Nathan Fan is a JD Candidate at Osgoode Hall Law School
On 22 October 2010, the 9th Circuit Court of Appeals refused a re-hearing of its earlier decision in September, finalizing the appellate court’s ruling in favour of Eminem’s production company F.B.T., against Universal Music Group, over royalties to be paid for online music sales. The Court of Appeals decision (F.B.T. Productions LLC v Aftermath Records) delivered on September 3rd ruled that a record label that provides a track to an online distributor such as iTunes is essentially providing a license, not a sale, to the distributor. In this case, it meant that F.B.T.’s entitlement to a 50% royalty split on the licensing of Eminem’s sound recordings should include the sales of permanent digital downloads and ringtones from iTunes and others online music services.
The contract F.B.T. signed in 1998 with Aftermath Records, a subsidiary of Universal Music Group, provided separate royalty rates for physical sales (“Records Sold”) and licensing of master sound recordings (“Masters Licensed”) – the former being 12-20% and the latter being a 50-50 split. Aftermath records had been using the “Records Sold” royalty rate for online digital sales and F.B.T. sued on the basis that these digital sales were entitled to the licensing royalty rates. The Court of Appeals held that Aftermath’s agreements with iTunes, cellular phone carriers and other third parties to use the sound recordings to produce and sell permanent downloads and ringtones amounted to a licensing of the master sound recordings. While Eminem is not a party to the contract, his agreement with former production company F.B.T. ensures he shares in the increase in royalties – a significant amount to be sure as Eminem is one of the digital era’s top selling artists.
F.B.T. representatives claim the decision as an “earthquake” for the music industry and one that “readjusts the economics between the artist and the record company”, potentially affording other artists with the opportunity to negotiate new royalty rates with record labels. Universal Music views the decision as one that is very limited in scope, noting that the ruling is not legal precedent as it is specific to the language of the recording contract. Reactions to the ruling have been mixed, as while some do not expect the decision “to have much of a practical impact on the recording industry,” others believe that it could have a profound effect, deeming many pre-online music era (i.e. pre-2000) recording contracts “essentially identical” to the F.B.T. contract. It will be interesting to note whether other legacy artists still selling music online (e.g. Bruce Springsteen and The Rolling Stones) will seek increased digital music royalties in light of the Court of Appeals’s reclassification of digital “sales” as “licenses”. Universal Music may still appeal the decision to the Supreme Court.