‘Confusion & Inconsistency’: Spotify, Amazon Make Case Against Royalty Board Rate Determination
Spotify, Amazon Music, Google Play and Pandora have filed their appeal of the Copyright Royalty Board's mechanical rate determination.
Spotify, Amazon Music, Google Play and Pandora have filed their appeal of the Copyright Royalty Board’s mechanical rate determination, which will see music publishers and writers enjoy a 44% rate increase by 2023. The digital services filed their appeal late Wednesday in the U.S. Court of Appeals for the D.C. Circuit.
The DSPs are asking the appeals court to examine whether the CRB made numerous legal errors while adopting a rate structure that was not proposed — and not justified by explanation or evidence — thereby depriving the services the right to rebut the logic on which the determination is based.
Moreover, the services also claim that the CRB’s decision to retroactively apply the rates to Jan. 1 2018 is invalid, again saying that its mandate doesn’t include the authority to do that. Likewise, the digital services filing claim that the CRB’s subsequent revision of the service revenue definition (what revenues would be counted in order to determine the percentages used in the mechanical rate formula) in the final determination was invalid because it didn’t have the authority to revise the one it had adopted in its initial determination.
Following a rate trial, as part of the rate-determination process, the Copyright Royalty Board eventually issues its initial determination, which occurred in January 2018. That allows for the participating parties to comment on the determination; it also ultimately sends it to the U.S. Register to review to ensure it followed copyright law and other regulations in making its determination.
After the Register approves the ruling, it is then published as a final determination in the Federal Register. That occurred on Feb. 5, 2019 and interested parties had one month to appeal.
However, the determination was the result of a split decision with two judges setting the rates while a third, Judge Strickler, dissented, saying that the rate structure and process was flawed.
“In sum, it is difficult to imagine a rate-setting decision more riven with confusion, inconsistency, and under-explanation,” according to the digital services appeal. “For the foregoing reasons [listed in the appeal], the Court should vacate the Final Determination and remand for further proceedings as to the royalty rates and rate structure. The Court should also order the reinstatement of the ‘Service Revenue’ definition for bundled subscription offerings from the Initial Determination and order that the earliest date the post-remand Phonorecords III rates and terms can take effect is April 1, 2019.”
In fact, the services appeal filing reads like a cut-and-paste job from CRB Judge Switzer’s dissenting opinion, embellished by legal citations from their own research, notating past rulings by the court that apply to the numerous objections to the determination raised by the services in their appeal. At the heart of the services’ appeal is their contention that the CRB took what some call a “Frankenstein monster-building approach” in arbitrarily pulling together a rate formula that mixed and matched different proposals set forth by the various parties during the rate trial.
The [CRB Judges] “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, the digital service filing complains,” according to the digital services filing.
“The fatal flaws in the Majority’s mixing-and-matching approach are further demonstrated by the Majority’s adoption of arbitrary bounds to its ‘zone of reasonableness’ that were not supported by any expert model or any other evidence,” the filing continues. Moreover, because the CRB judges adopted a combination of approaches for its rate structure, “no party had a chance to address or rebut because the majority invented them after the record has closed. This court has reversed the board and other agencies for similar errors,” which is why it should do so in this instance, according to the filing.
When a party is “afforded no opportunity during the hearing to test [or] examine the methodology the [agency] ultimately adopted,” the agency decision must be vacated, the filing states.
Despite numerous publicly stated warnings from National Music Publishers Association (NMPA) president and CEO David Israelite that the services shouldn’t appeal the ruling — which publishers and songwriters viewed as a victory because it gave them higher rates — the digital services filed notice in March of 2019 that they were going to appeal.
Consequently, the NMPA said it too would file an appeal based on what it didn’t like about the rate formula revisions in the new determination. That appeal was also filed last night. Finally, George Johnson, a Nashville-based indie songwriter who participates in most of the Copyright Royalty Board proceedings, followed up on his notification of intent to appeal by actually filing that appeal last night.
In making its rate determination, the CRB Judges ruled that the headline rate of the mechanical rate formula should have a phased-in incremental increase from the previous 10.5% level to 15.1% over the five-year period, while another bucket — the royalties paid to the record labels and artists — would increase similarly from 21% of the royalties paid to record labels each month to 26.1% of those royalties.
Whichever of those two royalty buckets produces more serves as the all-in royalty amount that will be paid to music publishers. That tally includes the performance royalties to be paid to the U.S. performance rights organizations like, ASCAP and BMI. In its determination, the CRB dropped a step from the formula to make it simpler to comprehend, much to the chagrin of the DSPs. Previously, the total cost of content royalties had a ceiling whereby if the royalties paid to the labels became the bucket that produced the greatest all-in rate for publishing, that amount was measured against a bucket created by multiplying total number of a service’s paid subscribers by 80 cents. Whichever was lower became the going-forward bucket in the formula.
Usually, the 80 cents-per-subscriber bucket is the larger amount, which means it rarely came into play, according to sources. But dropping that step from the formula is cited as one of the reasons why the CRB’s rate determination is flawed and needs to be vacated, according to the services’ appeal.
In dropping the ceiling, the digital services charged that the CRB majority judges abandoned the headline rate-setting responsibility to the record labels. Since record labels are not under a compulsory license and not subject to rate court in licensing its repertoire to on-demand digital services, in future “free market” negotiations the major labels could insist on higher rates, which will also ensure higher mechanical rates for publishers, including the ones they own, since the publishing rates are tied to what the labels get.
“When that prong controls, the mechanical royalty rate will increase whenever record labels demand and obtain a higher royalty rate for sound recording rights,” the filing states. Dissenting “Judge Strickler also concluded that, by eliminating the total cost of content cap, the Majority [CRB Judges} had not determined the statutory rates but rather had improperly ceded rate-setting authority to private record companies…He described the Majority’s assumption that sound recording royalties would eventually decrease to accommodate the increased payments to Copyright Owners as ‘a combination of naiveté and wishful thinking.'”
Getting back to the formula (buckle up), once the all-in bucket is determined, the performance royalties are subtracted, leaving a bucket for mechanical royalties. But the rate formula is not done yet. Then, the formula multiplies the service’s number of subscribers by 50 cents for each one to produce yet another bucket, and whichever one is greater between the bucket calculated by subtracting the performance royalties and the bucket created by the 50 cents per subscriber becomes the mechanical bucket formulas.
But the latest rate determination by the CRB granted the DSPs membership discounts, in certain instances, saying that a student plan should only count as half a subscriber, while a family plan should only count as one and a half subscribers — no matter how many family members are included in the plan. Those discounts — which the services voluntarily grant as part of their business model — are what the NMPA and the Nashville Songwriters International Assn. have appealed in their filing to the court, saying it erred in granting those discounts.
Other than that, the “Final Determination is for the most part supported by substantial evidence and is not arbitrary and capricious,” according to the NMPA/NSAI filing. “At every step, the Board provided detailed analysis of the parties’ competing proposals and the record evidence in support of those proposals.”
But in making the decision to allow for the membership discount, the NMPA filing notes that the CRB judges based their ruling on a “low willingness to pay” for some consumers who might not purchase a streaming subscription. Yet, the NMPA notes that no evidence on whether any of the discounted plans was supplied to the court to justify that decision. That’s why the NMPA/NSAI appeal says the court erred in allowing the discount and is asking the appeals court to eliminate the subscription discounts from the final rate determination.
These discounts have already become a factor, in that Spotify has applied them to the rates paid using the old formula in 2018 and found that, according to its math, it had overpaid publishers. It announced that it was clawing back that overpayment, infuriating publishers who were already angry about the rate determination appeal from the services. While the DSPs appeal filing is questioning the validity of the CRB retroactively applying the new formula back to Jan. 1, 2018, a footnote in the appeal says that Spotify, which has benefited from the retroactive application of the CRB adjusted rate formula, is not participating in that component of the services’ objection.
The digital services appeal filing lists lawyers from the firms of King & Spalding in San Francisco for Google; Weil, Gotshal & Manges in New York for Pandora; Mayer Brown in Washington and New York and Latham & Watkins in San Francisco and New York for Spotify; and Kellogg, Hansen, Todd, Figel & Frederick, in Washington for Amazon. The NMPA/NSAI filing lists lawyers from Weiss, Rifkind, Wharton & Garrison in Washington and from Pryor Cashman LLP in New York.