Music Royalties and Entertainment Law: A Guide for Artists

Introduction to Entertainment Law

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

The "business" aspect of the entertainment business does not always come easily to the creative minds that are its artists (Iandorio, 2004). Many artists discover that they have been deprived of certain rights, income, control, or access. This happened to the now-defunct band The Verve, for example, who watched 100% of the royalties from their million-selling single "Bittersweet Symphony" turned over to the Rolling Stones. Keith Richards and Mick Jagger — not The Verve — were nominated for a Grammy that year, after it was revealed that "Bittersweet Symphony" had violated a Rolling 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 in which it was claimed he had "subconsciously misappropriated" the melody from a 1950s song. More 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 stories of entertainers whose managers made a great deal of money while the entertainers themselves were 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 understand 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. In Hustlers, Inc. v. Thomasson, 307 F.Supp.2d 1375 (N.D. Ga. 2004), the court charged that a music publisher known as Hustlers, Inc. breached its publishing agreement with singer-songwriter Hughie Thomasson by withholding Thomasson's royalties, which entitled Thomasson to withdraw from his contract with Hustlers, Inc. (Silverman, 2005). Both parties claimed that the other had violated their publishing agreement. Thomasson argued that Hustlers, Inc. breached the agreement by not forwarding royalties owed to him under the contract's terms. Hustlers, Inc. countered that Thomasson had breached his publishing agreement by redirecting royalty payments to another publishing company. Hustlers, Inc. further argued that it had withheld royalties only to recover damages it suffered as a result of Thomasson's alleged prior breach. 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 constitutes 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, and aims to provide a guide for those representing artists and publishers.

Types of Royalties

Royalties are collected depending on the nature and source of the revenues generated. 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 Organizations (PROs) by sub-publishers for records sold in their region.

2. Performance Royalties: Domestic performance royalties are collected by one of three main Performance Rights Organizations: (1) ASCAP; (2) BMI; and (3) SESAC. These PROs 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 contact information. Performer royalties are separate from royalties due to songwriters and composers, although they are also collected and distributed by organizations. Record companies pay performer royalties to the artist or band that performed the songs released by the company, and the percentage is stated in the recording contract. If the songwriter is also the performer, they will receive the applicable percentage of performance royalties in addition to writing royalties. These royalties are often negotiable but typically range from 10% to 15%.

3. Synchronization Fees: Synchronization fees are collected by the songwriter and music publisher when granting a synchronization license to users or broadcasters of the songs, who then create a derivative audiovisual work in the form of movies, TV programs, commercials, and similar productions.

4. Print Music Income: Print music income is collected by the songwriter and music publisher when granting a print music license to music printers, who then print sheet music or folios.

Understanding How Royalties Are Calculated

Understanding how record royalties are calculated is never as simple as 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 in calculating an artist's royalties, of which the royalty percentage rate is only one.

Entertainment law language appears in many agreements between a royalty-earning party, such as a recording artist, and a royalty-paying party, such as a production company (Colfin, 2003). This type of language is also found in agreements between producer and production company, as well as between the record label or distributor and the artist, producer, and/or production company. A representative contract clause reads as follows:

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

Companies that pay royalties use many techniques to reduce their royalty payment obligations. In the sample clause above, the royalty rate is based upon 90% of the SRLP of net sales (Colfin, 2003). This percentage basis may vary from as low as 85% of SRLP to as high as 100%, depending upon the company and the artist. These decreases in the percentage of sales are based upon outdated deductions for "breakables," a holdover from the era when many vinyl records were broken in transit.

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

The royalty rate is further reduced through other means (Colfin, 2003). Many recording agreements are still based upon the long-playing album rate even though compact discs dominate the marketplace. Recordings sold as singles, cassettes, newer 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 generally receive a reduced royalty rate for foreign sales, typically between 50% and 75% of the regular rate depending upon the territory. The rate will be at the lower end for countries with smaller markets, such as those in South America or Eastern Europe. Higher rates are often available for sales in Western Europe as well as Canada.

For royalty earners, the situation is not entirely bleak (Colfin, 2003). While royalties are discounted in many circumstances, an earning party may also qualify for increases. Substantial record sales can entitle artists to an increase in the royalty rate based on specific plateaus of sales, such as Recording Industry Association of America (RIAA) certification for gold and/or platinum sales. Even if a contract does not explicitly provide for these increases, renegotiation may be possible when sales are significant.

Conclusion: Artist Protections and Industry Reform

Royalties are typically determined and divided according to their type and source (Salazar, 2005). Record companies pay publishers mechanical royalties based on the number of phonorecords sold, and sales of sound recordings are determined through sales reporting systems. The United States is unique in basing mechanical royalties on a per-song penny rate rather than a percentage, as many other countries do. Record companies pay the recording artist either the current minimum statutory penny rate or a "reduced" penny rate. The current statutory rate for an American copyright ranges between 7.1¢ and 9.1¢ per song.

Despite this basic legal framework, recording artists rarely receive the maximum statutory rate from their record companies (Salazar, 2005). Most domestic recording or production contracts contain a standard "controlled composition" clause that allows the record company to pay the artist or music publisher less than the minimum rate for songs written in whole or in part by the recording artist. This "reduced" mechanical royalty rate is usually a percentage of the minimum compulsory license rate, up to a maximum number of songs. A common example is 75% of the statutory rate per song, with a maximum of 10 songs regardless of how many songs are recorded and released on the album. This negotiated rate — often called the "min stat × 10 rate" — is collected by the music publisher, which then pays the residual to the recording artist according to their publishing agreement.

Before the artist receives their reduced mechanical royalties, the recording company makes various withholdings in accordance with the artist's recording contract (Salazar, 2005). Several clauses commonly reduce the artist's basic royalty rate — for example, receiving payment on less than 100% of units sold, receiving no royalties for "free goods" or promotional CDs, receiving a lower royalty rate for CDs, cassettes, and record club or budget records, and providing free licenses for promotional music videos.

In addition, various provisions in the recording contract delay and further reduce royalty payments (Salazar, 2005). Most record companies pay mechanical royalties on a quarterly basis, usually 60 to 90 days after each quarter. A certain percentage of the reduced royalty rate is also withheld as a "reserve against returns" — for instance, to account for over-shipment and product returns.

Entertainment law, especially as it relates to royalties, is a complex business. When money is involved, companies consistently seek to maximize their position. However, the law offers artists meaningful protections. A notable example came in 2004 when the New York State Department of Law fought for the rights of artists.

In May 2004, State Attorney General Eliot Spitzer negotiated a deal with the leading U.S. recording companies that returned nearly $50 million in unclaimed royalties to thousands of performers (Spitzer, 2004). The agreement followed a two-year investigation by Spitzer's office, which found that many artists and writers were not receiving royalties because record companies had failed to maintain contact with the performers and had stopped making required payments. This problem affected both well-known entertainers with numerous hit recordings and lesser-known musicians who may have had only one recording to their name.

Under the deal, the recording companies agreed to: list the names of artists and writers owed royalty payments on company websites; post advertisements in leading music industry publications explaining procedures for claiming unclaimed royalties; work with music industry groups and unions to locate artists owed royalty payments; and share artists' contact information with other record companies (Spitzer, 2004).

In addition, each company agreed to have its royalty, accounting, and legal departments meet regularly to review the status of royalty accounts and improve royalty payment procedures (Spitzer, 2004). The companies also agreed to comply with New York State's Abandoned Property Law, which requires that if an artist or their family cannot be located, unclaimed royalties be "escheated" — turned over to the state — which then holds the funds until a claim is made. The participating companies included Sony Music Entertainment, Sony ATV Music Publishing, Warner Music Group, UMG Recordings, Universal Music, EMI Music Publishing, EMI Music North America, BMG Songs, Careers-BMG Music Publishing, BMG Music, and the Harry Fox Agency.

Cases like this demonstrate that meaningful protections exist for artists and that entertainment law is a valuable asset when properly applied. In conclusion, artists should be encouraged to seek legal counsel when negotiating contracts, and entertainment lawyers should be diligent in leaving no contractual issue unexamined.