practices for small labels are fairly simple and easy to review and confirm. If you used a duplication service that can confirm 150 pressed CDs, and 79 CDs remain in inventory, it should be relatively easy for the CPA to confirm your accounting and to fulfill the requirements established in the statement, below. (As for your question, sorry, we don't know any CPAs.)
CPA statement that must be included. If you do manage to obtain a CPA's cooperation, the CPA must furnish the following statement:
"We have examined the attached “Annual Statement of Account Under Compulsory License For Making and Distributing Phonorecords” for the fiscal year ended (date) of (name of the compulsory licensee) applicable to phonorecords embodying (title or titles of nondramatic musical works embodied in phonorecords made under the compulsory license) made under the provisions of section 115 of title 17 of the United States Code, as amended by Pub. L. 94-553, and applicable regulations of the United States Copyright Office. Our examination was made in accordance with generally accepted auditing standards and accordingly, included tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances."