A guide for musicians on how to clearly define the difference between a Sale and a license within their record contracts. Includes a small analysis of the current battle within the Music Industry

1. License v. Sale
A Guide for Musicians and Their Record Contracts.
Written by Samantha May Juneman
2012
ph 562.277.2700
sjuneman@uw.edu
COM 558
www.Samlar.com Law & Policy
University of Washington
MCDM

2. What are we doing here? not yours to distribute or sell. However, the
physical entity containing the music is yours to do
Is there really a problem present when we speak what you please with. For our argument here, a
about a sale versus a license? Recording artists physical sale can include costs for packaging,
would say yes, but many record companies like distribution, and promotional efforts. Artists
EMI, Capitol Records, Warner Music, Universal typically receive 10%-20% of the physical sale as
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Music Group, and more, are ignoring the their royalty share. One (and we’ll see
difference. Probably on purpose, and we’ll get to examples of this) can argue that a digital
why, but nonetheless it’s affecting recordings download should not be categorized as a “sale”
artists and should be something clearly defined because the same costs do not apply to the
here. A sale and a license (in regards to recorded content that the consumer has received in this
and distributed music) is quite different transaction. In other words, the consumer did not
depending on whom it affects. In this guide, as a receive a physical compact disk, nor did they
musician, you’ll learn the difference, what the receive album artwork, so why are those costs
current battle around the two is, and how it being deducted from the share the artist
affects you. Most importantly, you’ll learn how to receives?
get the money you deserve and what you’ll need
to do to make sure those record companies What’s a License?
aren’t keeping it for themselves.
A music license can be defined as a “use of
So what’s the problem? copyrighted music … [and] is intended to ensure
that the owners of copyrights on musical works
The real problem artists are facing here is having
are compensated for certain uses of their work. A
their digital downloads categorized as a physical
purchaser has limited rights to use and
“sale” instead of a “license”. This way, “by
reproduce the recorded work without a
treating digital transmissions as “sales,” [record 2
separately arranged agreement.” Artists will, and
companies] can get away with handing over a
should, argue that a digital download of their
much lower royalty rate to musicians than if [they]
1 music (ex. Itunes, Amazon, any mp3 distributor,
treated these as “licenses.” Without specific
etc.) be categorized as a license. The person
language in your contract, your digital downloads
purchasing the download becomes the licensee
can go under reported, and also have container
and therefore now possesses the right to play
and packaging costs deducted from your royalty
that music in a private setting on his or her own
share. Unless a digital download is clearly
personal devices. That licensee does not own a
defined in your contract between you and the
physical piece of property and therefore does not
record company, your rightful earnings could be
have the right to distribute their copy, as they
calculated incorrectly. The worse part is, you
please, much like the right an owner of a physical
might never even notice!
sale does have to sell or transfer ownership of
their physical entity. Artists typically receive 50%
What’s a “Sale?” 3
of a license, as their royalty share. There are no
In this situation, when we mention a “sale,” we distribution, container, packaging costs, etc.
are referring to an exchange of property from one when one grants a license to another.
entity to another. In the record industry, it is
commonly referred to as a physical sale, where a
physical item containing content (whether that be
a CD, Vinyl, Cassette, etc) is being sold to a
consumer. As consumers, we commonly mistake
owning a CD as owning the music on that entity.
However, the intellectual property on that item is
A GUIDE FOR
SAMANTHA MAY MUSICIANS AND THEIR
JUNEMAN LICENSE V. SALE
2012 L ICENSE V . S ALE RECORD CONTRACTS

3. So who’s fighting?
There are some key players in the fight for distinction between a sale and a
license, and it’s important for you to know who they are, and what they did.
Here, we’ll outline our players, and their cases. Each are cases involving
artists involved in a battle against their record companies for under
reporting digital download sales, categorizing downloads as a physical
“sale” instead of a license, deducting container costs and packaging
expenses from royalties, and more.
LICENSE V. SALE

4. F.B.T Productions/Marshall of her work by using a lower-paying sales
theory, rather than under a license theory
Mathers V. Universal Music which would earn higher royalties for she and
Group 5
other artists who signed with EMI. Martha
sought monetary damages, injunctive, and
The artist, Marshall Mathers, better known as declaratory relief against EMI for deciding to
Eminem, has been a pioneer in this battle, pay its recording artists and producers a
recently (2012) winning a case against his record fraction of the actual amount owed to them
company; Universal Music Group. Eminem’s for the licensing of a master recording to
record contract stipulated that he gets 50% of the Digital Content Providers and for failing to
royalties for a license and 12% for a sale. properly pay royalties to its artists for
Without fighting against this issue, his contract electronic transmission of their works. In
and Universal’s accounting errors were expected Martha’s specific case, her contract specifies
to turn into a $40 to $50 million issue. “The suit that EMI was to receive 70% for every
reached its apparent end… when the Supreme licensed, digital download sold, and %50 for
Court refused to hear an appeal, letting stand a downloads sold by Ringtone Providers.
lower court’s decision that digital music should be Instead, EMI was accounting this revenue as
treated as a license.” The key language that coming from a physical “sale”, leaving Martha
becomes a precedent for all other cases about with a tiny percent of what her contract said
the matter is that “the lawsuit argued that record she deserved. Also here, EMI under reported
companies’ arrangements with digital retailers the actual number of digital downloads and
resembled a license more than it did a sale of a digital streams that occur by treating these
CD or record because, among other reasons, the transmission as they would sales of physical
labels furnished the seller with a single master products that might be returned. Illegally, EMI
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recording that it then duplicated for customers. was withholding a certain percentage of
The decision made in this case affects Eminem’s royalties called “reserves” which are intended
contract, signed in 1995, when technology like to cover the cost of unsold records, however,
MP3 players, iTunes, and the like weren’t in full digital transmission are incapable of being
effect. The precedent this case sets might not returned, as there is no physical product to
affect most current artists today, who sign return. This case has product up a number of
contracts sensitive to technology in the industry. “tricks” as to how the Record industry can
However, for those legacy artists,Subhead.
Subhead. Subhead. who still draw secretively cheat artists from their rightful
income from contracts signed in the 1970’s, that royalties.
have absolutely no language to specify how
licenses and sales are decided upon, this Kenny Rogers V. Capitol
decision paves the way for an epic battle of their
own, to rake in unpaid royalties estimating up to Records
a total of $4 billion, industry wide.
Kenny Rogers has joined the battle and has
filed a lawsuit against Capitol Records in the
Martha Davis v. EMI Group U.S. District Court of Tennessee. Alongside
th
March 30 , 2012, Martha Davis, a founding his claims of undistributed royalties from
member of the 80’s rock band “The Motels” filed music sold as digital downloads and
a class action lawsuit against her record label, ringtones, Rogers is fighting for his portion of
EMI. Davis too, felt victim of her record label awards from EMI winning the fights against
shorting her out of music royalties due under her piracy from companies like Napster and
original contract. Here, EMI is accused of Kazaa. Rogers is due “one-half of company’s
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“Mischaracterizing digital downloads and streams net royalties from each source” in regards to
licensing, and is claiming sales reported as
physical sales instead of licenses.
LICENSE V. SALE

5. Peter Frampton V. A&M Sister Sledge V. Warner
Records Music Group
Similarly, musical group, Sister Sledge,
Following the recent victory of F.B.T. fought Warner Music Group for the rightful
Productions and Em2M, Peter Frampton too is distribution of royalties earned from licensing
using the same argument against his case of music performances and recordings to
underpaid royalties from his record company, “Music Download Providers” and “Ringtone
A&M. Although Eminem was awarded his 50% Providers”. Collectively they sought after the
of digital royalties rather than 12% for physical distribution of unpaid money earned from
sales, Universal has maintained that this ruling Digital Content Providers. This suit argues
applies to contracts particular to that case that the contract Warner Music Group has
(F.B.T. vs. Universal) and does not set a legal entered with Digital Content Providers states
precedent. However, Frampton claims that the that WMG license it’s entire catalogue of
language in his agreement is nearly identical to master recordings for that Digital Content
that of the language the F.B.T. suit fought over. Provider to distribute. Therefore, because
This case, might solidify the ruling over the their contract is labeled as a license
original F.B.T case as a universal precedent for agreement, the artists’ music shall be labeled
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the entire music industry.
9 as a license when distributing royalties.
Chuck D. V. Universal Music
Group
Chuck D too has fallen victim to his record
company, Universal Music Group;
mischaracterizing digital downloads as physical
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sales of a record rather than licenses. This
“lawsuit contends that although UMG’s contracts
with digital music providers (like iTunes)
specifically characterize digital distributions as
licenses, UMG has applied the much lower
“sales” royalty rate to digital downloads and
underpaid its artists by hundreds of millions of
8
dollars.” This suit reports that UMG plays it’s
victims 25% of the royalties that is should be
paying them for moneys received from music
download providers. Chuck D has continually
fought of Artists’ rights and will set a precedent
for artists doing business with Universal Music
Group.
LICENSE V. SALE

6. WHAT CAN AN ARTIST DO
TO MAKE SURE THEY ARE
PROTECTED
HERE’S A LITTLE
GUIDANCE…
LICENSE V. SALE

7. Artist Checklist
Here are six things you can do to cover your bases and keep yourself in the know.
1. Clearly define your percentages for Physical record
sales and Licenses
How will you know what your royalties are if you don’t clearly define them?
Remember, for a physical sale, your royalty share should be anywhere from 10%-
20%. For a License, typically you can argue for 50% of the royalty share.
2. Agree on a definition of what a digital download is.
As long as you and your record company agree on what a digital download is, you
can solidify what kind of royalties should come from it right off the bat. Remember to
separately discuss digital downloads, streaming, and ringtone revenue.
3. Discuss the agreements your record company has with
its Digital Content Providers.
Many artists are currently using the argument that their record companies are acting
upon agreements between Digital Content Providers where their agreement
language specifically states that they are “licensing” master recordings for
distribution. If the record company is “licensing” your music, you should receive
royalties pertaining to your licensing agreement. Both of you need to agree on what’s
happening with your third party vendors.
4. Draft language that forbids deducting container costs,
reserves, and production/packaging costs from your digital
download revenue.
Your digital downloads aren’t being packaged into physical entities, nor are they
being returned to the store. Therefore, your record company cannot deduct these
costs (as they do for your physical sales) from the royalties you earn on digital
downloads.
5. Discuss how marketing costs effect your digital
downloads separately from your physical sales.
Your record company may not be able to argue for container or packaging costs on
digital sales, but there are a fair amount of marketing costs that come in to play on
the digital front. Discuss with you record company how digital marketing efforts will
affect your digital download royalties. If these costs are deducted from your royalty
share of a license, clearly define it in your contract; you don’t want these numbers
changing on you out of the blue.
6. Ask to see Digital Download numbers and figures on a
COMPANY basis.
regular
Record companies have been known to underreport digital download sales. There’s
nothing you can do about keeping your company from doing this to you, but you can
make sure that you are regularly keeping yourself in the know by reviewing your
numbers monthly. An outside reporting service can also be of help to you if you think
something fishy is going on.
LICENSE V. SALE

8. REFERENCES:
1. Gardner, Eriq. 4/3/2012, “The Motels Singer Joins Barrage of Digital Music
Royalty Lawsuits” The Hollywood Reporter. Reference
here:http://www.hollywoodreporter.com/thr-esq/motels-singer-martha-
davis-digital-music-royalty-lawsuits-307299
2. Wikipedia: Music Licensing. Referenced on May 28th, 2012:
http://en.wikipedia.org/wiki/Music_licensing
3. Belloni, Matthew. 2/3/2012, “Sister Sledge Files Class Action Against
Warner Music Over Digital Royalties (Exclusive)” The Hollywood Reporter.
Reference here: http://www.hollywoodreporter.com/thr-esq/sister-
sledge-files-class-action-286903
4. Sisario, Ben. 3/27/2012 “Eminem Lawsuit May Raise Pay for Older Artists”
The New York Times. Reference here:
http://www.nytimes.com/2011/03/28/business/media/28eminem.html?_r=1
5. Zand, Joel. 3/30/2012 “Martha Davis and ‘The Motels’ Sue EMI over
Royalty Payments” Justia.com. Reference here:
http://techlaw.justia.com/2012/03/30/martha-davis-and-the-motels-sue-
emi-over-royalty-payments/
6. Perpetua, Matthew. 2/14/2012 “Kenny Rogers Sues Capitol Records Over
Royalties” Rolling Stone Music. Reference here:
http://www.rollingstone.com/music/news/kenny-rogers-sues-capitol-
records-over-royalties-20120214
7. Perpetua, Matthew. 11/2/2011. “Chuck D. Files Lawsuit Against Universal
Music Group.” Rolling Stone Music. Reference here:
http://www.rollingstone.com/music/news/chuck-d-files-lawsuit-against-
universal-music-group-20111102
8. Hausfeld LLP. 11/2012. Reference here:
http://www.hausfeldllp.com/pages/current_investigations/518/chuck-d.-v.-
universal-music-group
LICENSE V. SALE

9. 9. People, Glenn. 12/28/2011 “Peter Frampton Sues A&M Records Over
Digital Royalties” Billboard Music.com. Reference here:
http://www.billboard.com/news/peter-frampton-sues-a-m-records-over-
digital-1005751352.story#/news/peter-frampton-sues-a-m-records-over-
digital-1005751352.story
10. Hausfeld LLP 2/2/2012. Reference here:
http://www.hausfeldllp.com/content_documents/9/Sledgev.WarnerMusic.p
df
11. Passman, Donald 2006, “All You Need To Know About The Music
Business” Sixth Edition, Free Press, New York, NY. Pg 73, 74, 86, and 87.
LICENSE V. SALE