Recent news reports have indicated that on Friday, May 26th, online music streaming service Spotify, which has its headquarters in Sweden, agreed to a $43.5 million settlement to prevent a class action suit filing from proceeding in court. The class action suit included allegations that Spotify failed to pay mechanical royalties to songwriters for some of the songs which have been available to consumers through the online music service.
The class action arises from a pair of lawsuits filed last year by David Lowery, founder of rock bands Camper Van Beethoven and Cracker, and singer-songwriter Melissa Ferrick. The cases, originally filed in the U.S. District Court for the Central District of California (C.D. Cal.) in late 2015, originally sought damages which would amount to a combined $350 million. Media reports indicate that an early response from Spotify to the allegations in those suits focused on the difficulty in obtaining the proper data on rights holders, insisting that the company held money aside to pay royalties even when they weren’t sure to whom such royalties should be paid. Last March, Spotify entered into an agreement with the National Music Publishers Association (NMPA) in which the streaming music service provider agreed to pay $30 million into a payout pool to cover royalty payments for unmatched or unpaid song royalties.
The $43.5 million from the recent Spotify settlement will reportedly go towards a separate fund to compensate publishers and songwriters. Such payments made by Spotify and other streaming services to copyright owners are known as mechanical royalties. Mechanical royalties are usually paid when a copy of a song is made, such as when a music publisher creates a CD containing copyright-protected songs. Although Spotify doesn’t sell or distribute physical media, it does owe mechanical royalties when it streams a copy of a song to a user.
Typically, music recordings have two levels of copyright protection: both for the recording itself as well as the musical composition. Entities which distribute phonorecords or “digital phonorecord deliveries” are statutorily required, specifically by 17 U.S.C. Section 115, to pay compulsory licensing rates for those deliveries. According to the U.S. Copyright Office, the term “digital phonorecord delivery” is defined, in part, as each individual delivery of a phonorecord by digital transmission of a sound recording that results in a specifically identifiable reproduction by or for any transmission recipient of a phonorecord of that sound recording. However, because Spotify and other streaming services are distributing copies of a recording and not the composition itself, it isn’t required to pay the federally mandated compulsory license and are able to negotiate directly with the publisher for licensing by sending a notice of intent (NOI) that the streaming service intends on distributing a recording.
However, there are a few aspects of this current copyright regime which make it more difficult to obtain and distribute royalties from streaming services as opposed to other forms of digital media distribution. First, according to reports from digital media, it appears that Spotify and other streaming services aren’t proactive about determining the proper rights owner when that information isn’t readily available. As well, streaming royalties are more difficult to determine because there is no sale of a digital copy. According to information published online by music licensing firm Harry Fox Agency, there are multiple factors which are taken into account when determining royalties owed for streaming music, such as service offering type, licensee type, service revenue and recorded content expense. By contrast, royalty rates for physical formats like CDs or permanent digital downloads is much more straightforward: 9.1 cents per copy of songs five minutes or less and 1.75 cents per minute or fraction thereof for songs over five minutes. Further, HFA maintains only one royalty rate chart for physical copies of digital sound recordings whereas there are five royalty rate charts for sound recordings distributed via subscription streaming services.
Part of Spotify’s interest in settling this case early may be to clear up its legal situation ahead of becoming a publicly traded company. In the middle of May, business news outlet CNBC reported that sources close to Spotify indicated that the company was interested in pursuing an initial public offering (IPO) on the New York Stock Exchange (NYSE), the IPO occurring either late this year or early 2018. The day before settling the class action lawsuit, Spotify added four people to its board of directors including individuals with experience at major entertainment and tech firms such as Disney, YouTube and Cisco.