Spotify’s Rush to Blame HFA May Be Misplaced

The knives are out for the Harry Fox Agency in Spotify’s mechanical licensing debacle but that blame is a little too convenient and may well be misplaced.  Discovery in the songwriter class actions will no doubt shed a spotlight on the situation, but when you think about it, there’s actually an alternative explanation that has the appeal of elegance.

Think about it.  In order for any licensing company to clear songs on a service someone at the service has to tell them which songs to license.  That’s where it starts.  With the service.  That is—with Spotify.  So Spotify knows which songs it needs to license.

HFA is a special case because it is both a publisher’s agent (licensing “out”) and a clearance company (licensing “in”).  This is the source of ambiguity for those who are unfamiliar with the landscape.

When HFA is licensing out for compulsory licenses, it probably has already been authorized to issue compulsory licenses on certain terms, sometimes called a “modified compulsory”.  What’s “modified” is often the accounting and audit terms, and the modification usually is quarterly instead of monthly accounting and the right to conduct an audit which is not otherwise available to the publishers.  All the other terms of the compulsory are incorporated by reference from Section 115 of the Copyright Act (and the regs).  Hence “compulsory”.  So modified compulsory because it’s almost a compulsory but not quite.  HFA is often authorized to issue such licenses by their publishers, which reduces transaction costs.  Hello Professor Coase.

Because the publishers represented by HFA while numerous are hardly all of the publishers out there, this modified compulsory will never be 100% of the songs on a digital service trying to be all things to all people.  Everyone knows this.

That is, on a digital service like Spotify.  HFA publishers will have ownership shares of many songs—and those won’t be 100% of the copyrights all the times.  Sometimes 100%, sometimes less.  Probably mostly less.

That means that in order to license the non-HFA publishers, Spotify needed someone to send out the now-famous NOIs (or notices required for compulsory licenses) including the “I can’t find them” notices to the Copyright Office.  But how would HFA know which songs were HFA publishers and which were not?

Because Spotify told them.

The $64,000 question is what happened then.  What I would imagine happened at that point is that HFA told Spotify they could issue a license for the modified compulsory and that they could send out an NOI for the rest.  I would also imagine that HFA told Spotify what would happen if they couldn’t find the publisher ON THE LIST THAT SPOTIFY GAVE THEM.  HFA is most likely to have the name and contact for their co-publishers, next most likely for other songs they have done song research on over the years, and then there’s the group (like Tunecore artists) that they have no knowledge of.

What I cannot imagine is that HFA would agree to guarantee—guarantee—that Spotify would have no blowback on the songs on the list that HFA had no information on, particularly if Spotify used the songs anyway.  That would be INSANE.

I have no doubt that Spotify will have tendered an indemnification demand under their services agreement with HFA pretty much regardless of what it actually says.  That would likely have played havoc with the escrow account—a real escrow account this time—that no doubt was withheld from the sales price when HFA was sold to SESAC.

But remember this—when whoever leaked Spotify’s contract with Sony to The Verge, we became privy to this language in Sony’s deal (that I have to believe is more or less duplicated in all the major label deals):

Company will obtain and maintain in full force and effect (at Company’s sole cost and expense) all necessary licenses, permits and other authorizations required by law to operate its business and to offer streams and otherwise use copyrighted audio, audiovisual and other materials as contemplated herein, and all necessary licenses and other rights (including, but not limited to, copyright, patent and trademark rights and other rights and licenses) necessary to provide the services and functions contemplated herein, including all relevant publishing/mechanical licenses, free of claims from any Person.

When you consider that the list that Spotify may have sent to HFA well could be the sales file for recordings Spotify had already used, the issue still comes down to what did Spotify know and when did they know it.

While the possibilities for boneheaded mistakes abound, I am much more inclined to believe that Spotify knew what was and wasn’t licensed in large part if not entirely.  And all that has to be true is that Spotify knew they were using songs owned by the songwriter class without a license.  I’d bet that it is highly unlikely that HFA has any responsibility for that.