Spotify USA Inc. (“Spotify”), the popular music streaming service with over 100 million active users and 30 million paying subscribers, continues to grow as an industry leader.^[1] Spotify launched in 2006 and reached over 20 million paying subscribers as of June 2015, and has added another 10 million over a nine-month span.^[2] Spotify’s music database currently includes over 30 million songs.^[3] In December 2015, Spotify was sued for $150 million in a class action suit in the Central District of California for allegedly streaming music without paying royalties to musicians.^[4] Within weeks, a similar $200 million class action suit was filed against Spotify in the same district.^[5] Other music streaming services, such as Jay-Z’s Tidal, have also been subject to similar lawsuits for unpaid royalties.^[6]

While these lawsuits focus on compulsory licenses and royalties under the Copyright Act^[7], music streaming services are left with a difficult decision to either allocate their resources to comply with the Act or pay for it later in future litigation. This article provides an overview of the Spotify and Tidal cases, summarizes the applicable copyright law at issue, and provides a technological solution that may help avoid future lawsuits.

Multiple Lawsuits Filed Against Spotify For Unpaid Royalties

David Lowery, the lead singer and composer of more than 150 songs for rock bands Camper Van Beethoven and Cracker, filed a class action copyright infringement lawsuit against Spotify on December 28, 2015, in the Central District of California.^[8] Lowery, on behalf of himself and other musicians, asserted that its mechanical rights for registered musical compositions were infringed by Spotify’s unlicensed or unauthorized reproduction or distribution of those compositions.^[9] Pursuant to 17 U.S.C. § 504(c), the class plaintiffs seek statutory damages ranging from $750 to $30,000 or up to $150,000 per infringed work for willful infringement.^[10] All in all, the class seeks at least $150 million from Spotify.^[11]

Eleven days later, well-known singer-songwriter Melissa Ferrick filed a similar class action lawsuit against Spotify in the same district.^[12] Ferrick seeks at least $200 million in statutory damages on behalf of herself and other musicians.^[13] On May 23, 2016, the district court consolidated these two Spotify cases and designated Lowery as the lead case.^[14] Plaintiffs filed a consolidated complaint a month later. ^[15]

Jay-Z’s Tidal – “Different owner, same game”

In an effort to improve streaming audio quality, a Swedish tech company, Aspiro, launched its own subscription-based music streaming service, Tidal, in October 2014.^[16] Within a few months, rap mogul Jay- Z acquired Aspiro and Tidal for about $56 million through his holding company, Project Panther Bidco, Ltd.^[17] A year after its launch, Tidal had over 3 million paying subscribers, and claims to have over 4.2 million paying subscribers as of July 2016.^[18]

Despite its efforts and aspirations “to re-establish the value of music,”^[19] Tidal has been subject to copyright lawsuits similar to those filed against Spotify. On February 27, 2016, representatives of the band The American Dollar filed a class action lawsuit in the Southern District of New York, alleging that Tidal failed to license or pay royalties for streaming their music.^[20] Plaintiffs sought statutory damages of up to $150,000 for willful infringement of each of their 118 copyrighted works. ^[21] Plaintiffs added, “[i]ronically when Defendant [Jay-Z] purchased the TIDAL Music Service in 2015, it claimed it would be the first streaming service to pay the artists. Different owner, same game.”^[22] Plaintiffs, however, dropped the case for unspecified reasons, and filed its notice of voluntary dismissal under Rule 41 of the Federal Rules of Civil Procedure on June 2, 2016.^[23]

Copyright Act and Royalties - Who Gets Paid?

The dispute between the musicians and streaming services centers on Section 115 of the Copyright Act.^[24] Understanding Section 115 may require some background on royalties. There are generally two forms of royalties that apply on a per song basis: composition royalties for publishing companies and songwriters, and sound recording royalties for record labels and performing artists.^[25] Spotify already has licenses to pay sound recording royalties to record labels and artists, but does not have direct licenses to pay composition royalties to the publishing companies and songwriters.^[26] By law, Spotify can pay such royalties either through a direct license or a compulsory license under the Copyright Act.^[27]

Known as mechanical rights, Section 115 allows anyone to make and distribute reproductions of songs if they obtain a compulsory license and pay the statutory fee.^[28] As part of a compulsory license, Section 115 requires streaming services to serve a Notice of Intent (NOI) to the publishing company or songwriter (or the Copyright Office if unknown), thirty days before releasing their song on the streaming service.^[29] Additionally, the statutory fee must be paid through the Copyright Office.^[30] Currently, the rates for downloading songs are 9.1 cents per song or 1.75 cents per minute of playing time.^[31] For interactive streaming of music, however, the rates are much more complicated.^[32] To help streamline the process, the Harry Fox Agency provides charts to calculate the royalty rates for streaming services like Spotify.^[33]

Spotify Acts First, Apologizes Later

In the Spotify case, Plaintiffs alleged that Spotify failed to negotiate directly with the publishing companies or serve an NOI in accordance with the Act. If true, Spotify infringed under Section 115, and the remaining issue in dispute would be damages (e.g., the number of songs infringed and whether Spotify willfully infringed).

Some musicians sympathize with Spotify because of the difficulty in identifying the songwriter of a song that may share the same title with hundreds of other songs in a database with over 30 million songs.^[34] Lack of ownership information puts a heavy burden on streaming services like Spotify and Tidal, as its database and number of subscribers continue to grow. Spotify may have made a calculated business decision not to comply with Section 115 to avoid such a burden. In March 2016, Spotify reached an agreement with the National Music Publishers Association to pay publishers between $16-25 million in unpaid royalties.^[35] Lowery, however, contends that Spotify is using the agreement to try to cut class members out of the current class action lawsuit.^[36] Indeed, the agreement forces claimants to waive "any claims" related to their works.^[37]

Moving forward, musicians and streaming services may need to work together to solve the problem of lack of easily accessible ownership information. One proposed solution is to require the publishing companies to provide metadata identifying ownership information for every track sent to Spotify.^[38] This solution, however, does not address the millions of songs already in Spotify’s database that lack ownership information. Without a concrete technical solution to identify and track ownership information of songs, streaming services must make a business decision to either allocate their resources to abide by the law (and possibly increase subscription fees) or pay for it later in future litigation. For the time being, Spotify appears to have chosen the latter.