Tuesday, June 5, 2018

Songwriters Still Need To Be Aware of the "Controlled Composition Clause" in Record Contracts


"Mechanical" royalties, so-called from the days when the only recordings sold were piano rolls which mechanically triggered a player piano, now represent royalties due to songwriters and their publishers for each copy of a record sold (whether physical copies or digital downloads or transmissions). The base statutory mechanical royalty rate in the United States is currently $.091 per song per record sold (and varies depending on whether the format is a digital download, streaming transmission, etc.). 

Pursuant to the U.S. Copyright law, this mechanical rate is applicable to all recordings made and distributed in the United States. However, due to certain ambiguities in the Copyright law, almost all record companies use their substantial leverage over new recording artists to cause them to enter into record contracts which substantially reduce this statutory mechanical rate pursuant to a controlled composition clause, often referred to as the "3/4 rate" since it typically reduces the amount to 75% of the statutory rate.

Under U.S. Copyright law, Congress established a statutory mechanical royalty rate for songwriters and their publishers based on an upward-sliding scale tied to a cost-of-living index on a per song per record basis. However, the controlled composition clause, one of the many royalty-reducing provisions in any record contract, contractually reduces the mechanical rate for a songwriter/ recording artist and its publisher on songs written or otherwise "controlled" by the artist. Most such clauses not only reduce the payment per song, but may also put a limit on the total number of songs on which payment will be made and may fix the point in time at which the calculation will be made (thereby circumventing the cost of living index increase).

A detailed analysis of a controlled composition clause is beyond the scope of this article. However, for a simplified example of how it works, lets assume a typical clause which might say that the songwriter/artist will receive 3/4 of the minimum statutory mechanical rate ($.068 instead of $.091)payable on a maximum of 10 songs per LP. The mechanical royalty on the artist's entire physical LP then has a cap of 68 cents (3/4 rate x 10 songs) so that, even if the songwriter/artist writes 12 songs for its own album, the artist's publishing which should be worth about $1.09 cents an album at the full rate is only allocated 68 cents under this clause. To further illustrate, assume the 12 song album has 6 songs written by the artist and 6 songs from outside publishers. The outside writers and publishers are not subject to the artist's 3/4 rate so the 6 outside songs get the full rate and are entitled to a total of about 54 cents. However, since the mechanical royalty on the entire LP has a contractual cap of 68 cents, the recording artist's publisher is limited to applying the remaining 14 cents to the artists's 6 songs, so that the artist's publishing is worth only about 2 cents per song.

Some controlled composition clauses also contain language which further reduces the mechanical rate on mid-priced and budget sales, etc., providing for a 3/4 rate on the 3/4 rate. In addition, record contracts often contain several subparagraphs that eliminate royalty payments for free goods and records sold below wholesale price, etc. Several of these categories would ordinarily be subject to mechanical royalties absent the controlled composition clause and, although this provision reduces mechanical royalties on the artist's publishing, it does not reduce payments to outside publishers and writers since they are not subject to the terms of the artist's contract.

The most treacherous dilemma for the songwriter/artist is that, even if the record company does not expressly acquire the artist's publishing rights in its contract, the value of the artist's publishing may so greatly be reduced by the controlled composition clause that the artist may find it difficult to get a publishing deal elsewhere. This is particularly true if the mechanical royalties are cross-collateralized with the artist royalties which means that, until the artist is recouped, no mechanical royalties are payable on the recording artist's publishing.

The foregoing scenarios raise numerous legal concerns for the record labels. The specter of antitrust and restraint of trade claims arises since virtually all labels have the three-quarter rate in their contracts giving the artist little, if any, choice. Since the controlled composition language is almost identical in each label's contract, it might not be all that difficult for a plaintiff to establish circumstantially that the labels conspire to fix the rate. A claim of interference with prospective financial advantage could be raised since the controlled composition clause devalues an artist's publishing rights. Another pertinent issue to be considered is whether, under partnership law (where one partner can bind the partnership), an artist's co-writer who is not actually a signatory to the record contract is subject to the 3/4 rate by virtue of being a "partner" in the song's creation.

Although a controlled composition clause can be made somewhat less onerous through some tenacious negotiating, record companies are generally inflexible on this provision and their obstinacy can only be mitigated if they have an ardent desire to sign a particular artist.

In fairness to record companies in the current marketplace, with the exorbitant cost and high risk of the recorded music business balanced against the greatly reduced financial rewards of the modern era, the companies need to cut costs where they can to try to make a profit on the few artists who do succeed. However, the question is one of whether devaluing the artist's publishing is a fair way of doing it. Record companies contend that, since they are financing the production and marketing of the artist's recordings, the artist should give them a break on the publishing royalties they would otherwise have to pay. However, whether the contractual reduction by a record company of the Congressionally legislated mechanical royalty rate would hold up if challenged in a court of law has yet to be tested.

Moreover, in the wake of Congress having amended the Copyright law to allow for performance rights for digital transmissions, and with the Music Modernization Act moving through Congress, the time is right for lobbying efforts by songwriter organizations and publisher groups to bring attention to the 3/4 rate issue and the need to clarify certain ambiguities in the copyright law so as to better protect songwriters and their publishing rights.


       Wallace Collins is a New York lawyer specializing in entertainment, copyright, trademark and              internet law. He was a recording artist for Epic Records before attending Fordham Law School.          T: (212)661-3656 / www.wallacecollins.com



Thursday, February 1, 2018

THE MUSIC MODERNIZATION ACT (H.R. 4706) SETS THE STAGE FOR A SONGWRITER/PUBLISHER TUG OF WAR

The Music Modernization Act (H.R.4706) provides many benefits and updates to the arcane royalty structure of US copyright law and overall it is a big step forward for songwriters and the music publishing world. However, there are certain provisions concerning unclaimed and unmatched monies which, as currently drafted, could lead to a myriad of problems for creators.

One potential pitfall stems from the bill directing the mechanical licensing collective (the entity designated to collect and distribute funds) to distribute unmatched royalties on a market share basis to music publishers. However,  most songwriter publishing contracts (other than superstar artist/writer contracts) include a clause which excludes writer participation in monies collected by publishers unless specifically identified as tied to titles created by such writer and administered by the publisher. Although the bill specifically directs publishers to distribute the unmatched royalties it receives pursuant to writer contracts, the actual result would be that the unmatched royalties would only be required to be distributed by a publisher to those superstar writers that do not have such an exclusion clause.

The bill does attempt to balance this discrepancy with a clause that requires publishers to distribute no less than 50% of the unmatched royalties to songwriters, allocated on a "use basis" during the time period in which the unmatched royalties were accrued. However, this sets up a scenario whereby a publisher or administrator with a 90-10 deal in favor of the songwriter could claim the writer should receive no portion of the unmatched royalties under his or her 90-10 contract, and is entitled only to a pro-rated share of the 50% of the unmatched monies received by the publisher on a use basis as designated by the bill. This would provide an automatic windfall for the publisher contrary to both contractual and statutory intent, with tens of millions of dollars at stake.

All of this may sound as obtuse as those annoying word problems in math class during our school days, but they are real life concerns with actual consequences in the real world. These problems could be solved by having the mechanical licensing collective do the initial title-by-title allocations based upon the market uses reported by the users prior to delivering the formerly unmatched royalties to the publishers as now matched and allocated by title.  Other simple fixes are also possible. So far, however, some of the other music industry parties involved in drafting the bill have balked at incorporating such solutions. The same goes for suggestions concerning implementation of more balanced representation of knowledgeable, unbiased professional songwriters and composers on the board of directors of the mechanical licensing collective, and the inclusion of songwriter and composer identifier numbers in the database set-up mandated under the bill.

The best course of action for most songwriters is to contact their performing rights organizations, their independent songwriter advocacy groups, and their publishers to let them know that they actively support this bill, but that these simple fairness issues should be properly addressed. These internal music community problems should be addressed and fixed now so that the bill can move forward with full and unanimous music community support.

There is no doubt that the Music Modernization does move the ball forward down the field for songwriters and publishers in a way that is long past due. Overall it is a good move in the right direction. Songwriters just need to be vigilant in making sure they get their fair share.

Wallace Collins is a New York lawyer specializing in entertainment, copyright, trademark and internet law. He was a recording artist for Epic Records before attending Fordham Law School. T: (212)661-3656 / www.wallacecollins.com

LEGAL BASICS FOR THE DIY WORLD: ARTISTS, AUTHORS, CREATORS AND MUSICIANS

Four Essentials:


1) Copyright Protection 
Under US copyright law, copyright (literally, the right to make and sell copies) automatically vests in the creator the moment the expression of an idea is "fixed in a tangible medium" (in other words, the moment you write it down, type it or record it on tape). With respect to music specifically, there are really two copyrights: a copyright in the musical composition owned by the songwriter and a sound recording copyright in the sound of the recording owned by the recording artist (but usually transferred to the record company when a record deal is signed). It is important to remember that you own the copyright in your work the moment you write it down or record it, and you can only transfer those rights by signing a written agreement to transfer them. Therefore, you must be wary of any agreement you are asked to sign. 

Although it is not necessary, it is advisable to place a notice of your copyright on all copies of the work. This consists of the symbol "c" or the word "copyright", the author's name, and the year in which the work was created (for example: "(c) John Doe 2017). The filing of a copyright registration form in Washington D.C. gives you additional protection in so far is it establishes a record of the existence of such copyright and gives you the presumption of validity in the event of a lawsuit. Registration also allows for lawsuits to be commenced in Federal court and, under Federal law, allows an award of costs and attorney's fees to the prevailing party (and you can register on-line or by mailing in forms with submissions). Currently, the filing fees are low enough to make registration well worth while. www.copyright.gov

2) Trademark Protection for Your Name 
Trademark rights are rights in a name or logo which indicate source or quality. Such rights are based on "use" of the mark and vest in the owner when the mark is first used in connection with goods or services. Although the title of a work is not protected by trademark, these rights are applicable to names used by actors, musical performers, DJs and companies. The more unique the name of your company, product or band is, the more easily protection is available for it as a trademark. 

The best way to protect yourself is to file a Federal trademark registration application, since registration will give you a presumption of ownership of the name nationwide. Before investing too much in your prospective trademark, however, it is a good idea to order a trademark search to make sure no one else has been using the same or a confusingly similar name before you. You can do this through a combination of on-line researches, through your lawyer, or by contacting a searching service. With respect to the name of a performer or band, keep in mind that a mere search of current Federal trademark registrations may be insufficient. It is best to conduct a full statewide search as well as a search of the copyright office records in order to find any songs which may be copyrighted in a band's name. This is important because trademark rights are based on "use." Therefore, even if another user does not file for Federal trademark registration, certain rights vest in that user under state law when they start using the name. This has led to problems in the past. For example, when you go to release your record or film worldwide you may find that someone else has been using the name of your band or film company in, say, Illinois. If they were using the name prior to when you first started using your name then, under state law, that user could prevent you from releasing your record in that state. The usual solution to such a problem is to buy out that users rights, but this can be costly, or enter into an agreement to alter and distinguish the names (e.g., Squeeze/Squeeze UK; Dreamworks, Dreamworks SKG. 

Once you have determined that no one else is using your name, the next step is to file an application for Federal trademark registration in the US Patent and Trademark Office. Registration provides nationwide protection as well as the presumption of validity for lawsuit purposes, as well as legal fees and additional damages for infringement. www.uspto.gov
  
3) To Incorporate or Not to Incorporate 
As a practical matter, sooner or later you may want to incorporate in order to limit your personal liability. When you incorporate your business you actually create an entity separate from yourself which will have its own bank account and tax identification number. If you operate properly as a corporation (i.e., signing documents as an officer of the corporation rather than as an individual, using a separate bank account, etc.), then, as a general rule, only the corporation is liable for the obligations of the agreements the corporation makes. The easiest example of how this protects you is if you imagine a situation where your corporation pays you a salary of several hundred thousand a year for several years. Over the years you use that salary to buy a house, a car, and a boat. Then one day catastrophe strikes and the corporation is sued for millions or goes bankrupt. Although the creditors could take the assets of the corporation, they could not pierce the corporate veil and force you to sell off your house, your car and your boat (Imagine: even when Chrysler went bankrupt Lee Iacocca did not give up any of the assets which he had purchased with his salary. In fact, he kept right on getting a salary from the corporation). If properly employed, a corporate entity can be used as a shield to protect you. In most cases, however, it is not really necessary to incorporate at the start of your artistic career. The law does require that, if you use a name professionally other than your personal name, then you should file a Business Certificate (or "DBA") in the County in which you reside or do business under that name. A DBA is necessary if you want to open a bank account in your professional pseudonym or group or company name. The DBA form is available in stationary stores or at the county clerk's office.

There are also tax advantages to operating as a corporation. As an individual making in excess of  a certain amount, as set by the IRS, even if your write-offs and deductions reduce your income substantially you will still be subject to the "alternative minimum tax' under current law. However, as a corporation, you are entitled to take the deductions and, as an individual, you are only subject to standard tax on the amount which passes through to you individuallyAlso, as a business matter, the individual members of a group or company may want to enter into a partnership agreement between and among themselves in order to spell out the particulars with respect to certain rights such as songwriting and ownership of the trademark rights in the name. Otherwise, any group of two or more persons operating a business for profit is considered a partnership for the purposes of applying the laws of partnership under the laws of most states. These laws generally employ a rule of sharing evenly in profits and losses, including all assets of the business
  
4) Signing Contracts 
Never sign any contract given to you without having your lawyer review it first. Do not rely on anyone else (or even their lawyer) to tell you what your contract says. And never let anyone rush you or pressure you into signing any agreement. There is really no such thing as a standard "form" contract. Any such contract was drafted by that party's attorney to protect that party's interests. Your lawyer can "translate" the deal and explain its terms to you, and then help negotiate more favorable terms for you. 

Keep in mind that it may, in fact, be in your best interest to "get it in writing" if you have an arrangement with someone. This is especially true in collaborative situations. Otherwise, you run the risk of a disagreement later over the actual terms of the oral agreement, and it becomes your word against that of the other party. That is not to say that an oral agreement is not a binding contract (as Kim Basinger recently found out). It is just that a contract is easier to prove if the terms of the arrangement are in writing. A simple contract may not necessarily require extensive involvement by lawyers. A contract can be as basic as a letter describing the details of your arrangement which is signed by both parties to the agreement.

As a general rule, you should consult with a lawyer if you are asked to sign anything other than an autograph. Too many aspiring artists want to get a record deal so badly they will sign almost anything that promises them a chance to do it. Even successful careers have a relatively short life span. Therefore, it is important for you to get maximum returns in the good years and not sign away rights to valuable income like publishing. Everyone needs someone to look out for his or her interests. That is why, at the end of the day, you may want to consult with an entertainment lawyer. Meet with several lawyers to find one whose vibe is right for you. If you believe in yourself and your talents, give yourself the benefit of the doubt, and invest in good legal representation.

Wallace Collins is an entertainment and intellectual property lawyer with more than 30 years of experience based in New York. He was a recording artist for Epic Records before receiving his law degree from Fordham Law School. Tel: (212) 661-3656; www.wallacecollins.com