Warner Music moves to settle digital royalties class action

Those Sledge sisters

There have been a spate of actions in the USA between heritage artistes and their record labels, with the former trying to improve what are often considered desultory royalty rates, as the music industry shifts from the sale of physical units to the licence of online downloads. The key issue is how a 'sale' should be classified when it comes to paying royalties to artists, particularly  with record contracts that pre-date iTunes, which launched in 2003. These contracts are usually silent on the issue of to digital sales - the internet simply did not exist when they were written. Most labels, including all three majors, have treated download income as 'record sales', but many veteran artists say that digital revenue originates in 'licensing deals' with iTunes and other digital platforms, and so should be treated as 'licensing' or 'other' income under their contracts. And it's a very important distinction, because most traditional recording contracts pay the artist a much bigger royalty on licensing revenue than from per unit sales - and the latter will also be subject to royalty reducers - contractual provisions such as a 'new technology' format reducer, TV advertising reducers (both sometimes to a half royalty rate), and/or a packaging deductions for CD and vinyl, and/or a reducer for units sold by mail order and/or a reducer for 'breakages'. Whilst artist royalties typically range from 1% in early contracts to about 20% - reducers can mean they are in reality actually almost nothing for some artistes.

A number of claims, beginning with the now settled law suit brought in 2006 by the Allman Brothers, Cheap Trick and others against Sony, revolved around the way in which record labels had calculated their digital royalties. In court papers filed in the United States District Court Southern District of New York in this case, a comparison of calculations was set out based on the sale of 1,000 downloads at 0.70c per unit – giving a total income of $700: Sony BMG thought the appropriate payment would be a royalty payment on 85% of all downloads sold after deducting mechanical royalties to the songwriters, a container charge of 20% and an royalty reducer for new technology of a further 50%. This gave a total royalty payment of $45.05. The Allman brothers felt they should be paid one half of the income from 100% of all units sold, less just the mechanical royalty payable to songwriters. This gave a royalty due of by Sony BMG to the Allman Brothers of $315.50. Some difference!

Legendary record label boss Morris Levy allegedly once told one of his acts “if you want royalties, go to Buckingham Palace” but a plethora of heritage artists including Toto Kenny Rogers,  Peggy Lee,  the estates Louis Armstrong, Billie Holiday, Patsy Cline, Ella Fitzgerald, Bill Haley, Mary Martin, Rick James, Rob Zombie and and Pearl Bailey as well as Chuck D, Peter Frampton, Public Enemy, Sister Sledge, Ras Kass, Dixie Chicks and Whitesnake have all sued on this issue, with all three major labels facing litigation, including class actions. 

Weird Al Yankovic

In another March 2012 lawsuit against Sony Music by Weird Al Yankovic, the successful US parody act again argued that Sony was improperly treating digital downloads as "sales" rather than "licenses" reducing his share of income from 50% to something more akin to 15%. Yankovic also alleged thhat Sony were improperly charging marketing costs for various VH1 and MTV specials, underpaying on domestic publishing royalties, failing to pay him for goods given or discounted to retailers, failing to properly account for streaming transmissions like ringbacks, and under reporting 'sync' income on music used on TV shows around the World. Yankovic also highlighted the equity stakes taken by Sony in YouTube, Vevo and Spotify and Yankovoc argued that his own videos - very popular on YouTube - had helped Sony get their equity stake and he was entitled to a share.

The landmark case is the action brought the producers of a number of early Eminen recordings, producers FBT Productions: In a claim against Universal Music, FBT succeeded in achieving the higher royalty rate: FBT argued they had a right to a 50/50 split of profits with Universal on sales of digital music and ring tones through online retailers as these were 'Master Licensing' deals attracting the higher royalty. The contract did not specifically mention income from download stores like iTunes, or what share the artist (and therefore FBT) should get from such sales but Universal had been treating download sales as being equivalent to CD sales paying a lower rate of 12-20%% as if these were physical sales. The  District Court refused summary judgment saying the agreement was ambiguous, but The U.S. Ninth Circuit Court of Appeals in San Francisco agreed with FBT saying that the higher royalty should apply - not least as a digital 'sale' is not actually a sale - its a licence to consumers. Universal even belatedly tried to apply royalty reducers to digital income - something that Judge Philip Gutierrez was having none of. The Supreme Court refused UMG's request for a further appeal so the appellate court's decision set an important precedent i the USA - although UMG have publicly disputed this.

Ronee Blakely

In the latest development, the smallest of the three major labels, Warner Music Group (WMG) has submitted a proposed settlement to its ongoing digital royalty disputes (a class action) over the Christmas break, which the courts will now consider. According to Billboard, the mini-major is proposing a two-part compromise to artists with record deals that pre-date 2002 - plaintiffs in the settlement agreement are named Kathy Sledge-Lightfoot, Gary Wright and Ronee Blakely.

Moving forward, WMG will increase digital payouts to artists by 5% from whatever record sale royalty figure is in their current contract, with a floor rate of 10%, but with a 14% cap, meaning the deal will favour more the artists with older record deals on lower royalty rates (because anyone with a 14% split already will see no benefit to their royalties - whereas an artiste on 1% will see an increase to the floor rate of 10%). The increase will be less on non-US download income. Billboard explain that the rate increase would be 2.5%. But since contracts typically call for artist to receive, in some countries, 90% of the U.S. rate, that means foreign downloads for an artist receiving a 10% rate in the U.S. would receive 90% of 12.5%, which equals 11.25% of wholesale.

In addition to the increased royalties, WMG will also set aside a one-off pool of $11.5 million, to be split between any artists who agree to the deal pro-rate based on their download sales between 2009 and 2012, though Billboard say that at least $3 million of that pot of cash will go to lawyers who have worked on this case.

Any artiste accepting this deal will be barred for pursuing further action on the digital royalties point, their contracts being amended to explicitly define digital income.  WMG is not admitting any wrongdoing. Moreover, Billboard says that the settlement allows the company to sidestep the issue of whether downloads should be paid as a license. More pragmatically, given that, if download revenue was simply treated as licensing income, artists could expect to receive probably near to 50% of those revenues, this must make this arrangement cost effective for WMG, and although participating artists will get an immediate pay off and avoid a long drawn out litigation, they might be giving up substantial future revenues as we move into a digital future. 

Sony Music proposed a similar deal to settle its digital royalties class action in 2012, though rumour had it the two main  artists who launched the litigation - the Allman Brothers and Cheap Trick - actually had a separate and more favourable agreement.  Both of these settlements, along with a settlement agreed by Weird Al Yankovic, mean that the 'FBT' precedent has still to be tested in US courts. 

Judge Richard Seeborg must now review the proposed settlement to the class action in the San Francisco federal court, which is in the Northern District of California. It remains to be seen if the court backs WMG's proposals and, if so, how many artists will then take up the offer. After the claims are put in, WMG will provide a report to the class counsel on what amounts will be paid out to each participant within six months, and then the class counsel and artist will have 90 days to object to any of WMG's calculations.

The Future of Music Coalition estimated that the major labels may have to hand over $2 billion in extra royalties to heritage acts if they lost the cases. The Dixie Chicks put it more simply in their claim against Sony– calling the royalties and accounting process “systematic thievery”.

F.B.T. Productions, LLC; EM2M, LLC v. Aftermath Records, DBA Aftermath Entertainment; Interscope Records; UMG Recording Inc.; Ary, Inc.  September 03 2010  621 F.3d 958; No. CV 07-3314 PSG (MANx).