MLC Expands Blanket License Enforcement Campaign With Lawsuit Against Spotify

“While the MLC cannot quantify the amount of underpaid royalties… Spotify could withhold up to $150 million in unpaid royalties during 2024 alone.”

MLCOn May 16, the Mechanical Licensing Collective (MLC), a non-profit entity responsible for administering blanket licenses enacted by the Music Modernization Act (MMA), filed a lawsuit in the Southern District of New York alleging that Swedish streaming media company Spotify has failed to meet its royalty obligations for MMA blanket licenses. The MLC alleges that Spotify’s recent decision to reclassify its Premium subscription service as a bundled subscription offering, leading the streaming company to reduce service revenue reported to the MLC by nearly 50%, is based on a faulty rationale that violates Spotify’s revenue reporting responsibilities for the service.

Spotify Reclassifies Premium Service Despite No Change in Functionality or Content

When the MMA was enacted in 2018, the law established blanket licenses for digital uses codified at 17 U.S.C. § 115(d) to serve as a new form of mechanical compulsory license in the digital streaming context. A detailed outline of royalty calculations for on-demand streaming services has been further promulgated by the MLC at 37 CFR § 385.21 for various types of subscription services, including standalone, purchased content, mixed service and bundled subscription offerings. For standalone subscriptions, streaming media companies like Spotify must report all end user revenue, while companies offering bundled subscriptions report a fraction of the aggregated services. Further, bundled subscriptions enjoy a lower calculation prong for reporting total amounts expensed for rights to make streams available, and a royalty floor of about half the floor applied to standalone subscriptions.

Source: MLC complaint

In April of this year, during Spotify’s regular monthly reporting obligations under the MMA, the streaming company for the first time reclassified its Premium service as a bundled subscription offering. In making this claim while reporting its streaming revenues for the month of March, Spotify pointed to the creation of a new Audiobooks Access standalone subscription service to support its argument that Premium, which offers access to audiobook content, qualifies as a bundled subscription service eligible for lower revenue reporting requirements.

The MLC’s lawsuit challenges Spotify’s reclassification of its Premium subscription service, noting that nothing about the functionality of the service or the available content has changed. Spotify allegedly first began offering access to audiobook content for Premium subscribers last November without changing the monthly subscription rate paid by customers for Premium access. Spotify similarly has not changed the monthly rate for its Premium subscription service for other past enhancements, like the addition of podcasts and short-form videos in 2015. While the MLC cannot quantify the amount of underpaid royalties until a protective order is in place, its complaint cited a Billboard article indicating that Spotify could withhold up to $150 million in unpaid royalties during 2024 alone.

Token Value of Non-Music Content Disqualifies Spotify Premium as a Bundled Service

While Spotify has asserted that its Audiobooks Access subscription is a standalone service, the MLC contends that the streaming music company does not advertise the service through its typical subscription promotion channels. The MLC alleges that Audiobooks Access can only be found through targeted searches on online search engines, and that the landing page for Audiobooks Access includes several promotions for Spotify’s Premium service. The MLC also alleges that, although Spotify insists that Audiobooks Access customers will not enjoy Premium features aside from audiobooks, such subscribers indeed gain access to the company’s on-demand, ad-free music streaming service.

Source: MLC complaint

For several reasons, the MLC alleges in its lawsuit that Spotify’s Premium service cannot qualify as a bundled subscription service. To constitute a bundled service, Premium would have to offer services other than the eligible interactive stream that have more than token value, but Spotify has not claimed Premium as a bundled service prior to March 2024 despite the inclusion of non-music audio content. Further, Spotify did not change the monthly subscription rate of its Premium service when it added audiobook content as of last November. The limited marketing for Spotify’s Audiobooks Access platform further demonstrates that the platform only has token value to Spotify, according to the MLC’s suit.

The MLC’s lawsuit against Spotify is the latest example of the licensing collective’s exercise of its authority under Section 115 of U.S. copyright law to enforce royalty obligations under blanket licenses. News reports from this January indicated that the MLC had sent notices of intent to audit to several major streaming platforms offering streaming services under the MMA’s blanket license. This February, the MLC filed a lawsuit against Pandora in the Middle District of Tennessee alleging that the streaming media provider had failed to pay proper royalties for its free ad-supported streaming tier despite several levels of user interactivity qualifying the service as an interactive stream.

Image Source: Deposit Photos
Author: andrewde
Image ID: 563263148 

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