The U.S. Court of Appeals for the Ninth Circuit, reversing a district court decision, held that Eminem’s record label improperly calculated royalties in connection with the exploitation of Eminem’s sound recordings as digital downloads and ringtones. F.B.T. Productions, LLC v. Aftermath Records, Case Nos. 09-55817, -56069, (9th Cir., Sept. 3, 2010) (Silverman, J.).
Plaintiff F.B.T. signed Eminem in 1995 and acquired exclusive rights to his sound recordings. In 1998, F.B.T. transferred the rights to Eminem’s artistic services to Aftermath. Pursuant to the agreement between F.B.T. and Aftermath, F.B.T. was entitled to between 12 percent and 20 percent of the adjusted retail price of all "full price records sold in the United States … through normal retail channels." The agreement also provided that, "notwithstanding the foregoing," F.B.T. was entitled to 50 percent of Aftermath’s net receipts "on masters licensed by us … to others for their manufacture and sale of records or for any other uses" (emphasis added). The parties entered into subsequent agreements, but the aforementioned provisions remained unchanged. In 2006, F.B.T. sued Aftermath after an audit disclosed that Aftermath had been calculating F.B.T.’s royalties for permanent digital downloads and ringtones as "records sold" and not "masters licensed." At trial, the district court denied F.B.T. summary judgment, and the jury found in favor of Aftermath. Aftermath was also awarded it over $2 million in attorneys’ fees. F.B.T. appealed.
The 9th Circuit reversed. The court held that the district court erroneously determined that the royalty provisions were ambiguous. Even if a transaction arguably fell within the "records sold" provision, the parties’ use of the term "notwithstanding" entitled F.B.T. to a 50 percent royalty if Aftermath licensed an Eminem master to a third party for "any" use. The court explained that just because a provision is broad, it is not necessarily ambiguous.
To determine whether permanent digital downloads and ringtones were "licensed" (as opposed to sold) to third parties, the court looked to the Copyright Act and 9th Circuit case law to differentiate a "sale" (involving a transfer in title or a sale of all exclusive intellectual property rights in a work) and a "license" (whereby a copyright owner retains title, limits the uses of the work and is periodically compensated for the grant of such right). Because it was undisputed that Aftermath retained ownership of the Eminem sound recordings at all times, retained the right to prohibit the download distributors from exploiting the recordings and received periodic payments from the distributors based on the number of downloads, the court concluded that Aftermath’s agreements with third-party download vendors are "licenses" to use the Eminem master recordings. Accordingly, the 9th Circuit concluded F.B.T. was entitled to a 50 percent royalty on all such downloads.
Based on its findings, the 9th Circuit reversed and remanded; it also vacated the award of Aftermath’s attorneys’ fees.