COMPETITION / CONTRACT
Recorded music, internet
Hot on the news that Sony had officially signed a licensing deal with SoundCloud, the last of the three major labels to sign an agreement with SoundCloud in an arrangement that involves the recording label major taking an equity stake in the streaming platform, comes the news that a federal judge has told 19 Recordings that it won’t be allowed to amend a lawsuit to address Sony Music’s equity stake in Sweden-based streaming giant Spotify.
Between them, the majors – Universal Music Group, Sony Music Entertainment and Warner Music Group – are believed to own somewhere around 15% in Spotify. In an ongoing US court case, Sony – which reportedly owns 6% in Spotify – was last year legally challenged by management company 19 Entertainment on the Spotify equity issue.
Last June, in the midst of an ongoing lawsuit over royalties paid to artists including Kelly Clarkson and Carrie Underwood, 19 attempted to add to their claim, saying that Sony had engaged in self-dealing by taking equity in Spotify, potentially worth hundreds of millions of dollars, in lieu of demanding fair-market royalty rates from the streaming company. 19 Recordings alleged this was a breach of good faith and fair dealing.
New York federal court judge Ronnie Abrams had already trimmed 19’s lawsuit. She dismissed the claim that Sony had improperly allowed digital service providers to sell disaggregated tracks to 19’s disadvantage, noting the license agreements does not “restrict or even address Sony’s discretion to sell disaggregated tracks.” The judge also addressed the claim that Sony was purposely drafting its contracts with streaming providers so that it would only have to account to artists for lower-rate “distributions” rather than higher-rate “broadcasts.” Abrams decided that Sony had this discretion.
Now, turning to Sony’s 6% stake in Spotify, U.S. Magistrate Judge Gabriel Gorenstein has said that “Such a low stake in Spotify does not allow a reasonable inference of ‘self-dealing’ between Sony and Spotify,” ading “More significantly, no self-dealing can be inferred regardless of Sony’s position in Spotify because there is no allegation that the total compensation package Sony received from Spotify under the Spotify Contract is anything other than a fair market value” and “Thus, the fact that the royalty rate is below a market royalty rate does not demonstrate that the contract did not provide appropriate value in return for the rights Sony allowed to be exploited by Spotify.”
19, represented by attorney Richard Busch, also aimed to have the advertising credits that Sony receives from Spotify brought up for review as part of the overall claim that Sony acted to deprive profit participants of the “fruit or benefit of its bargain.” Again Gorenstien accepted Sony’s argument that it has discretion to structure a deal with Spotify as it wishes, pointing to the language of the licensing agreement that permits exploitation on a “general or label” basis, concluding that a bare allegation that Sony is acting in its own self-interest consistent with its rights under contract isn’t enough to survive a motion to dismiss. “Because the filing of the proposed complaint would be futile, the motion to amend is denied.”
In February the Warner Music Group told investors that should the major ever sell its stake in Spotify, it would pay its recording artistes a portion of the proceeds. Warner is believed to own between 2% and 3% in Spotify – an equity position which it received via licensing negotiations – in effect for ‘free’ due to its position as the owner of a large catalogue of sound recordings. Warners also hold an equity stake in Soundcould on the same basis. What they would pay artists remains unclear. In February Sony Music Entertainment issued a statement saying that they would share equity stakes with artists – although not on the basis of an equitable split – saying “As we have previously shared with our artists and their representatives, net proceeds realized by Sony Music from the monetization of equity interests that were provided to Sony Music as part of the consideration for a digital license will be shared with our artists on a basis consistent with our breakage policy.”