Sony Asserts Right to Structure Deal With Spotify Even If Results Disfavor Artists

Taking equity in Spotify, keeping advertising income and not sharing the spoils of piracy lawsuits is all proper, according to new court papers by the record giant.
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Sony Music has a noteworthy response to claims it is enriching itself at the expense of artists by taking a stake and advertising income from Spotify in lieu of negotiating fair-market royalty rates.

In court papers unsealed today, Sony says it isn't required "to structure its affairs in whatever way yields the greatest royalties for 19," the American Idol-affiliated outfit that manages such artists as Kelly Clarkson and Carrie Underwood. Citing the judge, it says it may "act on its own interests in a way that may incidentally lessen the other party’s anticipated fruits from the contract."

As detailed by The Hollywood Reporter, the plaintiffs are looking to amend their lawsuit against Sony to include claims of breach of good faith and fair dealing as well as self-dealing. 19 points to what Sony has gotten from Spotity — including a six percent stake in the streaming company, confirmed in Sony's court papers — and says Sony and other major record labels "have significant power to exert control over Spotify in order to not only dictate how revenue will be paid, but wrongfully and in bad faith divert money from royalties that must be shared to other forms of revenue that they can keep for themselves."

Sony basically responds two ways to the charge.

First, Sony says its deal with 19 means that it has to account for exploitations of "specific" recordings, but that it may keep revenue not tied to any particular sound recording. "In short, the parties anticipated that SME may exploit the recordings in certain ways that would benefit SME, but that may not result in revenue for 19," it says.

For support that 19 — and by extension, its artists — aren't allowed to share in revenue "on a general or label basis," Sony points back to an earlier decision from U.S. District Judge Ronnie Abrams regarding money that was collected as settlement proceeds in copyright infringement and piracy lawsuits.

"Because no royalty provision required SME to share settlement revenue recovered 'on a general or label basis,' SME was free 'to retain the full amount of any settlements such suits yield," states Sony in what should be confirmation once and for all that money derived from lawsuits against companies like Limewire didn't end up in artist pockets. At least, not directly.

Second, Sony says the plaintiff has failed to allege facts giving rise to an inference it controls Spotify.

The record giant says "royalty rates are only one strand of the multifaceted bundle of consideration paid by Spotify" and that when it comes to a deal with a streaming company, it "reflects a variety of judgments and considerations." As examples, Sony says "a party might accept lower rates for one tier of service in exchange for higher rates on another" or "might be willing to accept lower rates in exchange for a larger advance or increased guaranteed minimum."

Sony says it's not alleged that the total consideration paid by Spotify is below-market, "only that the mix of consideration is unfavorable to 19, on the grounds that the royalty rates are below market and that this shortfall in value was shifted to 'other forms of income' such as the advertising provision."

But again, Sony says it has a right to do this.

Sony, represented by Jonathan Sperling and Douglas Curran at Covington & Burling, is opposing an amended lawsuit because it will be "futile" and claims that the other side is only making new claims to access its negotiations with streaming providers. Find the full opposition (with some redactions) below:

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