SoundExchange Takes Music Choice to Court Over Underpaid Royalties

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SoundExchange has filed a lawsuit against Music Choice, alleging that the music service has shortchanged it in millions of dollars of royalty payments from its business establishment music service. The lawsuit was filed in the Washington, D.C. District Court today.

In the complaint, SoundExchange alleges that while Music Choice pays royalties for the ephemeral licenses it uses for the more than 50 channels of music programming it provides to business establishment clients, Music Choice is not paying royalties on the ephemeral licenses it uses when its programming from its commercial cable channels are also provided to its business clients. SoundExchage further alleges that it has been shortchanged payments from Jan. 1, 2013 through Dec 31, 2016.

According to the complaint, "Music Choice systematically underpaid statutory royalties for its [MC For Business] during the period covered by that procedure, by consistently making an allocation of the fees and payments it receives for providing [that service] in a manner not contemplated by the CRB's regulations, and as a result, underreporting its "Gross Proceeds" to SoundExchange.

In addition, the complaint, filed on behalf of SoundExchange by David Handzo and other lawyers from the firm of Jenner & Block, further states that "Music Choice engaged in the same conduct before and after the 2013-2016 verification period" as well, which would entitle SoundExchange to a further recovery of statutory royalties and late fees in an amount to be determined at trial. 

According to a rate determination by the Copyright Royalty Board, SoundExchange is entitled to royalties of 10 percent of Music Choice's gross proceeds from its MC for Business for the year of 2013 for using the ephemeral license which allows copies of music to be stored for broadcast at business; and royalties of 12.5 percent of gross proceeds for the subsequent years.

SoundExchange said it engaged the firm of Prager Metis to audit Music Choice, which it added "did not fully cooperate in that process by, among other things, refusing to provide [the auditor] access to any information pertaining to its activities in 2013."

Nevertheless, "Prager Metis discovered that Music Choice systematically underpaid statutory royalties for its [MC for Business service] during the period covered by that procedure. Specifically, Prager Metis concluded that SoundExchange was due millions of dollars, including both unpaid royalties based on persistent underreporting of Gross Proceeds and late fees," the complaint states.

Music Choice said that Prager Metis had found that Music Choice offers two [MC For Business] service packages, each with a set number of channels; and that it paid royalties on a fraction of its actual revenues from that business. It only paid for the programming specifically created for businesses, not the Music Choice cable channel programming for consumers that it also provided to its business clients, even though Music Choice received additional revenue from business clients for the latter programming.

"Delivery of the same music channels to different customers as part of a different service does not make the use of sound recordings in the [MC for Business] free of any statutory royalty obligation the complaint stated.

Finally, the complaint stated, even if Music Choice's interpretation of CRB regulations of what it should pay royalties on is correct, SoundExchange added that the arithmetic that Music Choice explained to Prager Metis does not conform to available information concerning the number of [MC for Business] channels it provides, only including half the number of channels in its formula. "Thus, under any interpretation of the CRB's regulations, it appears that Music Choice has significantly underpaid the required statutory royalties and applicable late fees," the complaint states.

According to SoundExchange, if an audit reveals an underpayment of 10 percent or more, the service is required to pay SoundExchange cost of the verification process, which it listed at $35,000; plus a late penalty of an additional 0.75 percent of royalty payments for 2013 and an additional 1 percent of royalty payments for the years after 2013. Moreover, SoundExchange is requesting payment for its legal fees. Music Choice didn't immediately respond to a request for comment, while SoundExchange declined to comment beyond its press release.


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