In 2007, F.B.T. Productions, the label that first signed rap artist Eminem to a recording contract, filed suit for breach of contract against Universal Music Group subsidiary Aftermath Records, with which F.B.T. contracted for exclusive rights to Eminem’s recordings. Under the contract, Aftermath was required to pay the artist 12%-20% of the adjusted retail price for every record sold, and 50% for every record “licensed”. The gravamen of F.B.T.’s complaint was that UMG had breached this agreement as to digital downloads by paying royalties at the lesser rate designated for a record “sale” rather than the significantly higher rate for a record “license”, based on its position that digital downloads are more akin to a the licensing of a record than the physical sale of a record.

In reaching its decision in F.B.T. Productions, Inc. v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010), the Ninth Circuit reviewed the contract at issue and the circumstances surrounding it and found that the contract failed to define whether an online music download constituted a sale or a license. However, the contract did define a “master” as a “recording of sound… which is used or useful in the recording, production, or manufacture of records.” Pursuant to the facts of the case, Aftermath provided a single master recording to ITunes to duplicate in order to provide songs for consumers to download, a process that carries significantly less incremental costs than the physical sale of individual discs. The court found that the “masters licensed” provision 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. Finally, the court looked at federal copyright jurisprudence defining “licenses” to ultimately conclude that the sound recordings or masters that Aftermath provided to ITunes for the purpose of digital downloads constituted licenses, rather than sales.

Following the Ninth Circuit’s decision, UMG sought Supreme Court review. However, the Supreme Court declined to grant cert., paving the way for similar suits premised on the Ninth Circuit’s finding that digital downloads are equivalent to licenses rather than sales. One such suit was recently filed in the U.S. District Court for the Northern District of California. The complaint, brought by the estate of the late funk singer Rick James, was brought as a class action and alleges breach of contract and violations of California’s Unfair Competition Law (Bus. & Prof. Code § 17200 et seq.). More specifically, the complaint alleges that Rick James and members of the class have been deprived of millions of dollars in royalties for UMG’s failure to properly compensate them for digital downloads and ringtones by paying them the royalties designated for song sales rather than song licenses. The suit seeks to establish a class pursuant to Federal Rule of Civil Procedure 23(a) and 23(b) comprised of “[A]ll persons or entities… who entered into UMG production or recording agreements from January 1, 1965 to April 30, 2004 and who… received royalties on… income received by UMG from Music Download Services and Mastertone Providers at a rate less than the rate provided for licensing income in their contracts with UMG.

While the James case isn’t likely to affect newer artists who entered into their contracts in the era of digital downloads and whose contracts thus explicitly define the royalties arising from digital downloads, artists whose contracts predate digital downloads stand to profit significantly. Attorneys in the F.B.T. case estimate that the damages arising from royalties due for digital downloads of Eminem songs alone range from $17 to $20 million. Moreover, UMG is far from the only target for such claims. In fact, the Allman Brothers Band filed a similar class action suit against Sony Music Entertainment which recently settled prior to certification.

Notwithstanding the potential significance the James’ class action could have to a vast number of recording artists, it still faces some serious obstacles in the quest for certification. First, the suit assumes that the contract or contracts at issue are not governed by the standard “incontestability provision” present in most recording contracts. The majority of recording contracts signed during the class period contain such a provision, which typically include language such as “[A]ll royalty statements rendered by the label to the artist shall be binding upon the artist and not subject to any objection by the artist for any reason unless specific objection in writing, stating the basis thereof, is given to the label within one year from the date the statement is rendered.” Such a provision was present in the Allman Brothers’ Band 1985 contract and the federal District Court in New York where the case was filed found such a term valid and enforceable.

Additionally, the recent AT&T Mobility LLC v. Concepcion holding finding that the Federal Arbitration Act preempts any state law outlawing class action waivers could also impact the James case or similar class action cases to the extent the recording contracts at issue contain mandatory arbitration provisions.

However, if the James case is certified in spite of these obstacles, it will greatly impact those artists who entered into recording contracts before the implications of digital downloads were fully understood or even contemplated. And, while the outcome of the case doesn’t stand to have much significance moving forward, as modern day contracts have been adapted to specifically set forth the terms for digital downloads, there is still a lesson to be learned by record labels in drafting future contracts: a failure to foresee and swiftly adapt to changes in technology could come at a very high price.

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“Simply stated: labels matter.” These were the words of the California Supreme Court in its recent decision, Kwikset Corporation v. Orange County, 51 Cal.4th 310, 328 (2011), when it determined that consumers will chose one product over another because of a label, amongst other things. In fact, the Court noted how an entire body of trademark law has been created to “protect commercial and consumer interests in accurate label representations as to source, because consumers rely on the accuracy of those representations in making their buying decisions.” Id.

Defendants who seek to trivialize the importance of labels when they argue that a plaintiff’s consumer fraud claim should be denied because he “received the benefit of [his] bargain” if he purchases a “fully functioning product” even if the product label contains misrepresentations that may have been reasonably relied upon, are mistaken according to Kwikset. Id. at 332. Plaintiffs not only bargain for a working product, but for the accuracy of what representations are made on the product’s label too. Id.

For example, in Kwikset, the Court made it clear that the plaintiffs not only bargained for functional locksets, but functional locksets “made in the U.S.A.” as advertised by the defendant manufacturer. Id. The Court also compared how an observant Jew bargains not only for food, but food that is kosher; an oenophile who values subtle regional differences, bargains for wine from a particular locale; a fiancée unsupportive of bloodshed, bargains for a conflict-free diamond; and a fine jewelry collector bargains for a Rolex, not a counterfeit watch made to look like a Rolex. Id. at 328-29.

According to Kwikset, all product information which is inevitably tied to the product’s marketing, is contained within the product’s label and can impact a consumer’s purchase choice as much as the product’s functional capabilities, which too may be advertised in and through the product’s label. Id. at 328; see also Pfizer Inc., v. The Superior Court, 182 Cal. App. 4th 622, 632 (2010) (case where plaintiff bought Listerine due to the bottle’s red label which claimed that the product was “as effective as floss.”).

As such, a consumer who relies on a product label and challenges a misrepresentation contained therein, can satisfy the standing requirement for Cal. Bus & Prof. Code Section 17204 by alleging he would not have bought the product but for that misrepresentation. Kwikset Corporation, 51 Cal.4th at 330. To conclude otherwise, according to Kwikset, would bring to an end private consumer enforcement of bans on many label misrepresentations, contrary to the intent of Proposition 64. Id.

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Currently, there are two major processes by which medical devices requiring U.S. Food and Drug Administration (FDA) review come to the American market. Medical devices receive approval either Pre-Market Approval (PMA) or receive clearance to market through the 510(k) process.

PMA is the more stringent type of device marketing application required by the FDA. To gain approval, the manufacturer must present adequate scientific evidence through well-controlled clinical trials to assure that the device is safe and effective for its intended use(s). This process is used for the approval of Class III medical devices which include devices that support or sustain life, devices that are used to prevent impairment of human health, or devices that present potentially unreasonable risks of injury or illness.

The 510(k) process is the less stringent process which simply requires that the device be similar to a device already marketed (predicate device). It is somewhat similar to the “generic” drug concept in that it is used to obtain marketing clearance for a device that is “substantially equivalent” in safety and effectiveness to another lawfully marketed device or to a standard recognized by the FDA when used for the same intended purpose(s). In order for a device to be eligible for the 510(k) clearance, it must roughly display the same safety and effectiveness characteristics as the “predicate” device to which the new one is being compared, however, it does take into consideration technological advancements. In other words, so long as the new is similar in safety and effectiveness, it does not need to be made from the same materials or even use the same technology.

So basically, for 510(k) approval, 1) there is no requirement for clinical trials, 2) the FDA does not require premarket inspections on how the device was manufactured, 3) the FDA does not require postmarket studies and 4) the FDA has more limited authority to rescind or withdraw clearance of a 510(k) device that is found to be unsafe.

Thus, the 510(k) process is intended for devices that the FDA deems to involve low or moderate risks, but recently however, this process has become the center of great attention due to the number of recalls associated with it. As a result, the FDA is in the midst of a comprehensive review of its 510(k) process for medical devices.

A recent study published by Diana M. Zuckerman, Paul Brown, and Steven E. Nissen, titled “Medical Device Recalls and the FDA Approval Process” analyzed the FDA’s high-risk List of Device Recalls from 2005 through 2009 and determined 115 recalled devices that were determined to cause serious health problems or death of which 71% of were approved using the 510(k) clearance process. Cardiovascular devices made up the largest recall category, with 2/3 of those devices having been approved through the 510(k) process. More interesting is that despite the FDA’s requirement that almost all Class III devices must go through the PMA process, 13 of the 510(k) recalled devices were designated as Class III devices.

The study concluded that devices that were approved through this less rigorous 510(k) process comprised more than 2/3 of the recalled devices. This study reveals a flaw in the current FDA medical device review system and suggests that a reform of the regulatory process is needed to ensure the safety of devices.

A recent example of a recall associated with the 510(k) process is the recall of the Axxent FlexiShield Mini. This device is a radiation shield temporarily implanted in women with breast cancer to protect them during radiation treatment by limiting the amount of radiation the skin is exposed to by shielding areas that did not need radiation therapy. Instead, the medical device left the breast tissue and chest muscles contaminated with hundreds of heavy metal particles. In recalling this device, the FDA issued its most serious type of recall, one involving situations where there is a probability that use of these products will cause serious adverse health consequences or death. Because very little research has been done on the device, it remains unknown if the left over metal is dangerous to health and what its long-term effects in the body are. But what is known is that the metals show up on mammograms, making the mammograms difficult to read. The effect is astronomical for women who have already had breast cancer and worry about the odds of recurrences because the left over particles resemble calcium deposits, which can indicate cancer.

This recall in itself highlights the need for altering the 510(k) review process. Proponents of such change believe the FDA is putting patients at risk by approving high-risk medical devices under the 510(k) review process without sufficient pre-market review.

The FDA has responded to such criticism early this year by revealing plans to implement 25 changes to its 510(k) process, but held off on major moves until after the release of an Institute of Medicine (IOM) report that is expected to be completed this summer.

The IOM report has already become victim to great criticism for failing to incorporate representatives from the medical device community into its review process. Last month, Senator John Kerry delivered an open letter to FDA head, Margaret Hamburg, expressing concerns with several proposed 510(k) changes and urging greater industry representation in the IOM review process.

Only time will tell whether the need for increased patient safety outweighs the need to get medical devices out into the market quickly.

If you have questions or comments about this article, we would value the opportunity to hear from you. For information on other topics in consumer advocacy and to learn more about Khorrami Pollard & Abir, please visit our website or subscribe to our Consumer Advocate Legal Update blog.