For Some Rock Pioneers, Warner Music Treats Streaming Royalties as Charity

Defending an attempted class action, Warner says it shares revenues received from digital streaming even when it is not contractually obligated to do so.
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Tower of Power

For an older generation of musicians, the ethos was sex, drugs, and rock and roll. Nobody ever said much in the 1960s and early 1970s about the importance of good dealmaking. Now playing out is the ramifications of such negligence.

Spotify, Apple Music, Tidal and other digital outlets dominate the music business these days. What may be downright shocking for some of these older recording artists is finding out there might be not be any contractual entitlement to streaming royalties whatsoever. Or at least that's the position now being taken by Warner Bros. Records in an ongoing lawsuit. Yes, artists affiliated with the label are getting paid, but according to WBR, that's only because it's the right thing to do. If these artists complain about not earning enough money from streaming, maybe they should be happy that they are getting anything at all.

Lenny Williams, a solo artist and a member of the 1970s funk group Tower of Power, is attempting to lead a class action against Warner Music Group.

Williams asserts the label isn't forking over enough of the revenue received from the exploitation of artists' works on streaming platforms. According to the complaint he filed in October in California, that's because Warner Bros. takes a 40% distribution charge off of international revenue collected by foreign affiliates and then bases the artist's royalty rate on the remainder. He says his contract forbids Warner Bros. from assessing an "intercompany charge" for international sales.

In January, Warner Bros. brought a motion to dismiss with a surprising argument.

The label's lawyers wrote, "All of plaintiffs’ claims depend on establishing an underpayment of royalties, and they still cannot identify any provision of the contract that entitles them to the royalties they seek: the contract contains no provision for royalties to be paid based upon digital streaming of sound recordings, let alone foreign digital streaming of sound recordings."

If that's not clear enough, here's a footnote from the court brief: "For a variety of reasons, there are artists and companies (such as plaintiffs) for whom WBR shares revenues received from digital streaming even when it is not contractually obligated to do so. That, however, does not entitle plaintiffs to bring a suit for breach of a recording contract that contains no provision for WBR to pay royalties for digital streaming."

On March 13, U.S. District Court Judge R. Gary Klausner wasn't ready to dispense with the lawsuit because there might have been at least an implied contract.

"Although the words 'digital streaming' are not present in the 1974 Agreement, Plaintiff alleges that after the rise of digital streaming, Defendants continued to pay royalties for digital streaming under the existing contractual terms," wrote the judge in rejecting the motion to dismiss. "Providing royalty payments for digital streaming in addition to sales of phonorecords does not conflict with the express terms of the contract; rather, it supplements the term. As a result, Defendants' conduct may plausibly indicate that the term of the contract apply equally to digital streaming."

But that's not the end of this controversy. Not at all.

About a decade ago, there were many recording artists and producers upset by the royalties they were getting from digital downloads off of iTunes. The most famous case involved Eminem songs, with the production team responsible for many of the rapper's hits arguing that Universal Music was classifying digital downloads as "sales" rather than "licenses." Under "sales," artists only get about 15 percent of net receipts. As "licenses," artists are entitled to a more even split. In a decision that would pave the way for several class actions, the 9th Circuit suggested in 2010 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.

Guess what? Warner Bros. is now looking to take advantage of the decision.

Williams may be contractually entitled to royalties from sales, but apparently his contract is silent about licensing except for the fact that Warner Bros. has the right to license. Insiders say this wasn't unusual at all since at the beginning of the record business, everyone was focused on sales, with the licensing bonanza a future phenomenon. Nevertheless, given that the contract at least mentioned licensing in the rights granted to Warner Bros., it's at least very sloppy dealwork that there wasn't any contractual discussion of royalty payments from that.

So now, as the parties head to the issue of whether this case gets certified as a class action, there's a fuss over whether plaintiffs are entitled to discovery to figure out the commonality of Williams' situation.

Warner Bros. is opposing both the need for and timing of discovery, but in a court papers filed last week, the label did at least contemplate that at some point agreements with digital streaming providers would become relevant.

"Under this Court’s ruling on the motion to dismiss, agreements with digital streaming providers bear on whether streaming represents a form of licensing: if streaming is a 'license,' then plaintiffs’ claims fail on the merits; if streaming is a 'sale,' then this Court has found that a question of fact exists under the contract...," wrote an attorney at Sidley Austin.

The plaintiffs, represented by Neville Johnson, haven't reacted yet in court to the notion that if streaming is treated as licensing, their claims fail, maybe because the bar on "intercompany charges" applies to sales. Right now, however, the larger goal simply has to be about establishing the predicate right to receive royalties. That's certainly an issue that many artists never imagined would come up.