“Hi, my name is…Slim Shady” and your ringtone is a licence

Should the downloading of an album be treated the same as if you walk into a music store and purchase the same album on CD?  The answer is important if you are a record company who has backed the best kind of horse – an as yet unknown artist who is going to sell a lot of records – because you want to cast your net as broadly as possible.

A small record company, F.B.T. Productions (“FBT”), had the good fortune to sign one Marshall B. Mathers, a.k.a. Eminem, to their record label.  FBT on-sold the rights to Eminem’s music to another record company, Aftermath Records (“Aftermath”). (Eminem wasn’t a party to this case – presumably he was busy swimming through his large piles of cash.)

Today, no artist or recording company would conceive of signing an agreement that excluded royalties from digital media.  However, Eminem’s career pre-dated the retail of digital music.  Accordingly, the original agreement between FBT and Aftermath didn’t directly address downloads of, or ringtones based upon, Eminem’s music.

This particular problem, whereby content creators don’t receive compensation when their content is sold in different mediums, is familiar.  For example, do you remember the chaos that ensued from the Hollywood writers’ strikes in 2007-2008? (If you don’t remember the “chaos,” it’s because there are only so many cars an angry mob will overturn because there are no new episodes of “Friends”).  The writers were striking to obtain financial recognition of the new income being generated from the downloading and streaming of movies and TV shows.

The original agreement between FBT and Aftermath Records was for FBT to receive royalties for “…full price records sold in the United States…through normal retail channels.”

Of course, the problem is that “full price records…through normal retail channels” didn’t include downloads – so FBT would get a payment if you bought “The Eminem Show” on CD, but not if you downloaded it from iTunes.  Nor would FBT receive anything if Aftermath Records licensed other companies to produce and sell ringtones based on Eminem’s music – which, as users of public transport can verify, happen to be quite popular.

FBT had an ace up its sleeve – a subsequent provision in the agreement stated “[n]otwithstanding the foregoing” FBT is to receive 50% of Aftermath’s net receipts “[o]n masters licensed by us…to others for their manufacture and sale of records or for any other use.”

This neat, catch-all clause would be critical for FBT, providing FBT could establish that Aftermath’s agreements with these distributors of downloads and ringtones was a licence, not a sale.

According to the court:

Pursuant to its agreements with Apple and other third parties, however, Aftermath did not “sell” anything to the download distributors.  The download distributors did not obtain title to the digital files.  The ownership of those files remained with Aftermath, Aftermath reserved the right to regain possession of the files at any time, and Aftermath obtained recurring benefits in the form of payments based on the volume of downloads.

As the court ruled the agreements between Aftermath and the distributors constituted a licence, FBT was entitled to receive royalties from these other revenue streams.

This case would suggest that many recording artists may have been shut-out of the income streams generated by digital media, while at the same time their receipts for CDs sold slumped.  Accordingly, it highlights the importance of structuring royalty agreements so that they are technology neutral.  By focusing on a measure of units, rather than any particular medium, copyright creators can ensure they are not shut out when the sands of technology shift again.

However, what is most interesting about this case is the issues created by the internet itself as a medium for distributing and selling content, and the difficulty of fitting legal rules into the very fluid, digital world.  For example, while there is no doubt that the agreements between Aftermath and the distributors constitute a licence, is it really accurate to say that Aftermath could in any sense “regain possession” of these songs and ringtones, once they have been downloaded from the distributors’ websites?  As many users of Facebook are now learning, once something is posted on the internet, it is virtually impossible to retain control of it.

Furthermore, the distributors can’t sell the title to something they don’t own themselves.  So, if the people who downloaded Eminem’s songs and ringtones don’t actually own the title to the files they have purchased (even if the content on those files is subject to copyright), what do they actually own, and what did they actually buy?

Stay tuned – there are likely to be many other disgruntled current, ex- and soon to be ex-pop stars out there wanting to revisit their old “record” deals.


Leave a Reply

Your email address will not be published. Required fields are marked *

12 − two =