Ninth Circuit Holds Digital Download Is a License, Not a Sale

A post from earlier this week on the Copylaw blog, published by the Law Offices of Lloyd J. Jassin, discusses a recent federal appellate court decision that could affect how much authors are paid for digital downloads. 

In F.B.T. Productions, LLC  v. Aftermath Records, 2010 WL 3448098 (9th Cir., September 1, 2010), two record producers could not agree on the percentage of royalties due from audio downloads of Eminem’s recordings. Specifically, the issue was whether the “Records Sold” provision or the “Masters Licensed” provision governed the royalty rate for sales of Eminem’s records in the form of audio downloads and ringtones. 

The differences was not insignificant because the royalty rate applicable to sales under the “Records Sold” provision was between 12% and 20% of the adjusted retail price of all “full price records” sold in the United States, while the rate applicable under the “Masters Licensed” provision was 50% of net receipts from the sales of masters. 

Eminem’s former label, F.B.T., argued that the higher royalty rate applied, while Aftermath, his current label, had calculated and paid royalties to F.B.T. using the smaller percentages. The trial court had held that either party’s interpretation could be correct, i.e., the contract was ambiguous, and denied F.B.T.’s motion for summary judgment. 

In a nutshell, the court of appeals concluded that the “Masters Licensed” provision governed because:

When the facts of this case are viewed through the lens of federal copyright law, it is all the more clear that Aftermath’s agreements with the third party download vendors are “licenses” to use the Eminem master recordings for specific purposes authorized thereby – i.e., to create and distribute permanent downloads and mastertones [ringtones] – in exchange for periodic payments based on the volume of downloads, without any transfer in title of Aftermath’s copyrights to the recordings.

The importance of the decision is that authors are, like Eminem, “recording artists,” and therefore, as Jassin points out in his post, “receive 50% of the record company’s net receipts from rights licensed to third parties — as opposed to 12% to 20% of the retail price.” 

I think that Jassin is correct when he observes that publishers have anticipated a decision like this and have already modified their current contracts accordingly. However, as legacy or backlist contracts may not have been modified, publishers may attempt to amend them retroactively or seek a waiver of an author’s claim to back royalties, authors need to keep F.B.T. Productions in mind.

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