Cutting Out the Middle Man: Copyright Grant Terminations and the Repercussions of F.B.T. Productions vs. Aftremath

An interesting issue plaguing record labels is the notion of copyright grant termination by recording artists and songwriters.  Although no copyrighted works have yet become eligible for grant termination, such grant terminations can possibly have huge implications on the record labels that depend on the sales of older sound recordings. Copyright grant terminations will cause record labels great hardship, forcing the labels to return ownership in musical compositions to their original creators.

In typical music industry practices, songwriters and recording artists grant copyright ownership in musical compositions to record labels and music publishers in order to have their works manufactured and distributed.  Since the music industry depends on exploiting musical works, the party who owns the copyright interest in the musical composition has control over how works are used.  Accordingly, the copyright owner will be the primary party to profit from this exploitation.

If recording artists and songwriters reclaim their grants, the artists and songwriters will have sole control over the music and record labels will no longer be able to profit from the musical works.  Since copyright ownership in a musical composition is the most valuable asset for record labels, copyright grant terminations will essentially cause record labels to lose the foundation on which the music industry stands.

Under section 304(c) of the Copyright Act, the artists’ reclaim period begins in 2013 for copyrights assigned on or before January 1, 1978.  Section 304 of the Copyright Act gives artists and songwriters the inalienable right to terminate their pre-1978 copyright transfers 56 years after the date of transfer.   Under this section, “[t]ermination of the grant may be effected at any time during a period of five years beginning at the end of fifty-six years from the date copyright was originally secured, or beginning on January 1, 1978, whichever is later.”

For post-1978 transfers, section 203 of the Copyright Act allows artists and song writers to terminate their copyright grants 35 years after the grant, providing a window that is “affected at any time during a period of five years beginning at the end of thirty-five years from the date of execution of the grant.”

The right to terminate grants, however, does not apply to works made for hire.  Since works made for hire in the music industry are songs written and performed by “employees” of the record label, sole ownership belongs to the record label “employer.”  In 1999, record labels sought to have the House of Representatives amend the Copyright Act in order to have sound recordings classified as works made for hire, thereby bypassing the potential loss of copyright grants.

Record labels claimed that since albums are compilations of individual sound recordings, albums fit within an exception under the Copyright Act.  Record label argued that, since sound recordings already fit within an exception under the Copyright Act, sound recordings should also be considered works made for hire.  Record labels, however, failed to persuade Congress to recognize sound recordings as works made for hire.

Despite record labels attempt to maintain copyright transfers, several artists, such as the Eagles, have spoken openly about reclaiming their rights.  With artists like Steve Greenberg – who wrote, produced and performed the disco hit “Funkytown” under the stage name Lipps, Inc. – sending termination notices to record labels, it will only be a matter of time until record labels find themselves loosing valuable assets.

The approaching copyright grant termination windows are also coming at time when older artists, who have not released albums in decades, are becoming more frustrated with the royalty rates they receive for the digital exploitation of their music. Since many of these artists have not renegotiated their contracts since the outbreak of the digital age, much debate and animosity has arisen over the formulations used to calculate the royalty rate for digital downloads.

In March 2011, the US Supreme Court denied UMG’s petition to review the 9th Circuit Court of Appeals’ ruling in F.B.T. Productions vs. Aftermath Records (commonly referred to as the “Eminem-UMG/iTunes” case, even though Eminem and iTunes are not actually parties to the case), upholding the Court of Appeals decision. In the “Eminem-UMG” case, F.B.T. Productions, Eminem’s then production company, sued Universal Music Group arguing that digital downloads fell under the “master license” provision of the contract and not the “records sold” provision. Under the “master license” provision, F.B.T. gets a 50-50 split in profits for every digital download of Eminem’s music, rather than the 18.23% royalty rate for music sales under the “records sold” provision. In trial court, the jury found in favor of UMG, finding that digital downloads constituted a sale rather than a license.

F.B.T. appealed the trial court’s decision, and the 9th Circuit Court of Appeals ruled in favor of the production company. According to the Court of Appeal’s decision, digital downloads are third-party licenses, not sales, and are therefore subject to the higher royalty rate.

This decision has a great impact on artists signed to recording agreements that do not specifically address digital downloads. For artists signed to pre-digital age contracts, artists are potentially entitled to higher licensing royalty rates every time fans download their music.

F.B.T.’s industry changing suit caught the attention of many older artists. On April 1, 2011, Rick James’ estate filled a class action suit against UMG, seeking the higher “license” royalty rates for James and other artists who may join the suit. The impact of this suit can potentially have massive financial ramifications on record labels.

The tension between older musicians and record labels regarding the royalty rates that artists receive from digital downloads can further weaken the artist-label relationships. As artists can potentially receive millions in payouts for past downloads, artists will also have the incentive to terminate their original copyright grants in order to sign to more lucrative deals or to independently control the distribution of their music.

Although the copyright grant termination will cause havoc for record labels that are already suffering from profit loss, copyright grant terminations can better help artists reach listeners.  With artists in (more) control of their recordings, artists can license their recordings more freely and at lower rates, as well as sell albums and downloads at lower prices. In turn, artists are happier with higher profit margins while retaining more control over the distribution of their music.

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