In the US, the advance of music streaming has revealed the limitations of the existing copyright system, which was still entirely focused on the record economy. In particular, the mechanical rights that had to be obtained by labels when a musical work was recorded defied the logic of music streaming. This caused legal uncertainty not only for the rights holders, but especially for the users of the rights, i.e. the music streaming services, which soon had to deal with billion-dollar lawsuits for copyright infringement. The response to this was the Music Modernization Act, which was enacted in 2018 and established legal certainty in the US for all players in the music streaming economy.
The Music Streaming Economy – Part 13: The Music Modernization Act of 2018
Historical Context
Originally, the mechanical right was created in the US Copyright Act of 1909 so that the then young and economically emerging phonographic companies had to pay a fee to music publishers to be allowed to record their music. The law required phonogram producers to pay US $2 to rights holders for each reproduction of a non-musical dramatic work. Once a label had paid this mechanical licence fee, any other label could produce a cover version of the musical work without further licensing.[1] In Europe, instead of direct compensation between the labels and music publishers, a different approach was chosen by setting up special collecting societies for the licensing of mechanical rights, such as the Mechanical Copyright Protection Society (MCPS) in the United Kingdom in 1911 or STEMRA in the Netherlands in 1936.[2]
The situation in the USA was complicated that labels and rights holders could also agree on a lower licence fee than the statutory one. In order to collect the mechanical royalties, the National Music Publishers Association (NMPA) founded the Harry Fox Agency (HFA) in 1917, which also managed the publishers’ synchronisation rights.[3] This licensing and collection system worked well in the US as long as royalties were tied to the reproduction of sound recordings. However, the digital revolution complicated the situation. Digital downloads could still be incorporated into the system because there was still a link to reproduction and the Copyright Royalty Board (CRB), consisting of a panel of three judges, set the licence fee for downloads. However, early forms of music streaming caused problems. These could be solved, sind both MusicNet and Pressplay were owned by the major companies, and the settlement of mechanical rights between in-house labels and music publishers could be handled internally.[4] With the rise of non-interactive music streaming services, such as Pandora, streaming was considered a public performance analogous to broadcasting and it was not necessary to pay for mechanical rights. However, a new collecting society, SoundExchange, had to be created for this purpose because there is no compensation for the use of music recordings on the radio in the US.[5]
The Rightsholders Sue Spotify
The rise of Spotify and other on-demand streaming services caused the existing system of licensing and payment for mechanical rights to collapse. Labels no longer felt responsible for paying for the use of their work in a streamed music recording, and music publishers, fearing a massive loss of revenue, threatened legal action against streaming services for unauthorised use of their music. Spotify, which was familiar with the European system of Mechanical Rights Organisations (MROs), believed it could meet its obligations by entering into a licensing agreement with the Harry Fox Agency.[6] Spotify was sure that all the necessary rights had been licensed in the US. However, Spotify had failed to take into account that the Harry Fox Agency (HFA) does not represent the entire global repertoire like its European counterparts in the US, but only those rights owners who have signed a rights administration agreement with the HFA.[7] After its launch in the US, Spotify entered legally uncertain territory, as the Swedish company soon found out the hard way. On 28 December 2015, David Lowery, the frontman of two US rock bands, “Camper Van Beethoven” and “Cracker”, filed a lawsuit in a Californian district court against Spotify for copyright infringement, claiming that the company had failed to clear the rights to his compositions in the US and to apply to the US Copyright Office for a compulsory licence for his songs. As his music was distributed by Spotify to 75 million users, Lowery sought damages of at least US $150 million for the use of the mechanical rights in his songs embodied in sound recordings.[8] Spotify’s response from its head of communications, Jonathan Prince, was evasive, but also reflected the fragmented legal situation in the US for the licensing of mechanical rights: “We are committed to paying songwriters and publishers every penny. […] Unfortunately, especially in the United States, the data necessary to confirm the appropriate rightsholders is often missing, wrong, or incomplete. When rightsholders are not immediately clear, we set aside the royalties we owe until we are able to confirm their identities. We are working closely with the National Music Publishers Association to find the best way to correctly pay the royalties we have set aside and we are investing in the resources and technical expertise to build a comprehensive publishing administration system to solve this problem for good.”[9]
Nevertheless, shortly afterwards, in early January 2016, Spotify faced the next similar lawsuit. On 8 January 2016, US music publisher and songwriter Melissa Ferrick filed a copyright infringement lawsuit in the US District Court in Los Angeles, alleging that Spotify had been playing and distributing her compositions without a licensing agreement for the past three years. In the lawsuit, she criticised Spotify for failing to “[…] to license all of the songs embodied in phonorecords which it ingests and distributes by means of interactive streaming and temporary downloads.”[10] This relates to the unlicensed mechanical rights of musical works embodied in the sound recordings. According to the lawsuit, Spotify should have to US $200 million as compensation to Ferrick. Ferrick’s lawyers outlined in the lawsuit how Spotify should have acted in licensing the mechanical rights. The company could have either licensed the rights to the compositions directly from the rights holders, specifically Melissa Ferrick’s publishing company, or filed a Notice of Intent (NOI) for a compulsory licence with the US Copyright Office under Section 115 of the US Copyright Act – 30 days before the music recording was distributed – but Spotify failed to do so.[11] Instead, Spotify delegated its licensing obligations to the Harry Fox Agency (HFA), not realising that the HFA did not hold all the mechanical licences in the US. Although Spotify subsequently filed NOIs for the aforementioned songs, it missed the statutory deadlines.[12]
The lawsuit’s argument is both revealing and an indictment of the US licensing system for mechanical rights. According to the lawsuit, Spotify should have either cleared the mechanical rights for millions of songs individually with the rights holders before launching in the US, or alternatively applied for “notices of intent” for all those songs. Either would have been a huge administrative burden and would have massively delayed, if not made impossible, Spotify’s launch in the US. Copyright rules can thus become a market entry barrier for companies outside the US. In May 2016, the pending Lowery and Ferrick lawsuits combined them into one case because the allegations were the same.[13] This also improved the chances of an out-of-court settlement, which was reached between Spotify and the plaintiffs at the end of May 2017. Spotify agreed to set up a US $43.4 million fund to compensate songwriters and publishers whose mechanical rights had not been correctly licensed.[14] Shortly before, Spotify had also reached a US $30 million deal with the National Music Publishers’ Association (NMPA) to avoid claims of unpaid royalties for the mechanical rights of NMPA members. Like the Lowery-Ferrick case, Spotify agreed to set up a US $30 million compensation fund over two years, which was to be automatically extended for another two years in 2019.[15]
If Spotify thought it had put the issue of unpaid mechanical rights behind it, it was very much mistaken. The dust had not yet settled when, in July 2017, songwriter and co-founder of “Frankie Valli and The Four Seasons” Bob Gaudio filed a lawsuit against Spotify in a Nashville district court over unpaid mechanical royalties.[16] Music publisher Bluewater Music Services Corporation joined the lawsuit on the same day.[17] The plaintiffs’ arguments were similar to those in previous lawsuits that Spotify had just settled out of court, but Spotify went on the offensive. In a counterstatement, the company’s lawyers questioned whether any mechanical rights royalties should be paid for streams at all, arguing that streaming music is more like listening to the radio and therefore a public performance covered by already licensed rights: “In short, the act of streaming does not reproduce copies of sound recordings or musical compositions, and equally does not distribute copies of either sound recordings or compositions.”[18] Spotify did not object to the contradiction, having almost recognised with an out-of-court settlement that it had not paid for the mechanical rights. The other side’s lawyers were quick to point this out.[19]
The US-Congress Intervenes
However, the new legal interpretation of a stream took the proceedings to a new level, which now also called for political and legislative action. On 21 December 2017, Congressman Doug Collins introduced the Musical Works Modernization Act (MWMA) in the House Judiciary Committee.[20] All parties agreed that they needed to find a solution to the problem of licensing mechanical rights quickly. The new legislation set up a state-run non-profit organisation to build a database for licensing mechanical rights in the USA. This would be a point of contact for streaming services to clarify mechanical rights. In return, streaming services would be obliged to pay a blanket royalty fee for the use of mechanical rights to the new licensing agency, without having to obtain the consent of the rights holders. However, streaming services would still be able to negotiate lower fees directly with the rights holders if they wanted to.[21]
The bill was pushed forward by both Republicans and Democrats in the US Congress in a rare show of unity. To this end, the Musical Works Modernisation Act (MWMA) was linked to two other legislative initiatives: the CLASSICS Act,[22] which aims to provide consistent copyright protection for music recordings made before 1972, and the Allocation for Music Producers Act, which is intended to allow music producers, sound engineers and sound mixers to participate in SoundExchange distributions.[23]
On 25 April 2018, the entire legislative package, now known as the Music Modernization Act 2018, was approved by the US House of Representatives and forwarded to the Senate.[24] This was followed by public hearings with representatives of the affected music streaming services and satellite radio stations, as well as the major rights holders, held on 15 May.[25] Despite opposition from US satellite radio giant SiriusXM and owner of the non-interactive music streaming service Pandora,[26] the Music Modernization Act was passed unanimously in the Senate on 19 September 2018.[27] President Donald Trump signed the new law on 11 October 2018, in a rare show of unity with Republican and Democratic Congress members, as well as musicians and music industry representatives, in the Oval Office of the White House, as a press photo shows.[28]
In addition to the creation of a not-for-profit government licensing agency that was launched on 1 January 2021 as The Mechanical Licensing Collective (MLC) in Nashville, Tennessee,[29] the extension of mechanical rights to interactive music streaming was a particularly important result of the new legislation. The Music Modernisation Act clarified that an interactive music stream implies mechanical reproduction and must therefore be compensated.[30] I think Morrow & Nordgård are correct if they consider the Music Modernization Act as a win-win-situation for both rights holders as well as music streaming services.[31] Mechanical rights owners now receive clearly regulated compensation, and music streaming services have legal certainty in return. The importance of this legal certainty is demonstrated by the lawsuit filed by Wixen Music Publishing against Spotify on 29 December 2017,[32] because the bill of 21 December stipulated that the law would apply retroactively until 1 January 2018. The lawsuit therefore had to be filed before this deadline to prosecute Spotify for past copyright infringements. Founded in London in 1978 by Randall Wixen, the music publisher represents a catalogue of more than 2,000 composers and songwriters, including superstars such as Neil Young, The Doors, Tom Petty and the Black Eyed Peas.[33] With this illustrious group of rights holders behind it, Wixen Music Publishing filed a copyright infringement lawsuit in a Californian district court, seeking US $1.6 billion in damages for Spotify’s use of its rights catalogue.[34] Without the Music Modernisation Act, this very promising lawsuit would have set a precedent and other music publishers would have joined Wixen Publishing, threatening not only Spotify’s IPO in April 2018, but its very existence. Nevertheless, Spotify had to dig deep into its pockets once again to settle the lawsuit out of court, even though the settlement of 20 December 2018 was not made public.[35] Finally, at the end of June 2019, Spotify also managed to reach an out-of-court settlement with Bob Gaudio and Bluewater Music Publishing to end the 2017 copyright lawsuit.[36] A lot of money will have flowed here too.
The Mechanical Licensing Collective
As soon as the Music Modernisation Act came into force, the struggle over the level of compensation and the distribution of royalties began. The first step, however, was the creation of the Mechanical Licensing Collective (MLC), which the Act requires streaming music services to pay for the use of mechanical rights, and which administers and distributes the money. The US Copyright Office was responsible for its implementation, which immediately became the target of lobbying by the major music publishers and the National Music Publishers’ Association (NMPA), interest groups representing musicians and individual celebrity musicians.[37] However, it quickly became clear that the music industry’s publishers would have the say in the new licensing agency. In July 2019, the Copyright Office approved the National Music Publishers’ Association’s (NMPA) concept for the establishment of the Music Licensing Collective (MLC), which is naturally dominated by the music publishers Universal, Sony and Warner. The influence of the music publishing industry on the MLC can already be seen in the composition of the first board, which includes Sony/ATV Publishing, Warner/Chappel Music, Universal Music Publishing Group and the major indie music publishers such as BMG, Peermusic, Concord, Kobalt, Big Machine and Pulse, as well as representatives of some smaller publishers.[38]
However, Spotify and Amazon had filed a legal challenge in March 2019 against a decision by the US Copyright Royalty Board (CRB) on 27 January 2018, which set the rates for mechanical rights compensation for the next five years (the Phonorecord III provision). NMPA president David Israelite went so far as to say that “[…] Spotify and Amazon have declared war on the songwriting community by appealing that decision.”[39]
What was at stake? The three-judge panel of the CRB had set an overall increase of 43.8 per cent in the mechanical rights fee for the years 2018 to 2022, from 10.5 per cent in 2018 to 15.1 per cent in 2022.[40] This primarily affected music streaming services, which until the Music Modernisation Act, as we have seen, operated outside the system which previously only affected labels and music publishers. It can be assumed that these two players negotiated lower fees in accordance with the law, as labels and music publishers are often part of the same company. The on-demand streaming services felt that the comparatively large increase in CBR fees was disproportionate. Apart from Apple Music, which did not join the appeal, the other streaming services, notably Spotify and Amazon, acted against the CRB ruling.
Although it was the right of the streaming services to appeal the ruling, it was not only the music publishers and music industry lobbies that publicly campaigned against Spotify & Co. 90 songwriters also wrote an open letter to Spotify CEO Daniel Ek, saying they felt hurt and disappointed because he and his company had always presented themselves as allies of the creatives. The appeal against the CRB ruling would now prove the opposite and can be seen as an attempt to divide the songwriting community.[41]
In any case, the appeal delayed the entry into force of the new tariffs, which further exacerbated the conflict. It was not until the beginning of July 2022 that the CRB rejected the music streaming services’ appeal and confirmed the Phonorecord III decision from 2018.[42] After the streaming services had to pay US $424.4 million to the Mechanical Licensing Collective (MLC) in 2021 for previously unpaid mechanical rights royalties, they had to pay again. In total, the music streaming services in the USA had underpaid rights holders by US $418.8 million for 2021 and 2022, with US $281 million relating to mechanical rights and US $137.8 million to performance rights. At the same time, the MLC calculated that the on-demand streaming services had overpaid royalties for the mechanical right by US $28.8 million between 2018 and 2020, of which US $17.4 million went to Apple Music, US $7.4 million to Amazon Music, US $3.7 million to Spotify and US $2.8 million to YouTube Music.[43]
This put an end to the controversy over the interpretation of mechanical rights in the US, and the negotiations between music publishers and streaming services for the CBR’s Phonorecord IV provision proceeded calmly, resulting in an agreement that the mechanical rights tariff will be set at 15.35 per cent, with a gradual adjustment until 2027.[44] However, Spotify tried to avoid the tariff by arguing that its premium music offerings were bundled with podcasts and other content, and therefore a much lower tariff should apply. This brought music publishers in the US to the barricades and led to a lawsuit by the Mechanical Licensing Collective (MLC) against Spotify for underpaying rights holders.[45]
Regardless of the outcome of these proceedings, the new system of compensation for mechanical rights by streaming services, which is based on the Music Modernisation Act, was established for the long term and opened up a new source of income for music publishers and the music authors they represent. This provides the publishing sector with additional income to the historically anchored payments made by labels to music publishers for the mechanical reproduction of sound recordings and downloads, for which the rate was increased from US c9.1 to US c12 per track in May 2022.[46] Overall, the Music Modernisation Act has resulted in significantly more money flowing into the music publishing sector, which is also confirmed by the MLC’s announcement that since its creation in 2021 until March 2024, US $2 billion has already been distributed to rights holders.[47]
Ennotes
[1] Peter Tschmuck, 2021, The Economics of Music, 2nd edition, Newcastle upon Tyne: Agenda Publishing, pp 74-75.
[2] Ibid., p 75.
[3] Ibid.
[4] Serona Elton, 2019, ” Mechanical Licensing Before and After the Music Modernization Act”, Journal of the Music & Entertainment Industry Educators Association, vol. 19(1), https://doi.org/10.25101/19.1.
[5] Tschmuck, 2019, Economics of Music, p 97.
[6] Billboard, “Harry Fox Agency Inks Deal With Spotify For Publishing Licensing, And More”, July 18, 2011, accessed: 2024-09-09.
[7] Guy Morrow & Daniel Nordgård, 2022, “The Music Modernization Act: Mechanical Copyright in the Age of Music Streaming”, in: Guy Morrow, Daniel Nordgård & Peter Tschmuck (eds), “Rethinking the Music Business. Music Contexts, Rights, Data, and COVID-19, Cham: Springer Nature Switzerland, p 175.
[8] Lowery v. Spotify USA Inc., Class Action Complaint for Damages and Injunctive Relief, US District Court for the Central District of California, Case 2:15-cv-09929, December 28, 2015.
[9] Cited in Billboard, “Spotify Hit With $150 Million Class Action Over Unpaid Royalties”, December 29, 2015, accessed: 2024-09-09.
[10] Ferrick v. Spotify USA Inc., Class Action Complaint for Copyright Infringement, US District Court for the Central District of California, Case 2:16-cv-00180, January 8, 2016, p 9.
[11] Ibid., p 2.
[12] Ibid., p 3.
[13] Billboard, “David Lowery and Melissa Ferrick’s Lawsuits Against Spotify Get Combined”, May 24, 2016, accessed: 2024-09-09.
[14] Billboard, “What Will Spotify’s $43 Million Class Action Settlement Mean For Songwriters and Publishers?”, May 30, 2017, accessed: 2024-09-09.
[15] Billboard, “Spotify and Publishing Group Reach $30 Million Settlement Agreement Over Unpaid Royalties”, March 17, 2016, accessed: 2024-09-09.
[16] Gaudio v. Spotify USA Inc., Complaint for Copyright Infringement, US District Court for the Middle District of Tennessee, Nashville Division, Case 3:17-cv-01052, July 18, 2017.
[17] Bluewater Music Services Corporation v. Spotify USA Inc., Complaint for Copyright Infringement, US District Court for the Middle District of Tennessee, Nashville Division, Case 3:17-cv-01051, July 18, 2017.
[18] Gaudio v. Spotify USA Inc., “Defendant’s Memorandum in Support of Motion for a more Definite Statement”, US District Court for the Middle District of Tennessee, Nashville Division, Case 3:17-cv-01052, August 30, 2017.
[19] Billboard, “Legal Campaign Against Spotify Intensifies Ahead of Company’s Plan to Go Public”, September 13, 2017, accessed: 2024-09-09.
[20] US Music Modernization Act, H.R.4706 – Music Modernization Act of 2017, 115th Congress, 1st Session, vorgelegt dem House Committee on the Judiciary on December 21, 2017.
[21] Ibid.
[22] US CLASSICS Act, H.R.3301 – Compensating Legacy Artists for their Songs, Service, and Important Contributions to Society Act, 115th Congress, 1st Session, submitted to the House Committee on the Judiciary on July 19, 2017.
[23] US AMP Act, H. R. 881 – Allocation for Music Producers Act, 115th Congress, 1st Session, submitted to the House Committee on the Judiciary on February 6, 2017.
[24] Billboard, “Music Modernization Act Unanimously Passes US House of Representatives”, April 25, 2018, Zugriff am 27.03.2024.
[25] US Music Modernization Act, S. 2334 – Music Modernization Act of 2018, 115th Congress, 2nd Session, submitted to the Committee on the Judiciary of the Senate on January 24, 2018.
[26] Billboard, “SiriusXM CEO Jim Meyer Explains the Trouble With The Music Modernization Act (Guest Op-Ed)”, August 23, 2018, accessed: 2024-09-09.
[27] Music Business Worldwide, “‘A momentous day’ as US Senate passes Music Modernization Act”, September 18, 2018, accessed: 2024-09-09.
[28] Wikipedia, “President Donald J. Trump signs the Music Modernization Act on October 11, 2018”, official press photo by Joyce N. Boghosian, Public Domain, October 11, 2018, accessed: 2024-09-09.
[29] The Mechanical Licensing Collective (MLC), “How it Works”, n.d., accessed: 2024-09-09.
[30] Orrin G. Hatch-Bob Goldlatte Music Modernization Act, Pub. L. No. 115-264, 132 Stat. 3676 (2018), codified under US Copyright Act 17 USC § 115(e) (10).
[31] Guy Morrow & Daniel Nordgård, 2022, “The Music Modernization Act: Mechanical Copyright in the Age of Music Streaming”, in: Guy Morrow, Daniel Nordgård & Peter Tschmuck (Hg.), “Rethinking the Music Business. Music Contexts, Rights, Data, and COVID-19, Cham: Springer Nature Switzerland, p 174.
[32] Wixen Music Publishing v. Spotify USA Inc., Complaint for Copyright Infringement, US District Court Central District of California Western Division, Case 2:17-cv-09288-GW-GJS, December 29, 2017.
[33] Wixen Music Publishing, “About Wixen Music”, n.d. accessed: 2024-09-09.
[34] Music Business Worldwide, “Spotify sued for $1.6bn by Wixen in huge copyright infringement lawsuit”, January 2, 2018, accessed: 2024-09-09.
[35] Music Business Worldwide, “Spotify settles with Wixen, bringing $1.6bn lawsuit to an end”, December 20, 2018, accessed: 2024-09-09.
[36] The Hollywood Reporter, “Spotify Settles Copyright Lawsuits Brought by Songwriters”, June 27, 2019, accessed: 2024-09-09.
[37] Music Business Worldwide, “When the Music Modernization Act becomes law, who’s going to take care of it?”, January 7, 2019, accessed: 2024-09-09.
[38] Music Business Worldwide, “NMPA-backed Mechanical Licensing Collective (MLC) approved by US Copyright Office”, July 8, 2019, accessed: 2024-09-09.
[39] Music Business Worldwide, “Spotify and Amazon ‘sue songwriters’ with appeal against 44% royalty rise in the United States”, March 7, 2019, accessed: 2024-09-09.
[40] Music Business Worldwide, “Major victory for songwriters as US streaming royalty rates rise 44%”, January 27, 2018, accessed: 2024-09-09.
[41] The open letter can be read here: Music Business Worldwide, “Hit songwriters tell Spotify’s Daniel Ek they’re ‘hurt and disappointed’ by CRB rate appeal”, April 11, 2019, accessed: 2024-09-09.
[42] Music Business Worldwide, “Songwriters, rejoice: Spotify appeal FAILS to stop composers getting improved 15.1% streaming royalty rate in the US”, July 1, 2022, accessed: 2024-09-09.
[43] Music Business Worldwide, “Songwriters and publishers to receive nearly $400 payout after streaming royalty ruling in the US”, February 26, 2024, accessed: 2024-09-09.
[44] Music Business Worldwide, “Phonorecords IV: Music publishers react to US streaming royalty rate rise”, September 1, 2022, accessed: 2024-09-09.
[45] Music Business Worldwide, “Spotify’s battle with songwriters and music publishers is getting complicated. Here’s a recap”, May 23, 2024, accessed: 2024-09-09.
[46] Music Business Worldwide, “Record labels and publishers ink major settlement, moving from 9.1 cents to 12 cents per track for US mechanical royalties on physical sales”, May 5, 2022, accessed: 2024-09-09.
[47] Music Business Worldwide, “The MLC has distributed over $2bn to songwriters and publishers since 2021”, March 27, 2024, accessed: 2024-09-09.
Comentários