It Walks Like a License . . .
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
The trial court refused to rule, instead letting the question
go to a jury, 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. 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 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.