Trial Over Eminem's Digital Royalties Closes

The closing arguments of the Eminem trial in downtown Los Angeles elucidated a simple concept, couched in lots of legalese.

 

"When a music fan buys a song off of iTunes, the record label hasn’t done very much to get it on their playlist, and thus doesn’t deserve the lion’s share of the profits."

That’s what Eminem’s side asserted in Thursday’s (March 6) closing arguments of the trial between Universal Music Group (UMG) and F.B.T. Productions.

Richard S. Busch, F.B.T's lead attorney, asked how a digital download could be considered a record sold — “When Universal isn't selling anything?"

Only about $1.3 million is at stake in the trial, but the question of what record companies actually contribute in the selling of a digital file could have implications for the entire already-ailing music industry.

Eminem is seeking almost three times the royalty he currently receives for digital downloads.

Lawyers for UMG countered that they put millions of dollars into building the technology to send music files to digital retailers, and so deserve the royalty they currently receive.

Here’s how it came out in legal language. As lawyers for F.B.T. described it, UMG is merely hitting the “se nd” button when it sells to an online retailer. It’s not manufacturing or selling the record to the consumer. As such, F.B.T. views UMG as a third party who is licensing the song to the retailer.

F.B.T. likened the arrangement to the one UMG has with traditional record clubs, in which members can purchase a complete Eminem album along with other records for a set price. This is a licensing agreement, so Eminem gets 50% of the profit.

UMG, for its part, claimed that because record clubs fall under a separate part of the recording agreement they have with the artist, the situation is not comparable.

Currently, when an album is downloaded on iTunes, it falls under the “records sold” provision of the agreement, giving Eminem an 18.23% royalty rate.

F.B.T. contends that a digital download is not a record sold but rather a license, and should therefore fall under the “master license” provision of the contract. That would entitle the artist to a 50% royalty rate.

UMG pays a manufacturer $1.00 to $1.25 to create a compact disc, according to UMG's sole expert witness, Jeffrey Harleston, senior vice president of business and legal affairs at the company. When UMG licenses their music, that cost goes away, F.B.T. claimed.

"They don't have to press the records ...so the appropriate treatment is to share returns equally," Eminem's former lawyer, Gary Stiffelman said at the trial.

But UMG contended that the royalty rate is really what's important. If it costs more for UMG to make a vinyl album than a CD, that 18.23% royalty rate stays the same. So if a digital download costs less for the record company to manufacture, why should that rate change?

F.B.T.’s Busch, with a peppery style, scoffed at that: "They came in and made that up… They're to keep all the money when they don't have to pay a thing."

Instead, he said, the millions Universal put into its digital business actually went toward attempting to create its own online retail outlets to sell music -- two of which failed.

UMG's attorney Glenn Pomerantz shot back: "If I say things in a loud or sarcastic manner, that doesn't change the facts," he said. "Mr. Busch uses words like ‘shell game’ and ‘smokescreen,’ which don't have a place in a court of law."

 He added: "F.B.T. has made more than $21 million and asked you for even more," Pomerantz said. "And they don't deserve it."

Universal devoted much of its closing arguments to emphasizing the importance of defining “normal retail channels.” If iTunes is indeed "normal," then the standard 18.23% royalty rate applies. F.B.T. deemed this terminology a "red herring" irrelevant to the case.

Busch’s closing words suggested that the record companies had long seen this day coming. He said that three Universal executives met in 2002 to cook up a new royalty structure that would allow the company to reap most of the profit from digital downloads, as the technology was catching on.

As those who had been in the courtroom leaked out into the corridors at the end of the trial, one of the plaintiffs — Joel Martin, who operates Eminem’s publishing company, 8 Mile Style — said elements of Universal's arguments irked him.

"One thing in particular that really bothered me was that Universal said they knew of no other artists who received 50%," Martin said. "I was really pissed when they said that because they know there are lots of artists who get paid 50 percent - like Bob Seger, though he's with Capitol [Records]. But those agreements were never entered into evidence because they are confidential and difficult to get."

Martin added that though Eminem was not a party to the suit, he has been keeping up with the ongoing trial from Detroit.