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The Hollywood Reporter Covers Johnson & Johnson's Digital Downloads Class Action Against Warner Music (Feb. 3, 2012)

Posted by Johnson & Johnson, LLP | Feb 03, 2012 | 0 Comments

Sister Sledge Files Class Action Against Warner Music Over Digital Royalties

Band members and actress-songwriter Ronee Blakley are lead plaintiffs in a suit alleging potentially hundreds of millions of dollars in lost revenue from digital download sales

The Hollywood Reporter

Feb. 3, 2012

By Matthew Belloni

The members of the musical group Sister Sledge have banded together with an Oscar-nominated actress and songwriter to file a major class action lawsuit against Warner Music Group alleging they have been cheated out of millions of dollars based on improper calculations of revenue from digital music sales.

Debra Sledge, Joan Sledge, Kathy Sledge Lightfoot, Kim Sledge Allen and Ronee Blakely filed suit in federal court in San Francisco on Thursday claiming that the music giant's method for calcluating digital music purchases as “sales” rather than “licenses” on songs such as the band's chart-topping “We Are Family” cheats artists out of money due to them under recording contracts, many of them signed decades before music was sold digitally via iTunes, Amazon, ringtones and other outlets.

“Rather than paying its recording artists and producers the percentage of net receipts it received–and continues to receive–from digital content providers for ‘licenses,' Warner wrongfully treats each digital download as a ‘sale' of a physical phonorecord…which are governed by much lower royalty provisions than ‘licenses' in Warner's standard recording agreements.”

If that claim sounds familiar, it's one of the most hotly-disputed issues in the music business. Songwriters typically make much less money when an album is “sold” than they do when their music is “licensed” (the rationale derives from the costs that used to be associated with the physical production of records). But record labels have taken the position that music sold via such digital stores as iTunes should be counted as “sales” rather than licenses.

The difference in revenue can be significant. The Sister Sledge members claim their record deal promises 25 percent of revenue from licenses but much less from sales. Blakely, who is an Oscar nominated actress (Nashville) as well as songwriter and performer, alleges that her deal with WMG grants her 50 percent of licenses, much more than the rate WMG is paying based on its calculation of sales.

Eminem‘s publisher brought a nearly identical claim against Universal Music Group and won a fairly important decision at the 9th Circuit Court of Appeals in 2010 (the Supreme Court declined to hear an appeal). The 9th Circuit ruled that iTunes' contract unambiguously provided that the music was licensed. At the time, UMG downplayed the ruling as specific to Eminem's contract, but music lawyers believe more of these cases are going to be filed by legacy artists (newer contracts have specific language precluding such suits).

And now we have a full-fledged, 35-page class action lawsuit seeking to bring together many artists in one proceeding, calling Warner Music's actions “wide-spread and calculated.” Hundreds of millions of dollars in revenue is at stake, the complaint alleges. It should be interesting to see which artists come forward.

Sister Sledge also claims WMG has improperly kept revenue from “reserves,” which is money withheld to offset losses related to unsold records. The plaintiffs point out there's no such thing as unsold inventory in a digital universe.

The suit was filed by four firms: Pearson Simon Warshaw & Penny in San Francisco, Hausfeld in Washington DC, and Kiesel Boucher Larson and Johnson & Johnson in Beverly Hills.

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