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Streaming Music Services Win Redo of Royalty Rate Rule (1)

Aug. 11, 2020, 11:50 PM; Updated: Aug. 12, 2020, 5:01 PM

Streaming music providers Amazon Digital Services LLC, Google LLC, Pandora Media LLC, and Spotify USA Inc. won their challenge to “significantly increased” royalty rates they were ordered to pay to copyright owners by the Copyright Royalty Board, a D.C. federal appeals court said in a ruling unsealed Tuesday.

The Board didn’t give the streaming services proper notice that it would adopt the higher rate, rejected the services’ proposed benchmarks without a proper explanation, and wrongly redefined an important term late in the proceeding, the U.S. Circuit Court for the District of Columbia said. The court partially vacated and remanded the Board’s decision for further proceedings.

At the time, the National Music Publishers Association called the 2018 increase in royalty rates the biggest in CRB history.

According to the court, the Board erred in adopting a rate structure that uncapped and increased total content costs paid to copyright holders while also increasing the revenue rates owed to them. The court held the CRB proceedings didn’t give the services adequate notice of the new rates.

“There is no dispute that before and throughout the evidentiary hearing, no party had proposed or even hinted at the structure the Board ultimately adopted,” the court said. “And the Board, itself, offered no hint of such a dramatic change in course from prior decisions.”

The Board decided on a rate that could “significantly increase” the services’ costs while eliminating protections against unregulated royalty increases in the future. According to the court, removing this protection “yokes the mechanical license royalties to the sound recording rightsholders’ unchecked market power.”

“If the Board wanted to implement such an extreme change in the rate structure, it was duty bound to give a heads up to the parties,” the court said.

The Board also erred by arbitrarily rejecting the services’ proposed benchmarks for the new rate based on previous settlements, the court said.

The circuit court also found that the Board incorrectly redefined a term used in its calculations “late in the game” without explanation.

David Israelite, president and CEO of the NMPA, called the decision a “limited remand,” and said the court agreed that writers have been paid too little for streaming music.

“We are heartened that the Court understands and supports the fact that songwriters are grossly underpaid by streaming services,” Israelite said. “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.”

Israelite said the NMPA looks forward to “quickly resolving the procedural issues raised by the D.C. Circuit” to uphold the rate increase.

Judge Patricia A. Millett wrote the opinion, joined by Judges Karen LeCraft Henderson and Merrick B. Garland.

Weil, Gotshal & Manges LLP represented Pandora. King & Spalding LLP represented Google. Mayer Brown LLP and Latham & Watkins LLP represented Spotify. Kellogg, Hansen, Todd, Figel & Frederick PLLC represented Amazon.

The case is Johnson v. Copyright Royalty Bd., D.C. Cir., No. 19-1028, decision unsealed 8/11/20.

(Updated with NMPA comment beginning in 10th paragraph.)

To contact the reporter on this story: Blake Brittain in Washington at bbrittain@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Meghashyam Mali at mmali@bloombergindustry.com

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