Superfreak Joins Slim Shady on the Definition of Digital Downloads

The Supreme Court's March 21^st   refusal to grant certiorari on procedural grounds to Universal Music Group, Aftermath Records, and Interscope Records in F.B.T. Productions v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], cert. denied, 2011 U.S. LEXIS 2255 (2011), also known as the "Eminem" case, let stand a significant 2010 9^th Circuit Court of Appeals ruling on the interpretation of pre-internet recording contractual terms.  With F.B.T. as the current rule of law, the music industry faces potential financial repercussions as well as new legal challenges to the interpretations of its old school pre-digital age agreements.

In the F.B.T. case, the production company which first signed the now famous rapper, asked the 9^th circuit to examine and interpret terms of recording agreements entered into in 2003 and 2004 with Aftermath Records, a subsidiary of Interscope and Universal Music Group (UMG).  After conducting a 2006 audit, F.B.T. determined that it should have been paid on permanent digital downloads and master tones (ringtones and ringbacks) in accordance with the contract's standard licensing language providing a 50-50 split of monies from licensing to third parties rather than a royalty percentage from 12-15% on records sold.

The Ninth Circuit held that the contractual language was not ambiguous and relied on federal copyright law in its reasoning that Aftermath's relationship with digital retailers such as iTunes was a license and not a record sale.   The court stated that pursuant to federal copyright law, the terms "license" and "sale" have well "differentiated meanings."  It stated that "a sale of a work may be a transfer in title of an individual copy or a sale of all exclusive intellectual property rights in a work" See 17 U.S.C. Section 109 ((describing "first sale" doctrine)) as opposed to a license  "where a copyright owner transfers a copy of copyrighted material, retains title, limits the uses to which the material may be put, and is compensated periodically based on the transferee's exploitation of the material, the transaction is a license." 17 U.S.C. Section 114(f), 17 U.S.C. Section 111(a), 114(d) Section 115.   In following this logic, the court stated that "federal copyright law supports and reinforces our conclusion that the Aftermath agreements permitting third parties to use its sound recordings to produce and sell permanent downloads and mastertones are licenses." 621 F.3d at 966.

The F.B.T. decision, once effectuated, will result in windfall payments to F.B.T. in 50% of digital download licensing revenue rather than its prior payment scheme of pennies received on net sales of downloads of the digital tracks. 

On the heels of the higher court's refusal to hear the F.B.T. case, the Estate of Rick James, the late legendary funk/R&B artist who penned the hits "Superfreak" and "17" promptly filed a class action suit, also against Universal Music Group, using the F.B.T. interpretation to assert that it was also owed unpaid licensing monies under James' pre-internet contract.

Although UMG has insisted that the F.B.T. case is a unique, fact based decision, the James Estate contends that it as well as other potential class action plaintiffs, primarily "heritage or legacy" artists who may have signed contracts from January 1, 1965 to April 30, 2004 and whom the court might certify as a class, are also owed monies pursuant to the 9^th circuit interpretation of downloads as licenses rather than as royalty based sales.  Recording companies may respond by asserting contractual defenses such as a tolling and incontestability of contractual rights under auditing and accounting provisions.  At best, heritage/legacy artist representatives are on notice to join the class against Universal.

Query as to what artists and labels will next join the fray in asking courts to also interpret their contractual payout rights under pre-internet contracts. To date, Warner Brothers, Sony, and EMI, have not been hit with pre-internet contractual interpretation challenges but it's still early in the game. 

The potential payout under the F.B.T. decision could prove disastrous for an industry already crippled with a decade of losses from P2P piracy and a new set of legal questions based on cloud computing models.

Amid the legal commotion, in a Buffalo cemetery where the original Superfreak Rick James, rests in peace, a superfreaky twist is also taking place. Reuters reports that a male deer has stood sentinel over a nesting female goose for several days, threatening humans and keeping them at bay.  Can you hear Rick James croaking "OWW?" or "Let the Audits Begin?"

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