Why it matters: In April, Universal Music Group agreed to pay approximately $11.5 million to settle a class action lawsuit brought by over 7,000 recording artists who claimed that they were underpaid royalties from digital downloads of their music that had been characterized as “sales” rather than higher royalty rate “licenses.” The settlement follows similar “digital download” class action settlements involving Sony and, more recently, Warner Music Group.

Detailed discussion: On April 28, 2015, the district court judge in the consolidated class action Rick James, et al. v. UMG Recordings, Inc., preliminarily approved “as falling within the range of reasonableness” a settlement under which UMG Recordings, Inc. (“UMG”) agreed to pay approximately $11.5 million to a certified class of approximately 7,500 recording artists to resolve breach of contract claims alleging the underpayment of royalties resulting from UMG and its affiliated company Capitol Records LLC (Capitol) characterizing digital downloads of the artists’ music as “sales” (for which they would receive around 15% of net receipts) instead of “licenses” (for which they would receive a 50-50 split). For purposes of the case, digital downloads were defined to include permanent downloads, “mastertone” cellular ringtones and, in the case of Capitol, digital streams.

In addition to covering attorneys’ fees and administrative costs, UMG also agreed in perpetuity to increase by 10% all digital download royalty payments going forward (with no cap) to “Class Members,” who generally consisted of all “persons or entities (or their successors)” who had contracts with a UMG or Capitol U.S. record label between January 1, 1965, and April 30, 2004, that contained specified “records sold” and “masters licensed” royalty rate provisions (or, in the case of Capitol, that were part of its “Legendary Artists Program”). As part of this “prospective relief,” UMG agreed that the Class Members will “lock in” certain safeguards to their future digital download royalty calculations to prevent reductions due to “packaging” or other similar methods under which the digital downloads may be sold.

The motion to approve the settlement filed with the district court on April 14, 2015 details the parties’ protracted negotiations and mediation sessions starting in 2012, and the extensive discovery that included the review by the plaintiffs of over 11,000 recording contracts and numerous contentious discovery disputes presided over by a magistrate judge. The motion also details, as important to placing the UMG settlement in context, the history of the “digital downloads” class action suits that were filed against the four largest U.S. record companies: Sony (filed in 2006, settled in 2011), Warner Music Group (filed in 2011, settled in 2014), and Capitol EMI (later combined with the UMG class action for purposes of settlement) and UMG (both filed in 2011). Warner Music Group was the first of the 2011 class actions to settle in 2014, and the parties used it as a “template or starting point” in the UMG settlement.

One of the considerations the judge looked to in deciding to approve the settlement was “[t]he strengths and risks of Plaintiff’s case.” The judge pointed out that there has not yet been a ruling on the substantive issue underlying the case, i.e., whether the digital downloads at issue should properly be characterized as “licenses” or “sales.” The judge acknowledged that Eminem, an “individual plaintiff,” had successfully litigated the issue in F.B.T. Prods, LLC v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010, cert. denied 2011), but felt that this case could be differentiated based on varying contract language and defenses available, and the years of litigation that would ensue if the case were not settled would be “risky, expensive and create substantial delay in recovery to Class Members, many of whom recorded their music in the 1970s, 1980s and 1990s.”

UMG, who admitted no wrongdoing in the settlement, said in a statement that “[a]lthough we are confident we appropriately paid royalties on digital downloads and adhered to the terms of contracts, we are pleased to amicably resolve this matter and avoid continued legal costs.” One of the lead plaintiffs’ lawyers, Len Simon, highlighted the issue when he said that “[t]his settlement is a fair resolution of this controversy over how to compensate artists for their valuable work in a new medium which we believe was not contemplated by their contracts, many drafted in the 1970s or 1980s. And it compensates these artists now, rather than after additional years of litigation and uncertainty.”

Click here to read the Notice of Motion and Motion for Preliminary Approval of Class Action Settlement in James et al. v. UMG Recordings, Inc., CV 11-01613 (N.D. Cal. 2015).

Click here to read the UMG press release dated 4/14/15 titled “UMG and Class Action Attorneys Propose Settlement Agreement on Digital Download Royalties.”