Judge Finds Sony-Spotify Agreement to Be Ambiguous in Big Royalties Lawsuit

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Kelly Clarkson during American Idol Season 1 Finale - Performance Show at Kodak Theatre in Hollywood, Calif. 

19 Recordings alleges that "American Idol" stars have been cheated of streaming revenue.

When listeners hear "Since U Been Gone" by Kelly Clarkson on Spotify, they might not care too greatly how the exploitation of this song is characterized in contracts. But a judge's interpretation could upend the record industry as streaming platforms continue to grab greater market share.

On Wednesday, New York federal judge Ronnie Abrams delivered a new opinion in an important lawsuit. She finds that many of the licensing agreements that Sony Music have struck with streaming outlets like Spotify, Rhapsody and Last.FM are ambiguous as to how they describe streamed music. The result is that the case will continue — perhaps eventually to trial — and heretofore confidential contracts will be dissected at length.

American Idol-affiliated 19 Recordings is the plaintiff, contending that artists such as Clarkson, Clay Aiken and Carrie Underwood have been cheated on royalties from streaming. Specifically, 19 grants Sony Music the exclusive right to distribute and otherwise exploit recordings in return for royalties. In turn, Sony licenses the works to streaming outlets. If streams are treated as "broadcasts" or "transmissions," under the 19-Sony deal, that means the artists get a 50 percent royalty share. If on the other hand, streams are treated as "sales" or "distributions," then a lower record royalty rate — typically about 15 percent — applies.

The difference is humongous, and Idol artists are hardly the only ones with this arrangement. If 19 Recordings is correct that Sony has been mischaracterizing the distribution of music on services like Spotify as "distributions" rather than "broadcasts," there will likely be class actions brought on behalf of other artists against the record majors.

Back in March 2015, Judge Abrams ruled that in order to figure out whether streams were "distributions" or "broadcasts," the parties would need to look at the third-party agreements between Sony and streaming outlets. How did those classify streaming?

Well, after Sony threw up a huge fight over producing its contracts in unredacted form, the answer is hardly clear.

"Take, for example, Sony's July 1, 2013 Digital Audio Distribution Agreement with Spotify Global," writes Abrams. "19 argues that 'the exploitation' is exclusively characterized as a transmission because 'Stream' is explicitly defined as 'each instance in which any portion of a recording is delivered by means of digital audio transmission which digital audio transmission is substantially contemporaneous with the performance of the recording embodied therein...' The Court agrees with 19 that, under this definition, 'Stream' is unequivocally characterized as a 'transmission.'"

Of course, there's a "but" coming.

She adds, "But what complicates the analysis is the number of instances in which the word 'distribution' also appears in the contract, which raises the question whether those too constitute descriptions or characterizations..."

The confused judge has a lot of questions.

"Does the fact that Spotify is described as a 'distribution service' amount to a characterization of 'the exploitation'?" she asks. "Should one take into account where in the contract the purported description or characterization takes place? In other words, where the key words appear in provisions where one would not expect such a description/characterization — like provisions covering the date the streaming service is authorized to release music, assumption of costs, financial audits, the conversion of foreign proceeds, and the currency for payments of service fees in Brazil — does the location bear on whether it amounts to a description or characterization...?"

The judge finds that both sides make plausible arguments, meaning the case is now set to move to a summary judgment phase where perhaps, there will not only be discussion of contracts, but also extrinsic evidence pertaining to what Sony and third-party streaming outfits meant when they negotiated the deals.

At the moment, Abrams finds that most of the contracts are ambiguous, but not all. She's granted judgment in favor of Sony with respect to AOL's streaming while granting 19 judgment with respect to Apple's streaming. The case will continue to be a closely-watched battle in the music industry.

Here's the full opinion.