Spotify’s Fight Over Mechanical Royalty Rights

By: Selene Presseller

2018 could shape up to be a monumental year for Spotify and the music industry as whole. Despite the massive lawsuits pending against Spotify, the music-streaming giant is preparing to go public later this year.[1] Spotify is not letting the recently-filed $1.6 billion copyright lawsuit[2] slow down its plans to release its shares onto the New York Stock Exchange (NYSE).[3] Spotify’s ability to remain calm in the face of yet another lawsuit may be a result of just that. This is yet another lawsuit brought against Spotify claiming improper royalty payments to artists. At the heart of its mounting copyright infringement claims, Spotify’s failure to pay the mechanical royalties that artists believe are owed to them under copyright law.[4] Under Section 115 of the Copyright Act, the making and distributing of a phonorecord[5] of a musical work requires a compulsory license.[6] For a compulsory license, the licensee must pay a royalty to the copyright owner.[7]  The royalty rates and proper payment procedures are determined by the Copyright Royalty Judges and leave little room for deviation.[8] Artists contend that by not paying these mechanical royalties, Spotify is guilty of copyright infringement, an offense carrying a maximum liability of $150,000 per infringed composition.[9] Spotify, however, does not believe that its service requires mechanical licenses.[10] Spotify contends that streaming is not equivalent to reproducing and therefore it is not required to pay mechanical royalties under Section 115.[11]

At the root of the confusion are the outdated copyright laws. Spotify is arguing that it is a streaming service, similar to Pandora, who only has to pay performance royalties.[12] Section 115 of the Copyright Act, as currently written, does not distinguish between types of streaming services. A ruling from the courts in the Spotify cases could provide some clarification. If the court was to rule in favor of Spotify, this would set a precedent that would then have massive financial ramifications on copyright owners in the music industry.[13] There is also a piece of legislation currently pending in Congress that would establish clearer rules for when payment of these mechanical royalties are due based on the type of music service and how the services will use the songs.[14] On December 21, 2017, politicians proposed the Music Modernization Act. This would be the first major update to music licensing laws in almost twenty years.[15] Most notably, the Act reforms Section 115 to create a Mechanical Licensing Collective funded by digital services as a means of securing blanket mechanical licenses for interactive streaming or digital downloads.[16] The Act also updates the way mechanical rates are set to better take into account current market conditions.[17] For musical artists, this is an eagerly awaited revamp to the outdated copyright framework, but for Spotify, the passing of the Music Modernization Act could force it to rethink its monetization structure and maybe even its entire business model. Even if the Act is passed, the pending copyright suits against Spotify will not be affected by the new legislation. Spotify will still have to face the music as it attempts to avoid millions, or perhaps even billions, of dollars in copyright infringement claims.

[1] Little Chance Lawsuit Against Spotify Disrupts Its IPO, FORBES (Jan. 4, 2018, 8:07 PM),  https://www.forbes.com/sites/legalentertainment/2018/01/04/little-chance-lawsuit-against-spotify-disrupts-its-ipo/#18b1766721cf. See also Eriq Gardner, Spotify Hit With $1.6B Copyright Lawsuit Over Tom Petty, Weezer, Neil Young Songs, THE HOLLYWOOD REPORTER (Jan. 2, 2018, 10:57 AM), https://www.hollywoodreporter.com/thr-esq/spotify-hit-16-billion-copyright-lawsuit-tom-petty-weezer-neil-young-songs-1070960.  

[2] The case was filed in California federal court on December 29, 2017 by Wixen Music Publishing.

[3] Daniel Kreps, Wixen’s $1.6 Billion Spotify Lawsuit: What You Need To Know, ROLLING STONE (Jan. 3, 2018), https://www.rollingstone.com/music/lists/wixens-16-billion-spotify-lawsuit-what-you-need-to-know-w514878.

[4] Id.

[5] A phonorecord is defined by the United States Copyright Act of 1976 as a material object that embodies sound.

[6] 17 U.S.C.A. § 115 (a).

[7] 17 U.S.C.A. § 115 (c).

[8] 17 U.S.C.A. § 115 (c)(3)(C)-(D). See also Mechanical License Royalty Rates, https://www.copyright.gov/licensing/m200a.pdf.

[9] Erin Jacobson, How Spotify Has Waged War With The Music Industry, FORBES (Sept. 22, 2017, 8:35 PM), https://www.forbes.com/sites/legalentertainment/2017/09/22/how-spotify-has-waged-war-with-the-music-industry/#6ce6e6ed56d5.

[10] Id.

[11] Id. See also Eriq Gardner, A Legal Campaign Against Spotify Intensifies Ahead Of The Company’s Plan To Go Public, THE HOLLYWOOD REPORTER (Sept. 13, 2017, 12:41 PM), https://www.hollywoodreporter.com/thr-esq/a-legal-campaign-spotify-intensifies-companys-plan-go-public-1038440.

[12] Erin Jacobson, How Spotify Has Waged War With The Music Industry, FORBES (Sept. 22, 2017, 8:35 PM), https://www.forbes.com/sites/legalentertainment/2017/09/22/how-spotify-has-waged-war-with-the-music-industry/#6ce6e6ed56d5.

[13] Id.

[14] Press Release, ASCAP, U.S. Rep. Collins Introduces Music Modernization Act To Reform Licensing Landscape (Dec. 21, 2017) (available at https://www.ascap.com/press/2017/12-21-music-modernization-act-colllins-release).

[15] Id.

[16] Id.

[17] Id.