All controls on music distribution stem from U.S. copyright law, which gives the creator of a work full control of its use, including all financial transactions. Record companies negotiate copyright issues with artists--either for a fixed term or in perpetuity--for the right to distribute their work. Because of this, record labels defend their distribution rights and see bootlegging and piracy as infringement on their contractual property and legally defendable distribution system.
Before digital duplication and dissemination was widespread, music distribution law was relatively straightforward. Record companies pledged a portion of album sales to artists for the exclusive right to distribute their music. To help cover the financial stake record companies invested in funding recording and production costs, a system of accounting for record sales figures was developed. Mechanical royalties are paid for each physical copy of the album sold to consumers for in-home and personal use; this is further broken down to performer and songwriter royalties. For each copy of an album distributed, mechanical royalties were calculated as specified by an artist's contract with the record company.
In a marketplace dominated by a physical distribution system, distribution conflicts between artists and record companies frequently arose due to accounting methods to track sales figures. Contracts typically specified royalty rates to be paid on units shipped to distributors, though those figures could be adjusted downward if distributors returned unsold stock to labels or reported it damaged.
Although digital distribution methods break from traditional hard copy distribution methods as they eliminate physical limitations, the legal basis for digital distribution is the same. Creators grant copyright holders the right to sell and reproduce their work in their name, and income is distributed between songwriters, musicians and the record company as specified in contracts.
Unauthorized distribution of copyrighted music is a violation of U.S. copyright law, whether the copies are sold for a profit or merely distributed free of charge. Whether the distribution is done physically, through bootleg recordings, or through digital means is immaterial in this case. Copyright violations are usually a civil matter that can lead to fines of up to $150,000 per instance of the violation.
Record companies are subject to the same antitrust laws of other corporations, and cannot conspire to fix prices or force retailers to raise prices of their albums. Minimum advertised price legislation was enacted to stop the practice of paying retailers not to advertise prices below certain thresholds, thus keeping prices in other stores artificially inflated.