When a Contract Leaks – The Sony and Spotify Story

A review of the industry's reaction to the sudden transparency of the contract between the record label and a streaming service.
June 22, 2015

It has certainly been said before, but 2015 will likely not be remembered as a good year for the Sony Corporation in the entertainment world. This past month, the online news site The Verge, leaked a copy of the actual 2011 contract between the company’s major record label arm Sony Music Entertainment and the streaming service Spotify.[1] The contract has since been taken down,[2] but the details of the agreement did not go unnoticed.

Particular attention fell on the contract’s Most Favored Nation (MFN) clause concerning the advances that Sony was going to receive annually for licensing out its catalog.[3] An MFN is a term that describes a contractual commitment that guarantees to one of the signing parties (in this case Sony), that nobody else will get a better deal in regards to specific aspects of the agreement.[4] Commonly, such clauses include a described mechanism of accounting for ways of resolving any future developments that may put this guarantee in question.[5] In the case of the Sony and Spotify contract, the guarantee provided Sony, at a minimum with $42.5M in advance payments over the three years (assuming Sony’s exercise of the third year option) and a potential for more, given the MFN treatment of advances.[6] The Verve article also made a point to note that “according to a music industry source, labels routinely keep advances for [themselves, and do not share the revenues with their artists.]”[7]

Naturally, not everyone took the allegations of such a payment structure with ease. The artist managers in particular, responded through an open letter from their trade group, The International Music Managers Forum (IMMF).[8] The letter requested transparency in all relevant information concerning the use of the music artists’ works and argued against hidden terms and deals, such as those relating to advance payments, as they inevitably affect the overall earnings amount available.[9] The IMMF further added that the presence of such a hidden mechanism leaves the artists and their representatives with little bargaining power, and having to “[rely] either on trust, or on expensive auditors and lawyers to ensure that they (the artists) are getting their fair share.”[10] Addressing the criticism, Sony stated that it “shares with its recording artists all unallocated income from advances, non-recoupable payments and minimum revenue guarantees that Sony Music receives under its digital distribution deals.”[11]

However, the critics noted the specifics of the Sony language, and the fact that not much clarity was given to the size of the artists’ share of the income.[12] A number of cited sources have said that Sony along with other major record labels could now face a class-action suit on behalf of the artists for non-payment of streaming advances that many artists and talent managers allege are not being seen.[13] Nevertheless, no such action has yet been filed.[14] Additional details also suggest that artists are going to face difficulties bringing a case, given the specifics of many artist and label contracts that explicitly allow labels to avoid payments on such revenue streams.[15]

The threat of legal action is still by no means empty, and the resolution could simply come through a victory in the court of public opinion. It further goes without saying that any possible solutions will depend on the specifics of the hidden agreements, some of which today have become significantly more transparent than initially intended. Moreover, while the leaked contract was only between Sony and Spotify, the outstanding questions won’t be limited to just them.

[1] Micah Singleton, This was Sony Music’s Contract with Spotify, The Verge (May 19, 2015, 10:05 AM), http://www.theverge.com/2015/5/19/8621581/sony-music-spotify-contract.
[2] Bruce Houghton, Sony Forces The Verge To Take Down Leaked Spotify Contract, Hypebot.com (May 22, 2015), http://www.hypebot.com/hypebot/2015/05/sony-music-forces-verge-to-take-down-leaked-spotify-contract.html.
[3] Singleton, supra note 1.
[4] Bob Tarantino, I Want What She’s Getting – “Favored Nations” Clauses in Entertainment Contracts, Entertainment and Media Law Signal (Feb. 11, 2015), http://www.entertainmentmedialawsignal.com/i-want-what-shes-getting-favored-nations-clauses-in-entertainment-contracts.
[5] Id.
[6] Singleton, supra note 1.
[7] Id.
[8] Kari Karjalainen ET. AL., Open letter on Record Label and Music Publisher Deals in the Digital Market, International Music Managers Forum (IMMF) (May 21, 2015), http://immf.com/open-letter-record-label-music-publisher-deals-digital-market/.
[9] Id.
[10] Id.
[11] Andrew Flanagan, Artist Managers Call Out Sony Following Spotify Contract Leak, Sony Responds That It Pays, Billboard (May 21, 2015, 3:44 PM), https://www.billboard.com/articles/business/6575660/immf-sony-spotify-contract-response-breakage.
[12] Tim Ingham, Sony: We share Spotify advances with our artists, Music Bus. Worldwide (May 27, 2015), http://www.musicbusinessworldwide.com/sony-we-share-spotify-advances-with-our-artists/.
[13] Paul Resnikoff, Sources: Sony Could Face Class-Action Litigation Over Spotify Advances…, Digital Music News (May 29, 2015), http://www.digitalmusicnews.com/permalink/2015/05/29/sources-sony-could-face-class-action-litigation-over-spotify-advances.
[14] Id.
[15] Id.

Alexander Gorelik is a third year evening J.D. candidate with an interest in pretty much anything related to copyright, trademark, and entertainment law. During the day, he works negotiating and writing contracts and on the weekends he tries to stay involved with Maryland Volunteer Lawyers for the Arts (MDVLA). In his spare time, he particularly enjoys deep conversations, long walks on the beach and is a huge supporter of world peace.