In a case that could seismically alter the way labels and artists share download revenue, members of the Allman Brothers Band and Cheap Trick have filed a class action lawsuit alleging that Sony BMG h

In a case that could seismically alter the way labels and artists share download revenue, members of the Allman Brothers Band and Cheap Trick have filed a class action lawsuit alleging that Sony BMG has underpaid artists for digital music transactions.

At issue in the action, filed April 27 in U.S. District Court in New York by Labaton Sucharow & Rudoff and Probstein & Weiner, is whether the label’s deal with online services for downloads is a license or a sale.

Sony BMG labels consider that their deals with the services are for sales of records rather than licenses for the recordings (see sidebar). But the suit alleges that Sony BMG is violating contractual obligations to share 50% of the net licensing revenue from digital music transactions with artists.

The two bands claim that from 99-cent downloads, they receive only about 4.5 cents, rather than the 30 cents per track they believe they are owed.

For years, artists have complained that royalties are further cut; many contracts permit a 50% reduction in royalties for music sold through a new technology, as well as a packaging deduction. Many artists say these clauses only made sense in the physical world, when music migrated to CDs from cassettes.

Sony BMG declined comment.

The suit concerns royalties received for master ringtones and digital downloads through at least nine services, including Apple’s iTunes. The parties are seeking in excess of $25 million in damages. The artists allege that there are about 2,500 other acts in similar situations from the Sony BMG-affiliated labels.

“This has been the elephant in the room for a while,” says Dave Frey, manager for Cheap Trick. “If you don’t dispute the accounting now, that establishes how it’s going to be in the future.”

The suit, which still has to be certified in federal court as a class action case, follows a similar suit filed by Third Story Music against Warner Music Group over recordings by Tom Waits.

Other labels may soon be involved, as well. “I’m surprised that similar actions haven’t already been commenced against the other record labels,” says Brian Caplan, one of the attorneys bringing the suit.

The potential implications of these suits are enormous. The Cheap Trick suit claims more than 420 million records were sold in digital formats last year—a figure that includes master ringtone sales. Nielsen SoundScan reports more than 350 million digital tracks and 16 million digital albums were sold in 2005.

If downloading is found to be a licensing activity, such a shift in the business model could see labels renegotiating artists’ deals or refusing to provide certain recordings for digital delivery.

“Every manager I’ve talked to is in agreement about this,” Frey says. “It’s time to address this. I hope we don’t screw it up and set a bad precedent for everybody else.”

Additional reporting by Ray Waddell.