17-09-10

iTunes Sales Earn "License" Royalties The production company behind the rap artist Eminem has won its appeal concerning a 50% royalty rate for sales of digital downloads. In FBT Productions LLC v Aftermath Records (and Interscope and UMG) [2010] 09-55817 (reported 3 September 2010), the US 9th Circuit Court of Appeals held that, under the FBT/Aftermath contract, Aftermath owed FBT a 50% royalty for licensing the Eminem masters to third parties including iTunes. Eminem, through FBT, signed an agreement with Aftermath in 1998 in which he would receive between 12% and 20% of the adjusted retail price of all "full price records sold in the US through normal retail channels" - but would receive 50% of Aftermath's net receipts on masters "licensed…to others for their manufacture and sales of records or for any other uses". The cases therefore turned on the meaning of the words "licensed" and "normal retail channels" which were not defined in the agreement. The practical question in this case was whether Eminem's royalties from iTunes (and other permanent download) sales should be paid at the lower 12/20% rate or at 50%. Though the lower court had earlier sided with Aftermath, the US Court of Appeal overruled in favour of FBT/Eminem by finding that the agreements with iTunes and other digital distributors were "licences" - under both Aftermath's own proposed construction of the term and in line with US copyright law. The Court noted that under the dictionary definition a "license" is simply "permission to act" and noted the different uses of the words "license" and "sell" in the US Copyright Act - the latter being used to describe "a transfer of title of an individual copy or a sale of all exclusive rights". The Court found that Aftermath did not "sell" anything to the digital distributors (including iTunes) and that those distributors did not get "title" to the digital files. Therefore, under the FBT/Aftermath agreement, the iTunes revenues resulted from a "license" and Aftermath owed FBT a 50% royalty under the "Masters Licensed" provision for "licensing the Eminem masters to third parties for any use". This case addresses one of the biggest unanswered questions of the last decade for artists and the Court gave a remarkably strong answer. Though this case will inevitably be appealed by Aftermath/UMG to the US Supreme Court and deals with US rather than UK law, it is clear that (at least under some older artist recording contracts) iTunes and other permanent download royalties may have to be paid, not under the old standard "records sold" basis but rather, on the "third party licence" basis - which, conventionally, is an equal profit share with the label. The full text of the judgment may be accessed via: www.ca9.uscourts.gov/ca9/newopinions.nsf.
Article by Tom Frederikse