Mechanical Licensing Collective Sues Pandora for Unpaid Royalty Fees Under MMA

On February 12, the Mechanical Licensing Collective (MLC) filed a lawsuit against streaming music company Pandora Media in the Middle District of Tennessee seeking unpaid royalty fees for blanket licenses under the Music Modernization Act (MMA). The case, prompted by recent final determinations on blanket license royalty rates, could prove an interesting test case on the level of interactivity and personal control required before a streaming service qualifies as a covered activity under the MMA.

‘Interactive Service’ Doesn’t Require That Users Select Every Song On-Demand

Although the MMA was signed into law in October 2018, appellate remands following previous rate determinations prevented a final blanket license rate from being published in the Federal Register until August 2023. A six-month grace period for reporting retroactive usage expired on February 9, at which time Pandora allegedly failed to cure its improper reporting for its Pandora Free streaming service. The MLC, which is authorized under the MMA to collect and distribute royalties collected for blanket licenses, first became concerned about Pandora’s usage reporting for its free interactive service in 2021, when the streaming company refused to report Pandora Free revenues despite usage reporting consistent with the MMA’s definition of an interactive service.

Blanket licenses under the MMA are not required for every digital music service operating online today, but the law does impact streaming companies that provide an interactive service to users. As the MLC’s lawsuit notes, the legal definition for an “interactive service” covers digital transmissions of streaming music recordings except for certain radio transmission exemptions. According to the MLC, this definition includes streaming services with “lean back” options, including pre-made playlists and customized webcasts, and does not require that every sound recording be selected by a user. In a footnote, the MLC added that this legal definition does not allow providers of interactive services to carve out particular streams if their activities fit the definition of “interactive service.”

The MLC put Pandora on notice last November that it was underreporting revenues for its free service in potential violation of 17 U.S.C. § 115, which codifies the MMA’s blanket licenses. In the November letter, the MLC informed Pandora that the streaming company was incorrect to interpret its Pandora Free service as a non-interactive service outside the scope of Section 115. “The fact that users of [Pandora Free] may choose to listen to playlists consisting of sound recordings they have not selected does not change the fact that these users have at all times the ability to listen, on-demand, to sound recordings that they select,” the MLC’s letter to Pandora stated. Indeed, Pandora Free is “possibly the most full-featured free interactive streaming offering in the U.S. market” thanks to unlimited on-demand streaming and background listening capacity on mobile platforms.

MLC Alleges User Interactivity at Several Stages of Pandora Free’s UI

In a response mailed to the MLC less than two weeks later, Pandora Media “categorically reject[ed]” the notion that its Pandora Free service was required to pay royalties under a Section 115 blanket license. Further, Pandora criticized the MLC, arguing that “[i]t is not the role of the MLC to offer ‘statements on the law’” on whether particular transmissions qualify as interactive services that must pay blanket license royalties. The MLC reiterated Pandora’s reporting obligations in another letter sent in late December, about six weeks before the February deadline for retroactive revenue reporting.

Despite Pandora’s contentions that its free service does not require a Section 115 blanket license, the MLC traces several layers of interactivity present across Pandora Free’s user interface (UI). While the service itself is free to users, Pandora collects revenues when users watch ads to obtain unlimited skips. The Pandora Free user interface also touts the ability to “[s]earch and play your favorite songs on-demand for free.” The MLC alleges that Pandora developed its free ad-supported streaming tier to emulate other interactive services operated by competitors Spotify and YouTube under blanket licenses for services that, according to the MLC, offer less interactivity than Pandora Free.

The MLC’s lawsuit includes a single count against Pandora Media for the recovery of unpaid statutory license royalties and late fees going back to January 2021, when the MLC alleges Pandora’s free service was first covered by the Section 115 blanket license. According to royalty rate charts provided in the MLC’s complaint, Pandora would be liable to pay the greater of about 15% of service provider revenue, or about 25% of the service provider’s total content cost to record labels based on the type of offering provided (i.e.: portable subscription, ad-supported service, purchased content locker, etc.). This all-in royalty base would then be offset based on performance royalties already paid for the content. The MLC is also seeking costs and attorneys’ fees under 17 U.S.C. § 505.

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