By Dorothy Atkins
Law360 (June 12, 2023, 6:13 PM EDT) -- Former Beach Boys guitarist David Marks urged the Ninth Circuit Monday to revive his proposed class action alleging Universal Music Group's subsidiary secretly pocketed an unfair cut of legacy artists' foreign streaming royalties, arguing the label is obligated to pay royalties and UMG's claim its payments are voluntarily is "nonsensical."
During a hearing before a three-judge panel, David Marks' counsel, Daniel Lifschitz of Johnson &Johnson LLP, argued the record label won't acknowledge it has any obligation to pay the band for foreign digital streaming royalties, even though it makes no sense for the company to pay artists royalties if it was not contractually obligated.
If the company were right, "tomorrow they could decide to turn the spigot off" and stop paying artists for foreign digital streams outright, he said.
"It's nonsensical to claim that these for-profit companies that have public shareholders are simply giving away millions of dollars out of the goodness of their hearts," he said. "Shareholders would object tomorrow and say, 'Stop giving away free money. We're losing money for the shareholders.'"
The company is paying the royalties because it knows it must, Lifschitz added.
The attorney's arguments came during an appeal in a proposed class action filed by the former Beach Boys band member in May 2021. The suit claims the record label paid royalties on foreign digital music streams to class members via biannual royalty checks only after taking a 25% cut of foreign streaming royalties for an allegedly arbitrary "intercompany charge" without disclosing the deductions.
Marks and his band members originally entered into an agreement with the record company's predecessor in 1962, entitling the musicians to royalty payments from vinyl record sales, the suit says. A decade later, in 1972, after Marks left the band, he entered a settlement that clarified the terms of the original contract, but neither contract mentioned digital streaming sales, according to the lawsuit.
The seven-count complaint asserted breach of contract claims and claims under California's Unfair Competition Law and seeks declaratory relief.
But U.S. Judge Mark C. Scarsi tossed the case in April 2022, finding that Marks failed to point to a contract that governed the dispute since the earlier contracts did not mention digital recordings.
Marks appealed, and his attorney argued before a three-judge panel Monday that if upheld, the lower court's ruling would, in effect, eliminate revenue streams for thousands of legacy artists. Under questioning by the judges, Lifschitz acknowledged that the original contracts did not address royalties for digital streams.
But he argued that the record label instituted an "ad hoc" new royalty scheme by continuing to cut artists checks for the digital streams that stated foreign streaming revenues were being paid based on a 50% royalty of all revenues received, without disclosing that the record label was actually retaining 25% in profits.
He added that the artists agreed to the purported amendments and an implied contract by cashing the checks, and he noted that the 1972 agreement authorized an intercompany charge, but it was intended to pay for costs associated with creating the vinyl records and was capped at 10%.
U.S. Circuit Court Judge Jay Bybee replied that the musician's argument has raised a "really curious problem."
"What's ironic is that the louder that you argue that you're not getting 50% of everything, then it just feels like there's no contract," the judge said.
But UMG's counsel, Sean Ashley Commons of Sidley Austin LLP, argued the royalties statements are "not offers to negotiate," and are not amendments to the prior contracts. He noted that the shift from vinyl records to digital music streams did not occur overnight, and although digital streaming now accounts for more than 80% of sales, that is not how it always was, he said.
Commons argued that although the company "generally" has an obligation to pay royalties, ultimately it does not believe the artists have a specific binding contract that would entitle them to50% of the royalties.
But at the end of the record label's arguments, Judge Bybee appeared skeptical of Common's argument.
"I'm really puzzled by the position that you're taking, that there's absolutely no contract what so ever on the 50% and that you're simply a volunteer at this point," Judge Bybee said.
Commons replied that it is not unusual for record labels to pay artists beyond the terms of their contracts by forgiving unpaid advances and through other actions.
"This is not an unusual practice by any means," he said.
However, during Marks' rebuttal argument, the musician's attorney disputed the notion that the royalty payments were a gift from the record label.
Judge Bybee asked if there has been an effort to try to mediate this dispute and two others pending in federal court over the foreign streaming royalties.
The attorney replied that he does not believe there has been any global mediation efforts to resolve the issue, but noted that the original contracts contemplated technological changes and the royalty rates that the artists currently receive are three-to-seven times higher than the rates in the original contracts.
At the end of the hearing, the panel took the arguments under submission.
U.S. Circuit Court Judges Jay Bybee and Morgan Christen and U.S. District Judge Sidney A. Fitzwater, sitting by designation, sat on the panel.
Marks is represented by Daniel Lifschitz of Johnson & Johnson LLP.
UMG Recordings is represented by Sean Ashley Commons of Sidley Austin LLP.
The case is David Marks v. UMG Recordings Inc. et al., case number 22-55453, in the U.S. Court of Appeals for the Ninth Circuit.