Dear reader
If you're a regular reader of my Blog - which I hope you are! - you'll know that one of the recurring themes in my blog postings is about how new business models in the creative and technology industries are being driven by the shift from physical to digital distribution - from selling goods to licensing rights. Several recent US cases have highlighted how this shift can impact on traditional royalty structures and on re-sale rights.
On the issue of royalties, FBT Productions v. Aftermath Records illustrates what can happen when what was regarded as secondary exploitation – licensing – at the time a deal was agreed, becomes a primary revenue stream, in this case licensing digital distribution rights for downloads to Apple. At the heart of the dispute between Eminem’s production company FBT, and the record company Aftermath was whether licensing Apple to sell digital files of Eminem recordings constituted ‘masters licensed’ or ‘records sold’. The distinction under the agreement between FBT and Aftermath was significant. ‘Records sold’ entitled Eminem to receive between 12% and 20% of the adjusted retail price of all “full price records sold in the US” whereas FBT would received 50% of Aftermath’s net receipts on ‘masters licensed’ by them!
In fact, the US Appeal Court decided in FBT’s favour who, of course, argued that the deal with Apple was a licensing deal, carrying the higher royalty rate. It illustrates that great care needs to be taken in the use of terms such as “sale” and “licence” in the context of digital distribution deals.
There is another significant difference between selling physical goods – DVD’s, books etc – and licensing the right to use content. In the US, the ‘first sale’ doctrine, similar to the principle of ‘exhaustion of rights’ in the EU, means that when a physical good such as a book is lawfully sold on the market, the owner of the rights in that book cannot control the subsequent re-sale of that good. However, this doesn’t apply to rights licensed. You can immediately see how this can impact on the secondary market for goods. This distinction was illustrated in Vernor v. Autodesk. Here, the US Court of Appeal considered whether Mr Vernor, an ebay merchant, had the right to resell Autodesk software packages that he purchased from their customer. Ruling in favour of Autodesk, the Court concluded that Autodesk’s original customer was a licensee and not an ‘owner of a particular copy’ of the software. The use of the term ‘licence” in the bundled documentation together with restrictions dictating how the software could be used meant that the original customer did not have any right of re-sale to Mr Vernor in the first place.
The case yet again demonstrates how critical the use of the terms ‘licence’ and ‘sale’ can be, this time within the context of developing software for distribution and, as also highlighted here, when dealing in the secondary market for software.
The issue as to whether goods are sold or instead rights licensed is still very much a live one. The US Court of Appeal is still yet to hear further arguments concerning ‘sale’ and licence’, this time in relation to computer games (MDY Industries v. Blizzard Entertainment) and promotional music CDs (Universal Music Group v. Augusto).
I'll be posting a more detailed analysis of the cases on my website shortly, and I'll send you a link to it in my next post.
Have a good week!
Laurie Kaye
How can we square the recent decision in Vernor v. Autodesk with the very real difference in "incidents of ownership" enjoyed by the parties?
The original customer, CTA, lawfully obtained possession of the copies (the physical discs). Their right to possession was also perpetual. They (like Vernor afterward) could do as they saw fit with the discs: they could just store them on a bookshelf, they could insert them into a computer and use them, they could use them as drink coasters, or they could just throw them in the trash. All that among a host of other incidents of ownership (such as risk of loss).
Autodesk on the other hand enjoyed no such incidents of ownership. They no longer had any right to possession of the discs. This single fact alone severely limits their incidents of ownership. They could not decide where the discs would be stored or when and how they would be disposed of. They couldn't use the copies for their intended purpose (with a computer). There is *nothing* that Autodesk could do with the copies that CTA (and later, Vernor) could not do with them. Conversely, Autodesk cannot do any of the things that CTA (and Vernor) could do with them.
It seems quite clear that CTA (and later Vernor) enjoyed far more incidents of ownership over the copies. How can we make this compatible with the court's ruling?
Posted by: Dan Moulding | October 24, 2010 at 06:56 PM