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Enrique Iglesias reckons misclassified streams cost him millions in royalties 

By | Published on Thursday 25 January 2018

Good news for avid collectors of sales v licence lawsuits. Sony Music may have settled its royalties battle with a bunch of American Idols, but now Enrique Iglesias has sued Universal Music over the way the mega-major classifies his streams for royalty purposes. Iglesias reckons that classification is in breach of his record contract and has cost him millions.

As the recorded music business has shifted over to digital, there has been much debate over how record companies share download and streaming income with heritage artists whose record contacts don’t specifically reference such revenues.

Record contracts usually provide artists with a percentage share of any money their recordings generate. However, the percentage paid to the artist often varies according to how the money is generated. A traditional distinction was between sales income (eg selling CDs) and licence income (eg sync deals). A common royalty on the former was 15%, while on the latter 50%, so these distinctions make quite a big difference for the artist.

Labels in the main have treated downloads as sales income, even though the deals done between the record companies and the download stores are licensing deals. That led to a flurry of lawsuits, mainly in the US, of which the FBT Productions case against Universal in relation to Eminem’s recordings was the highest profile. Despite all that litigation, most artists saw their download royalties increase by only a few percent, a long way off the 50% rate that was commonly assigned to ‘licence’ income.

What about streams though? How should streaming income be treated when it comes to paying royalties on old record contracts? Most of the big cases on sales v licence to date focused on downloads not streaming. That made the legal battle between 19 Recordings – representing various finalists from ‘American Idol’ – and Sony Music interesting, as it included the argument that a higher licence royalty should be paid on streams. But earlier this month it emerged that that lawsuit has been pretty much settled out of court.

This brings us to the lawsuit filed by Iglesias in Miami yesterday. The case is very much focused on streaming monies and how streams are defined by a label when such income is not specifically mentioned in a record contract. Neither of Iglesias’s two deals with Universal Music specifically mentions streaming income. No, not even his second deal that was signed in 2010. Which seems like quite an oversight for such a recent contract.

Cases of this kind are all about contractual interpretation, and therefore centre on the specific wording of Iglesias’s two record contracts with Universal. While much of the lengthy lawsuit that was filed yesterday is dedicated to running through all of the music star’s multifarious successes, a little time is dedicated to specific contract terms.

In particular, a catch all ‘any other income’ clause in the original 1999 contract. According to the lawsuit, that clause said that monies generated by “any type of use not specifically covered” elsewhere in the contract would result in a royalty payment to Iglesias of 50%. And that, the lawsuit notes, is substantially higher that the standard ‘album royalty rate’ contained elsewhere in the deal.

Given that streams aren’t specifically mentioned in either the original 1999 contract or the subsequent second contract in 2010 (downloads are, but not streams), Iglesias’s lawyers reckon that he should have been getting the 50% “any type of use not specifically covered” royalty on all the streaming monies generated by his records. But he has not.

Iglesias, therefore, has been significantly underpaid because of – says the lawsuit – “Universal’s improper crediting of streams at the incorrect album royalty rate, which is less than a fraction of the 50% streaming royalty”. I’m not sure anything can be less than a fraction. That’s just another smaller fraction surely? But we get the point.

Actually, interestingly, in a footnote, the lawsuit states that Universal’s Interscope label – which released Iglesias’s English language albums under the first part of his deal with the major – did initially pay the higher 50% rate on streams. The other Universal subsidiaries which released his Spanish language albums and later records presumably did not.

Says the legal filing: “Up until approximately 2016, Interscope properly recognised and credited Iglesias’ streaming royalties at 50%. However, upon receiving a directive from Universal, Interscope – without consulting or otherwise notifying Iglesias – began crediting streams at the incorrect, lower record royalty rate”.

Given the managers and lawyers of many heritage artists reckon the sales v licence question was never properly addressed, despite all the lawsuits on download royalties Stateside, this new case will be interesting to watch. Although it also includes a dispute over Iglesias’s audit rights, it is very much focused on how streaming income is defined in old (and, as it turns out, not so old) contracts that don’t talk about streams.

Though, usually when it’s mega-star artists who sue, a confidential out of court settlement follows, so that no precedent is set that may apply to other artist deals with similarly written clauses. Nevertheless, this dispute will be one to watch. Certainly Iglesias’s legal rep James Sammataro reckons the dispute could inform other heritage artists with grievances over their share of streaming income.

He told reporters: “Despite [his] record-breaking success, Universal has wrongly insisted that artists like Enrique be paid for streams in the same manner as they are paid for physical records despite the fact that none of the attendant costs – production, distribution, inventory, losses – actually exist in the digital world. This is not what Enrique’s contract, or the contracts of many other artists, call for”.

“Artists, producers and songwriters should benefit from the reduced costs of streaming, not have their musical works spin unwarranted profits”, Sammataro continued. “Universal has long ignored, and is now attempting to distort, the clear terms of its artist agreements so that it alone reaps the savings from digital streams. After lengthy efforts to have Universal honour its contractual obligations, Enrique’s team regrettably concluded that he had no choice but to file this lawsuit”.