The luxury of foresight is a beautiful thing. Even the legal team at Universal Music Group isnât blessed with it. Â WeÂ 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 âdeclined to hear an appeal filed by Universal Music Group in a dispute over payments for downloaded tracks and ringtones.âÂ 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.
Hereâs the (somewhat) abridged version of the facts:
F.B.T Productions, the production team that (fortuitously) signed Eminem in 1995, transferred its rights to Eminemâs recordings to Aftermath Records (a subsidiary of UMG). Under the terms of that agreement, F.B.T. and Eminem were entitled to various royalty ratesÂ depending on the retail channel of records sold.
The two vital Royalty Provisions, at issue, are (1) The âRecords Sold Provisionâ, which provides that F.B.T is to receive between 12% and 20% of the adjusted retail price of all âfull price records sold in the United StatesâŚthrough normal retail channelsâ and (2) The âMasters Licensedâ provision, which provides that ânotwithstanding the foregoing,â F.B.T is to receive 50% of Aftermathâs net receipts âon masters licensed by usâŚto others for their manufacture and sale of records or for any other uses.â
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 âRecords Sold” Provision. However, F.B.T. initiated suit and claimed that the âMasters Licensedâ provision was appropriate â which entitled them to 50% of Aftermathâs 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 courtâs ruling, the appellate court held that the 50% royalty rate pursuant to the âMasters Licensedâ provision of the agreement was the proper application.
Back to NOW.
The Detroit Free Press reports that the Supreme Court, after denying the appeal, âsent the case back to a trial court to determine damages.âÂ Moreover,Â âIf Universal and F.B.T. cannot settle on a figure, a judge or a jury would decide what is owed.â
According to Joel Martin of F.B.T., âthis is probably a $40 million to $50 million issue.â
Whether or not the damages are granted within that predicted range, Mr. Marshall âEminemâ Mathers, has yet to comment on the legal fiasco.Â Nor has he taken any direct part of the suit.Â 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 âabout one agreement with very unique languageâŚ [therefore] the ruling has no bearing on any other recording agreement and does not create legal precedent.â 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, âEvery artist who has this sort of language in their contract is not going to go back to their record company and say âOK, so what do you want to do about (download royalties)?ââÂ 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 âmight include Motown performersâ whose royalty rate agreements were âguided by the same argument that worked for Eminem.â Billy Wilson from the Motown Alumni Association says that this is the decision theyâve been waiting for and âweâve been talking with the artists about it, and theyâve been very interested.â
It seems like both parties have a valid argument.Â 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.Â At the same time, the floodgates may have just opened for a royalty compensation massacre.Â Wherever these circumstances may lead, one thing is certain: Â Record companies need to look deeper in their crystal balls and draft their artist agreements in anticipation ofÂ all forms of digital media.