Christian L. Castle, Attorneys -- Austin, Texas

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Spotify's Compliance Record Striking a Chord

From Texas Lawyer (January 28, 2016)

Two recent copyright infringement class action lawsuits against Spotify show the $8 billion music streaming service's Achilles heel—Spotify's largely secret failure to license songs.

According to Billboard, Spotify failed to license or pay royalties for between 10 to 25 percent of Spotify's 30 million song music offering and claims to be accruing a "reserve fund" of $17 million to $25 million for unpaid royalties. Spotify has so far refused to disclose how many songs are unlicensed or how much it owes for which songs.

Given the scale, it is very likely that Texas songwriters could be included in either potential class, particularly independent songwriters who have registered their U.S. song copyright.

How Did Spotify Get Here?

Two different songwriters brought the class actions separately: David Lowery ($150 million) and Melissa Ferrick ($200 million).

Recall that sound recordings contain two separate copyrights: the song and the recording. Different parties can own each work. These class actions concern the song copyright.

Spotify defends itself by complaining that U.S. song licensing is uniquely complex. Outside the U.S., songs come in a single blanket license (e.g., the UK's PRS for Music). In the U.S., the bundle of rights is divided between the blanket public performance rights licensed by performing rights organizations like ASCAP and BMI under government orders, and compulsory mechanical rights under a statutory license. The government controls the price for both rights. Spotify allegedly failed to comply with the compulsory license laws despite warnings—resulting in the alleged copyright infringement forming the basis of the class actions.

This complexity is created by government regulation. ASCAP and BMI are prohibited from licensing the mechanical rights (for the exact same performances, songs and users). The federal government has long controlled licensing and prices for songs, so Spotify knew this when they entered the U.S. market. For example, the federal government set the price for the compulsory song license at $.02 in 1909 where it stayed for 67 years; the ASCAP consent decree started 75 years ago.

While the government actively regulates songwriting, it largely avoids enforcing compliance with its licenses, essentially leaving enforcement to songwriters and music publishers.

What Did Spotify Fail to Do?

The class actions accuse Spotify of failing to comply with the two main requirements of statutory requirements for compulsory mechanical licenses. The user must: notify each copyright owner of the proposed use in advance; and account and pay government royalties for uses of the song.

The class actions allege that while Spotify may have licensed some of the songs it offers, it has not licensed potentially millions of songs. The cases allege that Spotify admitted these failures in various public statements.

It is reasonable to ask if a person who fails to comply with burdens of the compulsory license ought to continue to enjoy its benefits. The Copyright Act has no "use it or lose it" mechanism that would suspend or extinguish an abuser's right to the compulsory license—once again, enforcement is left to songwriters and publishers.

The advance notice requirement states that the user must either send the notice to the copyright owner or send it to the Copyright Office if the owner cannot be found in the records of the Copyright Office. Press reports suggest that Lowery could have been found with a "ten second" online search of Copyright Office records.

Spotify claims that it cannot locate the rights owners, but apparently does not acknowledge the unknown owner option. The class actions suggest that Spotify's failure to send notices for millions of songs suggests something more than a mere oversight.

Were Filing Fees A Factor?

One possible explanation for Spotify's predicament is a reluctance to pay the filing fee to register the notice with the Copyright Office who also publishes a list of all unknown owner notices on the Copyright Office website. Notice filing is a kind of insurance against copyright infringement claims until the owner comes forward, if ever. That filing fee works out to about $25 per song—which looks cheap compared to statutory damages.

It appears that even $25 per song does not trump the "optical" risk assessment—the likelihood of getting caught balanced by a bet that songwriters would never have the means to sue.

A similar problem arose in 2004 regarding unclaimed royalties at record companies and publishers. The New York Attorney General investigated the rightsowners and found that they needed to do a better job of paying royalties. That started with the rightsowners publishing a list of all the artists for whom they were holding royalties.

Plaintiff Lowery evidently knows the history—before filing his action, Lowery asked the current New York Attorney General to conduct a similar investigation into Spotify's undisclosed and unpaid royalties, but evidently got no reply after several months.

Press reports suggest that one solution might be to follow those 2004 guidelines starting with requiring Spotify to publish a public list of unlicensed song titles (from Spotify's sound recording metadata). Lowery's class action effectively asks the court to order this disclosure.

Spotify may well be doing it better than other services but it appears they all have the same problem—they apparently decided it was better to seek forgiveness than ask permission. Or comply with the law.


Copyright 2006 - 2019 Christian L. Castle