Rockers’ Push for Reasonable Royalties Survives Motion to Dismiss

Used with permission from Microsoft.

The mainstream distribution of music through digital media has been around for over a decade now, yet many questions about the relative rights of record companies and artists in this medium remain unsettled. One indicator of the uncertainty brought on by digital distribution in the music industry is the class action suit brought by Rob Zombie (of Rob Zombie and White Zombie fame), David Coverdale (of Whitesnake), Dave Mason (of Traffic and other groups), and the estate of singer Rick James against Universal Music Group in James ex rel. James Ambrose Johnson, Jr. 1999 Trust v. UMG Recordings.

These all-star plaintiffs allege that Universal Music Group (UMG) improperly withhold royalties from artists by defining digitally distributed sound recordings and “mastertones” (cell phone ringtones) as “sales” and not “licenses.”

Contractually, UMG and other labels set aside dramatically different royalty percentages for the “sale” as compared to the “licensing” of sound recordings. For a “sale,” artists are typically paid between 10 and 20 percent of gross revenues as royalties. The label’s greater percentage reflects the costs associated with manufacturing, shipping, and selling recordings at retail locations. However, for a “licensed” use, the royalty rates are far more favorable to the artists; typically edging closer to a 50-50 split of revenue.

Obviously, this means a lot of money rides on whether or not a particular use is a “sale” or a “license.” The plaintiffs allege that the digital distribution of their sound recordings via digital music services (such as iTunes or Amazon), as “mastertones” (cell phone ringtones, waiting tones, etc.), and through other services were “licenses” of their recordings, not “sales.” After all, the labels’ greater share of royalties associated with “sales” was designed to offset the costs associated with the production, distribution, and sale of physical media like CDs, DVDs, and tapes. In the case of revenues accumulated through digital distribution, there are minimal costs borne by the label in offering the recording to the consumer.

The plaintiffs’ claims rely on the Ninth Circuit case F.B.T. Productions, LLC v. Aftermath Records, decided in September 2010. In F.B.T. Productions, the Ninth Circuit held that agreements that allow “distributors, cellular phone carriers, and other third-parties to. . . produce and sell permanent downloads and mastertones [of sound recordings] in exchange for periodic payments based on volume of downloads. . . [are] ‘licenses.’” In this way, the Ninth Circuit indicated that distribution of physical products were “sales” of copies (with the associated costs for “packaging” and “shipping” and “breakage”), while any digital downloads, cell phone ringtones or waiting tones, or other similar services were to be construed as “licenses.” Despite strenuous objections from music industry groups, the Supreme Court denied certiorari.

This presents a problem for UMG and other music labels, who had previously defined digitally distributed recordings as “sales” and collected their 80-90% “sale” royalties on everything from sound recording downloads through iTunes and Rhapsody to ringtone distribution through Verizon, Sprint, AT&T, and T-Mobile.

Under F.B.T. Productions, these uses are now considered to be “licenses,” and as a result record labels might well owe artists substantial sums of money. In F.B.T Productions, the amount in question was somewhere between $17-20 million in unpaid royalties for a single litigant: the production company who discovered the rapper Eminem. If F.B.T Production’s ruling were to be enforced on a large scale, conservative calculations indicate that labels could owe artists as much as $2.15 billion in royalties from iTunes sales alone!

For their part, UMG and others in the industry claim that the language in the F.B.T. Productions contract was unique to that case, having been drawn up by a small production company instead of using a standard form UMG contract, and that that decision should not apply to agreements that used that stock contract (which would be the vast majority of cases.)

The artists who stand to gain the most from this suit are those older “catalog artists” whose music sells consistently and whose contracts were “form” contracts drafted before the advent of digital distribution. While most modern record contracts include provisions that expressly deal with digital distribution royalties, there are a huge number of contracts with no such provision, as the idea of “digital distribution” on a large scale has only been around for just over a decade.

This is shown by the scope of the current putative class description, which covers “all persons and entities. . . who entered into UMG production or recording arrangements from January 1, 1965 to April 30, 2004.”  This is big news for many such artists. Joyce Moore, the wife of Sam Moore, who sang “Soul Man” and other hits with Sam & Dave in the 1960s, noted in an interview with the New York Times: “This is life-changing. If we were being paid a nickel a download, as opposed to 35 cents — that’s a huge amount of money for a guy that is on a fixed income or has to run up and down the road at 75 years old.”

In surviving UMG’s motions to dismiss and transfer in James ex rel. James Ambrose Johnson, Jr. 1999 Trust v. UMG Recordings this past November, the plaintiffs have won the first major engagement in the dance of motions.  The music industry is watching this case intently. It’s only fitting, then, that such a “rock star” of a case was brought by real rock stars!

Joshua Druckerman is a second-year law student at New York Law School and a member of its Law Review.

Abbey Spanier, LLP, located in New York City, is a well-recognized national class action and complex litigation law firm.