Entertainment Law Is a Diverse

Entertainment law is a diverse field of law that integrates contracts and intellectual property law (Iandorio, 2004). Every book, movie script, theatrical performance, sound recording, television show, etc. thus becomes intertwined with these legal issues.

The "business" aspect of the entertainment business doesn't always come easy to the creative minds that are entertainers (Iandorio, 2004). Many artists discover that they were somehow deprived of certain rights, income, control, or access. This happened recently to the now-defunct band the Verve, for example, who watched 100% of their royalties from the million-selling single "Bittersweet Symphony" turned over to the Rolling Stones. Instead of the Verve, Keith Richards and Mick Jagger were nominated for a Grammy that year, when the Verve's "Bittersweet" hit was revealed to violate a Stones licensing arrangement.

Crippling legal problems are not exclusively the province of up and coming acts, however (Iandorio, 2004). During the late George Harrison's lifetime, he had to defend a notorious copyright infringement suit when it was claimed he "subconsciously misappropriated" the melody from a 1950s tune. Recently, a California jury awarded $5.4 million against Michael Bolton and Sony, his record company -- the largest damages award ever made in connection with a music plagiarism case. The news archives are filled with these stories of entertainers whose managers have made a lot of money while the entertainers are left with bills. For this reason, entertainment lawyers are an important part of the entertainment industry.

With the merging of technologies between the entertainment and computer industries, legal specialties have merged, as well (Kaufman, 1996). Lawyers who want to practice in areas involving new technology increasingly need to know various aspects of entertainment law, copyright and intellectual property law, computer law and communications law.

Ultimately, much of what makes up entertainment law consists of negotiations and deal making, rather than case law.

Consider the following example. Hustlers, Inc. v. Thomasson, 307 F.Supp.2d 1375 (N. D.Ga. 2004): Court, inter alia, charged that a music publisher known as Hustlers, Inc. breached its publishing agreement with singer-song writer Hughie Thomasson by withholding Thomasson's royalties, which entitled Thomasson to withdraw his contract with Hustlers, Inc. (Silverman, 2005). Both parties in this dispute claimed that the other party had violated their publishing agreements. Thomasson argued that Hustlers, Inc. breached the publishing agreement by not forwarding royalties owed to him under the terms of their contract. On the other hand, Hustlers, Inc. argued that Thomasson breached his publishing agreement between them by redirecting royalty payments to another publishing company. In addition, Hustlers, Inc. charged that it purposely withheld royalties only to recover damages that it suffered as a result of Thomasson's own alleged and prior breach of his agreement with Hustlers, Inc. However, the court noted that while Hustlers, Inc. may be entitled to equitable recoupment, that does not alter the fact that failure to pay royalties is a breach of the publishing agreement which authorized Thomasson to withdraw or terminate the agreement.

This paper explores the legal and business issues affecting musicians, with a focus on royalties. This paper aims to provide a guide for those representing artists and publishers.

Royalties

Royalties are collected depending on the nature and source of the revenues made. There are four potential types of royalties in the music recording and music publishing industry (Silverman, 2005):

1. Mechanical Royalties: Domestic mechanical royalties are collected by domestic record companies for records sold. Foreign mechanical royalties are collected from foreign Performance Rights Organization ("PRO") by sub-publishers for records sold in their region.

2. Performance Royalties: Domestic performance royalties are collected by one of the three main Performance Rights Organization: (1) ASCAP; (2) BMI; and (3) SESAC. These PRO's issue blanket licenses to music users for publicly performing their songs in the operation of their businesses and broadcasts. To ensure prompt and timely payment of performance income from a PRO, each songwriter and music publisher must first join as a member and properly register their songs and current locations. Performers royalties are separate from royalties due for songwriters and composers, although also collected and distributed by organizations. The record companies pay performers royalties to the artist or band that performed the songs released by the company and the percentage figure is stated in the recording contract. If the songwriter is also the performer of the tracks, they will receive the percentage of performance royalties in addition to writing royalties. These royalties are often negotiable but often 10% - 15%.

3. Synchronization Fees: Synchronization fees are collected by the song writer and music publisher that grants a synchronization license to users or broadcasters of the songs, which then create a derivative audiovisual work in the form of movies, TV programs, commercials, and more.

4. Print Music Income: Print music income is collected by the songwriter and music publisher that grants a print music license to music printers which then prints sheet music or folios.

Understanding Royalties

Understanding how record royalties are calculated is never as simple as just applying one's royalty percentage rate to the gross dollar amount derived from all album sales (minus returns) (Colfin, 2003). A variety of factors are involved when calculating an artist's royalties, only one of which is the royalty percentage rate.

Entertainment law language is found in many agreements between a royalty earning party, such as a recording artist, and a royalty paying party, such as the production company (Colfin, 2003). This type of language is also seen in agreements between producer and production company, as well as between the record label/distributor and the artist, producer and/or production company.

Subject to your compliance with your obligations hereunder and except as otherwise provided herein, ANYCO will pay to you for the rights granted herein and for the services performed hereunder, the royalties set out below, being percentages of ninety (90%) percent of the Retail Price exclusive of taxes, duties, and the packaging deductions specified below of all records (other than videograms) manufactured, sold and not returned and for which ANYCO is paid, reproducing exclusively Masters recorded hereunder (Colfin, 2003)."

Depending upon the variables in the passage above, and various factors throughout the contract, it is possible for a royalty earner with a ten percent (10%) royalty rate to have a better deal than one with a fifteen percent (15%) rate (Colfin, 2003). For example, the royalty percentage rate can be calculated on either the wholesale price or on the suggested retail list price (SRLP). A royalty rate based on SRLP is usually lower than the rate based on wholesale because of the price difference between wholesale and retail price. This type of royalty rate, prior to any deduction, is commonly referred to as "points."

Companies that pay royalties use many techniques to reduce their royalty payment obligations. In the sample passage above, the royalty rate is based upon ninety percent (90%) of the SRLP of net sales (Colfin, 2003). Typically, this percentage basis may vary from as low as eighty five percent (85%) of SRLP to as high as one hundred percent (100%), depending upon the company and the artist. These decreases in percentages of sales are based upon outdated deductions for "breakables," left over from the time when many vinyl records were broken in transit.

Other deductions from royalties include packaging expenses allowances for free goods and cash reserves held over for anticipated product returns (Colfin, 2003). Reserves against returns are not really a deduction, although many people think they are. Rather, this is an accounting concept that seriously affects the timetable of when artists can expect royalty payments. Record companies and/or their distributors typically withhold royalties to account or the probability of returns of released product. The company paying royalties will usually seek complete discretion over the amount withheld. The company or artist receiving royalties often tries to limit the amount to a percentage of all sales. The amount withheld is not a deduction because if returns are not substantial, the reserved amount should be distributed. The royalty earner should ensure that the paying company does not hold onto these funds for long periods of time and that the percentage of funds withheld is not large. In holding these reserve funds, the paying company usually keeps the accumulated interest.

The royalty rate is decreased even further through other means (Colfin, 2003). Many recording agreements are still based upon the long-playing album rate even though compact discs (CDs) dominate in the marketplace. Recordings sold as singles, cassettes, new recording formats such as Digital Audio Tape (DAT), budget product or through record clubs, usually yield a lower royalty rate. Even compact discs are frequently discounted.

According to Colfin (2003): "Royalty earners will also generally receive a reduced royalty rate for foreign sales, typically between 50%-75% of the regular rate depending upon the territory. The rate will be on the lower end for countries with smaller markets, such as those in South America of Eastern Europe. Higher rates are often available for sales in Western European as well as Canada."

For royalty earners, it is not really as bleak as it seems (Colfin, 2003). 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. It is not necessary to have a publishing or recording contract to claim broadcast royalties but you will need to know the titles, dates and more.

2. Mechanical royalties are paid by record companies for the right to manufacture records embodying the work. These are usually collected and distributed by organizations, as well.

Conclusion

Royalties are typically determined and divided according to their type and source. They are calculated and divided in the following way (Salazar, 2005). Record companies pay publishers mechancical royalties based on the amount of phonorecords sold. The record companies, through sales reporting systems, determine sales of sound recordings. The United States is unique in that it bases mechanical royalties on a penny basis per song. Many other countries calculate a percentage. Record companies pay the recording artist either a current minimum statutory penny rate, or what is known as a "reduced" penny rate. The current statutory rate for an American copyright is between 7.1¢ and 9.1¢ per song.