A US court has dismissed a lawsuit filed by Eminem’s publisher Eight Mile Style against Spotify in relation to the management of mechanical royalties in the US in the era before the Music Modernization Act and the creation of mechanical rights collecting society The MLC. The publisher’s claims were barred because of the legal doctrine of ‘equitable estoppel’, which relates to the music company’s conduct prior to going legal.
Despite the dismissal, Judge Aleta Trauger does conclude that Spotify didn’t properly license the mechanical rights in Eminem’s songs prior to the change in the licensing regime brought about by the MMA, saying that Spotify’s management of song royalties was “seriously flawed”. However, Eight Mile Style could and should have done more to rectify the issues, says Trauger, rather than simply allowing them to continue unchecked for years and then filing a lawsuit.
In its defence filings, Spotify argued that it had an ‘implied licence’ from Eight Mile Style, because it had been paying royalties at rates set by the US mechanical rights compulsory licence and the publisher had been banking that money. There was also a question over whether or not Eight Mile Style should even be allowed to sue, because it missed a deadline set by the MMA for filing lawsuits relating to pre-MMA disputes.
However, those were not the grounds on which Trauger sided with Spotify. “Eight Mile Style’s right to recovery faces a legal obstacle far older than the MMA”, she writes in her judgement.
Which brings us to the “well established principle of equitable estoppel”. Estoppel is a legal doctrine that says a court can reject a claim made in relation to unlawful conduct, even if that claim is legally valid, if the entity making the claim contributed to the unlawful conduct in some way. Or, in the words of the judge, they had a “knowing, culpable role in fostering the defendant’s unlawful behaviour”.
“Eight Mile Style was not a hapless victim,” says the judge, but rather “a sophisticated steward of its copyrights that was aware that the licensing status of its compositions had fallen into confusion and simply allowed its rights to be violated”.
This was not simply incompetence, says the judge, but rather a “strategic choice” to create a scenario where Eight Mile Style could sue for damages that would exceed the royalties due, because of the way copyright damages work in the US. “The doctrine of estoppel disfavors that practice and, at least in this instance, forbids it”, Trauger says.
The wider judgement runs through the various issues with the licensing of Eminem’s songs by Spotify, some of which were due to the generally chaotic nature of mechanical rights licensing in the US before the MMA, and some of which were specific to the management of Eight Might Style’s catalogue.
There has always been a compulsory licence streaming services can rely on to cover the mechanical rights in songs in the US, with rates set by the Copyright Royalty Board. However, prior to MMA, each streaming service had to send paperwork for every song it streamed to the relevant publisher to benefit from the compulsory licence.
Spotify used the Harry Fox Agency for that process. With many of songs that were streamed on Spotify, including many of the Eight Mile Style songs, that paperwork was not correctly processed, meaning that technically the compulsory licence did not apply, and so - in the absence of an explicit licence from the publishing rightsholder - Spotify was technically not covered by a licence.
When it came to Eight Mile Style’s catalogue, there was also confusion over who was the appointed licensing entity for Eminem’s songs, and who should be receiving that paperwork relating to the compulsory licence.
Spotify was sending it to Kobalt, which processes Eight Mile Style’s royalties. However, technically the licensing entity was another company closely allied with Eight Mile Style called Bridgeport. Trauger concludes that Eight Mile Style knew that there was confusion over who was the licensing entity and could have taken steps to address that problem, for example by updating the Harry Fox Agency database.
As a result of that confusion, Spotify also pulled Kobalt into the dispute, arguing that Kobalt, as the rights administrator, did not tell Spotify that it was only the royalty processor and not the licensing entity for Eminem’s songs. This, said Spotify, could have been highlighted when Kobalt participated in a legal settlement agreed with the National Music Publishers Association and when Spotify entered into a direct blanket licensing agreement with Kobalt.
With this in mind Spotify asked the court to grant a motion that it is entitled to indemnification from Kobalt in relation to this dispute, which Trauger also granted.
All these issues around song royalties went far beyond Eminem's music, of course, resulting in the overhaul of mechanical rights licensing instigated by the MMA. Behind that legislation was a deal between the streaming services and the music publishers. The services said they would cover the costs of running The MLC if it took responsibility for getting publishers and songwriters paid.
Which crucially means the services are no longer legally liable if admin errors stop writers and publishers getting paid, including in relation to issues that pre-dated the MMA. That restriction on the liability of the streaming services went into effect on 1 Jan 2018.
Eight Mile Style filed its lawsuit the following year. In theory the lawsuit was filed too late, but the publisher argued that, under the MMA, there were obligations for Spotify to meet in order to avoid liability for past infringement, and that it had failed to do so. It also reckoned that the restriction on liability contained in the MMA was unconstitutional
However, because she dismissed the action on estoppel grounds, Trauger did not consider either of those arguments.