Understanding David Lowery’s Lawsuit Against Spotify And The Complexity Of Music Licensing

1 (1)Musician David Lowery's recent lawsuit against Spotify claims, among other things, that the streaming service has failed to obtain the appropriate mechanical licenses from artists. Whether or not this is true, the lawsuit is raising some interesting questions, and highlighting just how confusing the world of music licensing is.


Guest Post by Mike Masnick on Techdirt

We generally don't talk much about musician David Lowery around here any more. We covered a few stories about him a few years ago, and he seemed to take it ridiculously personally, and continues to attack me with false and misleading claims. Every so often someone sends me a link to a blog post he's written and it's almost always laughably wrong (for example, in one recent story he falsely claimed that "Google" is on Spotify's board — because a former Google exec who is no longer at the company also happens to be on Spotify's board). So, take the following with that caveat in mind. I tried to be objective in the analysis, but some will likely suggest that's impossible given his years-long attacks on me.

Lowery, if you don't know, is a decently successful musician who has ranted against any new service or business model for musicians. When he was first getting attention over this it was about iTunes, but lately it's been things like Spotify, Pandora and YouTube. He appears to pine for the "old days" when there was less competition and a clearer career path for musicians like himself. So his concern is always that these companies are somehow "cheating" him and his friends out of money. Mostly this has been idle, if frequently misleading, whining. But right before the new year, it turned into an actual lawsuit against Spotify that he's hoping to turn into a class action. You can read the whole complaint here (or embedded below), though I warn you: to understand it, you need to go pretty deep into the arcane nature of music licensing.

Here's the thing about copyright law: historically, as new technologies come along, copyright has a lot of trouble dealing with them. And, typically, the pattern is that the industry freaks out and tries to stop the new technology, but eventually someone duct tapes on a new bit of copyright law to cover it. Unfortunately, this means that there are all these weird periphery sections of copyright law that are supposed to apply to specific circumstances, which then get made obsolete by later technological situations, and it leads to lots of confusion and anger… and lawsuits.

Stick with me through the next few paragraphs. It's going to seem ridiculously impossible to ever do anything that involves licensing music after you get through all of this, in part because it's been made so cumbersome thanks to all this duct tape.

So, everyone knows that music is covered by copyright. And, if you follow these things moderately closely, you may also know that the copyright on a recorded song involves two different copyrights: there's the copyright in the sound recording (for the musicians who recorded the song, but usually held by the record label) and a copyright in the composition which is held by the songwriter. But things get much more complex even beyond that. And that's because there are different exclusive rights under copyright law, such as rights for reproduction, distribution and public performance.

On top of that, there are different types of licenses for these different parts and different rules for how such licenses can be obtained and who can obtain them in which situations. The rules and licensing are different for terrestrial radio than they are for satellite radio than they are for "non-interactive" streaming radio (e.g., Pandora) than they are for "interactive" streaming services (e.g. Spotify). Pandora, for example, gets to make use of compulsory licenses relying on a rate set by a group of old judges known as the Copyright Royalty Board (you may have heard that they just raised the rates, but not nearly as high as some were asking for).

With Spotify, on the other hand, most of the licenses actually had to be negotiated. But because of all the different aspects, there was a lot to negotiate. There are deals to be made with the copyright holders for the sound recordings (mostly the labels, some of whom took equity stakes in Spotify to make those deals happen) along with licenses from the "Performance Rights Organizations" (PROs) like ASCAP and BMI for "performing" the works. Then there are mechanical licenses which are for reproducing or distributing the composition, and cover a variety of things — and are generally available in a compulsory fashion (i.e., if you want them, as long as you pay, you can get them). They're called "mechanical" licenses from back in the day when reproducing a work actually was a big "mechanical" process. When someone wants to cover a song, they can get a compulsory mechanical license for that (which is why artists cannot stop anyone from covering their songs — much to Prince's dismay). You also need a mechanical license to reproduce and distribute a "phonorecord" of a musical work.

1Most mechanical licenses are managed and sold via an organization called The Harry Fox Agency (HFA), who works on behalf of music publishers (companies who tend to hold the copyrights on the musical compositions, rather than the actual recordings) that teamed up to create the agency a long, long time ago. There is also a complex bit of copyright law, known as Section 115, which gives the specifics on compulsory licensing of mechanical licenses in certain circumstances, if certain rules are followed. But here's the crazy thing: it's 2016 now, streaming services have been around for years, and still no one's entirely sure if Section 115 compulsories actually apply to them. It's never actually been tested and many services (including Spotify) assume they do, but a potentially big question is whether or not they really do. Isn't that kind of insane?

There's actually even more things that go into copyright licensing for music and I simplified some elements of this, but hopefully this gives you an idea
of how absolutely insane all of it is. But… it's necessary to understand all of that to figure out what's going on with Lowery's lawsuit. Almost all of the press coverage doesn't delve into any of this, and just says that he's claiming Spotify isn't paying for some of the music that's available on the service. But it's not a case where Spotify is just putting songs on its service willy-nilly. Spotify absolutely is licensing the sound recordings from the copyright holders, and then the performance licenses from the PROs. And it's getting mechanicals via HFA and/or via Section 115.

However — and here's the big issue — while Spotify gets the recordings directly from the copyright holder, and thus knows who to pay the royalties to, those songs often do not include the necessary metadata to connect the publishing/songwriting side of things to the recordings. So while the company knows who to pay for some parts of what it needs to pay, for others it has no idea. Under the law, the money for such royalties needs to be kept in escrow to pay at some later time when the details are sorted out — which is something that Spotify claims to do. The company recently announced that it's building a giant database to connect the publishing/songwriting info with the database it already has on the sound recordings, in order to distribute the $17 million or so it's been holding in escrow. This seems like a move in the right direction, but to some songwriters, they argue that it's "proof" that Spotify didn't properly license songs. That's possible, but unlikely. Spotify is holding the money in escrow because it that's the requirement when you do not have the necessary info to pay the compulsory licenses.

Lowery is arguing that Spotify is simply failing to obtain the necessary mechanical licenses for many of the compositions in its database, including a bunch of his songs. There is, separately, an "unfair business practices" claim that we'll also discuss in a minute. Over the past week or so since the news of this lawsuit came out, I've spoken to half a dozen different copyright lawyers to try to understand the details, and they're all at least slightly perplexed by the lawsuit, with some noting that details need to come out later to further explain the argument.

A few copyright lawyers I spoke to were flat out confused as to why Spotify would even need a mechanical license in the first place, seeing as it's streaming music, rather than "reproducing" and "distributing" it such that Spotify users end up with a full copy to keep. There are two possible responses to this that I (and some other lawyers I spoke to) can come up with, though Lowery's lawsuit does not clarify which of these he's arguing (or if it's something else entirely). One is that Lowery considers merely streaming music to be "distribution" and "reproduction" of a "phonorecord." Indeed, this appears to be the argument that Audiam, a company that has been deeply involved in this issue, makes on its website: every stream requires a mechanical license royalty.

One copyright lawyer I discussed this with called such an argument "meritless" but I actually wonder how the courts would shake out on it. It would get down pretty deep into the weeds of the technology behind streaming, and what counts as a "reproduction" and "distribution" of a work, and whether or not the ephemeral copies that are created in the streaming process require mechanical licenses even though they disappear as soon as they're played. You may recall that one of the key copyright cases a few years ago, regularly referred to as the "Cablevision" case but technically Cartoon Network v. CSC Holdings, found that such ephemeral copies are not copies for the purpose of copyright law. But that's technically only law in the 2nd Circuit, not the 9th Circuit where Lowery's case was filed.

The Supreme Court refused to hear the appeal in the Cablevision case. If Lowery's case does focus on such ephemeral streams, it could reopen that dangerous can of worms, and raise serious questions about copyright for cloud computing (remember, a study showed that the ruling in the Cablevision case was a key driver in jumpstarting the cloud computing industry).

Still, there may be a plausible argument that Spotify is "distributing" a song when it streams it, but again that's not exactly settled law. Either way, Spotify appears to be acting as if that is the case anyway in trying to secure mechanical licenses, so perhaps this won't be a huge deal in the case.

The other, perhaps more plausible, explanation is that the issue is really only in cases where Spotify allows users to actually download a song for offline play (a feature for Spotify Premium users). In those cases, it's much more compelling that Spotify would need a mechanical license, because the copies are not so ephemeral. But, it would also explain why the numbers for the mechanical royalties are so much lower (the fact that set off so much focus on all of this), because the mechanicals wouldn't apply in most streaming situations.

2In either case, Lowery might run into a second stumbling block: Spotify can (and likely will) argue that it complied with the rules required in Section 115(b) for a "notice of intention" in order to get the compulsory mechanical license. Basically, Spotify would argue that it did what is necessary to get a compulsory mechanical license when it was unsure of who held the publishing/songwriting rights on a song. If it actually did do this, Lowery's case may be dead in the water — though I'm guessing Lowery's lawyers will argue that it failed in some aspect of properly using Section 115 — or, as mentioned above, that Section 115 doesn't actually apply to streaming services. If Spotify did not actually follow Section 115's rules, then Lowery's case suddenly is a lot stronger. Similarly, if a court suddenly determines
that Section 115 doesn't apply… well, then a lot of streaming services are in serious trouble.

Separately, Lowery argues that Spotify's actions are "egregious and willful" — the latter of which is necessary to seek a maximum statutory damage amount of $150,000 per work infringed. Again, assuming that Spotify did in fact do as it has claimed, and followed the rules for Section 115 compulsory licenses, it's going to be much more difficult to convince anyone that the actions were "willful." Similarly, if you read this article by a copyright lawyer who appears to agree with Lowery (though it was written before Lowery's lawsuit), you see that as soon as Spotify was aware of how to pay the money, it did so. That's going to make the whole "egregious and willful" claim an uphill battle. But, we shall see…

Finally, there's the "unfair business practices" claim. Here's the crux of that one:

On information and belief, Plaintiff alleges that Spotify: (a) depresses the value of the royalties owed to Plaintiff and the Class Members’ for use of their Works through an arbitrary and non-negotiated payment structure; and (b) captures and holds funds which are otherwise distributable and earns interest thereon, thereby profiting off its own unlawful conduct. These business practices are unlawful and unfair pursuant to California Business & Professions Code § 17200

This again seemed like a non-starter to a few copyright lawyers I spoke to. First, it seems like it's just another copyright claim, hidden as a state unfair business practices claim — meaning it might get tossed out. Copyright law is (nowadays) entirely a federal issue, and attempts to bring in state laws are generally tossed out as federal copyright law "preempts" such claims. Furthermore, since copyright law allows holding such royalties in escrow, it seems difficult to argue that this is somehow illegal under California law. And I have no idea what is even meant by "depresses the value of royalties owed."

In the end, there's a lot that's not entirely clear about the lawsuit, and it's left many people scratching their heads. It is possible under a unique set of circumstances (some of which would involve fairly egregious behavior on the part of Spotify) that Lowery may have a case here. Similarly, if a court decides that Section 115 doesn't actually apply to streaming services, that would give Lowery a major win. But there are many, many arguments for why the lawsuit has little chance. The one issue that concerns me most, however, is whether or not he will actually start arguing that ephemeral copies represent a "reproduction" and/or "distribution" under copyright law. Either way… stay tuned.

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