A recent question from the Filmmaker magazine message boards:
I want to know what the realistic pros and cons are of just screening the film at festivals without the rights. Will the festival refuse to screen it? Will we be disqualified from any prizes or competitions? What exactly is the danger?
This is the Sundance answer to that question, and I suspect most film festivals would tell you much the same thing: you need clearances, but the festival can't take the time to investigate that you've done the legal and proper thing.
From a legal standpoint, you must clear all copyrighted material included in your
film before you can publicly screen it. However, Sundance does not check to
make sure that you have cleared these materials at any point during the process,
nor will we be held responsible for any legal issues that might arise from the
inclusion of uncleared materials in your film. It is the sole responsibility of the
entity submitting the film to secure permission from the copyright holder of the
material in question, whether it is music, stock footage, or any other elements
that could violate someone else's copyright. Quite often, rights-holders offer
reduced rates for festival films, so you should contact them directly to avoid any
possible rights infringements.
(Taken from the Sundance submission FAQ at c4e.sundance.org.)
Technically speaking, all we're interested in is if you TELL us you have all the rights to show the film.
The festival directors/programmers I've met would probably never admit publicly that they don't care if you clear the rights or not. (Some would be risking professional relationships or even their jobs to do so.) However, I have learned from observation when screening submissions in their presence that they notice when high-profile music is used. Often they will scan the credits for some indication of clearance in those cases, but it's usually out of curiosity ("How much money did these filmmakers have in their budget?") than out of a sense of duty to make sure that the rights have been cleared.
On a related note, I will say that the idea of just getting "festival clearance" for music can make getting distribution a lot harder down the road. An interested distributor will take into account whether they have to lay out a lot of cash for music rights -- and you can be sure the price for those rights will go up when a distributor is actually interested in your film. Go ahead and either pay for worldwide rights in perpetuity for all formats while your film is still unknown or opt for another, cheaper piece of music.