F.B.T. Productions v. Aftermath Records

Citation: F.B.T. Productions, LLC v. Aftermath Records, 09-55817 (9th Cir. Sept. 3, 2010)(full-text).

Factual Background
F.B.T. Productions, LLC signed the rapper Eminem to an exclusive recording contract in 1995. Two years later, F.B.T. transferred its rights to Eminem’s recordings to Aftermath, which is a subsidiary company of UMG Recordings, Inc. Under the terms of that agreement, F.B.T. and Eminem were entitled to various royalty rates depending on the retail channel of records sold.

In 2002, UMG Recordings, Inc. entered into an agreement with Apple Computer, Inc. to sell Eminem masters through iTunes as permanent downloads. Aftermath and UMG entered into a number of other agreements for permanent downloads and mastertones, that included the use of Eminem’s sound recordings.

In 2003, F.B.T. and Aftermath entered into a new agreement, increasing some of the royalty rates but keeping the working of the “Records Sold” and “Masters Licensed” provisions. The parties also added an amendment in 2004, providing that “Sales of Albums by way of permanent download shall be treated as [U.S. Normal Retail Channel] Net Sales for the purposes of escalations. The amendment further provides, “Except as specifically modified herein, the Agreement shall be unaffected and remain in full force and effect.”

F.B.T. initiated an audit in 2006, which showed that Aftermath had been applying the Records Sold provision to calculate the royalties due for sales of recordings in the form of permanent downloads and mastertones. F.B.T. insisted that the Masters Licensed provision should have been applied instead, which entitled F.B.T. to 50% of Aftermath’s net receipts “[o]n masters licensed. . . to others for their manufacture and sale of records or for any other uses.”

At issue in this dispute is which contract provisions applied to records sold in the form of permanent downloads and mastertones.

Trial Court Proceedings
Before trial, F.B.T. moved for summary judgment on the grounds that permanent downloads and mastertones are forms of licenses and as such are covered by the “Masters Licensed” provision of the agreement. The lower court denied F.B.T.’s motion, and a jury returned a verdict in favor of Aftermath, applying the “Records Sold” provision of the contract, which gave F.B.T. and Eminem 12-20% of the adjusted retail price of albums sold in the United States. The court of appeals reversed and found that the contract was unambiguous and should have been interpreted in the manner suggested by F.B.T. and Eminem.

Appellate Court Proceedings
Following the jury verdict in favor of Aftermath, the court of appeals reviewed the issue of whether the contract was ambiguous and which provision of the agreement should be applied to permanent downloads and mastertones. Under California law, “[t]he language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.”. Parol evidence is properly admitted to construe a contract only when its language is ambiguous.

Aftermath supported its decision to apply the “Records Sold” royalty rate, which applied to full price records sold in the U.S. through normal retail channels, by arguing that digital sales through iTunes are made through a normal retail channel. The court pointed out the use of the word “notwithstanding” in the agreement, specifically that "notwithstanding the Records Sold provision," F.B.T. was to receive a 50% royalty on masters licensed to others for their manufacture and sale of records or for any other uses. The parties’ use of the word “notwithstanding” indicates that even if a transaction could arguably fall within the scope of the Records Sold provision, the act of licensing a master to a third party for “any” use, entitled F.B.T. to a 50% royalty.

Aftermath further argued that there was no evidence that it or F.B.T. had used the term “licensed” in a technical sense. Under Cal. Civ. Code §1644, "[t]he words of a contract are to be understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense. . . ." Looking to the ordinary and popular meaning of the word “license,” the court drew upon the dictionary definition whereby a license is “permission to act.” Because Aftermath did not dispute that the permanent downloads or mastertones were produced and sold by third parties following a permission to act granted by Aftermath, the court ruled that the license provision of the agreement should apply.

The court further supported its ruling that Aftermath had licensed the recordings at issue by looking to the Copyright Act’s treatment of the terms “license” and “sale.” Under the Act, a “sale” of a work may either be a transfer in title of an individual copy of a work, or a sale of all exclusive rights in a work. By this definition, Aftermath did not “sell” anything to its digital distributors, who did not receive any right or title to the digital downloads. Section 114(f) of the Copyright Act describes the statutory authorization for a third party to exercise public performance rights that otherwise remain the exclusive rights of a copyright holder and defines this authorization as a “license.” This definition much more closely applies to the agreements between Aftermath and its digital distributors regarding the Eminem sound recordings.

Aftermath also argued that the 2004 amendment to the agreement clarified that the "Records Sold" provision sets the rate for permanent downloads. As the court pointed out, however, the amendment clearly states that the remainder of the agreement is not affected by the provision applying strictly to escalation.

Ultimately, the court held that the contracts at issue were unambiguous in the grant of a license by Aftermath to its digital distributors, and the subsequent application of a 50% royalty rate in favor of F.B.T. under the "Masters Licensed" provision of the agreement between Aftermath and F.B.T. 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.