Universal Music has agreed to pay up to $11.5 million and bump up royalties going forward to resolve a lawsuit that alleged it had cheated recording artists by improperly classifying digital downloads off of services like Apple's iTunes as "sales" rather than "licenses." The settlement, filed on Tuesday and needing the Judge's approval, would compensate an estimated 7,500 artists including named plaintiffs Chuck D. of Public Enemy, Rick James (by way of trust), Dave Mason of Traffic, Whitesnake, The Temptations, The Motels and others.
The lawsuit came on the heels of a 2010 appellate ruling in F.B.T. Productions v. Aftermath - dealing with Eminem recordings - which suggested that "licenses" rather than "sales" were the more appropriate accounting treatment in an era where record labels no longer spend huge amounts on packaging physical CDs. The difference is substantial. Under "licenses" or "leases," artists have an even split with labels. Under "sales," artists only get about 15 percent of net receipts. Universal defended itself by questioning whether the FBT holding applied to many of the contracts of class plaintiffs. Other big labels including Warner Music and Sony were hit with class action lawsuits, both previously settled. However, Universal Music and subsidiary Capitol Records (as part of EMI) were hold-outs until fairly recently. Last month, after litigating a case that reviewed some 11,000 recording contracts, the parties signaled that a settlement was coming.
According to a motion to approve the settlement filed on Tuesday, the Warner settlement (also $11.5 million) became a "starting point," but the parties struggled to reach their own conclusion, particularly on the issue of future relief. As part of the deal, Universal makes no admission of wrong-doing, but it will be paying nevertheless. In a statement, UMG commented, “Although we are confident we appropriately paid royalties on digital downloads and adhered to the terms of contracts, we are pleased to amicably resolve this matter and avoid continued legal costs.” Of the $11.5 million settlement, just over $3 million is going to attorney's fees and costs while about $200,000 is going to the named plaintiffs. The rest will be going to artists with contracts from UMG or Capitol Records between 1965 and 2004 with certain caveats.
Perhaps the most interesting aspect of the settlement deal is the royalty bump that artists will now be getting over future downloads. It's a 10 percent bump on the royalty rate, so if an artist previously got 15 percent of net receipts, that artist would now get an additional 1.5 percent, or 16.5 percent total. What's more, according to the motion to approve the settlement, "Class Members will also lock in certain additional benefits in the calculation of their royalties on Download/Mastertone income preventing reductions for, e.g., 'packaging' and free goods from being implemented in the future."
Digital downloads are on the decline as streaming income is surging, and at least one lawsuit is currently in play that challenges whether Sony is improperly characterizing those streaming receipts in an accounting-favorable way. However, this settlement seems to be a fair resolution of this controversy over how to compensate artists for their valuable work in a new medium which was not contemplated by their contracts, many drafted in the 1970s or 1980s - and it compensates these artists now, rather than after additional years of litigation and uncertainty.
There are bound to be many more such lawsuits on various issues as the landscape evolves going forward in the future.
Wallace Collins is an entertainment and intellectual property lawyer based in
New York with more than 30 years of experience. He was a recording artist for Epic Records before receiving his law degree from . Tel: (212) 661-3656; www.wallacecollins.com Fordham Law School