July 21, 2014 8:34am PT by Eriq Gardner
Sony Music Fights Lawsuit Alleging Cheating of 'American Idol' Stars
Five months after the record company founded by American Idol creator Simon Fuller brought a blockbuster lawsuit against Sony Music Entertainment for allegedly cheating artists such as Kelly Clarkson, Clay Aiken and Carrie Underwood, a New York federal judge is being asked to make an early determination about the claims.
The litigation explores quite a bit of ground in the modern music business, from the way in which a music major like Sony accounts for revenue off platforms like Spotify and iTunes to how advertising expenditures are treated. One topic that was largely overshadowed when 19 Recordings filed its claims this past February was Sony's alleged duty to share the spoils of its proceeds from big battles on the copyright front. For example, three years ago, Sony was among the record majors that extracted $105 million in settlement from file-sharing LimeWire. Does the money trickle down?
In a motion to dismiss filed late last month, Sony argued that it isn't obligated to credit 19 such money.
Sony says its contracts pertaining to Idol alumni "provide for 19 to share in excess recoveries only from legal proceedings that SME institutes 'in the name of  and/or Artist.' It does not apply to proceedings that are brought in SME’s name, including those aimed at stopping broad-based copyright infringement of a substantial portion of Sony’s catalog."
The plaintiff's attorneys responded on Thursday that the contract gives Sony the right to sue in the artists' names and compel cooperation from them. The plain meaning of the contract, it's argued, necessitates that artists be compensated from the proceeds of copyright infringement lawsuits.
"Sony has multiple ways to bring suit," says the plaintiff. "The manner in which Sony brings suit is of no consequence as to 19’s right to receive a portion of any money which is attributable to Artist’s Masters."
Here are some of the other topics in the case:
In the lawsuit, the plaintiff alleges that Sony stiffs musicians by paying the lower of two royalty rates on streaming income. Specifically, Sony treats music exploited on services like Spotify as "sales" or "distributions" rather than "broadcasts" or "transmissions." The effect of doing this, says the plaintiff, is to account for such deliveries as no different than downloads purchased.
"19's claim that all streaming services must be accounted for as a 'broadcast' or 'transmission' simply seeks to rewrite the plain terms to which it agreed over and over, in agreement after agreement," responds Sony.
Sony says artist royalties are "unambiguously" tied to the language used in the music major's licensing deals with third party services. If that wasn't so, Sony argues, there would be no purpose in setting up a contract with two different royalty rates, as Sony would simply be obligated to pay the higher rate. The defendant adds that in negotiating the contract, "19 was clearly sensitive to the possibility that it would disagree with the characterization contained in the streaming agreement," so limitations were made for any streaming service operated by Sony or its affiliates.
In other words, Sony says the limitations would be meaningless if it never had the possibility of treating streaming income as distributions.
In opposition, the plaintiff maintains that Sony can't in good faith "mischaracterize" what's happening in streaming. "This robs 19 of the fruits of the Recording Agreements by purposefully avoiding using the correct operative words when Sony knew a 'broadcast' or 'transmission' was precisely what was occurring," states the plaintiff's legal brief.
The lawsuit addresses what happens when consumers go to iTunes and buy individual tracks off an album. Though many of the songs weren't released as "singles" per se, Sony treats them as singles to allegedly avoid having them count toward album sales that would trigger royalty escalators for the recording artists.
Again, Sony points to the "unambiguous language" of the agreements. "If the parties intended multiple separate sales of Records that are not Albums to count as an Album, they would have said so," says the defendant.
The parties have a huge disagreement over math.
Sony says the interpretation that multiple individual tracks sold should be grouped as partial album sales "leads to absurd results," calculating the economic consequences being at most just "two dollars and change" even if millions of records were sold. 19 Recordings, though, says that its audit calculated an underpayment of $960,000 thanks to this practice, and further, "It's easy to see that the labels can come out 20 percent to 40 percent (or even more) ahead if they sell 11 to 13 tracks individually to the same or multiple buyers, rather than the entire album in a single transaction to a single buyer."
The plaintiff is alternatively looking to bring a claim against Sony for breaching its duty of good faith and fair dealing by allowing iTunes and other download providers to permit the "disaggregation of the Album format," allowing individual tracks to be sold for the alleged benefit of Sony and to the detriment of 19 and its artists.
But according to Sony, "19’s assertion that the Agreements did not contemplate the changes to the music industry caused by the rise of individual track downloads is refuted by the fact...that all of the Agreements were executed after individual track downloads became a fixture in the music industry."
There's more! The lawsuit also addresses other topics, like how advertising expenditures are deducted in royalty statements. For this, read the full memorandum supporting the motion to dismiss, as well the brief opposing dismissal.