The Economics of Music Streaming Request; an update from the IPO on the reversion of rights and the contract adjustment

Earlier this month, the UK Intellectual Property Office (IPO) published its report on proposed changes to England’s copyright laws. The report was published in response to the DCMS Inquiry into the Economics of Music Streaming completed in March 2021 and the subsequent Competition and Markets Authority (CMA) Music Streaming Market Study.

The report deals directly with two proposals aimed at protecting the contractual interests of UK music creators by making changes to national copyright laws. These two proposals, fallback rights and treaty adjustments, are examined from the perspective of jurisdictions where such rights already exist to help inform the impact they could have if introduced into UK legislation. The full IPO report can be found here.

revocation of rights

Withdrawal clauses can be used in publishing agreements to allow ownership of works included in the agreement to revert to the songwriter after a specified period of time. fallback clauses (or termination rights as they are sometimes called); Therefore protect the artist or songwriter as they provide a mechanism for copyright reclaiming from the label or publisher.

implementation

If recourse rights are to be included in the UK copyright regime, several points need to be considered, namely:

• Identification of who has termination rights and how this is handled in multi-party scenarios.
• Calculation of when the right of termination can be exercised and within what period of time the termination can take place.
• Deciding whether the right of withdrawal applies to contracts concluded before the law came into force (“retroactivity”).
• Calculation of whether, to whom and when an early termination must be served.
• Formalities of a Notice of Termination, Identification of Delivery Methods and Records.

Stakeholder views were sought on all of these issues. British campaigners have generally advocated a short transfer period with a 20-year limit (as suggested during the DCMS inquiry). Some have called for simplification of these processes and even suggested the possibility of automatic reversal rights, but these are not without complexity. In any case, it is necessary to think about these formalities in order for the rights of recourse to take effect and, in addition, to ensure that artists and creators are aware of their rights under any new legislation.

The question of ownership also remains unclear, especially when multiple contributors are involved in a sound recording. The collaborative nature of music production poses a challenge to the application of reversion rights, particularly where reversion rights do not arise automatically (as unanimous consent of all collaborators would be required). This is compounded by the fact that the contribution is not always the same and creates the possibility of disputes between the parties.

The IPO report identifies two alternative proposals:

1. UK legislation could state that reassignment rights result in ownership passing to the artists featured on the recording and not to the original owner; Therefore, the question of first ownership of the sound recording is avoided. This would function as a legal transfer of rights, as opposed to a strict “right of return”; or
2. The right of recourse applies only to the rights of the performers and not to the sound recording itself. Copyright in the sound recording would generally remain with the record company, but the performer would terminate their consent to the reproduction and distribution of the sound recording, thereby giving the record company and allowing the performer to renegotiate the terms of the contract.

Both proposals are not without flaws, as highlighted in industry interviews that took place during the consultation and the preparation of the ICO report.

Stakeholder Views

The IPO report highlights the diverse views of stakeholders across the industry. Record labels and music publishers have expressed concern about the introduction of rights resale and the destabilizing effect it could have on investment in the music market. Economic modeling for many of these labels, including the “majors”, is rooted in long periods of copyright transfer and certainty of ownership of such copyrights. The possible retroactive effect of rights of recourse can understandably create tension within the industry. Some have noted that this risks undermining labels’ and publishers’ efforts to attract new talent and negating the global impact that has characterized these rights packages. Conversely, the creative community believes that the introduction of rights repossession is empowering and allows them to make decisions about their creative work. Songwriters and their managers also argued that the introduction of these rights would not threaten the economic viability of the UK market, but would put it on a level playing field with creators around the world and ultimately create a fairer landscape within the industry.

contract adjustment

Inspired by the long history of “bestseller” clauses in mainland Europe, the DCMS selection committee also proposed a statutory contract adjustment mechanism that would kick in when rewards to creators are deemed disproportionately low compared to the overall revenues they generate from their work.

Rep. Kevin Brennan’s 2021 Private Members’ Bill (which is unlikely to make further progress after failing at second reading) reflected this proposal and included a contract adjustment measure that would have allowed composers and authors to receive “additional, fair and reasonable remuneration… in the event that the originally agreed remuneration is disproportionately low compared to all later income from the exploitation of rights.”

The IPO report aimed to clarify the possible scope of a contractual adjustment right, the role of any accompanying legislation and its potential impact on the music industry.

implementation

A key consideration for the DCMS Select Committee was whether such a right would apply only to lump sum agreements, license agreements, or both. Bestselling rights tended to apply only to blanket deals (where the disproportion between authors’ revenues and rightsholders’ revenues was not as predictable). However, the DCMS proposal, influenced by German and Dutch legislation and the EU’s DSM Directive, envisages a broader framework that includes both blanket agreements and license agreements.

As far as retroactivity is concerned, the DCMS Select Committee intends that a contract adjustment right should “benefit performers on outdated legacy contracts”. In practice, however, the retroactivity of this right has been limited in both Germany and the Netherlands, either by applying it only to agreements concluded after the legislation came into force, or by applying it to agreements before the legislation, but only in Regarding excessive payments that happened after its passage. It is also unclear how the contract adjustment right would apply to royalties, i.e. would the terms of license agreements change in the future or would a calculation need to be made to account for the disproportionate revenue generated between the enactment of the law and the enactment of the claim ?

Stakeholder Views

Perhaps unsurprisingly, both record labels and publishers have argued that current royalty models are fair, since royalty payments tend to increase in proportion to a song’s popularity. Labels and publishers also argue that successful artists have considerable bargaining power.

In contrast, members of the music-making community argued for a right to adjust contracts, especially given that many legacy contracts have low license fees and long durations.

Conclusions

Finally, the report states that we are still far from concluding on the changes in the economy of the Music Industry. Given the differing views in the industry and in the commons, and the lack of empirical evidence to substantiate claims, it is very difficult to assess the impact that recourse and contract adjustments may have on all parties involved.