Eminem lawsuit finds iTunes downloads to be "licenses"

March 30, 2011

Eminem License or SaleWhen you download a song from iTunes, do you own it or license it?

To the shock of some, you’re only granted a limited license to the music “purchased” through iTunes (if you’re curious as to the limits of the license, check here).

However, it’s fortunate for Eminem – as well as a plethora of other artists – that a federal court determined that the music iTunes gets from record labels is licensed, not owned.

The case, F.B.T. Productions, LLC v. Aftermath Records, was just denied certiorari by the U.S. Supreme Court last week, ending a closely-watched legal battle that began in 2007.

The case centered on whether songs sold through iTunes were sales or licenses for the purposes of a contract.

The contract is between F.B.T. Productions, the company that first signed Eminem to a recording contract in 1995, and Universal Music Group subsidiary Aftermath Records, to which F.B.T. transferred Eninem’s exclusive recording services.

While disputing over the difference between whether something is a license or a sale may seem like splitting hairs, the financial stakes are quite high.

Under the contract, Aftermath is only to pay 12%-20% of the adjusted retail price for a record sold, and 50% of “masters licensed.”

The court reviewed several different aspects of the contract and circumstances surrounding it, including 2003 and 2004 revisions to the contract that, while both were entered after UMG made sound recordings available through iTunes, neither revised the contract to specifically define online music downloads.

However, despite all the factors reviewed, the “masters licensed” discussion seems the most persuasive.

The contract itself defines a “master” as a “recording of sound…which is used or useful in the recording, production or manufacture of records.”  According to the facts, Aftermath provides a single master recording to iTunes to duplicate to provide songs for consumers to download.

The court then found that the “masters licensed” provision applies to “(1) masters (2) that are licensed to third parties for the manufacture of records or for any other uses, (3) ‘notwithstanding’ the Record Sold provision.”

Lastly, the court then looked at federal copyright jurisprudence defining “licenses,” and then simply connected the factual dots to conclude that that the sound recordings that Aftermath provided to iTunes were licensed.

The aftermath of this case is significant.

F.B.T. told the New York Times that the decision was worth $17 to $20 million now, and that it may be worth $40 to $50 million within five to 10 years.

Moreover, while record labels have gotten smarter since the early 2000s and have revised their contracts to specify royalties for digital music downloads, there are gluts of artists with older contracts that do not.

Obviously, they also stand to gain significantly from this decision.

In the grand scheme of things, the lawsuit won’t change the way that recording labels currently conduct business, but it should serve as a warning for the future: failures to adapt to shifts in technology will cost you dearly.