Record Labels Shot the Artists, But They Did Not Share the Equity

Record Labels Shot the Artists, But They Did Not

Share the Equity

BRYAN LESSER*

BSTRACT

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.

ABLE OF CONTENTS

INTRODUCTION .......................................... 290

I. B

ACKGROUND ....................................... 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. T

HE 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. T

HE SOLUTION:AFIDUCIARY DUTY ....................... 302

A. Good Faith and Fair Dealing ....................... 303

B. Fiduciary Duty by Special Circumstance ............... 304

1. Legal Standard .............................. 304

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. R

EPERCUSSIONS 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

ONCLUSION ............................................ 313

NTRODUCTION

On March 17, 2017, Spotify announced that it had reached a deal with

Universal Music Group, the largest record label in America.

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].

The deal renews

Spotify’s licenses to stream sound recordings on demand, allowing Spotify to

continue operating its enormous music library.

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].

The deal also lowers the royalty

rate to be paid per stream.

Royalty payments are how artists receive income

from the interactive streaming of their recordings.

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.

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.

Spotify has reached a similar deal with Sony Music Entertainment

Elias Leight, Spotify Reaches Deal over Royalties with Sony Music,R

OLLING STONE (July 11,

2017), http://www.rollingstone.com/music/news/spotify-reaches-deal-over-royalties-with-sony-music-

w491703 [https://perma.cc/7W7N-6B3W].

and will soon reach a new agreement with Warner Music Group.

3. Id.

4. Id.

5. Id.

6. Id.

8. Sophie Sassard, Exclusive: Spotify, Warner Hope to Clinch

Royalty Deal by September,R

EUTERS

(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].

291 2018] RECORD LABELS SHOT THE ARTISTS

This is an elaborate deal that will increase Spotify’s proﬁtability, making it all

the more attractive for an upcoming initial public offering (IPO).

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.

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. B

ACKGROUND

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.

Sound recordings should not be confused with musical works, which constitute

a separate copyrighted work.

A sound recording is the recorded sound,

whereas a musical work is the authorship of a song.

Stephen E. Demos, The Fair Pay Fair Play Act of 2015: Does Congress Spot-Ify a Solution for

the Music Market?,12J.B

US.& TECH. 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

UNECORE (Dec. 8, 2016), http://www.

tunecore.com/blog/2016/12/breaking-copyrights-music.html [https://perma.cc/6VG7-BXVA].

Under the Copyright Act

of 1976, sound recordings were not given the same scope of exclusive rights

and protections as musical works.

Sound recordings were protected from

reproduction and distribution of the copyrighted work, such as selling pirated

CDs.

Congress initially rejected granting a public performance

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.

In 1995, the Copyright Act was amended in anticipation of the impending

digital revolution and its potential effect on album sales.

Congress passed the

Digital Performance Right in Sound Recordings Act of 1995, giving sound

recordings a limited public performance right in digital media.

The Digital

Performance Right in Sound Recordings Act separated interactive digital ser-

vices from non-interactive digital services.

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.

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,31B

ERKELEY TECH. L.J. 725, 735 (2016).

The sound recordings were protected by state laws. Loeza, supra, at 735 n.96.

12. See J

ULIE E. COHEN ET AL., COPYRIGHT IN A GLOBAL INFORMATION ECONOMY 410 (4th ed. 2015).

13.

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.”). For example, playing a song on the radio would be a public performance. Jeffrey S.

Becker et. al., The Fair Play, Fair Pay Act of 2015: What’s at Stake and for Whom?,32E

NT.&SPORTS

LAW. 5, 5–6 (2015).

17. Loeza, supra note 11, at 735 (citing Arista Records, LLC v. Launch Media, Inc., 578 F.3d 148,

152 (2d Cir. 2009)).

18. Id. at 737.

19. Id. at 737; see Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39,

109 Stat 336.

20. Loeza, supra note 11, at 737; see also 17 U.S.C. § 114(j)(7).

21. Loeza, supra note 11, at 739; see also Digital Millennium Copyright Act, Pub. L. No. 105-304,

112 Stat 2860 § 405 (1998).

293 2018] RECORD LABELS SHOT THE ARTISTS

since the mid-1990s.

Under the current law, there are three tiers of digital transmissions. The ﬁrst

tier, non-interactive non-subscription broadcast transmissions, is exempt from

the public performance right, so the broadcasters do not owe a copyright owner

any royalty as long as the broadcaster is offering a free, over-the-air digital

broadcast by FCC licensed broadcasters.

The second tier, non-interactive

digital streaming services, has a statutory license scheme and establishes the

parties are free to negotiate a different rate.

Pandora is an example of a

non-interactive digital streaming service.

The third tier, “interactive ser-

vices,”

provides an exclusive right to public performance of a sound record-

ing, and the only way to obtain a license for this use is through a freely

negotiated agreement between the digital streaming service and the copyright

owner.

streaming services because the services are considered a substitute for album

sales.

B. The Basics of the Music Industry

There are now three major American record labels: Universal Music Group,

Warner Music Group, and Sony Music Entertainment.

Paul Resnikoff, Two-Thirds of All Music Sold Comes from Just 3 Companies,D

IGITAL MUSIC

NEWS (Aug. 3, 2016), http://www.digitalmusicnews.com/2016/08/03/two-thirds-music-sales-come-three-

major-labels/ [https://perma.cc/YNN3-6KKN].

Together they made up

62.4% of global music revenue in 2016.

Many musicians dream of being

22. Loeza, supra note 11, at 736 (citing Peter S. Menell, This American Copyright Life: Reﬂections

on Re-Equilibrating Copyright for the Internet Age,61J.C

OPYRIGHT SOC’Y U.S.A. 235, 252–54

(2013-2014)).

23. 17 U.S.C. § 114(d)(1) (2010); C

OHEN ET AL., supra note 12, at 432.

24. 17 U.S.C. § 114(d)(2) (2010); This payment goes to Soundexchange who then divvies up the

payment with 45% of the royalty going to the featured artist, 50% going to the copyright owner, and

5% to a fund for session musicians, non-featured artists, and background singers. C

OHEN ET AL., supra

note 12, at 435.

25. In re Pandora Media, Inc., 6 F. Supp. 3d 317, 332 (S.D.N.Y. 2014), aff’d sub nom. Pandora

Media, Inc. v. Am. Soc. of Composers, Authors & Publishers, 785 F.3d 73 (2d Cir. 2015).

26. An “interactive service” is one that enables a member of the public to receive a transmission of a

program specially created for the recipient, or on request, a transmission of a particular sound

recording, whether or not as part of a program, which is selected by or on behalf of the recipient. The

ability of individuals to request that particular sound recordings be performed for reception by the

public at large, or in the case of a subscription service, by all subscribers of the service, does not make a

service interactive, if the programming on each channel of the service does not substantially consist of

sound recordings that are performed within one hour of the request or at a time designated by either the

transmitting entity or the individual making such request. If an entity offers both interactive and

non-interactive services (either concurrently or at different times), the non-interactive component shall

not be treated as part of an interactive service. 17 U.S.C. § 114(j)(7) (2010).

27. 17 U.S.C. § 114(d)(3) (2010); C

OHEN ET AL., supra note 12, at 432.

28. C

OHEN ET AL., supra note 12, at 432.

29.

30. Id.

294 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

offered a record contract from a major label.

How Record Labels Invest,INTERNATIONAL FEDERATION OF THE PHONOGRAPHIC INDUSTRY, http://www.

ifpi.org/how-record-labels-invest.php [https://perma.cc/LF6Z-PM4Y].

Being signed to a major label

increases an artist’s chance of success due to increased prestige, exposure, and

ﬁnancial support.

Under a traditional recording contract, the record label pays for the recording

and promotion process.

Once there is a record contract, the record label will

either be the sole owner, co-owner, or licensee of the copyrighted sound

recording, depending on the contract’s terms.

The record label will then have

the authority to license the sound recording for proﬁt.

This authority includes

the right to distribute both physical and digital albums.

Upon signing a

recording contract, the label pays the artist an advance payment against future

royalties, which can be used for recording expenses, such as fees to producers

and arrangers, studio and equipment rentals, and living expenses.

Recording

an album costs about $150,000 to $500,000.

The record company then retains

the royalties from the album sales to recoup its upfront payments to the artist.

When combined with promotional and other costs, these contracts are often a

money-losing endeavor for record labels.

Occasionally an artist becomes

popular enough to pay for the ﬁnancial losses of all the other artists.

Even

those artists that become popular enough to generate a proﬁt for the record

labels often remain indebted to the record company and rarely receive any

royalty payment.

C. The Rise of Spotify

Spotify is an on-demand digital streaming service founded in 2006 by CEO

Daniel Ek and Martin Lorentzon.

The Spotify Team, We’ve Only Just Begun!,S

POTIFY (Oct. 10, 2008), https://news.spotify.com/us/

2008/10/07/weve-only-just-begun/ [https://perma.cc/57VK-5DGL]; Burt Helm, Inside Spotify’s U.S.

Invasion,I

NC. (July 2, 2012), https://www.inc.com/30under30/burt-helm/daniel-ek-founder-of-spotify.

html [https://perma.cc/2LPM-G3WM].

Spotify launched in the European Union in

2008 and in the United States in 2011.

31.

32. Id.

33. See D

ONALD S. PASSMAN,ALL YOU NEED TO KNOW ABOUT THE MUSIC BUSINESS 68 (7th ed. 2009).

34. See Estate of Brown v. Arc Music Grp., 830 F. Supp. 2d 501, 513 (N.D. Ill. 2011).

35. See E. Jordan Teague, Saving the Spotify Revolution: Recalibrating the Power Imbalance in

Digital Copyright,4C

ASE W. RESERVE J.L. TECH.&INTERNET 207, 218 (2012).

36. See Molly Hogan, The Upstream Effects of the Streaming Revolution: A Look into the Law and

Economics of a Spotify-Dominated Music Industry,14C

OLO.TECH. L.J. 131, 145 (2015).

37. Douglas Okorocha, A Full 360: How the 360 Deal Challenges the Historical Resistance to

Establishing a Fiduciary Duty Between Artist and Label, 18 UCLA E

NT.L.REV. 1, 12 (2011).

38. How Record Labels Invest, supra note 31.

39. Id.

40. Id.

41. Id.

42. Id.

43.

44. Helm, supra note 43. Spotify was signiﬁcantly

easier to launch in the EU than in the US because

of the differences in copyright law. See John Seabrook, Revenue Streams: Is Spotify the Music

Spotify then partnered with Facebook,

295 2018] RECORD LABELS SHOT THE ARTISTS

Industry’s Friend or Foe?,NEW YORKER (Nov. 24, 2014), http://www.newyorker.com/magazine/2014/11/

24/revenue-streams [https://perma.cc/WPE4-8JN2].

increasing the social aspect of the music streaming experience.

Candice Katz, Share the Music,S

POTIFY (Aug. 8, 2011), https://news.spotify.com/us/2011/08/08/

share-the-music/ [https://perma.cc/9BRD-X3RE].

Among other

successful ventures, Ek had previously served as the CEO of

Torrent, a major

peer-to-peer ﬁle-sharing program often used for internet piracy..

His goal in

founding Spotify was to turn Napster into a viable business.

Ek believed that

piracy could be beaten because it has signiﬁcant downsides—including poten-

tial for viruses, slow downloading, and lack of user friendliness in piracy

services—and because people just do not like being pirates.

Id. The rise of Spotify has led to a signiﬁcant decline in digital music piracy. See James Titcomb,

Internet Piracy Falls to Record Lows Amid Rise of Spotify and Netﬂix,T

ELEGRAPH (July 5, 2016),

http://www.telegraph.co.uk/technology/2016/07/04/internet-piracy-falls-to-record-lows-amid-rise-of-

spotify-and-ne/ [https://perma.cc/W489-H5V6].

Spotify exploded onto the U.S. market with the help of Napster-founder Sean

Parker and Facebook-founder Mark Zuckerberg.

By 2014, Spotify had over

ten million paying subscribers and over forty million active users.

Spotify Hits 10 Million Global Subscribers,S

POTIFY (May 21, 2014), https://press.spotify.com/us/

2014/05/21/spotify-hits-10-million-global-subscribers/ [https://perma.cc/5Q8L-DEUJ].

By mid-

2017, the number of paid subscribers was over sixty million and the number of

active users was over 140 million.

About Spotify,S

POTIFY, https://press.spotify.com/us/about/ [https://perma.cc/XHX9-646F] (last

visited Nov. 26, 2017).

Spotify uses a “freemium” business model with two tiers of users: one tier

that allows free use of the product with ads, and another tier that provides

access to an ad-free service with a paid subscription.

Go Premium. Be Happy,S

POTIFY, https://www.spotify.com/us/premium/?checkout=false [https://

perma.cc/JV6V-CARQ] (last visited Nov. 26, 2017).

Spotify has two primary

sources of revenue: advertising and subscriptions.

The goal is often to bring in

users with the free mode, then push them into becoming a premium member

with additional features.

Spotify Premium, unlike free Spotify, allows users to

select individual songs and can be used ofﬂine.

Go Premium. Be Happy,S

POTIFY, https://www.spotify.com/us/premium/?checkout=false, (last

visited May 14, 2017). Prices range from $ 4.99 per month for students and $ 9.99 per month standard.

Id.

II. THE SITUATION:SELF-DEALING RECORD LABELS

Technology caused the recording industry to form the way it did, with radio

play promoting album sales.

45.

46. Seabrook, supra note 44.

47. Id.

48.

49. Seabrook, supra note 44.

50.

51.

52.

53. See Teague,

supra note 35, at 222.

54. Id. at 214.

55.

56. Christopher Knab, How Recor

d Labels and Radio Stations W

ork Together,M

USIC BIZ ACAD.

(Mar. 2010), http://www.musicbizacademy.com/knab/articles/radiostations.htm [https://perma.cc/EJ5Z-

E5JG]

When the technology changed, the industry

296 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

changed with it. The old industry involved record labels promoting artists’

albums.

This was a limited relationship with aligned interests; both artist and

label beneﬁtted from selling the most albums at the highest price.

Now, record

labels use 360 deals that involve the label in nearly all aspects of the recording

artist’s business, yet the label and artist interests are not fully aligned: record

labels are proﬁting at the expense of the artists by offering reduced royalty rates

to streaming services in exchange for equity in the streaming companies.

Zack O’Malley Greenburg & Nick Messitte, Revenge of the Record Labels,F

ORBES (Apr. 15,

2015), https://www.forbes.com/sites/zackomalleygreenburg/2015/04/15/revenge-of-the-record-labels-

how-the-majors-renewed-their-grip-on-music/#7e6366312fba [https://perma.cc/CQY6-73TQ].

Courts have declined to rectify this situation because the parties’ rights are

governed by the label-artist contract, which gives the label the right to use its

discretion in determining how to exploit the sound recordings.

After the advent of the internet and the rise of internet piracy, record labels

searched for new revenue sources.

This led to three major consequences in the

current music industry: (A) the development of the 360 deal; (B) the acquisition

of equity in Spotify; and (C) a widespread belief that artists are not being fairly

compensated. The combination of these three factors suggests that a change in

the legal relationship between artist and label would be justiﬁed because the

label’s role in the artist’s business has increased yet the label is beneﬁtting itself

at the expense of the artist.

A. The Development of the 360 Deal

The internet changed the music industry.

Traditional recording agreements

only gave labels the right to share in the income derived from the sale of an

artist’s recordings.

In the ﬁrst decade of the twenty-ﬁrst century, music sales

were cut in half.

David Goldman, Music’s Lost Decade: Sales Cut in Half, CNN (Feb. 3, 2010), http://money.cnn.

com/2010/02/02/news/companies/napster_music_industry/ [https://perma.cc/9HN4-VHA5]. (noting the

music business was worth half of what it was ten years ago).

The decline in album sales forced labels to ﬁnd other sources

of income to remain viable.

See Jeff Leeds, The New Deal: Band as Brand, N.Y. T

IMES (Nov. 11, 2007), http://www.nytimes.

com/2007/11/11/arts/music/11leed.html?pagewanted=1&_ r=1&emc=eta1 [https://perma.cc/5HD2-

5DVS].

“As the drop in album sales deepened, artists’

ancillary ventures—such as publishing, touring, and merchandising—proved

more valuable to the ﬁscally distressed labels than the decaying record-selling

business.”

Thus, the 360 deal was born.

57. See id.

58. See id.

59.

60. See 19 Recordings Ltd. v. Sony Music Entm’t, 165 F

. Supp. 3d 156, 164–65 (S.D.N.Y. 2016).

61. Loeza, supra note 11, at 736.

62. See Peter S. Menell, This American Copyright Life: Reﬂections on Re-Equilibrating Copyright

for the Internet Age,61J.C

OPYRIGHT SOC’Y U.S.A. 201, 235, 237 (2014).

63. Okorocha, supra note 37, at 9.

64.

65.

66. Okorocha, supra note 37, at 9.

297 2018] RECORD LABELS SHOT THE ARTISTS

A 360 deal, or a multiple rights agreement, grants labels a right to share in all

the revenue generated by an artist, from merchandise and ticket sales to motion

picture acting.

Most labels take between 10% and 35% of their artists’ net

income from these non-record sale sources.

The 360 deals have become

standard in both major and independent labels.

As proﬁts from the sale of

recorded music dropped, labels conceived of a music industry driven by artist

branding rather than music sales.

See Cherie Hu, The Record Labels of the Future are Already Here,F

ORBES (Oct. 15, 2016),

https://www.forbes.com/sites/cheriehu/2016/10/15/the-record-labels-of-the-future-are-already-here/

#26079181872a [https://perma.cc/L52S-6VRG].

The relationship between artists and labels changed in other ways too. As the

brand of the artist became the valuable asset, artists gained more power over

their own success.

Artists are now able to use social media to promote their

brands,

diminishing the role of the record labels.

So, record labels are

becoming less crucial to success, yet they are increasing their control over

revenue sources.

Chance the rapper recently became the ﬁrst artist to win a Grammy without a record label. Jason

Guerrasio, A 23-Year-Old Rapper Who Has no Label Just Made History with His Grammy Win,B

US.

NSIDER (Feb. 12, 2017), http://www.businessinsider.com/chance-the-rapper-grammy-win-2017-2 [https://

perma.cc/W47X-Q4RD].

B. The Acquisition of Equity in Spotify

In their search for new revenue sources, record labels also sought to integrate

vertically into music streaming services.

The three major music labels have

acquired equity in several interactive streaming services, including Spotify,

Rdio, and Soundcloud.

The success of Spotify as a digital streaming platform comes largely from its

successful negotiations in securing licenses for sound recordings.

Having a

one-stop shop where users can listen to just about every song their hearts’ desire

is essential to maintaining a user base.

See Ethan Wolff-Mann, Which Music Streaming Service Is Best for You?,M

ONEY (July 20, 2016),

http://time.com/money/4391632/best-music-streaming-service-spotify-apple-tidal/ [https://perma.cc/

42L5-SHRC].

In Sweden and the European Union,

where Spotify began, obtaining copyright licenses does not require the free

market negotiation process that takes place in the United States.

67. Id.

68. Id.

69. The CEO of Warner Music requires all new acts to sign 360 deals. Id. at 10.

70.

71. See id.

72. Id.

73. See id.

74.

75. Greenburg & Messitte, supra note 59.

76. Id.

77. See Seabrook, supra note 44.

78.

79. See Richard

Smirke, Europe and Copyright: A Comprehensive

Look at the Continent’s Digital

Plans,B

ILLBOARD (Apr. 26, 2016), http://www.billboard.com/articles/business/7349853/digital-single-

market-music-business-european-union [https://perma.cc/FC6H-R5H2] .

Ek and the

298 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

Spotify team enlisted the help of Sean Parker to negotiate with the United

States’ major music labels for the rights to U.S. airplay.

Ingrid Lunden, Sean Parker Has Left Spotify’s Board; Padmasree Warrior, Thomas Staggs Join

in Lead up to IPO, (June 22, 2017), https://techcrunch.com/2017/06/22/sean-parker-has-left-spotifys-

board-padmasree-warrior-thomas-staggs-join-in-lead-up-to-ipo/ [https://perma.cc/4UP3-NU8Y].

Getting the major

record labels to allow music to be streamed for free throughout the country,

potentially cannibalizing record sales,

See Ben Richmond, Taylor Swift Versus Spotify: How the Music Industry Is Still Fighting

Streaming, (Nov. 3, 2014), https://motherboard.vice.com/en_us/article/nzeqvd/taylor-swift-shows-

streaming-isnt-a-solution-to-the-music-industrys-woes [https://perma.cc/8BDT-3SKF].

was no easy feat.

Labels received partial ownership in Spotify in exchange for licenses to their

sound recordings.

Helienne Lindvall, Behind the Music: The Real Reason Why the Major Labels Love Spotify,

UARDIAN (Aug. 17, 2009), https://www.theguardian.com/music/musicblog/2009/aug/17/major-labels-

spotify [https://perma.cc/H9NJ-2D5B].

The three major labels combined own an estimated 18% of

Spotify stock.

Sony owns an estimated 6% of the equity, and Merlin, an

aggregation of indie labels, owns about 1%.

The transfer of this equity was negotiated as part of the same deal that

granted Spotify a license to stream the music and set the royalty rates to be paid

to artists.

Tim Ingham, Warner Will Pay Artists Spotify IPO Money When It Sells Its Shares,M

USIC BUS.

ORLDWIDE (Feb. 4, 2016), http://www.musicbusinessworldwide.com/warner-will-pay-artists-spotify-ipo-

money-when-streaming-service-ﬂoats/ [https://perma.cc/4Z4V-Y5ZT]. See also Josh Constine, How

Spotify Is Finally Gaining Leverage over Record Labels,T

ECHCRUNCH (Mar. 18, 2017), https://techcrunch.

com/2017/03/18/dictate-top-40/ [https://perma.cc/NKQ6-2E6W].

This might be the reason royalty rates are as low as they are.

The

record labels have the potential to receive income from Spotify in two ways,

through the portion of the royalty that the labels share with the artists, and from

the sale of equity.

It is likely that the record labels structured the deal with

Spotify to receive equity in exchange for a lower royalty rate.

Spotify has been ﬂirting with going public through an initial public offer-

ing.

Robin Wauterd, Spotify Could Reach 100 Million Users and a $53 Billion Valuation by 2020,

US.INSIDER (Sept. 16, 2016), http://www.businessinsider.com/spotify-could-reach-100-million-users-

and-a-53-billion-valuation-by-2020-2016-9 [https://perma.cc/FQ5D-TBL9].

The most conservative estimates value the company, with its forty million

paying subscribers, at $8 billion.

The most extreme evaluation, expecting to

reach 100 million paying subscribers by 2020, values the company at $53

billion.

One investor has estimated that a more reasonable value would be $32

billion.

80.

81.

82.

83. Id.

84. Id.

85.

86. Seabrook, supra note 44 (“‘Y

ou might want to take a discount in a business you have equity in,’

one label head told me.”).

87. Teague, supra note 35, at 220–21.

88. Id. at 221.

89.

90. Id.

91. Id.

92. Id.

299 2018] RECORD LABELS SHOT THE ARTISTS

Given that record labels’ acquisition of equity in Spotify in exchange for

lower royalty rates reduces artist earnings from Spotify, it would make sense for

the record companies to share any proﬁts from the equity with the artists.

Stephen Cooper, the CEO of Warner Music Group, once said that “in the event

we... receive cash proceeds from the sale of these equity stakes, we will share

this revenue with artists.”

Warner’s shares in Spotify are estimated to be worth

at least $200 million.

If the aforementioned investor’s estimates are correct,

Warner’s proﬁt from equity sales after an IPO would be worth $800 million.

Sony made a similar statement.

Tim Ingham, Sony: We Will Also Pay Artists Proﬁts from the Sale of Our Spotify Stake,M

USIC

BUS.WORLDWIDE (Feb. 4, 2016), http://www.musicbusinessworldwide.com/sony-we-will-also-pay-artists-

proﬁts-from-the-sale-of-our-spotify-stake/ [https://perma.cc/EY82-TBLP] (“Net proceeds realized by

Sony Music from the monetization of equity interests... will be shared with our artists on a basis

consistent with our breakage policy.”).

Universal has not made a statement on this

matter.

Despite these messages about compensating artists, it is unclear how

the compensation will take place.

Chris Cooke & Andy Malt, Free Money All Round, Say Warner and Sony on Spotify IPO

Payouts,C

OMPLETE MUSIC UPDATE (Feb. 5, 2016), http://www.completemusicupdate.com/article/free-

money-all-round-say-warner-and-sony-on-spotify-ipo-payouts/ [https://perma.cc/ZG2H-DXLE]. The

claims that Warner and Sony will pay artists portions of the equity sale proceeds is probably just a

public-relations move, some of the big three are publicly traded and might not be able to follow

through. Id.

Without a legal right to some portion,

artists’ compensation will be subject to the goodwill of the record labels.

C. Widespread Belief That Artists Are Not Being Fairly Compensated

The world took notice when Taylor Swift withdrew her music from Spotify

because she believed she was not being fairly compensated.

100

Iris Lee, Are Musicians Really Making Less Money Now?,

IMONEY.MY (Dec. 4, 2014), https://

www.imoney.my/articles/are-musicians-really-making-less-money-now [https://perma.cc/T5UE-

NN9J]; see also Lisa France, Taylor Swift to Spotify: You Belong with Me, CNN (June 9, 2017),

http://money.cnn.com/2017/06/09/media/taylor-swift-streaming-spotify-tidal-amazon/index.html [https://

perma.cc/55U9-SQC2] (Taylor Swift said, “I’m not willing to contribute my life’s work to an

experiment that I don’t feel fairly compensates the writers, producers, artists and creators of this

music.”).

Many other

artists, including Gwen Stefani, Kanye West, and Radiohead, have since also

withdrawn their music from Spotify due to perceived unfair compensation.

101

93. Ingham, supra note 85.

94. Id.

95. Id.

96. See Wauterd, supra note 89.

97.

98. Id.

99.

100.

101. V

ictor Luckerson, 11 Wildly

Popular Albums You Can’t Get on Spotify,T

IME (Mar. 29, 2016),

http://time.com/4274430/spotify-albums/ [https://perma.cc/EP3J-XG8A]. Many of these artists have

since returned to Spotify. See France, supra note 100; Lucy Clarke-Billings, Radiohead’s Burn the

Witch: Has Thom Yorke Made Up With Spotify?,N

EWSWEEK (May 4, 2016), http://www.newsweek.com/

thom-yorke-launches-new-single-burn-witch-spotify-despite-criticism-455398 [https://perma.cc/M7BH-

GCVE]

300 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

Spotify’s payout system is complicated and not publicly disclosed.

102

Spotify

has reported a general payment scheme in which it takes its monthly revenue

(from advertising and subscriptions) and multiplies it by the artist’s total

streams that month. Then it divides that number by the total number of Spotify

streams. Then, 70% of the computed result goes to the master recording and

publishing rights holders. After that, the portion gets multiplied by the artist’s

royalty rate in the record contract.

103

Jack Linshi, Here’s Why Taylor Swift Pulled Her Music from Spotify,T

IME (Nov. 3, 2014),

http://time.com/3554468/why-taylor-swift-spotify/ [https://perma.cc/FT86-E2A6]. This rate varies from

contract to contract; for non-interactive streaming services, this number is set at about 50% to artists

and 50% to record labels. See C

OHEN ET AL., supra note 12, at 435.

Figure 1

104

Through this general model, Spotify claims to keep 30% of revenue and to

pay out 70% to rights holders.

105

Mike King, Spotify’s D.A. Wallach Explains How Spotify Pays Artists,H

YPEBOT (Sept. 6, 2012),

http://www.hypebot.com/hypebot/2012/09/spotifys-da-wallach-explains-how-spotify-pays-artists.html

[https://perma.cc/TAN7-7NUZ]. D.A. Wallach is the artist in residence at Spotify and leads their artist

outreach team. Id.

That 70% payout is being divided up between

the publisher and songwriter as well as the record label and artist.

106

The

amount that goes to record labels and is then shared with recording artists is

only about 52%.

107

Spotify has claimed that it pays out $0.006 to $0.0084 per

stream.

108

Stuart Dredge, How Much Do Musicians Really Make on Spotify, iTunes and YouTube?,

UARDIAN (Apr. 3, 2015), https://www.theguardian.com/technology/2015/apr/03/how-much-musicians-

make-spotify-itunes-youtube [https://perma.cc/MKG8-T9ZS].

These estimates simplify a process in which the free tier is paid on a

different rate than the subscription tier

109

Claire Zillman, Here’s How Much Artists Really Make on Spotify,F

ORTUNE (June 4, 2015),

http://fortune.com/2015/06/04/heres-how-much-artists-really-make-on-spotify/ [https://perma.cc/4C9K-

24LS].

and more popular artists are paid a

different rate than less popular artists.

110

A signed artist earns closer to an

estimated $0.0011 per stream.

111

An independent artist with over a million

102. Teague, supra note 35, at 222.

103.

104. Linshi, supra note 103.

105.

106. Id.

107. Leight, supra note 7.

108.

109.

110. See Seabrook, supra note 44.

111. Dredge, supra note 108 (assuming under standard contract that artist only keeps about 20% of

royalty).

301 2018] RECORD LABELS SHOT THE ARTISTS

streams claims the average payout is $0.004891 per stream.

112

Paul Resnikoff, My Band Has 1,000,000 Spotify Streams. Want to See Our Royalties?,DIGITAL

MUSIC NEWS (May 26, 2016), http://www.digitalmusicnews.com/2016/05/26/band-1-million-spotify-

streams-royalties/ [https://perma.cc/NAZ9-EW2K].

In 2013, the average top ten most streamed albums on Spotify earned

$145,000 per month.

113

Gabriela Tully Claymore, Spotify Explains Royalty Payments,S

TEREOGUM (Dec. 3, 2013),

http://www.stereogum.com/1587932/spotify-explains-royalty-payments/news/ [https://perma.cc/G3H3-

P7YT].

Spotify reported that it paid out two million dollars to

Taylor Swift in the year leading up to her withdrawal from the service, yet her

record label reported that she received only $496,044.

114

David Johnson, See How Much Every Top Artist Makes on Spotify,T

IME (Nov. 18, 2014),

http://time.com/3590670/spotify-calculator/ [https://perma.cc/9H4F-PGUM]. The number discrepancy

could involve separate payments from songwriting.

The Spotify payout system should be compared to other revenue sources. For

a $0.99 song sold on iTunes, an artist gets about $0.23, Apple keeps $0.30, and

the record label gets about $0.47.

115

It has been argued that musicians were

never making money from their recordings,

116

Mike Masnick, RIAA Accounting: Why Even Major Label Musicians Rarely Make Money from

Album Sales,T

ECHDIRT (July 13, 2010), https://www.techdirt.com/articles/20100712/23482610186.

shtml [https://perma.cc/CN3U-S44F].

yet music sales generally make

up about 10–20% of a musician’s income.

117

Jordan Weissmann, Think Artists Don’t Make Anything Off Music Sales? These Graphs Prove

You Wrong,A

TLANTIC (Feb. 27, 2013), https://www.theatlantic.com/business/archive/2013/02/think-artists-

dont-make-anything-off-music-sales-these-graphs-prove-you-wrong/273571/ [https://perma.cc/6EBK-

7CQX] (analyzing a survey by Northwestern Law Professor Peter DiCola).

Once the three major record labels have agreed to a lower royalty rate, it

depresses the market and forces other labels and independent artists to agree to

lower rates.

118

See Daniel Sanchez, Why Does Spotify Pay Out Such a Terrible Per-Stream Rate? The Answer

Is More Complicated Than You Think,D

IGITAL MUSIC NEWS (Aug. 18, 2016), http://www.

digitalmusicnews.com/2016/08/18/kill-rock-stars-president-explains-why-spotify-pays-out-terrible-

streaming-rates/ [https://perma.cc/6C5C-YLFP].

For instance, if Drake and Nicki Minaj have already agreed to

stream their songs at a certain rate, it makes it impossible for a less popular

artist like Car Seat Headrest to argue that their songs are worth more per

stream.

119

In summary, the relationship between the artists and record labels fundamen-

tally changed with the advent of 360 deals and the further integration of labels’

and artists’ businesses. The record labels have become partial owners of Spotify,

functionally serving as both buyer and seller of sound recording copyrights. The

growth of 360 deals and the acquisition of equity in streaming services have led

112.

113.

114.

115.

Dredge, supra note 108. It would take about 200 streams

on Spotify to equal the $0.23 the artist

receives from iTunes if the artist’s cut per stream is $0.0011. See supra text accompanying note 111.

116.

117.

118.

119. Another proposal that has been suggested to help

artists receive the full fair market value of

their works in the streaming context is to extend the statutory licensing system used for non-interactive

streaming services. See Teague, supra note 35. This proposal has several problems. It would make it

more difﬁcult for streaming startups to succeed because the reduced royalty combined with equity

exchange allows the streaming service to defer costs until it is better established, and because a

government-mandated royalty rate would hinder the free market.

302 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

many recording artists to believe that they are not being fairly compensated for

their contribution to digital streaming services.

III. T

HE SOLUTION:AFIDUCIARY DUTY

Recognizing the modern relationship between artists and record labels as a

partnership that imposes a limited ﬁduciary duty upon the labels would enable

the artists to recover a portion of the proﬁt from the sale of Spotify stock.

A ﬁduciary duty is a product of public policy, designed to regulate opportun-

ism and abuses of trust or conﬁdence.

120

A ﬁduciary duty need not be formal-

ized in writing.

121

Ongoing business between two parties could be sufﬁcient to

recognize a ﬁduciary duty.

122

A ﬁduciary duty would give artists increased

leverage, obligating record labels beyond what is expressly required of them by

the recording contract.

123

Generally, there are two types of ﬁduciary relationships: those that arise from

legal relations such as attorney and client, broker and client, partners, principal

and agent, and trustee and cestui que trust; and those that exist as fact, in which

there is conﬁdence reposed on one side and the resulting superiority and

inﬂuence on the other.

124

No ﬁduciary relationship currently exists between a

recording artist and a record label in the absence of special circumstances.

125

A ﬁduciary duty can take several forms in different contexts.

126

Eugene Temchenko, Fiduciary Duty,C

ORNELL U. L. SCH. (2016), https://www.law.cornell.edu/

wex/ﬁduciary_duty [https://perma.cc/TZX3-3GE5] (discussing the corporate, charitable, and conﬁden-

tial ﬁduciary relationships).

Band mem-

bers can owe ﬁduciary duties to one another.

127

Companies contracted to

promote and sell intellectual property can owe a ﬁduciary duty to the creator.

128

Managers, and often their companies, can owe a ﬁduciary duty to the artists

they have agreed to promote.

129

There are three legal theories an artist can use to establish a legal right to the

proﬁt of equity stakes in streaming services: (A) good faith and fair dealing;

(B) ﬁduciary duty by special circumstance; and (C) ﬁduciary duty by partner-

ship. The cases suggest that good faith and fair dealing and ﬁduciary duty by

120. Wendy V. Bartholomew, Fiduciary Duty: Can It Help Calm the Fears of Underpaid Artists?,6

AND.J.ENT.L.&PRAC. 246, 253 (2004).

121. Id. (citing 37 A

M.JUR.2D Fraud and Deceit § 32 (2002)).

122. 37 A

M.JUR.2D Fraud and Deceit § 34 (2017).

123. See Bartholomew, supra note 120, at 252.

124. 37 A

M.JUR.2d Fraud and Deceit § 37 (2002); 37 C.J.S. Fraud § 8 (1996).

125. See, e.g., Cooper v. Sony Records Int’l, 2001 WL 1223492, at *5 (S.D.N.Y. Oct. 15, 2001);

Cafferty v. Scotti Bros. Records, Inc., 969 F. Supp. 193, 205–06 (S.D.N.Y. 1997); Carter v. Goodman

Group Music Publishers, 848 F. Supp. 438, 445 (S.D.N.Y. 1994); Rodgers v. Roulette Records, Inc.,

677 F. Supp. 731, 739 (S.D.N.Y. 1988).

126.

127. Dead Kennedys v. Biafra, 2003 WL 21399983, at *10 (Cal. Ct. App. June 18, 2003).

128.

Stevens v. Marco, 305 P.2d 669, 681 (Cal. 1956) (patents).

129. Hal I. Gilenson, Badlands: Artist-Personal Manager Conﬂicts of Interest in the Music Industry,

ARDOZO ARTS &ENT. L.J. 501, 519 (1991); Joel v. Weber, 602 N.Y.S.2d 383 (N.Y. App. Div. 1993)

(Billy Joel’s manager owed him a ﬁduciary duty).

303 2018] RECORD LABELS SHOT THE ARTISTS

special circumstance are both unlikely to succeed. The advent of 360 deals and

the acquisition of equity by record labels have made the artist–label relationship

ripe for recognition as a partnership.

130

Given the location of Spotify headquar-

ters and the stated jurisdiction of many record contracts, the following Section

will focus on New York state law.

131

A. Good Faith and Fair Dealing

Good faith is deﬁned as honesty in fact in the conduct or transaction

concerned.

132

Good faith performance or enforcement of a contract emphasizes

faithfulness to an agreed common purpose and consistency with the justiﬁed

expectations of the other party.

133

The duty of good faith and fair dealing

applies to all contracts and does not require a ﬁduciary duty.

134

Claiming a

violation of good faith to receive a legal right to a portion of the equity proﬁt is

unlikely to be successful for artists because few contracts provide for this

situation.

The covenant of good faith and fair dealing is breached where a party has

complied with the contract’s literal terms, but has done so in a way that

undermines the contract’s purpose and deprives the other party of the beneﬁt of

the bargain.

135

In New York, the covenant of good faith and fair dealing does

not prohibit a party from acting in its own interests in a way that may

incidentally lessen the other party’s expected beneﬁt.

136

Although a duty of

good faith and fair dealing is implicit in every contract, it cannot be used to

create independent obligations beyond those agreed to and stated in the con-

tract’s express language.

137

In 19 Recordings v. Sony,

138

the court found that Sony did not breach the duty

of good faith and fair dealing by agreeing to accept equity in its deal with

Spotify.

139

19 Recordings is a music label representing Carrie Underwood and

several other American Idol stars that licensed its sound recordings to Sony for

distribution.

140

The complaint alleged that Sony deprived it of the beneﬁt of the

bargain by not seeking the highest royalty rate possible in Sony’s negotiations

with Spotify.

141

Instead, Sony accepted nearly 6% in Spotify equity and advertis-

130. For a more thorough discussion of an artist-label partnership see Okorocha, supra note 37. This

Note is different from Okorocha because his paper focuses on a right to an accounting, but this Note

focuses on a right to equity proﬁt.

131. See Tritt v. Category 5 Records, LLC, 570 F. Supp. 2d 977, 980 (M.D. Tenn. 2008).

132. R

ESTATEMENT (SECOND) OF CONTRACTS § 205 (1981).

133. Id.

134. Okorocha, supra note 37, at 16.

135. In re HSBC Bank, USA, N.A., Debit Card Overdraft Fee Litig., 1 F. Supp. 3d 34, 51 (E.D.N.Y.

2014).

136. Sec. Plans, Inc. v. CUNA Mut. Ins. Soc’y, 769 F.3d 807, 817 (2d Cir. 2014).

137. Sutton Assocs. v. Lexis-Nexis, 761 N.Y.S.2d 800, 804 (N.Y. Sup. Ct. 2003).

138. 19 Recordings Ltd. v. Sony Music Entm’t, 165 F. Supp. 3d 156 (S.D.N.Y. 2016).

139. Id. at 165.

140. Id.

141. Id. at 163–164.

304 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

ing slots, which Sony could use for its own products or sell to other compa-

nies.

142

The equity and the advertising slots are revenue streams that directly

beneﬁt Sony, are not shared with the artists, and were acquired by leveraging

the sound recordings.

143

Sony responded to the complaint by saying that there

was no stipulation in its contracts with 19 Recordings that prohibit it from

acting in its own interests even if it “may incidentally lessen the other party’s

anticipated fruits from the contract.”

144

The court found that Sony was acting in its own self-interest within the rights

granted to the company by the licensing contract given Sony’s sole and absolute

discretion to license the sound recordings.

145

Further, the court noted that it had

to dismiss the complaint because 19 Recordings failed to establish the fair

market value for a stream in the absence of the equity or advertising slots.

146

For these same reasons, any suit that is based solely on contractual duties of

good faith and fair dealing is unlikely to succeed.

B. Fiduciary Duty by Special Circumstance

The deﬁning characteristic of a ﬁduciary relationship is the conﬁdence or

trust reposed in one party to act primarily for the entrusting party’s beneﬁt.

147

The duty extends to “all relations in which conﬁdence is rested, and in which

dominion and inﬂuence resulting from this conﬁdence can be exercised by one

person over another.”

148

A ﬁduciary relationship generally arises when there is

an unequal relationship between the parties—the party entrusting the conﬁdence

must be in a position of inequality, dependence, weakness, or lack of knowl-

edge.

149

Yet, to avoid extra-contractual duties, courts do not lightly impose an

informal ﬁduciary duty.

150

Artists are unlikely to succeed in establishing a right

to the equity proﬁt under this theory because courts defer to contracts and

precedent limits recognizing a ﬁduciary duty by special circumstance.

1. Legal Standard

It is futile to identify a comprehensive set of factors that necessarily give rise

to a ﬁduciary relationship.

151

When determining whether an informal ﬁduciary

relationship exists between contracting parties, courts may examine several

factors, generally including: the trust or conﬁdence existing between the parties;

142. Id. at 164.

143. Id.

144. Ingham, supra note 85 (quoting Sony’s response to 19 Entertainment’s complaint).

145. 19 Recordings, 165 F. Supp. 3d at 165.

146. Id.

147. 37 C.J.S. Fraud § 8 (1996) (citing Kent v. United of Omaha Life Ins. Co., 484 F.3d 988 (8th

Cir. 2007)).

148. Bartholomew, supra note 120, at 253 (citing 37 A

M.JUR.2D Fraud and Deceit § 32 (2002)).

149. Id. (citing 37 A

M.JUR.2D Fraud and Deceit § 32 (2002)).

150. 37 A

M.JUR.2D Fraud and Deceit § 34 (2002).

151. City of Hope Nat’l Med. Ctr. v. Genentech, Inc., 181 P.3d 142, 151 (Cal. 2008) (citing R

APHAEL

CHODOS,THE LAW O F FIDUCIARY DUTIES 44 (2000)).

305 2018] RECORD LABELS SHOT THE ARTISTS

superiority, inﬂuence, or control by one party over another as a result of the

relationship; and other special facts indicating a need for special duties.

152

ﬁduciary relationship, even an informal one, is “founded upon trust or conﬁ-

dence reposed by one person in the integrity and ﬁdelity of another.”

153

ﬁduciary obligation exists whenever one person places special trust and conﬁ-

dence in another person, relying upon them to exercise discretion and expertise

with the utmost honesty, and the ﬁduciary knowingly accepts that special trust

and conﬁdence, undertaking to act on the client’s behalf.

154

The extent of superiority, inﬂuence, or control by one party and the reliance

of another weigh heavily in favor of establishing a ﬁduciary relationship.

155

The

essence of a ﬁduciary or conﬁdential relationship is that the parties do not deal

on equal terms because the person in whom trust and conﬁdence is reposed and

who accepts that trust and conﬁdence is in a superior position to exert unique

inﬂuence over the dependent party.

156

This is why lawyers, stockbrokers, and

trustees have ﬁduciary duties; they have control and inﬂuence over a person

who is reliant on them.

157

It is unclear what courts look for when establishing a ﬁduciary duty, but a

special fact or circumstance beyond the ﬁrst two factors is necessary to establish

a ﬁduciary duty. It could be that the parties were close friends,

158

or that the

parties had a prior course of dealing.

159

Public policy encourages imposing

further duties based on special circumstances.

160

The special circumstance must

be something that establishes a special entrustment which justiﬁes the imposi-

tion of obligations beyond the contractual obligations.

161

2. Application to the Artist–Label Relationship

Many artists have attempted to establish a ﬁduciary duty under this theory

and almost none have succeeded.

162

One successful case was CBS v. Ahern,

163

in which the contract gave the record label the authority to retain the artist’s

152. Bartholomew, supra note 120, at 255; for other articulations of the factors see, e.g., 37 C.J.S.

Fraud § 8 (1996); Reuben H. Donnelley Corp. v. Mark I Mktg. Corp., 893 F. Supp. 285, 289 (S.D.N.Y.

1995).

153. Apple Records, Inc. v. Capitol Records, Inc., 529 N.Y.S.2d 279, 283 (N.Y. Sup. Ct. 1988).

154. United States v. Milovanovic, 678 F.3d 713, 723 n.9 (9th Cir. 2012).

155. Bartholomew, supra note 120, at 256.

156. Brown v. Wells Fargo Bank, NA, 85 Cal. Rptr. 3d 817, 835 (Cal. Ct. App. 2008).

157. Id.

158. Cody v. Gallow, 214 N.Y.S.2d 127, 128 (N.Y. Sup. Ct. 1961).

159. Levine v. Chussid, 221 N.Y.S.2d 311, 312 (N.Y. Sup. Ct. 1961).

160. Tamar Frankel, Fiduciary Duties, in T

HE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW

127 (Peter Newman ed., 1998).

161. Mellencamp v. Riva Music Ltd., 698 F. Supp. 1154, 1156 (S.D.N.Y. 1988).

162. See, e.g., Reuben H. Donnelley Corp. v. Mark I Mktg. Corp., 893 F. Supp. 285, 289 (S.D.N.Y.

1995); Sony Music Entm’t, Inc. v. Robison, 2002 WL 272406 (S.D.N.Y. Feb. 26, 2002); Silvester v.

Time Warner, Inc., 763 N.Y.S.2d 912, 918 (N.Y. Sup. Ct. 2003).

163. CBS, Inc. v. Ahern, 108 F.R.D. 14 (S.D.N.Y. 1985).

306 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

royalties for the purpose of investing.

164

The maintenance of this special

account by the record label for the beneﬁt of the artist was sufﬁcient to establish

a ﬁduciary duty.

165

However, this special accounting and investment arrange-

ment is unusual; most artist–label contracts do not include this type of investing

arrangement.

Another notable instance was Apple Records v. Capitol Records,

166

in which

Capitol Records owed a ﬁduciary duty to The Beatles.

167

The court reasoned

“that from such a long enduring relationship was borne a special relationship of

trust and conﬁdence, one which existed independent of the contractual du-

ties.”

168

The “long enduring relationship” was about twenty-six years.

169

These

circumstances were sufﬁcient to establish a ﬁduciary duty, and the record

company violated that duty by claiming the recordings were destroyed when

they were actually sold for proﬁt.

170

Other artists have not fared as well as The Beatles in establishing the

requisite trust to form a ﬁduciary relationship.

171

The Dixie Chicks’ six years of

trust and conﬁdence in Sony was not sufﬁcient to establish a ﬁduciary relation-

ship.

172

A simple contract to collect royalty fees and pass them along is not

sufﬁcient trust to create a ﬁduciary relationship.

173

The Beatles’ case is an

outlier that might partially be explained by the 26-year relationship between

The Beatles’ and Capitol.

174

Modern 360 recording contracts give the labels control over all rights granted,

which typically includes ﬁnal approval over tour schedules, salaries of certain

employees, and the vendors the artist uses for publishing and merchandising.

175

It could also include using the label-owned management company to manage

the artist.

176

Bob Donnelly, Buyer Beware: Why Artists Should Do A 180 On “360” Deals,B

ILLBOARD (Mar.

22, 2010, 12:00 AM), https://www.billboard.com/biz/articles/news/1209534/buyer-beware-why-artists-

should-do-a-180-on-360-deals [https://perma.cc/S6Q3-HBTK]. The manager would likely have a ﬁdu-

ciary duty to the artist. See Joel v. Weber, 197 A.D.2d 396, 602 N.Y.S.2d 383 (N.Y. App. Div. 1993).

Further, the recording labels’ venture into equity ownership of

music streaming platforms like Spotify forces artists to rely even more on

record companies. Spotify enables the artists to be heard and develop a wider

164. Id.at25.

165. Id.

166. Apple Records, Inc. v. Capitol Records, Inc., 529 N.Y.S.2d 279 (N.Y. App. Div. 1988).

167. Id. at 283.

168. Id.

169. Id. at 279.

170. Id. at 283.

171. See, e.g., Sony Music Entertainment, Inc. v. Robison, 2002 WL 272406, at *3 (S.D.N.Y.2002);

Savage Records v. Jones, 667 N.Y.S.2d 906 (N.Y. App. Div.1998); Rodgers v. Roulette Records, Inc.,

677 F. Supp. 731, 739 (S.D.N.Y. 1988); Mellencamp v. Riva Music Ltd., 698 F. Supp. 1154, 1156

(S.D.N.Y. 1988); Carter v. Goodman Group Music Publishers, 848 F. Supp. 438, 445 (S.D.N.Y. 1994);

Silvester v. Time Warner, Inc., 763 N.Y.S.2d 912, 918 (N.Y. Sup. Ct. 2003).

172. Sony Music Entm’t Inc., 2002 WL 272406, at *3.

173. Rodgers, 677 F. Supp. at 739.

174. Cooper v. Sony Records Int’l, 2001 WL 1223492, at *5 (S.D.N.Y. Oct. 15, 2001).

175. Okorocha, supra note 37, at 13.

176.

307 2018] RECORD LABELS SHOT THE ARTISTS

fan base, allowing them to sell more concert tickets and t-shirts. Now that the

record companies partially own the streaming services, they can greatly affect

the exposure artists get on that platform.

177

This vertical integration increases

the trust placed in the record company and is a special fact that could indicate a

need for heightened duty. However, given the strong precedent against recogniz-

ing a ﬁduciary duty from special circumstance, it is unlikely to succeed.

178

C. Fiduciary Duty by Partnership

The modern artist–label relationship should be considered a legal partnership.

This should successfully enable recording artists to recover a portion of the

proﬁt from the Spotify equity. A partnership is deﬁned as a contractual relation-

ship or a voluntary association of two or more competent persons to place their

money, effects, labor, and skill in lawful commerce or business and to divide the

proﬁts and bear the losses in certain proportions.

179

Partners owe a limited

ﬁduciary duty to one another.

180

1. Legal Standard

There is some variation in the factors that lead to recognition of a partner-

ship.

181

A version of the Uniform Partnership Act has been adopted by forty-

nine states, including New York.

182

Under the Uniform Partnership Act, proving

the formation of a partnership requires a showing of: (1) the parties’ sharing of

proﬁts and losses; (2) the parties’ joint control and management of the business;

(3) each party’s contribution of property, ﬁnancial resources, effort, skill, or

knowledge to the business; and (4) the parties’ intention to be partners.

183

one factor is dispositive, it is necessary to address the parties’ relationship as a

whole.

184

An important element of a contract of partnership or joint venture, both under

common law and statutory law, is a mutual promise or undertaking by the

parties to share in the proﬁts of the business and accept liability for its debts.

185

Agreement to share losses may be inferred where all of the other elements of a

partnership are present.

186

Losses do not have to be monetary, but may include

177. Seabrook, supra note 44. Lorde’s meteoric success was based on being listed in the right

Spotify playlist. Id.

178. Okorocha, supra note 37, at 16.

179. 68 C.J.S. Partnership § 1 (2017).

180. 106 A

M.JUR.3D Proof of Facts § 7 (2009).

181. Id.

182. Okorocha, supra note 37, at 4; N.Y. P

ARTNERSHIP LAW § 11 (McKinney 1994).

183. 106 A

M.JUR.3D Proof of Facts § 8 (2009); Anwar v. Fairﬁeld Greenwich Ltd., 728 F. Supp. 2d

372, 403–04 (S.D. N.Y. 2010) (applying New York law). Sacramento E.D.M., Inc. v. Hynes Aviation

Industries, Inc., 965 F. Supp. 2d 1141, 1150 (E.D. Cal. 2013) (applying California law).

184. In re Cross Media Mktg. Corp., 367 B.R. 435, 455 (Bkrtcy. S.D.N.Y. 2007) (applying New

York Law).

185. Dinaco, Inc. v. Time Warner, Inc., 346 F.3d 64, 68 (2d Cir. 2003) (applying New York law).

186. Anderson v. Nat’l Producing Co., 253 F.2d 834, 838 (2d Cir. 1958).

308 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

“sweat equity”—the loss of time and effort.

187

Further, the element is always

necessary because a partnership could exist without the sharing of losses.

188

Co-ownership of any sort, including the management and control of the

business, is evidence of a partnership.

189

A partnership can exist as long as the

parties have the right to manage the business even though in practice one

partner relinquishes the day-to-day management of the business to the other

partner.

190

Some contribution to the enterprise of property, ﬁnancial resources, effort,

skill, or knowledge to the business is necessary to be a partner.

191

Contribution

of labor, capital, or promotion of the business is sufﬁcient.

192

Sweat equity is

also sufﬁcient as contribution to the enterprise.

193

To demonstrate the existence of a partnership, the parties must enter into the

relationship with the intent to share in the proﬁts and losses, have joint control

or management, and contribute to the enterprise, regardless of the parties’

expressed purpose.

194

Even if the contract includes a statement that “no partner-

ship is intended,” the contract could establish a partnership if the contract

directs the association of two or more persons to carry on a for-proﬁt business

as co-owners.

195

To determine whether a partnership exists, the focus is whether

the contract’s objective terms demonstrate an intention to jointly carry on a

for-proﬁt business, not whether the individuals subjectively intended to form a

partnership.

196

In Godoy v. Restaurant Opportunity Center, former restaurant workers helped

form a not-for-proﬁt restaurant, but they were denied employment or back pay

upon completion of the project.

197

The plaintiffs argued that they were merely

employees, but the court found that they had actually formed a partnership

because they had assumed a risk of loss and stood to beneﬁt from potential

gains, despite the lack of formal agreement. This is because they were members

of the board of directors of the cooperative committee that constituted joint

control and management, their sweat equity constituted a contribution to the

enterprise, and all of this was done intentionally.

198

187. Godoy v. Rest. Opportunity Ctr. of New York, Inc., 615 F. Supp. 2d 186, 195 (S.D.N.Y. 2009);

Sacco v. Paxton, 133 So. 3d 213, 218 (La. Ct. App. 2014).

188. See Anderson, 253 F.2d at 838 (explaining the owner and the operator of a circus were partners

despite the operator not being liable for losses under the contract).

189. In re Tsurukawa, 287 B.R. 515, 521 (B.A.P. 9th Cir. 2002).

190. Id.

191. VIDIVIXI, LLC v. Grattan, 155 F. Supp. 3d 476, 481 (S.D.N.Y. 2016).

192. Id.

193. Godoy v. Rest. Opportunity Ctr. of New York, Inc., 615 F. Supp. 2d 186, 195 (S.D.N.Y. 2009).

194. 106 A

M.JUR.3D Proof of Facts § 9 (2009).

195. Union Carbide Corp. v. Montell N.V., 944 F. Supp. 1119, 1132 (S.D.N.Y. 1996).

196. 106 A

M.JUR.3D Proof of Facts § 9 (2009).

197. Godoy, 615 F. Supp. 2d at 187.

198. Id. at 195.

309 2018] RECORD LABELS SHOT THE ARTISTS

In Rivkin v. Coleman, a medical assistant who helped a physician develop a

medical device had not established a partnership.

199

No partnership existed

because Dr. Coleman bore the sole risk of loss; Ms. Rivkin’s claim for loss of

sweat equity was insufﬁcient because she would not be personally liable in the

same way as Dr. Coleman and because her sweat equity was already compen-

sated in the form of salary.

200

Further, Ms. Rivkin never had joint management

or control over the business.

201

2. Application to the Artist–label Relationship

The artist–label relationship should be considered a partnership. The record

label and the artist both share in the proﬁts and losses from their venture. This

sharing of proﬁts is furthered by 360 deals, which entitle record labels to a

portion of proﬁts from touring and merchandise that was traditionally reserved

for the artists. It may seem as though the record label bears the risk of losses

because it pays the advance and then attempts to recoup that expenditure

through album sales, but the artists bear the risk of loss in two ways. First, the

artists lose sweat equity by losing their time and effort on a speculative

endeavor.

202

Second, the artists also bear the risk of loss of revenue from accepting

reduced royalties. The royalty rates are reduced, and this increases the viability

of the streaming service. In exchange for reduced royalties, the record labels

received equity which, if the streaming service succeeds, will yield proﬁt in the

amount commensurate with the difference between the reduced royalty and the

royalty’s fair market value. The artists have already shared the loss of a reduced

royalty, the question remains whether they should be entitled to the proﬁts if the

venture succeeds.

The risk of loss being shared by the artists are more similar to the workers in

Godoy than the medical assistant in Rivkin because both the record label and the

artist bear the same type of risk of loss; time and effort as well as ﬁnancial.

Under a 360 deal, both the record label and the artist have a right to

management and control over the business. The degree of creative control

varies, but both parties have control over business decisions regarding touring

locations and dates, merchandising, and advertising.

203

Both the record label and the artist contribute to the enterprise. Under a 360

deal, the record label puts up the initial capital investment and promotes the

artist. The artist then spends time and effort and likely out-of-pocket expenses

199. Rivkin v. Coleman, 978 F. Supp. 539, 541 (S.D.N.Y. 1997).

200. Id. at 543.

201. Id.

202. Godoy, 615 F. Supp. 2d at 195.

203. Okorocha, supra note 37, at 13.

310 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

to create the sound recordings and to promote themselves through touring.

204

Mike Errico, Touring Can’t Save Musicians in the Age of Spotify, N.Y. TIMES (Jan. 25, 2016),

https://www.nytimes.com/2016/01/25/magazine/touring-cant-save-musicians-in-the-age-of-spotify.

html?mcubz=0 [https://perma.cc/5H5M-46T6].

While touring, the artist often must pay for a vehicle and other travel expenses

out of pocket.

205

The musical instruments and their maintenance are usually

purchased by the musicians with their personal funds.

206

Under many 360 deals,

the record label helps pay for t-shirts and merchandise, but the artist often bears

a majority of those costs.

207

Both the record label and the artist entered this relationship with the intent to

have joint control and management over this for-proﬁt business. Whether they

intended or agreed to be partners in this endeavor is irrelevant. All the factors

are present in the artist–label relationship; the modern artist–label relationship is

ripe for recognition as a partnership.

IV. R

EPERCUSSIONS OF RECOGNIZING A FIDUCIARY DUTY

If the artists and record labels are found to be partners, they will owe a

ﬁduciary duty of care and loyalty to one another as a matter of law.

208

The exact

contours and repercussions of this duty would have to be decided by the courts

on an ad hoc basis. If the ﬁduciary duty is recognized, courts will have to

consider the: (A) advantages; (B) counterarguments; (C) limits to the ﬁduciary

duty; and (D) the method to calculate the payout from the equity proﬁt.

A. Advantages of Recognizing a Fiduciary Duty

If a ﬁduciary duty is recognized, then some artists would have a claim for

constructive trust to the proﬁts from the equity sales.

209

To establish the

equitable doctrine of constructive trust there must be: (1) a conﬁdential or

ﬁduciary relation; (2) an express or implied promise; (3) a transfer made in

reliance on that promise; and (4) unjust enrichment.

210

Before 360 deals became

commonplace, artists attempted to sue record companies under this constructive

trust theory, but they failed due to a lack of ﬁduciary duty.

211

Record labels impliedly promised to maximize royalty revenues because that

was the business model that beneﬁtted both contracting parties. The artists

transferred ownership or license of their sound recordings to the record labels in

reliance on that promise to maximize royalties. Instead of maximizing royalties,

the record companies were unjustly enriched by accepting equity in exchange

for a lower royalty rate without sharing the equity with the artists. If the

204.

205. Id.

206. Id.

207. Id.

208. 106 A

M.JUR.3D Proof of Facts § 7 (2009).

209. Bartholomew, supra note 120, at 257.

210. Bankers Sec. Life Ins. Soc. v. Shakerdge, 406 N.E.2d 440, 440 (N.Y. 1980).

211. Rodgers v. Roulette Records, Inc., 677 F. Supp. 731, 739 (S.D.N.Y. 1988).

311 2018] RECORD LABELS SHOT THE ARTISTS

artist–label relationship is found to be a partnership with ﬁduciary obligations,

this would establish all of the elements necessary to support a successful claim

for a constructive trust.

212

Recognizing a ﬁduciary duty would also give artists the power necessary to

obtain fair compensation for their work and the leverage they need to negotiate

in future situations.

213

B. Counterarguments to Recognizing a Fiduciary Duty

Courts’ recognizing a ﬁduciary duty between record labels and recording

artists will need to handle some associated challenges. The major record labels

argue that it is impossible to maintain a ﬁduciary duty without violating the duty

of loyalty to any single artist because of artist priorities, conﬂicts with release

dates, and competition within the label for resources.

214

Further, recognizing a

ﬁduciary duty in such situations could open the ﬂoodgates of litigation for other

contractual obligations that are morphed into ﬁduciary obligations.

215

The record labels also claim a right to the whole equity proﬁt.

216

The labels

believe that the equity was obtained in consideration of the label’s entire library,

not any individual artist.

217

See Eriq Gardner, Sony’s Equity Stake in Spotify Challenged in Lawsuit Claiming Artists Are

Robbed,H

OLLYWOOD REP. (June 24, 2015), http://www.hollywoodreporter.com/thr-esq/sonys-equity-stake-

spotify-challenged-802758 [https://perma.cc/NB99-PRJT].

The labels argue that they took the risk that any of

these start up tech companies could fail, so they deserve the proﬁt from the few

that succeed. The record labels should be free to use their business judgment in

a way that maximizes proﬁt. It is better for the artist to get paid something for

their recordings rather than nothing, which is what would happen if the stream-

ing services failed and internet piracy returned to Napster-level highs. The

record labels take stakes in these music streaming startups and give the stream-

ing services generous royalty agreements to help the streaming services suc-

ceed.

218

Forcing the record labels to seek higher royalties could bankrupt the

streaming services, leaving illegal downloading through peer-to-peer (P2P)

networks as the dominant form of access to music.

C. Limiting the Duty

To counter these difﬁculties, courts should limit the ﬁduciary duty. The

ﬁduciary duty owed by partners to one another is not the same obligation that a

trustee owes to a beneﬁciary of a trust.

219

The partnership ﬁduciary duty is

212. See Simonds v. Simonds, 380 N.E.2d 189, 194 (N.Y. 1978).

213. See Bartholomew, supra note 120, at 252.

214. Corrina Cree Clover, Accounting Accountability: Should Record Labels Have a Fiduciary Duty

to Report Accurate Royalties to Recording Artists?,23L

OY. L.A. ENT.L.REV. 395, 428 (2003).

215. See Elmira Teachers’ Ass’n v. Elmira City Sch. Dist., 2006 WL 240552, at *6 (W.D.N.Y. Jan.

27, 2006).

216. See 19 Recordings Ltd. v. Sony Music Entm’t, 165 F. Supp. 3d 156, 165 (S.D.N.Y. 2016).

217.

218. Seabrook, supra note 44.

219. See U

NIFORM PARTNERSHIP ACT § 409(e) (2013); UNIFORM PARTNERSHIP ACT § 404 cmt. 5 (1997).

312 THE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY [Vol. 16:289

limited in ways that allow the partner to still act in self-interest, even if it harms

the partnership.

220

The artist–label ﬁduciary duty should only apply to instances

in which the record label uses a work created by an artist for the label’s beneﬁt

in a way that reduces the beneﬁts conferred upon that artist.

221

This articulation

of a limited duty is consistent with the ﬁduciary duty partners owe to one

another because it only applies when the partnership property is in use by one of

the partners.

222

The conﬂicts of interest which the record labels worry about

would not be a problem if the duty were limited in this way.

Under a full ﬁduciary duty, “neither party may exert inﬂuence or pressure

upon the other, take selﬁsh advantage of his trust or deal with the subject-matter

of the trust in such a way as to beneﬁt himself or prejudice the other except in

the exercise of utmost good faith.”

223

Unlike a trustee’s ﬁduciary duty, a partner

can undertake a proﬁt-seeking activity for self-beneﬁt even if it might harm the

partnership.

224

At common law, a partner could even engage in a competitive

enterprise with the partnership under certain circumstances.

225

What the partner

cannot do without violating the duty is use the partnership to beneﬁt himself at

the expense of the other partner.

226

For example, if two partners own a grocery

store, one partner can open another grocery store down the street, which would

harm the initial store owned by the partnership. But, the partner cannot use his

ownership of the ﬁrst store as leverage against a supplier to beneﬁt the second

store because, in that case, the other partner would have a right to any beneﬁt

obtained by use of the partnership assets.

227

Further, the artist–label contract can alter the limits and obligations under the

duty of loyalty.

228

This includes exempting an entire category of activity from

the duty of loyalty.

229

So record labels would still be free to represent a variety

of artists without violating the duty of loyalty.

In the artist–label partnership, the partnership is the artist’s brand. For

example, the brand “Lady Gaga” would be a partnership asset between Stefani

Joanne Angelina Germanotta and Interscope Records, which is owned by

220. See UNIFORM PARTNERSHIP ACT § 404 cmt. 5 (1997).

221. This might include instances in which a record label does not give full royalty payments

collected to an artist. See Bartholomew, supra note 120; Clover, supra note 214; and Okorocha, supra

note 37 (giving artists a right to audit the accounting by record label in royalty payments).

222. U

NIFORM PARTNERSHIP ACT § 409(b)(1)(B) (2013).

223. CBS, Inc. v. Ahern, 108 F.R.D. 14, 25 (S.D.N.Y. 1985).

224. See U

NIFORM PARTNERSHIP ACT § 409(e) (2013).

225. See Meinhard v. Salmon, 249 N.Y. 458, 468, 164 N.E. 545, 548 (1928) (J. Cardozo) (had the

real estate opportunity been a certain distance from the property owned by the partnership, no violation

of ﬁduciary duty would have occurred).

226. See U

NIFORM PARTNERSHIP ACT § 409(b)(1), (b)(3) (2013).

227. See NCAS Realty Mgmt. Corp. v. Nat’l Corp. for Hous. Partnerships, 143 F.3d 38, 43 (2d Cir.

1998) (citing N.Y. P

ARTNERSHIP LAW § 43(1) (McKinney 1988)). A ﬁduciary duty is breached if a partner

beneﬁts from “any transaction connected with the formation, conduct, or liquidation of the partnership

or from any use by him of its property.” Id.

228. U

NIFORM PARTNERSHIP ACT § 105(d)(3)(A) (2013).

229. U

NIFORM PARTNERSHIP ACT § 105(d)(3)(B) (2013).

313 2018] RECORD LABELS SHOT THE ARTISTS

Universal Music Group. If Universal were to release a Katy Perry song in

mid-May with the expectation that it would be the hit song of the summer, that

may harm Lady Gaga, but it would not violate the ﬁduciary duty because the

label did not use any assets of the Lady Gaga partnership. Whereas if Universal

were to grant a license to publicly perform “Poker Face” by Lady Gaga as part

of a deal that would reduce the amount of money going to Germanotta while

increasing the amount of money going to Universal, that would violate the duty.

In one instance, the partner is competing against the partnership with a separate

enterprise, in the other instance, the partner is using partnership assets to beneﬁt

himself at the expense of his partner. The actual use of a partnership asset would

be needed to constitute a violation of the ﬁduciary duty.

230

D. How to Pay Out the Equity Proﬁt

Calculating the payout to the artists from any equity proﬁt will not be an easy

task. This paper suggests that the Spotify equity was not obtained in consider-

ation of the labels’ whole catalogues; rather, it was obtained in lieu of a higher

royalty rate. This means that a portion of the equity proﬁt rightfully belongs to

the artists as recoupment of the reduced royalty rate. So, the payout should be

tied to the idea that if the equity had not been obtained the artists would have

received a higher royalty from Spotify.

231

The payout should be pro-rata based on the number of streams each artist has

received since the inception of Spotify. The total number of streams that an

artist has received on Spotify should be divided by the total number of streams

on Spotify. Then that number should be multiplied by the ratio of each royalty

payment the artist is contractually owed. Finally, that number should be multi-

plied by the total proﬁt the record label received from the equity sale.

232

CONCLUSION

Technology changed the music industry, and the law must adapt to achieve

equitable results in light of new circumstances. Internet piracy decimated the

music industry, so the major record labels searched for new revenue sources.

They developed 360 record deals and made them the industry standard for new

artists, thereby extending their control over the artists by entitling themselves to

all revenue sources generated from the success of the artist’s brand. In an effort

to defeat internet piracy, the record labels turned to music streaming services

like Spotify and gave them reduced royalty rates in exchange for equity in the

230. See Sriraman v. Patel, 761 F. Supp. 2d 7, 19 (E.D.N.Y.), amended, 761 F. Supp. 2d 23

(E.D.N.Y. 2011) (a medical partner did not violate ﬁduciary duty by acting as chief of medicine).

231. It is unclear if artists who do not have 360 deals will be entitled to this remedy. They would not

be owed a ﬁduciary duty, but, once some artists become entitled to this remedy, equitable consider-

ations might enable other artists to recover a portion of the equity proﬁt.

232. (Number of streams the artist has received / Total number of streams) * (royalty ratio in

contract)) * (record label’s proﬁt from equity sale).

314 T

HE GEORGETOWN JOURNAL OF LAW &PUBLIC POLICY

[Vol. 16:289

company. This reduced the beneﬁts conferred on the artists that the labels had

agreed to promote, including Taylor Swift. The record labels now stand to gain

tremendously from Spotify’s upcoming initial public offering.

Given the change in circumstance, including the advent of the 360 deal and

the acquisition of equity, the artist–label relationship should be recognized as a

partnership. Doing so would create a limited ﬁduciary duty which would only

be violated if the record label used the artist’s work in a way that beneﬁts the

label at the expense of the artist. Recognizing the artist–label relationship as a

partnership would entitle artists to a portion of the proﬁt from the sale of

Spotify stock through a constructive trust.