Suit alleges hundreds of millions in underpaid digital royalties

A consolidated amended complaint in the class action filed over underpaid digital royalties by several heritage acts against Universal Music Group gives the most complete delineation yet of the plaintiffs’ case.

The complaint, filed Thursday in a Northern California federal court, claims that UMG, “run almost entirely by lawyers, embarked on a scheme to defraud its artists,” and that the No. 1 major label “conceived, approved and undertook this deception at its highest executive level.”

The class action consolidates claims made on behalf of the class in a series of filings made since spring of 2011 by the estate of Rick James, Chuck D of Public Enemy, Dave Mason, Whitesnake and Temptations members Otis Williams and Ron Tyson.

Former plaintiff Rob Zombie and his group White Zombie have exited the action, due to what a source said were “individualized issues.” Bo Donaldson, founder of the ’70s act Bo Donaldson and the Heywoods (known for their 1974 hit “Billy Don’t Be a Hero”), and hip-hop duo Black Sheep have joined as plaintiffs.

A number of individually filed suits — many of which also include other matters of royalty accounting — are also pending against UMG and the other major label firms over digital payouts.

The newly filed complaint is a scathing indictment of UMG’s business practices in the digital era.

It claims that UMG understood for years that — as a 2010 appellate decision in a case filed against UMG by F.B.T. Prods., Eminem’s early producers, ruled — royalties for digital downloads and ringtones should be calculated as licenses (usually specified contractually as 50% of net receipts) and not as sales (calculated at a much lower rate, typically not higher than 12%-15% of net).

The action maintains that in order to pay its acts less, UMG deliberately miscategorized the licenses as sales, continuing, “UMG’s lawyers sought to delete the word ‘license’ from proposed agreements with (download) providers. Many of the providers, such as Sprint, refused to call the licenses something that they were not, and the license language stayed.”

The complaint continues: “UMG spent years engaging in this cover up. Since almost all of its executives involved in the foregoing wrongful conduct were (and are) lawyers, UMG consistently invoked not only business confidentiality but also the attorney-client privilege to cloak their deliberations on this subject in secrecy. It has continued to do so in this lawsuit.”

The action claims that UMG’s policy of treating downloads as sales was a “corporate-wide decision made at the highest executive level,” which dates back to a 2002 memorandum from Michael Ostroff, then the company’s executive vice president of business and legal affairs.

The action says, “Prior to the Ostroff memo, and before the advent of iTunes, UMG routinely entered into licenses with digital content providers…and treated the income derived from those licenses accordingly, paying the licensing rate to artists on such income. On royalty accounting statements to its artists from this time period, UMG showed the income derived from this arrangement under ‘license’ and paid artists at the licensing rate.”

The suit claims that the plaintiff class has been underpaid by UMG to the tune of “hundreds of millions of dollars” on digital downloads and “tens of millions” on ringtones.

One telling paragraph indicates how little some heritage artists are receiving from both records and downloads.

According to the suit, the Temptations are entitled under their 1971 contract to 6% of the retail price of records sold. “Under its current policy,” it continues, “UMG has combined this low record sold rate with the underpayment for permanent downloads to pay approximately 2¢ per download out of the 70¢ paid to UMG by Apple on that artist’s catalog of recorded music. Many Motown legacy artists have similar contracts.”

A Universal spokesman said he had no knowledge of the consolidated complaint and could not comment. UMG has consistently maintained that the appellate ruling in the so-called Eminem case is not a legal precedent.

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