A judge won't dismiss class action claims over a record label's accounting.

The Hollywood Reporter

April 19, 2013

By Eriq Gardner

Like many musicians, Martha Davis has been looking at her royalty statements and wondering whether she should be getting more income when consumers buy music off of digital outlets.

Davis was the lead singer of the 1980's Los Angeles-based New Wave band, The Motels, who hit it big with the songs, “Only the Lonely” and “Suddenly Last Summer.” She's among a throng of recording artists who have filed lawsuits against major record labels for not turning over enough royalties on digital music. She's the lead member of a nationwide class action against EMI Group and Capitol Records and alleges that if the defendants counted digital music as “licenses” rather than “sales” — because there's no physical manufacturing happening on iTunes — she's be seeing a much heftier royalty rate, per her contract.

The question for a judge in her case is whether Davis waited too long to bring her claims. Should she have filed a complaint, say, when Apple introduced iTunes 12 years ago and record labels began accounting for income there as “sales”?

On Thursday, U.S. District Judge Yvonne Gonzalez Rogers rejected Capitol's arguments that her claims were barred by statute of limitations.

Judge Rogers gives two big reasons in her ruling (read in full here) why her claims aren't time-barred.

First, although Capitol believed that Davis was contractually required to give written notice of an objection upon receiving a royalty statement, the judge says that the allegations arguably support a basis for tolling, meaning that the time in which she needs to object is paused. The judge says that it's a question of fact, which is another way of saying that it won't be resolved until later after the parties engage in fact-finding.

Second, the judge says that Davis can make the case that she was prevented from learning about the alleged errors by the record company's misrepresentations or concealment.

“Here, Davis alleges that Capitol knowingly underpaid her and other class members by reporting digital download licenses as sales of physical record sales, and concealed the fact that Capitol improperly accounted for sales,” the judge writes.

Judge Rogers also declines to dismiss a claim for declaratory relief over Capitol's argument that it is duplicative of her claim for breach of contract. The judge also refuses to reject claims that Capitol breached a covenant of good faith and fair dealing and violated California's Unfair Competition Law.

“Davis's allegations regarding the circumstances of the fraud here are sufficiently particular,” writes the judge. “The facts as to who made the decisions regarding the alleged misleading royalty statements are facts peculiarly within the control of Capitol. Davis's general allegation of Capitol's knowledge is permissible.”

If Capitol can take any solace from the ruling, it's that the judge has denied the possibility of punitive damages.

Still, Capitol and EMI are facing big claims. This lawsuit brought by seven lawyers at four different law firms aims to represent others in the relevant class. According to an amended complaint, EMI's roster of artists include Coldplay, Beatie Boys, Gorillaz and Norah Jones. In general, the royalty rate for a “sale” is about 15 percent whereas for a “license,” it's about 50 percent.

A side-note: Capitol Records recently experienced a big legal win against ReDigi, an upstart service which aimed to take advantage of the First Sale doctrine of copyright law to allow its users to resell “used” digital music.

In Davis' lawsuit, the lawyers quoted Capitol's ReDigi complaint in an attempt to show that record label was being somewhat two-faced by arguing in a different context that digital audio files were licensed (which would mean that they weren't subject to the First Sale doctrine). In the ReDigi complaint, the record companies used the phrase “distributes and licenses,” which then got changed (among other language modifications) by Davis' lawyers as “redistributes and licenses.”

Capitol wanted the judge to strike the passage from Davis' complaint.

Judge Rogers responds, “While it is clear that Davis did not directly and accurately quote the language from the ReDigi complaint, the error does not change the meaning of the ReDigi allegations in any significant way. The Court does not condone Davis's misquotation, but neither does it find the allegation ‘immaterial, impertinent, or scandalous'…”