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Wixen sues Spotify for $1.6 billion in wake of Music Modernization Act

By | Published on Wednesday 3 January 2018


Confirming that America’s mechanical royalties mess will continue to be newsworthy in 2018, it emerged yesterday that independent music publisher Wixen filed a $1.6 billion mechanical royalties lawsuit against Spotify over the Christmas break. Which is definitely a fun way to start the year. Except for Spotify of course.

This all relates to the payment – or not – of so called mechanical royalties to songwriters and music publishers by the streaming services in the US. No one denies that plenty of mechanical royalties have gone unpaid by the streaming platforms Stateside, though there is a dispute over whose fault that all is.

Is it the fault of the streaming services for implementing lax royalty payment systems when they entered the US market? Or is it the fault of the US music publishing sector for sitting idly by as the digital music revolution got underway and it became ever increasingly obvious that the country’s mechanical royalties system – which was always pretty shoddy – was going to fall over once subscription streaming became the dominant recorded music revenue stream?

Services like Spotify stream recordings of songs, and therefore need licences to exploit both the record industry’s recording copyrights and the music publishing sector’s song copyrights. It is also generally agreed that delivering a stream involves both copying and communicating music, which in music publishing jargon means streaming services exploit both the mechanical rights and performing rights in songs.

It is the former that have caused all the problems. When it comes to performing rights, US streaming services can get blanket licences from the performing rights organisations ASCAP, BMI, SESAC and GMR.

In most other countries, similar collecting societies exist for mechanical rights. Indeed, in some countries, it’s the same collecting society. Which means that, although some music publishers do license some of their song rights directly to streaming services, a digital service provider can usually get a ‘mop up’ licence from a collecting society covering pretty much every other song ever written.

Streaming services need such ‘mop up’ licences because they don’t actually know what songs are streaming on their platforms. Once a record label has done its deal with the DSP, it pumps its recordings catalogue into the streaming service’s servers. But the label only controls the recording rights, and it doesn’t tell the DSP who controls the song rights. Or even what song is contained within any one recording.

Therefore the DSP really needs a blanket licence covering all musical works to ensure it is able to pay all the royalties due whatever songs may be contained within any one label’s recordings.

But in the US, the music publishers never quite got round to setting up a mechanical rights collecting society. That was partly because there is a compulsory licence covering mechanicals in America, so songwriters and publishers are obliged to license music users at set rates. But, under the compulsory licence, the music user must alert the copyright owner that their music is being used and arrange to pay the royalties due under law.

In the world of CDs, the label sorted the mechanical rights licence, and in America it usually employed an agency to identify the song, locate the songwriters and publishers who had a stake in said song, and make sure they got paid. When iTunes appeared on the scene, unlike in Europe, the labels continued to deal with the mechanicals. But when on-demand streaming arrived, it was decided that the digital firms, rather than the labels, should take on responsibility for those royalties.

Many DSPs hired the same agencies that the labels used to manage the admin of the compulsory licence. In particular the Harry Fox Agency, which used to be owned by the US music publishing sector’s trade body. And that, some would argue, was Spotify’s big mistake, given there are other agencies operating in this space possibly better equipped to undertake the task.

Unlike a label, that would usually need to sort out the mechanicals on whatever ten songs appeared on the next album it was putting out, Spotify et al needed to sort out the licensing of millions of songs from the off, with a flood of new tracks being added each week. Given HFA had a pretty bad reputation even in the CD era, it was perhaps unsurprising it failed to rise to the digital licensing challenge.

Which meant that as streaming boomed, many American songwriters and music publishers – although receiving performing right royalties through the collecting societies – were not getting the mechanical royalties they were due.

And, even if you think America’s piss-poor mechanical royalties system is mainly the fault of the American music publishers, in the eyes of US copyright law it was the duty of the DSPs to ensure paperwork was filed and royalties paid in line with the compulsory licence. Which meant Spotify et al were liable for copyright infringement for every song they had streamed without doing the required admin tasks.

Which was top news for lawyers with calculators, given US copyright law provides statutory damages of up to $150,000 per infringement, and the lawyers would likely be on a cut of any damages awarded. Hence all the mechanical royalties lawsuits that have been filed against various streaming firms in the US in recent years.

With the potential of millions – hey, now billions – of dollars of damages being claimed, Spotify sought to solve the mechanical royalties problem by negotiating some settlement deals. First with the National Music Publishers Association. And then with the lawyers leading a class action on behalf of a group of songwriters and publishers who chosen not to participate in the NMPA arrangement (that being the separate David Lowery and Melissa Ferrick class actions against Spotify combined).

Both those deals included compensation for past mechanical royalties that went unpaid, and also some vague commitments for how Spotify was going to ensure everyone got the royalties they were due in the future. But, despite those deals being done (or nearly done, in the case of the class action), new lawsuits continued to be filed on this issue.

Presumably concerned that, however many deals it did, there could be an almost infinite stream of mechanical royalty lawsuits from pissed off songwriters and music publishers, Spotify started looking for other options.

Which included submitting to court the rather bold new argument that, having thought about it really hard, Spotify now reckoned a stream was, actually, just a communication and not a copy. So that, in fact, it should be able to pay all the royalties due to songwriters and music publishers through the PROs, ie ASCAP, BMI, SESAC and GMR.

Which was a controversial position, although the desired outcome of that argument – that songwriters and publishes would earn the same but via one payment system instead of two – had some logic to it.

Meanwhile, behind the scenes, Spotify’s allies in the music community began considering a radical overhaul of America’s mechanical rights licensing system. Which basically means introducing the system already employed pretty much everywhere else in the world.

Though, because of the compulsory licence, that would require a rewrite of American copyright law, which is what the previously reported Music Modernization Act – unveiled just before Christmas – seeks to do.

That legislation would set up a collecting society for mechanical rights in the US for the first time that would offer streaming services blanket licences, ie the mop up licences they need. Which, needless to say, would be a massive help to the streaming platforms.

As a kickback to the songwriters and music publishers, the act would also overhaul how royalties are set whenever collective licensing applies to song rights in the US, including performing rights as well as mechanical rights. Which is a good kickback, because songwriters and music publishers are convinced that the current royalty setting system repeatedly undervalues music.

The Music Modernization Act is backed by music publishers, the US collecting societies, songwriter groups and the streaming sector. And the people behind the proposed legislation hope that that consensus might ensure the Act doesn’t get stuck in Washington for years, as often happens with proposed copyright reform.

Though, while some music publishers and songwriters may support the Music Modernization Act, that doesn’t mean all music publishers and songwriters support it. A number of issues have been raised already. Plus, given it will also overhaul the way performing right royalties are set, music users not affected by the mechanical rights shit storm – such as the conventional broadcasters – may also object. So, not a complete consensus then.

And so enter Wixen, an independent music publisher representing plenty of big name songwriters like Tom Petty and Neil Young, and members of Rage Against The Machine, Weezer and The Black Keys. It’s had problems with all of Spotify’s proposed settlements to date, and it spent a chunk of last year telling the court considering the Lowery/Ferrick class action that the deal on the table was insufficient.

Or, in Wixen’s words, “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, willful copyright infringement of their works”.

For its part, Spotify questioned whether Wixen was actually empowered to speak for all of its songwriters who were members of the Lowery/Ferrick class, a question relating to the specifics of the administration deals the publisher does with its writers.

And that’s presumably a question Spotify can ask again now that Wixen has filed a mechanical royalties lawsuit all of its own. The mega-bucks $1.6 billion in damages being sought are the result of the publisher’s sizable catalogue of works and the aforementioned statutory damages.

Wixen also has some issues with the Music Modernization Act. Indeed, it claims that it is one provision in that proposed legislation – regarding the impact the new licensing system would have on any ongoing mechanical royalty disputes – that has forced the company to go legal at this time, even while it is concurrently participating in the ongoing legal wrangling around the Lowery/Ferrick settlement.

The company’s President Randall Wixen said in a statement yesterday: “We are very disappointed that these services will retroactively get a free pass for actions that were previously illegal unless we actually file suit before Jan 1 2018. Neither we nor our clients are interested in becoming litigants, but we have been faced with a choice of forfeiting rights and damages, or taking action at this time”.

Adding that he was actually supportive of much of the Music Modernization Act, while also insisting that he hoped an amicable settlement could still be reached with Spotify, Wixen went on: “We regret that this otherwise admirable proposed bill has had this effect, and we hope that Spotify nonetheless comes to the table with a fair and reasonable approach to reaching a resolution with us. We are fully prepared to go as far forward in the courts as required to protect our clients’ rights”.

So, Wixen’s lawsuit could be seen as a negotiating tactic and/or a contingency plan, though that won’t stop the independent publisher driving a hard bargain in both the courts and Congress as Spotify and its friends in the music community seek to put America’s mechanical royalties mess behind them once and for all.