IP Law Daily, COPYRIGHT—S.D.N.Y.: ‘Pretext’ or not, Spotify’s bundled royalty rates are consistent with the law, (Jan 30, 2025)

By Matthew Hersh, J.D.

Songwriters and publishers claim the music giant gamed the system by adding audiobooks of token value.

Spotify did not violate the law when it bundled free audiobooks to its premium music subscribers and then reduced its royalty payments to music copyright owners as a result, the federal court for Manhattan has held. But the court, in a decision that copyright owners are all but certain to appeal, acknowledged that Spotify’s strategy might well have been pretextual—and that it took advantage of a regulatory definition that “sounds very little like what an ordinary consumer might imagine to be a bundle” (Mechanical Licensing Collective v. Spotify USA Inc., No. 2:24-cv-3809 (S.D.N.Y. Jan. 29, 2025)).

The dispute arises out of Spotify’s entry into the market for audiobooks. The music giant’s first step came in an announcement in 2023 that its premium subscribers—those paying $10.99 for unlimited ad-free music—would also have access to 15 hours per month of audiobook listing for no additional cost. But it was the next step, on March 1, 2024, that raised the ire of the songwriters and music publishers. On that day, Spotify started offering U.S. customers a standalone audiobook service for $9.99—only one dollar less than its service that included audiobooks plus music. Shortly thereafter, ostensibly because its $10.99 premium service now constituted a “bundled” offering of separately valuable music and audio works, Spotify reduced its royalty payments for the music portion of the Premium service by nearly 50 percent.

Songwriters and music publishers, smelling a rat, promptly filed a lawsuit. The complaint, filed in the name of the Mechanical Licensing Collective—the entity that is empowered to collect royalties from record labels and digital service providers on behalf of copyright owners of musical works—claims that Spotify’s royalty structure violated the federal regulations that govern intra-industry payments for digital online music. Spotify moved to dismiss the complaint, leading to this opinion.

Bundle. The court found that Spotify’s royalty practice was lawful. Under an industry agreement for music licensing rates, codified in regulations issued by the Copyright Office, the amount that a digital music provider pays to songwriters and publishers can vary depending on whether the provider offers a flat service or whether it combines different services—such as music streaming and cloud storage—into a “bundle” that is cheaper for its customers than buying both services separately. Spotify could not take advantage of this provision, the lawsuit claimed, because the addition of Audiobooks to Spotify’s premium service resulted in no change in the price that premium services paid. Spotify argued that it was still entitled to pay the “bundled” rate under the regulations—and the court agreed.

Spotify was entitled to pay the bundled royalty rate, the court found, because the Copyright Office regulations governing bundling pricing unambiguously supported Spotify’s position. Under those regulations, a digital service provider that bundles music with “some other product or service” pays copyright owners only for the pro rata music portion of that service, even if that pro rata rate is less than what a standalone music service would bring in. The copyright owners argued that audiobooks could not qualify as an “other” service under those regulations because Spotify did not offer them as a separate standalone service before it started bundling them with music. In other words, the copyright owners argued, the reference to “other products or services” means “other preexisting, standalone products or services.” But the problem for the copyright owners, the court found, was that “the regulations do not say ‘other preexisting, standalone products or services, and the Court finds no basis to read words into the law that are not there.” This argument would therefore fail.

Nor would the copyright owners gain traction by arguing that Spotify’s launch of the separate audiobook program was pretextual. The copyright owners pointed out that Spotify did not report its musical service as a bundle when it first combined that service with audiobooks in 2023. But the fact that Spotify did not immediately report the service as a bundle in 2023—“although it could have, and thus likely paid more in royalties... than it was otherwise required to pay,” the court noted—did not mean that its later decision to reclassify the service as a bundle was invalid. In fact, “even if Spotify’s decision were pretextual,” the court observed, that would not change the outcome. “[The copyright owners] point[] to no provision of [the Copyright Act] or its implementing regulations that suggests that a digital service provider like Spotify forfeits the opportunity to report an offering as a [b]undle simply because it previously did not do so,” the court reasoned.

Finally, the court found, the audiobook service added sufficient value to the bundle offering that Spotify could qualify for the bundled royalty rate. Under the regulations at issue, a service that is combined with music must have “more than token value” for the package to qualify as a bundle. The copyright owners argued that the audiobooks had no meaningful standalone value because Spotify gave 15 hours of audiobooks to its premium customers for free. That argument had “intuitive appeal,” the court acknowledged. Indeed, the court noted, Spotify’s ostensible bundle sounded “very little like what an ordinary consumer might imagine to be a ‘bundle’” and might be “more accurately described as a ‘two-for-one’ deal.” But unfortunately for the copyright owners, the court was constrained to conclude, the implementing regulations “have not adopted the ordinary meaning of the word “bundle.” Thus, “although the Court agrees with the premise of [the copyright owners’] argument that the regulations define [b]undle in a manner that encompasses more than what an ordinary consumer might consider a ‘bundle’ to be, the Court cannot disturb the words of the regulation as they are defined.”

The Case is No. 2:24-cv-3809.

Judge: Torres, A.

Attorneys: Darren Wright Johnson (Paul Weiss LLP) for Mechanical Licensing Collective. Allison Levine Stillman (Latham & Watkins LLP) for Spotify USA Inc.

Companies: Mechanical Licensing Collective; Spotify USA Inc.

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