Friday, April 10, 2009

Are Digital Downloads Worth More Than CD's?

The music industry watched with rapt attention the recent legal skirmish between musicians and their record labels over the payment of royalties. At issue in the Eminem royalty battle was the definition of digital distributions of music and what royalties should record labels pay to their musicians when consumers download digital recordings or ringtones. According to the pleadings filed in the case, the contract for the rap artist Eminem set royalty rates payable by Universal Music Group and several other labels for “records sold” at twelve to twenty percent of net proceeds and set royalty rates for “masters licensed” at a royalty rate of fifty percent of net proceeds.

The plaintiffs claimed that Universal Music Group failed to pay the full fifty percent of net proceeds from the digital downloads and ringtones of the Eminem catalogue of recordings. According to the plaintiff’s auditor, Universal owed them at least $650,000.00 in back royalties as a result of this breach of the contract. The jury disagreed and found in favor of Universal Music Group. Many in the industry have, therefore, declared the issue settled and began moving forward with the belief that a digital download is a record sale for the purposes of calculating royalties.

In spite of all of the attention the Eminem case has garnered, it is a relatively insignificant case. It has no precedential value for other courts, does not solve the definitional problem of whether a download or ringtone is a sale or license of music, and has done little in the way of adding contractual clarity or consistency to this issue.

New York entertainment attorney Brian Caplan, of Caplan and Ross, LLP, knows firsthand about the issues involved in defining a download or ringtone for the calculation of a musician’s royalty. Mr. Caplan is pursuing the same royalty claims found in the Eminem case in the class action lawsuit he filed on April 27, 2006 against Sony Music Entertainment. In Allman v. Sony BMG Music Entertainment Mr. Caplan is asking for damages in excess of $25,000,000.00 for clients such as the Allman Brothers and Cheap Trick among others.

In appraising his chances of success in light of the Eminem defeat, Mr. Caplan focused on two important points. “In the Eminem case, there was an amendment in 2004 to the recording artist contract that defined downloads as sales of albums.” According to Mr. Caplan no such language exists in any of the contracts at issue in his case. “You simply need to look at the agreements record labels have with companies like Apple. The consumer signs a contract with iTunes saying ‘I am a licensee and I acknowledge that iTunes does not own the master,’ and iTunes has stated that it is a licensee of major record labels granting to you, the consumer, a sublicense. If this is the case, then the musicians whose contracts do not specifically define a download as a sale, like in the Eminem case, are entitled to 50% of the net proceeds from downloads pursuant to their contracts.”

Mr. Caplan points to the February 6, 2007 press release from Steve Jobs, CEO of Apple Computers, Inc. In that press release Mr. Jobs stated that “[s]ince Apple does not own or control any music itself, it must license the rights to distribute music from others, primarily the “big four” music companies: Universal, Sony BMG, Warner and EMI.” In reviewing the agreement between Universal Music Group and Apple Computer, Inc. the trial court in the Eminem case stated that the facts suggest “that the agreement was a license.”

Mr. Caplan also points to the fact that “the jury verdict in the Eminem case, or any jury verdict for that matter, is not binding on other juries or other courts.” Precedents are “set by higher courts, not by juries” Mr. Caplan reminds us.

While the skirmish over Eminem’s royalties was not a defining moment in the music business, it was the opening salvo of what looks to be a protracted campaign on the part of musicians to collect more significant digital royalties from their financially strapped labels.

Due to the substantial amount of money at stake in this case, it will very likely go to trial and then be appealed. The resulting appellate ruling would create a legally binding precedent defining the parameters of the digital distribution model for a majority of recording artists for years to come. An appellate ruling of that magnitude would tip the balance of power in the recording industry in favor of the successful side of this dispute. If the musicians were to succeed, combined with the financial vulnerability of the record labels, this case could change the face of the recording industry to a more artist driven business model for years to come.