Music Streamers Win Appeal Over Royalty Hike for Song Owners

Daniel Ek - H - 2020

The Copyright Royalty Board, a three-judge panel within the Library of Congress, must take another gander at what Spotify and other streamers will be paying for the rights to distribute musical works. In an opinion that was made public on Tuesday, the D.C. Circuit Court of Appeals decided that the CRB provided insufficient notice and reasoning when setting royalty rates two years ago.

Under copyright law, the CRB undertakes rate setting and the terms for a compulsory mechanical license every five years. The CRB's most recent round was seen as being favorable to songwriters and music publishers. In a 2-1 vote, the CRB decided that digital services like Spotify, Pandora, and Amazon would need to increase by 44 percent what they were paying from preexisting rates. Until the ruling, these digital services had apportioned 10.5 percent of their revenue for royalties to song owners. By 2022, they'd have to pay a 15.1 percent rate.

Not so fast, rules the DC Circuit.

"[W]e agree with the Streaming Services that the Board failed to provide adequate notice of the final rate structure," states an opinion authored by DC Circuit Judge Patricia Millett.

The DC Circuit also faults the CRB for failing to explain why it didn't use previous rates as a benchmark. Under copyright law, the CRB only undertakes rate setting when the sides can't agree on what's fair. During the previous mechanical license ratemaking proceeding, there was a settlement, which perhaps provides some evidence of what the parties considered reasonable. The copyright owners argued it wasn't relevant nor revelatory because there were certain other factors that led them to underselling themselves. The CRB didn't use the old settlement at all when examining the new rates.  The DC Circuit finds an error.

"In rejecting that settlement as a possible benchmark, the Board faulted the Streaming Services for failing to explain why the parties to the Phonorecords II settlement agreed to the rates in that settlement," writes Millett. "The Board also rejected the notion that the Streaming Services’ reliance on the continuation of the Phonorecords II rates alone justified the use of that settlement as a relevant benchmark. But nowhere does the Final Determination explain why evidence of the parties’ subjective intent in negotiating the Phonorecords II settlement is a prerequisite to its adoption as a benchmark."

Finally, the DC Circuit comes to a third reason for ripping up the CRB's determination and ordering a re-do. It pertains to how revenue is counted, specifically with regards to bundled offerings. From its initial determination to the final determination, the CRB switched its approach. Initially, it wanted revenue counted in bundled offerings by subtracting prices attributable to other products in the bundle. When copyright owners objected, the CRB then adopted a new definition of service revenue for bundled offerings whereby the value of the streaming component would be measured as a standalone price.

In vacating the determination and remanding for further proceedings, the opinion states, "The problem is that the Board has completely failed to explain under what authority it was able to materially rework that definition so late in the game."