Spotify is said to be preparing an initial public offering — perhaps a “direct listing” that would take place next year. It still faces one significant obstacle, however: Copyright issues around compositions it didn’t license. In May, the company announced a $43.4 million settlement of a putative class-action lawsuit that would compensate publishers and songwriters for the infringement of their work, plus enable them to get paid accurately moving forward.
Now that settlement faces final approval, and a court rejection of the deal — or a high enough number of rightsholders that opt out — could leave the company facing complicated litigation, as well as the possibility of stratospheric damages for copyright infringement.
During a hearing on Friday (Dec. 1) in the U.S. District Court for the Southern District of New York before Judge Alison J. Nathan, lawyers for Spotify and the putative class argued for final approval of the settlement, while two other rightsholders filed objections that the damages for each composition streamed were insufficient. Under the terms of the settlement, the writers of compositions that have been streamed between zero and 100 times would receive a minimum payment, while the rest of the money would be divided on a pro rata basis.
The basic issue is fairly straightforward: Spotify didn’t license mechanical rights for the compositions it streamed, even when it had rights to recordings of them. Although the company says that poor record keeping makes it very difficult to identify and find rightsholders, it also failed to issue the appropriate NOIs — Notices Of Intent — with the U.S. Copyright Office. In March 2016, Spotify agreed to a $30 million settlement with the National Music Publishers Association. Rightsholders can choose to opt out of the settlement and sue on their own, as several have already done.
Dealing with the issue is proving more complicated, especially since Spotify hasn’t said — and no one else knows — exactly how many compositions the company has infringed. That means lawyers for the putative class couldn’t say how much each class member would receive. “It’s hard to give a precise range,” said a lawyer for the putative class.
“How about an imprecise range?” Judge Nathan asked.
This, too, was difficult, apparently, although a lawyer for Spotify, Andrew Pincus of Mayer Brown, suggested a “ballpark” estimate that the company had infringed 300,000 songs. That would mean each rightsholder would get an average of about $100, although the actual numbers would vary widely. Statutory damages for willful copyright infringement range from $750 to $150,000.
The two objections to the settlement focused on the idea that the compensation for rightsholders was inadequate. David Given, an attorney with Phillips, Erlewine, Given & Carlin LLP who represented Andy Paley, a songwriter known mainly for film and television music, argued that the settlement was small compared to the potential damages. “In the mountain of paper that was submitted, there’s no information about Spotify’s culpability,” he said.
Daniel J. Schacht, a partner at Donahue Fitzgerald Attorneys, represented Wixen Music Publishing, which does administration for some of the biggest songwriters in the music business, including Tom Petty and Neil Young. He argued that the settlement was also unfair procedurally, since it could be difficult for some rightsholders to opt out.
After hearing motions concerning attorneys fees, the judge announced that she needed some time to reach a decision. But the issue may not be closed so easily. If the settlement is finalized, as the vast majority of such settlements are, it remains to be seen how many rightsholders will opt out — and how many of them will sue Spotify on their own. If it’s rejected, Spotify and the putative class would presumably amend it, and then resubmit it, to the court.
Spotify isn’t the only streaming service with this problem. All of the on-demand services that pay mechanical royalties to rightsholders have streamed compositions without licenses, although the amount of infringement varies. The result of this case could set a pattern for others.
It can be difficult to find and identify rightsholders to compositions. Still, years ago, Spotify made a decision to stream first and do some of the required paperwork later. This allowed it to start operating in the U.S. relatively quickly — and get the market share that helped make it the No. 1 streaming service, plus attract the audience that’s fueling an enormous amount of growth across the music business. But it may have been an extremely expensive decision.
This article originally appeared on Billboard.