APPLE ITUNES DOWNLOAD A LICENSE, NOT A SALE:
FBT PRODUCTIONS, LLC V. AFTERMATH RECORDS
The Supreme Court recently declined to hear a Universal Music Group appeal in its years-running fight with Eminem’s former production group. The decisioncould have substantial monetary implications for the industry and older artists. In late 2010, in a somewhat strained decision, the Ninth Circuit court held in FBT Productions, LLC. v. Aftermath Records, 621 F.3d 958 (2010), that permanent downloads via Apple’s iTunes and other digital download purveyors constitutes a license for the purposes of calculation of royalties under a particular music distribution agreement. The facts at issue in the case were briefly as follows:
- Plaintiff FBT had signed rapper Eminem to an exclusive agreement in 1995.
- Plaintiff FBT entered into a deal with defendant Aftermath Records three years later that provided, among other things, that:
- FBT would receive between 12% and 20% of the adjusted retail price of all “full price records sold in the United States through normal retail channels”; and
- FBT would receive 50% of Aftermath’s net revenues on masters licensed for the manufacture and sale of records.
- Five years later, as the digital music revolution began to take firm hold, Aftermath’s parent signed a deal with Apple that, in the words of the court, “enabled…the Eminem masters, to be sold through Apple’s iTunes store as permanent downloads.” Emphasis added.
- Shortly thereafter, in 2003, FBT and Aftermath entered into a new agreement that terminated the prior one. The new agreement increased royalty rates and included many of the terms from the prior agreement. The court notes one substantive addition to the agreement: it provided that “’Sales of Albums by way of permanent download shall be treated as [US Normal Retail Channel] Net Sales for purposes of escalations.’”
- For three years thereafter, Aftermath sold Eminem records through iTunes (and similar channels) and Aftermath paid, and FBT accepted, royalties at the lower license rate on such sales.
In overturning the lower court, the appeals court issued a curious decision. While in its factual summary of the case the court states that iTunes enabled the Eminem masters to be sold, it forces its own hand when it later decides that these sophisticated industry participants used the term license in its “ordinary and popular sense, rather than…a technical sense.” Grasping to support its position the court goes on to say that “Aftermath was at all relevant times the owner of the copyrights to the Eminem recordings at issue in this case…Aftermath did not “sell” anything to the download distributors….the ownership of those files remained with Aftermath, Aftermath reserved the right to regain possession of the files at any time.”
The somewhat perplexing opinion leaves unanswered questions:
- Will this case which clearly analyzes the language of one particular contract, have precedential applied in the context of other agreements?
- So does the test turn on the relationship between Apple and Aftermath or that between Apple and its customer?
- If iTunes and its ilk “enabled [the masters] to be sold”, why is this transaction now considered a license?
- Why did the court turn a blind eye to the contract clause providing for the payment of lower royalties in the event of sales by way of permanent download? Wasn’t the iTunes download surely what the parties had in mind when including that provision?
- Since the court holds that Aftermath reserved the right to regain possession, can Aftermath cancel my “license” of Stan (ft Dido)?
- If an iTunes transaction doesn’t represent a sale, what does – in a world where disc sales have become nearly extinct?
- Was the court simply trying to reach an equitable result in the wake of a dramatic shift in the economic realities of the music industry?
This case will have little impact on artists signed to labels in the 2000s and later. But it could have substantial impact for older artists and their estates. It could also be applied in other segments of the entertainment industry. We eagerly look forward to the next case to interpret FBT Productions and to more clarity on many of the questions presented above.
Our firm regularly advises clients on how to approach and analyze music production, distribution and license deals.
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