License v. Sale

COM 558 Law & Policy

University of Washington MCDM

A Guide for Musicians and Their Record Contracts.

Written by Samantha May Juneman 2012

562.277.2700 sjuneman@uw.edu www.Samlar.com

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LICENSE V. SALE

What are we doing here? Is there really a problem present when we speak about a sale versus a license? Recording artists would say yes, but many record companies like EMI, Capitol Records, Warner Music, Universal Music Group, and more, are ignoring the difference. Probably on purpose, and we’ll get to why, but nonetheless it’s affecting recordings artists and should be something clearly defined here. A sale and a license (in regards to recorded and distributed music) is quite different depending on whom it affects. In this guide, as a musician, you’ll learn the difference, what the current battle around the two is, and how it affects you. Most importantly, you’ll learn how to get the money you deserve and what you’ll need to do to make sure those record companies aren’t keeping it for themselves.

So what’s the problem? The real problem artists are facing here is having their digital downloads categorized as a physical “sale” instead of a “license”. This way, “by treating digital transmissions as “sales,” [record companies] can get away with handing over a much lower royalty rate to musicians than if [they] treated these as “licenses.” 1 Without specific language in your contract, your digital downloads can go under reported, and also have container and packaging costs deducted from your royalty share. Unless a digital download is clearly defined in your contract between you and the record company, your rightful earnings could be calculated incorrectly. The worse part is, you might never even notice!

What’s a “Sale?” In this situation, when we mention a “sale,” we are referring to an exchange of property from one entity to another. In the record industry, it is commonly referred to as a physical sale, where a physical item containing content (whether that be a CD, Vinyl, Cassette, etc) is being sold to a consumer. As consumers, we commonly mistake owning a CD as owning the music on that entity. However, the intellectual property on that item is

not yours to distribute or sell. However, the physical entity containing the music is yours to do what you please with. For our argument here, a physical sale can include costs for packaging, distribution, and promotional efforts. Artists typically receive 10%-20% of the physical sale as their royalty share.11 One (and we’ll see examples of this) can argue that a digital download should not be categorized as a “sale” because the same costs do not apply to the content that the consumer has received in this transaction. In other words, the consumer did not receive a physical compact disk, nor did they receive album artwork, so why are those costs being deducted from the share the artist receives?

What’s a License? A music license can be defined as a “use of copyrighted music … [and] is intended to ensure that the owners of copyrights on musical works are compensated for certain uses of their work. A purchaser has limited rights to use and reproduce the recorded work without a separately arranged agreement.”2 Artists will, and should, argue that a digital download of their music (ex. Itunes, Amazon, any mp3 distributor, etc.) be categorized as a license. The person purchasing the download becomes the licensee and therefore now possesses the right to play that music in a private setting on his or her own personal devices. That licensee does not own a physical piece of property and therefore does not have the right to distribute their copy, as they please, much like the right an owner of a physical sale does have to sell or transfer ownership of their physical entity. Artists typically receive 50% of a license, as their royalty share.3 There are no distribution, container, packaging costs, etc. when one grants a license to another.

A GUIDE FOR

MUSICIANS AND THEIR RECORD CONTRACTS

SAMANTHA MAY

JUNEMAN 2012

LICENSE V. SALE

So who’s fighting?

There are some key players in the fight for distinction between a sale and a license, and it’s important for you to know who they are, and what they did. Here, we’ll outline our players, and their cases. Each are cases involving

artists involved in a battle against their record companies for under reporting digital download sales, categorizing downloads as a physical “sale” instead of a license, deducting container costs and packaging

expenses from royalties, and more.

LICENSE V. SALE

F.B.T Productions/Marshall Mathers V. Universal Music Group The artist, Marshall Mathers, better known as Eminem, has been a pioneer in this battle, recently (2012) winning a case against his record company; Universal Music Group. Eminem’s record contract stipulated that he gets 50% of the royalties for a license and 12% for a sale. Without fighting against this issue, his contract and Universal’s accounting errors were expected to turn into a $40 to $50 million issue. “The suit reached its apparent end… when the Supreme Court refused to hear an appeal, letting stand a lower court’s decision that digital music should be treated as a license.” The key language that becomes a precedent for all other cases about the matter is that “the lawsuit argued that record companies’ arrangements with digital retailers resembled a license more than it did a sale of a CD or record because, among other reasons, the labels furnished the seller with a single master recording that it then duplicated for customers.4

The decision made in this case affects Eminem’s contract, signed in 1995, when technology like MP3 players, iTunes, and the like weren’t in full effect. The precedent this case sets might not affect most current artists today, who sign contracts sensitive to technology in the industry. However, for those legacy artists, who still draw income from contracts signed in the 1970’s, that have absolutely no language to specify how licenses and sales are decided upon, this decision paves the way for an epic battle of their own, to rake in unpaid royalties estimating up to a total of $4 billion, industry wide.

Martha Davis v. EMI Group March 30th, 2012, Martha Davis, a founding member of the 80’s rock band “The Motels” filed a class action lawsuit against her record label, EMI. Davis too, felt victim of her record label shorting her out of music royalties due under her original contract. Here, EMI is accused of “Mischaracterizing digital downloads and streams

of her work by using a lower-paying sales theory, rather than under a license theory which would earn higher royalties for she and other artists who signed with EMI.5 Martha sought monetary damages, injunctive, and declaratory relief against EMI for deciding to pay its recording artists and producers a fraction of the actual amount owed to them for the licensing of a master recording to Digital Content Providers and for failing to properly pay royalties to its artists for electronic transmission of their works. In Martha’s specific case, her contract specifies that EMI was to receive 70% for every licensed, digital download sold, and %50 for downloads sold by Ringtone Providers. Instead, EMI was accounting this revenue as coming from a physical “sale”, leaving Martha with a tiny percent of what her contract said she deserved. Also here, EMI under reported the actual number of digital downloads and digital streams that occur by treating these transmission as they would sales of physical products that might be returned. Illegally, EMI was withholding a certain percentage of royalties called “reserves” which are intended to cover the cost of unsold records, however, digital transmission are incapable of being returned, as there is no physical product to return. This case has product up a number of “tricks” as to how the Record industry can secretively cheat artists from their rightful royalties.

Kenny Rogers V. Capitol Records Kenny Rogers has joined the battle and has filed a lawsuit against Capitol Records in the U.S. District Court of Tennessee. Alongside his claims of undistributed royalties from music sold as digital downloads and ringtones, Rogers is fighting for his portion of awards from EMI winning the fights against piracy from companies like Napster and Kazaa. Rogers is due “one-half of company’s net royalties from each source”6 in regards to licensing, and is claiming sales reported as physical sales instead of licenses.

Subhead. Subhead. Subhead.

LICENSE V. SALE

Peter Frampton V. A&M Records Following the recent victory of F.B.T. Productions and Em2M, Peter Frampton too is using the same argument against his case of underpaid royalties from his record company, A&M. Although Eminem was awarded his 50% of digital royalties rather than 12% for physical sales, Universal has maintained that this ruling applies to contracts particular to that case (F.B.T. vs. Universal) and does not set a legal precedent. However, Frampton claims that the language in his agreement is nearly identical to that of the language the F.B.T. suit fought over. This case, might solidify the ruling over the original F.B.T case as a universal precedent for the entire music industry.9

Chuck D. V. Universal Music Group Chuck D too has fallen victim to his record company, Universal Music Group; mischaracterizing digital downloads as physical sales of a record rather than licenses.7 This “lawsuit contends that although UMG’s contracts with digital music providers (like iTunes) specifically characterize digital distributions as licenses, UMG has applied the much lower “sales” royalty rate to digital downloads and underpaid its artists by hundreds of millions of dollars.”8 This suit reports that UMG plays it’s victims 25% of the royalties that is should be paying them for moneys received from music download providers. Chuck D has continually fought of Artists’ rights and will set a precedent for artists doing business with Universal Music Group.

Sister Sledge V. Warner Music Group Similarly, musical group, Sister Sledge, fought Warner Music Group for the rightful distribution of royalties earned from licensing music performances and recordings to “Music Download Providers” and “Ringtone Providers”. Collectively they sought after the distribution of unpaid money earned from Digital Content Providers. This suit argues that the contract Warner Music Group has entered with Digital Content Providers states that WMG license it’s entire catalogue of master recordings for that Digital Content Provider to distribute. Therefore, because their contract is labeled as a license agreement, the artists’ music shall be labeled as a license when distributing royalties.10

LICENSE V. SALE

WHAT CAN AN ARTIST DO TO MAKE SURE THEY ARE

PROTECTED

HERE’S A LITTLE GUIDANCE…

LICENSE V. SALE

COMPANY

Artist Checklist

Here are six things you can do to cover your bases and keep yourself in the know.

1. Clearly define your percentages for Physical record sales and Licenses

How will you know what your royalties are if you don’t clearly define them? Remember, for a physical sale, your royalty share should be anywhere from 10%-

20%. For a License, typically you can argue for 50% of the royalty share. 2. Agree on a definition of what a digital download is.

As long as you and your record company agree on what a digital download is, you can solidify what kind of royalties should come from it right off the bat. Remember to

separately discuss digital downloads, streaming, and ringtone revenue. 3. Discuss the agreements your record company has with

its Digital Content Providers. Many artists are currently using the argument that their record companies are acting

upon agreements between Digital Content Providers where their agreement language specifically states that they are “licensing” master recordings for

distribution. If the record company is “licensing” your music, you should receive royalties pertaining to your licensing agreement. Both of you need to agree on what’s

happening with your third party vendors. 4. Draft language that forbids deducting container costs,

reserves, and production/packaging costs from your digital download revenue.

Your digital downloads aren’t being packaged into physical entities, nor are they being returned to the store. Therefore, your record company cannot deduct these

costs (as they do for your physical sales) from the royalties you earn on digital downloads.

5. Discuss how marketing costs effect your digital downloads separately from your physical sales.

Your record company may not be able to argue for container or packaging costs on digital sales, but there are a fair amount of marketing costs that come in to play on the digital front. Discuss with you record company how digital marketing efforts will affect your digital download royalties. If these costs are deducted from your royalty share of a license, clearly define it in your contract; you don’t want these numbers

changing on you out of the blue. 6. Ask to see Digital Download numbers and figures on a

regular basis. Record companies have been known to underreport digital download sales. There’s nothing you can do about keeping your company from doing this to you, but you can

make sure that you are regularly keeping yourself in the know by reviewing your numbers monthly. An outside reporting service can also be of help to you if you think

something fishy is going on. LICENSE V. SALE

REFERENCES:

1. Gardner, Eriq. 4/3/2012, “The Motels Singer Joins Barrage of Digital Music Royalty Lawsuits” The Hollywood Reporter. Reference here:http://www.hollywoodreporter.com/thr-esq/motels-singer-martha-davis-digital-music-royalty-lawsuits-307299

2. Wikipedia: Music Licensing. Referenced on May 28th, 2012: http://en.wikipedia.org/wiki/Music_licensing

3. Belloni, Matthew. 2/3/2012, “Sister Sledge Files Class Action Against Warner Music Over Digital Royalties (Exclusive)” The Hollywood Reporter. Reference here: http://www.hollywoodreporter.com/thr-esq/sister-sledge-files-class-action-286903

4. Sisario, Ben. 3/27/2012 “Eminem Lawsuit May Raise Pay for Older Artists” The New York Times. Reference here: http://www.nytimes.com/2011/03/28/business/media/28eminem.html?_r=1

5. Zand, Joel. 3/30/2012 “Martha Davis and ‘The Motels’ Sue EMI over Royalty Payments” Justia.com. Reference here: http://techlaw.justia.com/2012/03/30/martha-davis-and-the-motels-sue-emi-over-royalty-payments/

6. Perpetua, Matthew. 2/14/2012 “Kenny Rogers Sues Capitol Records Over Royalties” Rolling Stone Music. Reference here: http://www.rollingstone.com/music/news/kenny-rogers-sues-capitol-records-over-royalties-20120214

7. Perpetua, Matthew. 11/2/2011. “Chuck D. Files Lawsuit Against Universal Music Group.” Rolling Stone Music. Reference here: http://www.rollingstone.com/music/news/chuck-d-files-lawsuit-against-universal-music-group-20111102

8. Hausfeld LLP. 11/2012. Reference here: http://www.hausfeldllp.com/pages/current_investigations/518/chuck-d.-v.-universal-music-group

LICENSE V. SALE

9. People, Glenn. 12/28/2011 “Peter Frampton Sues A&M Records Over Digital Royalties” Billboard Music.com. Reference here: http://www.billboard.com/news/peter-frampton-sues-a-m-records-over-digital-1005751352.story#/news/peter-frampton-sues-a-m-records-over-digital-1005751352.story

10. Hausfeld LLP 2/2/2012. Reference here: http://www.hausfeldllp.com/content_documents/9/Sledgev.WarnerMusic.pdf

11. Passman, Donald 2006, “All You Need To Know About The Music Business” Sixth Edition, Free Press, New York, NY. Pg 73, 74, 86, and 87.

LICENSE V. SALE