Universal Music Beats $750M Lawsuit Over Spotify Equity Filed By ’90s Rap Duo Black Sheep

Universal Music Group (UMG) has won the dismissal of a closely-watched class action that challenged the fairness of its 2008 purchase of shares in Spotify — a case that accused the company of taking lower-than-market royalty rates in return for a chunk of equity that’s now worth hundreds of millions.

The lawsuit, filed last year by the members of the ’90s hip-hop duo Black Sheep, claimed that UMG had secured its now-lucrative stake in the then-nascent streamer by signing an “undisclosed, sweetheart deal” that left artists underpaid to the tune of $750 million. UMG has called the claims “patently false.”

In a decision Monday (Nov. 20), U.S. District Judge Jennifer L. Rochon ruled that even if UMG had taken below-market royalty rates from Spotify in return for equity, doing so would not have breached its contracts with artists — which give the music giant “unfettered discretion” to license its recordings as it sees fit.

“Plaintiffs argue that UMG exceeded the bounds of its discretion under the contract by making an undisclosed licensing deal in exchange for Spotify stock, for which UMG is withholding artists’ rightful share … of the proceeds UMG reaped,” the judge wrote. “But they do not square that conclusion with UMG’s unlimited right to license their work.”

Black Sheep members Andres “Dres” Titus and William “Mista Lawnge” McLean sued in January, claiming Universal acted in “bad faith” when it secretly acquired a 5% stake in the “fledgling streaming service” in 2008 for just a few thousand dollars. The real payment to Spotify, the lawsuit claimed, had been UMG’s willingness to accept “substantially lower royalty payments” — an arrangement that benefited UMG and Spotify but “shortchanged artists” and “deprived” them of fair royalties.

“Universal concealed from artists that it acquired Spotify stock and that royalty payments were depressed as a result,” lawyers for the duo wrote in their complaint. “Over time, the value of the Spotify stock that Universal improperly withheld from artists has ballooned to hundreds of millions of dollars.”

When the case was filed, Universal called the claims “patently false and absurd.” In later court filings, the company flatly denied the core allegation: “UMG disputes that the equity stock acquired in 2008 was part of the consideration that Spotify provided for a license to UMG’s music catalog.”

Reps for both UMG and Black Sheep did not return requests for comment on Tuesday.

The major music companies all acquired equity in Spotify during the streamer’s early days. According to a 2018 report by Music Business Worldwide, the then-Big Four music companies (Universal, Warner, Sony and EMI) plus Merlin paid just €8,804 total for a combined 18% of the streamer divvied up between them. The role that royalty rates played in that deal, and whether artists would eventually see some of the profit, was hotly debated for years.

After Spotify went public in 2018, it started to become clear just how valuable those stakes had become. Sony Music sold 50% of its shares for $768 million in April 2018, followed by Warner selling its entire stake for $504 million in August 2018. Both later made good on previous pledges to disburse some of the proceeds to artists, although reportedly with differing stipulations.

Universal has yet to sell its shares in Spotify, but it made a similar pledge in March 2018. Later that year, when Taylor Swift signed with the company, she reportedly required that UMG further promise to distribute the money to artists regardless of unrecouped balances — meaning artists will be paid regardless of whether they still owe the label money.

But in their lawsuit, Black Sheep argued that such promises were not good enough. They said Universal had already wronged many of its artists in one of two ways — simply by taking lower rates and thus reducing their royalty payments, or by failing to disburse the profits of their equity stakes as royalties.

In Monday’s ruling dismissing the case, Judge Rochon said she did not even need to decide whether or not those allegations were true. Instead, she simply ruled that even if they were true, Universal would still not have violated its record deal with Black Sheep.

“The contract’s plain language does not support plaintiffs’ theories,” the judge wrote about the allegedly reduced rates, noting that the deal gave UMG the “sole, exclusive and unlimited right” to license the recordings. “Given this wide discretion, there is no basis upon which to find that UMG breached the contract by accepting a lower royalty from Spotify.”

Judge Rochon also rejected the argument that UMG should have accounted for the equity profits when paying artists, saying the contract only requires payment for revenue that is “solely attributable” to their specific songs.

“Plaintiffs cannot directly trace UMG’s alleged acquisition of Spotify stock to the use or exploitation of their work alone,” the judge wrote. “UMG did not breach the contract by failing to account for its value when paying Plaintiffs their royalties.”

Even beyond the merits of the lawsuit, the judge also said she would have dismissed most of it for a far simpler reason: That it had been filed far past the statute of limitations. If the case had moved forward, Rochon said it only would have applied to royalty payments made after January 2021, not those reaching back all the way to 2008.