Eminem Could Cost Universal Millions

The question of whether a digital download counts as a straight sale or a license may end up costing Universal Music Group millions of dollars.

Eminem and his producers were awarded 50 percent of all revenue from iTunes downloads, which is about three times more than what Universal has been paying them. Universal appealed that ruling but was turned down by the U.S. Supreme Court.

That decision may have already cost the world’s biggest music company between $17 million and $20 million, according to the manager of FBT Productions, which first signed Eminem and continues to collect royalties on his music. He told the New York Times that could rise to $40 million or $50 million in five years.

What’s worse for the Vivendi-owned business is that the estate of funk star Rick James has already filed a federal class action against the label, claiming it should also have been paid 50 percent of all sales of digital downloads and ringtones.

If other artists join in, Universal and all the other major music companies that have underpaid could face claims big enough to bankrupt them.

The lawsuits raise the question of whether a download is a license or a sale.

Artists would normally earn somewhere between 12 percent and 20 percent of the revenues from sales but if a song is licensed they’d receive 50 percent.

The U.S. court agreed with FBT’s argument that the Eminem downloads counted as licenses.

Universal argues that it was simply the wording of Eminem’s specific contract that resulted in them losing the case. It’s subsequently changed the wording on its standard contracts to make it clear that downloads count as sales.

Thousands of artists signed their deals years before the arrival of iTunes, and many of them will have been on a royalty rate lower than 10 percent. Many may see the Eminem case as a precedent that could be used to up their own digital royalty rates.

In 2006 The Allman Brothers Band and Cheap Trick filed a lawsuit against Sony BMG arguing that their download royalty rates were too low. Apparently, the acts were being paid about 4.5 cents per 99-cent sale. Sony settled out of court.

In fact, the Eminem case may be one of the first not to be settled out of court, although the claimants will have likely signed a non-disclosure agreement to prevent them from talking about it.

The labels clearly want to avoid setting a precedent for other acts on their roster that might also be thinking of taking them to court.

It’s common that bigger artists, who are still signed to the same label, renegotiate their deals throughout their careers. Those artists will most likely have a clause about digital downloads in their contracts.

Last year, global revenues from recorded music fell by 8.4 percent and a UMG insider recently told The Guardian that Vivendi has ordered the music company to cut costs by $100 million this year.