SoundExchange Sues Music Choice Over a ‘Persistent Effort to Avoid Paying Royalties’

SoundExchange’s lawsuit alleges that cable-based streaming music service Music Choice is cooking its books.  But is there more to this story?

Another day, another contentious music royalty lawsuit.

This time, the plaintiff is SoundExchange, a non-profit tasked with collecting US-based non-interactive digital radio royalties.  That includes Music Choice, which is best known for its cable-based radio streams.

But Music Choice also has a business-focused radio service, similar to SiriusXM/Pandora’s business-to-business services.  On this front, SoundExchange says Music Choice is deliberately cooking its books to misrepresent its royalty obligations.

“Music Choice’s actions reflect a persistent effort to avoid paying royalties for its use of protected sound recordings.  Its creative accounting has deprived creators out of the royalties they are due and is inconsistent with the Copyright Royalty Board’s regulations,” wrote SoundExchange Senior Vice President and General Counsel Colin Rushing.

So far, there’s no official response from Music Choice.  But according to SoundExchange, Music Choice is deliberately undercounting its gross receipts from its ‘business establishment service (BES),’ then remitting the lowered amounts.  According to statutes laid out by the U.S. Copyright Royalty Board, Music Choice is obligated to pay 12.5% of its gross revenues from its BES business.

For those following along at home, the specific CRB regulation is mentioned in 37 C.F.R. Part 384.

Specifically, SoundExchange is alleging underpayment during the 2013-2016 period, based on an audit conducted.

Unclear at this stage is whether Music Choice has inked independent licenses with rights owners for its BES, which could explain the lowered gross revenue figure.  In 2017, Pandora opted to steer away from SoundExchange and strike a raft of direct deals with record labels and recording rights owners.  The move was partly prompted by high administrative costs at SoundExchange, as well as enormous unpaid ‘black box’ balances currently estimated at more than $300 million.

Just recently, sources to Digital Music News reported that SoundExchange’s CEO, Michael Huppe, was paid $1.4 million during 2017.  That was subsequently confirmed by IRS non-profit filings, which must be disclosed under federal law.  In total, SoundExchanges top 10 executives — including Colin Rushing — rake in more than $5.4 million in annual salaries, with substantial portions exempt from federal taxation.

Over the past few weeks, SoundExchange has refused to disclose any executive salaries for 2018, including Huppe’s.  Additionally, the organization has also refused to disclose any details on its unpaid, ‘black box’ royalty holding accounts.  The refusal followed a selective disclosure of 2018 financials, specifically related to royalty payment increases.

Music Choice itself usually carries a low-profile.  But the company is now repeatedly butting heads with other industry players.  Just last year, the company was blasted by indie label organization A2IM for seeking a royalty-free exemption from Congress — at the expense of artists, of course.

A2IM CEO Richard Burgess called the effort ‘one of the most deceitful and disingenuous efforts to cheat artists out of their rightful royalties that I have ever seen.’

The complaint, filed with the U.S. District Court for the District of Columbia, can be found here.