Bamboozled! UMG’s Inter-Company Accounting At Issue

The legal battle between brothers Mark and Jeff Bass, the Detroit producers credited with grooming rapper Eminem in his early days, and Aftermath Entertainment, the American record label founded by Dr. Dre and distributed through Universal Music Group’s Interscope Records, has grown to include the inter-company accounting practices of large, multinational record labels.

History

A brief history is in order.  The Bass brothers, working under their nom de rap Funky Bass Team a.k.a. F.B.T. Productions, signed fellow Detroiter Marshall Mathers (a.k.a. Eminem), to a recording contract in 1995.  In 1998 and 2000, F.B.T. signed agreements with Aftermath to (first) distribute and (later) own all of Eminem’s sound recordings in exchange for between 12% – 20% of the retail price of copies of Eminem’s records sold (“Records Sold” provision) or 50% of the net revenue Aftermath obtained by licensing Eminem’s master recordings (“Masters Licensed” provision).

[Side Note: It is quite common in recording contracts for royalties paid on records sold to be lower than royalties paid of masters licensed; see, e.g., here.]

When an audit of Aftermath revealed that F.B.T. was receiving royalties for permanent downloads and ringtone sales under the Records Sold provision (and not the more lucrative Masters Licensed provision), F.B.T. filed suit in 2007.  After a jury found that Aftermath had been correctly accounting to F.B.T. (i.e., digital downloads were Records Sold), F.B.T. appealed.  The 9th Circuit reversed and held, as a matter of law, that digital downloads and ringtones were licensed to various third parties such as iTunes who, in turn, distributed over the Internet.

The agreements also provide that “notwithstanding” the Records Sold provision, F.B.T. is to receive a 50% royalty on “masters licensed by [Aftermath] . . . to others for their manufacture and sale of records or for any other uses.” The parties’ use of the word “notwithstanding” plainly indicates that even if a transaction arguably falls within the scope of the Records Sold provision, F.B.T. is to receive a 50% royalty if Aftermath licenses an Eminem master to a third party for “any” use. A contractual term is not ambiguous just because it is broad. Here, the Masters Licensed provision explicitly applies to (1) masters (2) that are licensed to third parties for the manufacture of records “or for any other uses,” (3) “notwithstanding” the Record Sold provision. This provision is admittedly broad, but it is not unclear or ambiguous.

The 9th Circuit remanded the case back the Central District of California for a trial on damages, which was supposed to begin in April, 2012.

[Another Side Note: If you wonder how Richard S. Busch, a commercial litigator from Tennessee, ends up representing the Bass brothers, I have a theory.  Busch represented Bridgeport Music, a publishing company that owns or controls much of the catalog of George Clinton, and Westbound Records, a record company that released several albums of Clinton’s famous funk band Funkadelic, in a series of cases in the Middle District of Tennessee over alleged unlicensed sampling.  In a controversial landmark decision, Bridgeport Music, Inc. v. Dimension Films, 410 F.3d 792 (6th Cir. 2005), the 6th Circuit held that the unlicensed use of a two-second guitar chord from Funkadelic’s song “Get Off Your Ass and Jam” in gangster rap group N.W.A.’s song “100 Miles and Runnin’” constituted copyright infringement.  In its decision, the 6th Circuit wrote: “Get a license or do not sample. We do not see this as stifling creativity in any significant way.”   It turns out that prior to working with Eminem, Mark and Jeff Bass worked as a production team for George Clinton and his label Westbound Records.]

Present Dispute

The present dispute involves whether F.B.T. can supplement the complaint they filed in 2007 on the eve of a second trial, which was to commence on April 24, 2012.  F.B.T. claims that Aftermath’s expert report, served on February 7, 2012, revealed for the first time that Aftermath was receiving only 29% of the revenue generated from foreign sales of downloads and ringtones under an inter-company agreement with its foreign affiliates.  Because under the 9th Circuit’s decision Aftermath is to pay F.B.T. 50% of revenue (under the Masters Licensed provision), it makes an enormous difference whether that calculation includes 100% of revenue generated by the foreign sales or just the 29% of revenue Aftermath recognizes on its books.

In opposing F.B.T.’s motion for leave to file a supplemental complaint under FRCP 15(d), Aftermath argued, in part, that a prior partial summary judgment ruling had already decided the issue of foreign revenue.  In rejecting Aftermath’s argument, Judge Gutierrez noted that

Defendants largely rely on a single sentence from their summary judgment brief for the proposition that the issue they wanted determined was clear: “In audits conducted post-dating the trial, F.B.T. has contended it is entitled to 50% of what is received by any company affiliated with Universal Music Group, anywhere – including 50% of the ‘receipts’ of foreign distribution companies.” Mem. ISO Defs. Mot. for Summ. J., 20:21-25. In light of Defendants’ current position on revenue sharing with foreign affiliates, the import of this sentence now seems clear. However, at the time, FBT did not seem to understand the reference. In opposition, FBT stated in a footnote that the “significance of this sentence is not clear.” Opp. to Defs. Mot. for Summ. J., Dkt. # 710, at 17:24-28 n.11.

Judge Gutierrez went on to complain

[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, F.B.T. now has until July 6 to filed its amended complaint.  The parties will then get to conduct further discovery on the issue of inter-company accounting.  Looks like a trial won’t be happening until the end of this year or early next.

Judge Gutierrez’ opinion is below:
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