Spotify Threatened With Another Class Action Lawsuit As Disputes Over Royalties Intensify

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A woman walks through a hallway at Spotify offices following a press conference in New York City.

A class-action lawsuit recently filed against Spotify by Michelman & Robinson, LLP on behalf of Cracker frontman and college professor David Lowery will soon have company, Billboard has learned. The law firm of Gradstein & Marzanno -- itself in the midst of litigation on behalf of the Turtles against Sirius XM and Pandora -- will file its own class-action suit.

This new suit will make similar claims as Lowery and Michelman's, alleging that the subscription service is not fully licensed for some of the music it offers subscribers, and that the company is not issuing complete royalty payments. One source counters that additional lawsuits won’t add to Spotify’s problems because the company's potential liability remains the same regardless. As well, class-action lawsuits are difficult to implement and maintain, especially in instances where similar suits are ongoing in parallel. The law firm was unavailable for comment.

"We would look to see what crossover there was" with any parallel actions, says Mona Hanna, co-lead counsel on the Lowery/Michelman & Robinson case. “This is not a turf war. It is about protecting the industry and the artists. Let's get this issue resolved.”

The major labels could add to the drama by threatening their own cases against the company as leverage in licensing negotiations. And while Spotify may be the service under fire, all interactive streaming services are at risk on this issue, including Rhapsody, Rdio, Amazon Prime and Apple Music. To that end, sources tell Billboard a similar lawsuit is being prepared against a competing company.

For its part, Spotify is betting that settlement talks currently underway with National Music Publishers’ Assn. (NMPA), and the company's announcement of plans to build a publishing administration system, will placate music publishers and songwriters. The NMPA settlement would allow publishers to claim payments for monies owed to them by Spotify in exchange for waiving any legal claims they might have against the music service over copyright infringement or copyright non-compliance. Any money remaining at the end of the process would likely be divided between the participants by market share. The proposal could also result in a code of best practices intended to plug any holes in royalty distribution going forward, as well as bolstering Spotify's plans for a music publishing database with the aid of the NMPA and other collection organizations.

An executive involved in the negotiations contends that the class-action suits won’t impact the NMPA talks. “Remember, there was a class-action lawsuit against YouTube," that executive tells Billboard. "When the NMPA reached a settlement with YouTube [in 2011], most music publishers opted in instead of pursuing the class action lawsuit, which was eventually dismissed."

At least one company will not participate, believing they can secure better remuneration for their songwriters through an independent deal. At press time, only Warner/Chappell Music had been confirmed to be opting out of the negotiations and going its own way on the issue. Sources suggest that the major's choice to opt out of the NMPA settlement is directly tied into the current licensing negotiations between the three majors and Spotify.

A major issue in negotiations between Spotify and the three majors is the service's free tier, which pays one-seventh as much per stream as its paid tier. Some would like to see the free tier eliminated; others say they will work with the free tier, but will demand a bigger minimum payment this round.

“These lawsuits... increase negotiating leverage over rates on the free tier,” says one major label executive. Another executive counters that Spotify's leverage increases with its revenue, which continues to rise.

The major labels are fully committed to interactive streaming services -- with paid subscribers -- as the industry’s future. Warner Music Group's second quarter saw streaming overtake downloads as its central source of digital revenue, and companies don’t want to short-circuit that growth by engaging in damaging lawsuits against the services. If Spotify were to be held fully liable for each copyright infraction, it could trigger mutually assured destruction, according to one industry participant.

Many in the industry were well aware that a problem with improper licensing and royalty payments existed, but it wasn't until Audiam began matching master recording royalty payment statements against music publishing payment statements that the true extent of the problem became obvious. Depending on who is talking, between 10 to 25 percent of songs interactive on services like Spotify are not properly licensed and/or not distributing royalty payments. Sources tell Billboard that Spotify owes music publishers and songwriters around $25 million, however another estimate puts that figure at $17 million.

"We are committed to paying songwriters and publishers every penny," said Spotify global head of communications and public policy Jonathan Prince in a statement on Monday's news of David Lowery's filing. "Unfortunately, especially in the United States, the data necessary to confirm the appropriate rights holders is often missing, wrong, or incomplete. When rights holders are not immediately clear, we set aside the royalties we owe until we are able to confirm their identities…”

But many take issue with that assessment, contending Spotify and other interactive services knew they had a problem from the beginning but ignored it and did not build the proper systems to manage licensing.

“Spotify blames everyone but Spotify for its infringement, non-payment and non-compliance,” says Audiam founder and CEO Jeff Price. “Its rationale appears to be [that] everyone else caused Spotify to infringe on music as all of us don’t have the 'data.'  This is a misleading statement. First, Spotify does not need to know who wrote a song to determine if a composition is licensed. If Spotify does not know who wrote the song, then it most likely doesn't have a license. Therefore, don’t use the song.” Price points out that Audiam has supplied data to the catalogs that it administers and it still is not being properly paid by Spotify.

“The real issue is that Spotify built limited-to-no systems to get licenses, accept data and make payments,” Price complains. “It took the world’s music without, in many cases, knowing whose music it was, and used it with no licenses and without making payments, similar in many ways to the original Napster.”

Sanford L. Michelman of Michelman & Robinson LLP makes a similar argument. “The underlying issue is Spotify has a business model that is catch-as-catch-can,” he says. “If you are going to take a songwriter's work, then get the permission to do it. It's not a system where if you catch me without permission, [Spotify] will pacify you with some more dollars.” It's not supposed to be about the songwriter catching the service with its hand in the cookie jar, he says. Mona Hanna tells Billboard that the firm's case "is designed with the express purpose of protecting artists' rights and hoping that this result in a change in how Spotify operates."

Concurrently, Spotify has apparently settled with Another Victory (an Audiam client), the publishing arm of Chicago-based hard rock label Victory Records, as the publisher's songs are now available to stream on Spotify. Price says the service is still playing hardball with his company, however, as well as many other publishers and catalogs, including those of Metallica and Bob Dylan. Price claims Spotify is ignoring his communications about getting his company's other clients properly licensed and paid.

Spotify, Warner/Chappell, Sony/ATV and Universal Music Publishing Group declined to comment for this report. Executives at the other streaming services were unavailable for comment.