The most closely watched lawsuit in the music industry asks this question: how much should a song on iTunes or another digital music service be worth to the performer?
Chad Batka for The New York Times
Ruth Fremson/The New York Times
The artist at the center of the suit isEminem, but some of the biggest beneficiaries of the case may be thousands of older artists who have not released an album in decades.
Four years ago, the producers who discovered Eminem sued his record label, the Universal Music Group, over the way royalties are computed for digital music, which boils down to whether an individual song sold online should be considered a license or a sale. The difference is far from academic because, as with most artists, Eminem’s contract stipulates that he gets 50 percent of the royalties for a license but only 12 percent for a sale.
“As of now it’s worth $17 million or $20 million, but on a future accounting basis, five or 10 years from now, it could easily be a $40 million to $50 million issue,” said Joel Martin, the manager of F.B.T. Productions in Detroit, which first signed Eminem and continues to collect royalties on his music. (Marshall Mathers himself, who performs as Eminem, was not a party to the suit, although he stands to earn millions from it.)
The suit reached its apparent end last week when the Supreme Court refused to hear an appeal, letting stand a lower court’s decision that digital music should be treated as a license. Lawyers and music executives say that few younger artists are likely to be affected by the decision because since the early 2000s record companies have revised most of their contracts to include digital sales among an artist’s record royalties. Eminem’s first contract was signed in 1995.
Many older artists, however, whose contracts predate digital music and have not been renegotiated, stand to profit significantly from the decision.
“This is life-changing,” said Joyce Moore, the wife of Sam Moore of Sam & Dave, the duo that had hits in the 1960s like “Soul Man.” “If we were being paid a nickel a download, as opposed to 35 cents — that’s a huge amount of money for a guy that is on a fixed income or has to run up and down the road at 75 years old.”
The lawsuit argued that record companies’ arrangements with digital retailers resembled a license more than it did a sale of a CD or record because, among other reasons, the labels furnished the seller with a single master recording that it then duplicated for customers.
“Unlike physical sales, where the record company manufactures each disc and has incremental costs, when they license to iTunes, all they do is turn over one master,” said Richard S. Busch, a lawyer for F.B.T. and Mr. Martin’s company, Em2M. “It’s only fair that the artist should receive 50 percent of the receipts.”
A federal jury ruled in favor of Universal in 2009, but that decision was overturned on appeal last year. The label petitioned to the Supreme Court, which declined to hear the case.
Universal said the implications of the decision were limited.
“The case has always been about one agreement with very unique language,” the company said in a statement. “As it has been made clear during this case, the ruling has no bearing on any other recording agreement and does not create any legal precedent.”
Although current hits get more attention, older music still represents a huge portion of overall music sales, and over time durable hits can rack up significant sales. Last year there were 648.5 million downloads of “catalog” singles in the United States, meaning songs more than 18 months old, compared with 523 million for current tracks, according to Nielsen SoundScan.
Fred Wilhelms, a lawyer in Nashville who specializes in collecting royalties for musicians, said that sales of older music had provided the labels with steady income at low cost.
“The labels make tens of millions of dollars a year from the deep catalog without paying a penny in promotion costs,” said Mr. Wilhelms, who estimates that the Eminem ruling might apply to tens of thousands of artists. “Anybody who ended their recording career before 1978, and probably before 1992, is in the decision,” he added.
Royalty rates vary, but today most acts get 10 to 15 percent of their music’s net sales, minus packaging and other deductions, lawyers say. In the 1970s and before, the rates were often even lower. But for decades, licenses of music — to movies, television or other third parties — gave artists a 50 percent share, without the same deductions, on the principle that a third party was bearing the relevant costs.
Jason M. Schultz, an assistant professor of law at the University of California, Berkeley, who helped write a friend of the court brief on behalf of the Motown Alumni Association — a group that represents Motown acts but is not associated with the label — said that recording contracts made in the early days of digital music reflected the labels’ failure to recognize that technology’s potential.
“The record companies would strike these deals with artists in a way that favored them,” Mr. Schultz said. “But when the digital revolution came around, those contracts ended up favoring artists. The record companies guessed wrong.”
Although sales of digital music around the world now represent 29 percent of record companies’ revenue, according to the International Federation of the Phonographic Industry, the Eminem case, and several others like it, stem from the mid-2000s, when the potential value of digital music was first becoming clear. According to court papers, the Eminem case had its origins in an audit of accounting records that F.B.T. and the rapper conducted in 2005, two years after Apple opened the iTunes store.
In separate cases, the Allman Brothers have sued Universal and Sony BMG Music Entertainment over similar contractual issues. The Sony case, filed in 2006, was expanded to a class-action suit, and earlier this month the parties informed the judge in the case that they had “reached an agreement in principle.” (The Allman Brothers and Cheap Trick, which joined the case, both settled their claims.) The Allmans’ suit against Universal, filed in 2008, is still pending.
For million-selling acts like Eminem and the Allman Brothers, the stakes are high. But plenty of other artists stand to gain from the decision as well.
“For people who had a single hit, who couldn’t afford to chase $100 in owed royalties,” Mr. Wilhelms said, “they are now looking at a couple thousand. It’s worth a couple phone calls and an angry letter or two.”