Latin Music Week

What Will Spotify's $43 Million Class Action Settlement Mean For Songwriters and Publishers?

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Daniel Ek, CEO and Founder of Spotify, speaks at a media event on May 20, 2015 in New York City. 

All the services will have to address this issue, according to David Lowery.

On Friday (May 26), Spotify reached a settlement in a putative class action lawsuit, consolidated out of two lawsuits brought by Melissa Ferrick and David Lowery, involving songwriters and publishers whose compositions the service streamed without a license. The settlement, which still needs to be approved by the court, calls for Spotify to set up a $43.45 million fund to compensate rightsholders for past infringement, and allows the company to put behind it a potential obstacle to an initial public offering expected to come later this year.

The deal could be a win for both sides. Since it’s an opt-out settlement, songwriters and publishers who own works registered with the U.S. Copyright Office are assumed to be included unless they say otherwise -- which means that Spotify will reduce its risk of future lawsuits. The publishers and songwriters in the class will share in the $43.4 million fund, which will be divided up according to a formula based on the number of times a work was streamed. The information submitted by class members will become part of a database that Spotify uses to pay royalties in the future.

No one knows how much money will be collected by individual songwriters and publishers, since no one knows precisely how many compositions Spotify didn't license, or how many of them are registered with the Copyright Office. But rightsholders will almost certainly collect more than they would have if Spotify had been paying the statutory royalty rate, says Henry Gradstein, a partner at Gradstein & Marzano who served as interim co-lead counsel for rightsholders along with Susman Godfrey partner Steven G. Sklaver. In March 2016, the NMPA reached a private settlement with Spotify for an estimated $30 million.

Perhaps just as important, the settlement represents an important step toward resolving how Spotify deals with the issue of mechanical royalties -- and commits it to doing so in a way that could help other services.

Like all on-demand services, Spotify needs to license compositions, as well as recordings. In order to do so, it has to license public performance rights from from performing rights groups like ASCAP, plus mechanical rights from publishers themselves. Licensing mechanical rights doesn't necessarily involve negotiation, since services can use the statutory license by filing a Notice of Intent (NOI) with the Copyright Office and then paying a set royalty to the publisher.

Although streaming services say that poor record keeping on the part of the music business makes it difficult to pay mechanical royalties accurately, they haven’t filed NOIs for many of the compositions they stream. They effectively decided to stream first and ask questions later, a strategy that has helped them attract users but also alienated some creators and rightsholders who haven’t been paid for the use of their work.

This settlement requires Spotify to commit resources to solving that problem. It calls for the hiring of a third-party Settlement Claim Facilitator, the creation of an audit procedure, and the formation of a "best practices group" to work on tools to solve the problem. Perhaps most significantly, it requires Spotify to support an industry-wide effort to digitize Copyright Office registrations in order to make it easier to identify rightsholders. Some of the requirements are vague, but they still represent a commitment to sorting out the paperwork required to pay royalties properly.

"Spotify says they’re on a course to fix this problem and this is one step in that process," Gradstein says.

The case being settled is known as "Melissa Ferrick v. Spotify U.S.A. Inc.," and was consolidated out of putative class action lawsuits filed by Ferrick and Lowery. "The settlement process was extremely intense," Sklaver says. "We’re talking about seven months of negotiation, which included two in-person mediations, plus meetings and exchanges of data."

The problem goes beyond Spotify -- most of the on-demand streaming services face similar issues. Since statutory damages for copyright infringement can run as high as $150,000 per work, on-demand streaming services have built businesses atop the legal equivalent of weapons of mass destruction, as one industry lawyer put it. Experts believe that many of the unlicensed compositions on streaming services are relatively unpopular, and few individual songwriters are likely to sue. But since damages for copyright are assessed per work, not per use, a class-action lawsuit could significantly damage a streaming service’s finances.

The other major case that involving the same issue was filed against Rhapsody in March 2016 by the law firm Michelman & Robinson on behalf of Cracker frontman Lowery, an outspoken advocate of creators rights. (Lowery was the named plaintiff in the second putative class action lawsuit against Spotify that was consolidated into Ferrick's, but is no longer involved.) As in the Spotify case, a class has not yet been certified by the court.

Although Spotify’s expected public offering motivated the company to put this issue behind it quickly, other streaming services need to deal with it as well. "We’ve gone from people being unaware that this is a problem," says Lowery, who has helped bring attention to the issue, "to all the services having to address this."