The Warner Music Group has submitted a settlement to the class action lawsuit filed by artists who claimed they were entitled to be paid on a licensing basis instead of a royalty basis for download and mastertones.
The difference is basically whether they should be paid an artist royalty rate that ranges from 6% to about 20%, depending on each artist's rate, versus a licensing basis, which means splitting revenues with the artist or paying 50% of net revenues.
WMG is offering artist who opt-in to the settlement a pool of $11.5 million, which will include about $3 million in lawyer's fees and expenses, to all U.S. artists who signed a recording contract with one of its labels prior to Jan. 1, 2002. Thousands of artists are eligible to participate in the settlement. In making the settlement offer, WMG is not admitting any wrongdoing. Moreover, the settlement allows the company to sidestep the issue of whether downloads should be paid as a license.
The artists who named as plaintiffs in the settlement agreement are: Kathy Sledge-Lightfoot, Gary Wright and Ronee Blakely.
“We are pleased to have resolved this matter and believe that this is a fair settlement for all parties," a WMG spokesman said in a statement.
In 2012, Sony Music Entertainment made a settlement in a similar class action lawsuit, agreeing to pay $8 million to Sony artists.
The WMG settlement offer covers sales during the period of Jan. 1, 2009 through Dec. 31, 2012. According to the settlement, artists who signed contracts prior to 2002 generated about $381 million in U.S. download and ringtone sales during that period. Consequently, each artist's settlement would be the pro-rated share of that revenue. So if an artist download and mastertones counted for $19 million in sales during that period, the artist's settlement payment would be 5% of the $8.5 million pool. Settlement payment can be applied against unrecouped balances, however.
The time period for the settlement is based on the statute of limitations and the fact that most recording contract includes clauses on how far back audits can occur, according to people familiar with the settlement.
Going forward beginning Jan. 1, 2013, artists will receive an incremental 5% of royalties, capped at 14% with a floor of 10%. That means artist who signed contracts in the early days of the industry -- when 1% to 6% royalty payments were common -- would be increased to the floor rate of 10% for downloads and mastertones. Meanwhile, producers with royalty points will receive the same incremental increase on a percentage basis. So an artist with a 10% rate would receive 14% rate on the wholesale revenue of a U.S. download going forward, according to the settlement, while producers receiving 3% would see their rate increase to 4.2%.
For foreign royalties, the rate increase would be 2.5%. But since contracts typically call for artist to receive, in some countries, 90% of the U.S. rate, that means foreign downloads for an artist receiving a 10% rate in the U.S. would receive 90% of 12.5%, which equals 11.25% of wholesale.
While the settlement is now been agreed upon and submitted to the court by both the plaintiff and the defendant, the court still needs to grant preliminary approval.The class action suit was filed in the San Francisco federal court, which is in the Northern District of California, where Judge Richard Seeborg is presiding.
When the effective date, which is expected to be sometime in January, is set, artist will have about four months to submit a claim form. If artists opt-in, they forego their right to pursue a lawsuit on whether they should be paid on a license-bases instead of a royalty basis. Artists, of course, can choose not to participate in the settlement and pursue any legal remedies at their disposal in the dispute over whether downloads require payments based on a licensed rate or royalty rate.
After the claims are put in, WMG will provide a report to the class counsel on what amounts will be paid out to each participant within six months, and then the class counsel and artist will have 90 days to object to any of WMG's calculations.
The law firms that brought forth the class action suit on behalf of artists are Pearson, Simon & Warshaw, LLP; Hausfeld LLP; Kiesel Law LLP; Lieff Cabraser Heimann & Bernstein, LLP; and Phillips, Erlewine & Given, LLP. The lawfirm of Munger Tolles & Olson LLP defended WMG in the suit.