By Kevin Stawicki
Law360 (September 8, 2020, 4:42 PM EDT) — The estate of 1950s pop star Ricky Nelson has reached a $12.7 million deal with Sony Music Entertainment to settle its classwide claims over the label's hefty “intercompany charge” on international streaming revenue before it calculates an artist's royalty rate.
In addition to the $12.7 million set aside for the class of artists, Sony agreed to increase the amount of royalty payments calculated on future foreign streaming revenues by 36%, according to a motion for preliminary approval filed Friday. That prospective relief will add “many millions of dollars and in excess of the common fund, since streaming is now the most dominant form of music distribution available,” the parties said.
“Thus, the settlement provides substantial and significant relief to class members, while eliminating the risk, expense, and uncertainty associated with protracted, contested litigation through trial and appeals,” the parties wrote.
Settlement talks began shortly after Nelson's estate filed the suit in 2018, seeking to represent “hundreds, if not thousands” of Sony Music artists who said the record label illegally assessed charges connected to its foreign affiliates from their compensation agreements. The methodology underreports revenue generated from foreign sales by reducing the portion owed to artists, a violation of the terms of their agreements, the suit claimed.
“By assessing an intercompany charge for international sales, defendant impermissibly takes up to 68% off the top of the international revenue earned from streaming sales, and bases the artist's royalty rate on the remainder,” the artists said in the complaint.
But Sony maintained that it properly compensated artists according to their contracts, which had no provision requiring it to make the royalty payments.
Once the parties came to a standstill during settlement negotiations, they brought in a mediator to work out the final deal signed Friday. Litigating the case would have resulted in significant costs for both sides, the parties said.
“This case involves many intricate legal issues relating to complex recording contracts and their interpretation in light of decades of performance thereunder,” the parties said. “The costs and risks associated with litigating to a verdict, not to mention through any related appeals, would have been high, and the process would require extensive time and resources.”
The suit tore into the core of how Sony compensates its artists. Nelson, whose full name was Eric Hilliard Nelson, entered into his current compensation agreement in 1976, then with CBS Records, which was later acquired by Sony. He released more than 30 albums and had several hits, including “Hello Mary Lou” and “Travelin' Man,” before dying in a plane crash in 1985.
Music royalties coming from outside the U.S. are generally paid through “foreign collection societies” that retain a commission, which the complaint said was not at issue. But Sony's foreign affiliates are not independent, the suit said; they're all wholly owned or controlled subsidiaries of Sony Music, with names such as Sony Music UK and Sony Music Australia.
“Sony Music exercises total control over these subsidiaries to create substantial profits and increase the corporate bottom line,” the suit said. “It is through these relationships with its foreign affiliates that Sony Music assesses the intercompany charge at issue herein that deprives artists such as [the Rick Nelson Co. LLC] and the class members of royalty revenues from foreign sales.”
Sony Music and the foreign affiliates are alter egos of one another, the suit said, so “failure to disregard their separate identities would result in fraud or injustice.”
Representatives for the parties did not immediately respond to requests for comment Tuesday.
The Rick Nelson Co. is represented by Laurie Rubinow and James C. Shah of Shepherd Finkelman Miller & Shah LLP, Neville L. Johnson and Douglas L. Johnson of Johnson & Johnson LLP, Daniel L. Warshaw and Bobby Pouya of Pearson Simon & Warshaw LLP and Jeffrey A. Koncius and Nicole Ramirez of Kiesel Law LLP.
Sony is represented by Jonathan M. Sperling and Andrew W. Hahn of Covington & Burling LLP.
The case is The Rick Nelson Co. v. Sony Music Entertainment, case number 1:18-cv-08791, in the U.S. District Court for the Southern District of New York.
–Additional reporting by Bonnie Eslinger. Editing by Adam LoBelia.