Class Action Alleges Warner Music Group Is Shorting Certain Artists on Foreign Streaming Royalties

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Warner Music Group faces a proposed class action that alleges the record label has intentionally failed to properly account for royalties owed to certain artists for digital streaming outside of the United States. 

The 31-page case was filed by two members of the American pop rock group Orleans who allege Warner has wrongfully allowed its foreign affiliates to assess an arbitrary “intercompany charge” on digital streaming revenue, which didn’t exist at the time the band initially signed with the label, from outside the U.S. before reporting and paying the balance owed to artists. 

The filing stresses that the agreements artists signed with Warner presumed that the record label’s main business was and always would be the sale of physical records, which at one time constituted virtually all of the recording industry’s revenue. A problem exists today, the suit relays, because digital streaming now accounts for more than 80 percent of all recorded music consumption. 

In other words, the complaint says, Warner Music Group, whose labels and divisions include Atlantic Records Group, Elektra Records, Rhino Entertainment and more, now administers a large number of agreements that “are no longer supported by their original consideration.” To leave the contracts as such would risk a “public relations crisis and a wave of artists seeking to rescind their depreciated Agreements and reclaim their works,” the suit contends. 

Although the Warner defendants, in an attempt to quietly address this “ticking time bomb,” began issuing payments to artists for digital streams, the record label nevertheless sought to minimize how much it had to pay by “engaging in improper accounting practices for earnings generated outside the United States,” the lawsuit alleges. 

For example, the lawsuit states, if Warner Music Group had its foreign affiliate deduct 25 percent of the royalties collected abroad, the 50 percent royalty that the record label claimed to be paying to an artist would, in fact, be only a 37.5 percent royalty, given it would be applied against only 75 percent of the revenues collected. 

Ultimately, Warner has used the apparent “intercompany charge,” which supposedly bears no relation to the actual costs incurred by affiliates, to artificially and clandestinely reduce certain artists’ royalty pools for its own financial benefit. 

The lawsuit contends that because Warner Music Group did not disclose the intercompany charge as a “royalty rate reduction” in the artists’ financial statements, they had no reason to suspect that their earned royalties were being “quietly slipped into Defendants’ back pocket.”

“As a result, the royalty statements that Plaintiffs and Class Members ;received were—and continue to be—false and misleading, since the royalty rates indicated are only being applied to an arbitrary percentage of the recordings’ earnings without justification,” the lawsuit alleges.

The case looks to represent all persons and entities in the United States, and their agents, successors in interest, assigns, heirs, executors, trustees and administrators, who are currently being paid foreign streaming royalties and are parties to agreements with Warner Music Group and its predecessors and subsidiaries, whose music was streamed in a foreign country and are not accounted to or paid at source. 

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