The Shadiness of Unpaid Digital Royalties

It has already been widely known that record labels can be a rather shady bunch thanks to such creative accounting devices as recoupable expenses, as well as unpaid or underpaid royalties, the latter an issue that has been a subject of many court cases over the years. The latest twist on unpaid royalties concerns a recent court case that indirectly involved the rapper who sometimes calls himself Slim Shady.

In March 2011, the Supreme Court of the United States turned down an appeal of a ruling from the U.S. Court of Appeals for the 9th Circuit, based in San Francisco, that Mark & Jeff Bass, the Detroit-based brothers who produced rapper Eminem’s early recordings from the mid-to-late 1990’s, were entitled to more revenues from digital download and ringtone sales than was previously negotiated.

The ruling treated digital downloads as material that is “licensed” to distributors like iTunes rather than as a physical product like a compact disc, and thus meant that the Basses should have received half, or 50%, of the revenues from it being licensed as a digital download, instead of the negotiated 12 to 20% it got because the record label—in this case, market leader Universal Music Group—decided to give digital royalties the same percentage rate as compact discs.

Granted, Eminem himself was not necessarily a party to the lawsuit, but a representative for its lead plaintiff said that Eminem’s net worth could grow, probably by another $30 million, if not more, as a result of that suit.

While the Supreme Court’s refusal to hear the appeal means that the 9th Circuit’s decision stands, another case coming down the pipeline is going to test the digital royalty issue some more. The estate of the late Rick James [1948-2004], the funk musician famous for such hits as “Superfreak,” decided back on April 1, 2011—no fooling—to file its own lawsuit in the U.S. District Court of San Francisco against Universal Music Group, also citing unpaid royalties based on the 12 to 20% compact disc/physical product standard instead of the 50% digital download licensing royalty, as well as the label not being fair enough with its artists in dealing with royalty matters.

The James estate is also asking that their lawsuit be given “class action” status, which, if ruled in favor of the plaintiffs, would mean other recording artists would be entitled to those additional royalties. If that were to happen, how much could those additional royalties total?

Author and MIDI pioneer David Kusik, using a chart by Asymco, estimated that the iTunes Store paid more than $12 billion to record labels from the store’s start in 2004 through the beginning of 2011, then calculated out of it that artists are owed as much as $2 billion-plus in unpaid royalties from the sale of music by the iTunes Store, and that doesn’t count sales of digital downloads from other sources like Amazon and Napster.

In addition to artists owning and controlling the music that they write and record, another of the advantages to being an independent is that those same artists get to keep more of the money they take in from the sales and licensing of what they write and record.  In this iTunes age, being an independent musician means that the major label middleman is no longer necessary.

Given the many ways that major labels can fudge the numbers and keep the recording artists under contract to them from earning what they’re entitled to, do you think more and more such artists should find a way or two out of their existing contracts and go independent? Or do you think they should just remain dependent and take their chances?