Spotify litigation and its major music impact

Spotify reporting its first operating profit.  A new significant amendment to copyright law in the fall of 2018.  New rate determinations and posturing on both sides of the publisher/writer versus digital services debate.  From a legal perspective, these are intriguing times in this business of music we love.

The Bluewater Music Services Corporation vs. Spotify, Inc. action currently in the midst of discovery in the U.S. District Court – Middle District of Tennessee and set to go to trial in January of 2020 serves as a snapshot of the ongoing debate regarding music publishing royalties and the current position of stakeholders in the process.

An article written by Marc Schneider and published in Billboard Biz on February 6, 2019, reports that Spotify scored its first operating profit in the fourth quarter of 2018.  The company which began in Stockholm, Sweden, in 2005 now streams to 78 countries and plans to expand to India.  It reports double-digit revenue growth and 96 million paid subscribers (“Spotify Hits 96 Million Paid Users, Scores First Operating Profit in Fourth Quarter”, Marc Schneider, Billboard Biz, February 6, 2019).

But the jury may be out both literally and figuratively on the legality of the Spotify operation and the karma of its fair play in the music industry.  At issue in the Bluewater case, filed on July 18, 2017, are 2,142 compositions owned or administered by the plaintiff.  Along with several other plaintiffs who were joined into the action for discovery purposes, Bluewater opted out of a class action settlement that it later alleged “was woefully insufficient financially and nothing more than a way to allow the major music companies … to help Spotify along to a public offering”.  The complaint for damages alleges that the affiliated record labels own over 18% of Spotify.  Further, it states that the $20.7 million paid by Spotify in the settlement agreement amounted to a mere four dollars per infringed composition.

In short, the Bluewater action alleges a lackluster system in place by Spotify that cannot adequately compensate copyright holders for usage of their musical product, either under a statutory or compulsory license. According to the complaint, there is no infrastructure in place to provide data  regarding compositions embodied in the respective sound recordings streamed.  Spotify moved forward with this illegal system when it launched in the United States in 2011.

The upshot is that Spotify is alleged to be streaming a lot of music without proper licensing and with no system in place to pay royalties or to determine the identity of copyright owners in good faith.  The Bluewater complaint estimates this to be 35 billion unpaid streams with approximate statutory damages for infringement at approximately $300 million.

Hence the mammoth amount of discovery that must take place.  The motions filed thus far in the case indicate that there has been difficulty with discovery compliance by Spotify – almost certainly regarding information that it considers confidential and proprietary.

The complaint traces the history of Internet peer-to-peer file sharing and mentions legacy names such as Napster, Kazza, and Grokster and past litigation initiated by the Recording Industry Association of America against individual defendants.  The 1990s and early 2000s are long gone, but the same sorts of issues linger to the present day. 

The Music Modernization Act has requirements of record keeping and due diligence regarding locating and compensating copyright owners.  Spotify is a giant in today’s music industry and will continue to be in this influential position for the foreseeable future.  But it also appears that its inadequate system is illegal and that it has also illegally withheld billions of dollars from those who create music.

But the two sides must also find common ground.  Digital services and copyright owners need each other.  To this end, the court has ordered two attempts to resolve Bluewater in alternative dispute resolution such as mediation.

This business of music we love needs strong digital platforms to earn streaming revenue, and it needs creative people to make music and to prosper while doing so.  The forces of the market and the new copyright law must blend to create prosperity for all.  Resolving the Bluewater case and ensuring compliance with the Music Modernization Act would be a great start.