1. How Spotify's Argument in Copyright Lawsuit Could Upend the Music Industry's Newfound Recovery

How Spotify's Argument in Copyright Lawsuit Could Upend the Music Industry's Newfound Recovery

How Spotify's Argument in Copyright Lawsuit Could Upend the Music Industry's Newfound Recovery

In financial terms, Spotify is like a high-end mall that was just built on an earthquake fault line. Like other subscription streaming services, it’s driving the music industry’s nascent recovery with recurring revenue. But the company constructed its business in the U.S. quickly -- carelessly, but apparently with the best of intentions -- on the foundation of music licensing from another era. Now the tremors are coming in the form of high-stakes copyright infringement lawsuits -- and Spotify’s response could shake the foundations of the streaming business even more.

In July, Spotify was sued by Robert Gaudio, a songwriter and founding member of Frankie Valli and The Four Seasons, and Bluewater Music Services Corporation, which administers publishing rights for songwriters. In lawsuits filed by Richard Busch -- a top copyright litigator best known for representing Marvin Gaye’s family in the "Blurred Lines" case -- the companies allege that Spotify infringed their copyrights by streaming compositions for which it hadn’t licensed “mechanical rights.” (Spotify licenses recordings from record labels, public performance rights from collecting societies, and mechanical rights from publishers.) Spotify has said that it can’t always identify or find the owners of compositions, since the publishing business doesn’t do a good job of tracking that information, and that it sets aside money to pay them. Even if the company acted honorably, however, it didn’t file paperwork with the Copyright Office for the publishers it couldn’t identify or find, as required by law.

In response, Spotify filed a motion -- technically a “memorandum in support of motion for a more definite statement” -- arguing that, actually, it has no obligation to pay mechanical royalties in the first place. The publishers’ complaints do “not set forth a cogent theory of infringement,” because, contrary to the practice of the last decade and a half, music streams should be considered legally akin to public performances (like radio broadcasts), not a distribution of copies (like physical or digital sales), so it only needs public performance licenses from collecting societies and not mechanical licenses from music publishers.

In the abstract world of copyright litigation, these are fighting words. “As long as this is an active argument, we are in a state of war with them,” says David Israelite, president and chief executive of the National Music Publishers’ Association (NMPA), referring to Spotify.

On Wednesday (Sept. 13) Busch responded to Spotify’s motion, added a request for sanctions, and, separately, filed a third complaint on behalf of seven publishers whose works are administrated by the Songwriters Guild of America. In his response, Busch argues that Spotify’s motion “is clearly meant to drive up Plaintiff’s costs.” He also points out that Spotify itself said it “needs” mechanical rights in comments it submitted in 2014 to a U.S. Copyright Office music licensing study. And in a rate court proceeding earlier this year, Spotify presented an argument to set a certain rate for the rights it now says it doesn’t have to pay.

Lawsuits like this are the reason why a Supreme Court Justice once called copyright “the metaphysics of the law.” Mechanical rights, which go back to the advent of the player piano, allow the distribution of copies -- which Spotify’s filing argues isn’t what the company does. Although this might make a certain intuitive sense, since users don’t see copies, the issue is more complicated than it seems: Spotify does copy music files to operate its service, and it also sometimes copies songs onto consumers’ mobile devices in order to improve performance. But the idea that streaming requires a mechanical license rests on a 2001 rate-court settlement, which could be overturned. 

Most cases like this settle. But a decision that Spotify isn’t obligated to pay mechanical royalties, which is generally seen as unlikely but possible, would destabilize the entire publishing business. Mechanical licenses account for about half of the revenue that on-demand streaming services pay to the owners of compositions. (The other half goes to collecting societies, which in turn pay songwriters and publishers.) Spotify could keep paying mechanical royalties even if it wins this case -- it may be required to do so under its contracts with publishers -- and the company seems more interested in limiting its potential liability than in reducing its costs. But that doesn’t mean that it couldn’t stop paying in the future, or that another company wouldn’t take this precedent and run with it.

A win for publishers might not be so great for the music business, either, since it would shake up Spotify as it prepares for a rumored public stock offering -- and at a time when the industry is depending on the revenue it generates. When Spotify entered the U.S. market, it decided to stream all of the recordings to which it had rights -- whether the underlying compositions were licensed or not -- in order to build market share. That gamble has already cost the company more than $70 million, in the form of a $30 million deal with the NMPA and a a $43 million settlement in a putative class-action lawsuit. When Spotify agreed to the $43 million settlement, it essentially gambled that enough publishers would join that it could put this issue behind it. But these three new lawsuits, as well as the long list of publishers objecting to the settlement, suggest that it could lose this bet as well.

That’s how the earthquake could start. Statutory damages for willful copyright infringement can reach as much as $150,000 per work, and Busch is arguing that Spotify’s conduct merits that maximum. Juries rarely award anything close to that, but the Gaudio lawsuit involves 106 compositions, while the Bluewater one involves 2,339 -- meaning that Spotify could potentially be on the hook for more than $366 million just from those two lawsuits alone. If many publishers opt out of the $43 million settlement -- and the list of objectors suggest that’s likely -- Spotify could face a series of similar lawsuits and, eventually, enough damages to hurt the company.

Although this is only an issue in the U.S. (in other countries mechanical royalties are distributed by collecting societies), every on-demand streaming service has a similar problem, to one extent or another. Services that go out of business can’t pay anyone -- and, like it or not, downloads aren’t coming back. 

If the two sides can’t reach a settlement and this case goes to court, a win for either side, however justified, could also be a loss for the music business as a whole. It’s easy to see this as a moral issue -- Spotify is a rapacious technology company! Publishers can’t track the songs they own! -- but it might be better understood as a chain reaction that’s getting out of control. Now it’s not in either side’s interest to back down; the publishers need to win, and Spotify can’t afford to lose. That leaves the rest of the business hoping that this doesn’t escalate to mutually-assured destruction, music-business style.

The Original Sin here was Spotify’s decision to stream first and clear rights later. But the selection of music the company offered arguably helped it drive a music business recovery. That recovery didn’t help publishers that weren’t getting paid, of course, so it’s hardly surprising that they’d want to sue a $10 billion company that didn't pay them properly. Facing the threat of a series of lawsuits that could add up into a serious risk, Spotify then unveiled a weapon of its own. And now, as the legal filings fly back and forth, the music business recovery is starting to look just a little more fragile than it did a few months ago.