Interview - Aug 12, 2003
“Many artists never even focus on what constitutes a deductible cost, until it's too late.”John J. Tormey III, Esq. is a music and entertainment lawyer with his own practice in New York. In this three-part interview, he talks in great detail about the legal issues many artists encounter during their careers in the music industry. Part 3 deals with issues related to record label contracts, such as the controlled composition clause, ownership of the masters, and the one condition that is usually necessary for artists to get market value for their work product.
DISCLAIMER: Neither this interview nor any part of it is intended to constitute legal advice with respect to any particular situation or fact pattern. Secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies to one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.
Can the existence of the "controlled composition" clause in artist contracts be justified, or is it just a way for labels to get a larger slice of the cake? How often does it show up in record label contracts, and what leverage does an artist need to have to prevent it being included? What do you think of the clause?
A great lawyer-mentor I once had advised me to fight like a wild dog on this clause—if representing an artist, and not a label. That’s my opinion of the clause, although my opinion of it might mellow in cases where I’m representing a label instead! There are two sides to the story.
A mechanical royalty is a so-called “music publishing” royalty payable to the owner of a song for the use of the song on a CD. Think of it as a “per-pressing” payment, or a “per-imprint” payment. Eight separate songs pressed onto one CD still means eight separate mechanical royalties, unless the songwriter-artist signs a document that provides for less. The word “mechanical” is a historical artifact from player-piano rolls and old copyright law.
Mechanical royalties can be either: (A) statutory; or (B) negotiated. Unfortunately for the songwriter-artist, when negotiated, they are often negotiated downwards and not upwards.
A statutory mechanical royalty is prescribed by statute, the U.S. Copyright Act. Licensees proceed under the “compulsory licensing” provisions of the Act, in cases where the song has already been licensed (at least once) and publicly distributed. That new second-comer licensee effectively “compels” the copyright owner to license the song that second time, at a per-pressing rate set by the Act. The current statutory rate is eight cents per pressing for songs of five minutes or less (the formula escalates for longer songs).
Let’s assume that we’re talking about a three-minute pop song included on a songwriter-artist’s CD to be distributed by a label. Start with the assumption that the label should pay the artist-songwriter something for the use of the song (something, fortunately for the artist, additional to his/her royalty on CD sale receipts) or otherwise, the label would be infringing the songwriter’s copyright.
How do label and artist pick a number? Well, the songwriter and label may agree to the “reference point” eight-cents-per-pressing statutory rate, without invoking compulsory license procedures, as indeed, those procedures might not even be available because the song has just been written. And if the songwriter has even less leverage than that “reference point” would suggest, the songwriter might be “asked” (I use the word euphemistically) by the label to agree to a rate that is less than the eight-cent rate.
Essentially, “controlled composition” is short for “artist-controlled composition”. A controlled composition is a song owned or controlled by the recording artist directly or indirectly. Labels often “request” a reduced mechanical royalty (again, as distinguished from record royalty) for controlled compositions. In other words, as above, the record company wants to pay the artist less than the “full” mechanical rate.
The validity of the label's argument probably corresponds in some way to the number of tracks on the CD that are actually written by the artist. If every one of fifteen three-minute tracks on a CD are written by the artist, then a label might feel that multiplying the current eight-cent mechanical rate by the fifteen tracks, for each CD, would be a daunting and financially prohibitive experience. The label might also be concerned about the interplay of mechanicals and Canadian royalties, and the interplay of mechanicals with record club records and promotional records not offered for sale.
These boil down to pure numerical exercises. Can the label justify the pay-limiting clause? The label may try to, just like any business owner may try to justify paying a vendor less in an effort to reduce the business owner’s fixed costs. Heck, I am always trying to find legitimate ways to reduce my own business’s fixed costs (and so should you). The clause naturally shows up in record-label “first forms” quite a lot, and ultimately ends up in many signed agreements.
What leverage does an artist need to eliminate it? A lot; for example, having a second record label-suitor and the resultant bidding war (of course, the controlled composition issue, like a “container charge”, becomes moot if the artist decides to self-distribute instead).
The point is that the artist’s counsel could probably brief twenty different reasons why the label’s controlled composition clause is unfair and oppressive as written. The label’s counsel could probably brief twenty different reasons why the label would probably go out of business if the clause did not appear in all of the label’s contracts. This is what good lawyers are paid to do under our adversarial American system of law, after all. But therein lies the rub.
The fact is, most record deal negotiations don’t catalyze a written twenty-principle brief on every point of the deal that is in play. In fact, the experience is usually the opposite—in the real world, for others, it’s usually short strokes, staccato conversations, notes on a golf score card, notes on a cocktail napkin. In my world, it’s usually sitting at my desk with my phone in my ear and my checklists, drafts, red-lines, and files in front of me. Decisions are often made at that precise moment, because time is money.
I had a karate instructor as a young teenager. He wisely told me that, yes, we were expected to spend hours and hours learning the discipline and style of the kicks, punches, blocks, and “kata” (or forms) in Tae Kwon Do, and that we would be tested on them. However, he said, the kicks and punches we might use in a real street fight would be, at best, severely abbreviated forms thereof, and would probably look nothing like their disciplined long-form counterparts to the outside observer. And he was right.
Does that mean that it was a worthless exercise to spend all that time on the disciplined kicks and blocks? No, because the discipline is in fact what made us better fighters, if ever needed. The same is true for negotiations at the major-league level, as well as court appearances. They always happen more quickly than you expect.
The other reality is economic: all clients, if asked, would prefer not to pay for their lawyer to over-brief and over-argue a point, especially if the end result is not likely to be positive. This is the practical counterweight to the lawyer’s undivided and inviolate responsibility to serve as the client’s zealous advocate—the lawyer cannot undertake a task that the client is unwilling to pay for.
So regarding controlled compositions, the artist attorney’s charge is probably to fight the point, but within the twin realms of client instruction and commercial reason, and mindful of the respective “leverages” of both parties to the proposed deal.
If artists share the costs of making the album (or even pay for them completely) since these are recoupable from their royalties, do you think they should also share ownership of the masters or even own them completely? What prevents artists from including a clause that states that the right to the masters are transferred to the artist once the costs have been recouped?
Shared ownership is tough to implement. Possession is nine-tenths the law, as the old adage goes, and I think with masters, the fraction is more like 999 over 1,000. I suppose the label owner and the artist could put the masters in a locked briefcase and then each handcuff themselves to the briefcase, but that would probably put a damper on their social lives.
Seriously, in theory nothing stops the artist from inserting or trying to insert that type of rights-transfer clause. I have obtained contractual “reversion of masters” clauses for my artist clients in the past. However, as with controlled compositions, the inertia of custom and practice is a powerful force. A body in motion tends to stay in motion. A body at rest tends to stay at rest. In a negotiation, a label might tell an artist that they have never before parted with possession of masters—and they might actually be telling the truth.
Even if a label does agree contractually, on paper, to a reversion of masters or reversion of rights clause, to take effect ten years hence, that doesn’t necessarily mean that the reclaiming of possession will be smooth and easy for the artist ten years from now. People, and companies, have been known to breach written agreements once in a while. And people sometimes forget (conveniently or otherwise), what they said or signed ten years ago.
Artists do not always pay for the costs, in whole or in part, of making the album. Yes, the prevalent model when I first learned record contracts allowed the artist to collect an advance that was the excess of a “recording fund” over and above the tangible costs of the album. This created a predictably brutal game between artist and label, whereby the label would try to attribute a mind-numbing assortment of “expenses” against an artist’s recording fund, often through “creative” accounting and/or a duplicate and discrepant set of corporate books.
Often, the artist would find himself/herself with no advance left, or even in debt to the record company after one or more successful albums (see my article entitled Trickle Down). However, new models, new technologies, and new methods of distribution have emerged, which may continue to change the “recording fund” paradigm (or whatever name it may be given this particular selling season).
If the record label makes a significant investment in the artist, demo, career, marketing and tour support, and particularly in the recording of the album, then I understand the record label’s desire to hold on to the masters, at least for a spell.
First, the possession of the masters secures the record company’s investment in ways that a mortgage of copyright, a piece of paper, can’t really match. When Tom Scholz of Boston socked those tapes away in his refrigerator, he was chilling liquid gold. This stuff is valuable intrinsically, almost like currency.
Remember that a record company may obtain a negative injunction preventing an artist from recording for another label but cannot obtain an affirmative injunction forcing an artist to record and perform further, as that would violate the Thirteenth Amendment’s prohibition against slavery.
So what security does a label usually want and need in order to militate against the artist flaking out on them? Or cutting a better deal across the street as soon as his or her stock rises? That security would be the masters, and possession thereof. People and companies like their security to be liquid.
Second, there are obvious practical concerns. If the record company and not the artist is the party responsible for mass-pressing and duplication, then the masters are needed until the last pressing is completed. Sometimes a record is re-released, even years after its initial release, particularly when a new media or technology is developed. Imagine if the masters to every LP now re-released on CD had been instead retained 100% of the time over the last 30 years by the artists, instead of their labels! Would society have even found most of those masters? I don't think so.
These days, I realize that duplicate digital masters have changed the analysis somewhat. But even so, it’s not a great idea for masters to be shuttled back and forth between owners, just like joint custody is less in a child’s interest than a single happy family. With masters being passed back and forth, there is, among other things, a risk of losing track of cumulative edits thereto, and a significant risk of loss and damage while in transit. The insurance carriers are not particularly fond of the latter idea.
Typically, labels move around less than artists do, and I know several artists who change addresses as often as a few times per year. You don’t want masters forgotten and left behind in cross-town taxicabs, as has been the fate of a few motion picture release prints in recent years. To avoid dead-weight economic loss, it's better that the masters stay in one place.
In short, the party who initially pays for the masters, who has the most immediate and continued need for using the masters, who can keep the masters the safest, who is expected to physically move the least, and who is most likely to stay solvent (see below) is probably at an advantage in any “Who should retain continued possession of masters?” debate.
Indeed, if the artist is going to take the masters home with him/her every night, why does he/she really even need the record company? The artist might as well self-distribute and hire an outside publicist. But most artists still need the labels, to put the CDs on the racks of the mass-market retailers, to put them in the CD-club catalogues, to pay for tour support, and otherwise.
An artist is unlikely to have the leverage to keep masters from inception, but could have the leverage to try to take a contractual reversion of them at a pre-specified but future time. Yes, that pre-specified time could, in theory, be “recoupment”, if “recoupment” is clearly defined contractually. However, the concept of “recoupment” is seldom if ever clearly defined by a label’s first (“F.U.”) form! (And, please, don’t expect labels to send you a priority e-mail once the magic moment of “recoupment” has actually occurred).
Finally, don’t forget the solvency issue. If your research indicates that a label might be about to go bankrupt, then the last thing you want is to give the label possession of the masters and find them swept up into a bankruptcy estate—believe me on this. In fact, if the label is in financial dire straits, you would probably want to rethink the whole deal before signing anyway. But you would be shocked as to how many people fail to check the solvency of the other contracting party before signing. And if you don’t believe that solvency is an issue, then I may have some airline stock stories to tell you about.
What other costs are often recoupable from the artist’s royalties, and to what extent? Are all advances always recoupable?
As with a number of the above points, it is all, or should be, a matter of negotiation.
While the label may indicate that their roster of deductible costs is “standard”, that statement may or may not be true. Many artists never even focus on what constitutes a deductible cost, until it's too late. I believe that the artist should prospectively consult, not only with an entertainment attorney on this issue, but also with an accountant who is familiar with the entertainment industry.
Preferably, the artist should consult with the accountant who is likely to conduct the artist’s royalty audit if and when requested. For more on the importance of the audit clause, please see my article entitled Trickle Down.
As for whether all advances are recoupable (read “deductible as against other artist monies”), the answer is not always. By analogy, in film deals, we ask whether it is “applicable against” or “not applicable against”. In music deals, the answer really depends upon how the remainder of the contract is drafted.
Remember that “Advance” is, after all, just a word, an empty compartment, a capitalized term, into which music industry contracts sometimes pour meaning. Remember that there are other words one can use to describe other types of payments, such as “guarantee”, “per diem”, “allowance”, “bonus”, “signing bonus”, “non-refundable, non-recoupable signing bonus”, and so forth. The number of different types of payment arrangements and schedules that one might insert into a contract are limited only by the imagination of the drafter.
That being said, I would consider this a “don’t try this at home” proposition. I think a non-lawyer artist would be making a mistake trying to draft around the concept of “recoupability”, just like I would be making a mistake if I picked up a guitar with a few of my clients and started soloing in front of their paying audience. In life, we all have our roles to play. An artist should know how to protect his/her own business interests, but also when to turn the task over to a professional.
Has the typical record contract changed in recent years? Have clauses been deleted or added to adapt to the current business environment? Have any of these changes occurred as a result of increased artist awareness of the business?
Yes, yes, and no, respectively.
I think you can guess that the most important recent changes have been in the area of computer-assisted media, the Internet, and digital rights. By way of analogy to the publishing world, please see my article on Publishing and Electronic Rights.
Recently, changes in the accounting practices of certain labels have been reported, including some discussion of an “audit recovery clause”, which penalizes the label with the artist’s audit costs, if the audit finds a 5% or 10% shortfall in royalties. This makes me realize that there is nothing new under the sun: I was using and seeing a similar audit cost recovery clause in merchandising agreements back in the 1990s.
Sadly, I think that everyone reads their “force majeure” clauses a lot more carefully since 9/11, especially insurance companies. Lawyers need to make sure that terrorism is dealt with in those clauses, in one way or another. More entertainment companies are paying attention to immigration matters, in their contracts and otherwise, not just since 9/11 but even before then, when a few entertainment companies got nailed for having hired workers with no legal right to work in the United States.
And of course, lately there has been more of a concern whether any individual CD will be properly labeled with parental warnings, marketable by the major retailers, or playable on the air due to adult or otherwise graphic content. The last issue is quite difficult to paper around. No open-minded entertainment lawyer wants to be thought of as a “censor”, after all. But on the other hand, the marketability of the material to the public is a genuine business issue, about which a label is often legitimately concerned. By definition, it costs more to “bleep” out all the lyrics to a song and mix down a radio version.
The bottom line is that a good contract is a repository of bad experiences. I once knew of a company that, every time it got burned on a deal, would add a clause to its so-called standard form, drafting with a view to preventing occurrences of the same problem. The company was hardly ever burned twice on the same issue.
However, new issues always arise as technology changes, as people get older, and as the world keeps turning. For this reason, it is a good idea for artists and companies to still proactively review their own boilerplate periodically, even basic documents like invoices and form letters, and perhaps enlist an attorney’s assistance when doing so.
The CD format has been around for twenty years, but is still often defined as a new technology by record labels, which means that the artist’s royalty is cut by 25%. Should this be changed now that the CD is the dominating format?
As with our discussion of trademarks, I think that there are too many embedded assumptions in these particular questions, so please don’t rely on those assumptions. I see things a bit differently. For example, not all labels adopt the above ratio. There are many labels, large and small, and some are more technologically advanced than others. Some are also kinder than others.
For what it’s worth, I was still buying vinyl LPs 20 years ago in 1983. I started buying cassettes when I went to L.A. in 1984. I don’t think I started buying CDs until I bought a CD player at some point in the early 1990s. So, in fairness to labels, I think of CD technology as more like a ten-year-old phenomenon, rather than twenty. Maybe I was slower to embrace CD technology, because I love my LPs so much.
In any event, not all labels refer to CDs as new technology in this day and age. I have seen and written agreements that are more up to date than that. It is possible that a label will try to discount an otherwise-applicable royalty rate on a variety of bases, including foreign sales, sales in “alternate” configurations like CDs(!), "record club” sales, and so on.
But in theory, nothing prevents an artist from realigning the proverbial scales of justice. In theory, nothing prevents the artist from redrafting the label’s “discounted royalty rate” text as a visual graphic chart containing higher numbers. Depending on the circumstances, that might be one way to negotiate.
It’s the same with respect to “controlled compositions”. All we are talking about is a numerical exercise. People often underestimate their own power to say “no” to a number. And numbers are in play more often than you might think.
Does the artist have the leverage to ask for a higher (or at least “LP-compatible”) CD royalty rate? In part, that depends on who the artist is and what the artist has to sell. But the most important thing to keep in mind is that in a record deal or otherwise, you almost never get market value for your services or work product, until there are two or more competing suitors bidding for the same. If a label is the artist’s proverbial “only game in town”, meaning the artist’s only pending offer, then the label will almost invariably intuit it!
So, yes, the artist can ask for a higher or more realistic CD royalty rate, but whether or not the artist gets it from Label X may well end up depending upon whether the artist has already had a written offer from Label Y. If the artist is fortunate enough to experience a bidding war, then that artist can probably afford legal counsel and should secure the services of an entertainment attorney at the earliest possible opportunity.
The attorney should be the one negotiating the higher royalty rate in this type of case. (And the label will have a hard time keeping a straight face telling an entertainment lawyer that a CD is “new technology”. An “Aw, c’mon!” response from the lawyer should be enough to sink that label's battleship).
When negotiating a record company deal (from the artist’s perspective), which clauses are the easiest to get better terms on and, conversely, which are the hardest?
A full and therefore accurate answer to that question would probably require a weekly seminar over at least three months.
But suffice it to say that if any musician wants me to show them, in the context of a live situation and label negotiation, I would be happy to represent them, assuming that I’m not already representing the label in the same deal!
What types of performance clauses should be avoided?
I would definitely suggest having a look at the articles on Personal Service Contracts and
on my web site. Basically, any clause that places a vague or indeterminate performance standard on one or both parties should be avoided. Obligations, such as the expected output, tasks, time frame, and others, should be clearly defined.
The bottom line: if you want something from a party in a contract, ask for it very, very specifically. Otherwise you will find that, in most cases, you will be unpleasantly surprised when the other party performs the absolute bare minimum under the contract. If you don’t ask, you don’t get. Don’t be afraid to be specific. Don’t be afraid to think carefully before writing. Don’t be afraid to think carefully before signing. Lawyers themselves follow these same rules.
What clauses in artist contracts with record companies would you like to see removed once and for all?
This isn’t really a problem specific to record company contracts, but I can’t stand contracts beginning with the recitation “WITNESSETH”. It sounds to me like an affected lisp! (And besides, who is “Seth”?)
Seriously, there are words that lawyers need to use, like “hereinabove”, and “thereby”. Then there are other words that are just knee-jerk legalese seemingly used solely for the sake of obfuscation. I like reading and writing plain English contracts that are meaningful, understandable, and fair to both parties, whenever possible. It is indeed these types of documents that stand the best chance of surviving judicial scrutiny, if they are ever put to that test in litigation. Overall, I’d like the next generation to have contracts that are in plain English and therefore shorter.
Also, I have a tough time conceptually and philosophically with anything resembling a “morals clause”. They usually sound foolish when read aloud (try it). If you can’t legislate morality, how can you adjudicate it? How can you enforce it contractually? Thankfully, a number of entertainment companies have seen the wisdom of abandoning the “morals clause” in recent years. Besides, parts of our society actually reward bad behavior these days, unfortunately. An artist’s felony conviction might have been grounds for a record contract’s termination by a label, back in the 1950s. These days, the label might look at the event as free publicity for the new CD.
Finally, to answer your question directly, I would knock out “artificial and arbitrary limitations on artist audit rights”. Any limitations on artist audit rights should be thoughtfully prepared and drafted, and customized to the situation at hand. They shouldn’t be merely and mindlessly lifted by a label from another label’s boilerplate!
What aspects of the music industry are in need of drastic change?
I would shut down artist-unauthorized music piracy in all its forms, including illegal downloads. To me it’s no different than taking money out of someone’s wallet when they are not looking, or worse yet, stealing someone’s family dog or their child.
I am encouraged that, as of the date of this interview, the Associated Press has reported that the music industry has just issued over 800 subpoenas in connection with the illegal sharing of computer music files. More proceedings are expected to follow. For the pirates, it appears that the feast is just about over.
My father is an artist. Many of my friends are artists, including several working musicians who believe that up to two-thirds of their total current music distribution is bootlegged illegally. Stealing is obviously wrong, and I could cite a Commandment, as well as many laws, on point. But beyond that, how can anyone rationalize stealing from an artist? Artists are the very last group of people that should be victimized in any respect!
Artists have it hard enough as it is, and the majority of them never find a way to persevere in their art while making ends meet. I don’t care how rich the artist may seem now. Whatever the case, that artist had to work and sacrifice to get there. Their work and sacrifice should be respected, as an absolute rule. They should not be made to suffer music piracy. Music piracy is not a victimless crime.
What has been the greatest moment of your music career?
As an entertainment lawyer, probably when I helped a friend, and he wrote me a note, which I saved, saying “Thanks John—You Rule!” I like when people appreciate what I do for them.
Meeting several of my music idols has also been a big thrill, such as Dickey Betts, Carly Simon, Jorma Kaukonen, Bruce Springsteen, Ornette Coleman, Tina Weymouth, Robben Ford, Ray Manzarek, Bobby Short, and Leonard Bernstein.
Some of the backstage exploits when my friends and former band mates tour through town are fun too; and thankfully, they almost always play New York. Because of the “Road Code”, I guess I can’t talk about these events too much.
As a musician, my greatest “moment” was probably my entire junior and senior years in college, the latter with Tom Morello and my other dear college friends Aaron, Bob, Nick and John. For the better part of those years, it seemed like we booked and played gigs virtually every weekend, and we rehearsed non-stop at the Cambridge Music Complex when we weren’t attending classes.
I remember the excitement of recording and distributing a demo, and landing gigs because of it. A musician lives to play, and loves to play out. That era was the second-best time in my life, apart from right now.
What do you see yourself doing in 5-10 years' time?
Exactly what I am doing now. I just hope and pray that this world is a safer place in which to do it. New York has been a tough place to live in recent years. Like many other folks, I lost friends in the Twin Towers, and things haven’t been the same since. Terrorism has had an effect on the music business, on entertainment generally, on the economy—and on our lives. Music and entertainment are vitally important, but there are things that are even more important.
Answers (c) 2003 John J. Tormey III, Esq. All Rights Reserved.
Questions (c) 2003 Hitquarters. All Rights Reserved.
John can be contacted at email@example.com. For full contact details and related articles, please visit tormey.org.
Interviewed by Stefan Sörin
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