on November 9, 2011
by Shannon M. Villalba

Copyright sale vs. Copyright license—what’s the difference and why does it matter?

With the advances in technology and availability for consumers to pick and choose which songs they would like to purchase in lieu of purchasing an entire album, it is imperative for musicians to know how they are going to get paid.  Several musicians are taking it into their own hands and educating themselves as to what is the difference between a copyright license and a copyright sale when it applies to digital downloads and going after their own record labels for the discrepancy in royalty payments.

So then, what is the difference between a copyright license and a sale and why does it matter? A copyright license is a license to listen to the music, like renting your home, but you retain ownership, and therefore, the ownership rights. A sale is like selling your home; you transfer your ownership rights to the purchaser.  As such, the royalty payment scale is different between licenses and sales.  Artists can receive a 50% share on royalties from a license as opposed to only a 12-20% royalty rate from a sale. This can mean a huge difference in a payout for musicians.

Although the US Supreme Court has refused to address the issue, the 9th Circuit in a recent lawsuit by Eminem’s former Detroit-based producing partners, F.B.T. Productions, ruled that digital music is more like a license than a physical sale of music.  Following that suit, Rob Zombie, the Estate of Rick James, and now Chuck D of Public Enemy filed class action lawsuits against Universal Music Group for miscalculating royalties owed to them and other artists for digital downloads, such as MP3s and ringtones.  Should the courts rule in favor of the musicians, UMG and other labels would be forced to remit to the artists back royalty payments. According to a study by the Future Music Coalition, there could be $2.15 billion difference for music only downloaded off of iTunes.

So far it looks like the artists may have the upper hand because Judge Susan Illston allowed Zombie and James’s case to move forward, stating that there is a connection to protecting the public:

“The Court finds that plaintiffs have alleged more than just a breach of contract because the complaints allege that UMG engaged in a broad scheme to underpay numerous royalty participants, including formulating ‘an opaque and artificial method for accounting for and paying its royalty participants for income derived from such licenses,’ and engaging in a ‘sustained public relations effort designed to convince the public that it had employed ‘groundbreaking’ and ‘enlightened’ accounting practices that actually benefitted (rather than cheated) the Class.”

We’ll see what happens next, but it appears that once again the traditional methods of negotiating contracts in the music business need to be revised.

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