Record Labels Shot the Artists, but They Did Not Share the Equity
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Record Labels Shot the Artists, But They Did Not Share the Equity BRYAN LESSER* ABSTRACT Spotify is planning an initial public offering. The three largest record labels in America own equity in Spotify. Recording artists are not being fairly compen sated by the streaming service. The lack of fair compensation is likely caused by the record labels’ partial ownership of Spotify. The relationship between record ing artists and their record labels has changed in the digital era. This Note argues that the new relationship between artist and record label should be considered a partnership. Recognizing the artist–label relationship as a partner ship gives rise to fiduciary duties. The recognition of a fiduciary duty would obligate record labels to pay artists a share of the profits from the sale of equity in Spotify’s upcoming IPO. TABLE OF CONTENTS INTRODUCTION .......................................... 290 I. BACKGROUND ....................................... 291 A. The Public Performance Right for Sound Recordings ...... 292 B. The Basics of the Music Industry ..................... 293 C. The Rise of Spotify ............................... 294 II. THE SITUATION:SELF-DEALING RECORD LABELS .............. 295 A. The Development of the 360 Deal .................... 296 B. The Acquisition of Equity in Spotify ................... 297 C. Widespread Belief That Artists Are Not Being Fairly Compensated ................................... 299 III. THE SOLUTION:AFIDUCIARY DUTY ....................... 302 A. Good Faith and Fair Dealing ....................... 303 B. Fiduciary Duty by Special Circumstance ............... 304 1. Legal Standard .............................. 304 * J.D. Candidate, Georgetown University Law Center, 2018. © 2018, Bryan Lesser. 289 290 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289 2. Application to the Artist–Label Relationship ......... 305 C. Fiduciary Duty by Partnership ...................... 307 1. Legal Standard .............................. 307 2. Application to the Artist–label Relationship .......... 309 IV. REPERCUSSIONS OF RECOGNIZING A FIDUCIARY DUTY ............ 310 A. Advantages of Recognizing a Fiduciary Duty ............ 310 B. Counterarguments to Recognizing a Fiduciary Duty ....... 311 C. Limiting the Duty ................................ 311 D. How to Pay Out the Equity Profit .................... 313 CONCLUSION ............................................ 313 INTRODUCTION On March 17, 2017, Spotify announced that it had reached a deal with Universal Music Group, the largest record label in America.1 The deal renews Spotify’s licenses to stream sound recordings on demand, allowing Spotify to continue operating its enormous music library.2 The deal also lowers the royalty rate to be paid per stream.3 Royalty payments are how artists receive income from the interactive streaming of their recordings.4 Further, the deal makes some sound recordings exclusive to Spotify Premium users and unavailable to users of the free service for certain periods of time.5 The lower royalty rate decreases Spotify’s operating costs, and the exclusive content increases its revenue by encouraging users to pay the subscription fee to join Spotify Premium.6 Spotify has reached a similar deal with Sony Music Entertainment7 and will soon reach a new agreement with Warner Music Group.8 1. Alex Hern, Spotify to Host Top Stars’ Albums for Premium Subscribers Only,GUARDIAN (Apr. 4, 2017), https://www.theguardian.com/technology/2017/apr/04/spotify-universal-albums-premium- subscribers-only [https://perma.cc/UT4V-QEGN]. 2. Nick Statt & Micah Singleton, Spotify Will Restrict Some Albums to Its Paid Tier, MSN (Mar. 16, 2017), http://www.msn.com/en-us/news/technology/spotify-will-restrict-some-albums-to-its-paid-tier/ar- BByeAhj?li=AA4Zoy&ocid=spartandhp [https://perma.cc/T8YE-2BCJ]. 3. Id. 4. Id. 5. Id. 6. Id. 7. Elias Leight, Spotify Reaches Deal over Royalties with Sony Music,ROLLING STONE (July 11, 2017), http://www.rollingstone.com/music/news/spotify-reaches-deal-over-royalties-with-sony-music- w491703 [https://perma.cc/7W7N-6B3W]. 8. Sophie Sassard, Exclusive: Spotify, Warner Hope to Clinch Royalty Deal by September,REUTERS (July 24, 2017), https://www.reuters.com/article/us-spotify-warner-music/exclusive-spotify-warner-hope- to-clinch-royalty-deal-by-september-sources-idUSKBN1A91BL [https://perma.cc/VMP4-V7NF]. 2018] RECORD LABELS SHOT THE ARTISTS 291 This is an elaborate deal that will increase Spotify’s profitability, making it all the more attractive for an upcoming initial public offering (IPO).9 The reason the three major record labels negotiated this deal—in which they will receive lower royalty payment—is likely because they own a significant portion of Spotify stock and stand to profit tremendously from the IPO.10 The artists who created the music, however, will receive reduced benefits because their royalty rates are lower and their music is now being limited in its public dissemination. The artists entered into recording contracts on the assumption that the record labels had a common interest in obtaining the highest royalty rate and promot- ing the artists to the widest possible audience. Under the current law and absent specific contractual provisions, the recording artists have no legal recourse against the record labels and no legal right to the profit from equity obtained by leveraging their songs. Part I of this paper will introduce the public performance right for sound recordings in interactive digital media, the basics of the music industry, and the success of Spotify as an interactive digital streaming platform. Part II will explain the current situation, including the advent of 360 record deals, the record labels’ acquisition of Spotify stock, and the widespread belief that recording artists are not being fairly compensated. Part III will propose a potential solution by looking at three methods that an artist can use to establish a legal right to the profit from a record label’s ownership of Spotify equity: good faith and fair dealing, fiduciary duty by special circumstance, and fidu- ciary duty by partnership. Part IV will then address the repercussions of recognizing a fiduciary duty, including the advantages and counterarguments, how to limit the fiduciary duty, and how to calculate the payout of the equity profit. This paper concludes that the law should recognize that the artist–label relationship is a partnership triggering a limited fiduciary duty. This fiduciary duty should be limited to situations in which the label uses an artist’s work to benefit the label in a way that decreases the benefit conferred upon the artist. I. BACKGROUND A complicated history led to the “Big Three” American record labels— Universal Music Group, Warner Music Group, and Sony Music—benefitting themselves at the expense of the artists they agreed to promote. Granting licenses to stream music on demand in exchange for equity in a company is a novel concept. To understand how it is possible, this paper will summarize: (A) the public performance right for sound recordings, (B) the basics of the music industry, and (C) the rise of Spotify. 9. Id. 10. Id. 292 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289 A. The Public Performance Right for Sound Recordings Sound recordings were not given federal copyright protection until 1972.11 Sound recordings should not be confused with musical works, which constitute a separate copyrighted work.12 A sound recording is the recorded sound, whereas a musical work is the authorship of a song.13 Under the Copyright Act of 1976, sound recordings were not given the same scope of exclusive rights and protections as musical works.14 Sound recordings were protected from reproduction and distribution of the copyrighted work, such as selling pirated CDs.15 Congress initially rejected granting a public performance16 right to sound recordings on the grounds that, among other things, enforcing the right would be too difficult and the publicity from unrestricted airplay actually benefitted the rights holders.17 In 1995, the Copyright Act was amended in anticipation of the impending digital revolution and its potential effect on album sales.18 Congress passed the Digital Performance Right in Sound Recordings Act of 1995, giving sound recordings a limited public performance right in digital media.19 The Digital Performance Right in Sound Recordings Act separated interactive digital ser- vices from non-interactive digital services.20 In 1998, Congress passed the Digital Millennium Copyright Act, amending the scope of the public perfor- mance right to include sound recordings in certain digital media.21 Despite these new provisions, digital music piracy has continued to plague the music industry 11. Act of Oct. 15, 1971, Pub. L. No. 92-140, 85 Stat. 391 (1971); Stasha Loeza, Out of Tune: How Public Performance Rights Are Failing to Hit the Right Notes,31BERKELEY TECH. L.J. 725, 735 (2016). The sound recordings were protected by state laws. Loeza, supra, at 735 n.96. 12. See JULIE E. COHEN ET AL., COPYRIGHT IN A GLOBAL INFORMATION ECONOMY 410 (4th ed. 2015). 13. Stephen E. Demos, The Fair Pay Fair Play Act of 2015: Does Congress Spot-Ify a Solution for the Music Market?,12J.BUS.&T ECH. L. 73, 79 (2016). For example, Jimi Hendrix originally owned the sound recording copyright to “All Along the Watchtower,” but Bob Dylan owned the musical works copyright. Justin Jacobson, Breaking Down Copyrights in Music,TUNECORE (Dec. 8, 2016), http://www. tunecore.com/blog/2016/12/breaking-copyrights-music.html [https://perma.cc/6VG7-BXVA]. 14. Loeza, supra note 11, at 735. 15. Demos, supra note 13, at 78. 16. 17 U.S.C. § 101 (2010) (“To perform or display a work ‘publicly’ means—(1) to perform or display it at a place open to the public or at any place where a substantial number of persons outside of a normal circle of a family and its social acquaintances is gathered; or (2) to transmit or otherwise communicate a performance or display of the work to a place specified by clause (1) or to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.”).