March 09, 2011

Legal News: F.B.T. Prods., LLC v. Aftermath Records

When interviewing for a music industry job or internship, knowing what is going on in the industry can really impress your interviewer and give you those extra points to snag the position.  To keep you updated, I'll be posting summaries of cases, legislation, or whatever else is going on in the legal world that affects the music industry.

What Happened:
F.B.T. Prods., LLC v. Aftermath Records is a case from late 2010 involving a contractual dispute over royalties due to Eminem's producers, FBT Productions (Eminem was not a party to the case).  The plaintiff signed Eminem to an exclusive recording agreement and helped launch his career, and the defendant is Eminem's label, a subsidiary of Universal Music Group that was founded by Dr. Dre.  The dispute was over whether, based on the language in FBT's agreement with Aftermath to deliver Eminem records, sales made on iTunes should be treated as albums sold through Normal Retail Channels in the United States (USNRC) or as masters licensed to iTunes for "manufacture and sale of records or for any other uses."  This is a big difference, because according to the contract, FBT's royalty on albums sold through USNRC was around 12-20%, but it was to receive 50% income from masters licensed.  Digital distribution had not been contemplated in the disputed contracts, so Aftermath decided to treat singles and albums sold through iTunes as though they were sold through a physical record store, which was what USNRC meant then (and usually still does now).  FBT disagreed, and so it was up to the court to decide how the contract should be interpreted.
The trial court jury sided with Aftermath, but the Ninth Circuit reversed in favor of FBT because the contract said that notwithstanding the Records Sold provision, FBT would get 50% of licensing net receipts for any use.  The court found that downloads sold by iTunes were licensed to it by Aftermath, not sold, because Aftermath retained ownership of the songs and received a royalty for their use.  Therefore, Eminem records were not "sold" through USNRC when Aftermath agreed to let iTunes sell Eminem downloads, but licensed.

Why It's Important:
Because contract dispute cases are very fact specific (the exact contract language determines the outcome), F.B.T. Prods. doesn't leave much of a precedent for courts to follow in future cases.  But that doesn't mean that future plaintiffs won't try to use the outcome to their advantage.  A similar lawsuit was filed against Sony Music Entertainment in 2006, and the plaintiffs are likely to use whatever parts of the F.B.T. Prods. opinion that they can to sway the court in their favor.  Aftermath messed up by not executing an amendment to the contract clarifying how digital downloads would be accounted for, and made that mistake worse by choosing the accounting scheme that benefited it instead of FBT.  The general lessons to be learned here are to draft/read contracts carefully, explicitly provide for changes in the business and/or technology, and don't trust the other party to look out for your best interests.

- Lauren
lauren@internlikearockstar.com | Twitter: @Musicn3rd
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