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Spotify questions whether mechanical royalties are even due on a stream 

By | Published on Friday 1 September 2017


The ongoing debacle around the payment of mechanical royalties on streams in the US has taken a very interesting turn indeed, as Spotify responds to the latest litigation filed on this dispute by asking: what if no mechanical royalties are due on streams at all?

Let’s recap. Copyright provides copyright owners with an assortment of controls over whatever content they own. The exact list of controls varies from country to country, but might commonly include all of the following: the reproduction control, the distribution control, the rental control, the adaption control, the performance control, the communication control and the making available control.

In music, and especially music publishing, a distinction is commonly made between the reproduction and distribution controls – often referred to as the ‘mechanical rights’ – and the performance, communication and making available controls – commonly referred to as the ‘performing rights’. In some countries the music publishing sector licenses these different elements of the song copyright separately. So in the UK, PRS represents the performing rights, while MCPS and the music publishers control the mechanicals.

When you press a CD you exploit the mechanical rights but not the performing rights. When you play a song on the radio you exploit the performing rights but not the mechanical rights. But what about digital?

Copyright law doesn’t usually state which controls the digital transfer of a song or recording exploits, though generally the music industry has treated a digital delivery as both a reproduction and a communication (or a reproduction and a making available) at the same time – ie both the mechanical and performing rights are exploited. Which means that, in the UK, if you operate a download or streaming platform, you need a licence from both MCPS (and/or the publishers) and PRS just to cover the song copyrights.

That said, the US – as is often the case – has done things differently. There, it was decided early on that a download only exploited the mechanical rights, while a personalised radio service like Pandora or iHeartRadio only exploited the performing rights. However, with on-demand streaming of the Spotify variety, it has generally been accepted that both the mechanical and performing rights are being exploited.

That, of course, has caused all sorts of hassle, because in the US – while there are collecting societies that can together provide an industry-wide blanket licence covering the performing rights in all songs (ie BMI, ASCAP, SESAC and GMR) – the same is not true for mechanical rights. And while there is actually a compulsory licence covering mechanicals – so the rates due to be paid are set by statute – streaming services still need to find the copyright owners of all the songs they stream, put said rights owners on notice and pay over any royalties due.

Spotify, like many streaming companies, hired the services of the Harry Fox Agency – the closest the US has to a mechanical rights collecting society – to administer mechanical royalties. But there are not insignificant gaps in the HFA database, resulting in not insignificant sums of mechanical royalties going unpaid. Which resulted in two major class action lawsuits being filed against Spotify, and a separate multi-million dollar mechanical rights settlement being negotiated between the digital firm and America’s National Music Publishers Association.

As previously reported, despite reaching a $43.4 million settlement in relation to the 2015 class actions – which were ultimately merged into one – in July this year two new lawsuits were filed over unpaid Spotify mechanicals, by Bluewater Music Services and Bob Gaudio. The latter was the primary songwriter for Frankie Valli And The Four Seasons and is a music publisher in his own right.

Both lawsuits were highly critical of Spotify and all the previous efforts to solve the mechanical royalties problem. On the NMPA settlement, the Bluewater lawsuit stated that: “[it] did nothing to resolve the outstanding issues with the Spotify licensing and royalty payment system as the settlement allowed Spotify to continue to not pay accurately and did not require it to build any systems moving forward”.

Spotify has now formally responded to the new lawsuits. The new legal filing takes particular umbrage to suggestions in the Bluewater/Guadio litigation that its business model has parallels to the original Napster and the other early file-sharing platforms. “Spotify bears no resemblance to Napster”, or any other P2P file-sharing network, the digital firm’s legal response insists. “Its business practices bear no resemblance to those piratical and unlawful peer-to-peer networks”, it goes on. “And nor does its technology”.

The new lawsuits include a “dishonest portrayal” of Spotify’s business, this week’s response states, before accusing the lawyers working for Bluewater and Guadio of making bombastic and unsubstantiated claims in a bid to persuade songwriters and publishers to reject the settlement already reached in the earlier mechanical royalty class action.

Which is all interesting enough, though the most significant part of Spotify’s response to the new lawsuits is its questioning of whether or not a stream even exploits the mechanical rights of a song at all.

Spotify’s lawyers begin by claiming that the Bluewater and Guadio lawsuits are high on bluster but low on specifics when it comes to the actual allegation of copyright infringement. The litigants would likely argue that it’s a given that mechanical royalties are due whenever their songs are streamed, but Spotify’s attorneys counter that it is for the plaintiff’s to prove that is so.

Write Spotify’s lawyers: “Plaintiffs allege that Spotify ‘reproduce’ and ‘distribute’ plaintiffs’ works, thereby facilely checking the boxes to plead an infringement of the reproduction and distribution rights. But plaintiffs leave Spotify guessing as to what activity plaintiffs actually believe entails ‘reproduction’ or ‘distribution'”.

Bluewater and Guadio talk about ‘streaming’ in their lawsuits, the lawyers go on, but ‘streams’ aren’t in themselves defined in copyright law, and therefore it’s for the plaintiffs to describe how Spotify is reproducing and distributing their songs.

The streaming firm’s legal filing then runs through the various bits of American case law that confirm personalised radio services like Pandora and iHeartRadio only exploit the performing rights. Why should that principle not still stand just because a stream is available on-demand rather than as a personalised stream?

Anticipating that Bluewater and Guadio might counter that Spotify routinely downloads copies of tracks to mobile devices – rather than just streaming them – so to allow offline listening, the streaming firm suggests that it would argue that functionality is covered by the American principle of fair use, and therefore no licence is required.

Of course lawyers working for Bluewater and Guadio might instead ask why Spotify has previously entered into settlements worth tens of millions of dollars over unpaid mechanicals if it thought no such royalties were ever due. In last year’s disputes, Spotify’s defence was generally that paying mechanicals in the US was ridiculously complex because of the lack of a relevant collecting society and/or industry-wide song rights database.

It’s not clear how Spotify would respond to that perfectly legitimate question. Though it is true that the definition of a stream in terms of which copyright controls are exploited remains ambiguous – hence the dispute elsewhere in the world over whether or not recording artists should receive Performer ER royalties from the streaming services (they should if a stream exploits the basic communication control).

If this case was ever to get to court, any ruling could set a landmark precedent on the definition of a stream Stateside which – if it was ruled a stream only exploited the performing rights in the US – might kick start a big debate over the copyright status of streams in other territories too.

None of which would necessarily alter how much Spotify pays over to the music rights owners in total, just how that money reaches the industry. But for Spotify, it would end the risk of being held liable for expensive statutory damages in relation to unpaid mechanicals in the US. And it could also ultimately affect how monies are shared between the different stakeholders within the music community, in America and beyond.

So, all in all, when it comes to legal disputes of the moment, this is definitely one to watch.