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Warner tries to settle digital royalties class action

By | Published on Tuesday 7 January 2014

Warner Music

Warner Music submitted a proposed settlement to its ongoing digital royalty disputes over the Christmas break, which the courts will now consider.

As previously reported, there has been much debate in the US music community as to how digital income – mainly from downloads to date – should be classified when it comes to paying royalties to artists with record contracts that pre-date iTunes, and which therefore make no specific reference to digital sales.

Many 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 et al, so should be treated as ‘licensing’ or ‘other’ income. It’s an important distinction, because most record deals pay the artist a much bigger royalty on licensing revenue that record sales money.

The landmark case in this, of course, is the one successfully pursued by FBT Productions against Universal Music in relation to the early Eminem recordings in which they have a stake. Since the American courts agreed that FBT was due the higher royalty on digital income a plethora of heritage artists have sued on this issue, with all three majors facing litigation, including class actions.

It’s a class action lawsuit that Warner is trying to settle, hence its proposal needs court approval. According to Billboard, the mini-major is proposing a two-part compromise to artists with record deals that pre-date 2002.

Moving forward, it will increase digital payouts to artists by 5% from whatever record sale royalty figure is in their current contract, but with a 14% cap, meaning the deal will favour more the artists with older record deals, whose contractual split of record sale income will usually be smaller (because anyone with a 14% split already will see no benefit). The increase will be less on non-US download income.

In addition to the increased royalties moving forward, Warner will 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 at least $3 million of that pot of cash will go to lawyers who have worked on this case.

Anyone accepting this deal will be barred for pursuing further action on the digital royalties point, their contracts being amended to explicitly define digital income.

Given that, if download money was simply treated as licensing income, artists could expect to receive anywhere up to 50% of the money, that makes this arrangement cost effective for Warner, though results in a quick kickback for participating artists, versus long drawn out litigation. And we’re still waiting for a test case to reach court that assesses whether the aforementioned FBT ruling sets a wide-ranging precedent.

Sony Music proposed a similar deal to settle its digital royalties class action in 2012, though rumour had it the artists who launched the litigation – the Allman Brothers and Cheap Trick – actually had a separate more favourable agreement.

It remains to be seen if the court backs Warner’s proposals and, if so, how many artists take up the offer.