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Labels want Grooveshark to swim with the fishes

by Matt Miller | Published January 9, 2012 at 2:39 PM

Ghosts of villainous online music services, you've got company. Labels and musicians alike accuse a hugely popular, private equity-backed audio streaming site called Grooveshark of being the latest in evil, music-grabbing incarnations.

Last week, EMI Entertainment World Inc., the U.S. publishing unit of EMI Group Ltd., filed suit in New York State Supreme Court against Grooveshark's parent, Escape Media Group Inc. EMI alleges Escape Media not only failed to deliver royalty payments as obligated by a 2009 licensing contract after a previous lawsuit, but hasn't remitted any money at all.

This action follows UMG Recordings Inc., which sued Escape Media two years back in the same court. The suit is pending. The publishing arm of Universal Music Group alleges Grooveshark never had a licensing deal, offers huge troves of unauthorized UMG music to listeners and claims Grooveshark employees actually uploaded many of the tunes themselves.

Grooveshark claims to be "the world's largest on-demand and music discovery service" with more than 35 million users. It proclaims itself a champion of the musician. During the past several weeks, however, a number of musicians have begun to go public with stories that Grooveshark offers unauthorized music and dances around, or actively thwarts, efforts by the copyright holders to block those songs. In some cases, songwriters allege the offending material reappears hours after it is taken down. Many of these tales first broke on the pages of Digital Music News, an online industry newsletter.

It's been more than a decade since Napster changed recorded music delivery forever before succumbing to legal pressures and going bust. The landscape remains crowded, complicated and at times treacherous. Despite all this uncertainty, investors continue to pour money into the services, both startups and more established entities.

Grooveshark is pushing legal boundaries. Central to its defense is the Digital Millennium Copyright Act, enacted in 1998. The DMCA provides a safe harbor that limits the liability of online services if they are merely conduits for unauthorized uploads and remove the offending material once notified.

But where responsibility begins and ends isn't all that apparent. Must the rights holder, for example, issue a takedown notice for each offending song or video? Conversely, does the service have an obligation to block the carrying of songs it knows -- or should know -- are unlicensed? A number of high-profile cases involving such services as YouTube, Vimeo and the now-bankrupt Veoh have so far proven inconclusive, with one ruling favoring the service and another the rights holder.

"We don't have real clarity on that issue," says Tamera Bennett, a Dallas-area lawyer who represents music rights holders. According to Bennett, the big buzzword these days is "red flag," meaning an offense so obvious that the service should act. "How high and bright does this red flag have to be? That isn't settled," says Bennett.

Grooveshark's own case isn't helped by a series of e-mails sent from Escape Media's chairman and principal investor Sina Simantob. In one particularly telling April 2010 exchange, in an attempt to elicit an investment, Simantob wrote a partner in the venture capital firm Greycroft Partners LLC the following: "We bet the company on the fact that it is easier to ask for forgiveness than it is to ask for permission." That followed a late 2009 e-mail Simantob wrote to a Grooveshark executive boasting the company never paid "a dime to any of the labels" and predicting record companies will eventually pay Grooveshark for its data on who is listening to what music.

Lawyers for UMG filed the e-mail exchange with the court in support of the case. They also filed as supporting evidence a recent post in Digital Music News by someone claiming to be a former manager of Grooveshark. The anonymous individual said Grooveshark management demanded employees upload songs themselves, with quotas and bonuses attached. If true, that would negate the company's defense that it was merely a service for third-party providers.

Simantob is the founder of what he terms the "boutique investment firm" Sinco International Investments. He declined to comment, citing the advice of outside counsel.

Escape Media's last funding round was $3 million in 2010, according to a Securities and Exchange Commission filing.

Royalties from music services to various rights holders are central to the new model. Grooveshark demonstrates just how unsettled that whole issue remains. In documents EMI filed with its lawsuit, e-mail between Grooveshark's and EMI's inhouse counsel shows that Grooveshark kept the giant music publisher in the dark, with no accounting changing hands after years. EMI had no idea how much money it was owed.

"With respect to the monies you claim are due, we cannot believe that EMIMP is only entitled $150,000 for 18 months of exploitations -- this seems extremely low," writes EMI counsel Michael Abitol.

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