Publishing

Appeal Ruling on Publisher Royalty Rate Hike Looks to Favor Digital Services: Sources

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Spotify, Amazon, Pandora and YouTube have been handed a procedural victory on their appeal to a 44% royalty rate increase for songwriters and publishers, sources tell Billboard.

The U.S. Court of Appeals in D.C. that reviewed the digital services' appeal on the Copyright Royalty Board's (CRB) mechanical rate determination has thrown out the rate structure cobbled together by a majority of the board's three judges, Billboard has learned.

The ruling, which is under seal, could wash away the rate increase that the CRB judges -- in a split 2–1 decision -- had awarded songwriters and music publishers in January 2018. The CRB ruling was finalized in February 2019 and appealed by digital services a month later on grounds of procedural issues with how the CRB determined the rates. The appeal court ruling -- which sources say vacated part of the CRB decision and remanded others parts back to the CRB Judges -- likely supplied directions for how to deal with those procedural issues. Yet some sources indicate the appeal court ruling doesn't necessarily prevent the CRB from issuing the same rates, as long as it complies with the Court of Appeal judges' guidelines.

Before the new rate determination, publishers were earning a collective 10.5% of each digital service's revenue. But starting Jan. 1, 2018, that grew to 11.1% with incremental rate increases annually over a five-year period, culminating at 15.1% through 2022. That rate, which currently stands at 13.3% for 2020, is known as the headline rate because it's considered there easiest way to describe the payment owed to rights holders in a complex three-step formula that determines the final rate.

At the heart of the digital services' appeal is that the CRB judges who had crafted the rate determination took a mixed-and-matched approach in their ruling, taking parts from the various parties' arguments for what the rates should be. Some industry executives have criticized that at as a Frankenstein's monster approach, saying the CRB judges cherry-picked different suggestions -- something the digital services' appeal says is beyond the judge's mandate. The dissenting CRB judge, David R. Strickler, also stated his opposition to that process in his response to the majority's ruling.

The digital services also challenged the CRB’s decision to retroactively apply the rates back to Jan. 1, 2018, the beginning of the new five-year rate period; how it structured its rate for services that are bundled with another service or product; and the judge's method of calculating a service’s revenue.

Once the services appealed the CRB ruling, so too did the National Music Publishers' Association, even though the trade organization was mostly pleased with the rate trial's results. It did not, however, like the generous family and student discounts allowed under the CRB ruling and appealed that component of the decision. Those discounts allowed Spotify to actually have a rate decrease in the first year of the term as it clawed back 2018 over payments to publishers in 2019. It's unclear how those discounts impacted the other services.

At the center of the digital services' appeal was a complaint that the CRB judge majority “did not explain why it was appropriate to combine a key element of one expert's model with the result of a different expert's model, particularly when the two models contained incompatible structures, made different assumptions, and used entirely different data inputs.” Moreover, because the CRB judges adopted a combination of approaches for the rate structure, "no party had a chance to address or rebut because the majority invented them after the record has closed,” the filing continued. They asked the appeal court to vacate the CRB decision.

It appears that they got what they asked for, as one source says the Court of Appeals “vacated and remanded the main rate determination;" while another source says the Circuit Court “vacated most of Phonorecords III, including tossing out the rates and structures.”

But other sources say the appeal court remanding was based largely on procedural grounds, and didn’t rule on whether the rates were wrongly determined by the CRB. "The appeal court remanded for procedural issues or further explanation," says a source. That source says the decision doesn't prevent the CRB from again determining the same rates and terms that are in effect now.

It's unclear what happens next, but since most of the parties' arguments over proposed rate models have already been made, it’s unlikely that the entire process would have to start over. More likely, the CRB would have to go back to the close of the trial component and build a new rate determination using guidelines or directions from the Appeals Court.

If publishers and songwriters want to look at the bright side of things, this ruling means it provides another opportunity to achieve the higher rates awarded in the first go around. This time, hopefully, backed up with firmer legal standing.

None of the parties involved responded to requests for comment.