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Appeals court says UMG too shady on royalties

September 3, 2010 |  5:16 pm

Eminem, Universal Music, Aftermath, iTunes, downloads, royalties It's bad enough for the major record companies that CD sales are plummeting. Now, the 9th Circuit Court of Appeals is threatening to make digital downloads less profitable too.

A three-judge panel sided with F.B.T. Productions Friday in its dispute with Universal Music Group over Eminem's recordings for UMG's Aftermath label, ruling that F.B.T. was entitled to significantly higher royalties for downloadable tracks and albums sold through Apple's iTunes Store. The panel sent the case back to District Court to determine how much UMG will have to pay in damages.

UMG said it would appeal the ruling to the full 9th Circuit, and that the case wouldn't have broader implications because it hinged on the unique provisions of a single contract. Nevertheless, the victory for F.B.T. (if it stands) could embolden other hitmakers to seek higher royalties for digital downloads -- something many artists have demanded but few have obtained.

F.B.T., a team of producers that discovered and wrote songs for Eminem, sued Universal in 2006, accusing the company's Aftermath label of failing to pay sufficient royalties for the titles sold through iTunes. Its attorneys contended that the 99-cent downloads weren't "records sold ... through normal retail channels," which would carry a royalty of 12% to 20%. Instead, they argued that the sales stemmed from licensing deals that Aftermath struck on Eminem's behalf, on which the royalties should have been 50% of the net receipts.

A District Court jury agreed with Universal that iTunes sales were just like CD sales, and the judge awarded Universal more than $2.4 million in legal fees. But the appeals panel held ...

... that the District Court should have granted F.B.T.'s claims without a trial because its contracts with Aftermath put the iTunes "unambiguously" in the licensing category.

For consumers, iTunes is simply the digital equivalent of the CD racks at BestBuy or Amoeba Records. The major labels have treated it that way, too. But Richard Busch, an attorney for F.B.T., said the difference is that there is an incremental cost to each CD that record companies sell to retailers like BestBuy. There are no such costs when labels license a recording to Apple so that it can distribute copies from its servers. The royalties on physical sales were lower than on licensing deals because the costs were higher.

How big a financial blow the ruling could be to UMG is hard to tell. The company struck a deal directly with Eminem a few years after signing with F.B.T., and the two sides disagree over which of Eminem's recordings for Aftermath are covered by the contracts with F.B.T.

The ruling's reach isn't clear, either. Two people familiar with the matter said that, unlike the F.B.T. deals, most artists' contracts with the major labels specify that downloads receive the same royalties as physical sales.

Still, Fred Goldring, a music industry strategist and former music lawyer, said the major record companies have been clinging to contract provisions from the world of physical products that don't make much sense in the digital world. "At some point, it's going to be 90% digital and 10% physical, and that argument goes away," he said.

The major record companies have "done a lot of good for a lot of artists ... getting them to be much bigger than they would ever be on their own," Goldring added. But the change in technology is making it harder for them to dictate terms to artists. Simply put, Goldring said, they're no longer "the gatekeepers between artists and their audience."

-- Jon Healey

Credit: Frederick M. Brown / Getty Images

Healey writes editorials for The Times' Opinion Manufacturing Division.