IS IT A SALE…OR A LICENSE?

Ivan Hoffman, B.A., J.D.


        Here is the situation: you have a written contract for the production and sale of records, books or other creative works.  And now the work is being offered as a download on another site.  Is the download deemed a sale of the work or is it a license of the work?

        The difference is very important.  Sales of a work are generally paid to the creator (author, recording artist etc.) at a lower rate (often a percentage of the retail or wholesale price) but licenses of the work, since they generally involve no production or other expenses on the part of the publisher or record company or other distributor, are generally paid to the creator at a percentage of the license fee, perhaps including any advances received by the publisher, record company or other distributor, and usually range anywhere from 25% to 50% or higher of the gross.

        This issue has become most prevalent in the record business where often the agreements were drafted long before there was anything like downloading available.  However, it is also quite prevalent in the book publishing business given the fast growing market for downloadable books.

        And so the parties and in turn the courts have had to interpret the intent of the parties as expressed in the agreement.  Keep in mind that these matters are very much about the language of the individual agreement and thus the lesson here, as in many of my other articles including those in the series “Precise Contract Language” (click on “Articles for Writers and Publishers” and “Articles for Recording Artists, Songwriters and Actors”) is about clear drafting and not using forms.  A great deal of money can ride on the outcome and trying to “save” money by not having an experienced attorney draft the agreement can turn out to be very “expensive.”  In the case discussed in this article, the decision seemed to turn on one single word!

        In FBT Productions, LLC. and Mm2M, LLC vs. Aftermath Records et. al., the Ninth Circuit Court of Appeals interpreted the 1995 agreement between the label and the artist “Eminem.”  In the agreement between FBT and Aftermath, the language provided:

The “Records Sold” provision of that agreement provides that F.B.T. is to receive between 12% and 20% of the adjusted retail price of all “full price records sold in the United States . . . through normal retail channels.” The agreement further provides that “[n]otwithstanding the foregoing,” F.B.T. is to receive 50% of Aftermath’s net receipts “[o]n masters licensed by us . . . to others for their manufacture and sale of records or for any other uses.”
        In 2002, the label entered into an agreement to have the recordings included on the iTunes web site.  The label also made deals with cell phone companies to have the recordings used as master tones, also known as ringtones.

        The parties later entered into a new agreement, replacing the 1995 agreement, and it stated:

“Sales of Albums by way of permanent download shall be treated as [U.S. Normal Retail Channel] Net Sales for the purposes of escalations.” (i.e. as sales)
        When Aftermath accounted to Eminem, it did so on the basis that the downloads were normal retail sales.  Eminem contended that downloads are licenses.  The appellate court stated:

        On summary judgment, Aftermath argued that the Records Sold provision applied because permanent downloads and mastertones are records, and because iTunes and other digital music providers are normal retail channels in the United States.

[4] However, the agreements also provide that “notwithstanding” the Records Sold provision, F.B.T. is to receive a 50% royalty on “masters licensed by [Aftermath] . . . to others for their manufacture and sale of records or for any other uses.” The parties’ use of the word notwithstanding” plainly indicates that even if a transaction arguably falls within the scope of the Records Sold provision, F.B.T. is to receive a 50% royalty if Aftermath licenses an Eminem master to a third party for “any” use. A contractual term is not ambiguous just because it is broad. Here, the Masters Licensed provision explicitly applies to (1) masters (2) that are licensed to third parties for the manufacture of records “or for any other uses,”(3) “notwithstanding” the Record Sold provision. This provision
is admittedly broad, but it is not unclear or ambiguous.
        Aftermath further argued that the agreements it entered into with others did not qualify as “licenses” but the Court disagreed and summarized the differences between “sales” and “licenses” under the copyright law.  The Court stated:
 [7] 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.

[8] 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.

        Aftermath further argued that the 2004 amendment, discussed above, indicated that downloads were to be governed by the “sales” provisions of the agreement.

        The Court again disagreed and stated:

Aftermath argues that the 2004 amendment to the agreements clarified that the Records Sold provision sets the royalty for permanent downloads. However, the 2004 amendment states only that albums sold as permanent downloads are to be counted “for purposes of escalations” under the Records Sold provision, and that “[e]xcept as specifically modified herein, the Agreement shall be unaffected and remain in full force and effect.” Read in context, the plain language of the amendment provides that sales of permanent downloads by third parties count towards escalations on the royalty owed when Aftermath itself sells records through normal retail channels. It does not state, and in no way implies, that the royalty rate for the sale of the permanent downloads by third parties is set by the Records Sold provision.

       Conclusion

        As indicated above, the Court seemed to decide the matter on the basis of one word: “notwithstanding.”  This indicated to the Court that even if downloadable uses might otherwise qualify as normal retail sales, the agreement meant that “notwithstanding” that,  the parties intended that such downloads be treated as licenses.

        I have said many times, good legal drafting is about saying things in the agreement in such a way that no one can interpret it differently than the draftsperson intended.  Say the extra words.  And remember: it never matters, until it matters and then…it matters! SM

Copyright © 2010 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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