In monetary terms, the biggest decision made by the Supreme Court in the current session is a case that they decided NOT to take. On March 21, 2011, the Supreme Court denied certiorari of a Ninth Circuit ruling made on September 3, 2010 in re: F.B.T. Productions vs. Aftermath Records. Absent a settlement, the case now goes back to the trial court for a damages determination.
Aftermath Records is a unit of Universal Music Group (“UMG”). Universal Music is the world’s largest music publishing house in the world, with more than a million copyrights under its control. UMG also owns the largest catalog of recorded music in the world.
Plaintiff F.B.T. is the owner of Eminem’s music. The agreement under which Universal distributes Eminem’s music began in 1995. At that time, digital distribution of music had not seriously begun, so the contracts at that time did not address digital music distribution as directly as now occurs with newly-negotiated contracts.
The contract between UMG and Eminem’s representatives provides for two different compensation rates. Prior to digital distribution of music, the lower rate applied to physical records, tapes or CDs sold to consumers. With physical distribution, both costs (such as manufacturing, warehousing & shipping), and risks are higher. Understandably, this causes smaller compensation to the artist. When other distribution was involved (called licensing, such as use of the music in a movie or commercial), a higher compensation rate applied.
UMG argued that digital distribution such as what is performed by iTunes is just a different kind of store; therefore, the lower retail percentage should be paid to the artist. Predictably, the plaintiff thought the lack of costs and risks meant the higher compensation rate was appropriate.
At the District Court level, the jury found for UMG. The Ninth Circuit reversed. The Ninth Circuit summarized the contract dispute as follows:
The “Records Sold” provision of that agreement provides that F.B.T. is to receive between 12% and 20% of the adjusted retail price of all “full price records sold in the United States … through normal retail channels.” The agreement further provides that “[n]otwithstanding the foregoing,” F.B.T. 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 uses.” The parties refer to this provision as the “Masters Licensed” provision. The contract defines “master” as a “recording of sound, without or with visual images, which is used or useful in the recording, production or manufacture of records.” The agreement does not contain a definition of the terms “licensed” or “normal retail channels.”In 2002, Aftermath’s parent company, Defendant UMG Recordings, Inc., concluded an agreement with Apple Computer, Inc., that enabled UMG’s sound recordings, including the Eminem masters, to be sold through Apple’s iTunes store as permanent downloads. Permanent downloads are digital copies of recordings that, once downloaded over the Internet, remain on an end-user’s computer or other device until deleted. The contract between UMG and Apple is but one example of the many agreements that Aftermath has concluded to sell sound recordings in digital formats since approximately 2001. Since 2003, Aftermath has also concluded contracts with major cellular telephone network carriers to sell sound recordings as mastertones, which are short clips of songs that can be purchased by users to signal incoming calls, popularly known as ringtones. …
F.B.T. brought suit after a 2006 audit showed that Aftermath had been applying the Records Sold provision to calculate the royalties due to F.B.T. for sales of Eminem’s recordings in the form of permanent downloads and mastertones. Before trial, F.B.T. moved for summary judgment that the Masters Licensed provision unambiguously applied to those sales. …
After provisionally reviewing the undisputed extrinsic evidence, the district court concluded that the agreements were reasonably susceptible to either party’s interpretation and denied both motions for summary judgment. At trial, only Aftermath moved for judgment as a matter of law at the close of the evidence. The court denied the motion. The jury returned a verdict in favor of Aftermath, and the district court awarded Aftermath its attorneys’ fees of over $2.4 million.”
The Ninth Circuit made short order of the contract interpretation dispute as follows:“… the sound recordings that Aftermath provided to third parties qualify as masters. The contracts define a “master” as a “recording of sound … which is used or useful in the recording, production or manufacture of records.”It was, however, undisputed that permanent downloads and mastertones only came into existence from 2001 to 2003. Consequently, the fact that the Masters Licensed provision had never previously been applied to those forms of licensing is immaterial. There is no indication that the parties intended to confine the contract to the state of the industry in 1998. To the contrary, the contract contemplated advances in technology. It provided that Aftermath had the right to exploit the “masters in any and all forms of media now known and hereinafter developed.” Aftermath’s evidence of how the Masters Licensed provision had been applied in the past therefore did not cast doubt on its application to permanent downloads and mastertones.”
The owners of the Eminem rights indicate that this is worth tens of millions for them. No doubt, that is why they spent $2.4 million prosecuting this issue at the trial court.
However, the far bigger winners are the thousands of artists that have older-form contracts that have never been renegotiated. Starting in the early 2000s, music labels realized that digital distribution was the next big thing, and altered the contracts to avoid possible disagreement involving digital distribution. But there are still plenty of contracts that use the same approach that the Ninth Circuit interpreted. As much as UMG and the rest of the record labels might try to say otherwise, the Ninth Circuit’s decision will weigh heavily on any trial court that must interpret these older contracts.
That is certainly the thinking behind a class action lawsuit filed on April 1, 2011 against UMG. The class action, with the estate of blues legend Rick James as lead plaintiff, extensively cites the Ninth Circuit’s decision and the related Supreme Court denial of certiorari. No doubt, similar lawsuits will be filed against every major music label.
Here is an initial estimate of the range of monetary damages under this type of claim. Apple’s iTunes’s is not the only vendor distributing digital music, but we can start with Apple. Apple’s public filings state that they launched their iTune’s Music Store in April 2003, and recorded $36 million in sales in the partial year that ended in September 2003. Since that time, digital music sales exploded, totaling $18 billion from inception through the fiscal year that ended September 2010. Continuing sales exceed a billion dollars every quarter. Some sales included in these totals are not music, but music is the vast majority. Apple’s typical contract for music distribution gives Apple around a third of these revenues ($0.34 cents out of each $0.99 download), with the remaining two-thirds going to the music owner. So, two-thirds of Apple’s music sales are around $12 billion as of September 2010.
Assuming all of these Apple sales were owed a payment at the rate contained in UMG’s contract involving Eminem, 50% of this $12 billion is $6 billion. Assuming 16% (the midpoint reported by the Ninth Circuit has already been paid, around $2 billion would have been paid under the now superseded provision, leaving around $4 billion still owing. Stating the same thing in other words, the lower rate of payment is around a third of what would need to be paid, and the unpaid two-thirds of the $6 billion pool is around $4 billion.
But, the above paragraph assumes the entire $12 billion starting pool pertains to contracts that contain contract language somewhat similar to what the Ninth Circuit addressed. We know that is not correct. According to Nielsen SoundScan, 2010, downloads of “catalog” (the older) singles were 648.5 million in the United States, compared with 523 million for current tracks. If only half of the sales are under the older contract forms, damages would be around $2 billion.
Regardless of how one wants to alter the estimates, this is an enormous decision that now goes back to the auditors and trial courts with new vigor.