"Copyright Math" is a Joke

A few days ago I watched a TED Talk by Rob Reid entitled the "$8 billion iPod" where Mr. Reid, a comedian and the founder of music subscription service Rhapsody, "unveils Copyright Math (TM), a remarkable new field of study based on actual numbers from entertainment industry lawyers and lobbyists." This Ted Talk is Mr. Reid's tongue-in-cheek take on what's wrong with copyright law. Mr. Reid was engaging, entertaining, and funny, but was this an idea worth spreading? 

Complex issues that are oversimplified and distorted for comedic value are enjoyable and even valuable in providing us with a respite from serious deliberation on such things. But, if these oversimplifications and distortions are presented as truthful representations of facts -- that are just delivered in a funny way -- they risk undermining serious discussions that can create workable solutions. This TED Talk is simply a comedic straw man ... not an idea worth spreading!  

To give an example, Mr. Reid defines the $150,000 in statutory damages contained in Section 504 of the U.S. Copyright Act as Congress and Hollywood's view of "the precise amount of harm that comes to media companies whenever a single copy of a copyrighted song or movie gets pirated." This is a gross misrepresentation of the Copyright Act's damages section. Section 504(c) of the copyright act sets two types of damages:

(1) Actual Damages: which is actually the precise amount of harm from an infringement -- currently this would be somewhere between $.99 and $1.29 for a digital song 
and 
(2) Statutory Damages: which ranges from a low of $200 to a high of $150,000 per work infringed and depends on the intent of the infringing party.  

Mr. Reid portrays statutory damages as actual damages and thereby creates an easy target to attack. But you might ask, why do we have statutory damages in the first place? Is that just a semantic argument? No, it is not. Let us pretend there is no statutory damages available under copyright law. What would most people do if they want the newest digital release of their favorite musical act? They could go online and purchase it from the record company who would charge them $1.29 for this one song. Or they could go find a pirated copy somewhere online for free. What is the potential cost of downloading the pirated copy? Well, it ranges from $0 if they get away with it to $1.29 if they get caught.  

Where would this system leave the record company? They would have a simple choice: either hire a lawyer and bring a lawsuit in federal court against the the person for $1.29 or do nothing and absorb the loss of that sale. What would the cost of a lawsuit be? Well, I can assure you it would be higher than the potential return of $1.29. So the only rational act for the record company would be to do nothing. With this system, would you expect a vibrant music industry? How much quality music would we have? 

To further examine the need for statutory damages, let us look at one more illustration from the world of retail sales. If you were to walk into a store, take an item, and walk out without paying for it, what are the potential risks? If caught, you face criminal prosecution that could result in a fine that exceeds the value of the item stolen, time in prison, and a permanent criminal record. Why have such laws? The answer is obvious: if the only risk to theft was paying for the item you attempted to steal, most people would have an incentive to attempt to steal the item first and then just pay for it if they were caught. Indeed, if there is no cost placed on the act of theft that exceeds the cost of the item stolen, we would be creating an economic incentive to steal and theft would become the norm. The potential benefit (free stuff) would far exceed the cost (paying for the item), therefore, you are no worse off for attempting to steal the item than you would have been had you not attempted to steal the item. 

But, as economists like to remind us, everything has a cost. The costs of this increase in theft and the countermeasures that would be needed to combat it would then be passed on to all consumers whether or not they are participating in this unethical behavior. Some otherwise ethical persons would see that they are being unfairly treated in this system and would decide that theft is the only way to keep from bearing the cost of others' theft and a new social norm would ensue. There is a reason that nations like China and India (ranked 27th and 46 respectively in the International Innovation Index (the U.S. ranks 8th)), who place less value on the enforcement of intellectual property rights, have lower levels of innovation despite the impressive levels of educational attainment and talent of their people. 

The statutory damages clause of our Copyright Act is an indication of the value we place on innovation and creative endeavors. Statutory damages attempt to place a cost on the act of the theft itself and thereby deter such behavior and encourage innovation and creativity. To state otherwise, as Mr. Reid does to much applause and many laughs, is to not understand the issue, to distort the facts, and to spread misinformation. It in no way lives up to the TED Talk's mantra of presenting "ideas worth spreading."   

Land of the "Free"

While rummaging through the National Public Radio (NPR) archives (yes I spend some of my free time listening to old NPR pieces -- don't judge), I ran across a three part series from August of 2009 focusing on the trend of free goods and services in the digital economy. No one sector of our economy is more acutely aware of this trend and the resulting outcomes than those of us who have made a living in the music industry. Well before the housing crises or the near-collapse of the banking system, the digitization of music content destroyed the music industry's longstanding business model.

Listening to the NPR coverage of the free-economy and thinking about my post from last week furthered my contemplation of the broader long-term legal, economic, and cultural ramifications of such an economy.

According to the first segment in the NPR series, many Internet businesses are attempting to follow the Google model of monetizing their service through add revenue. Yet, ask any journalist from any newspaper on the planet, this is not a viable solution for the vast number of online businesses. There are only so many advertising dollars available.

Others are offering many different levels of services or products. Usually a free basic service or product and a fee based premium service or product. Yet this business model has not been as successful as the free model. As many of my colleagues in the music industry like to ask: "How do you compete with Free?"

The difficulty of designing fee-based business models in the new digital online economy is redefining intellectual property law and maybe America. This developing "social norm" of free access to other persons' intellectual property is and will continue to influence how we view tangible property such as personal property and real property.

Could this developing social norm shift the culture of America? There have been many commentators who have examined whether, in the wake of our current economic crisis, the "rugged American individualism" has given way to a socialistic culture more identified with Europe. A while ago a Reuters columnist, Bernd Debusmann, had a very compelling blog entry on this topic, which can be found by clicking here.

I wonder, however, if the new social norm of the digital world's free economy set the stage for such a shift of the American culture well before the housing crash and the credit crunch? Could the communal view of intellectual property advocated by such corporate giants as Google be pushing America from a heavily individualistic ownership culture to a more communal "Europeanized" culture? 

Songwriter Contracts

This is a reposting of an original 2009 blog post. This post was the start of a project exploring songwriter contracts. I never finished the project and am reposting this original post to kick start the project anew.

Today I had the pleasure to meet with a few Nashville Songwriters at the Country Music Hall of Fame. I was there to offer my services in a pro bono clinic as part of the For All campaign of the Tennessee Bar Association (TBA). This clinic was co-sponsored by the TBA's Entertainment and Sports Law Committee and the Arts & Business Council of Greater Nashville's Volunteer Lawyers and Professionals for the Arts (formerly the Tennessee Volunteer Lawyers for the Arts).

One of the questions I received regarded the distinctions between the types of songwriter contracts. That got me thinking that I should post a quick outline regarding the the different types of songwriter contracts. This just scraches the surface. But I plan on building on this post in the weeks to come.

When a person speaks of a “songwriter agreement” or “songwriter contract” they are referring to a contract entered into between a songwriter and a music publisher. Music publishers, as many of you know, act on behalf of songwriters to get their written songs “cut” (i.e., recorded on an album). This is known as “plugging.” Publishers also take care of all the administrative work related to plugging. This can include registering songs with the U.S. Copyright Office, issuing licenses, and accounting for royalties.

There are several types of songwriter agreements. Generally they are
1. Single Song Agreements
2. Exclusive Songwriting Agreements
3. Co-Publishing Agreements and
4. Administration Agreements

Single Song Agreements
Under a Single-Song Agreement, the songwriter transfers copyright ownership of specifically identified song(s) to the publisher. These are “non-exclusive” agreements because there is no term. In other words, these agreements are simply a one-time “sale” where the copyright is transferred from the Songwriter to the Publisher. The songs must already be in existence and are specifically identified in the contract.

Exclusive Songwriter Agreements
The main difference between exclusive songwriter agreements and single song agreements is that in an exclusive songwriter agreement the songwriter is transferring to the publisher copyright ownership of all songs written during the duration of the contract. Further distinguishing these types of agreements from single song agreements is that under an exclusive songwriter agreement the songwriter usually receives an advance that is recoupable from future royalties.

Co-Publishing Agreements
Under a co-publishing agreement, two or more parties (usually the songwriter and their publisher) share ownership of songs. In the typical co-publishing agreement, the songwriter transfers partial copyright ownership to the publisher and retain part ownership either in themselves or in their own publishing company. The songwriter’s independent publisher will have administration duties under this type of contract. The provisions of co-publishing agreements are usually very similar to those of exclusive songwriting agreements.
The main difference is that the songwriter will receive both the songwriter’s share of royalties (usually 50% of net royalties) and a cut of the publisher’s share the royalties (usually 25% of the net royalties).

Administration Agreements
Administration agreements are service contracts between the songwriter (or writer’s publishing company) and a publisher or administrator. These type of agreements are usually, although not always, reserved for established songwriters. In an administrative agreement a songwriter will pay up to 25% of net royalties for the administrative services of a music publisher. The important distinction between this type of agreement and the other types above is that the songwriter does not transfer any copyright ownership to the publisher.

On and off over the next few months I will be highlighting issues and pitfalls regarding these songwriter contracts. For those of you who are unfamiliar with songwriters and music publishers I suggest you check out the Nashville Songwriters Association International.

The Shifting Social Norms of Creative Expression

Mike Masnick's techdirt article "No Copyright Intended: The Coming Generation Who Intrinsically Assumes Remix & Sharing Makes Sense" points directly at the tsunami that we have all been watching repeatedly crash on the shores of the creative industries and begs the question "o.k., so what are we going to do"? 

His article rightly concludes that the new normal (i.e., social norms) is the remix of content. He argues that "no amount of 'education' ... can fool people into believing that nonsense is reasonable." But what he fails to address is that no amount of ignorance can suspend the laws of economics. Indeed this is the storm that has created the Tsunami in the first place. 

For those who are not impacted by the economic realities of infringement, it is understandable to disregard the economic consequences (harm) of such behavior. Their behavior can be analyzed through the egalitarian social norms so recently created by the free content ideal (e.g., the democratization of knowledge). Are there benefits to the free flow of information, knowledge, and culture? Absolutely! This ideal may well be worth pursuing for the advancement of humanity. But human nature and economic realities must be understood and dealt with, least we go down the road of Utopian Marxism.  

Are these new social norms moving us toward alternative systems to copyright? What could those alternatives be? Is there enough advertising to support all of the creation digitization has catalyzed? Are we at the dawn of a new patronage system? After all, the patronage system was the system that copyright replaced -- wouldn't that be interesting? Or, more likely and reasonable, are we going to see the evolution of another system altogether? 

What this all boils down to is one simple question: How do we provide an incentive to create quality creative content without copyright? I'm not saying that copyright is the answer. It is becoming increasingly apparent that there are problems with the current state of technology and social norms when governed by copyright law. The friction and failures are undeniable. But necessity -- human nature and economics -- will demand a solution eventually. 

Don't agree? Malcolm Gladwell in his book Outliers explores the "10,000-Hour Rule," which is a theory based on the work of Dr. K. Anders Ericsson. Ericcson, one of the world's leading experts on the cognitive precursors of how expert performers acquire their superior performance in fields such as music and the arts, has found that it takes about 10,000 hours of extended deliberate practice to become an expert superior performer. Broken down to its simplest form, Ericsson's theory posits that what creates true greatness is extraordinary effort. In "Outliers" Gladwell gives many compelling examples and arguments in support of this theory. 

Will anyone have the time and resources to devote such effort toward an endeavor, if such efforts result in no rewards? I'm sure some will ... but how many? Will those willing to devote such time now require a patron? What are the costs of a patronage system on creativity and the common good? What system could save us from the costs of patronage or the failures of copyright?  

In essence I am asking: (1) what are the benefits of this shift in social norms, (2) what are the costs, and (3) are we as a society willing and able to pay such costs for such benefits? If the answer to number 3 is no, we need to start creatively exploring alternatives.

Click Lit

This weekend I was listening to "Weekend Edition Saturday" on National Public Radio (NPR). Scott Simon was interviewing Slate Magazine's Dahlia Lithwick (click here for the full transcript). Ms. Lithwick, a lawyer by trade, is taking time off of her day job covering the U.S. Supreme Court at Slate to co-author a fiction novel in the "mommy lit" genre.

Besides the fact that I have long admired Ms. Lithwick's writing and reporting, there is nothing particularly noteworthy about an attorney writing a fiction novel, even an attorney of Ms. Lithwick's considerable writing prowess. What makes this work of authorship newsworthy is that Ms. Lithwick's collaborators--her numerous "friends" on the social networking site Facebook. According to her interview, she sends out Facebook posts asking for help and her Facebook friends to chime in and collaborate on the story. Their input ranges from naming central characters to plot development. She also posts each chapter for review and comment.

This is such an interesting new way to write a novel. It is like having a focus group help you write every chapter, every plot twist, every detail. As intrigued as I was by this new model of writing, I was drawn in more by the potential conundrum of who might own the copyright to the work.

According to the U.S. Copyright Act, 17 U.S.C.A. Sec. 101, a joint work is “a work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole.” When analyzing joint authorship, we typically apply the two-pronged joint authorship test where we look to (1) contribution and (2) intent.

Under the contribution prong of the joint authorship test each author claiming to be a co-author must have contributed sufficient independent original expression that could stand on its own as copyrightable subject matter. Therefore, those who helped name the protagonist's husband would not be considered a joint author.

The next prong of the joint authorship test is mutual intent: a joint author must intend that his or her contribution be a part of a joint work (i.e., they must be a willing collaborator with other joint authors). Because of the collaborative nature of asking for input, posting chapters for review and input, and editing based on these contributions it would seem that the application of this prong of the test favors joint authorship for those Facebook "friends" who are contributing some significant content that on its own would garner copyright protection.

Lastly, because the Facebook terms of use require each user to issue a license to all intellectual property posted, can Facebook publish this work?

This is a very interesting experiment indeed.

The Performance Rights Act

For those of you following the Performance Rights Act, I was recently a guest on Paul Butler's radio show Prime Time America. Joining me was Bob Powers, Vice President of Government Relations in the Capital Hill Office of the National Religious Broadcasters.

Give it a listen by clicking on the link above and pressing the play icon. Tell me your thoughts on this topic by leaving a comment here.

Brooks & Done

In case you have not heard, Brooks & Dunn announced on their official website that they are splitting up. As a fan of this amazing duo, I was greatly saddened by the news. As a former music attorney and current legal scholar, I was intrigued.

If you believe their website, and I have no reason not to, this is a very amicable split. Yet, often when a group or duo splits up it resembles a nasty divorce more than the break up of a band. For those of you that remember the legal battles between duet partners and close friends Dolly Parton and Porter Wagoner or bitter ex-band mates Al Jardine and Mike Love of the Beach Boys, you know how ugly and expensive these things can get.

For many music fans, this begs the question of why do so many former band mates have so much trouble with each other after a split? As I see it, there are two main causes. The first cause is personal. As is often the case with the end of any relationship, there can be a lot of personal baggage that has been festering under the surface of the relationship for years. Once the relationship ends, those issues surface with a vengeance. Aside from trying to be a better person, there is very little preventative steps anyone can take to address this cause.

The second cause is legal and much more preventable. From a legal perspective, the festering personal issues that surface at the end of a relationship are best dealt with before they ever arise. Any musician who is thinking about entering into a band will be well served to take the proper steps in the front end, when everybody is getting along, to decided what happens to the band's assets and liabilities upon a breakup, how decisions will be made prior to and after the break up, and what to do if a member wants to leave or a new member joins the band. These decisions should be documented in a written operating agreement that is agreed upon (i.e., signed) by all the members of the band.

By addressing these issues up front, the hurt feelings that may surface upon the split are just that--hurt feelings. They may bother you, but they don't cost you anything financially. If the band members fail to address these issues up front, the hurt feelings act as an insurmountable hurdle to any fair resolution of such issues. The parties then waste a lot of time and money in protracted and expensive litigation just to have a judge or jury settle these issues for them.

Again think of a divorce. If the husband and wife have a prenuptial agreement, the divorce is usually a rather simple matter. Everyone knows going into the marriage what is going to happen if the marriage ends. For the obvious reasons, it is much easier to convince your band mates to enter into an operating agreement than it is to convince your future wife to enter into a prenuptial agreement.

“Overlawyered” or Just Over Simplistic

There seems to be a trend with some commentators who, in their desire to push-back against copyright law, are distorting the truth in an attempt to influence the debate. These people are not necessarily wrong in the trepidation regarding copyright law--their arguments, however, are not well reasoned and lack a fair assessment of the legal system, federal litigation, or the Copyright statute. It is their tactics not their message for which I take umbrage.

One such example can be found on Walter Olson's blog Overlawyered. In a June 5, 2009 post, Mr. Olson quotes Kathleen Fasanella, a 27 year veteran of the apparel industry, as saying that the copyright legislation titled the Design Piracy Prohibition Act "will be enough to sink many small apparel and fabric firms that can’t afford lawyers to fight big firms' infringement claims." It is this type of quote that currently seem to be driving the debate on the scope of copyright law.

While I admit to enjoying Mr. Olson's blog from time to time, his post was irresponsible. His arguments against copyright protection are classic examples of the logical fallacy of the scare tactic--where a person reduces complicated issues to overly-simplistic undesirable outcomes and exaggerates possible dangers beyond their likelihood. To simply make such comments that individuals and small businesses of limited means are unable to protect themselves from overly litigious corporations is unsubstantiated and does not take into account economic realities of business or the legal procedures available to litigants.

For instance, if an individual or small business is sued for copyright infringement and they have not infringed, they have several protections available to them in the Federal Courts including summary judgment and Rule 11 sanctions for the filing of frivolous law suits. These procedural safeguards are useful in efficiently defending baseless lawsuits and can even result in the Defendant receiving an award of attorney fees and the other costs of their defense.

If the small business or individual did infringe (they should not expect to be allowed to violate a copyright with no consequences should they?) they can still limit their liability through a quick and reasonable Rule 68 Offer of Judgment. The Rule 68 Offer of Judgment has the attractive benefit of either settling the case quickly and in a reasonable fashion before much in the way of litigation expenses are incurred or shifting the burden of the costs of the litigation to the plaintiff for being unreasonable.

Furthermore, in the current business environment how many large corporations are looking to task resources (both time and money) litigating against small businesses and individuals unless they have a serious claim that pasts muster under the most strict cost/benefit analysis?

Copyright law is always trying to strike a fine balance between protecting authors rights in their works--thereby giving them an economic incentive to create--and protecting the public's' access to these works. While I agree we must stay vigilant to keep copyright law in a state of equilibrium between these often competing public policies, we must not fall victim to such unsubstantiated arguments like the ones described in the post cited above. Great harm is often the result of building public policy on a foundation of fear instead of reason.

The King of Pop, Inc.

Time author Adam Smith recently reported on the debt of the late King of Pop, Michael Jackson. This short, yet reveling, story can be found on Yahoo by clicking here. It is sad when a person of Michael Jackson's vast talent passes on with such staggering debt--reported to be between 300 million and close to 600 million dollars. While much of the reporting on Michael Jackson's debt at the time of his passing is speculation, we do know that he lost his Neverland Ranch to foreclosure as a result of defaulting on substantial loans and that the debt was huge.

Yet, much of the reporting only tells half of the financial story. Michael Jackson enjoyed two valuable commodities during his life that survived his death--(1) intellectual property in the form of music and song catalogs and (2) his name and likeness (i.e., publicity rights). The ability to monetize these assets is legally and financially more significant than the hefty debt his lifestyle created. His estate's earning power will play out in the next few months and years. The income-generating property of Michael Jackson's estate could rival or even surpass that of the other Music King, the King of Rock Elvis Presley.

A playlist for the ages

For those of you who are curious after reading my last post, here are the 24 songs for which Ms. Thomas-Rasset was ordered to pay 1.92 million dollars. This is, without a doubt, the most expensive play list ever created. Yet, you can purchase all of these songs from iTunes for around $23.76. In other words, the judgment was a little more than 80,000 times the actual damages (the lost revenue of the record labels).

1. Cryin by Aerosmith
2. Somebody by Bryan Adams
   
3. Pour Some Sugar on Me by Def Leppard
4. Bills, Bills, Bills by Destiny’s Child
5. Here We Are by Gloria Estefan
   
6. Coming Out of the Dark by Gloria Estefan
   
7. Rhythm Is Gonna Get You by Gloria Estefan
8. Iris by the Goo Goo Dolls
9. Basket Case by Green Day
10. Welcome to the Jungle by Guns N' Roses
11. November Rain by Guns N' Roses
12. Let's Wait Awhile by Janet Jackson
13. Faithfully by Journey
    
14. Don't Stop Believing by Journey
15. One Step Closer by Linkin Park
16. Bathwater by No Doubt
    
17. Hella Good by No Doubt
18. Different People by No Doubt
19. One Honest Heart by Reba McEntire
20. Now and Forever by Richard Marx
21. Possession by Sarah McLachlan
22. Building a Mystery by Sarah McLachlan
23. Run Baby Run by Sheryl Crow
24. Save the Best for Last by Vanessa Williams

$1.92 Million ... Wow

O.K. Let me first say I'm sorry for the lack of postings for the last few months. I have had a lot on my plate this past 6 weeks, for which I will spare you all the details. But I promise I am going to make up for the missing posts over the remainder of the summer.

For those of you who have been following the Jammie Thomas-Rasset saga, a jury has yet again found her guilty of willful copyright infringement--this time, however, they have awarded the labels who sued her $1.92 million. (For those of you unfamiliar with this case please Click here and here.) In her prior trial, which was overturned by the trial judge for an erroneous jury instruction, Ms. Thomas-Rasset was ordered to pay $222,000 in statutory damages. This recent result greatly increases the stakes of this very dramatic test case.

There are so many interesting facets of this case, it is hard for me to pick one to blog upon. One of the recent plot twists that caught my attention was the post-judgment statements of the Recording Industry representatives. The Associated Press has reported that the RIAA has made statements that settlement is still a possibility (see the second link above).

While I believe that such a settlement would be in all the parties' best interests, it will not be in the best interests of the law. Why might a settlement between two private litigants not be in the best interest of the law? Because such settlement agreements almost always contain a clause requiring the defendant (Ms. Thomas-Rasset in this case) to waive any right to appeal the verdict and in return she will have to pay a small amount (around the $3,000 to $5,000 others have paid to settle their file-sharing cases) to the Plaintiffs. Such a settlement will keep the constitutional issues of whether such extremely large statutory-damage awards, ones that are disproportionately large compared with the actual damage done by the file sharing, are unconstitutional.

Many of us in the legal community have been eagerly awaiting a copyright case of sufficiently high statutory damages to trigger an appellate battle that could get the attention of the U.S. Supreme Court. There is little in the way of case law to offer guidance to the intellectual property bar or the trial judges. This could indeed be the case that settles this important constitutional issue--but only if Ms. Thomas-Rasset is willing to continue the fight. Part of me hopes she will and part of me hopes she will come to her senses.

Pitfalls in Single Song Agreements

To continue my series of songwriter contract posts, I thought it would be helpful to discuss some of the pitfalls a songwriter might encounter when entering into a single song agreement.

As I stated last week, a single song agreement is the sale of a song or songs (in spite of the name, single song agreements can be for more than a single song) that are already written. Therefore, a single song agreement should contain a list of the title or titles of the song or songs that are governed by the agreement; this is the no-brainer part of these agreements and usually does not pose a problem. The corollary pitfall, however, is often not as easy to spot in a multi-page legal contract.

This corollary pitfall is usually found in a words like option, term, and exclusive. If a single song agreement is the transfer of songs that have already been composed, there should not be any options for yet-to-be-composed songs or songs that are not specifically enumerated in the agreement or addendum. It, therefore, seems to clearly follow that there should not be a term (the word "term" in the world of legal contracts refers to the length of time a contract lasts) or options for additional songs. Lastly, there should never be any language in the agreement that would make the songwriter's services provided exclusively to the publisher.

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.

Turn over the bootleg CD and nobody gets hurt

The Tennessee State Legislator is currently considering a bill that would require police intervention for copyright owners or their authorized representatives to request purveyors of counterfeit copies of their works to voluntarily surrender the illegal copies. Such counterfeited works, which are better known in the music industry as either pirated or bootleg copies, are often sold at flea markets or in local independent record stores.

If the Bill aims to strike a balance between protecting the rights of copyright owners and the rights of legitimate vendors--all of which are laudable public policy goals--it is seriously off the mark. It is already a crime in Tennessee to illegally take someone's property. That is not what rights holders do when they approach a vendor selling a bootleg. The bootleg is not the vendor's property in the first place. The criminal code already protects legitimate vendors. This Bill simply removes the self-help solution available to rights owners. Which would be fine, if the State of Tennessee was willing to fund a statewide taskforce to police such piracy.

For background, there was an excellent article in the Nashville based Tennessean newspaper today that highlights the competing interests involved. (That article can be found by clicking here.) Also the Recording Industry Association of America (RIAA) has an excellent website highlighting the economic and social impact caused by physical piracy.

The interesting issue here is that copyright holders, like those represented by the RIAA and similar organizations, have a legitimate interest in both protecting their copyrights and assisting legitimate vendors who often must compete with pirates who have an unfair competitive advantage. The involvement and education of local law enforcement in this effort should be encouraged by our laws. Also, a funded law enforcement taskforce would legitimize efforts of rights holders who do attempt to confiscate counterfeit copies of their works. Such official procedures could make the process more effective. Having a local uniformed police officer busting a bootlegger at the flea market would have a clear deterrent affect.

The law fails, however, to provide local law enforcement with the resources necessary to meet a mandate such as that found in the Tennessee Bill and does not add any protection to legitimate vendors. It simply protects pirates. If your local police force does not have the proper resources, this Bill will simply tip the balance in favor of the pirates. That possible unintended consequence should be seriously considered before such a bill is made law.

Music Access

I just finished reading the Digital Music Report 2009 authored by the International Federation of the Phonographic Industry (IFPI). The IFPI is the organization that represents the interests of the recording industry worldwide and has 1400 members including the Recording Industry Association of America.

The report goes into great detail describing the shifting business model from a sales and distribution based model to one that monetizes access to music. According to Nielsen SoundScan single track downloads in the U.S. crossed the one billion mark in 2008. That represents a 27 % increase in one year.

Considering the recent defeat of former Eminem producers F.B.T. Productions, this new business model could be the savior of the record labels. But is it unfair to the musicians? Let me know what you think by answering my latest poll.

Choice Overload and Radio

I just finished reading an excellent interview by Kyle Bylin, Associate Editor of Hyperbot.com. Bylin interviewed Barry Schwartz, who is the Dorwin Cartwright Professor of Social Theory and Social Action at Swarthmore College and author of the book The Paradox of Choice: Why More Is Less. In this interview, Bylin probes into the impact of the paradox of choice on the music industry. Professor Schwartz explains in the interview that when people are given overwhelming options (i.e., choice overload), such as in today's music culture, if they do make a decision they tend to take one of two courses of action: (1) they rely on habit to make decisions or (2) they rely on filters to tell them what to choose.

The second course of action is very interesting to me in light of our previous discussions of the most recent version of the Performance Rights Act. Let's take my prior argument as true, that Radio hinders the sale of music overall (again, I'm not saying radio hinders individual albums, artists, or songs; I'm saying all music). Could radio still be benefiting the labels and some artists, by acting as a filter in our choice overloaded society?

From an economic standpoint this could make sense. For years (I'm talking 50 or more) record labels have operated a generally static business model. They payout advances to bands, the bands record an album, the album is shipped out into the world and marketed, the band goes on tour to further market the album, singles are released into the world via radio, and 90% fail. Yes, that's right, 90% fail to ever make a profit. The other 10% make the labels back their money and a profit. Consider the failures to be R&D. The problem in the last 8 or 9 years is that the other 10% are not selling that many albums either because of the file-sharing problem ushered in by digital technology.

It has been clear for years that record labels have to change their business model. First, they need to find other streams of revenue to stay viable--hence the Performance Rights Act and the push for 360 deals. Second, they need to increase the number of acts that actually turn a profit. Gone are the days when 10% can sell enough units to carry the other 90% and generate a healthy profit for the label.

Could the power of Radio be harnessed by the labels, in this choice overloaded society, to improve their current 10% success rate? In other words could the labels use radio as a filter to improve their sales of individually selected acts? Some say that is what radio has been doing all along, and manipulation of that system (ever heard of payola?) also has a longstanding tradition. But that still only resulted in a 10 or 20% success rate at best.

I'm talking about a more efficient business model. One that takes into account the current realities of of exceedingly large numbers of individual songs on the Internet. One that abandons payola and where labels no longer package 8 bad songs with 2 good ones so that they can charge $15 per album to turn a profit. I don't know what this business model would look like yet, but it is an interesting thought.

One last thought: if they could harness the power of radio in such a way, would that violate antitrust law?

Focus? What does that have to do with Copyright and Music Law?

Check out the slide show in the post below. It is interesting, funny, and helpful. But you might ask yourself what it has to do with copyright and music law?

The slide show's topic is how to keep focused. At the beginning there is a slide that talks about knowledge work, and that got me thinking about my previous blogs. People who create intellectual property (yes I'm talking about copyrights and music) are the quintessential knowledge workers. They don't crank out widgets for a living; they create. With all the talk in the music industry focused on developing new streams of revenue (see my posts below on monetizing radio airplay), our artists, songwriters, and even us attorneys may lose sight of our main focus of our knowledge work, whether that be creating music or writing contracts.

To make money creating (i.e., as a knowledge worker) you must gain a competitive advantage over others who are in your field. One competitive advantage is to do the same thing as your competition, but do it more efficiently, which is known as a cost advantage. The other way is to do it better than your competition, which is known as a differentiation advantage.

So if you are a creator and you want to make money from your creative efforts, you need to focus your creative energy in a productive way. The following slide show will help with that, I promise.

Who Moved My Brain? Revaluing Time and Attention

Check out this SlideShare Presentation:

Who Moved My Brain? Revaluing Time and Attention

View more presentations from merlinmann.

How do you compete with free?

To continue on with my last two posts, I have a question for you: How do you compete with free? That is a common question posed by many in the recording industry. The question is usually given in the context of the ravages of digital technology on music sales. While I think this is an overly simplistic question, I am posing it regarding radio.

That's right, over-the-air terrestrial radio. Our prized AM/FM radio. I'm currently reviewing some of the testimony given to congress recently. Professor Ashbel Smith from the University of Texas at Dallas makes some very good points in his statement before the Committee on the Judiciary regarding the Performance Rights Act.

One such result of his research is that if people are listening to free music on the radio, they are not listening to prerecorded music ... seems like a no-brainer. I'd like to say he has a wonderful grasp of the obvious, but it is gospel in the music industry that radio airplay drives music sales. So if that is the longstanding industry belief, that radio airplay drives sales, why do we believe this? I'll admit that radio air play can drive up the sales of a single song or album, but does it actually increase overall record sales? That is the important question, the question that Professor Smith addresses in his statement.

It is an interesting idea that radio airplay actually hinders the sale of prerecorded music instead of promoting it. What do you think? Answer the survey at the right to weigh in on the debate.

Performance Rights Act, Part II

So, where do I stand? To follow up on last week’s post, I support the act. Why? Well, at the outset let me say that it is not simply because I work in the Music Business. As I tried to point out in my previous post, the battle lines over this legislation have been drawn through the middle of the music industry. I have close friends and business associates on either side of this issue.

The reason I support this legislation is that it serves the greatest good—sounds Utopian, I know, but please let me explain before you write me off as a hopeless socialist.

I am a constitutionalist. My view of copyright legislation is seen through the lens of Article I, Section 8, Clause 8 of the U.S. Constitution, which states that “Congress shall have power…To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their Writings and Discoveries.” The specific words “To promote the Progress of Science and useful Arts” establish a utilitarian policy that guides Congress when enacting such laws.

It stands to reason that the grant of a copyright—which is nothing more than a monopoly (albeit a limited one)—must benefit more than the individual holder of that right. Indeed, very few monopolies are tolerated in the U.S. market without a utilitarian justification. Otherwise you simply have an unfair restraint of trade benefiting the few at the expense of the many.

Some argue that the utilitarian policy underlying copyright is contrary to the American ideals of self reliance and property rights. Yet, if authors are not given protectable property rights in their creations, some of them will stop creating for want of economic incentives. In other words, if you can’t make a living doing something, you are likely to abandon the endeavor and pursue a more lucrative path—that sounds very American to me.

As the U.S. Supreme Court stated in MGM Studios Inc, v. Grokster, Ltd. “… the administration of copyright law is an exercise in managing the trade-off” 125 S. Ct. 2764, 2775 (2005). While the court was speaking specifically of the tradeoff between technological innovation and artistic creation, it was also speaking more broadly to the tradeoff in all copyrights cases of balancing of the greatest good.

In applying this doctrine to the Performance Rights Act we can look to the vast majority of developed nations that have long ago mandated the payment of such royalties without a devastating impact to their over-the-air broadcast media. When compared to the devastating impact digital technology has had on the music industry, it is clear to me that the greatest good will be served with the passing of this act.

Without an objective economic impact analysis concluding, with some degree of certainty, that the trade off is a greater risk (i.e., that terrestrial radio in the U.S. will be driven out of business if forced to pay such royalties), the Performance Rights Act should be passed and signed into law.

The Performance Rights Act, H. R. 848, S. 379

Many people like to blame Shawn Fanning. While Mr. Fanning’s creation of the specific computer code that became commercially known as Napster was not inevitable, digital file sharing was. As equally inevitable are our current struggles regarding how to adapt—both socially and economically—to digital technology.

One attempt at adaptation is the most recent version of the Performance Rights Act currently before both houses of Congress. To me, one of the most interesting aspects of the legislative process is the demarcation of battle lines within an industry impacted by a specific piece of legislation. The many versions of The Performance Rights Act has created its share of feuds within the music industry.

The purpose of the bill is simple: require standard AM and FM radio stations (technically known as “terrestrial radio” to distinguish them from Internet and satellite radio) to pay performers royalties for the broadcast of their recorded music. Up until now, terrestrial radio stations paid only the songwriter a royalty.

The airplay of songs, so the theory goes, promotes album sales and that is how the artist and their label receive compensation for their creative efforts. Indeed that theory worked well into the late 1990’s. As we all know, the advent of digital technology made that theory about as useful as the one about the earth being flat.

Of course you can easily see the conflict this legislation created. Artists and their record labels (e.g., Warner Bros. Music, Sony/BMG, Universal Music, EMI, etc.) are supportive of monetizing the airplay of their music. But terrestrial radio is, of course, opposed to paying royalties on music they have been using free for years. To complicate matters, every business in the nation is reassessing and cutting back on advertising.

Yet, there was, at the beginning of the drafting stages of this bill, another not-so-obvious conflict that arose. The songwriting community joined terrestrial radio in opposition to the performance royalty. Songwriters and their music publishers were concerned that a performance royalty could cause a reduction in their royalty payments from terrestrial radio.

To address the concerns of the songwriting community, the drafters of the Performance Rights Act inserted Section 5 into the Act. Section 5 mandates that the songwriters’ royalties “shall not be reduced or adversely affected in any respect” by the implementation of the performance royalty. Thus the drafters limited the opposition to the bill.

Considering that the two major streams of revenue for a songwriter and their music publisher are the sale of music (which we all know is shrinking daily) and radio royalties, the insertion of Section 5 into the bill was critical.

So, where do you stand? Let me know by answering the survey on the right. I will let you know where I stand on the bill next week.

Statutory Warranty of Title and Copyright Grants

In my last two blogs I discussed contractual copyright warranties and their impact on everything from posting photos on Facebook to a singer/songwriter’s contract with their label and publisher. Contracts, however, are not the only place to find such dangerous warranty language regarding copyrights.

Article 2, § 312 of the Uniform Commercial Code (UCC), entitled “Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement”, creates a statutory warranty that “the title conveyed [in copyrighted works] shall be good, and its transfer rightful; and the [copyright] shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.” The legislature of every state has passed a version of this provision. In Tennessee it can be found at T.C.A. § 47-2-312.

My first inclination upon reading this statute was to think that it was preempted by the Federal Copyright Act. But, upon further research I found several cases that state that neither the copyright act nor any other of the federal intellectual property laws preempts such application of state law to the grant of a copyright. See Pure Country Weavers, Inc. v. Bristar, Inc., 410 F.Supp.2d 439 (W.D.N.C.2006). Therefore, even if you are successful in eliminating such contractual language from an agreement, you may still face a state claim for breach of warranty.

Since all such exclusive grants of copyright must be in writing, the way to protect yourself or your clients from such a claim of breach of warranty based on § 312, is to include language in the written instrument that excludes such warranties. Article 2, §312(2) of the UCC allows for such warranties to be “excluded or modified only by specific language or by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have.”

Warranties and Indemnification Language in Entertainment and Intellectual Property Agreements

To build on my previous post, I thought I would write about warranties and indemnity language in entertainment and intellectual property agreements. Many of my clients do not understand the significance of the warranty and indemnity language that is inevitably placed in recording artist contracts, exclusive songwriter agreements, and the myriad of other intellectual property and entertainment agreements. Many more don't know that indemnity clauses creates a duty to pay any losses or damages of the other party based on the warranty language.

I always advise my clients and teach my students that such language is an effective means of risk management. Smart people and well run business entities enter contractual relationships with slight trepidation. They conduct risk assessments and balance those risks against the possible rewards of the relationship. As we have all heard before, such a balancing of risk and reward requires us to ask ourselves: does the reward outweigh the risk? This question, however, is too vague to be of any real use. As any attorney has experienced, the masterful debater can always convince themselves of the answer they emotionally want to reach.

The better question to ask oneself is: Am I able and willing to absorb the loss? You must look to both your emotional position and your resources. That is why your investment adviser makes you plan your retirement strategy by deciding your (emotional) willingness and (financial) ability to tolerate market fluctuations.

So what does this have to do with warranty and indemnification language? Warranty and indemnification language directly impacts each contracting parties’ answer to the question “am I able and willing to absorb the loss” of this transaction.

Let’s look at this from a record label’s point of view. If a record label is going to invest in a band, provide them with A&R services, pay them an advance, spend money producing and shipping their albums, they want to limit the level of risk in all the areas they have control. Since they can’t control with any degree of certainty what the consumers will purchase, they will focus on all the variables of risk they can control. Warranty language allows the record label to allocate the risk to the band for such things as copyright and trademark infringements.

From the Band’s perspective this can be uncharted water. Let’s say that you are a member (say the drummer) in the band. Your band is about to sign a recording artist contract with a major record label. You want to record some of the songs your lead singer brought with him from his previous band. The label is insisting that you provide them with a license to these songs and warrant that such songs are free and clear of any copyright claims. The label also wants language in the contract that if they get sued for infringement on these songs, the band will be required to pay the label’s attorney fees and pay any judgment.

If your lead singer co-wrote the songs with another person and then granted the copyright to those songs to a music publisher in an exclusive songwriter agreement, you and your band mates had no right to give the label a license to property to which none of you, not even your lead singer, properly owns. You could be on the hook for any possible copyright infringement claims brought by the music publisher against the label. Indeed, you could be liable even if you did not have knowledge of who owned the copyright to the songs.

Can you see now how your answer to the question “am I able and willing to absorb the loss” of entering into a contract is impacted by the warranty and indemnity language?

The trepidation I spoke of before should lead you to ask questions of your lead singer before agreeing to any such contractual language. I would also ask to see the copyright registration or look it up myself on the U.S. Copyright Office’s website. If you don’t do your research, you are answering the question “am I able and willing to absorb the loss” of this transaction without the necessary information. Without the proper information, you might as well not even ask yourself the question in the first place.

Facebook Terms of Use

Welcome to my inaugural post. I hope you find my blog entertaining, informative, and interactive. My desire is not just to send my thoughts out into the world. I look forward to many engaging exchanges with those of you who are similarly interested in copyright and the music industry. As a practicing lawyer and professor of music business and law, I do not intend this blog to be geared exclusively toward lawyers or those with legal problems. I hope to draw many of my non-attorney colleagues from academia, the music industry, as well as all the other persons who own or use copyrights. That last group, as I will point out often, includes almost everyone--whether they know it or not.

This week I was drawn into a very interesting new event: a mass uprising of the Facebook nation. I have found Facebook users to be an extremely devoted (read obsessed) group. I was entertained to read and hear about how many of them became incensed at Facebook’s decision to take away their right to revoke the dangerously broad license they willingly granted Facebook to their photos,text posts, and even music. Facebook, being the responsive company that it is, immediately relented and reinstated such revocation rights.

To give you some contextual background, let me briefly explain. Prior to the change in its terms of use, Facebook members could revoke the license they granted to Facebook simply by removing the content from the member's Facebook page. That system, however, created a major problem for Facebook. You see, when a member removes their content from their Facebook page, the content very often remains as postings on other members' Facebook pages. The removal of such content by the member, while terminating the license, does not remove the content from the entire Facebook system. This creates unlicensed displays and reproductions of copyrighted material, both of which constitute possible copyright infringement.

Yet, what intrigued me most in the surge of dissent that followed this change was that the very same members seem to be perfectly happy to continue to grant a license that is overly broad and exposes them to possible copyright infringement suits. This is, in my opinion, just further proof of the obvious: people don’t read terms of use on the internet—even when they are protesting such terms. Considering the stakes of defending a copyright infringement suit (if you are unaware of such stakes Google “Capitol Records v. Jammie Thomas”) you ignore such legal agreements at your own peril.

My biggest issue with Facebook has always been that the terms of use are both too narrow and too broad to meet their expressed needs. The narrowness issue can now easily be seen in the current problem Facebook was attempting to address by taking away members’ rights to revoke the license. The problem of the content's license being revoked even when the content still exists on other members' Facebook pages clearly demonstrates the inadequacies of the Facebook terms of use.

What I have been waiting for, however, is the protest to extend to the breadth of the license and the warranty language. For example, many aspiring recording artists (both bands and solo artists) are now marketing their music on Facebook by posting their recorded songs. If such artist is also a songwriter who happens to have an exclusive songwriter agreement with a publisher, they do not own the copyright to the musical compositions they just licensed to Facebook. If you have done this, you have breached your contract with your publisher and your contract with Facebook

A more common example of this problem I have seen on many of my friends Facebook pages is when they post their wedding, graduation, and other event photos. Many of these photos were taken by professional photographers who retain their copyrights to the photos. Many of these photographers grant a license to post such photos on the Internet. But that is it--such licenses only allow the person to post the photographs for personal use on the Internet. Those licenses are very narrow. I have reviewed and drafted several such licenses and never have I seen or included the right to create derivative works or use such works for third-party advertising purposes.

Facebook, however, has always reserved the rights "to use, copy, publicly perform, publicly display, reformat, translate, excerpt (in whole or in part) and distribute such User Content for any purpose, commercial, advertising, or otherwise, on or in connection with the Site or the promotion thereof, to prepare derivative works of, or incorporate into other works, such User Content, and to grant and authorize sublicenses of the foregoing."

Facebook also requires members to warrant that they, the member, have the right to grant such broad rights to Facebook--and of course, often they do not. This creates potentially disastrous exposure to substantial liability for members. In the two examples above those members could face multiple copyright infringement and breach of contract suits from both their music publisher or photographer and also Facebook. All simply to market their music or share their wedding photos with some friends. Facebook needs to narrow their licensing language to meet the needs of the business's purpose.

Considering that the Copyright Act allows a plaintiff to recover statutory damages of $150,000.00 plus attorney's fees for willful infringement of a copyright, members should insist on a more tailored licensing regime.