Wrapping up six years of heated litigation, Sony offered an $8 million settlement this week in a class action lawsuit led by The Allman Brothers and Cheap Trick, accusing Sony of underpaying the bands’ digital record royalties. Originally filed back in 2006, this class action forged the way for numerous artists to sue their labels for counting digital downloads as “sales” rather than “licenses.” Last year, Eminem’s producers won a similar suit against Universal. See F.B.T. Productions, LLC v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010). At the crux of such disputes lies the discrepancy between sale and license royalty rates: royalties for phonorecord sales typically fall between 8 and 20 percent, whereas a 50 percent royalty rate remains the industry standard for licenses.
As the Amended Class Action Complaint alleges, Sony’s failure to properly account to Plaintiffs for recording royalties of their recordings sold by “Music Download Providers” and “Ringtone Providers” through digital distribution has resulted in a gross underpayment of royalties to Plaintiffs. See Allman v. Sony BMG Music Entm’t, No. 06-CV-3252 (GBD), 2008 WL 2307598 (S.D.N.Y. July 10, 2006). By treating digital downloads like traditional record sales, Sony has successfully triggered a lower-paying royalty deal for its artists. The Complaint charts out the differences between the two royalty options, highlighting that of the 99 cents charged to the consumer by Apple for each download through iTunes, Plaintiffs receive approximately 4.25 cents. Similarly, from each $1 to $1.50 that Sony receives for a ringtone, Plaintiffs receive only 8.3 cents. Plaintiffs argue that these numbers stand in stark contrast to the revenue Plaintiffs would receive if Sony licensed its sound recordings to Music Download Providers, since the artists’ Recording Agreement requires Sony to pay its artists 50% of all net licensing receipts received, when such sound recordings have been licensed to third parties.
However, in a brief and pointed opinion, the district court judge determined based on the contractual language that there is “no basis from which it can reasonably be inferred that payment pursuant to the master recording lease provision is applicable.” Allman v. Sony BMG Music Entm’t, 06-CV-3252 (GBD), 2008 WL 2477465, at *1 (S.D.N.Y. June 18, 2008). Since the master recording lease provision (which would entitle Plaintiffs to 50% of net receipts as a royalty) necessarily required proof that the master recordings were in fact leased to the Music Download Providers – proof not provided by Plaintiffs – that provision did not apply. Instead, the district court held that the royalty provisions applicable to “Sales of Phonograph Records” reigned supreme, which included master recordings sold by Defendant or its licensees through normal retail channels, such as iTunes. Since the parties stipulated that digital music files fell within the contractual definition of “phonograph records,” the iTunes downloads constituted sales of the digital sound recordings rather than licenses and thus justified the lower artist royalty rate.
Now, almost four years later, the Settlement directs that $7.65 million (less attorneys’ fees) will go to class members who sold at least 28,500 downloads on iTunes, while the remaining $300,000 will be paid to class members equally, per capita, with sales fewer than 28,500 total downloads.
Despite being premised primarily on contractual interpretation, Allman nonetheless raises timely, compelling questions pertaining to the disconnect between emerging digital technologies and frequently outdated contracts. For example, one background explanation for the prevailing lower royalty rate in Allman may be that the lead Plaintiffs’ record contracts came into existence before the advent of digital music sales online, and did not adequately predict or account for future methods of artist payments. In any case, the district court’s opinion makes clear that “the emergence of a new era of digital sound recordings does not afford plaintiffs the right, under the guise of contract interpretation, to rewrite the terms of the contracts in order to secure a more favorable, or what they consider to be more equitable, royalty formula.” See Allman, 2008 WL 2477465, at *2. Depending on the exact wording of other artist contracts, then, we can expect to see an increase in this type of litigation.