Sony's Equity Stake in Spotify Survives Scrutiny in 'American Idol' Lawsuit

19 Recordings was arguing that Sony was taking ownership in the streaming giant in lieu of demanding fair-market royalty rates.
Donn Jones/Invision/AP

A federal judge has told American Idol-affiliated 19 Recordings that it won't be allowed to amend a lawsuit to address Sony Music's significant stake in Sweden-based streaming giant Spotify.

Last June, in the midst of an ongoing lawsuit over royalties to such artists as Kelly Clarkson and Carrie Underwood, the plaintiff attempted to add the claim that Sony had engaged in self-dealing by taking equity in Spotify worth potentially hundreds of millions of dollars in lieu of demanding fair-market royalty rates from the streaming company. 19 Recordings, founded by Idol creator Simon Fuller and controlled by the show's owner, Core Media Group (which is now part of a joint venture between 21st Century Fox and Apollo Global Management), alleged this was a breach of good faith and fair dealing.

When the new claim was attempted, New York federal court judge Ronnie Abrams had already trimmed the lawsuit. For instance, she threw out the contention that Sony had improperly allowed digital service providers to sell disaggregated tracks to 19’s disadvantage, noting the license agreements does not “restrict or even address Sony's discretion to sell disaggregated tracks.” The judge also addressed the claim that Sony was purposely drafting its contracts with streaming providers so that it would only have to account to artists for lower-rate "distributions" rather than higher-rate "broadcasts." Abrams decided that Sony had this discretion.

Now, turning to Sony's stake in Spotify — estimated to be more than six percent — U.S. Magistrate Judge Gabriel Gorenstein isn't sold. "Such a low stake in Spotify does not allow a reasonable inference of 'self-dealing' between Sony and Spotify," he writes.

That's not the primary basis for his decision not to allow an amended lawsuit, however.

"More significantly, no self-dealing can be inferred regardless of Sony’s position in Spotify because there is no allegation that the total compensation package Sony received from Spotify under the Spotify Contract is anything other than a fair market value," continues Gorenstein. "Thus, the fact that the royalty rate is below a market royalty rate does not demonstrate that the contract did not provide appropriate value in return for the rights Sony allowed to be exploited by Spotify."

19, represented by attorney Richard Busch, also aimed to have the advertising credits that Sony receives from Spotify brought up for review as part of the overall claim that Sony acted to deprive profit participants of the "fruit or benefit of its bargain."

But here again, Sony's argument that it has discretion to structure a deal with Sony as it wishes becomes the poison arrow. Gorenstein points to the language of the licensing agreement that permits exploitation on a “general or label” basis, wishes to head off "creating a new right," and ultimately comes to the conclusion that a bare allegation that Sony is acting in its own self-interest consistent with its rights under contract isn't enough to survive a motion to dismiss. "Because the filing of the proposed complaint would be futile, the motion to amend is denied," he finishes in the opinion.

The parties are due back in court on Tuesday for summary judgment arguments. Last month, Warner Music became the first major to promise artists that they would share in the spoils of any sale of Spotify equity.