On February 5, 2019, the Copyright Royalty Board's Determination of Royalty Rates and Terms for Making and Distributing Phonorecords (Phonorecords III) was published in the Federal Register, making effective the Board's final determination raising mechanical royalty rates for interactive streaming for the five-year period from 2018-2022, a determination that brings substantial royalty improvements for the entire songwriting and music publishing industries.
Pryor Cashman represented the Copyright Owners (music publishers and songwriters represented by their trade organizations the National Music Publishers' Association and the Nashville Songwriters Association International), throughout the proceeding.
"This proceeding pitted songwriters and music publishers against technology giants Apple, Google, Amazon, Spotify and Pandora. Each of these five technology companies was represented by a separate law firm, but they were united in the effort of seeking to reduce the royalties to be paid to those who create the songs without which these companies' music streaming services would not exist," said Frank Scibilia, a partner on the Pryor Cashman trial team and Co-Chair of the firm's Copyright Practice. "Our focus at trial was not only to begin correcting the unfairly low royalties that were being paid to those who create and own the rights to the music, but also to protect those owners and creators against the tech companies' business strategies that unfairly reduced the reportable revenues on which royalties have been based. We are pleased that the majority of Judges agreed on both counts, and the final determination is now effective."
The proceeding began in 2016 and culminated in a five-week hearing before the three Copyright Royalty Judges in Washington D.C. in 2017. After an initial determination issued in January 2018 indicating the higher rates, opposition by the streaming services continued. Four streaming services filed motions for rehearing in February 2018, and all five services made separate submissions asking the Register of Copyrights to challenge the determination as part of its review for legal error in December 2018. The Pryor Cashman team successfully opposed all of these efforts to undermine the determination.
"The final determination that became effective today is even stronger than the initial determination, as the Judges clarified an important definition during the rehearing motion phase, providing additional protection against streaming services using product bundling to exclude revenues from the royalty pool," said Benjamin Semel, a partner on the Pryor Cashman trial team who delivered the closing arguments for the Copyright Owners at the hearing. "The baseline statutory royalty rate for using musical works in interactive streaming will rise 44 percent by 2022, but the improvements in this determination go beyond just that. Just as importantly, the new royalty rate structure offers more protection against royalty dilution. The royalty pool will now be the greatest of three different metrics: (1) an annually rising percentage of revenue, (2) an uncapped and annually rising percentage of the amounts paid by the services to record labels in the free market for the same streaming activity, and (3) fixed per-user royalty floors that vary among the different streaming models."
Donald Zakarin, Chair of Pryor Cashman's Litigation Group and Co-Chair of its Music Practice, stated, "While there is still significant improvement to be made to fairly compensate for the use of the songs that drive the explosive growth of music streaming, we are gratified that the first adjudicated determination made as to rates and terms for interactive streaming has recognized the important contributions of songwriters and music publishers. We could not have achieved this result without the dedication and help of our clients, especially NMPA's President David Israelite, General Counsel Danielle Aguirre, and Senior Counsel Erich Carey, NSAI President Bart Herbison, and the many songwriters and publishing executives who provided compelling testimony and detailed information about the music publishing and songwriting businesses." Zakarin added that, as a result of the recent enactment of the Music Modernization Act, the next mechanical royalty ratesetting proceeding, which begins in 2021 to set rates from 2023 through 2027, will further call upon the Judges to utilize a new market rate standard that is more favorable to copyright owners.
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