Recent Court Decision Highlights Importance of Drafting Licenses With an Eye Toward Possible Technological Developments and Their Effect on the Marketplace in the Future


The Supreme Court recently declined to hear an appeal of a Ninth Circuit decision holding that music distributed through Apple's iTunes and other digital-music services qualified as a "license" rather than a "sale." As a result, the artists who entered into these agreements were entitled to the much higher royalty rate specified for "licenses" rather than the lower royalty rate for "sales." See Aftermath Records v. F.B.T. Prods. LLC, No. 10-768 (March 21, 2011). Because contract interpretation focuses heavily on the specific language used in specific contracts, the Ninth Circuit decision may not carry broad precedential weight across the entire music industry. This decision could, however, greatly affect the interpretation of similarly worded contracts, as courts attempt to apply language written for the sale of records and compact discs to transactions in the digital marketplace.

Indeed, shortly after the Supreme Court declined to review the Ninth Circuit's decision, a class action suit was filed against the publishing house Universal Music Group in the District Court for Northern District of California seeking back royalties for digital downloads. As the digital-download market continues to grow at the expense of sales of physical albums, courts will likely again be asked to determine royalty rates in the digital marketplace by interpreting contract language that was drafted with an eye toward an earlier marketplace. These cases serve as a reminder of the importance of drafting contracts with an eye towards the future.

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