Back Track

Recording artists could recoup millions of dollars in royalties following a federal court ruling in a case brought by a metro Detroit entertainment team.
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Will management and labor ever be equally aligned? Maybe in the entertainment industry, after a metro Detroit producer won a recent federal judgment stating that recording-artist royalties must be split evenly with record labels. The ruling may affect everyone from mega-stars to one-hit-wonders, along with the legal and accounting firms that represent them.

The issue involves a contract discrepancy concerning how digitally downloaded songs — and the associated payment structures — were classified by Universal Music Group as it related to Detroit rap star Eminem, one of the world’s most successful recording artists.

Many other artists with similar provisions in their contracts stand to benefit, as well.

Joel Martin, manager of Bass Brothers FBT Productions in Ferndale, where Eminem recorded many of his hit songs like “Lose Yourself,” recalls seeing the initial discrepancy. “We had an audit that was conducted in 2006,” Martin says. “It went back three years. So starting in 2006, it potentially covered the first time that digital royalties appeared on any kind of statement. When we got the audit royalty report it was obvious that they were paying us under the records-sold provision, as opposed to the license provision. We made a claim to Universal Music that we had an issue with it.”

What, ultimately, was in question? Clarification was needed on whether a digital download from iTunes should be considered a licensing deal. Adam Parness, director of music licensing at Rhapsody.com, says under a “records-sold” classification, the artist gets 12 percent to 15 percent of each song sold (some artists may get a higher percentage, based on their popularity). “If it is a licensed master, which has traditionally meant a license for a soundtrack or TV show, that has been a 50/50 split,” Parness says.

The big shake-up occurred when artists began trying to define the digital download classification. If the label sends a master recording over to iTunes, which duplicates that digital file to thousands of individual fans for a 99-cent download fee, how are the payments divided?

Up until the recent court ruling, iTunes kept about 29 cents and the labels got 70 cents. The labels then kept roughly 88 percent of the 70 cents, and sent the remaining 12 percent or so to the artist. In other words, the master copy obtained by iTunes looked pretty darn similar to the one sold for a movie soundtrack.

“Who in their right mind would say you could apply packaging deductions to digital downloads? There are no packaging deductions,” Martin says.

Although the case may appear clear-cut, FBT’s legal team — which included Howard Hertz, a shareholder with Hertz Schram in Bloomfield Hills (Honigman Miller in Detroit was on the initial legal team but was conflicted out) — had their hands full bringing a jury up to speed and explaining the delineation between a license deal and a record sale.

Martin says Universal’s legal team “constructed this scenario where the iTunes store is just that, a store, just like you go into a regular store and you want to buy something. You pay for it, you get it, and you listen to it. You can do whatever you want with it. Our position was it’s not exactly like a store where you can physically go buy something that you can resell.”

The upshot? The 9th U.S. Circuit Court of Appeals in San Francisco found that iTunes “used” the masters, meaning it’s a license. Universal appealed the ruling to the U.S. Supreme Court, which declined to review the case, so the 9th Circuit opinion stands.

Martin says the monetary worth of the verdict for Eminem (and, by extension, himself, since he administers the rights to the songs) up to this point “is between $15 million and $20 million. On a future going basis, you could be talking $50 million to $60 million in the life of the catalog — and this is just one catalog.”

As a result, numerous artists are re-examining their contracts. “The big problem was removed by the courts,” Martin says. “They held that [the case] is what they would call black-letter law; you can now go into court relying on that. It doesn’t automatically change things, but if there are class actions and people contest the accounting provisions, that is exactly what they are going to do.”

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