Eminem award of digital royalties could set precedent
By Anita Wadhwani � THE TENNESSEAN �
September 4, 2010
A federal appeals court has sided with rap artist
Eminem and his producers in a dispute with
Universal Music Group over digital music royalties,
a decision that legal experts say could shake up the
entire music industry with potentially tens of
millions of dollars at stake.
The U.S. 9th Circuit Court of Appeals in San
Francisco ruled Friday that the record label had to
pay the producers who helped launch Eminem's
career, F.B.T. Productions, a bigger cut for music
sold online through downloads and mobile-phone
ring tones than for the same music sold in stores.
"As a practical matter, this case means every single
music lawyer is going to be taking a close look at
their clients' contracts to see if there's comparable
language as a basis for a similar type of lawsuit,"
said Kelly Frey, a partner with Baker Donelson, who
practices entertainment law in Nashville.
Entertainment lawyers say the ruling has the
potential to set a far-reaching precedent that could
lead to a recalculation of online royalty payments
for untold numbers of artists, not just for the
millions of dollars in retroactive royalties that
Eminem and F.B.T. could gain from Universal.
For its part, Universal Music Group said in a brief
statement that it plans to fight the appeals court
ruling, and it dismisses the notion that the case will
have any precedent-setting impact.
"We will be filing a petition for a rehearing," the
company's statement said. "In the meantime, it
should be noted that this ruling sets no legal
precedent as it only concerns the language of one
specific recording agreement. Any assertion to the
contrary is simply not true."
'License' versus 'sale'
Four years ago, Eminem music producers F.B.T. filed
a lawsuit against Universal Music Group, claiming
they had a right to a 50/50 split of profits with
Universal on sales of digital music and ring tones
through online retailers such as iTunes and Sprint.
The case involves a dispute about contract language
that predates the rise of digital music sales � but
now may govern
how revenue is shared between artist and label as
downloads become the arena with the most money.
The Detroit-based producers worked with Eminem
on his early albums and have their own contract
with the artist, who is entitled to the majority of
royalties F.B.T. earns through the label, said Joel
Martin, a managing partner with F.B.T.
The contract between F.B.T. and Universal spelled
out two types of royalty agreements � typical
language found in many artists' contracts, said F.B.
T.'s Nashville-based lawyer Richard Busch, a partner
with King & Ballow.
Music sales earned royalties of about 12 percent
according to the contract, F.B.T. contends. But
"licensing" music to a third party triggered a 50/50
split. The ruling by the appeals court in San
Francisco defined the transaction between the music
label and an online store as a "license" rather than a
record "sale."
The distinction takes into account the differences in
cost incurred by the record label, Busch said.
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"When Universal sells CDs and records, they incur
costs for manufacturing each individual record,"
Busch said. "There is no similar per unit cost for
them when they just send one copy of a digital
master to iTunes.
"This is why we believe it is only fair that record
companies share the receipts 50/50 with artists,
and that is why the language is in agreements in the
first place."
In more recent years, the typical music contract
spells out precisely the royalty arrangements in
force for online music sales. Many older contracts
have been amended to avoid disputes about such
revenue splits.
Case goes back to L.A. court
The 9th Circuit's appellate ruling in the Eminem case
comes a year and a half after a federal jury in Los
Angeles had originally sided with Universal in the
royalty dispute. But the appellate decision means the
case now goes back to a Los Angeles lower court to
determine the exact amount of damages, Busch said.
The licensing provisions found in most music
contracts predate the digital era, a relic of the way
the music industry used to do business, according
to David Maddox, assistant professor in the Mike
Curb College of Entertainment and Music Business at
Belmont University.
Twenty years ago, master versions of music were
licensed to foreign countries to produce records.
The licensed music earned artists more money,
because the labels incurred few expenses in
manufacturing albums and shipping them.
Later, music compilers such as K-Tel would license
music for compilation CDs that they'd manufacture,
again requiring no expenditures on the part of the
record label and a 50/50 split in profits with the
artist.
Joel Martin, managing partner with F.B.T.
Productions, says the digital relationship is really
no different, and artists should have a far larger
share of the profits because the label incurs little
extra costs.
"The record companies have been trying to say they
are selling the records to Apple, but the reality is
that it is not a sale. They give one copy to Apple and
Apple does all the work," he said.
Martin predicts a floodgate of artists who have
similar language in their contracts trying to get
labels to pay up.
"This affects a whole generation of artists who have
agreements that have existed for years," he said.
"The Motown artists, for example, probably have
that agreement."
Martin suggests that Eminem stands to earn millions
of dollars from an estimated 100 million units of
downloads from iTunes and other online stores.
Reach Anita Wadhwani at awadhwani@tennessean.
com.
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Eminem, producers may be due millions.
Eminem, producers may be due millions.
Eminem is entitled to the majority of royalties that F.B.T. earns through the label.
Eminem is entitled to the majority of royalties that F.B.T. earns through the label. (FILE / ASSOCIATED PRESS)
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