On June 19, Spotify asked a US federal court to dismiss The Mechanical Licensing Collective (MLC)’s lawsuit over the streaming service’s reduction of mechanical royalty payouts in the US, saying it would be “a substantial waste of time and resources” for the case to go forward.
In a letter to Judge Analisa Torres of the US District Court for the Southern District of New York, lawyer Alli Stillman of Latham Watkins LLP, representing Spotify, argued that The MLC’s own complaint against Spotify showed that Spotify is in compliance with the rules set out by the Copyright Royalty Board’s Phonorecords IV rules, so The MLC effectively has no case.
The MLC’s argument “is contrary to the facts as pled [by the MLC] and the plain text of the Phonorecords IV regulations,” states the letter, which can be read in full here. It added: “The complaint should be dismissed with prejudice.”
In a response to Spotify’s request for a dismissal, lawyers for The MLC disputed Spotify’s request on the grounds that the streaming service was, in effect, arguing the merits of a case itself in the motion to dismiss, and that is not what pre-trial motions to dismiss are for.
Citing previous rulings, The MLC’s response stated: “It is well-settled that a motion to dismiss ‘is not a procedure for resolving a contest between the parties about the facts or the substantive merits of the plaintiff’s case’… ‘the court’s task is to assess the legal feasibility of the complaint; it is not to assess the weight of the evidence.’”
“The MLC opposes Spotify’s proposed motion to dismiss because it is based on mischaracterizations of the well-pleaded allegations in the MLC’s complaint, new purported facts that go well beyond or contradict the MLC’s pleading, and merits-based arguments that are inappropriate on a motion to dismiss,” lawyer Jay Cohen of Paul, Weiss, Rifkind, Wharton & Garrison LLP wrote on behalf of The MLC in a missive filed with the court on July 26.
The MLC’s full response to the motion to dismiss can be read here.
The conflict between Spotify and US songwriters and publishers began this past March, when Spotify notified The MLC that it now considered its Premium subscription tiers to be “bundles,” as they now include 15 hours of audiobook time per month.
The MLC was formed under the Music Modernization Act to collect royalties from music streaming services on behalf of publishers and songwriters.
Under the Copyright Royalty Board’s Phonorecords IV rules, digital service providers can pay out a lower royalty rate from bundled subscription plans.
“The MLC opposes Spotify’s proposed motion to dismiss because it is based on mischaracterizations of the well-pleaded allegations in the MLC’s complaint, new purported facts that go well beyond or contradict the MLC’s pleading, and merits-based arguments that are inappropriate on a motion to dismiss.”
The MLC, response to Spotify’s motion to dismiss
Spotify’s move triggered a lawsuit by The MLC, which argued that the Sweden-headquartered streaming service “unilaterally and unlawfully decided to reduce the service provider revenue reported to the MLC for Premium by almost 50%, by improperly characterizing the service as a different type of subscription offering and underpaying royalties.”
By some preliminary estimates, Spotify’s reduction of mechanical royalty payments would mean a reduction of USD $150 million annually to US songwriters and publishers.
In a regulatory filing for its Q2 2024 earnings, Spotify estimated that if The MLC were successful in its lawsuit, the streaming service would have to pay out EUR €46 million, or roughly USD $50 million.
According to Spotify: “If the MLC were entirely successful in this case, the additional royalties that would be due in relation to the period March 1, 2024 to June 30, 2024 would be approximately €46 million, of which approximately €35 million relates to the three months ended June 30, 2024, plus potentially penalties and interest, which we cannot reasonably estimate.”
The €35 million [in royalties alone] for the three months ended June 30, 2024 (i.e the second quarter of 2024) converts to $37.68 million.
If Spotify were to pay around $37.68 million (€35m) less in mechanical royalties per quarter following its bundle change in March, SPOT’s mechanical royalty payments would be cut by approximately $150 million over the span of a year following the change.
On the company’s Q2 earnings call, Spotify co-founder and CEO Daniel Ek suggested that, even with the reduction in royalty payments, Spotify will be paying out more in royalties than it was before, due to a growing subscriber base and price hikes to its Premium subscription plans.
In its lawsuit, The MLC argued that Spotify’s change was unlawful because the Phonorecords IV rules require that a service bundled with music streaming must have “more than a token value,” and the 15 hours of audiobooks offered with Spotify’s Premium subscriptions doesn’t qualify.
The MLC’s complaint noted that Spotify didn’t raise its subscription price when it first introduced the audiobooks feature last November, and only declared the plan to be a bundle months later, in March of this year. That, The MLC said, shows that Spotify itself doesn’t see more than a token value in the audiobooks offering. (Spotify raised the price of its Premium subscriptions in the US half a year later.)
The MLC’s argument is “facially implausible and wrong as a matter of law,” Spotify argued in its motion to dismiss.
“Audiobooks – as part of Spotify Premium, and elsewhere in the market – have significant, demonstrable value, and MLC’s effort to rewrite the very royalty terms to which copyright holders agreed, and which the CRB enacted into law less than two years ago, should be rejected out of hand.”
It called The MLC’s attempts to determine Spotify’s intentions through its pricing strategy “baseless speculation” that is “irrelevant to the legal question, which is whether at the time Spotify reported Spotify Premium as a bundle, it met the regulatory criteria” as cited in Phonorecords IV.
“The relevant question is whether 15 hours of audiobook streaming has ‘more than token value’ to consumers, not whether Spotify chose to immediately leverage that value by raising prices, or to keep prices constant for a time in order to attract and retain more subscribers (the kind of business decision companies routinely make),” the motion to dismiss stated.
These types of arguments have no place in a motion to dismiss, The MLC argued in its response.
“Spotify… entirely ignores the proper legal standard for a motion to dismiss. Instead, Spotify spends four pages setting out its contrary view of the facts and its competing position on the ultimate merits, relying to a substantial degree on purported facts from outside… the complaint,” The MLC stated.
“Those extraneous facts do not – and cannot – provide any basis for dismissing the complaint.”Music Business Worldwide