US appeals court sends rate setting determination back to the Copyright Royalty Board

By Emmanuel Legrand

Two years ago, the US Copyright Royalty Board (CRB) determined after a lengthy process that mechanical royalties paid by digital streaming services to songwriters and publishers would incrementally raise between 2018 and 2022, resulting in a whopping 44% rate increase over five years. Publishers rejoiced and streaming services Amazon, Google, Spotify and Pandora took the matter to the courts and appealed the ruling (Apple Music abstained).

  The DC Circuit Appeals Court has now given them a win by sending the parties back to the CRB, with the notification that the CRB “failed to provide adequate notice of the rate structure it adopted, failed to explain its rejection of a past settlement agreement as a benchmark for rates going forward, and never identified the source of its asserted authority to substantively redefine a material term."

  The Court noted that the appellants "disagree on multiple fronts with the Board and with each other. As a result, many issues devolved into Goldilocks’ arguments, with the Streaming Services protesting that the rates are too high; the Copyright Owners objecting that they are too low; and the Copyright Royalty Board saying they are just right."

The CRB failed to provide fair notice

  The ruling goes on: "Having considered all of those arguments and the extensive administrative record, we affirm in part and vacate and remand to the Copyright Royalty Board in part because it failed to give adequate notice or to sufficiently explain critical aspects of its decision-making. Specifically, the Board failed to provide adequate notice of the rate structure it adopted, failed to explain its rejection of a past settlement agreement as a benchmark for rates going forward, and never identified the source of its asserted authority to substantively redefine a material term after publishing its Initial Determination."

  “In sum," it continues, "because the Copyright Royalty Board failed to provide fair notice of the rate structure it adopted, that aspect of its decision must be vacated and remanded for further proceedings. If the Board wishes to pursue its novel rate structure, it will need to reopen the evidentiary record."

  In practical terms, the Court of Appeals gave the CRB a framework in order to proceed with the rate setting process. It did not crush the rates themselves, but objected to the way they were reached by the CRB. For David Israelite, CEO and President of the National Music Publishers’ Association, which was one of the appellants in the appeals procedures, alongside the Nashville Songwriters Association International (NSAI), the Court of Appeals decision is based on "technicalities."

Not a rejection of the rates

  In a statement, Israelite said the Court of Appeals "made its determination which supported the rate increase granted by the CRB to music publishers and songwriters, agreeing that writers have been underpaid and that the rate increase start date is January 1, 2018."

  So for Israelite, the Court of Appeals "did not reject the top line rate increase for songwriters" but instead asked the CRB "for further explanation as to why it had rejected one particular supposed benchmark" and also explain "its authority for modifying ‘service revenue’ in regards to music bundles."

  "We believe these things are easily done by the CRB," said Israelite. “We are heartened that the Court understands and supports the fact that songwriters are grossly underpaid by streaming services. It is shameful that Spotify and Amazon have now spent millions of dollars – money which could’ve been paid to songwriters – on attempting to deny them a raise based on technicalities.”

Ruling against songwriters

  He concluded: “We will continue to fight back against Spotify and Amazon’s brazen attempts to cut songwriter’s royalties and look forward to quickly resolving the procedural issues raised by the DC Circuit Court of Appeals in order to uphold our hard fought rate increase.”

  Songwriter, performer and activist David Lowery believes the ruling "clearly goes against songwriters." In a blogpost on The Trichordist site, Lowery wrote that "there is little chance this will not lower your royalty rates in the subsequent rehearing." Analysing the ruling, Lowery found that the Court of Appeals "all but directs the CRB to put the cap back on 'total content costs'. This clearly will have a depressive effect on the alternate mechanical royalty calculation."

  Secondly, he added, the court "seems to be fundamentally uncomfortable with the fact that songwriters get a (phased in over 5 years) 40% raise. Like everyone involved in the proceedings so far, no one seems to understand the initial rate was arbitrary. It was picked out of thin air when no one knew what streaming meant."

Parties need now to reach a solution

  He added: "Finally it’s totally depressing to see a federal court reiterate the notion that the federal government can not put a streaming service out of business by raising songwriter rates too high. It’s not the governments job to save companies that have bad business models. If the streaming services can’t pay fair rates to songwriters perhaps they should charge their customers more, not pay songwriters less. Why do the federal courts think songwriters have to subsidise the streaming business? All in all a depressing read."

  For Jim Griffin, a principal at digital consultancy company OneHouse, the appeal "raises as one core issue a remarkable 'achievement' for songwriters in the rate decision at issue: An 'uncapped' total cost content 'prong' combined with significantly increased rates. It is easy to see why this contested decision provoked glee at the NMPA. The music services, however, successfully argued that this was not addressed on the record and that they have a right to do so that was unjustly foreclosed by the imposition of this rate-setting protocol (uncapped) after the close of the record."

  Continues Griffin: "What's going to happen? They're going to re-open the record and address it for the first time. What do I think should happen? I think the parties should meet and confer — if necessary, with benefit of mediation — and reach a solution that works for everyone to resolve this old issue. It will not be repeated, at least not this way, because this rate adjudication occurred under a now abandoned four-part test (A, maximize access to works; B, fair return and income; C, relative roles of owner/user in opportunity; D, minimise disruption on industry structure and practice) that is replaced going forward under the Music Modernisation Act: 'Establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller'."