For years, we've been covering a key legal fight in the music business, involving Eminem's producers, FBT, and Universal Music, over how much was owed on iTunes sales. The key issue: is an iTunes purchase a "sale" or a "license." Older music contracts that predated the internet era tended to focus on sales, in which artists tend to get about 15% royalties. "Licenses," on the other hand, tended to be for things like commercials or movies, but commanded around 50% royalties. But when you talk about iTunes songs, you can make somewhat compelling cases that it's either a sale or a license, depending on which details you focus on. Universal Music, of course, insisted that it was just like a CD sale. FBT argued it was just like a license. There are a ton of other similar lawsuits ongoing, but after losing at the district court level, FBT won on appeal. That resulted in a somewhat insane and contentious fight over how much Universal would have to pay up, with a judge slamming Universal for hiding revenue with tricky funny money accounting, and even trying to expense the cost of this very lawsuit back against what they owed.

However, the damages phase of the case was set to go to trial in the spring, and it would have (1) revealed an awful lot about the blackbox of Universal Music's accounting practices and (2) given a roadmap for the many other similar lawsuits against Universal Music (and the other major labels). Given that, it should come as no surprise that Universal Music scrambled to come up with a way to get FBT to settle... with the terms of the settlement being secret. This almost certainly means that UMG paid through the nose, with the hope that it makes it more difficult for other artists to get similar rewards, and while allowing Universal to keep its secrets secret... for now.

We've had plenty of discussions about shady RIAA accounting, and more and more of that is coming out in public following a series of lawsuits that concern both how the major labels account for digital sales (is it a sale or a license?), but also in how they calculate overall royalties. One of the most high profile of these cases involves Eminem's producers, FBT Productions, which was the first of these cases to rule that digital/iTunes sales were "licenses" and not sales (and thus required Universal Music to pay much higher royalty rates: 50% as opposed to ~15%). Of course, as the case has moved on to other stages, it's increasingly revealing some of the many, many shady practices that Universal Music has been using to try to hide revenue from Eminem -- including trying to expense the cost of this very lawsuit against his earnings.

The latest news is that a judge has completely slammed Universal's latest attempt to hide money from FBT, after it came out that Universal had inserted what appeared to be a minor definitional piece into a summary judgment action earlier in the case, which it's now using to claim that FBT should only get a cut of 29% of revenue, rather than 100% or revenue. The details are a bit technical, but as THResq explains:

Last autumn, Universal brought a motion for summary judgment on the phrase "our net receipts" in the agreement in question. In response, the judge ruled that "our" referred to Aftermath. So Universal says the judge's ruling means FBT has to live with what Aftermath gets (29 percent) instead of what Universal gets (100 percent).

However, Universal also has some sort of tricky accounting going on for foreign receipts, in which Aftermath only gets 29% -- so now it's arguing that it only has to pay out the 50% on that 29%, rather than on the full 100%. The judge reasonably went ballistic at this obvious attempt to trick the court and FBT, and to effectively sneak through the provision defining "our net receipts" earlier:

"Furthermore, 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."

This does not bode well for Universal in this case, however it is yet another example of the tricky math that the RIAA labels like to use in screwing over artists. It's good to see more and more of this coming out in public, though it's really quite amazing the lengths that these labels (mainly the majors) will go to in order to keep money from artists, using all sorts of suspicious accounting and legal tricks. The deceptiveness here is clearly planned out, and they seem almost proud of how clever they are in screwing over artists. It's stunning. In an era where more and more artists are realizing that having a label is now an option not a requirement, publicly trying to screw them over on royalties is not exactly a path to success.

We were just discussing some of the details from Kenny Rogers' lawsuit against EMI/Capitol Records which showed the many, many ways in which record labels avoided paying artists what they were owed... and now some more details have leaked in the very similar (but further along) case concerning Eminem's royalties. You may recall that, back in 2010, Eminem's producers, FBT Productions, won its case against Universal Music, for the first time establishing that iTunes sales should be counted as licenses rather than sales. This was important, because sales get a royalty rate that's usually around 15%... but licenses get a royalty rate around 50%.

While Universal Music insisted that its deal with Eminem was unique and such a ruling wouldn't apply to most other artists, plenty of other artists have been suing their labels (like Kenny Rogers above), and estimates of upwards of $2 billion in back royalties that the labels may have to pay out.

The Eminem case is back at the district court as they try to sort out just how much FBT is owed, and Eriq Gardner, over at THResq, got his hands on one of the audit reports put together by an expert for FBT. It only shows a limited range of years (July 2005 to December 31, 2009), but also shows (similar to the Rogers lawsuit) how the report turns up all sorts of other areas where Universal likely underpaid FBT. As you can see, the audit shows $3.8 million owed for the missing royalties from iTunes downloads. But also of interest? FBT claims that it never received a cut of the YouTube settlement money -- which many people had been wondering if it was ever going to go to the artists. Apparently not.

However, the most insane thing here may be the line at the bottom, in which it appears that Universal held back $2 million in a "legal hold." Gardner notes that this is money held back to pay for this very lawsuit. This is classic record label economics. Everything that you do that costs money, they charge against the artists' royalties. Order pizza at the recording studio? They charge that against your (small) cut of the royalties. Want to do extra promotions? Charge it against the royalties.

And... apparently, sue Universal music for withholding millions in royalties? It looks like they'll charge that against your royalties too...

For a few years now, we've followed the lawsuit between Eminem and Universal Music concerning digital royalties. The basics are that the record labels offer incredibly low royalties on sales of music media, such as CDs. However, when it came to "licensing" music (generally for movies or commercials or whatever), it offered a much higher payout to the artist. This made some amount of sense under traditional label thinking, since selling product actually involved a fair amount of costs and work. But licensing a song for a movie was pretty simple.

So, the question that Eminem (and some other artists in other lawsuits) asked was: what is iTunes? Is it a "sale" like a CD, thus entitling the artist to low royalties? Or is it a "license," like for a commercial, entitling him to 50% royalties? Reasonable arguments can be made on both sides, and since the recording industry has a habit of a quantum-like switching where it pretends that something is a sale when it wants it to be a sale, but then insists it's just a "license" when that's beneficial, it felt pretty good about its chances in the lawsuit. And while Universal Music won at the district court, the appeals court went the other way, and said that iTunes represents a license.

And, now, the Supreme Court has refused to hear the appeal, meaning that this ruling lives on in the all important 9th Circuit. It's possible that some other similar cases may come out with a different ruling in a different circuit, greatly increasing the likelihood that the Supreme Court steps in, but for now, it seems that the courts are saying iTunes is a license not a sale. While more recent contracts have been written to avoid this problem, it does seem like there are a lot of legacy contracts out there (which are tied to a lot of ongoing revenue via the back catalogs for the major labels) where this could be an issue. In other words, the record labels may owe a ton of money to artists.

And they still think infringement is the biggest challenge they face?

Well, well, well. A few years back, we noted that Eminem's publisher was upset about the royalty cut they were getting from sales on iTunes, and they eventually sued both Apple and Universal Music over this (though, I'm still confused why Apple is involved). The issue is a contractual one: as is standard in lots of recording industry deals, musicians make very little money from each album sold. However, when their music is "licensed" for other things -- such as a commercial, movie or video game, they make a much larger percentage. The reasoning, of course, is that there are a lot more "costs" that go into making and selling a CD, which the label is taking on.

But here's where it gets tricky: what is a sale via iTunes? Is that a "sale" like a CD (meaning a small percentage royalty)? Or is it a "license" like for a movie (meaning a much bigger royalty)? Conceptually, you can make a reasonable argument for either side. After all, from the consumers' perspective, it's very much like buying a CD. But... from a technological perspective, it's really a lot more like licensing, since you don't have the same production, physical goods, shipping and distribution costs. A jury originally sided with Universal Music, saying that it's really just like a CD sale, and thus, the lower royalties should apply.

However, the 9th circuit appeals court has just ruled the opposite way, saying that the contract is "unambiguous" that iTunes sales count as a license, for which the higher royalties apply: This could have a major impact on how much Universal has to pay out to musicians for iTunes sales. Of course, Universal Music is downplaying the ruling, saying that it's unique to Eminem's contract, and that the company plans to fight the ruling. However, Universal Music (and others, potentially) may be in bigger trouble than they care to admit over this ruling. There are other, similar cases underway as well. While I'm sure its more recent contracts are quite specific on this point, for large segments of the back catalog, Universal could be looking at actually having to pay out significantly more in royalties. Of course that assumes they have accurate records somewhere -- which certainly is no given.

Back in 2007, we noted that Eminem's publisher was suing Apple for offering Eminem tracks on iTunes. Apple pointed out that it had an agreement with Eminem's record label, and we wondered why Eminem wasn't suing Universal Music, rather than Apple. So, earlier this year, when Eminem and Universal Music went to court we assumed that the lawsuit had been refocused on the proper party. Apparently, we were wrong. The lawsuit against Apple is scheduled to begin Thursday if no agreement is reached today. However, remember that lawsuit against Universal earlier this year? Well, Universal won, with the court saying that Universal had the right to distribute digital offerings. So... why is the lawsuit against Apple still going forward? Am I missing something...?

A few years back, a few bands, including Cheap Trick and the Allman Brothers sued their record labels claiming their cut of iTunes sales wasn't right. It was basically a contractual suit. Since there are a million and one different licenses to deal with, the record labels were treating digital sales the same way they treated CD sales -- of which the artists get a tiny tiny percentage. However, these bands noted that it seemed like digital sales was much more similar to a deal where they were licensing their music for use in another product -- such as a commercial or a movie. In those deals, the bands get a much bigger cut. A little while later, Eminem filed a similar lawsuit -- though somehow (great lawyers there...) thought that it was all Apple's fault and sued Apple. It looks like that got sorted out eventually, and Eminem refocused the lawsuit on Universal Music. And... didn't get very far. Last week a jury found that Universal Music was right: a digital sale is just like a physical sale, and thus the significantly lower royalty rate applies. You can bet pretty much every major record label just breathed a huge sigh of relief (even though an appeal is likely), because a ruling in the other direction would take away a hefty chunk of margin from their digital sales.

We've had plenty of folks submitting to us the story that Eminem's publisher is suing Apple over Eminem songs available on iTunes. It's getting some play around the tech news and tech blog world, but everyone seems to be missing the key point. Eminem's publisher is suing the wrong party. No one denies that Universal Music Group, who distributes Eminem's music, gave Apple permission to sell his songs on iTunes. What's in dispute is if Universal had that right in the first place. In other words, it's a contractual issue between Eminem's publisher, Eight Mile Style, and Universal. Suing Apple seems to just be for the publicity of it. However, what this does demonstrate is how ridiculous it is whenever anyone presents the RIAA's views as "the music industry's views." The RIAA represents the labels, and not the musicians and not the music publishers in many cases -- all of whom have different goals. And, clearly, the label often does things that the other components of the music industry just don't like. However, it's a bit sad that Eminem's publisher has decided to sue Apple rather than the publisher with whom it has a distribution contract. In fact, the complaint is nearly identical to one that a bunch of bands filed last year. It's just that those bands (such as the Allman Brothers and Cheap Trick) had their lawyers actually sue the record label (in that case, Sony Music), rather than Apple.