Universal Music Loses Bid to Dismiss Class Action Over Digital Revenue

Rob Zombie - 26th Annual Rock And Roll Hall Of Fame Induction Ceremony - P - 2011
Stephen Lovekin/Getty Images

A federal judge in California is allowing a big class action lawsuit to go forward against Universal Music Group that alleges the record label has underpaid royalties on digital downloads and ringtones. Spearheaded by Rob Zombie and the estate of Rick James, the consolidated class action seeks damages that could rise to the billions of dollars.

The lawsuit was filed in April and came on the heels of previous litigation that opened the question of how labels should be treating digital music distribution.

UMG and other labels believe that when consumers download song recordings via the Internet or on a mobile phone, it constitutes a "sale."  Many recording artists, on the other hand, note there's little manufacturing cost involved and consider what's happening to be a "license."

The difference between a "sale" and a "license," for accounting purposes, is huge. If the record labels are correct, they only need to pay artists a royalty rate that's roughly between 10 and 20 percent. If artists get their way, the revenue apportionment is much closer to a 50/50 split.

A study by the Future of Music Coalition estimated that the difference in interpretation just for music downloaded off of iTunes alone could be $2.15 billion. Considering all the other digital outlets out there, and the fact that consumers increasingly get music through digital channels, an adverse judgement for record labels in the current class action could threaten their continued viability in the marketplace.

Prior litigation suggests that artists may have an upper-hand in this fight.

In September 2010, for instance, in a separate case that involved early music from Eminem, the 9th Circuit Court of Appeals made a ruling that deemed Eminem recordings transfered online to be a license. "It is well settled that where a copyright owner transfers a copy of copyrighted material, retains title, limits the uses to which the material may be put, and is compensated periodically based on the transferee's exploitation of the material, the transaction is a license," wrote circuit judge Barry Silverman in the decision.

UMG spun the decision as being a singular case over unique contract language that wouldn't impact its relationship with other recording artists.

The class action by Zombie and James represents a follow-up of sorts to determine what royalties are owed to recording artists, music producers, and other royalty participants throughout the nation.

In reaction to the lawsuit, UMG attempted to dismiss it, arguing that the claims were dressed-up breach-of-contract claims and hurt neither consumers nor competitors. The record label said that since the issues involved "sophisticated business finance issues," it could hardly be brought as a class action under the California Business & Professions Code alleging that misconduct harmed the general public.

The plaintiffs disagreed, saying the public was indeed harmed, and pointed to the California Select Committee on the Entertainment Industry, which cautioned the major record labels against engaging in policies and practices that constitute "purposeful neglect" of royalty participants.

On Tuesday, Judge Susan Illston handed the plaintiffs an initial win, finding that the complaint did allege a connection to the protection of the public, and that further fact-finding would need to ensue.  That might potentially happen before a jury. According to the decision:

"The Court finds that plaintiffs have alleged more than just a breach of contract because the complaints allege that UMG engaged in a broad scheme to underpay numerous royalty participants, including formulating 'an opaque and artificial method for accounting for and paying its royalty participants for income derived from such licenses,' and engaging in a 'sustained public relations effort designed to convince the public that it had employed ‘groundbreaking’ and ‘enlightened’ accounting practices that actually benefitted (rather than cheated) the Class.”

Judge Illston also denied UMG's attempts to transfer the case.

In reaction, UMG has given us this statement: "The court has simply stated that the motion, which addressed a small part of the case, is more appropriately decided at the summary judgment stage rather than at the motion to dismiss stage. We believe that once the court addresses the merits of this case, we will prevail.”

E-mail: eriqgardner@yahoo.com

Twitter: @eriqgardner