Music Industry's Legal Ramble

The Monsters are Due on Maple Street: In the 1960 Twilight Zone episode with this title, inexplicable power outages and celestial lights cause the citizens of an idyllic American town to accuse one other of being aliens. Fear feeds suspicion, hysteria turns to mayhem, and soon lynch mobs roam the streets and former friends are burning down each other's homes.

Something similar may be happening in the music industry, which is now in the second year of the longest sales downturn in its history. In late September, the LA Times reported that major record labels are debating whether to sue German media conglomerate Bertelsmann AG, "in an effort to make somebody pay for several years' worth of online music piracy" by now-bankrupt file-sharing service Napster.

Bertelsmann, parent company to BMG, one of the music industry's "Big Five," had loaned Napster $90 million in the period stretching back to last October, according to documents revealed in Napster's bankruptcy petition. In the hope of leveraging Napster's file-sharing technology for commercial gain, Bertelsmann bought into the startup while participating in protracted copyright-infringement litigation against it. The ill-fated financial venture was part of the reason for the departure of former Bertelsmann CEO Thomas Middelhoff, and is also apparently grounds for potential action against the conglomerate, which could be on the hook for as much as $1 billion, based on a maximum fine of $150,000 per alleged copyright violation. "The recording studios that we represent are looking at the question of whether or not there can be claims for copyright infringement that could be brought directly or indirectly against Bertelsmann," said attorney David Stratton, who represents A&M and Geffen Records. According to the Times, lawyers in the case estimate their chance of success as "greater than 50%."

File-sharing and downloading music on the Internet are now the music industry's standard excuses for the long sales slump, despite studies that indicate that downloaders are also the biggest buyers of CDs. The danger of "online theft" is an article of faith in the music biz these days, and the nation's lawmakers are dutifully considering bills intended to stop it. Among the bills are proposals by Representative Howard Berman of LA's San Fernando Valley that would legalize attacks on peer-to-peer (P2P) networks and private computers deemed to be sources of stashed music files. "P2P piracy doesn't just affect the record companies and movie studios that piracy profiteers paint as bogeymen," Berman said. "P2P piracy destroys the livelihoods of everyday people—copyright owners of all stripes in all walks of life."

Recording Industry Association of America (RIAA) chief executive Hilary Rosen welcomed legislation that would free the music industry to launch attacks on copyright abusers. "Taking music on the Internet is no different than taking it from a store," she told reporters. "Theft is theft." One possible strategy is the deployment of thousands of "decoy" files that would make the search for real music files a frustrating one. "The primary purpose of decoying is to create a needle-in-a-haystack situation which makes the pirated content difficult to find," explained Randy Saaf of MediaDefender, Inc., a company that sells technology to combat P2P piracy.

Virginia Congressman Rick Boucher, an outspoken opponent of legislative handouts for the entertainment industry, has long recommended marketing solutions instead. His latest suggestion: The recording industry could fight online piracy by making their entire inventories available for download at reasonable prices. "That's the way to compete with the lower quality free peer-to-peer services," he told fellow lawmakers, according to a report from Dow Jones Newswire.

Lawmakers in California have renewed hearings on accounting abuses and oppressive contracts in the music industry. During the last week of September, many recording artists spoke to a California Senate committee on entertainment, urging them to pass legislation that would reign in allegedly unfair accounting practices at major record labels.

Convened in Los Angeles, the committee heard testimony from country star Clint Black, Tom Waits, the Backstreet Boys' Kevin Richardson, and the Eagles' Joe Walsh, Glenn Frey, and Don Henley. Henley is also a founding member of the Recording Artists Coalition (RAC). Record labels executives have routinely denied under-reporting royalties, despite outside audits that have found consistent problems with the industry's accounting. "We need to hold them accountable, and none of us as individuals have been able to do that," Henley told state senators.

The RAC hopes to win passage of legislation that would impose penalties on record companies for accounting errors. Currently, there are no penalties in place for under-reporting of royalties by record companies. Foreign sales are often miscalculated, artists claim. "You don't really get to audit the record companies. It's an illusory thing at best," said Democratic state senator Kevin Murray.

Some high-profile performers have challenged their record labels and won their personal battles, without winning the war for their peers. The Dixie Chicks emerged victorious from a long struggle with Sony Music, in which their accusations of accounting disparities led to a new contract giving them a 20% share of the profits on their recordings. The outspoken Courtney Love is reportedly also close to settling her case against Universal Music.

Murray and his colleague in the state senate, Martha Escutia, convened the hearings after shelving a proposal several months ago to free musicians from an exemption to a general seven-year limit on employment contracts in California. That bill was scrapped at the behest of the RAC, which claimed it was too narrow in scope to win much support. Murray intends to introduce a larger bill later this year that will address not only employment contracts, but also royalties, pensions, and health care for musicians.

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