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 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

BEWARE THE "CONTROLLED COMPOSITION" CLAUSE IN RECORD CONTRACTS

Under U.S. Copyright law, Congress has seen fit to legislate a minimum statutory mechanical royalty rate for songwriters and their publishers.  Based on an upward-sliding scale tied to a cost-of-living index, the mechanical royalty rate is set by the Copyright Royalty Tribunal on a per song per record basis. The current rate in effective is $.091 per song.  However, most record companies use their substantial leverage over fledgling recording artists to cause them to enter into record contracts which purport to reduce this minimum rate pursuant to the "controlled composition" clause - and this provision might also be made to apply to producers and songwriters who do work for those artists.

The controlled composition clause is one of the most insidious of a plethora of royalty-reducing provisions in any record contract. It 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 such payment will be made and may fix the point in time at which such calculation will be made (thereby circumventing the cost of living index increase). This is an issue not only for the songwriter/recording artist but for the producer/songwriter and for non-contractual songwriters who may chose to collaborate with an artist who is signed to a recording agreement with a controlled composition clause.

A full 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 where the songwriter/artist will receive 3/4 of the minimum statutory mechanical rate (assuming the minimum rate is 6 cents per song at the time) on a maximum of 10 songs per LP. The mechanical royalty on the artist's entire LP usually has a "cap" of 68.25 cents (3/4 of $.091x 10 songs) so that, even if the songwriter/artist writes 12 songs for its own album, the artist's publishing is not worth $1.09 per album ($.091 x 12 songs) but only 68.25 cents.

To further illustrate, assume the 12 song album has 6 songs written by the artist and 6 songs from outside publishers. Unless otherwise agreed, the outside 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 51 cents. Since the mechanical royalty on the entire LP has a "cap" of 68.25 cents, the songwriter/recording artist is limited to applying the remaining 13 cents to the songwriter/artist's 6 songs, so that the artist's publishing is worth a little more than 2 cents per song. And keep in mind, if the artist's producer agreement has language tying the record producer to the artist's controlled rate or an outside songwriter's mechanical license has similar language, then both the producer and the outside writer would also be subject to the reduced rate and the "cap."

To take it one step further, imagine a case where 8 of the 12 songs on the LP were from outside publishers. The outside publishers would be entitled to at least 72 cents in mechanical royalties ($.091 x 8 songs).  Since the artist's contractual cap is 68.25 cents, then for each LP sold the songwriter/record artist would actually lose mechanical royalties and owe its record company a few cents for each record that sells which would be deducted out of the songwriter/artist's recording royalties. The net effect is that the songwriter/artist's own 4 songs receive no mechanical royalties at all.

A controlled composition clause may 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.  Moreover, although this provision reduces mechanical royalties on the artist's publishing, it does not reduce payments to outside publishers since they are not subject to the clause.

The most treacherous dilemma for the songwriter/artist is that, even if the record company does not acquire the artist's publishing 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 especially true if the mechanical royalties are cross-collateralized with the artist royalties since, until the artist is recouped, no mechanical royalties will be payable to the songwriter/recording artist or its publisher.

The foregoing scenarios raise numerous legal issues including antitrust, interference with prospective financial advantage and restraint of trade.  Another issue raised is whether, under partnership law (where one partner can bind the partnership), a 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.

These days almost every record contract contains a controlled composition clause.  Although certain aspects of a controlled composition clause can be made less onerous by some persistent negotiation (such as escalations of the rate based on sales thresholds), record companies are generally inflexible in their insistence *on this provision and their position can only be tempered by their desire to sign a particular artist or by an artist's importance and stature. This provision should be reviewed very carefully by an artist and his lawyer; any artist's lawyer who failed to discuss this clause and explain its ramifications to the client (under the assumption that it is "standard" in every record contract) would certainly be inadequately representing the client, and may suffer the consequences when the actual effect of the provision is eventually revealed to the artist.

In fairness to record companies, with the exorbitant cost and high risk of the record business, record 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.

By way of analogy, imagine a particular record company, in order to cut costs, decided that, despite the Federally mandated minimum wage, any employee who wanted to work for that label would have to accept three-quarters of the minimum wage.  It is unlikely such a preposterous policy would hold up in court.  When it was tried by calling in an "internship program" the Courts did now permit it. Whether the contractual reduction by a record company of a Congressionally legislated minimum royalty rate would hold up in a court of law has yet to be tested.

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