The economics of music streaming inquiry; an update from the IPO on rights reversion and contract adjustment

Earlier this month, the UK Intellectual Property Office (IPO) published its report on the proposed amendments to English copyright laws. The report was published in response to the DCMS Inquiry into the economics of music streaming, which concluded in March 2021 and the Competition and Markets Authority’s (CMA) subsequent market study into music streaming.

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The report directly addresses two proposals aimed at protecting the contractual interests of UK music creators by making changes to domestic copyright law. These two proposals, rights reversion and contract adjustments, are explored from the perspective of jurisdictions where such rights already exist to help inform the impact they may have if introduced into UK legislation. The full IPO report can be accessed here.

Rights Reversion

Rights reversion clauses can be utilised in publishing contracts to allow for ownership of works contained within the agreement to revert back to the songwriter after a certain period of time. Reversion clauses (or termination rights as they are sometimes known); therefore, protect the artist or songwriter as they provide a mechanism by which copyright can be reclaimed from the label or publisher.

Implementation

If reversion rights are to be incorporated into the UK’s copyright regime, there are several points that need to be considered, namely:

  • Identifying who holds the right to terminate and how this is managed in multi-party scenarios.
  • Calculating at what point the termination right can be exercised and the time period during which termination can occur.
  • Deciding whether the reversion right would apply to contracts that were agreed prior to the legislation coming into force (‘retroactivity’).
  • Calculating whether any advance notice of termination ought to be served, on who and when.
  • Formalities of a termination notice, identifying methods of service and record-keeping.

Opinions have been sought from stakeholders on all of these issues. British campaigners have generally lobbied for a short period of transfer with a 20-year limitation (as proposed during the DCMS inquiry). Some have called for simplification of these processes and have even suggested the possibility of automatic reversion rights, but these are not free of complexity. In any event, thought will have to be given to these formalities to allow for reversion rights to be effective, in addition to ensuring that artists and creators are aware of their rights under any new legislation.

The issue of ownership also remains unclear, particularly where there are multiple contributors to a sound recording. The collaborative nature of music production poses a challenge to the operation of reversion rights, particularly where reversion rights do not automatically arise (as the unanimous consent of all collaborators would be required). This is enhanced by the fact that contribution is not always equal and poses the possibility of disputes arising between parties.

The IPO report identifies two alternative proposals:

  1. UK legislation could state that reversion rights result in ownership reverting to the featured artists on the recording, rather than the first owner; therefore, sidestepping the issue of first ownership of the sound recording. This would operate like a statutory transfer of rights, as opposed to a strict ‘reversion’ right; or
  2. The reversion right applies only to the performers’ rights rather than the sound recording itself. The copyright in the sound recording would continue to subsist with the record label generally-speaking, but the performer would terminate their consent to the reproduction and distribution of the sound recording, thereby allowing the label and the performer to renegotiate the contractual terms.

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

Stakeholder views

The IPO report highlights the disparity in views of stakeholders across the industry. Record labels and music publishers expressed concern about the introduction of rights reversion and the destabilising effect it may have on investing in the music market. The economic modelling for many of these labels, including the ‘majors’, is rooted in long periods of copyright transfer and certainty of ownership of such copyright. The possible retroactive effect of reversion rights, understandably, may create tensions within the industry. Some have commented that it risks undermining the efforts undertaken by labels and publishers in acquiring new talent and fracturing the global effect that is typical of these rights packages. Conversely, the creative community believes the introduction of rights reversion to be empowering and a way of enabling them to make decisions about their creative works. Songwriters and their managers also cited that the introduction of these rights would not jeopardise the economic viability of the UK market but place it on a level playing field with creators across the globe and ultimately create a fairer landscape within the industry.

Contract Adjustment

Inspired by the long history of ‘best-seller’ clauses in mainland Europe, the DCMS Select Committee also proposed a statutory contract adjustment mechanism which would operate when the rewards to creators are seen to be disproportionately low in comparison to the overall revenues generated by their work.

MP Kevin Brennan’s 2021 Private Members’ Bill (which is likely to make no further progress after failing at second reading) reflected this proposal and included a contract adjustment measure that would have enabled composers and authors to claim “additional, fair and reasonable remuneration… in the event that the remuneration originally agreed is disproportionately low compared to all subsequent revenues derived from the exploitation of the rights.”

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

Implementation

An important consideration for the DCMS Select Committee was whether any such right would apply only to lump sum agreements, royalty arrangements, or both. Best-seller rights have typically applied to lump sum agreements only (where the disproportionality between creator revenues and rights holder revenues are not as foreseeable). However, the DCMS’ proposal, which was influenced by German and Dutch legislation and the EU’s DSM directive, provides a broader framework encompassing both lump sum agreements and royalty arrangements.

As for retroactivity, the DCMS Select Committee intends that a contract adjustment right should ‘benefit performers on outdated legacy contracts.’ In practice however, the retroactive effect of this right has been curtailed in both Germany and the Netherlands, either by applying only to agreements made after the legislation has come into force, or by applying to pre-legislation agreements but only in respect of disproportionate payments that occurred after its enactment. It is also unclear how the contract adjustment right would apply to royalties i.e., would the terms of royalty agreements change going forward, or would a calculation need to be made to consider the disproportionate revenues that occurred between the enactment of the legislation and the making of the claim?

Stakeholder views

Perhaps unsurprisingly, both record labels and publishers argued that current remuneration models are fair as royalty payments tend to escalate in proportion to a song’s popularity. The labels and publishers also put forward the argument that successful artists have a considerable amount of bargaining power.

In contrast, members of the music creators’ community argued in favour of contract adjustment right, especially given that many legacy contracts have low royalty rates and a long duration.

Conclusions

Ultimately, the report identifies that we are still a long way from any conclusion regarding changes to the economics of the music industry. Given the divergent views across the industry and in the Commons, and the lack of empirical evidence to justify claims, it is very challenging to gauge the impact that reversion rights and contract adjustment may have on all parties involved.

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