Music Lawyer To SoundExchange: My Clients Did Not Authorize Lobbying Expenditures

Once again Fred tells it like it is and asks the questions that everyone wants to know the answers to!

http://blog.wired.com/music/2007/08/music-lawyer-to.html

By Eliot Van Buskirk EmailAugust 07, 2007 | 12:07:45 PMCategories: Save Net Radio  

Fredw Fred Wilhelms, a Nashville entertainment lawyer — whom music writer Dave Marsh once called “the (music) industry’s ethicist-in-chief if the industry had ethics” — has written a letter to SoundExchange executive director John Simson, asking how much SoundExchange has spent on lobbying and public relations efforts that don’t appear to be covered by the section Copyright Act that specifies how the organization can spend its money collected in the name of its members, some of whom Wilhelms represents.

Here’s Fred Wilhelms’ letter to SoundExchange’s John Simson, as posted on P2Pnet:

    I have read with interest and concern the recent article [link] by Eliot Van Buskirk on the Wired.com blog suggesting that SoundExchange has exceeded its regulatory authority by engaging in the musicFIRST campaign.

    I happen to believe, based on my own reading of the law, the lobbying efforts do exceed the legislative and regulatory authority given to SoundExchange. I also believe that the lobbying activity on a matter outside the scope of SoundExchange’s original charter constitutes a violation of the 501 (c) (6) tax-exemption held by SoundExchange. Again, that is just my opinion based on reading of the relevant statutes and regulations. You, I imagine, have received contradictory legal advice.

   I am sure that a complete investigation by the appropriate authorities will, once and for all, resolve the questions of legal conduct. Nonetheless, I strongly urge SoundExchange immediately appoint a truly independent entity to review SoundExchange’s operations and issue a public report as to its compliance with all legal requirements and limitations. The credibility of the organization has been questioned, and only independent evaluation can restore it. SoundExchange already has important obligations to recording artists and record labels. The integrity with which it carries out those obligations is now in serious doubt. The questions and the doubt must be put to rest, one way or another.

    As much as the questions of legality are a major issue, as an attorney for of a number of artists registered with the organization, I find even more troubling the comments made by SoundExchange representatives in the Van Buskirk article. They do not make me confident that SoundExchange is taking its current responsibilities seriously because it seems to have bigger plans for itself.

    The first such comment is attributed to SoundExchange “spokesperson” Richard Ades. When asked how much SoundExchange money was spent on musicFIRST, he supposedly replied that the information was “proprietary.”

    This response is simply unsatisfactory. That an organization ostensibly existing only because of obligations to my clients and other artists and labels believes it has a right not to disclose what it does with their money is simply astounding. It is arrogant, and it is wrong. The money does not belong to SoundExchange, and SoundExchange does not have the right to dispose of it merely as it sees fit.

    The amount spent by SoundExchange is from money received from licensees for performances by my clients. That money, less the actual cost of administration of the collection and distribution process, should be paid to them. That is the job SoundExchange promised to do.

    Any reduction of the payment on account of expenditures for a purpose unrelated to the royalties earned by my clients by their performances on satellite and Internet broadcasts is impermissible by law and a breach of the trust placed in SoundExchange. It doesn’t keep that promise to pay the artists and labels what they have earned when it spends money on something that doesn’t promote those specific goals.. Any suggestion that the amount of that reduction is information they cannot have because it is “proprietary” is reprehensible. My clients’ interests are not served by keeping that information private.

    No one who is registered with SoundExchange is served by keeping that information private. The only interests served by keeping this information private are those of the individuals making the contribution and the entity receiving it. Neither of these is equal to, let alone paramount to, the interest of my clients. What right does SoundExchange claim to keep it a secret?

    On behalf of my clients, I demand that you immediately publicly release all information relating to the expenses incurred in the musicFIRST campaign by SoundExchange, and the extent of its commitment to cover future costs of the campaign. My clients deserve to know what you are doing with their money. My clients want to know who approached SoundExchange, who brought the matter to the Board’s attention, and who voted for and against it.

    Some time ago, you were quoted as saying that you thought SoundExchange’s operations should be “transparent.” This is your opportunity to prove you were telling the truth.

    You and I have had some issues about SoundExchange secrecy before. In 2005, you claimed that the list of artists you could not find was proprietary information and you wouldn’t release it to me unless I agreed not to disclose any information about the list. I declined, saying I couldn’t place myself in a position to know what artists were entitled to money but constrained from telling them, or asking anyone else to help me find them. In retrospect, all that was accomplished by keeping that list secret was delaying, for over a year, any organized effort to find those artists and get them paid. Maybe that was the goal. If so, it worked.

    The secrecy policy didn’t make any sense then, and it doesn’t make any sense now. It leaves the deep impression that SoundExchange has something to hide, and that it is intent on hiding it from the people it is ostensibly working for. That imperious attitude might work for a trade association that only has to answer to its members, like the RIAA. For an organization like SoundExchange, the attitude is simply wrong.

    As for your own statement, Mr. Van Buskirk classified it as not responding to his question about the legality of SoundExchange’s sponsorship of musicFIRST. Perhaps you were misquoted, but it does not appear that you ever directly addressed the question. All too often in five months since the CRB rates were announced, SoundExchange spokespeople have not answered questions that were asked, but have simply said what they wanted to say. It is immensely frustrating to try to engage SoundExchange people in a dialog when they don’t pay attention to what is being said by the other parties. You missed an opportunity to promote the discussion by actually entering into it, rather than ignoring it.

    But let me try one more time to ask some questions to see if you will actually answer them.

    Does it really matter who blows the whistle on SoundExchange violating legal and tax restrictions on its operations?

    Does the fact that broadcasters may have brought this up this time mean they aren’t true?

    Frankly, the questions, whatever the source, are nothing new. Rusty Hodge raised the same points on his blog nearly six weeks ago. SoundExchange representatives, including Director Dick Huey, have deigned to “explain” SoundExchange policy and procedures (inaccurately, as it turns out) on Mr. Hodge’s blog before, but the questions about the relationship between SoundExchange and musicFIRST went unaddressed. Maybe you thought you could just ignore them when Mr. Hodge raised them, after all, he’s just a webcaster, and he must be a puppet for DiMA in your estimation. But now, Mr. Van Buskirk has asked them again. I guess he’s a dupe of NAB, and that’s all the reason you need not to address what he asked.

    Enough dissembling, Mr. Simson. The broadcasters are not responsible for SoundExchange violating the law. When that child pointed out that the emperor had no clothes, it wasn’t the child’s fault the emperor was naked, was it?

    It appears part of the SoundExchange playbook to attack the messenger rather than the message, and you’re just sticking to the script. Your Director Dick Huey indulged himself in an anonymous personal attack on me on p2pnet.net in an attempt to discredit my criticisms there of SoundExchange operations. When he was caught at it, he didn’t apologize for the personal attack, he just declared he had directed it at the wrong person. The propriety of the personal attack didn’t bother him in the slightest. And, just like you did on Velvet Rope, after promising to answer any questions about SoundExchange, he disappeared when his first statements were demonstrated to be untrue. He came, he threw mud, he left. This hit-and-run tactic also appears to be part of SoundExchange standard operating procedure. As long as it distracts from the real subject at hand, it appears to be permissable.

    The third SoundExchange representative quoted in the Van Buskirk article is Michael Huppe, SoundExchange counsel.

    Mr. Huppe is quoted as saying: “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.”

    I have reviewed the SoundExchange registration documents executed by my clients. I have pored over every page of the SoundExchange website. I can’t find a single word that could be taken as authorization to spend my clients’ money on something beyond collection and distribution of Internet and satellite performance royalties, which is the job SoundExchange promised to perform.

    Please show me where that permission was granted by my clients.

    As far as I can tell, my clients authorized SoundExchange to collect royalties due them from Internet and satellite broadcasts of their recordings and to distribute those royalties, less a reasonable cost for administration. You’ve never even tried to explain what that administrative cost is, but let us save that discussion for another day. Just tell me where my clients approved SoundExchange sponsorship of musicFIRST.

    As far as those allowable costs are concerned, 17 USCA 114 (g) (3) appears to limit costs that can be deducted from my clients’ share of the royalty proceeds to three types of expenses, the “reasonable costs” of:

    1. the administration of the collection, distribution, and calculation of the royalties;

    2. the settlement of disputes relating to the collection and calculation of the royalties; and

    3. the licensing and enforcement of rights with respect to the making of ephemeral recordings and performances subject to licensing under section 112 and this section, including those incurred in participating in negotiations or arbitration proceedings under section 112 and this section, except that all costs incurred relating to the section 112 ephemeral recordings right may only be deducted from the royalties received pursuant to section 112.

    My clients, your registered members, would like to know which one does SoundExchange claim applies to sponsorship of musicFIRST? Which one permits SoundExchange to deduct the sponsorship costs from their share of the royalties?

    Mr. Huppe says the money was taken from my clients’ share of the royalties.

    Why? How?

    The simple fact that SoundExchange’s board voted unanimously to take actions that violate the law doesn’t make those actions legal. That fact might make your Directors personally liable for the unauthorized expenses (and the tax penalties incurred), because my clients will expect that SoundExchange be made whole again. They have a right to that. Of course, keeping secret the amount misspent on musicFIRST will make determination of what should be paid back by each Director a bit more difficult.

    All of a sudden, I understand Mr. Ades said that information is considered “proprietary.”

    Please advise me how SoundExchange expects to recover the resources improperly spent on musicFIRST.

    My clients are well aware of the problems SoundExchange has historically had in finding the artists it is supposed to pay. They know that over 8,100 of their peers, 30% of the artists you can identify, are still on the “unfound” list on your website. They believe that list is a indictment of operational ineptitude and indifference that brands as outright lies SoundExchange’s public statements of respect for artists.

    They also know there are probably tens of thousands more artists who have been played but SoundExchange can’t identify because you are relying on sampling to allocate royalties. Artists who aren’t lucky enough to be in the sample aren’t going to earn any royalties at all. You don’t even mention the fact that you rely on sampling in your website FAQ, but my clients know all about it anyway. They just consider your lack of disclosure about that, and the misleading statements SoundExchange spokespeople have made about it to be further evidence that SoundExchange only cares about artists when they can serve as poster children for one self-aggrandizing campaign or another.

    My clients and I believe that when words don’t match the deeds, believe the deeds. SoundExchange has given them enough words, and few enough deeds, to make the choice an easy one. It isn’t in SoundExchange’s favor, Mr. Simson.

    To be blunt, SoundExchange already has a job it promised to do. It isn’t doing it well.

    Not finding 30% of the artists you can identify is not doing a good job.

    “Reserving” tens of millions of dollars a year, then absorbing that money when you “can’t find” the proper recipients is not doing a good job.

    Setting a schedule for forfeitures of millions of dollars, and then not making any effort to publicize the forfeitures, is not doing a good job.

    Being unable to explain how and why you rely on sampling to allocate royalties, and not even formally admitting you do, is not doing a good job.

    Claiming that the amount of money you spend on something clearly outside the limited function you have been granted by law is “proprietary” information, is not only not doing a good job, it is a slap in the fact of the people you are supposed to work for.

    Attacking the people who point out that you might be violating the law is not doing a good job.

    Deducting the cost of violating the law from the money of your registered members, in open and direct contradiction to the law, is not doing a good job, no matter how many of your Directors approved.

    SoundExchange shouldn’t even be thinking about extending its reach until it proves it can grasp what it has now and discharge those duties competently. From where my clients stand, you have a long way to go. Contributing to a campaign that will expand its authority, while 30% of the artists it already has money for remain unpaid, is not only illegal, it is presumptuous and the height of arrogance.

    Sincerely,

    Fred Wilhelms

One Response to “Music Lawyer To SoundExchange: My Clients Did Not Authorize Lobbying Expenditures”

  1. GREAT ARTICLE!!!!

    Jon Scott

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