Post co-authored by FMC Policy Fellow Ian Dunham

In February 2014, 19 Recordings—a record label representing artists from the TV show “American Idol” like Kelly Clarkson and Carrie Underwood—sued Sony Music for allegedly withholding royalty payments totaling $7 million. In March of this year, U.S. District Court Judge Ronnie Abrams issued a ruling allowing some of these claims to go to trial. The upshot is that, while some components of the case will move forward, the court decided that others don’t hold water. Even more recently, Sony swung back with allegations of fiduciary mismanagement at 19.

A central argument of this case, and one that has been allowed to stay and be heard by the court, is that Sony categorized the playing of sound recordings owned by 19 as “sales” rather than “broadcasts” or “transmissions.” Accordingly, 19 claims that “systematically miscalculated royalty payments” resulted from contractual shenanigans. Sales are due a considerably lower royalty rate, whereas broadcasts are to be paid “50 percent of Sony’s receipts.” Judge Abrams states that 19’s accusations of unfair dealings will hinge on the language present in Sony’s agreements with third-party distributors like Spotify, not on the language within the Sony / 19 licensing agreement. As such, Abrams writes that “this is a narrow issue and one that should prove relatively easy to resolve.”

The Hollywood Reporter recently reported on Sony’s accusations of 19’s own financial mismanagement, and that it owes $2 million in overpaid royalties. This could be viewed as judicial theatrics on Sony’s part. Either way, when the dust settles, allegations on both sides will be addressed with the result hopefully being greater clarity in business practices.

All of this has been amplified because of the leaked contract between Sony and Spotify, which we covered here. That agreement seems to point to a broader, more systemic problem in the universe of music licensing. Not only are artists, such as those represented by 19 Records, suspicious of their own contracts with labels, but also the direct deals under which services like Spotify license music from companies like Sony. The conditions around direct licensing for on-demand streaming services creates an added layer of opacity, especially since these deals are always under non-disclosure agreements. Making sure artists are paid fairly should be a priority for all players in the space, but due to ambiguous or needlessly complex contract terms, unintentional accounting mistakes and corporate miscommunication, the end result is mutual suspicion and distrust.

We can compare the environment for licensing on-demand streaming services with the statutory license available to non-interactive, or “radio-like” platforms. The latter allows artists to be paid directly by the nonprofit SoundExchange under fair splits. Furthermore, the artists’ share isn’t held against their “recoupable” debt to a label. Services enjoy more predictable rates due to a more transparent ratesetting process (a trio of federal judges examine evidence and set rates covering a set term based on evidence presented in public proceedings.) There are fewer ways for the major labels to “game the system” by demanding large cash advances (recoupable by the service or otherwise), minimum payment guarantees and equity ownership in the service. Musicians and managers are increasingly questioning whether any of this money makes its way back to the artists themselves.

The sort of acrobatics being performed by Sony and 19 could be easily avoided under an expanded statutory license. At the heart of the Sony / 19 battle is the question about how Sony deals with the distribution of music in the emerging digital marketplace, all of which has a huge impact on what artists are paid and under what conditions.

We think there are many advantages to a market that has some measure of oversight. It seems like many of the contractual disagreements seen by the US District Court of Southern New York stem from direct deals going awry. We’d like on-demand services to play by the same rules that non-interactive services do. We’d like to see rightsholders make money on the merits of their catalog, not perceived market share. We’d like all artists to have a better comprehension of the terms of the deals to which they are entered. And with increased transparency, there is increased trust.

The type of privileges that the leaked Sony / Spotify contract awarded to the major label are out of reach for independent artists and most small labels. For this community, a statutory framework could help level the playing field with online streaming. Leverage is crucial in dealmaking, and we understand that in certain instances, the ability to “say no” is all the leverage an artist or rightsholder has. So maybe there’s an artist opt-out provision in a statutory for on-demand services. We also recognize that a chief reason artists sign to a label—besides promotion, marketing and distribution muscle—are monetary advances. Perhaps we can envison a system where artists forego direct payment under a statutory for an advance from their label for a set period. That way, the label has an opportunity to recoup, but they can’t hold the marketplace hostage just to get a better deals the benefits of which the vast majority of artists never see.

Music is a creative sector. It’s time to get more creative about how we imagine licensing in the digital realm. It’s the only way to ensure that artists aren’t left behind in the emerging music economy.