While royalties are discounted, an earning party may qualify for increases as well. Substantial record sales provides artists with an increase in the royalty rate based on specific plateaus of record sales, such as Recording Industry Association of America (R.I.A.A.) certification for gold and/or platinum sales. Even if a contract does not spell out for these increases, it may be possible to renegotiate if the sales are significant.
Negotiating a Contract
When negotiating a contract for the use of preexisting content, the following factors must be considered (Kaufman, 1996):
The contracting party. Often, in the entertainment industry, it is unclear who the proper party is to acquire rights from. A lawyer must be certain to obtain rights from the party that actually has the legal right to grant those rights (as opposed to a subsidiary whose claim to own those rights may be in question). If one counsels Britney Spears, for example, and a record company only distributed a song (but did not produce it), it is important to verify whether the record company or the actual production company is the appropriate party to grant the rights.
The media in which the licensed work will be used. If a client will be obtaining rights to use the material, it is helpful to specify which media it will be used in as precisely as possible, as well as to include a grant of rights "in all media whether now known or hereafter devised" or likewise.
The compensation payable. This may take many forms, including flat fees, advances (payments that apply against royalties), guarantees, royalties, net profits, and option payments. To the extent that royalties or other contingent payments are involved, it is important to specify how they will be defined, computed and accounted.
Appropriate representations, warranties and indemnities. For example, the licensee will typically want a representation and warranty that the licensor owns or controls all rights necessary for the grant and that the licensee's exercise of the rights granted will not violate or infringe upon the rights of any third party.
Accounting provisions and audit rights. If you are representing a licensor or other grantor or creator of content rights (such as MegaPictures) and any contingent compensation (e.g., royalties) is payable, you should negotiate appropriate provisions governing Accountings and Audit Rights
Intellectual property rights enforcement
The agreement should include provisions regarding any required copyright, trademark or other notices regarding the underlying work and who will have what rights to enforce various copyright and other rights with respect to the work.
Rights in musical works
There are unique issues that arise with respect to musical compositions. If a client wants to use a sound recording of a musical composition, two licenses are needed: one from the owner of the copyright in the musical composition (the music publisher and/or the songwriter(s)), and another from the owner of the copyright in the sound recording embodying the particular performance of that musical composition (generally a record company).
One of the most important areas of entertainment law is copyright (Kaufman, 1996). Various types of preexisting material may be protected by copyright, including text, audiovisual works, musical compositions, sound recordings, visual art, photographs, graphics, animation, charts, so-called "sampled" sounds, databases and computer programs.
The current U.S. copyright law was enacted in 1976 and has been active since January 1, 1978 (it has been amended several times since) (Kaufman, 1996). Accordingly, a different set of copyright rules applies to works created on or after January 1, 1978 than to those created before this date. For "original works of authorship" created in 1978 or later, federal copyright protection is accorded as soon as such works are "fixed in a tangible medium of expression." Additionally, the 1976 Copyright Act views copyright as consisting of a "bundle of rights" in a work which collectively comprise the copyright. Generally, "ideas" do not qualify for copyright protection, although "expressions" do.
In respect to rights in musical works, sound recordings did not become eligible for federal copyright protection until February 15, 1972 (under an amendment to the then existing copyright law) (Kaufman, 1996). Sound recordings fixed prior to this date may have qualified for protection under state common law.
Section 106 of the Copyright Act sets forth five exclusive rights of copyright owners (subject to certain limitations) (Kaufman, 1996):
1) to reproduce the copyrighted work in copies or phonorecords;
2) to prepare derivative works based upon the copyrighted work;
3) to distribute copies or phonorecords to the public by sale or other transfer of ownership or by rental (with certain exceptions);
4) to perform the work publicly (for certain works); and 5) to display the work publicly (for certain works).
Determining whether a piece of work is protected by copyright or is in the public domain is not always a simple process, especially in the entertainment industry (Kaufman, 1996). In addition, even if a work is in the public domain, it is possible that certain elements or versions of the work may be protected by copyright. In addition, if a work is in the public domain in the United States, it may be copyrighted in other countries. Finally, recent legislation will enable copyright protection to be restored to certain works that had entered the public domain in the United States.
For these reasons, lawyers with clients seeking to acquire rights in copyrighted material are advised to do a copyright search and to make a careful legal analysis of the results of the search, in order to determine whether the material is protected by copyright and who the owner of the appropriate rights under copyright is (Kaufman, 1996).
The topic of copyrighting and how it impacts royalties is a hot issue right now. The Recording Industry Association of America is suing users of illegal peer-to-peer ("P2P") file sharing networks (Frank, 2004). Many people argue that this is ridiculous, as many of the defendants are teenagers or parents of children who used their computers to download music illegally. More extreme factions say that people should be allowed to download free music if they so desire.
The controversy over copyrighted music is a complex subject. Most people admit that it is wrong to steal (Frank, 2004). It is rare that people run out of restaurants without paying for a meal; however, few people would turn down a free meal at their favorite restaurant. In this light, copyrighted music is a gray area. Regardless of what is available online, however, entertainments law holds that copyrights belong to songwriters, musicians, record labels and music publishers. Thus, making unauthorized copies is the same as stealing. Unfortunately, this concept is not understood by the collective conscience.
According to Frank (2004): "The physical embodiment of music -- the CD and the package -- comprises a very small portion of the purchase price of an album. Most of the purchase price is the purchaser's payment for the right to own a copy of copyrighted intellectual property, i.e. The copyrighted musical compositions and sound recordings. That money pays for a lot of different things."
According to Frank (2004): "The retail price of a record is split among the retailer, record label, songwriters and recording artist. All four of them spend some of that money on salaries and rent. Record labels also pay for third party costs of marketing, advertising and public relations. Artists pay for instruments, rehearsal space, a tour vehicle, gasoline and simple recording equipment to use as a tool in their creative process. Put together, all of these things keep music flowing and give us the opportunity to know about it."
Songwriters are legally protected when they copyright their work. Any original work (lyrics/music etc.) is a person's property as soon as it is created and lasts for approximately 70 years after one's death (Frank, 2004). This means that no one can use it with the artist's permission, unless it is assigned to some other person by selling it, lending it, or giving it away. Titles, names, slogans and phrases cannot be copyrighted although it is possible to apply for a trademark.
Any person who wishes to use all or part of one's work for publishing or performance purposes must pay for a copyright or performance license (Frank, 2004). These fees are paid to a collection agency who then forward them to the person who created the musical, artistic or literary work.
Royalty is the term used for the funds allocated for payment on an original work (Frank, 2004). Royalties are split between the record company, publisher, songwriter and performer depending on what type of royalty is agreed upon. There are several royalties that are gathered and distributed by collection agencies:
Songwriter and composer royalties include the following (Frank, 2004):
1. Performance royalties are distributed either directly or indirectly when the work is publicly performed. These royalties include live performances, records, broadcast, television, film or video. They are usually collected by organizations and then paid either directly or indirectly through a publisher to the composer.…