Music & Publishing Industries Suffer Setback in Digital Download Case

 

Copyright Alert: 9th Circuit Holds Digital Downloads are Licenses Not Sales

FBT Productions LLC v. Aftermath Records (9^th Circ. 2010)



What should musicians and authors be paid for digital downloads?  In a decision with implications for the publishing industry the Ninth Circuit Court of Appeals recently ruled that rapper Eminem’s production company was entitled to 50% of his record label’s revenue from digital sales. 

The issue in F.B.T. Productions v. Aftermath Records was whether a digital download was a “sale” or a “license.” Like the music industry, publishers have taken the position that digital downloads should be accounted for as sales not licenses.  Typically, the royalty rate paid for subsidiary rights revenue is split 50/50 between the author and publisher, compared to 25% of net paid to authors for the “sale” of an eBook. 



Distinguishing Sales and Licenses

 

In its September 3, 2010 ruling, the court held that digital downloads should not be treated as auditable physical units for royalty accounting purposes.   The ruling is important for the recording industry, because recording artists (like book authors) receive 50% of the record company’s net receipts from rights licensed to third parties -- as opposed to 12% to 20% of the retail price. 

The divisibility of copyrights was the theory relied upon by the court in determining that a digital download from the iTunes store was not a sale but a license. 

The Ninth Circuit held:

When the facts of this case are viewed through the lens of federal copyright law, it is all the more clear that Afterrmath’s agreements with the third-party download vendors are “license” to use the Eminem master recordings for specific purposes authorized thereby — i.e., to create and distribute permanent downloads . . . — in exchange for periodic payments based on the volume of downloads, without any transfer in title of Aftermath’s copyrights to the recordings. Thus, federal copyright law supports and reinforces our conclusion that Aftermath’s agreements permitting third parties to use its sound recordings to produce and sell permanent downloads . . . are licenses.

To the extent publishers transfer the right to make digital copies available to a digital download distributor, who then sells direct to consumers, it would, under the holding of this decision, constitute a license.  Digital download distributors do not, to quote the decision, “obtain title to digital files.”  The legal principle is quite simple.  Copyrights are divisible.  They can be assigned for less than their complete term, for a particular territory, and for a particular use -- rather than all rights under copyright.  If iTunes or Amazon or Sony or Kobo purchases an eBook from a publisher and resells it to a consumer, in the Ninth Circuit, it would considered a sale.  On the other hand, if the publisher retains ownership of the files, and receives periodic statements iTunes, et al, the rule of the case, applied mechanically, would categorize revenue from the "sale" of a digital download as subsidiary rights income.  


Many contract templates have already been modified by publishers in anticipation of a decision such as this one.  As such, they are likely immune to the decision's economic impact.  With regard to legacy or backlist contracts, labels and publishers will try to mitigate the impact of this decision by seeking retroactive contract amendments, and, perhaps, waivers of claims for back royalties.

The court regarded the record label’s ability to regain possession of the digital files at any time as a key element in supporting it’s finding that the label did not “sell” anything.

There is no dispute that Aftermath was at all relevant times the owner of the copyrights to the Eminem recordings at issue in this case, having obtained those rights through the recording contracts in exchange for specified royalty payments. Pursuant to its agreements with Apple and other third parties, however, Aftermath did not “sell” anything to the download distributors. The download distributors did not obtain title to the digital files. The ownership of those files remained with Aftermath, Aftermath reserved the right to regain possession of the files at any time, and Aftermath obtained recurring benefits in the form of payments based on the volume of downloads . . . Under our case law interpreting and applying the Copyright Act, too, it is well settled that 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.

Importantly, if FBT were applied to books, you would find the word “license” multiple time, in, for example, Amazon’s Digital Distribution and Sony’s eBook agreements with publishers. 

Opportunities for Authors & Strategies for Publishers

 There is no way to predict whether the Second Circuit would follow the same line of reasoning as the Ninth Circuit.  Historically, the Second Circuit and Ninth often come to different conclusions via-a-vis new media issues.  No doubt, the commentators will have a day of it.  The decision will be opposed by the music and publishing industries.  Public statements will be made stating that the decision should be limited to the facts of this particular case.  And, while Eminem’s label may threaten to take the case to the Supreme Court, it will likely not act on that threat, as a final adverse judgment (assuming the Supreme Court would hear the case) would be devastating to that beleaguered industry.   

"The Penguincubator"
Dowload or Book Sale?
Penguin's Early B2C Experiment

Like the recent Random House–Wylie dust up, and the Rosetta Books decision, matters such as this are usually settled on confidential terms.  As the  FBT decision is not limited to records, agents and publishers should turn to their lawyers to help them determine what is the best current business practice in view of this important decision.  Consequences?  Agents will be emboldened to demand higher royalties from digital downloads, raising the familiar argument, "There's little direct cost today in getting eBooks into readers' hands.  Give me more!"   The future?  eBook rates for backlist titles (but maybe not for frontlist titles) will rise above 25%, and some wise publisher in the next six months will issue a press release stating that “In the light of dramatic changes that have taken place in the book publishing industry over the past several years, it is only fitting that the authors who comprise our backlist – and their heirs – be paid in accordance with today’s standards.”  

As the Rosetta Books decision illustrated, additional rights beyond primary rights, when sought by a publisher, are subject to separate negotiations and consideration.  If not resolved by a separate agreement, or amendment to the contract, such matters can wind up in court.   Whether this decision helps establish new ground rules for artist and author compensation remains to be seen.  I bet it does. 



How will this affect book publishing?  Will it accelerate the pace of the industry’s transition from a B2B to a B2C model?  Will conglomerates unload (trade) publishing houses?  Will Google start acquiring houses like the TV networks once went after studios?  A Penguincubator on every corner?  Stay tuned. It's not the end of publishing, just another chapter. 



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THE INFORMATION CONTAINED IN THIS ARTICLE IS OF A GENERAL NATURE.  IT IS NOT INTENDED AS LEGAL ADVICE.  READERS ARE STRONGLY ADVISED TO CONSULT WITH AN ATTORNEY BEFORE RELYING ON ANY INFORMATION CONTAINED HEREIN.  THIS POST DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP OR ANY OTHER EXPECTATION OF REPRESENTATION

The Electronic Rights Dilemna

What Jerry Garcia & Ted Turner Can Teach the Publishing Industry

A Legal Footnote to the Andrew Wylie E-Book Controversy

Penguin R

andom House has its own self to blame for the electronic pickle they find
themselves in today. When drafting the original, pre-internet, publishing contracts for Cheever, Nabokov and Updike, they left out the future technology clauses.  To be clear, it's not that they didn't know how to draft future technology clauses.  They left them out.   As such, they just weren't thinking much about the future.  Likely, they were doing what was expedient, i.e., signing up books in "book form."  

What Was Random House (Not) Thinking?

As early as 1909, publishing attorneys have been thinking about e-books.  In 1909, they even included a "future technologies" clause in Mark Twain's publishing contract for his soon-to-be published (as in 2010) autobiography.  The "future technologies” clause, which acts as a catch-all for technologies and media not yet invented, has been around for a long while.  Narrowly drafted (out of respect for the author's rights and the publisher's legitimate interests), such a clause would have snagged verbatim e-book reading rights.

What the Publishing Industry Can Learn from Captain Trips & Captain Outrageous

What once seemed trivial (i.e., drafting a contract clause), is now upsetting the balance of power in the publishing industry.  It's a classic case of an ounce of prevention.   Happily, America has a long history of entrepreneurs taking undervalued opportunities (e.g., Turner's purchase of the old -- much undervalued -- MGM/UA film library in 1986) and leveraging them to create great value.

There's a Jerry Garcia/Phil Lesh/Robert Hunter lyric that neatly sums it up:  "One man gathers what another man spills” That was Turner's modus operandi, when he acquired the pre-1986 MGM, and pre-1950 Warner movie libraries.  He dusted them off, colorized them, and started profitable new media ventures.   He looked for and found undervalued opportunities and created great value. That's the American way.  Is Andrew Wylie a latter day Ted Turner?  Is he creating value or merely nibbling away -- unfairly -- at Random's backlist?  You be the judge.

Wylie's E-Book Gambit Changes the Digital Landscape

This week the industry was shaken by Andrew Wylie's announcement that he was entering into an exclusive  relationship with Amazon to sell Kindle versions of  his author's bestselling p-books.  Wylie's move is troubling.  What's troubling is that Amazon becomes the exclusive e-purveyor of  bestselling backlist titles -- and a direct competitor of RH and other print publishers who obtained "book form" rights under legacy agreements.   From the Big-6 publishers' perspective, this disrespects both the letter of their publishing contracts (all of which contain non-competition clauses), and the spirit of them.  It's Rosettta Books all over again, but different, since the digital landscape has changed since the late 90s.  Today, for example, e-books are displacing mass market sales.   

On the one hand, you can't fault Wylie for seeking out new digital revenue streams for his authors (and their heirs).  However, Amazon is no longer just a bridge between publishers and readers.   It is a competitor.  You can't play both sides of the net without being called out for it.  

What to Do?

Traditionally, bookselling was separated from publishing, with booksellers (including Amazon) realizing the benefit of combining the wares of many publishers. Now that Amazon has the ability to perform all of the activities that take place between delivery of an edited manuscript and delivery of finished books to readers, the publishing industry needs to take a long hard look at its business relationships -- and business model.  The Wylie-Amazon alliance is a slippery slope that can easily decrease the diversity of books in the marketplace, as well as access to them.  Like Amazon's BookSurge gambit of two years ago, Amazon is seeking to steer consumers to books that they either produce and/or control.  

Two years ago, Amazon stated that they were not seeking exclusivity to indie published books (i.e., requiring POD titles be printed exclusively through Amazon's BookSurge POD service).   Industry pundits claimed that was exactly what they were trying to do.   Apparently, the pundits were correct.  Today, public disavowels are impossible.   How Amazon will deflect the wrath of the industry remains to be seen.   

In Joseph Esposito's excellent article entitled the "Platform Wars" [IBPA Newsletter], he wrote, "Book publishers have lost control over their own industry, and not because consumers have won.  They haven't -- they will be no better off with defacto platform dominance than anyone else except the company that controls the platform." 

Platforms like Amazon and Google have morphed into celestial publishers.  Amazon did this by design.  Google stumbled into the publishing business by scanning books without permission.  For their punishment they received exclusive control over "Orphan Works" (i.e., in-copyright, but out-of-print books, whose authors have gone missing).  

And so it goes.  Amazon is like the abusive partner one tolerates for the benefit of the kids.  However, the industry is loosing its patience.  While I have a beef with John Sargent (we don't see eye to eye on the GBS), I applaud his muscular response, and RH's, to Wylie's exclusive arrangement with Amazon. 

The digital meteor has hit.  It will be followed by the copyright termination time bomb.  To survive both, publishers need to present content in a variety of digital formats and rethink certain ways of doing business -- and who they wish to partner with.   Large publisher dominance is being eroded.  Change is inevitable. It cannot be stopped nor should it be.  However, it would reduce my paranoia if Amazon, Apple and (especially) Google, were prevented from playing digital favoritism.  Amazon is no longer just a retailer, and Google has never been a public utility.  They are publicly traded companies, prone to favor their own intellectual property over the property of others.     

Mr. Esposito's advice is right on  the money.  "[T]he best strategy is to be present on all the competing platforms, while exercising judgment as to timing and pricing."   Essential parts of that strategy include, making Amazon (and Wylie) stand in the corner and apologize; taking a blue pencil to the Orphan Works provision of the GBS; and, as Joe suggests, exercising good publishing judgment as to timing and pricing.   And, the industry just might want to put the Justice Department's number on speed dial.  If you sleep with a mildly abusive partner, you may wake up someday and find yourself needing an order of protection.   

Related Post: 

Let Me Be The First To Welcome Our New E Publishing Overlords

Is Your Publishing Contract Enhanced eBook & iPad Ready?

What Legal Lessons Can the 7-Inch Single Teach the Publishing Industry? 

By Lloyd J. Jassin

Why is Arthur Godfrey smiling?  In 1949 the former CBS pitchman understood that each new electronic technology changed the nature of what, and how, we communicate.  And, his attorney knew that advances in new technology, in this case, the recently introduced 7-inch Microgroove single, would challenge the way entertainment contracts for pre-1949 recordings would be interpreted.

Old Wine in New Bottles

Just as in the 40s and 50s, with rapid advances in new technology, old contracts are being dusted off and language scrutinized to answer the question “Who controls new rights created by recent technological developments?”  Due to ambiguities and omissions in many older publishing agreements, "Who controls enhanced eBook rights?" has become a controversial topic, subject to differing interpretations.    

Exemplifying the digital rights controversy is the December 11, 2009 letter from Markus Dohle, CEO of Random House, in which he boldly asserted that RH controlled the “vast majority” of digital rights to its backlist.  This assertion  precipitated a collective “Yeah, right!” from literary agents across the globe.  This article, among  other things, looks at how courts interpret pre-digital age contracts.    

To be clear, Mr. Dohle’s claimed ownership of backlist digital rights is based on a very favorable (for RH) interpretation of  pre-digital age contracts, in which RH received “for the term of copyright, the exclusive right to publish and sell works contracted for in book form.”  

Are 360 All Rights Deals in the Our Future?

What is also significant about RH’s pronouncement, is that it likely presages a new, more muscular approach to contract negotiation by the big six publishers.  Specifically, I refer to 360 deals.  Increasingly common in the music industry, with a 360 deal, a publisher would receive a percentage of earnings from ALL of the author’s activities, instead of just book sales.  Traditionally, motion picture, television, dramatic and merchandising rights, as well as lecture fees, were off limits to publishers.  Synergy, which media monoliths CBS and New Corp claimed would transform the publishing industry when they acquired, respectively, S&S and the House of Harper, hasn't happened in a big way.  In short, 360 deals are ill-advised.

Has Random House Reinvented the Way We Read Publishing Contracts? 

Random House’s grab for digital rights follows a well-established pattern in the entertainment industry.  Cases addressing whether older entertainment industry contracts granted rights for new uses such player piano rolls, radio, motion pictures, television, videocassettes, and even paperbacks and eBooks, are plentiful.  Like Random House, motion picture studios once claimed that they already had the right to exhibit films on television, and to distribute them as home videos.  While the cases are not uniform in their holdings, rest assured, basic principles of contract interpretation exist to guide us.  
   

How to Interpret Old Contracts

When a contract is ambiguous, the job of ascertaining the parties’ intent may, ultimately, be left to a court to decide.  Since contracts are not drafted in a vacuum, courts look at industry practice.  In the case of eBook and enhanced eBooks, courts will ask whether distribution of books in digital form was recognized by knowledgeable people in the industry when the contract was drafted.  Courts will also look for any provisions that tend to limit the “exclusive right to publish . . . in book form."   For example, did the author negotiate a “reserved rights” clause?   To be clear, the majority of courts have held that a grant of future technology rights cannot be inferred from an agreement, unless the technology was known at the time of the grant. 

When a contract is susceptible to two reasonable interpretations, the Restatement (Second) of Contracts, states that the agreement should be construed against the party who drafted the language.  Since Random House was in a stronger bargaining position, unless it could be shown that the author (or agent) had an equal hand in drafting the agreement, RH’s backlist contracts would be interpreted by courts in a light most favorable to the author.

Contract Fixes

-->Unfortunately, there are no neat definitions for what many are calling enhanced eBooks.  In the old days (i.e., six months ago), so-call enhanced eBook rights fell within the meaning of the terms “interactive” or “multimedia” rights.  Whereas, an eBook and a book are both linear narratives, an enhanced eBook is a horse of a different color.  Since the sale of film or television rights – which are generally retained by the author -- could be impacted by a grant of multimedia rights, as a rule, agents and knowledgeable publishing attorneys, strike all reference to “interactive” or “multimedia” rights from publishing contracts.  Few publishers balk at this.  As an alternative, if a publisher does balk, most accept language that limits the grant, e.g., “Multimedia rights shall not include traditional motion picture, television or video rights in linear form or audio rights.”  Another contract fix is written approval by the author, prior to turning their book into a multimedia derivative work.
While RH’s pronouncement does violence to federal copyright policy that protects authors from the unintentional grant of the exclusive rights to their works, under the 1909 Copyright Act, it was much easier to inadvertently transfer one’s copyright rights than it is today.  Unlike today, under the old 1909 Copyright Act , which still applies to works published before 1978, an exclusive license could be implied from the conduct of the parties

Where the Random House agreements Mr. Dohle cites to contain “future technologies” clauses, RH's claim is much stronger -- although, not all courts have enforced these provisions.  For example, in Tele-Pac, Inc. v. Grainger, a New York court held that the license to distribute films for “broadcasting by television or any similar device now known or hereinafter to be made known” did not encompass videocassette rights.   The Appellate Division of the New York Supreme Court, rejecting the lower court’s attempt to equate broadcasting with the grant of videocassette rights, held that distribution of a film by videocassettes was not analogous to broadcasting by television.

If a court were to adopt the Tele-Pac analysis, it might determine that an e-Book is not analogous to a bound volume,  just as a film is not a videocassette.  Whereas a plausible argument can be made that e-Books and books are two distinct media, a compelling argument can be made that an enhanced eBook and bound book are two very distinct media -- the latter having more in common with film and television adaptation rights, rights traditionally retained by the author.   Interestingly, where an author retains enhanced eBook rights, a question exists as to what contractual limits, if any, exist on the author’s ability to synch audio, video and still images with the book’s text.   

Conclusion

Whereas the display of the verbatim text of a book on a screen is an eBook, an enhanced eBook (whether an iPad, app, or website combining text, graphics, audio and/or video) is a derivative work and is a matter for informal or formal negotiation. 

Today, most print publishers are only in a position to exploit non-interactive rights. Most will be satisfied to obtain what is know as either display or verbatim electronic rights, as opposed to interactive or multimedia electronic rights.  Ultimately, authors will have to decide how much faith to place in their publisher’s ability to produce and market so-called enhanced eBooks.  Alert authors, before taking that leap of faith, however, must modify their publishing agreements so their ability to exploit lucrative film and television rights (in partnership with others) is not inadvertently undermined.     

Lloyd J. Jassin is an attorney and co-author of  The Copyright Permission and Libel Handbook (John Wiley & Sons”).  A former publishing executive, he has represented publishing clients for many years.  He can be reached at Jassin@copylaw.com.  The Offices of Lloyd J. Jassin are  located at The Actors’ Equity Bldg., Suite 400, 1560 Broadway, New York, NY 10036, 212-354-4442 (tel.), 212-840-1124 (f).  Follow him on Twitter at www.twitter.com/lloydjassin.