What happens next? The matter heads back to the Copyright Royalty Board, which will proceed under the guidance laid out by the court. But will the CRB, which now has a new member, hold new hearings or revise its determination based on the evidence it heard during the initial trial? If it sets lower rates, will digital services be able to claw back “overpayments” -- and what might that mean for songwriters? None of the parties involved with the proceeding would comment on the record, but here’s what we know.
The parties involved had 45 days to ask for a re-hearing by the Appeals Court, meaning Sept. 21 was the last day to make that request. Sure enough, indie songwriter George Johnson, who has been particularly vocal on the topic and was the first to initially appeal the Copyright Royalty Board rate determination, has asked for such a re-hearing. Now, the Appeals Court has seven days to make a decision on whether to grant one, and if they decline, then the whole rate determination is void and the entire process heads back to the CRB.
There is a possibility that either the NMPA or Johnson ask for a “stay” to the Appeals Court’s decision while they petition the U.S. Supreme Court to review the ruling. Then it’s a question of whether the Supreme Court decides to hear the case. According to its website, the Supreme Court only accepts 100 to 150 of the more than 7,000 cases it is asked to review each year, and usually only if the case has national significance, might harmonize conflicting lower court decisions, and/or could have precedential value. But if nothing else, appealing to the Supreme Court would further delay the setting and finalization of rates for the period.
What happens if the Appeals Court declines?
If that happens, the parties would have another 45 days to file proposed plans with the CRB on how to satisfy the DC Circuit mandate, according to sources familiar with the process.
Let’s go back. What did the Appeals Court decide?
Perhaps most important, as well as potentially very complicated, the court confirmed that whatever ultimately happens in the rate determination, it will be retroactive back to Jan. 1 2018. Unless the rates stay the same or increase from what the CRB initially set, this retroactive ruling could mean the digital services will be able to claw back some royalty payments.
The court also denied the NMPA’s appeal to eliminate or modify the family and student plans discounts on services like Spotify. Those discounts already provided lower-than-expected overall royalty rates for Spotify, and allowed the digital service to claw back payments to publishers since 2018.
The court also knocked out the CRB’s change to how bundling discounts on prices should be accounted for in royalty payments. In its initial determination in January 2018, the CRB re-applied the way royalty payments for bundled subscriptions had been determined in the past, which was measured by subtracting the prices of the non-music components of the bundle from the overall cost, leaving just the music component’s price. But in its final determination issued in February 2019, long after the trial’s comment period had closed, the CRB instead said the music component should be measured as a standalone entity, with a value assigned comparable to other similar music services. The Appeals Court said this change was unfair, telling the CRB to either provide a fuller explanation of its reasoning for making the change or to take new action on the issue.
Finally, the Court took issue with the CRB Board’s dismissal of a 10.5% “benchmark” rate that had been used in the rate formula since 2008, which we’ll get into below.
Now That We’re Live, How Do We Monetize: A Case Study With Underoath | Billboard Pro Spotlight
Is that all the Appeals Court did?
No, but in order to understand the implications of other parts of the decision, first let’s review the CRB’s initial rate determination for 2018-2022 for services like Spotify’s paid tier, generally the largest source of revenue for labels, publishers, songwriters and artists.
Essentially, the rate formula is calculated by the greater of three distinct buckets of streaming-service money, which the CRB stipulated would rise incrementally between 2018 and 2022: 11.4% of total revenue, rising to 15.1% by 2022; 22% of royalty payments made to labels, rising to 26.2%; and the floor for mechanical royalties, determined as subscriber count multiplied by 50 cents. It currently stands at 13.3% of total revenue or 24.1% of label payments. (For the terms between 2008-2012 and 2013-2017 the total revenue rate remained at 10.5% and the royalty payment rate at 21%, which meant the 2018 determination represented a significant increase.)
To determine the royalty rate, the higher of the first two buckets is chosen, and then the amount of performance royalties paid is subtracted from that chosen bucket. That money is then compared to the mechanical floor bucket, and whichever amount is higher becomes the mechanical royalty pool.
That sounds complicated. Was it ever more complicated than that?
Yes, and that’s another point of contention.
For the previous 10 years, there was an intermediate step within that formula that had existed for 10 years, called the royalty rate cap, or ceiling. In that step, the percentage of money produced by the royalty payment rate -- which, again, was increased from 21% of payments made to labels to 22%, rising to 26.2% by 2022 -- would be weighed against the total number of subscribers to a service multiplied by 80 cents. Whichever amount of money was lower would then become the highest allowable amount for the mechanical royalty pool.
The CRB ruling in 2018 eliminated that intermediate step. But the Appeals Court said that by eliminating it, the CRB had opened a loophole, wherein if the three major labels managed to negotiate a rate increase for themselves, then their corresponding publishing arms -- and all other publishers -- would automatically receive a rate increase, too. And the Court did not like that.
What else did the Court criticize?
It had an issue with the departure from the rate of 10.5% of total revenue for one bucket in the first place. The Court said that that rate -- the result of a settlement between the services and the publishers -- had been negotiated in the free market between a willing buyer and willing seller, and had stood for a decade. Without “a reasoned analysis,” the Court wrote, “we cannot discern the basis on which the Board rejected the [10.5%] rates as a benchmark.” Basically, it argued, the CRB needed to explain why it disregarded something that had been in place for a decade.
Say this goes back to the CRB. Is it back to the drawing board? Or can the CRB judges address the issues with the evidence that’s already been given?
Depends which side you ask. Some publishers are optimistic. “The decision is not as bad as I thought at first,” says the president of a large independent music publisher. Another publishing executive says, “We believe that at least a couple of the issues on remand are procedural and can be resolved quickly and efficiently by the judges.”
Even some streaming service executives say they can see the CRB changing its rate determination based on the evidence it has already heard in hopes of satisfying the Appeals Court.The past has shown that the “CRB judges don’t like to change their minds,” says one executive. “They have lots of procedural tools that they can use to rubber stamp their prior rate settings.”
If the CRB takes that approach, what can be fixed easily?
“The bundle issue only applies to a couple of services, so that can probably easily be fixed” to the satisfaction of the Appeals Court mandate, says the digital executive. The publishing executive agrees: “It seems that the appellate court is looking for further explanation [on how the CRB set its bundling rates], which would not require a new hearing.”
What about the Court’s issue with the dismissal of the 10.5% benchmark?
The Appeals Court said the CRB didn’t adequately explain why it rejected the benchmark, “there was ample evidence introduced to this effect at trial,” a publishing executive says. “The CRB will have to go back and provide a a detailed explanation of the rejection, which should include some of that evidence. A more reasoned analysis, based on the evidence, should resolve this issue.”
What about the elimination of the royalty rate ceiling from the formula? Would putting that step back in satisfy the Court?
“Presumably, if the CRB re-capped the [the amount paid to record labels], that would resolve the issue raised by the DC Circuit,” says a publishing executive. “That may be an easy way to resolve the issue without taking new evidence or a remand hearing.”
Even some streaming service executives think that could be an easy, logical solution for that component. But these changes wouldn’t be so straightforward.
“There is a version of the future that says, ‘Okay, make the fewest changes possible to the determination, consistent with the [Court] ruling,’” says a lawyer for the digital services. “In that world, simply putting the cap back in is an approach the CRB can take. Also, if the Appeals Court didn’t like the reasons the CRB gave for not relying on the [10.5% of service revenue] benchmark, it’ll give another reason. The CRB absolutely could take that approach.”
But, he warns, that way could be difficult. “It’s clear that the [Court] had some very big problems with the CRB’s rate determination, so if the CRB were reading the Court more astutely, they might say, ‘The Judges don’t love our rate determination, I may have to go back to the drawing board.’”
Did the Appeals Court really dislike the rate determination, or is it just seeking clarity on the decisions?
A publishing lawyer cites what he calls a “devastating” paragraph in the Court ruling that lays out the Court’s attitude towards the entire determination: “Worse still, the Board not only stripped away the total content cost caps, but also significantly hiked both the revenue rate and the total content cost rates the streaming services would have to pay.”
The appeals court decision goes on to point out that, since that CRB decision was made after the close of the evidentiary portion of the rate proceeding, the CRB “deprived streaming services of the opportunity to voice their objections to a completely uncapped total content cost prong, or for that matter the interplay between that rate structure and the rate increases.”
Thinking of Selling Your Catalog? How to Plan the Smart Way | Billboard Pro
What are the chances that the CRB will open new evidentiary proceedings?
“I think it’s less a ‘they have to do it’ and more a ‘they definitely can do it if they want to’ kind of thing,” says the streaming service lawyer. “If I were a betting man, I’d say less than 50% that they do, but probably not much less.”
Another digital service executive thinks that an evidentiary hearing is the only way forward. The CRB judges “could try to pivot their findings by making minor adjustments, but the Appeals Court left them little room to do so,” says the executive.
In fact, the Appeals Court all but instructed the CRB to re-open the process for new evidence, saying in its ruling, “if the [CRB] wishes to pursue its novel rate structure, it will need to reopen the evidentiary record.”
Now that more than three years have passed since the CRB’s initial announcement of the rate determination, what other factors will come into play?
One of the assumptions that was made by the CRB in its determination was that record labels likely would accommodate the higher publishing rates by lowering the royalty rates they demand from digital services for master recordings, the digital-service executive points out. “The Circuit Court decision really forces the CRB to justify if their assumption was correct,” he says, adding he is skeptical that the evidence will back up their assumption. With recent announcements about new deals between services and some major labels, it should be pretty easy to point to evidence one way or another.
How long will all of this take?
That all depends on what approach the CRB takes. If the CRB doesn’t allow for new evidence, then the digital-service lawyer predicts the decision would come back sometime in the spring or summer. This isn’t the only thing on the CRB’s plate now, however: The Board is currently involved in the Web V rate trial and has a statutory deadline to turn in that decision by April 2021. So if the CRB decides to hold new evidentiary proceedings, he predicts, a final rate determination might not be made until late 2021. Just after that, the CRB is expected to begin the process of setting the rates for the following period, 2023-2027.
Shouldn’t the CRB just address the entire period from 2018-2027?
“It’s impossible to say whether that could happen or not, but there is a lot coalescing now between the CRB proceedings and everything happening around the Mechanical Licensing Collective,” says the streaming executive, noting that it has to start offering its blanket mechanical license on Jan. 1, 2021. “These circumstances put a lot of pressure on everyone to work things out.”
In the interim, what royalty rate should the services be paying? And what will all of this mean for publishers and songwriters?
If the services continue paying the current rates, and the CRB comes out with lower rates than those used for 2018-2020 royalty payments, digital services could demand the return of the difference, retroactive to Jan. 1, 2018. If the publishers have to give back money, they could try to reconcile songwriter accounts, too, though whether they would is unclear.
The only outcome that doesn’t result in the services clawing back overpayments or forking out money for underpayments is if the CRB somehow manages to come up with the same rates and get the Appeals Court to accept them -- which seems unlikely. So while the publishers liked the retroactive component and were annoyed it had been part of the digital services’ appeal, it now represents a double-edged sword hanging over their heads.
Does the Appeals Court decision affect Apple?
Not directly, because Apple didn’t appeal the CRB determination. Apple is believed to have direct deals, so it doesn’t even use the compulsory license. If its publishing rates are tied to the compulsory license rate, however, a rate change could affect what Apple pays.
One more thing: Should we keep in mind that line from the Motörhead song “Ace of Spades,” “...and don’t forget the Joker?”
Yes, of course: One wild card has yet to come into play as these proceedings move forward. After the CRB issued its rate determination on Feb. 5, 2019 in a split decision with one dissenting judge, the Chief Copyright Royalty Judge Suzanne Barnett was replaced by Judge Jesse Feder, who previously worked in the U.S. Copyright Office. Who knows how the new judge will see these issues?