The luxury of foresight is a beautiful thing. Even the legal team at Universal Music Group isn’t blessed with it.  We are, however, born with the power of hindsight and the helplessness that comes along with it. Unfortunately for UMG, the advent of iTunes and Ringtones is hardly something any powerhouse attorney could have reasonably anticipated.

The Detroit Free Press has reported that on Monday 21, 2011, the United States Supreme Court has “declined to hear an appeal filed by Universal Music Group in a dispute over payments for downloaded tracks and ringtones.”  By refusing to hear the case, the Court has let stand a 2010 Ninth Circuit Court of Appeals ruling against UMG, in which F.B.T Productions sued the record company giant for Royalties owed over an Eminem recording contract.

Here’s the (somewhat) abridged version of the facts:

F.B.T Productions, the production team that (fortuitously) signed Eminem in 1995, transferred its rights to Eminem’s recordings to Aftermath Records (a subsidiary of UMG). Under the terms of that agreement, F.B.T. and Eminem were entitled to various royalty rates depending on the retail channel of records sold.

The two vital Royalty Provisions, at issue, are (1) The “Records Sold Provision”, which provides that F.B.T is to 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 (2) The “Masters Licensed” provision, which provides that “notwithstanding the foregoing,” F.B.T is to receive 50% of Aftermath’s net receipts “on masters licensed by us…to others for their manufacture and sale of records or for any other uses.”

In 2002, Aftermath/UMG entered into a number of agreements with Apple and others to sell Eminem sound recordings for permanent downloads and mastertones. Aftermath, in calculating the royalties owed for sale of recordings for these permanent downloads and mastertones, applied the “Records Sold” Provision. However, F.B.T. initiated suit and claimed that the “Masters Licensed” provision was appropriate – which entitled them to 50% of Aftermath’s net receipts. Universal, in opposition, claimed it owed F.B.T. the same royalty it paid for physical sales: 18% of the suggested retail price

In reversing the trial court’s ruling, the appellate court held that the 50% royalty rate pursuant to the “Masters Licensed” provision of the agreement was the proper application.

Back to NOW.

The Detroit Free Press reports that the Supreme Court, after denying the appeal, “sent the case back to a trial court to determine damages.”  Moreover,  “If Universal and F.B.T. cannot settle on a figure, a judge or a jury would decide what is owed.”

According to Joel Martin of F.B.T., “this is probably a $40 million to $50 million issue.”

Whether or not the damages are granted within that predicted range, Mr. Marshall “Eminem” Mathers, has yet to comment on the legal fiasco.  Nor has he taken any direct part of the suit.  With the prospect of thickening his pockets, I find it commendable for anyone to stay so silent.

Nonetheless, the big issue still remains: What binding impact does this case have on the music industry? The two parties, as expected, are in strong disagreement.

UMG spokesman, Peter Lofrumento stated that the case is “about one agreement with very unique language… [therefore] the ruling has no bearing on any other recording agreement and does not create legal precedent.” Moreover, UMG & industry observers have noted that most current hit artists already have contracts that explicitly spell out download royalties, and many other deals have been reworked in recent years.

Joel Martin of F.B.T. disagrees. He notes, “Every artist who has this sort of language in their contract is not going to go back to their record company and say ‘OK, so what do you want to do about (download royalties)?’”  In fact, experts are predicting that the holding will have profound effects, especially with respect to artists with older deals who feel compelled to receive higher payments of download sales.

The Detroit Free Press notes that this “might include Motown performers” whose royalty rate agreements were “guided by the same argument that worked for Eminem.” Billy Wilson from the Motown Alumni Association says that this is the decision they’ve been waiting for and “we’ve been talking with the artists about it, and they’ve been very interested.”

It seems like both parties have a valid argument.  UMG is obviously and predictably concerned with the legal implications this may have for the older artists that contain broad record sales and licensing provisions.  At the same time, the floodgates may have just opened for a royalty compensation massacre.  Wherever these circumstances may lead, one thing is certain:  Record companies need to look deeper in their crystal balls and draft their artist agreements in anticipation of all forms of digital media.