Suit seeks definition of licensing vs. sales.

Tom Waits’ Third Story Music sued Warner Music Group May 31, seeking a court declaration of whether providing recordings for digital downloads should be classified as a license or a sale.

The complaint, filed in the U.S. District Court in Los Angeles by the law firm Cohen and Cohen, says that Waits’ production company provided seven albums to WMG’s former labels Asylum and Elektra/Asylum. WMG also released three Waits anthologies.

It alleges that WMG has taken the position the digital downloads are sales, paying Waits’ company 9% (on earlier recordings) and 13% (on later recordings) of the 67 cents per download received from Apple Computer for iTunes transactions. For album downloads, this results in a 30%-40% decrease in royalties to Waits, while increasing the share retained by WMG, the complaint says.

Third Story claims that it is entitled to 25% of the money WMG received for downloads on earlier recordings and 50% for later recordings under the licensing provisions of the recording agreements.

As many consumers have embraced purchasing permanent downloads from such services as iTunes, the issue of license vs. sale has been the subject of heated discussions among attorneys for artists and labels over the past two years.

Recording contracts typically provide that artists will be paid a royalty based on either the wholesale or retail price for “records” sold and a share of the fee received for master recordings that have been licensed to third parties.

Most artists’ lawyers claim that providing recordings to online services for downloading is an activity akin to licensing. Yet most labels treat it as a sale, which entitles them to pay less of the amount received to artists.

The suit also seeks payment for underpaid royalties should the court determine that digital downloads fall under the definition of a license.

WMG had not yet seen the complaint when contacted and had no comment.

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