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Judge allows international royalties dispute to feature at next FBT v Universal hearing

By | Published on Thursday 28 June 2012

Universal Music

So, yet another interesting development in the ongoing FBT Productions v Universal Music dispute, the one that could set the precedent for how artists with pre-iTunes record contracts are paid royalties on download sales.

As much previously reported, the major labels treat download revenue as record sales money, and pay artists the royalty they are contractually due on such income, usually 15%. But many heritage artists have argued that download revenue should be treated as licensing income, because the labels do one licensing deal with firms like iTunes, rather than having to press, distribute and market actual CDs. It’s an important distinction, because many artists will be contractually due a significantly bigger share of licensing deal income than record sales money, maybe as much as 50%.

FBT, who as early Eminem collaborators have a stake in Slim Shady’s early recordings, released by Universal’s Interscope division, via its Aftermath imprint, successfully sued for the bigger share of digital royalties. And now a string of other major label artists are suing, citing the FBT case as justification for a bigger digital pay out. Though Universal insist the FBT ruling does not set an industry-wide precedent, and the other cases are yet to get to court.

Meanwhile, the FBT case itself rumbles on, because another hearing is needed to work out exactly what the production outfit should be earning from digital sales. And this week, the judge overseeing the case made another ruling in FBT’s favour regards some technicalities over how royalties should be calculated, allowing the producers to raise a secondary issue when the case returns to court. And he didn’t mince his words either when responding to Universal’s arguments as to why said issue should not be considered at this stage.

According to the Hollywood Reporter, the latest squabble relates to the way in which money moves between the various Universal Music companies around the world, when tracks released in the US are sold abroad by other divisions of the major. To cut a long story short, according to FBT’s lawyers, only about 29% of international revenue actually returns to the major’s Aftermath division, with the other 71% being kept by the local Universal companies that actually sell the music (so in the UK that would be Polydor).

Which is an issue, FBT say, because Universal is proposing to only pay new increased royalties on the revenues actually received by Aftermath, and not the revenues held onto by other Universal subsidiaries. Again there’s a digital element to this argument. When local Universal labels invest new time and money into physically releasing international artists in their territories, there may be an argument for a system that ultimately pays out less to the artist. But in the digital domain – where US catalogue is simply made available to non-US download stores under existing licensing agreements, then – FBT would argue – the practice is less acceptable.

Anyway, FBT want this issue to be discussed when their case returns to court, but Universal does not. The major argues that this particular matter has already been resolved, and FBT has no business bringing it back up at this stage in the proceedings. That claim is based on the fact that last autumn the major asked the judge for clarification regards the phrase “our net receipts” which had been used in an earlier ruling, and as to whether that referred to Aftermath’s net receipts. The judge said it did.

So, when FBT raised the issue of international revenues, Universal’s lawyers argued that, in his clarification last year, the judge had already ruled that revenues generated by other Universal subsidiaries were not relevant. Moreover, they said, FBT’s legal team would have realised exactly what the major was referring to when it asked for clarification on the “our net receipts” point last year, and if they had an issue with the judge’s interpretation of that clause they should have raised it then, not now. Team Universal added that they suspected the plaintiffs deliberately failed to raise the issue then so to cause more trouble now.

However, Judge Philip Gutierrez has not bought that argument, saying in a written judgement that [a] he did not mean to make a ruling on this matter when asked for clarification on “our net receipts” last year, and [b] he doesn’t believe that FBT were aware that Universal intended for the international royalties issue to be resolved via that clarification either, because there would be no logic in them choosing to ignore the matter until later.

On the latter point, the judge wrote: “The court is deeply troubled by defendants’ argument. While it is hard to see what FBT could gain by feigning ignorance, it is now quite apparent what defendants could hope to gain by bamboozling the court and plaintiffs on this issue. Defendants’ current stance makes it appear as though defendants carefully inserted the issue into the motion for summary judgment before they had notified FBT or the Court of what percentage of the revenues from foreign sales of permanent downloads and mastertones would be paid to FBT. An attempt to dupe the court into a premature ruling will not serve as the basis to deny FBT an opportunity to challenge defendants’ accounting practices”.

All of which means the international royalties issue will be discussed when the FBT case returns to court. Which is a pain for Universal. And I can’t imagine being accused of deliberately trying to “dupe” an American court will be particularly helpful when your busy convincing US regulators that your company should be trusted with a 40% market share by allowing you buy the EMI record labels.



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