The recent Ninth Circuit decision in F.B.T. Productions, LLC v. Aftermath Records could give artists and other copyright holders a basis to challenge the amount of royalties they receive for music downloads, ringtones and other digital formats.
In 1998, F.B.T. Productions LLC transferred its exclusive rights in recording artist Eminem’s services to Aftermath Records in exchange for certain royalties, the amount of which depended on the medium: records sold through normal retail channels earned royalties between 12% and 20% whereas licenses of the master recordings generated royalties of 50%. Aftermath (and its parent company UMG Recording Inc.) subsequently entered into agreements with third-parties under which Eminem’s music was distributed as downloadable songs and cell phone ringtones.
In 2006, FBT sued Aftermath Records, UMG and other affiliated companies after an audit revealed that royalties paid for music downloads and ringtones had been calculated based on the lower percentage rate. FBT contended these music downloads and ringtones were “masters licensed by [Aftermath] to others for their manufacture and sale of records or for any other uses” and consequently, it was entitled to 50% royalties under the “Masters Licensed” provision. Aftermath, however, took the position that these formats were “full price records sold…through normal retail channels,” thereby entitling FBT to only 12% to 20% royalties under the “Records Sold” provision.
Both FBT and Aftermath moved for summary judgment, but the district court found that the contract provisions at issue were ambiguous and denied both motions. Ultimately the jury returned a verdict in favor of Aftermath, and FBT appealed.
In a decision last Friday, the Ninth Circuit held the district court had improperly denied FBT’s motion for summary judgment. Relying on the contract’s plain meaning as well as statutory and case law, the court held that Aftermath’s agreements with third-parties concerning downloads and ringtones were “licenses” for the use of the Eminem master recordings sufficient to entitle FBT to the higher royalty rate under the Master Licensed provision.
The Court of Appeals found unpersuasive Aftermath’s expert testimony that the Master Licensed provision had customarily been applied only to compilation albums and uses in movies, television and commercials. The court noted that permanent downloads and ringtones were not in existence at the time the contract was created and the parties had expressly envisioned advances in technology. The court also rejected Aftermath’s argument that FBT’s failure to object to the amount of royalties paid for downloads and ringtones constituted acquiescence to the rate applied, noting that FBT had no obligation to audit the royalties statement any earlier than it did.
UMG reportedly plans to petition for rehearing.
Update: On October 22, 2010, the Ninth Circuit denied UMG’s petition for rehearing.