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If It Walks Like a License . . .

by Paul Rapp on September 8, 2010

Eminem’s da man. He’s behind a decision that was issued by the federal appeals court in California last Friday that may bring down the record companies entirely. Turns out a lot of musicians are owed a lot of money by a lot of record companies.

Here’s the deal: Until very recently, your standard recording contract was a hideously unfair affair. In return for a recording advance, the artists would give the copyrights to their recordings to the record company, and receive a royalty payment of something like 12 percent of the retail price, minus 25 percent for packaging, another 10 percent for “breakage” and another 10 percent for “free goods.” So the effective royalty was often around 8 percent of retail (if that), out of which the artist had to pay back the recording advance, and often had to pay a producer, a production company, a manager, etc. In other words, in a traditional recording deal, the artist usually got bubkes on the sale of recordings.

However, traditional recording contracts also provide that when the recordings are licensed for manufacture by a different recording company, or for use in a movie, television show, or advertisement, the money is split 50-50 between the recording company and the artist.

That’s still unfair, but it’s better than bubkes.

In 2003, after almost a decade of stonewalling, lawsuits, and general dicking around, the major record companies caved to threats of antitrust and copyright abuse lawsuits and let Apple sell their music at the iTunes store. A bunch of other vendors, like Amazon and Rhapsody followed. iTunes recently announced it had sold its 10 billionth track.

Eminem had one of these standard contracts with his record company, Aftermath, which is part of major label Universal. Since 2003, his record company has been treating iTunes sales and the like just like CD sales—that is, paying Eminem bubkes. So Eminem’s production company sued Aftermath, claiming that digital download sales by third parties (like iTunes or Amazon) were more like licenses, and that Eminem ought to getting 50 percent instead of bubkes.

Think about it: With a CD, the record company has to make the CD, package the CD, warehouse the CD, ship the CD, accept returns on unsold product, deal with wholesalers, and bill and collect payments from a whole variety of sources. With a digital download, the label ships a digital file to a handful of download companies and then sits back and waits for the checks to roll in. Just like they would with any other licensing deal.

The trial court refused to rule, instead letting the question go to a jury (beats me why a question of contractual interpretation is left to a jury, but hey . . .), and the jury, perhaps piqued by Eminem’s many past transgressions, found in favor of the record company. Bubkes for you, Mathers!

But at the appeals court, where passions tend to run cooler, the trial court ruling was overturned. In a succinct 15-page decision, the court ruled that it was unambiguous from the language of the recording contract that these arrangements between Aftermath and iTunes, etc. were licenses, plain and simple. Aftermath argued that the word “license” doesn’t appear in any of its agreements with these third-party vendors; the court found, in so many words, that these agreements quacked like a license. Eminem is entitled to 50 percent on downloads, ringtones, and everything else sold by somebody else. Period.

Aftermath/Universal announced that the ruling was limited to just Eminem’s license. Uh, no. The contract language was boilerplate; the exact same or similar language appears on virtually every major label contract in effect today. Then Aftermath/Universal vowed to fight the ruling. Good luck with that. The options are severely limited: They can ask the court to reconsider, which it won’t; they can ask for a hearing before the full panel consisting of every Ninth Circuit judge, which will probably be denied; and they can petition the Supreme Court, which will probably decline to consider what’s essentially a garden variety contractual interpretation case.

There are a bunch of similar pending cases out there, brought by bands like the Allman Brothers and Cheap Trick, seeking millions of dollars of unpaid royalties. This case will affect those cases. And I’m guessing just about every other major label artist on the planet has called their lawyer this week asking if there’s something in this for them. And the answer is likely to be yes. Or more like, hella yeah.

I don’t think the impact of this ruling can be underestimated. It’s pretty huge. Maybe the labels should just all declare bankruptcy right now in order to protect their shareholders—who everybody knows are more important than the artists. If this doesn’t kill the labels dead, the Great Reversion Rights Migration of 2013 will. I’ll tell you about that in two weeks.