9:33pm PT by Eriq Gardner
Judge Blasts Universal in Key Eminem Royalties Case Ruling (Exclusive)
Universal Music has been handed an epic smackdown by the California judge presiding over a battle with producers of many hit Eminem recordings. In a decision that is sure to have tongues wagging throughout the music industry, Judge Philip Gutierrez suggests that Universal has been "bamboozling" and attempting to "dupe" him into overlooking an issue that could mean substantial money for the plaintiffs in the case and perhaps musicians throughout the country.
Many observers have been closely watching this lawsuit brought by FBT Productions against Universal Music for years. The case involves whether record labels must account for digital music downloads as "licenses" instead of "sales" -- a significant difference when it comes to sharing revenue with song artists. This is the case cited by other musicians bringing similar claims.
But as the case heads to trial a second time, after the 9th Circuit Court of Appeals confirmed that digital music should be treated under the licensing provisions of a contract, another huge issue has come up: the way a big music conglomerate like Universal apportions revenues between its foreign and domestic divisions before sharing the proceeds with revenue participants.
On Wednesday, in a potentially significant decision, FBT was given the green light to amend its complaint to allege that Universal has breached an implied covenant of good faith and fair dealing as well as breaching a previous settlement agreement. Just as notable are the judge's harsh words for Universal.
FBT now wishes to allege that not all money generated by foreign sales of Eminem songs returns to Aftermath, the Universal division that releases the rapper's music. Instead, the plaintiffs say that under an intercompany agreement at Universal, 71 percent of the revenue is paid to Universal's foreign affiliates while Aftermath only gets 29 percent of the revenue.
It's Universal's position that when it comes to splitting money with the artist, it only has to pay on the 29 percent, instead of the 100 percent that FBT wishes.
This is potentially huge now that consumers are buying songs on digital outlets like iTunes and downloads are on the verge of being treated as "licenses" instead of "sales," assuming that the decision in the 9th Circuit in the FBT case withstands further judicial review. Under the old system, artists got about 15 percent of revenue from sales. Now, the rate is primed to be bumped up to a 50 percent split on licenses, but if they're only getting a split on a quarter of the overall pot, that's a step backward for the artists. FBT was incensed upon learning that it might actually owe Universal money.
So FBT attempted to amend their lawsuit to bring new claims, which prompted an objection from Universal.
Universal made a few arguments. The music giant said that FBT has known about these claims for years and should not be allowed to raise them now, just before the second trial. Even if FBT had realized what was going on recently, Universal said that it had still delayed in bringing the claims. Universal also asserted that the claims were futile, and lastly and most controversially, the company contended the issues FBT wished to raise were resolved on summary judgment in October.
Gutierrez disagreed that the claims came late and said the merits will have to be dealt with later, but it's that point about whether he previously ruled on this that has brought judicial fireworks.
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).
"The Court disagrees," Gutierrez wrote in his opinion Wednesday.
He said the ruling mostly referred to "net receipts" and whether Universal could deduct distribution costs. He said he was not discussing the revenue sharing between Aftermath and foreign affiliates at all.
Both FBT and the judge were slow about what Universal now says it meant. And the judge said it's hardly FBT's fault. "Defendants contend FBT was being 'coy' and actually knew precisely the issue Defendants were raising," he wrote. "The Court finds it hard to swallow the assertion that in this hotly contested case FBT would have played possum on Defendants’ summary judgment motion, just so FBT could attempt to raise this issue later in a supplemental complaint."
Then, the judge opened fire on Universal Music. Here's the key paragraph in full:
"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."
So the judge is allowing FBT to go forward with its new claims that Universal isn't dealing fairly by keeping revenues overseas.
We've reached out to Universal, and if we get comment, we'll update.
Richard Busch, the attorney from King & Ballow representing FBT, says he can't comment on pending legal matters except to say, "This is an enormous victory for our clients."