Wednesday, January 5, 2011

Digital Explosion Changes Landscape for Entertainment Lawyers

When I first began practicing entertainment law in the late 1990s, the music industry was dealing with the crisis of illegal peer-to-peer downloading of music via websites like Napster, LimeWire and Kazaa. Now it seems the industry is facing another game-changing crisis: the extinction of the CD. With declining sales and the rise of digital downloading through iTunes and other outlets, we soon may refer to the CD in the same manner as we do the audio cassette, 8-track and vinyl record: outdated and an antique.

The debate about the demise of the CD doesn't seem to focus on "if," but only "when." In 1999, the Recording Industry Association of America reported that 938.9 million CDs were sold. This figure fell to 384.7 million in 2008. While there has been an obvious correlating increase in digital download revenue, it hasn't made up for the lost revenue from declining CD sales. So here lies the difficulty for music labels, artists and entertainment lawyers alike: How do we make money in this brave new entertainment world?

Many labels have resorted to "360 deals," a concept where high-stature artists like Jay-Z or Madonna sign a deal that allows a record label to participate in various income streams, including merchandising, tours, concerts, etc.

Where does this leave attorneys? There was a time when entertainment lawyers would see a new recording contract deal every week and spend countless weeks negotiating with the record label in the future release of a CD album. With 360 deals, there are fewer contracts to negotiate and review, and a reduced need for a lawyer's participation.

And so we must deal with this question: Where is the music industry going with the demise of these record labels in the traditional sense?

To answer this question, we first must accept the new reality. New technologies have made recording music less expensive and more practicable. Artists no longer need to be funded by a major record label to have their music recorded, and social networking sites like Facebook, MySpace and others have made direct artist-to-consumer distribution possible.

Even the most popular artists have found ways to bypass the record label by posting music videos online and receiving per-play licensing payments from video sites such as YouTube. Finally, mp3 downloading sites like iTunes have made access to music easier than ever, and allow consumers to pick and choose individual songs rather than purchasing an entire album for $19.99.


This still leaves us with the question of how major labels and artists can sustain revenues. My advice to players in this game would be: "If you can't beat 'em, join 'em." At this point, it is impossible to stop the demise of the CD, so it is up to record labels and artists to think of new and creative ways to make money. It seems as though record labels have begun to embrace this change.

But, lawyers are divided, with one thinking it's the end of an era, and others more optimistic.

Attorney Joel Katz of the Atlanta-based Greenberg Traurig LLP, and one of the top entertainment lawyers in the country, thinks the CD marketplace will be fine.

"I think the digitally distributed product has dramatically grown in the marketplace; however that doesn't mean the end of physical product," Katz said. "This type of musical product will have to be carefully marketed and differently promoted to survive in the general marketplace. But I believe both types of product will stabilize and do well."

However, Los Angeles-based attorney Courtney Coates has a slightly different view.

"I believe the CD will be increasingly marginalized to a great extent in the same way the tape cassette was marginalized by its successor, the compact disc," explained Coates, who operates the Law Offices of Courtney Coates on the West Coast. "Even moreso, the advent of digital medium has revolutionized the time, place, and manner in which we experience all forms of media, especially music."

While the debate goes on, labels are realizing it would be futile to attempt to pull a huge amount of copyrighted material from a site like YouTube. So, record labels appear to have begun negotiating their own licensing terms for the posting of songs and videos. Some solo artists, like Prince, have continually refused to post material on YouTube without negotiating a lucrative deal and being paid for copyrighted work.

A great example of an artist (or band, in this case) thinking of a creative way to stay on top was Radiohead in 2007. After its contract with EMI was terminated, Radiohead released the album "In Rainbows" over the Internet in 2007, inviting fans to pay what they wished. Though most fans downloaded the album without paying a penny, pre-release sales were more profitable than the total money generated from sales of Radiohead's 2003 album "Hail to the Thief."

The band also claims that the subsequent publicity increased sales when the album began being sold in stores a few months later. Upon its retail release, "In Rainbows" entered the UK Album Chart and the U.S. Billboard 200 at No. 1, and sold more than 3 million copies worldwide in digital and physical formats.

I tell clients that if they don't have a platinum-selling album (one million copies) or track record of success, the days of needing a record label may be over. You can put your music out over the Internet and make more money.

Perhaps the greatest challenge for the music industry is to predict future trends and get a piece of the action from the start. Many experts see one-stop-shopping multimedia outlets as the future of media, where a consumer can purchase mp3s, ringtones, movies, radio broadcasts, podcasts and more from a single location.

In addition, Apple is kicking around an idea for "cloud-based media hosting," where users can store their iTunes libraries on Apple's servers and stream directly to any Internet-connected device. Record labels intend to argue that this approach is not allowed under current licensing agreements and should come with an increase in compensation from Apple.


While the music industry struggles to adapt, the field of entertainment law is growing exponentially. While this notion brings a smile to my face, it will nonetheless be a challenge to keep the law current with respect to such an amorphous subject area.

Illegal downloading continues to be a problem through torrent-based programs, which are harder to pinpoint because a downloader collects multiple parts of the file from different users as opposed to a single centralized server like Napster. Congress and the Justice Department are notoriously slow to react to this area of law, and lawmakers will be hard-pressed to find a solution.

In addition, disputes over artist royalties are likely to increase. Most of the songs created over the past 100 years were written during a time when the idea of transferring that song through the air to a handheld, cordless device for permanent storage would have been considered science fiction. As a result, many recording contracts are ambiguous with respect to digital downloads. This is where lawyers will need to brush up and be prepared for the legal fights to come in the courtroom.

The most recent case was a federal appeals court ruling in September in California. (FBT Productions v. Aftermath Records, 09-55817, 9th U.S. Circuit Court of Appeals). The court overruled a lower court ruling against rapper Eminem's former producers, FBT Productions LLC, in a claim brought against Aftermath Records, a unit of the Universal Music Group.

FBT Productions claimed that downloads fall under a "masters licensed" clause governing the label's licensing of the recordings to third parties, for which the artist gets a 50 percent royalty. Universal Music's lawyers argued that iTunes downloads were no different from retail sales of CDs. The standard recording contract's "records sold" provision typically stipulate much lower royalty rates.

A three-judge panel concluded: "[T]he agreements unambiguously provide that notwithstanding the records sold provision, Aftermath owed FBT a 50 percent royalty under the masters licensed provision ... because the agreements were unambiguous and were not reasonably susceptible to Aftermath's interpretation."

Although Universal claims the ruling applies only this one agreement, this case nonetheless provides an interesting precedent where a court was not shy about construing a contract in favor of an artist or producer when it comes to a royalties dispute. With the abundance of artists who signed recording contracts in the eras of vinyl record and audiocassette, we are likely to see more and more disputes over downloading royalties and copyright licensing.

So, as lawyers, we must learn everything we can about the digital laws, the Copyright Act and the intersection of music law and digital law. Specifically, for lawyers to navigate this rapidly changing digital highway, we will have to move away from the standard drafting of a 33-page recording contract and understand the nuances of a much smaller 10-page digital downloading contract.

Also, there is a hybrid of laws that will be triggered by this digital explosion. For example, there's international law, with music being downloaded overseas and the fees associated with that action. Then there are the copyright implications of posting music all over the Internet and managing the ultimate end-users liability.

Corporate law will be triggered as more music corporations will pop up online. It's just a matter of time before we see all types of tax issues when Uncle Sam wants to profit from this multi-billion dollar music industry commerce. And, of course, litigation will be the biggest area of growth as the digital landscape takes it shape and lawyers fight it out in protecting the music.

While many people view this new entertainment world as a treacherous and unknown landscape, others, however, see it as a new world full of opportunity. Those who keep their ear to the grindstone and stay ahead of the trends and technologies can develop a niche market for themselves and rise to the top of the industry.

In the meantime, Best Buy, Target and Walmart are going to have to figure out what to do with the space in their stores that is currently occupied by the CD section.

James L. Walker Jr. is an attorney and owner of Walker & Associates, based in Monroe, Conn. He represents hundreds of corporations, artists, songwriters, producers and small businesses, and is the author of the book, "This Business Of Urban Music." Walker & Associates attorney Michael D. Blumberg assisted with this article. Attorney Walker can be contacted at .

By James L. Walker Jr., The Connecticut Law Tribune


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