Newsletter - Volume 57, October 2010
Music Industry Changing Its Tune
The music industry has seen its fair share of changes within the past decade.
MTV no longer plays music videos, CDs have largely been replaced by digital
downloads, artists are using social networks and are less dependent on record
labels to successfully promote themselves. Below we explore a few changes which
appear to be placing more money in the artists' pockets and which will likely
impact the artist-company relationship in the years to come; what has led to
these changes and what they mean for the future of the industry.
Older Artists Are Re-recording
Several "veteran" artists have found a new way to market some of their greatest
hits, despite the restrictive recording contracts under which they were
produced. In efforts to regain some creative control and profit, these artists
are re-recording their greatest hits and re-selling the recordings themselves.
For example, Suzanne Vega, known for such popular hits as Tom's Diner and
Luka, recently released her Close-Up Vol. 2, People & Places album
which is full of re-recordings of her greatest hits. Similarly, in 2008, Carly
Simon produced an album of acoustic re-records, mostly for personal reasons,
but also recognizing the benefits that full ownership gave her, including
earnings and creative control.
Under a typical big-label recording contract, the label owns the "master
rights," the copyright in any sound recordings made by the artist during the
term of the contract, in exchange for the label's services in promoting and
exploiting the recordings via album sales, arranging public performances and
the like. The label typically exercises creative control over the releases and
retains the majority of profits from record sales, with the artist negotiating
for somewhere between 8 and 16 percent of the profits. From this share,
however, the record company will often "recoup" advances, recording costs,
promotional costs, some touring and video costs, often leaving the artist with
just a small piece of the pie and very limited control on how the works are
exploited. Even with very successful albums, there is often unrecouped debt
that carries over into the next album, meaning the artist sees little to no
royalties. Most often these contracts commit the artist to dealing exclusively
with that label, and obligate the artist to produce six to eight records, which
can take years. Attempts to get out of these contracts and/or win back rights
are costly and seldom successful, as the artists seldom have the bargaining
power or deep pockets the recording companies do.
By re-recording songs, artists have no need to obtain the master license from
the label, because they are not using any sound recording produced under the
contract, but rather creating a new recording altogether. "Mechanical rights"
to the actual song, including the composition and lyrics, still belong to the
songwriter or music publisher. Thus, if someone wants to create a cover of a
song, a mechanical license from the owner of the song is all that is needed and
there is no need to negotiate with the label at all. Further, U.S. Copyright
law stipulates that once the copyright owner of a musical composition records
the song and distributes it publicly, anyone who wants to re-record or create a
cover of the song can do so without permission (subject to certain limitations)
by issuing the copyright owner a notice of intention to obtain a "compulsory"
mechanical license. The cover song is subject to a compulsory license which
provides the copyright owner an automatic royalty payment for every recording
created and sold. The license is "compulsory" because the artist cannot refuse
to issue the license so long as all the requirements are met. In this case,
however, assuming the songwriter has not assigned all mechanical rights to a
music publisher, he or she is the owner of the mechanical license in the first
place and thus does not need to provide any notice or pay any royalty,
compulsory or not. The only way a record label can legally discourage
re-recording is with contract clauses that prohibit its artists from doing so.
Typically, such clauses will state that the artist cannot re-record until five
years after the contract expires. Thus, artists like Suzanne Vega, who are
years out of their contracts and still own full mechanical rights can make
their own recording without violating any agreement.
Problems do arise, however. Many consumers already own greatest hits albums for
popular artists that have been around for a while, and many are sentimental to
the original versions. Thus, the re-recorded albums can be less than
marketable. On the other hand, re-recordings are proving to be popular amongst
music supervisors who choose songs for TV, commercials and the like. Purchasing
licenses to use these versions is much less expensive than negotiating with
labels, and consumers seldom notice differences in the re-recorded versions
when played as background music.
In all, re-recording has provided a clever new way for some acts who are no
longer at their peak to market themselves, and at the same time take back some
creative control and reap more of the benefits, and profits, from their
efforts.
New Artists Are Side-stepping the Big-label Deals Altogether
As touched on above, a big-label record deal does not in many cases bode too
well for the artist. Increasingly, many are seeing such deals as wholly unfair.
As a result, many artists, including those who were already unsuccessful under
a big label deal and those who were never signed, are deciding to sidestep such
deals altogether. With the internet, numerous artists are finding ways to
promote and sell their songs without big-label assistance. They may sell far
fewer albums than they would with a big-label deal, but they retain full
ownership of the master rights for their songs, meaning they realize all of the
revenue.
Adding fuel to this is the fact that the big record labels have become publicly
held conglomerates with shareholders to please and thus have to provide
justification for investing considerable funds in an artist who may or may not
sell. Thus, they are becoming more hesitant to sign new artists, and more and
more are relying on marketing tools and statistical data to decide whether to
keep an artist on. For example, the band Big Head Todd and the Monsters was
signed with Giant/Warner Bros. Records, and its 1993 album Sister Sweetly
went platinum. Because its next two albums weren't as successful, the band was
dropped. It went on to create its own label, ironically named BIG Records.
While the band's independent albums may not have gone platinum, the band has
seen more money than it ever saw under its deal with Giant/Warner because it is
not giving up a majority of the master royalties.
Many other bands, such as Wilco, are following suite and creating their own
labels. In doing so, the artists sign themselves to their own label, retaining
all master rights and creative control. Some then license their artist services
to third parties to perform some of the other functions, such as distribution
or promotion. Artists under their own labels can also record, promote and sell
their albums on their own for much less than the big labels, who spend anywhere
from $20,000 to $100,000 recording a master, depending on what producer they
engage. With more and more people becoming technically savvy, artists often
have the know-how to produce themselves. The internet allows them to promote
and distribute at a low cost as well. For example, many artists are promoting
themselves on Facebook and MySpace, and by registering with CDBaby, a
distribution service similar to Amazon.com for independent artists, which
creates profiles for the artists, sells their music, and tracks sales numbers
amongst other services. All of this means that artists are relying less and
less on big-label recording contracts.
Artists May See Payment for the Performance of Their Songs on the Radio
Artists may see more revenue from their works if the Performance Rights Act is
signed into law. The Performance Rights Act is a proposed amendment to the
Copyright Act which would expand the protection for the public performance of
copyrighted sound recordings by requiring broadcast radio (AM/FM) stations to
pay the performers of the recordings they air.
Currently, broadcast radio stations are not required to pay owners of the master
recordings for "performing" their recordings on the radio because under the
Digital Performance Right in Sound Recordings Act, sound recordings are only
afforded a public performance right in digital transmissions, such as online
radio and webcasting. There has been a lot of debate over this bill;
ironically, the artists and labels are on the same side of the issue this time,
as it ultimately is either a label or the artist owning the master rights.
Broadcasters who oppose the bill argue that the performance right is unnecessary
and overly burdensome in the current economic climate, and risks shutting down
several radio companies. Further, they argue that it will be placing money in
the hand of already powerful record companies. Proponents, however, point out
that under the current version of the bill, where a label is involved,
compensation would be divided evenly between the artists and the label and
would not be subject to any record company recoupment. The artists' share of
royalties would be paid directly to them. In those cases where artists own
their own copyright, all of the performance royalties would be paid directly to
them. Also, a portion of the performance royalties received under the Act is
designated for background musicians and vocalists.
Whether the bill will pass has yet to be seen. It is something artists and
labels have been pushing for decades, and there are numerous other arguments
being made on both sides. Overall, however, it is clear that several recent
changes within the music industry are placing artist rights at the forefront,
and that the artists themselves are taking a proactive stance in eliminating
dependence on major labels.
Prototypes and Priority
In order to prevail in a trademark infringement claim, as a threshold matter a
trademark owner must establish that it has priority of use over the alleged
infringer. Use requirements are intended to prevent wholesale "reservation" of
trademarks. Only a party with priority of use can claim infringement. Without
use, there are no rights to infringe. Generally, establishing priority requires
showing a bona-fide actual use of a mark. Token sales or marketing of a product
will not suffice. Rather, sales of goods bearing a mark or other use of the
mark must be done for legitimate business reasons. Sometimes the question of
date of first use of a mark is clear—there may be press releases,
advertisements, sales receipts or other indicia. In some situations, none of
that is available, so how can a trademark owner establish priority and show
use?
The TTAB recently addressed this issue and provided some guidance. Automedx,
Inc. sought to oppose Arcivent Corporation's registration of the mark SAVe for
use in connection with medical devices, specifically portable ventilators, on
the basis of its registration for the mark SAVe for identical goods. The
opposed application had a constructive date of use of October 10, 2006. To
prevail in its opposition, Automedx had to establish use of the SAVe mark prior
to that date. The problem, however, is the goods were not yet approved for use
by the FDA and were not in the market at that time.
As medical devices, the portable ventilators at issue could not be sold for use
as same before the FDA approved such use. In October, 2006 Automedx' goods were
not yet approved and still in testing and development. FDA approval did not
issue until September 2007. However, during 2005 and early 2006, while awaiting
FDA approval, Automedx sold several prototype units to the U.S. Air Force and
Army who used them for field performance testing and animal testing. These
units were clearly labeled with the SAVe mark and a legend stating they were
not FDA approved and not for human use.
Applicant argued that Automedx did not have priority of use since its SAVe
products were not approved by the FDA until September 2007. Since sale was
prohibited before such approval, there was no legal way Automedx could use SAVe
in connection with the portable ventilators. Therefore, any prototype sales to
the military did not constitute legitimate use of the mark in commerce as
required.
The TTAB disagreed. In certain contexts, limited sales of prototype goods can
constitute use of a mark for purposes of priority. Here, the transactions
between Automedx and the military were arms-length commercial interactions with
a legitimate business purpose. That there was no FDA approval for use on humans
at the time of the sale was irrelevant, since the sales were not made with an
eye to such use at the time but only for testing. Thus, in this case, sales of
a small number of prototype goods constituted legitimate use of the SAVe mark
in commerce.
Though the TTAB found these particular ventilator sales sufficient to show use
of the SAVe mark, it was careful to note that not all prototype sales for
testing purposes will constitute actual, bona-fide use for priority purposes.
Each case will turn on its facts, but this recent ruling makes it clear that at
least some arms-length transactions involving product prototypes can qualify.
Supreme Court to Resolve Question on the Level of Intent Required to Support a Claim for Inducement to Infringe a Patent
Section 271(b) of the Patent Act creates a cause of action against inducing
infringement of a patent and reads "Whoever actively induces infringement of a
patent shall be liable as an infringer." The Supreme Court has granted
a writ of certiorari in the case of Global-Tech Appliances, Inc. v. SEB S.A.
to resolve uncertainty amongst the lower courts as to the state of mind or
level of intent required for a claim of inducement to infringe a patent. The
question raised is: Whether the legal standard for the "state of mind" element
of a claim for actively inducing infringement under 35 U.S.C. § 271(b) is
"deliberate indifference of a known risk" that an infringement may occur or
instead "purposeful, culpable expression and conduct" to encourage an
infringement.
Induced infringement is a form of indirect patent infringement where there is
some affirmative act by the person being sued to induce another to carry out a
direct infringement of the patent-in-suit. This affirmative act may be in
instructing, directing or advising the third party as to how to carry out a
direct infringement. While the actions required to show induced infringement
are fairly clear, there is a level of uncertainty on the state of mind or level
of intent required to support a claim of infringement under Section 271(b).
This is evidenced in recent Federal Circuit Court of Appeals decision applying
both standards in inducement cases. In DSU Medical Corp. v. JMS Co., Ltd.,
471 F.3d 1293 (Fed. Cir. 2006) (en banc), the Federal Circuit held that
inducement charges could only be sustained if the accused inducer "knew of the
patent." In contrast, in the recent case SEB (T-Fal) v. Montgomery Ward & Co.,
594 F.3d 1360 (Fed. Cir. 2010), the Federal Circuit retreated from the "knew of
the patent" standard and held that a "deliberate indifference" to potential
patent rights could be sufficient to satisfy the knowledge requirement of
inducement charges. At the heart of the writ of certiorari and a
supporting amicus curiae brief is the question of whether the
"deliberate" indifference standard from the Federal Circuit's SEB decision
conflicts with the Supreme Court's decision in MGM Studios, Inc. v. Grokster,
Ltd. While Grokster was a copyright case, it established a
standard on inducement to infringe claims.
The writ of certiorari was granted on October 12, 2010. Briefing and oral
arguments have not yet been scheduled.
Disclaimer: The contents of this newsletter are presented for information purpose only, and as such are not intended to constitute legal advice and should not be construed as such or acted upon without seeking advice of legal counsel. This information is not intended to and shall not create an attorney-client relationship of any kind or nature with IpHorgan Ltd. Please contact the firm with queries, concerns or for further details regarding the information presented herein. The entire contents are current only as of the date of the newsletter and are not to be interpreted as the opinions of our clients past, present, pending or future. (c)2010, IpHorgan Ltd. All Rights Reserved.
Newsletter Volume 72, January 2012
