Another Spot of Bother

24 January by Laura

Wixen sues Spotify for unpaid mechanical royalties

In the final days of 2017, Wixen Music Publishing filed papers against Spotify, claiming damages totalling $1.6bn for unpaid mechanical royalties. This is the latest in several cases against the Swedish streaming company, which has announced it would go public on the New York Stock Exchange later this year.

The story is not just about the pitiful amounts that Spotify pays songwriters. It also highlights the inefficiencies of copyright law in the US.

The dispute requires an understanding of how services like Spotify are licensed, and how the US treats certain elements of music copyright unlike pretty much anywhere else in the world.

Spotify allows users to stream recordings of songs, therefore it needs to have licences to exploit the copyright in the recordings and the copyright in the songs. It is generally agreed that streaming involves making a temporary copy of a song recording as it is played (buffered and cached), and this requires a licence to exploit the mechanical right in the song (making a copy of it) as well as the performing right (playing it).

The Wixen case and the other lawsuits against Spotify concern the mechanical rights and unpaid mechanical royalties. In terms of the performing rights, the collection societies in the US have provided blanket licences, essentially the right to exploit the performing rights of songs listed on their databases. Spotify provides usage data and a licence fee to the societies, which then work out which songwriters and publishers are due royalties and pay them.

In most other countries, collecting societies also exist for mechanical rights, in some cases it’s the same society. In the UK, it is the MCPS (the Mechanical Copyright Protection Society), though the MCPS is now part of the PRS. However, in the US, there is no collecting society for mechanical royalties. This is partly because in the US, music rights holders are obliged to provide a compulsory licence to users who wish to exploit mechanical rights in exchange for the users providing notice and a licence fee. Permission does not need to be obtained beforehand but if notice and payment are not given then the exploitation amounts to copyright infringement.

Record labels need to obtain mechanical licences to allow them to press copies of recorded songs. In the States, they would usually employ an agency to identify the song, locate the writers and publishers, provide notice and pay a fee. When iTunes initially started in America, the labels continued to deal with the mechanicals. But when streaming came along, it was decided that the platforms themselves should take responsibility for those royalties.

Many of them, including Spotify, hired the same agencies that the labels had used to administer the compulsory licences. Spotify hired the Harry Fox Agency (HFA), the biggest of the lot and owned by the American music publishing sector’s trade body. However, HFA didn’t manage to get through the huge backlog of information that was already being streamed, as well as the thousands of tracks being added on a daily basis. As streaming boomed and American songwriters and publishers started to see performing rights royalties trickle in, they realised they were not getting the mechanicals they were due.

The American publishing sector must take some blame for this for failing to set up and administer a mechanical copyright collecting society. It also failed to notice that HFA was not up to the job. Unlike here in the UK, where music users can check the PRS database for ownership of musical works, there is no comparable system in the US.

Whilst the system might suck, the fact remains that it was the responsibility of Spotify to check that they had obtained all the necessary consents, and that notices and fees were filed and paid in line with the compulsory mechanical licence. As they failed to do this, they were liable for copyright infringement for every song they had streamed without having completed the necessary paperwork. Statutory damages are available for copyright infringement in the US, which can be up to $150,000 for each infringement.

Having been sued for damages totalling billions of dollars, it’s no wonder Spotify started trying to settle out of court. It struck a deal with the National Music Publishers Association and agreed another with lawyers leading a class action on behalf of a group of songwriters and publishers. Both deals included compensation for unpaid mechanical royalties, and (unsurprisingly) more songwriters and publishers have since filed lawsuits.

In May last year amid its defence against a claim by Bluewater Music Services Corp and fearing a never-ending stream (sorry) of claims, Spotify announced that it should not have to pay any more unpaid mechanical royalties as they weren’t due on a stream! That case rumbles on.

Meanwhile, just before Christmas last year, two Republicans took legislative proposals for a Music Modernization Act (MMA) to the House of Representatives. The draft legislation aims to overhaul the publishing system and includes proposals to set up a collective to manage a blanket mechanical licensing system, similar to that which is already deployed in most other countries.

Just over a week after the draft bill was taken to Congress, Wixen filed its suit against Spotify. Part of the reason they filed when they did was due to a provision in the MMA, which sets the cut-off date for filing unpaid mechanical royalty claims to 1 January 2018. If the legislation becomes law and this retroactive provision remains, then effectively, the slate is wiped clean and no one else will be able to submit claims for unpaid mechanical royalties.

The Wixen case is likely to be settled, with their songwriters and subsidiaries receiving better payments than they might have had they been party to the class action settlement. Of course what is better for songwriters and publishers may not be better for consumers, and it is likely that Spotify’s Knock Off Nigel ‘Free’ version will become a thing of the past and the ‘Premium’ version will be more expensive.

Whatever happens, this case will be an interesting one to follow, and we’ll keep you updated!

collecting societies , licences , mechanical royalties , music law , performing rights , publishing , Spotify , streaming ,

Update by

Laura

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