New York federal judge recently ruled in favor of Sony Music Entertainment (“SME”) in the latest dispute over the proper characterization of artist royalties on digital music sales, dismissing a breach of contract claim brought by rock group Toto (best known for the hits “Africa” and “Rosanna”). Ever since the Ninth Circuit’s 2010 decision in favor of Eminem’s former production company in FBT Productions LLC v. Aftermath Records, artists such as Toto – whose recording contracts predated digital music sales – have taken to the courts arguing that they were underpaid on digital record royalties. Toto’s claims, like FBT’s and many other plaintiffs’ claims, focus on whether, under recording contracts, digital purchases are “sales” as opposed to higher-paying “licenses” or “leases.”
Toto sued SME for breach of its various recording agreements entered into between 1977 and 2002 (the “Agreements”). SME had been paying royalties on Toto’s digital music sales (through iTunes and Amazon) pursuant to contractual provisions covering record sales by SME or its “licensees” though normal retail channels. Toto claimed that SME should have been paying a higher royalty rate under a different contractual provision that covered “leases” of master sound recordings because SME’s agreements with third-party licensees such as iTunes constituted “leases.” SME argued that downloads sold through licensed digital retailers constituted sales by “licensees” through normal retail channels, and that the music industry’s understanding of the term “lease” was confined to special licenses for the inclusion of sound recordings on third-party products such as compilation albums.
The court unequivocally sided with SME, finding that the plain language of the Agreements defined the term “licensee” broadly to include authorized re-sellers like iTunes. Interestingly, the court also relied on SME’s uncontroverted evidence of recording industry custom in its determination that the plain language of the Agreements was unambiguous (whereas, typically evidence of industry custom is used to clarify or interpret ambiguous contract terms). SME’s industry custom evidence demonstrated that the term “lease” was, indeed, generally understood to mean “a license that allows a third party to incorporate the licensor’s recording into its own product.” Accordingly, the court held that the lower sale-by-licensee royalty rate applied to digital downloads of Toto’s music, not the higher “lease” rate. Because SME had paid Toto pursuant to the correct contractual term, there was no breach of contract, and the court granted summary judgment in favor of SME.
The Toto case exemplifies how contract-specific these digital royalty disputes can be. Given how many unique recording agreements are out there, the number of factual permutations is likely as variable as the number of artists that have filed suit in response to FBT. To date, those artists include at least the following: Chuck D, Sister Sledge, Rob Zombie, Rick James, the Allman Brothers, Cheap Trick, Kenny Rogers, Michael McDonald, George Clinton, Peter Frampton, Weird Al Yankovic, and the Counting Crows (the defendants include Sony, Warner, UMG, and Capitol). Some of these disputes are ongoing, and some have settled, but there are bound to be more decisions forthcoming, each keyed to the unique facts and contractual language at issue.
In light of case law that is likely to remain unpredictable, it is important for artists and other signatories to recording agreements to fully understand how they are being paid for transactions consummated through today’s most ubiquitous income channels. Also, because technology is known to outpace the law, artists should pay particular attention to how they will be paid through still-novel but quickly growing services like Spotify, Google Play Music, and Beats Music, and consult with counsel knowledgeable in the digital music business to better understand the mercurial terms of today’s recording agreements.