4:22pm PT by Austin Siegemund-Broka
Sony Music Fails to Eliminate 'American Idol' Revenue Lawsuit
The latest ruling in an American Idol-affiliated record company's clash with Sony is a lot like an episode of the singing competition show. Some claims were eliminated. Some weren't.
The dispute started when 19 Recordings, the company founded by Idol creator Simon Fuller, sued in February 2014 alleging Sony withheld over $7 million earned by former Idol contestants currently signed to 19 including Kelly Clarkson, Carrie Underwood and Jordin Sparks.
The company entered into exclusive licensing agreements with Sony for each of the artists. The agreements entitled to 19 to audit Sony's books with regard to its artists at any time. Following recent audits, 19 decided Sony was violating the licensing agreements' revenue structure and sued for breach of contract and breach of the covenant of good faith and fair dealing.
The claims provide a look into the revenue structures of recording and licensing deals — covering streaming, foreign royalties, film and TV "synchronization," music video production and more. Sony fought many of the claims in a motion to dismiss in June 2014. New York federal court judge Ronnie Abrams ruled on the motion Tuesday in a verdict that left a significant portion of 19’s case still standing.
With regard to streaming, 19 held in its complaint, filed by Richard Busch and Kenneth E. Gordon, Sony’s licensing agreements mischaracterize the distribution of music on services like Spotify as "sales" rather than "broadcasts" or "transmissions." The royalty fee is higher for the latter category. 19 claims that by "purposefully avoiding using the correct operative words when Sony knew a 'broadcast' or 'transmission' was precisely what was occurring" Sony withheld millions from 19.
In denying the motion to dismiss, Abrams writes that whether Sony did breach its contract with 19 doesn't depend on whether Sony should call streaming a "transmission" or a "sale," but whether it did in its contracts with streaming services.
What’s not at issue is "how it might fairly be described by 19," she writes. "This is a narrow issue and one that should prove relatively easy to resolve."
But whether they should label it a "transmission" to fairly provide royalties will be permitted in 19's breach of the covenant of good faith claim on the same issue. "The Licensing Agreement impliedly grants Sony the discretion to characterize the exploitation," writes Abrams. "But this says little about how Sony has actually wielded this discretion, and in particular, whether it has wielded this discretion in bad faith."
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The ruling is important for 19 because the $3 million they say Sony withheld related to streaming is the biggest figure attached to one of 19’s claims. But it’s not the label’s only victory.
They claim Sony has misinterpreted the part of the licensing agreement that outlines foreign television and radio advertising expenses to withhold royalties from 19. The agreement’s provisions specify that foreign ad spending within country-specific minimum and maximum amounts could be deducted from 19’s royalties until Sony has recouped 50 percent of the cost.
19 claims the company continually diverts royalties with a sort of sleight of hand in which it subdivides various ad revenues per country into individual advertising campaigns. The divisions permit it to peg each campaign within the minimum and maximum figures and deduct the costs from 19’s royalties. But if the campaign expenses were totaled, they’d hit a figure high enough to require approval from 19, argues the label.
Sony contends the licensing agreement doesn’t specify the spending be totaled.
Abrams doesn’t endorse 19’s interpretation, but she ruled the case should involve a decision on what the advertising language means. “The provision is simply too opaque to allow the Court to readily determine — at least without reference to extrinsic evidence, supplemental briefing, or both — its precise meaning,” she writes.
The judge also denied the motion to dismiss with regard to 19’s claim Sony misreports revenue from third-party "record clubs." But like Sarina-Joi Crowe on last week’s Idol, some claims won’t move forward.
The biggest is 19's claim the total sales of albums, which figure into how royalties "escalate" for the records past 1 million copies sold, should in the iTunes era include not just the sales of complete albums, but also each sale of an album’s tracks purchased individually (or "Track Equivalent Albums," used in other areas of the music industry).
There's no basis for that interpretation, writes Abrams. "19… has not pointed to a single contractual provision that aggregates individual track downloads into Albums, for any purpose," she writes.
19 claimed damages for the "escalation" dispute coming to a couple million, so the ruling significantly alters their potential payout.
The judge also dismisses 19's arguments that it should have received at least $1 million from settlements Sony won in lawsuits over the exploitation of its music (like the $105 million settlement file-sharer LimeWire paid in 2011). "19 is only entitled to its share of excess recovery where such suits were brought in 19' s name, which would have required 19' s express consent," she writes. And she dismisses 19’s claim the advertising costs for compilation albums shouldn't draw from the label's royalties.
But the judge points out there’s a variety of claims the motion to dismiss doesn’t dispute, from failure to figure all foreign and domestic sales into royalty calculations to underreporting revenue from the use of the songs in film and TV, including a Clarkson song in a Vitamin Water commercial. Read the full complaint.
She writes that Sony will have two weeks to notify the court whether it'll file another motion against the remaining allegations, "and, if not, why the failure to answer these allegations should not be considered an admission of those facts."
Sony declined to comment.
19’s lead counsel Busch tells THR, "We now look forward to litigating these claims."
Mar. 17, 4:43 p.m. Updated with comment from Busch and corrected to remove Clay Aiken from 19's current roster. THR regrets the error.