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Judge allows digital royalties class action to proceed

By | Published on Thursday 3 November 2011

Universal Music

In what could prove to be a devastating case for the major labels, a federal judge in California has given the green light for a class action lawsuit against Universal Music by a bunch of long established artists, led by Rob Zombie and the estate of Rick James. The music major had requested the case be dismissed.

As previously reported, this case is based on how pre-internet record contracts should be interpreted in the digital age. It’s quite common in record contracts for artists to be given different royalty rates depending on revenue stream, usually to the effect that the royalty from record sales – where the label incurs more costs and risk – is quite a bit less than the royalty on so called ‘licensing revenues’, so when a recording is used commercially by another business.

Since digital music took off the labels have classified downloads as record sales and therefore paid artists, whose pre-internet record contracts do not specifically mention downloading, the lower royalty. But some artists argue that, because with download stores the label’s costs and risks are almost non-existent, when a label makes its catalogue available to an iTunes type service it is a licensing deal and therefore the higher artist royalty should be paid.

This is not a new argument, and there have been previous attempts by heritage artists to sue for a bigger royalty cut on digital revenue, but those lawsuits have in the main been unsuccessful, judges ruling that, had downloads existed when the disputed contracts were originally agreed, it seems certain the label would have insisted the record sale royalty apply to download sales.

But then FBT Productions, the production house involved in the early Eminem recordings, which has a stake in those tracks, sued Universal over this issue and won. The major insisted the FBT case related to the specific wording of the production company’s contract, and the precedent in that case did not apply to every other pre-download record contract. But Zombie, the Rick James estate and others did not agree and began new legal action earlier this year.

That litigation became a class action, so that all artists signed to Universal with pre-internet contracts could benefit from any positive outcome. It was that fact that Universal mainly relied on in its efforts to have the lawsuit dismissed. It argued that these were contract disputes between individual artists and the music company, and that each dispute would need to be considered separately, because there wasn’t any “general harm” occurring that would justify a class action case being heard.

But lawyers for the plaintiffs disagreed, saying they believed Universal “engaged in a broad scheme to underpay numerous royalty participants, including formulating an opaque and artificial method for accounting for and paying its royalty participants for income derived from such licenses and engaging in a sustained public relations effort designed to convince the public that it had employed ‘groundbreaking’ and ‘enlightened’ accounting practices that actually benefited (rather than cheated) the Class”. And a judge earlier this week said that those allegations were enough to justify this being treated as a class action.

As that ruling was being made, elsewhere it was announced Public Enemy’s Chuck D was launching his own proceedings over the same issue. His legal rep told reporters: “Chuck D has been ‘fighting the power’ for over two decades and will continue to do so through this suit in order to help all musicians, including many legacy artists who are living on fixed incomes”.

Universal maintains it is in the right on this debate, and that it will prevail in court. Certainly the company will be hoping the ruling in the FBT case is an anomaly, because experts reckon if it lost a class action on this issue it could cost Universal billions. And the other majors would be open to similar claims.



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