Universal Music Settling Big Class Action Lawsuit Over Digital Royalties (Exclusive)

A deal would mean that all the record majors have resolved claims of cheating artists by treating iTunes downloads as "sales" rather than "licenses."
 Jordan Strauss/Invision/AP

An important chapter in the legal history of the music business may be coming to conclusion soon as Universal Music Group is close to submitting a settlement resolving claims that it cheated recording artists of royalties from digital downloads.

The putative class action from artists including Chuck D. of Public Enemy, Rick James (by way of trust), Dave Mason of Traffic, Whitesnake, Andres Titus of Black Sheep, Ron Tyson of The Temptations, among others, alleges that record labels should be treating digital download income off of venues like Apple's iTunes as "licenses" rather than "sales." By accounting the other way, the artists get about 15 percent of collected income rather than 50 percent they allege is due.

Attorneys for UMG and the recording artists have been directed by U.S. District Judge Susan Illston to submit a motion to approve a settlement by April 10. There's still some finishing touches and approvals needing to be done, say sources, but the parties have advanced far enough to have that date targeted on the calendar. In the meantime, the judge is terminating UMG's summary judgment motions that presented various arguments against the claims including that the recording artists were on notice about how it was calculating royalties since 2002.

The monetary value of UMG's coming settlement haven't yet been disclosed, but The Hollywood Reporter has learned that it will likely cover EMI, which was acquired by UMG in 2012 and has been dealing with its own litigation on the digital download front. Following settlements by Warner Music and Sony, UMG's deal if approved would mean that all of the record majors have resolved claims following the 2010 appellate ruling in F.B.T. Productions v. Aftermath — dealing with Eminem songs — which suggested that "licenses" rather than "sales" were the more appropriate accounting treatment in an era where record labels no longer spend huge amounts on packaging physical CDs.

According to sales data released this week by the RIAA, digital downloads is the top revenue producer in the music industry. Download sales are at $2.64 billion, which beats physical music sales of $2.27 billion. However, consumers are buying less from digital outlets like iTunes than they once did. Digital download sales are down 9.5 percent in the past year as streaming income has surged nearly 29 percent to $1.87 billion.

As streaming gets closer to dominating downloads, the litigation may shift likewise as well.

The digital downloads cases may be on the precipices of conclusion, but scrutiny may follow as to whether record labels are cheating artists on money collected from outlets like Spotify. For instance, on Tuesday, a judge refused to reject claims that Sony breached agreements and good faith dealing with 19 Recordings — the label of former American Idol contestants Kelly Clarkson, Carrie Underwood and Jordin Sparks — by allegedly mischaracterizing income from streaming services as as "sales" or "distributions" rather than as "broadcasts" or "transmissions."

UMG, represented by Jeffrey Goldman at Jeffer Mangels, declined to comment. The plaintiffs are being represented by many law firms including lead counsel Leonard Simon.

Email: Eriq.Gardner@THR.com
Twitter: @eriqgardner

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