"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 artist'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 (e.g., restrict only to physical records sold), 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