Eminem Decision Clarifies License v Sale Distinction

Posted on October 11, 2010 by Melita M. Pereira

In a reversal of a ruling delivered by the district court, the U.S. Ninth Circuit Court of Appeals has handed down a decision in the matter of F.B.T. Productions et al v Aftermath Records (3 September 2010) which holds that contracts between F.B.T and Aftermath contain an unambiguous set of terms relating to the distribution of royalties from the commercial use of Eminem’s music.

The Backstory (what all the fuss is about)
As Justice Silverman explains in his reasoning, while F.B.T. gained exclusive rights to Eminem’s recordings when they signed the rapper in 1995, an agreement was later signed by F.B.T. and Aftermath in 1998 “transferring Eminem’s exclusive recording services to Aftermath” (Silverman J, 13403-4). Contracts can be a bit of web sometimes and in 2002, another agreement was formed between Aftermath’s parent company, Universal Music Group Recordings, Inc., (UMG) and Apple Computers, Inc., that allowed “UMG’s sound recordings, including Eminem masters, to be sold through Apple’s iTunes as permanent download” (Silverman J, 13404).

Now, here is the question at the core of this dispute:

What Royalties are Owed by Aftermath to F.B.T.?

Well, that depends on whether the transaction between Aftermath and F.B.T constitutes a sale or licence. The question is a significant one since if the transaction constitutes a sale (an agreement under the “Records Sold” provision), F.B.T. would receive 12-20% of the “adjusted retail price of all ‘full price records sold in the United States … through normal retail channels’”, whereas if the transaction constitutes a licence (an agreement under the “Masters Licensed” provision), F.B.T. are entitled to 50% of Aftermath’s net receipts. The difference in the above percentages can amount to a lot when one throws iTunes, permanent downloads and Eminem into the equation.

The Overall Structure and Policies of “Artistic Rights”: License v Sale
In considering a resolution to the dispute, Judge Silverman made important reference to the terms “licence” and “sale” and their distinct “differential meanings” under the Copyright Act. Specifically, he notes that while “sale” refers to “a transfer in title of an individual copy of work, or a sale of all exclusive intellectual property rights in a work” (Silverman J, 13410), a transaction will be characterised as a grant of license where “the copyright owner transfers a copy of copyrighted material, retains title, limits the uses to which the material may be put, and is compensated periodically based on the transferee’s exploitation of the material” (Silverman J, 13410).

While expert evidence in the trial found that the “Masters Licensed provision” only applied to “compilation records and incorporation into movies, TV shows, and commercials”, the provision also incorporates permanent downloads and mastertones (since to do otherwise would be amount to freezing the interpretation in accordance with the state of the industry in 1998).

Conclusions
In the opinion of Judge Silverman, the agreement entered into by Aftermath to allow third parties such as iTunes and cellular phone carriers to “to use its sound recordings to produce and sell permanent downloads and mastertones” constituted a license.

Aftermath was held to owe F.B.T. 50% royalties in accordance with the Masters Licensed provision “for licensing the Eminem masters to third parties for any use” (Silverman J, 13413). In this matter, the Judge’s reasoning supports the understanding that the rate of royalties arising from the sale of permanent downloads is not determined by the Records Sold provision, but rather, the Masters Licensed provision (that is, it was a license, not sale).

While Ethan Smith of the Wall Street Journal blog argues that the decision is not a big deal since it merely represents a ruling following the interpretation of a single contract, New York City attorney Lloyd Jassin has posted a blog suggesting how the decision may be extrapolated to the legal framework upon which e-books are licensed for download.

I will leave you all to read these contrasting views, but I for one am inclined to agree with Lloyd Jassin on this one, especially if retail strategies for e-book sales start to resemble an iTunes format in which books (particularly academic books) may be downloaded by article or chapter, rather than the entire book.