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Bombshell 'American Idol' Lawsuit Claims Sony Stiffs Carrie Underwood, Kelly Clarkson (Exclusive)

The legal claims from the company behind the hit reality TV show, seeking at least $10 million in damages, could ignite new controversies over whether recording artists are getting a proper share of digital income.

Carrie Underwood Kelly Clarkson Split - H 2014
AP Images
Carrie Underwood and Kelly Clarkson

For 12 years, American Idol has been one of the biggest success stories in the music industry. Even as the reality singing competition series experiences some signs of aging, there is no doubt that the show has provided an immensely influential promotional platform for undiscovered talent and a sanctuary from some of the industry's post-Napster blues.

But as shown by a new lawsuit filed on Thursday by 19 Recordings against Sony Music, the story of how the industry has leveraged American Idol into one chart-topper after the next is not without allegations of greed and corruption. The complaint filed in New York federal court and obtained by The Hollywood Reporter also explores some cutting-edge issues on the digital side of the business.

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19 Recordings was founded by American Idol creator Simon Fuller and is now controlled by the show's owner, Core Media Group. In the lawsuit, 19, and by extension all of the artists -- including Kelly Clarkson, Clay Aiken, Carrie Underwood and Chris Daughtry -- who have entered into deals as part of their participation on Idol, claim that Sony Music has been systematically robbing them of millions of dollars in royalties. The lawsuit, seeking at least $10 million in damages, was filed after 19 exercised the right to audit Sony's books pursuant to recording agreements, and the parties couldn't come to any settlement.

Read the Full Complaint Here.

"We did not want to have to file this lawsuit, but Sony left us no choice, so this became necessary to protect our artists," says 19 Entertainment worldwide head of music Jason Morey. "Our complaint lays out the claims in great detail. Everything we have to say about the case is set forth in it."

Richard Busch at King & Ballow adds, "We have investigated this thoroughly and feel strongly about the claims."

Perhaps the biggest claim -- both monetarily as well as one that could impact record companies and musicians well beyond the Idol universe -- deals with the alleged underpayment of streaming royalties.

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Sony is among the larger music entities that has forged licensing deals with streaming services run by Spotify, Google and Apple.

But the lawsuit says that Sony is accounting for the exploitation of master recordings here as "sales" or "distributions" rather than as "broadcasts" or "transmissions." The distinction might sound like semantics, but it is nevertheless important. By treating streaming music as sales, Sony is essentially saying that such deliveries are no different than downloads purchased on Apple or Amazon. And with that, Sony would be forking over significantly less money under the terms of the company's recording agreements -- the difference between a 50 percent royalty share for a "transmission/broadcast" versus a fraction of that for a "sale/distribution." The plaintiff says the discrepancy has resulted in at least $3 million in damages.

"Such exploitation can only be fairly described as 'transmissions' or 'broadcasts,' and, upon information and belief, are so described in the licenses or other agreements between Sony and the streaming services," says the lawsuit. "However, Sony has nevertheless accounted to 19 for all streaming income received at the lower Album rate as if the exploitation between the streaming service and the end user was described as a 'distribution' or 'sale' and, by so doing, Sony has breached the Recording Agreements."

The lawsuit then goes into other ways in which Sony is allegedly cheating on music from Idol alumni.

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For instance, Sony is accused of improperly deducting money spent on television advertising. The plaintiff says that Sony once requested a "royalty break" on a proposed TV ad spend in New Zealand and the United Kingdom for the Kelly Clarkson album My December, which 19 refused. Allegedly, Sony doesn't always ask. According to the lawsuit, Sony is able to recoup ad money by finagling the math -- working to its own advantage the alleged distinction between an "individual" ad campaign and an "aggregate" ad campaign so as to not exceed maximum spends allowed by contract.

According to the lawsuit, "Sony's interpretation would lead to the absurd result of potentially allowing it the ability to conduct an unlimited number of TV and/or radio advertising campaigns in a given country for a particular Album without ever seeking 19's prior approval so long as each individual campaign, however limited, was within the specified required range."

19 also alleges that Sony has made other improper deductions over things like music videos, has incorrectly paid royalties on joint venture compilation albums, has improperly calculated escalated royalty rates in instances of more-than-a-million-selling albums, is failing to pay over money from past lawsuits, is improperly deducting foreign income taxes, is underreporting or not reporting at all synchronization master uses in films and TV shows, and more.

The accusations fly two ways. Apparently, in response to some of these accounting allegations, Sony has made arguments that it has overpaid 19 on certain items.

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"Sony attempts to state compilation albums are not albums," says the lawsuit, which rejects the premise as merely another excuse for a lower royalty rate.

The lawsuit also includes a novel discussion over whether Sony is gaming iTunes. On that Apple platform, consumers can buy 99 cent singles or $9.99 albums, but for accounting purposes, things get immensely tricky rather quickly.

What happens when consumers purchase multiple tracks off an album? Is that treated as the equivalent of an album purchase for the purpose of figuring out when artists are due bonus royalty escalators? Should royalty rates for singles apply even though consumers are choosing tracks off of iTunes' album section? And what happens when a song like Clarkson's "All I Ever Wanted" is available for purchase as both "All I Ever Wanted – Single" and as a track from the album All I Ever Wanted?

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The lawsuit says that Sony takes advantage by pretty much always delivering answers in its favor -- or, as the case may be, treating downloaded tracks as singles as much as possible. The plaintiff says this is unfair because there are no extra manufacturing, marketing or promotional costs associated with individual songs available for purchase separately. For its part, Sony claims that it has overpaid royalty participants on digital track downloads, according to the suit.

The legal salvo comes at a perilous time for singing competition shows. Fox has just canceled X Factor, which featured original Idol judge Simon Cowell, and NBC's The Voice just lost one of its biggest stars in Cee Lo Green. As for Idol, the ratings for its premiere this year were down 22 percent in the key demo and recent episodes have also been losing viewership.

Despite those woes, Idol has consistently produced great album sales. Fourteen alumni have each sold more than a million albums, led by Underwood with almost 15 million alone in cumulative sales. What that has really meant financially for these performers is an issue that will be explored in a New York courtroom.

Sony declined comment.

Twitter: @eriqgardner