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Sony close to settling the first big digital royalty dispute

By | Published on Monday 12 March 2012

Sony Music

So, a new development in the big digital royalties story that could help those veteran artists who reckon they are being short changed on digital revenue, though it could also shield Sony from the impact of the fallout of some big upcoming lawsuits on this issue, should they go in the artists’ favour.

As much previously reported, many artists with pre-internet record contracts are being paid royalties on download sales as if they were record sales. But, some acts reckon download revenue – which is, after all, secured by signing one-off licensing deals with download platforms, and which is generated with much less risk than the manufacture and sale of CDs – should be treated as ‘licensing income’. This is an important distinction, because artists usually earn a much bigger cut of licensing revenue versus record sale monies, often 20-35% more.

The biggest legal dispute on this issue to date, of course, was between early Eminem collaborators FBT Productions, who have a stake in the hip hop star’s early recordings, and Universal Music, which distributes those recordings via its Interscope/Aftermath division. The producers sued for a bigger cut of digital royalties through the American courts and won on appeal. A court hearing is upcoming to decide how much Universal should pay FBT, both now and in terms of future digital royalties.

Universal insists that the ruling in the FBT case relates only to the specific wording of their contract, but many artists and music lawyers in the US do not agree. Rob Zombie, Chuck D and the estate of Rick James are among those now suing Universal for a bigger cut of the download loot, citing the FBT judgement, while the other majors, EMI, Warner and Sony, have been targeted by similar litigation from Kenny Rogers, Sister Sledge and Toto respectively.

But Sony actually has more experience on this issue than its rivals, because it was subject to a much earlier digital royalties dispute led by The Allman Brothers, Cheap Trick and The Youngbloods, who sued the major way back in 2006. Sony initially succeeded in fighting off that legal attack, the first lawsuit being dismissed on various technicalities. But, as previously reported, in 2009 another judge overturned that initial dismissal, giving the green light for the claimants to pursue their case anew.

But then everything went quiet, and it looked like Sony had successfully kicked the case into the long grass, perhaps because the old rockers being given the OK to proceed in 2009 coincided with the first stage of the FBT litigation, where Universal won. But no, it turns out talks between Sony and legal reps for the Allman Brothers et al have been ongoing ever since, during which time, of course, the appeals courts have found in favour of the Eminem collaborators (in 2009 the Allman Bros’ lawyers were distancing themselves from that case, but presumably more recently they’ve been citing it quite frequently to Sony’s legal monkeys).

After Toto announced they were pulling Sony into the latest round of digital royalty squabbling last month, we heard rumours that a secret multi-million deal was close to be finalised between the major and its first digital royalty foes. And last week that was confirmed as the claimants filed details of that deal to the court for judicial approval.

If approved, the deal will see Sony set aside $7.95 million to compensate affected artists, and commit to increase those artists’ cut of digital income by 3%. According to Billboard, about $2.5 million of the upfront money would go to the lawyers. Quite how the rest would be divvied up isn’t currently clear, because this is a class action, so a whole bunch of artists with pre-internet contracts with Sony Music would be entitled to benefit (whether that would include Toto isn’t clear either). It is likely those artists who are big digital sellers would see the lion’s share of the initial settlement, though all would get the 3% increase in digital royalties moving forward.

More important than all that, though, is that this agreement is seemingly a major label basically admitting that there is indeed a case to say that all digital royalties on pre-internet record contracts should be higher than is currently being paid. Universal, of course, maintains that that principle is not generic, and in their case only applies under the FBT Productions contract (which was much more recent than most of the other recording agreements under dispute here).

Sony conceding on this point won’t help its competitors. Meanwhile, arguably, Sony bosses have contained the problem to an extent by agreeing to pay outs considerably less than the Allman Brothers’ legal team were originally pitching for. Paying 3% more on download sales than CD sales makes the digital pay out considerably less than what most artists could have expected to receive from conventional ‘licensing deal’ arrangements.

If the Allman agreement is approved by the courts, any Sony artist deemed to be within the ‘class’ can claim the extra digital royalty. If they reckon they are due more, they’d have to opt out of the class action ruling and then pursue their own litigation. Many might reckon an automatic 3% increase is better than going to the time, hassle and expense of pursuing their own lawsuits.

Whether Universal and Warner can negotiate similar out of court deals with their heritage artists remain to be seen. It will likely depend a lot on what settlement the courts force on the former in the FBT case. If the Eminem producers cash in big time, other Universal acts are likely to push for similar deals.



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