Judge throws out bot-fraud suit against Spotify with prejudice, clearing its pro-rata royalty model
A federal judge threw out RBX's bot-fraud class action with prejudice, closing the last court challenge to Spotify's pro-rata payout model. The investor stake: with no duty to shield artists from bots, fraud costs stay on bad actors, protecting the margins Jefferies is betting on.
Richard Tang · 2 min read
A federal judge has permanently shut down the lawsuit claiming Spotify−2.53% — Spotify, down 2.53 percent today lets bots steal royalties from working artists, and that matters more for Spotify's money than for Drake's. On October 26, Judge Stanton dismissed the class action from RBX, the rapper born Eric Dwayne Collins, with prejudice, meaning it cannot be refiled, after finding only vague, conclusory claims and no evidence Spotify violated California's Unfair Competition Law 1. It was the second dismissal; the first came in June, and the refiled complaint fared no better 1.
RBX's theory was about the payout mechanics, not one celebrity. Spotify pays from a pro-rata pool: an artist's cut depends on their share of total streams, so every fraudulent stream quietly dilutes everyone else. He alleged a non-trivial percentage of Drake's 37 billion-plus streams came from bot accounts, worth hundreds of millions in falsely earned royalties for top artists 1.
The judge found Spotify has no legal obligation to shield individual artists from bots on its platform 1, which means the cost of suspected fraud keeps falling on the bad actors Spotify charges back, not on its own margins.
The margin story assumes a clean royalty pool
Here is why investors should care. The stock is down 8.5% in 2026 at roughly 35x forward earnings on the fear that AI disintermediates streaming, while Jefferies+1.72% — Jefferies, up 1.72 percent today raised its target to $620, calling the platform highly defensible 3. That bull case rests on pricing power showing up in margins, and the margins are doing what a defensible platform's margins should: 33.4% gross margin last quarter, with 32.9% guided for the third quarter alongside €670 million of operating income 3.
Spotify's gross margin has climbed every year since 2022, and the Q3 guide holds the level
- Gross margin
- Estimate
Data
| Gross margin | |
|---|---|
| 2022 | 25% |
| 2025 | 32% |
| Q2 2026 | 33.4% |
| Q3 2026 guide (estimate) | 32.9% |
That case assumes the royalty pool stays clean and credible. Until October 26, a court could have rewritten those payout mechanics 5. Now the litigation leg of that defense is closed, alongside the operational one: our October 20 coverage reported Spotify purged tens of millions of AI tracks from its recommendations 5.
What still has to be proven
The AI-fear trade still has to be answered by the business itself, and Spotify's answer is to become the service agents call. It integrates with ChatGPT, Claude and Meta's−1.16% — Meta, down 1.16 percent today Muse, and co-CEO Gustav Söderström argues entertainment is the chore agents cannot replace, with 788 million monthly users and nearly €5 billion in third-quarter revenue behind that bet 4.
The court did not validate that bet. It cleared the ground under it. The next proof point is the fourth-quarter gross-margin outlook and December churn, which will show whether subscribers keep paying the higher prices.
Get Applications by email, free
How AI is changing the software people and companies use. In our daily email, every weekday.
