9th Circuit Holds Digital Downloads are Licenses Not Sales
FBT Productions LLC v. Aftermath Records (9th Circ. 2010)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.
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.”
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