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WHEN RECORD LABELS STARTED SELLING THEIR CATALOGUES AS DIGITAL downloads through online services (iTunes, Rhapsody, etc), a critical issue emerged regarding artist compensation: What percentage should be paid by labels to artists for songs and albums downloaded through digital content providers? Labels took the position that the percentage for downloads should be the same as the rate for physical album sales. Under this theory, labels would reap a huge windfall, as downloads do not require pressing, packaging, and distribution, saving labels considerable overhead.
This issue was most crucial for artists whose recording contracts were negotiated and executed in the pre-download era. Where royalty percentages for physical album sales were straightforward, new technological developments and digital downloads were not so clear. Not surprisingly, a host of lawsuits resulted after major record labels refused to renegotiate royalty rates for digital downloads. F.B.T. Productions, LLC v. Aftermath Records 621 F.3d 958 (2010) (a.k.a. the “Eminem Case”) was a highly publicized case in which the Ninth Circuit Court of Appeals held that a digital download should be treated as a “license” (not a “sale”) and the artist should receive 50% royalty. Several other artists followed suite, including Kenny Rogers, Martha Davis Chuck D, and Peter Frampton, alleging that their record companies failed to properly account for and pay for income received from the licensees of its recorded music catalog as they pertained to digital downloads and ringtones.
Is Digital Downloading a “License” or “Sale”? The issue boils down to contract interpretation. In the “Eminem Case,” the issue was which provision controlled digital downloads: the “Records Sold” or “Masters Licensed” provision. To determine this, the court had to determine whether the label’s agreement with iTunes (and like services) was a “license” or a “sale” of the sound recordings. A license is defined more by “use,” where a sale is transfer of “ownership.” The court in the Eminem Case made the difference very clear, stating:
“It is easily gleaned from [copyright law] that a license is an authorization by the copyright owner to enable another party to engage in behavior that would otherwise be the exclusive right of the copyright owner, but without transferring title in those rights…”
In plain language, the court determined that the record label’s agreement with iTunes was a “license” to use Eminem’s master recordings for specific purposes – i.e., to create and distribute permanent downloads – in exchange for payments based on the volume of downloads. The deal to distribute the masters was a license only and did not transfer title in Eminem’s copyrights. This being the case, the court decided that the “Mastered License” provision applied to digital download revenues and the 50% royalty rate would apply.
If you are signing a new recording contract, distribution arrangement, or renegotiating a current contract, here are some tips to consider regarding digital downloads:
1) Initial Discussions: There are many things to initially go over, particularly if you’re dealing with a small and/or indie label that will be more willing to get into particulars. One thing worth discussing is the arrangements the company has with digital content providers. This key information may help you determine what rate to negotiate. You may also find it helpful to see whether the contract language with digital content providers refers to their service as a “license.”
2) Define “Digital Download” in Your Contract: You’ll want to have the term “digital download” defined in your recording agreement. A common definition is “delivery of artist’s sound recording by digital transmission resulting in a reproduction made by or for the recipient, which may be retained and played by the recipient on a permanent basis.” The contract provision relating to digital downloads should also include reference to digital content providers.
3) Determine Percentages: You’ll want to make sure that digital downloads are treated as a license and have a different royalty rate than physical record sales. You’ll also want similar definitions and categorizations for ringtones, temporary downloads, and other such digital transfers of your music. A common royalty rate for physical album sales (major label) is 12%, where license rates are 50%. Make sure this is spelled out in easy to understand language.
4) Limit “Packaging” Costs: Check to see if there is any language regarding packaging in your digital download provision. You’ll want to make sure there is no language relative to production/packaging costs or container costs, as there are no such costs related to digital downloads. Note: this is not a stretch – labels are known for such bizarre and/or obscure tactics (for example, most record companies still do not pay royalties on 100% physical sales, paying instead 90% – a carry-over from the days when records were made of shellac and 10% breakage was allowed).
5) Get an Accounting of Digital Sales: Diligence is required to ensure you’re paid for all downloads. There have been instances where record companies have not paid royalties for all digital downloads sold. Record companies often account on a semi-annual basis. You’ll want to have an outside accounting company periodically inventory your label’s figures. This provision should likewise be clearly spelled out in your contract.
Adam Barnosky is a Boston-based attorney and writer. For music industry news, entertainment law updates, or to suggest an upcoming Legal Pad topic, find him on Twitter @adambarnosky.
Disclaimer: The information contained in this column is general legal information only. Consult your attorney for all specific considerations.