Universal prevails in lawsuit alleging it owed artists $750m in Spotify royalties

Universal Music Group (UMG) has won a court case against a proposed class action lawsuit that argued the recording company underpaid its signed artists some $750 million in royalties.

Andrus Titus and William McLean, members of the 1990s rap duo Black Sheep, filed the lawsuit this past January, alleging that UMG breached its contract with them, and with other artists, when it allegedly accepted lower royalty payments from Spotify in exchange for a tranche of Spotify stock in 2008.

In 1990, Black Sheep signed a record deal with Polygram Records that gave the artists 50% of “net receipts with respect to… any use(s) or exploitation(s) of [Black Sheep’s] Master Recordings.”

PolyGram Records became a part of Universal Music Group in 1998.

In their complaint, filed with the US District Court for the Southern District of New York, Titus and McLean alleged that UMG “struck an undisclosed, sweetheart deal with Spotify [in 2008] whereby Universal agreed to accept substantially lower royalty payments on artists’ behalf in exchange for equity stake in Spotify.”

They argued that UMG should have given its artists 50% of its stake in Spotify, or the equivalent cash value, as that would have been “proportional” compensation for the lower royalty payments.

UMG described the lawsuit at the time as being “patently false and absurd,” and added that the company has “a well-established track record of fighting for artist compensation.”

UMG took a 5% stake in Spotify in 2008, which rose to 7% after the company acquired EMI, which held a 2% stake in the company. However, due to stock dilution from further investments into Spotify, UMG’s share of Spotify stock had fallen to 3.3% as of the end of 2022, per the company’s annual report.

At Spotify’s current market price, a 3.3% share would be worth around $1.16 billion.

In her ruling, issued on Monday (November 20), US District Court Judge Jennifer L. Rochon rejected the proposed class-action suit on several grounds: That Titus and McLean had taken too long to file the suit; that UMG’s stake in Spotify doesn’t meet the definition of “net receipts” on which it would owe royalties; and that their contract with Polygram in effect gave UMG the right to negotiate royalty payments with Spotify as it saw fit.

Under New York law, plaintiffs have six years to bring a case to court in the event of a breach of contract, but the contract between Polygram/UMG and Titus and McLean specified a two-year statute of limitations from the breach of contract, which, if it had happened, would have happened in 2008 – 15 years before the lawsuit was filed.

“Even accepting plaintiffs’ alternative argument that UMG breached the contract again after Spotify’s IPO in 2018, plaintiffs’ failure to bring those claims within two years of UMG’s alleged breach still renders them untimely,” Judge Rochon wrote in the ruling, which can be read in full here.

“There is no basis upon which to find that UMG breached the contract by accepting a lower royalty from Spotify.”

Judge Jennifer L Rochon, Us District Court for the Southern District of New York

The judge noted that the contract stated that Titus and McLean were owed 50% of “net receipts,” and defined “net receipts” as being “amounts received by [UMG] in connection with the subject matter thereof which are solely attributable to the Master Recordings.”

“UMG’s alleged acquisition of Spotify equity is not solely attributable or traceable to the actual exploitation of a particular artist’s sound recording. Thus, because UMG’s Spotify stock does not count as ‘net receipts,’ UMG did not breach the contract by failing to account for its value when paying plaintiffs their royalties,” the judge concluded.

The ruling noted that the contract between UMG and Titus and McLean gave UMG the “sole discretion” to determine “[t]he method, manner and extent of… distribution and exploitation of [plaintiffs’] Master Recordings and Records.”

“Given this wide discretion, there is no basis upon which to find that UMG breached the contract by accepting a lower royalty from Spotify,” Judge Rochon wrote.

Judge Rochon also rejected the plaintiffs’ request for leave to amend their complaint, concluding that, under the circumstances, it would be “futile.”

The lawsuit is one of a series of cases in recent years, typically involving record contracts signed before the streaming era, in which artists and record companies have disagreed on how streaming royalties should be accounted for.

In 2018, Enrique Iglesias sued UMG for a “shortfall of millions of dollars” in its royalty payments from streaming. The suit involved contracts signed in 1999 and 2010, which didn’t specify the percentage UMG was to pay Iglesias for his share of streaming royalties. Iglesias and UMG settled the case out of court.

In 2009, Eminem’s publishing company, FBT Productions, sued UMG and Aftermath Records over iTunes royalties. At issue was whether a digital download counted as a “licensed use” of Eminem’s music, in which case the rapper would have been owed 50% of iTunes royalties, or whether it counted as “distribution” of the music, in which case Eminem’s cut would have been considerably less.

That case, too, was settled out of court.Music Business Worldwide

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