Spotify has asked a US federal court to dismiss a lawsuit brought by The Mechanical Licensing Collective (The MLC) over the streaming service’s decision this spring to reclassify its Premium paid subscription as a “bundle” that includes both music and audiobooks.
The move effectively lowers the mechanical royalty payouts to music publishers and songwriters in the US, drawing the ire of large parts of the US music industry, and resulting in a lawsuit from The MLC, the body tasked by US law to collect mechanical royalties.
Spotify had previously notified Judge Analisa Torres of the US District Court for the Southern District of New York that it planned to file a motion to dismiss – a move outright rejected by The MLC.
“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,” lawyers for The MLC said in a letter to Judge Torres in June.
In a memorandum in support of its motion to dismiss, filed with the court on Tuesday (August 27), Spotify argued the case centers around “an easily answered question: Is audiobook streaming distinct from music streaming, offering greater than token value? The answer is indisputably yes, and there is no need for federal court litigation to confirm it.”
Under the Phonorecords IV rules that govern mechanical royalty payouts in the US, digital service providers can bundle music services with other digital services, and pay out royalties as a share of the standalone value of each service, provided that the additional service has “more than token value.”
In its lawsuit against Spotify, The MLC put forward a number of arguments for why its audiobooks offering doesn’t amount to more than “token value,” an argument rejected by Spotify’s lawyers.
“Spotify is not only offering a new service to consumers, but is also paying a new set of rights owners – book authors and publishers,” Spotify’s memorandum stated.
Spotify called The MLC’s arguments “nonsensical and factually unsupportable,” and the lawsuit “meritless and wasteful litigation,” arguing it “devalues the contributions of the tens of thousands of book authors whose works are available with a Spotify Premium subscription.”
The streaming service introduced 15 hours of free audiobook listening time as part of its Premium subscription in November 2023, and in March of this year, it introduced an audiobooks-only subscription tier dubbed Audiobooks Access.
Around that time, it notified The MLC that it would be treating its Premium subscription as a “bundle.”
In its lawsuit, filed in May, The MLC argued that Spotify’s Premium plan doesn’t qualify as a bundle, for one because Spotify didn’t actually make any changes to its subscription plans in March of this year, when it notified The MLC of the change in how the streaming service calculates mechanical royalties.
Additionally, The MLC pointed to Spotify’s own behavior as evidence that the streaming service doesn’t see audiobooks as having “more than token value.”
Not only did Spotify not raise the price of Premium subscriptions when it added audiobooks, The MLC alleged that the streaming service made it difficult for consumers to find its standalone audiobooks tier – and the audiobooks tier also includes access to music.
“Spotify is not only offering a new service to consumers, but is also paying a new set of rights owners – book authors and publishers.”
Spotify, memorandum in support of motion to dismiss
In its motion to dismiss, Spotify rejected these arguments as “irrelevant” to the legal issues at hand.
“MLC’s allegations about marketing of Audiobooks Access have no connection to the legal requirements at issue. The Phonorecords IV regulations do not even require Spotify to offer a standalone audiobook streaming product at all, let alone market it in a particular way,” the memorandum states.
The memorandum, which can be read here, also said it’s “highly misleading” for The MLC to claim that Spotify didn’t change its pricing when it added audiobooks.
“Spotify increased its Premium prices in August 2023, just before launching audiobook streaming within Premium. And it has since followed with further price increases to Premium as of July 2024,” Spotify’s memorandum states.
It also argued that Spotify could have declared its Premium subscription plans to be “bundles” as far back as November 2023, when it introduced audiobooks.
“But it was not required to do so, and MLC cannot point to any legal authority to suggest otherwise,” the memorandum stated.
The Mechanical Licensing Collective, which is due to file a formal response in the coming weeks, issued the following statement to MBW today (August 29): “The MLC’s general practice is not to comment publicly on pending litigations.
“That said, we would reiterate that we take the enforcement obligations assigned to us by Congress extremely seriously and would refer you to the complaint we filed in this matter for more details regarding our position on this matter.”
Spotify estimated in a regulatory filing with the US Securities and Exchange Commission last month that it would have to pay out $50 million if the MLC wins its bundling lawsuit.
According to Spotify’s filing: “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.”
That EUR €46 million figure cited by Spotify converts to USD $49.52 million at the average quarterly exchange rate published by the European Central Bank.
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.Music Business Worldwide
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