February 15, 2012 9:38am PT by Eriq Gardner
Kenny Rogers Gambles on Digital Music Royalties Lawsuit
It's now EMI's time to fret about the percentage of royalties that need to be handed over to music artists on digital downloads. On Monday, Capitol Records, a subsidiary of EMI, was sued by Kenny Rogers, who claims he's entitled to 50 percent of net royalites from digital sales and ringtones.
Rogers is following the path of other artists who have recently gone to court against major record labels to object to underpayment from the digital distribution of music.
Universal Music Group is facing a class action from artists including Chuck D, Rob Zombie, and Rick James. Warner Music is confronting the same in a recently-filed class action by Sister Sledge and other musicians. Sony Music is no stranger to this type of litigation either, facing off against the Allman Brothers and Cheap Trick over online revenues.
What all of these cases have in common is a controversy over how digital music gets treated for accounting purposes. The contracts with artists share 10 to 20 percent of royalties for a "sale" but as much as 50 percent for a "license." The musicians say that since there are little packaging costs involved, what happens on an outlet like the iTunes Store is more akin to the latter.
There's huge money involved. According to a study by the Future of Music Coalition, the difference in interpretation could mean $2.15 billion in royalties from iTunes sales alone. The musicians received a huge boost in making their claims when in 2010, the 9th Circuit Court of Appeals ruled there was some precedent to suggest digital downloads should be treated as "licenses."
Unlike the past lawsuits filed in California, Rogers is gambling that a Tennessee court will treat him kindly. Nashville is the home of many songwriters, so it makes sense that Rogers will try his case there. In his complaint, Rogers claims breach of his 1977 Record Agreement, which is said to be governed by California law.
Rogers' 1977 contract covers some of his biggest hits, including "The Gambler" and "Lady."
The singer says that he sent a formal notice of royalty examination to Capitol in 2007, but that the record label was resistant to handing over documents pertaining to cash receipts from digital downloads and ringtone licensing. Despite this, Rogers claims that the audit report turned up underpayments in excess of $400,000.
In 2010-11, Capitol allegedly acknowledged that the situation needed to be ironed out, and settlement discussions commenced. But two Capitol employees who were engaged in the talks left the company, replaced by an attorney who promised to "promptly try to resolve the Rogers audit," according to the complaint.
Rogers objections go beyond digital download classifications. He's also taking issue with tax withholdings and allegedly improper foreign royalty rate calculations.
Although the lawsuit lists Rogers as the sole plaintiff, his demands include a declaration of rights that could be applied to other interested parties. He also wants compensatory damages, restitution, and an order that requires Capitol to submit to an accounting investigation. The lawsuit was filed by Richard Busch at King & Ballow.
EMI has not yet commented publicly on the lawsuit.
Here's the complaint: