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The Internet is redefining the methods by which record companies distribute music, allowing for Internet distribution of phonograph records instead of the sale of physical recordings. Recordings in digital form are currently available on the Internet and can be downloaded directly by consumers for personal use. The ramifications of this new distribution system may, conceivably, eliminate the manufacture, sale and distribution of physical recordings in favor of electronic distribution via transmission over the Internet, where consumers either make a hard copy for future use, or immediately “play” the recording on a computer. This new music delivery medium raises a number of challenging issues for the entertainment industry. For example, is this new method of distribution permitted under existing recording contracts? And, if so, what royalty is payable to the artist, if any? The last technical upheaval in the record business occurred at a time when LPs were being phased out technologically as CDs were being phased in. This format changeover raised serious financial issues for the record company, as the development cost for manufacturing CDs was higher than LPs, at least in the early stages and, as a consequence, record companies took the position that royalty rates payable to artists would have to be lower to reflect increased CD manufacturing costs. Record companies subsequently began negotiating with artists for reduced royalties. There was never a question, however, that the record companies had the right to distribute recordings via compact disc as opposed to long-playing records. Therefore, it might be interesting to look at an exclusive recording artist’s form used in a recognized book of music industry forms copyrighted some 15 years ago. The question is not whether this form is “good” or “bad” per se, but merely whether it properly deals with Internet distribution at all and, if so, what it says about the artist’s royalty rate for that distribution. The reason for chosing a form is that it presumably served as a model for practitioners and was derived from forms used by many recording companies during the LP-to-CD transformation era. The portions of the recording contract that are relevant are: the grant of rights clauses; the definitions; and the provisions relating to royalty payments. In the form agreement, the word “you” refers to the artist’s loanout lending company and “XYZ” refers to the record company. Figure 1 You warrant, represent and agree that throughout the Territory, XYZ is the sole, exclusive and perpetual owner of all Masters delivered hereunder or recorded by Artist during the term of this agreement, which ownership entitles XYZ, among other things, to all right, title and interest in the copyright in and to the Masters (but excluding the copyrights of the musical compositions contained therein). Each Master made under this agreement or during its term, from the inception of its recording, will be considered a “work made for hire” for XYZ; if any such Master is determined not to be such a “work,” it will be deemed transferred to XYZ by this agreement, together with all rights and title in and to it. All Masters made under this agreement or during its term (including duplicates, work tapes, etc.), the performances contained thereon and the Recordings derived therefrom shall, from the inception of their creation, be the sole property of XYZ, in perpetuity, free from any claims by you, Artist or any other Person and XYZ shall have the right to use and control same subject to the terms herein. XYZ (or XYZ’s designees) shall have the exclusive right to copyright all such Masters in its name as the author and owner of them and to secure any and all renewals and extensions of such copyright throughout the Territory. You will execute and deliver to XYZ such instruments of transfer and other documents regarding the rights of XYZ or its designees in the Masters subject to this agreement as XYZ may reasonably request to carry out the purposes of this agreement, and XYZ may sign such documents in your name or the name of Artist (and you hereby appoint XYZ your agent and attorney-in-fact for such purposes) and make appropriate disposition of them consistent with this agreement. Figure 2 Without limiting the generality of the foregoing, XYZ and any Person authorized by XYZ shall have the unlimited and exclusive rights to manufacture Records by any method(s) now or hereafter known embodying any portion(s) or all of the performances embodied on Masters hereunder; to publicly perform such Records and to permit the public performance thereof in any medium; to import, export, sell, transfer, lease, rent, deal in or otherwise dispose of such Masters and Records derived therefrom throughout the Territory under any trademarks, trade names or labels designated by XYZ; to edit or adapt the Masters to conform to technological or commercial requirements in various formats now or hereafter known or developed, or to eliminate material which might subject XYZ to any legal action; to use the Masters for background music, synchronization in motion pictures and television soundtracks and other similar purposes, including, without limitation, use on transportation facilities, without any payment other than as provided herein; or XYZ and its subsidiaries, affiliates and licensees may, at their election, delay or refrain from doing any one or more of the foregoing. PARSING THE FORM It is clear in the first paragraph of the granting clauses (see Figure 1) that the record company owns the Masters and that the Master is either considered a “Work for Hire” or, alternatively, all rights to the Master are transferred to the record company, thereby making the Master the record company’s sole property. Clearly, in this contract, there is no doubt that the record company owns the Masters. However, does such ownership imply that the record company may do anything it wants with the Masters? The second paragraph of the granting clause, without limiting the generality of the first paragraph, discusses the uses to which the recordings can be put (see Figure 2). In the definitional section, the word “Records” [FOOTNOTE 1]describes reproductions manufactured or distributed for home use, etc. Seemingly, the word “Record” implies a physical object. Additionally, the word “Master” [FOOTNOTE 2]describes a recording of sound ” … in any substance or material … “ , also implying a physical recording. The definitional clause continues by allowing for the utilization of Masters for audio-visual use (i.e., having the sound embodied in some audio-visual production). However, there is no express provision providing for the transmission of the sound embodied in the Master. The reference in the first paragraph of the granting clause to copyright refers to the phonogram copyright under the Copyright Act [FOOTNOTE 3]that, essentially, protects the copyright proprietor from the duplication of the recording, but does not confer to the copyright proprietor the bundle of rights that the music copyright owner of the music embodied in the recording owns. The structure of the agreement refers almost entirely to recordings as physical objects. Distinctions are made among various types of recordings (i.e., mid-price recordings or budget records, single recordings, long-playing recordings, ep records (a record containing ” … not less than four or more than seven sides … “ )). References to suggested retail list prices talk in terms of numbers of records sold. The concept of a container charge relates to deductions in the suggested retail price for record packaging, and the concept of a joint recording contains performances by both the contracted artist and other artists on a single album. The inescapable conclusion brought on by this contract analysis is that Internet distribution is not expressly covered and probably not covered even by implication. WHAT THE COURTS HAVE SAID Courts construing entertainment industry contracts with ambiguous or missing “new technology” clauses have generally rendered decisions based on two divergent theories: either a broad construction approach favoring licensees, or a strict construction approach favoring the licensor. [FOOTNOTE 4] In what may be a harbinger for future decisions regarding music distribution on the Internet, the Second Circuit ruled, in Boosey & Hawkes Music Publishers v. Walt Disney Co. [FOOTNOTE 5]that a 1939 agreement licensing Igor Stravinsky’s musical composition “The Rite of Spring” in the film “Fantasia” granted Disney rights to distribute the soundtrack in video format, even though this “new use” was not contemplated by the parties at the time of contract execution. The panel ruled that the language “to record in any manner, medium or form” warranted a grant to Disney allowing video distribution, absent a contrary indication in the agreement. [FOOTNOTE 6]Other courts have taken a more narrow approach, limiting the rights of the licensee to include only uses that unambiguously fall within the meaning of the questionable term. [FOOTNOTE 7] If the broad grant of rights language is not in the agreements, the courts generally do not rule in favor of new uses. [FOOTNOTE 8]If the broad grant of rights language is in the agreement, the courts generally rule in favor of new uses. [FOOTNOTE 9] The only broad language contained in the form falls within the definition of “Record,” defined as “all forms of reproduction, now or hereafter known.” This language is difficult to extend to Internet use because no physical media is utilized in the transmission or distribution; the digital sounds merely travel from XYZ’s computer to the consumer’s computer. Even the Booseycourt may concede that the leap from phonograph record or CD to direct digital transmission is infinitely greater than that used by Disney in moving from film to video format. Turning to the royalty provisions, it is quite clear that royalties in this agreement are based upon records sold, with specific references to physical records. There are deductions for mid-price and low-price sales, for sales outside the United States, and for sales to Army bases, etc.; also for sales at record clubs and direct mail. While this agreement does provide that the artist receive 50 percent of net receipts from licenses of Masters, this is the extent of the benefit. The clause appearing in some record agreements providing that the artist receives 50 percent from all other receipts not specifically subject to a royalty rate is omitted here. NO ROYALTIES PAYABLE? One can conclude that if the record company has the right to Internet distribution, the artist may not actually be entitled to any royalty at all. Note that in the second paragraph, the distribution of records is ” … without any payment other than as provided hereby … ” The possibility that the agreement may allow the record company to distribute music on the Internet without any obligation to pay the artist at all may lead to the interpretation that such form of distribution is simply not contemplated by the parties and, therefore, not permitted. In other areas of the entertainment industry such as the motion picture industry, the motion picture companies had, long prior to the date of the form, permitted exploitation of a motion picture by including contract language allowing for distribution by “all means and media now known or hereinafter created, throughout the universe and in perpetuity,” which would seem to cover the field. Clearly, Internet distribution will require a thorough review of all recording artist agreements, particularly those not of recent origin. This is not to say that all vintage recording artist agreements create similar problems. This form agreement merely indicates that all recording artist contracts may require renegotiation. :::::FOOTNOTES:::::: FN1“Record” or “Phonograph Record” means all forms of reproductions, now or hereafter known, manufactured or distributed primarily for home use, school use, juke box use or use in means of transportation, including records of sound alone and audiovisual Recordings. FN2“Master,” “Master Recording” or “Recording” means any recording of sound, whether or not coupled with a visual image, by any method and on any substance or material, whether now or hereafter known, which is intended for use in the recording, production and/or manufacture of Phonograph Records. FN317 U.S.C. �114 FN4See 3 Melville B. Nimmer and David Nimmer, Nimmer on Copyright, �10.10[A]. FN5145 F.3d 481 (2d Cir. 1998) (relying on Bartch v. Metro-Goldwyn-Meyer, Inc., 391 F.2d 150 (2d Cir. 1968) in which the court utilized a broad interpretation of ambiguous contract terms to cover new uses). FN6Id. At 486. FN7See Rey v. Lafferty, 990 F.2d 1379 (1st. Cir. 1993) (holding that a television viewing license does not extend to video distribution); Cohen v. Paramount Pictures Corp., 845 F.2d 851 (9th Cir. 1988) (holding that a license to use a television music score does not extend to video format). FN8See Warner Bros. Picture, Inc. v. Columbia Broadcasting System, Inc., 216 F.2d 945 (9th Cir. 1954), cert. denied, 348 U.S. 971 (1955) (allowing an author to exploit character rights in other writings by narrowly interpreting an ambiguous contract); Leisure Time Entertainment, Inc. v. Cal Vista, 79 F.3d 1153 (9th Cir. 1996) (holding that a contract did not contain an unambiguous transfer of rights to derivative works). See also Cohen v. Paramount Pictures Corp., 845 F.2d 851 (9th Cir. 1988) (holding that the owner of a license to exhibit a film “by means of television” was not entitled to exploit the film in video format). The Cohencourt ruled that, absent a specific grant, the licensee did not have rights “in a medium that had not been introduced to the domestic market at the time the parties entered into the agreement”. Id. at 854. But see Maljack Productions Inc. v. GoodTimes Home Video Corp., 81 F.3d 881 (9th Cir. 1996) (holding that a licensee owned certain music synchronization rights even though the original music grant did not contain a future technologies clause). The Maljackcourt, citing Cohen, stated that “we did not say in Cohenthat absent a future technologies clause, the author/grantor always reserves the right to exploit the work in new mediums.” Id. at 885. (emphasis added) FN9See Bourne v. Walt Disney Co., 68 F.3d 621 (2d. Cir. 1995), cert. denied, 517 U.S. 1240 (1996) (holding that the language of a grant to rights to record music in film was broad enough to encompass video format); Abkco v. Westminster Music, 838 F.Supp. 153 (S.D.N.Y 1993), aff’d., 41 F.3d 1502 (2d. Cir. 1994) (favoring licensee in a contract dispute regarding whether a contract issue was to be decided by a jury); Bartsch v. Metro-Goldwyn-Mayer, Inc., 391 F.3d 150 (2d. Cir 1968), cert. denied, 393 U.S. 826 (1968) (broadly interpreting a contract and holding that film rights to a play included the right to telecast the film). Paul A. Baumgarten is a partner at Rosenman & Colin LLP. Steven J. Katz, a summer associate at the firm, assisted in the preparation of this article.

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