Sony Reaches Settlement Over Streaming Royalties to 'American Idol' Stars

Kelly Clarkson - KTUphoria 2015 Performance - Getty - H 2017
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In a week that brought news that Spotify had confidentially filed for an IPO comes another key development concerning whether musicians stand to benefit from the growth of streaming. On Wednesday, it was revealed in court that Sony Music had reached a settlement in principle with 19 Recordings, the entity started by Simon Fuller that represents the financial interests of American Idol stars like Kelly Clarkson, Clay Aiken and Carrie Underwood.

The case began in February 2014 and raised the issue of whether Sony was properly treating streaming income from digital outlets including Spotify, Google and Apple. Later, the plaintiffs attempted to amend the complaint to also object to how Sony had gained a substantial equity stake in Spotify allegedly in lieu of demanding fair-market royalty rates. That put a spotlight on Sony's "breakage policy," meaning whether digital revenue was trickling down to artists in an equitable manner.

Unlike songwriters and publishers, who have long been dissatisfied with the streaming income they've received under compulsory license rules (a topic that is spurring proposed legislation as well as litigation like the fresh $160 billion lawsuit against Spotify), the recording part of the music business has been in better position to reap the rewards of streaming through negotiated direct deals with Spotify. But that doesn't necessarily mean that majors like Sony, Universal and Warner are fairly distributing the spoils.

The lawsuit brought by 19 had many claims, but the most important — especially after the judge rejected the self-dealing claim over Sony's Spotify equity — was the one alleging that Sony was applying lower-rate "distributions" rather than higher-rate "broadcasts" in accounting for streaming income. By treating streaming this way, Sony was essentially saying that such deliveries of music are no different than packaged sales (CDs, vinyl, etc.).

In the case, New York federal court judge Ronnie Abrams went back and forth on the issue, but ended up on the conclusion that the lower royalty rate applies where a third-party licensing agreement uses the term "distribution" to "describe or characterize" the exploitation of sound recordings. Sony's contracts with digital outlets appear to have used the term "distribution," but the judge found to be ambiguous whether this was a proper characterization.

And so, the case continued through discovery and headed to a possible trial. But assuming that the settlement is completed, there will be no need to fight over the issue any longer in open court. Yesterday, the judge discontinued the proceedings after being informed by the parties of the pending deal. The terms of the agreement haven't been made public, with those involved either declining comment or not responding to a query.