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More court submissions and another lawsuit add to Spotify’s mechanicals woes

By Chris Cooke | Published on Thursday 14 September 2017

Spotify’s mechanical woes in the US have further escalated this week with three significant developments: an objection to the streaming firm’s proposed settlement of the original class action on this issue, a firm rebuttal of its most recent legal arguments, and a brand new lawsuit to add to the pile. Good times.

As much previously reported, as well as needing two sets of music licences in place – so to cover both recording rights and song rights – a streaming service needs to ensure that its licensing deals cover both the ‘reproduction’ element of the copyright and the ‘communication’ element of the copyright. Because it’s generally been agreed to date that an on-demand stream is both a copy and a communication at the same time.

The distinction between the reproduction and communication elements of the copyright is more important when it comes to songs, because in some countries the so called ‘mechanical rights’ (the copying) and the ‘performing rights’ (the communication) have traditionally been licensed separately. So in the UK, performing rights are controlled by PRS, while mechanical rights are licensed by either MCPS or the music publisher direct.

In the US, performing rights go through the collecting societies like ASCAP and BMI. But there is no American equivalent to MCPS for mechanicals, so a streaming company can’t get one industry-wide blanket licence from one organisation.

Actually, US law provides a compulsory licence covering mechanicals, so rights owners can’t withhold permission and royalty rates are set by law. However, under that compulsory licence a streaming firm must contact the copyright owners of each and every song it streams and hand over the statutory royalties in a timely fashion. Where rights owners can’t be found, it should alert the US Copyright Office of that fact.

Traditionally mechanicals in the US – on both physical releases and downloads – were sorted out by the record companies as and when new records were put out. Meanwhile, with personalised radio services like Pandora – the first streaming set-ups that came to market – it was deemed that no mechanical royalties were due, so these platforms could license the song rights entirely via the societies like ASCAP and BMI.

However, when on-demand streaming came along, it was decided that mechanical royalties were due, but that the service rather than the label should to the licensing. Which meant the new streaming services needed to work out who needed to be paid mechanical royalties on each of the millions of songs in their catalogues. Spotify hired the services of a company called The Harry Fox Agency – which had provided similar services for the labels – to do just that.

As it turned out, that process didn’t go so well, meaning that plenty of songwriters and publishers – while getting their performing right royalties via the collecting societies – weren’t getting the mechanical royalties they were due from Spotify, and many of its rival services. A fact that resulted in a flurry of litigation, the most high profile being the class action lawsuits pursued against Spotify by musicians David Lowery and Melissa Ferrick.

Spotify ultimately settled those two class actions – which had been merged into one by the courts – while also announcing a separate deal with the National Music Publishers Association that it hoped would stop any future mechanical royalty lawsuits being filed. Between them, those two settlements saw Spotify commit to hand over tens of millions of dollars in damages, which would probably have been fine had it brought the whole American mechanicals debacle to a conclusion.

It did not. Earlier this year new lawsuits were filed by Bluewater Music Services and Bob Gaudio which made all the same claims as the earlier litigation, while arguing that the NMPA deal on mechanicals “did nothing to resolve the outstanding issues”. Seemingly no longer in any mood to negotiate yet another settlement, this time Spotify bounced back a bold new argument: who’s to say mechanical royalties are even due on a stream?

Actually, prior to this point Spotify was among the people saying that mechanical royalties were due on streams. The company’s previous response had been to gripe that, with no MCPS equivalent in the US, and no publicly-accessible central database of music rights information, it was more or less impossible to ensure everyone got their mechanical royalties. But now the streaming firm is arguing that no one has actually proven it is exploiting the mechanical rights in the songs its streams, mainly citing the legal precedents that decided personalised radio services only needed performing right licences.

The lawyer leading the latest lawsuits, Richard Busch, has now responded to that new line of argument in a new submission to the court.

Hitting back at Spotify’s suggestion that his clients’ lawsuits were high on bluster but low on specifics as to how the streaming firm is infringing their copyrights, Busch declares that: “it is clear that mechanical licences are required to engage in the process of interactive streaming, and the industry has reached a consensus on this topic”.

He then argues that the legal precedent cited in Spotify’s most recent submission all relates to personalised radio services rather than on-demand streaming platforms. “Numerous courts and other sources have specifically noted the distinction between Spotify’s interactive streaming service and other non-interactive services”, he states.

He goes on: “While Pandora [et al] may be able to get by on public performance licenses alone, the same cannot be said of Spotify and its interactive streaming service. Once this distinction is taken into account, one need not look further than the very case law cited by defendant to realise where defendant’s argument falls apart”.

So take that, Spotify. And while you’re at it, here’s yet another mechanical royalties lawsuit, filed in Nashville and also led by Busch, this time on behalf of seven independent publishers: A4V, J&J Ross Co, Lakshmi Puja Music, Lindabet Music Corp, Music By Shay, Music Of The West and Swinging Door Music.

Oh, and you know that settlement you reached on the Lowery/Ferrick class action? Well, let’s not forget that still needs court approval. And look, here’s a long line of songwriters telling the court not to approve. A document titled ‘Objections To Proposed Class Action Settlement Agreement’ was filed with the New York courts earlier this week.

The court filing reckons that “the settlement agreement is procedurally and substantively unfair to settlement class members because it prevents meaningful participation by rights holders and offers them an unfair dollar amount in light of Spotify’s ongoing, wilful copyright infringement of their works”. Somewhat ironically, one of the reasons given for the settlement being “procedurally unfair” is that it will be hard for songwriters to comply with the proposed process because of the lack of a decent music rights database.

So, all in all, Spotify is still stuck in a mechanical royalties quagmire as it continues to march towards a listing on the New York Stock Exchange later this year (a process that nevertheless continues, with the company’s money lenders reportedly now being consulted about the firm going with an unusual direct listing rather than a conventional Initial Public Offering as it arrives on Wall Street).

It’s worth adding that Spotify’s surprise new “we’re not convinced mechanicals are due at all” defence – which was always going to controversial, even among the digital firm’s friends in the music publishing world – isn’t about the streaming service trying to pay songwriters and publishers less money. It’s about trying to circumvent America’s messy mechanicals system.

Presumably Spotify has come to the conclusion that – however many settlements it reaches – there could always be another songwriter or publisher arriving on the scene demanding statutory damages of up to $150,000 per song streamed, even if only a few dollars of mechanical royalties are actually due. And that’s clearly not tenable long-term.

That position is understandable. Although going against even your own past statements of how on-demand streaming services are licensed is a risky move. There are companies out there who reckon they could do a much better job of ensuring everyone gets paid the mechanicals they are due, reducing the risk of regular rounds of litigation over unpaid monies. If Spotify’s current legal gamble fails, you can only hope that one of those companies is right.