Maverick/WMG Case Raised Unanswered Issues of Precedent

While most attorneys surveyed by ELW view the settlement of the litigation between Maverick Records, which was co-founded by Madonna, and Warner Music Group as the smart thing to do, some are disappoi

NEW YORK -- While most attorneys surveyed by ELW view the settlement of the litigation between Maverick Records, which was co-founded by Madonna, and Warner Music Group as the smart thing to do, some are disappointed that important issues of precedent raised in the Maverick complaint received no ruling.

WMG on June 14 said it had reached an agreement in principle with Maverick to settle their litigation and extend the Maverick joint venture. As part of the deal, WMG -- which currently holds 40% of Maverick -- will purchase the separate interests held in the label by Madonna and label COO Ronnie Dashev.

But regardless of the outcome, "It was shocking to see (WMG) suing this artist or this label which had made so much money for them over so many years," says one attorney. "It only goes to show the fickleness of the industry and that Madonna sales are on the wane."

WMG declined comment; calls to Madonna's spokeswoman were not returned at deadline.

The Maverick complaint charged WMG with breach of contract and sought undisclosed compensation and punitive damages.

Reportedly, Maverick valued the stake in the label held by its principals at $60 million; however, WMG is said to be paying Madonna and Dashev a total of only $10 million-$20 million under the settlement. Also as part of the settlement, WMG is said to be buying 5% of Maverick partner Guy Oseary's 25% stake, leaving him with a 20% stake in the company. WMG has also negotiated a new multi-year contract with the highly successful A&R executive. The settlement will put WMG's stake in Maverick at 80%.

Maverick was formed 12 years ago as a 50/50 joint venture between WMG and Madonna and her then manager Fred DeMann. In its first seven years, the label contributed $50 million in profits.

In 1999, when the joint venture was renewed, WMG loaned Maverick $20 million to buy out DeMann, and also provided a $6.5 million fee and an additional $7.5 million in funding to create a Latin division, according to WMG's pre-emptive suit, filed in the New Castle County Court of Chancery in Delaware. The renewal also increased the stake held by Madonna, Oseary and Dashev to 60%, leaving WMG with 40% ownership.

But the "fortunes of the joint venture declined precipitously" after the deal, the WMG suit says, with losses at the label totaling $66 million over the last five years. If the label made $50 million in its first seven years, then WMG had a total loss of $16 million.

But the Maverick complaint, filed in the Superior Court of California in Los Angeles, states that since the label was founded, it "generated $900 million in revenues and profits of $100 million for the WMG."

The new Maverick will be headed by Oseary and will move into the Burbank, Calif., headquarters of Warner Bros. Records, which will provide more services for Maverick than it did before. The move allows Maverick to reduce its staffing from about 40 to about 18; the departures are expected to include label GM Daniel Savage.

Maverick, which recently released a new album by Alanis Morissette, is expected to generate about $60 million in revenue this year. Sources familiar with the situation say that the staff and overhead reductions are being made in an effort to return the label to profitability.

The litigations seemed "rather short-lived," which can be favorable to both sides, says Christine Lepera, an attorney at Sonnenschein Nath & Rosenthal LLP in New York. "Both sides clearly had to compromise for this settlement ... and to come up with an amicable resolution was smart."

"The lawsuit was a very interesting and rare look at the inside workings of a custom label and provided some incendiary allegations of wrongdoing on the part of WMG," says Neville Johnson of the L.A. firm of Johnson & Rishwain.

But since the lawsuit was settled, "a number of issues of first impressions which I and other lawyers in the industry would have liked to see decided" will never be answered, he adds.

Johnson says the Maverick complaint alleges that there was "an intentional mandate (from WMG) to effectively stifle the growth and profitability of the label."

For example, the complaint includes claims that WMG failed to provide adequate radio promotion support for Maverick artists, and little back-end support. There were also allegations relating to mark-ups on manufacturing and other services that were so high that WMG was in effect allegedly gauging the label with bogus costs. The suit claims that Maverick "has always been highly profitable at the 'Group level,' which measures its actual profitability. At the 'Label level,' it typically appears to be in a loss position, because its true profit is diverted to other Warner entities."

The Maverick complaint also alleges that WMG failed to provide or pay for required services to market albums, leaving the label to incur about $30 million in costs.

"It was obviously going to be a battle of accountants and experts in the music industry as to custom and practice which would have proven to be very interesting," says Johnson. "It's impossible to tell upon reading the complaint who is in the right or wrong."

But Morton H. Fry, a lawyer with New York-based Stairs Dillenbeck Finley & Rendon, suggests that if the press reports that Madonna and her partner received only $10 million for a stake that was worth $60 million, "it seems that the owners got the lesser side of the settlement."

That probably reflects the lack of success at the label itself or the overall industry problems affecting label profitability, says Fry.

Another lawyer suggests that if Madonna came out on the short end of the settlement, "the strength of the partnership papers" gave WMG a stronger legal hand. "It struck me that when Madonna's lawyer switched from quoting a legal position into what's equitable that he didn't have much faith in his legal arguments."

Madonna was represented by Bertram Fields, one of the top U.S. entertainment litigators, as well as Lawrence Y. Iser and Kristen L. Spanier. All are with Greenberg Glusker Fields Claman Machtinger & Kinsella LLP in L.A.

But another lawyer who buys into Madonna's allegations that WMG was inflating Maverick's costs says that the legal dispute should be viewed against the backdrop of what is going on at WMG.

"They have had massive layoffs and losses, and they have new owners who made a calculated move to eliminate the fat," says one attorney. "They probably saw that the deal wasn't making enough money, and they wanted Madonna out of the deal to increase their portion of the profits."

Most observers say they are not surprised that the joint venture would up in litigation.

Stanley Schneider, who has served as inside council at a couple of the major record companies, observes that most joint ventures that involve artists' labels fail. "To have the skills needed to run a successful label, even a magician would have a hard time in today's market," he says.

"What ultimately happens is that the (major) has to buy out the (artist) partner to stem the losses," he explains. "At that point, they fight about valuation." In this case, Schneider guesses that "Madonna looks at the whole relationship, while Warner probably is only looking at the last two years."

If the label is losing money, then the parent would normally ask, "Why should I pay you?" Madonna probably answered that WMG made plenty of money off of her and Maverick over the course of their relationship.

Fry of Stairs Dillenbeck Finley & Rendon points out that "as a lawyer having put together as well as unraveled many of these joint ventures, one of the most common mistakes I find is that the 'sweat equity' side (fails) to put in a floor on the buyout price."