D.I.Y. v. GETTING SIGNED TO A MAJOR RECORD LABEL IN THIS SOCIAL MEDIA ERA

The question these days for musical performing artists seems to be whether it is better to do it yourself ("DIY") or sign with a major record company. The answer depends.

It used to be, back in the 1970s, '80s, '90s and even into the start of the new millennium, that the major record companies had talent scouts scouring the country and searching the clubs for talent. There were layers of A&R staff at major labels (A&R stands for “artist and repertoire”) who were often producers that would take artists into studios and make recordings. That way a record label could find out what an artist might sound like on record before proceeding further. The A&R staff would also review songs from publishers and songwriters to choose “hits” for the artists already signed to the label to record. Sometimes artist managers and lawyers would pitch talent to the A&R personnel, a process which was commonly referred to as “shopping” an artist to a label. For the most part, those days are done.

These days the A&R staff could more accurately be referred to as R&D (research and development). They no longer need to scour the clubs or take demos shopped to them by managers and lawyers. Artists can make state of the art recordings in their homes and distribute it digitally with the push of a button. The labels can search the internet and websites like YouTube and Facebook to see what artists are garnering interest from the public. These days it is more about creating a “buzz” with an online presence and doing live shows to build a fan following. The record companies are interested in analyzing data before they take an interest in investing time and money in a project.

The major labels are now less about finding and developing raw talent and more about marketing and promoting the artists that have developed themselves and built the widest public appeal. Rather than bring new artists into the studio to work with them, the labels tend to find artists that are already performing live and drawing crowds, and already have at least some recordings commercially released and available on line. Since an artist can create good quality recordings in a home studio, and easily upload music for commercial release through any number of online distributors, any artist can make music and get it out to the public without the need for a major record label’s assistance. The labels actually want the DIY artist to develop its sound and test market itself. When there is interest from the public, numerous hits on an artist’s website or YouTube video, substantial sales of the artist’s music, and long lines at the live shows, then the major labels start sniffing around. The contractual downside of signing with a major record company is that in most cases their contracts assign ownership of your copyrights to them in exchange for funding (an advance and a promise of royalties); the DIY artist can retain ownership of its copyrights and then use and exploit them to generate income.

On the up side, as an artist these days you can make and distribute your own recordings on-line through the digital streaming services and promote the music through social media and with live performances - and keep 100% of the copyrights and 100% of the profits. In the "good old days" an artist needed a record company to fund the recordings in state-of-the-art recording studios and then print, warehouse and ship the physical records to stores. Before Spotify, AppleMusic and other digital streaming services, radio was the only gateway to the public, and you needed a record company to market and promote the music to radio.  You no longer need to go that route. You can do it yourself if you prefer.

If the DIY route is not for you, then you still need to do some legwork to get the attention of a major record company. What you as an artist need to do, first and foremost, is work on your art. That can be a combination of writing great songs, making great recordings, making interesting videos and creating a great live show – any or all of those things. You need to build your websites and develop your social media in order to link your fans to your work so that the public can hear your music and see your performances. An artist needs to create a “buzz”, create excitement and interest for what the artist is doing creatively. Some artists do it with a killer song and others do it with an interesting video. You need to create something unique and interesting that the public just cannot resist. It is not easy. It takes hard work and perseverance – and requires a little luck to get attention. However, if the alternative is to give up and go work in a grocery store or some other day job, then you might as well hone your craft and give it all you have to try to create something that demands that people pay attention. Then, if you want, you will get signed to a major record company that will, hopefully, help fund your expanding efforts and spread your artistry to a broader audience around the world.

Wallace Collins is an experienced entertainment lawyer. He was a recording artist for Epic Records before receiving his law degree from Fordham Law School. T: (212) 661-3656; wallacecollins@gmail.com 

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 

THE IMPORTANCE OF CREATING AN INTERNAL BAND CONTRACT

     Over the years there have been many lawsuits between and among the members of various musical bands. These lawsuits have concerned everything from disputes over the distribution of money to the right of departing members to use (or not to use) the band name in connection with ongoing endeavors. In most cases, it would have been better to be safe than sorry, and get the understandings of the band members in writing when everyone was in agreement just so all the parties remember what they agreed to at the start. Disputes over copyrights and trademarks as well as money could be avoided with a properly drafted "pre-nup" for the band.

     The internal group member contract between the members of a band is fundamentally important, but many musical groups ignore this crucial early step. When two or more people associate for the purpose doing business they create a partnership in the eyes of the law. General partnership law applies to the association unless a written agreement states otherwise. General partnership law provides, among other things, that all partners equally own partnership property and share in profits and losses, that any partner can contractually bind the partnership and that each partner is fully liable for the debts of the partnership. In the case of most musical groups, a written agreement setting forth the arrangement between and among the group members as partners is preferable to general partnership law.

     A band agreement can address issues such as who owns the group name (and whether and in what capacity a leaving member can use the group name), who owns what property (including not only sound equipment but intangible property such as recording agreements and intellectual property such as the songs and the recordings created by the group), and how profits and losses are divided. Since it almost goes without saying that members of a band inevitably leave and groups inevitably disband, it is important to structure an inter-band agreement in the early stages of a career. It will function in a sense like a prenuptial agreement when matters start to disintegrate, and it can make the break-up process less painful.

     Some bands may deal with this agreement among themselves and some bands may have a lawyer prepare a basic inter-band agreement. If it is a fairly equal partnership where all members are writing and performing and sharing equally, it is a fairly simple process. However, where some members are songwriters and others are not and/or where one member claims ownership in the name or another makes significantly larger financial contributions than the others, it can become a complicated process. If the band cannot work it out among themselves, they can either sign a conflict waiver permitting the one attorney to act solely as scribe (and not as advisor) on behalf of the group, or each member of the group may need to get his or her own lawyer to protect each respective member's interests. Like it or not, as artistic and creative as forming a band can be, this is a business and it is wise to recognize that and deal with it. These inter-band issues are better dealt with at the beginning when everyone is optimistic and excited rather than later when tempers flare and bitterness pervades as egos clash.

     A typical band contract will address certain fundamental group issues. One important issue is who owns the group name if one member leaves or if a group dissolves which group of members are entitled to use the name. Under partnership law the partners would be the joint owners of the name and any member would probably be permitted to use the name (or maybe no members would be allowed to use the name once the partnership is deemed dissolved). Trademark rights are determined based on the "use" of a mark (not on who thought of the name) so each of the members of the group would be an equal co-owner of the group name under trademark law. The end result under either partnership law or trademark law might be impractical.

     In most cases, the band agreement will state that if a particular founding member was the creator of the group name then only a group comprised of that member and at least one other member can use the name. This will apply whether one other member leaves or if the group disbands and only the founding member and one other reform the group. There are as many different ways this provision can be drafted as there are different group names. When a group member leaves, the remaining members are going to want to keep the group name and are not going to want the leaving member to dilute its value or confuse the public by using it in any way. The band agreement provision may say that a leaving member cannot use the name at all or that the leaving member can only mention that he was "formerly" a member of the group (provided that such credit is printed smaller than the member's name or his new group's name, etc.).

         

     Rights in the group name may also concern revenues generated in addition to rights, specifically as they concern the sale of merchandise (e.g., hats, t-shirts, calendars and other products and paraphernalia). The band agreement should have a "Buy-Out/Pay Out" provision which would deal with this financial aspect of the group name.

     The band agreement will need to contain provisions regarding the sharing of profits and losses. One provision may pertain to revenues earned during the term while each member is in the group and another may pertain after the departure of a member or the demise of the group. In most cases, a group just starting out will have a provision that all profits from the group are shared equally between all members with an exclusion for songwriting monies (which each of the respective songwriter members would keep for themselves). Where an established group adds a new member, the provision may provide that the new member gets a smaller percentage than the founding members.

     However, in most cases, during the term there is not a problem determining appropriate revenue shares. The more complicated problem of revenue division arises after a member departs. The agreement may provide that the leaving member is entitled to his full partnership share of profits earned during his tenure but a reduced percentage (or no percentage) of profits derived from activities after his departure - or the agreement may provide for a reduced percentage for a short period of time after departure (e.g., 90 days) and then nothing thereafter. This is an easier issue to remedy as it relates to live performances and sales of merchandise during those performances than it is as it relates to record royalties. The group needs to determine what happens, for example, when a group member performs on 3 albums but leaves before the fourth album is recorded. Although it might be acceptable to refuse to pay the leaving member any royalties on the fourth and future albums recorded by the group under the record contract the leaving member signed as part of the group, it might not be fair to refuse to pay that leaving member his share of royalties from the 3 albums that he did record with the band. Of course, this might vary in the agreement depending on whether the leaving member quit or was fired.  

     Another important financial issue is the question of the leaving member's share of partnership property such as band recording equipment or a group sound system. Again, the agreement might specify a monetary payout to the leaving member if he is terminated but forfeiture if the leaving member quits. If merchandise with the leaving members name and likeness still in inventory is sold after the member leaves, a decision will have to be made about whether and how much the departed member might receive for the use of his name and likeness.

     The issue of control is also very important to deal with in inter-band contract. In most cases, each member will have an equal vote and a majority will rule. However, there are as many variations as there are bands. For example, some acts might require unanimous agreement or an important member may have two (2) votes and/or the band’s manager may have a tie-breaking vote. The agreement may also provide that certain matters such as requiring financial contributions from group members or incurring debts on behalf of the band require a unanimous vote. Again, there are endless variations including situations where a particular member makes all of the decisions or where new members do not have a vote on band business. One interesting inter-band arrangement was that of The Beatles.  In answer to that age-old question, "no", Ringo did not get less. In fact, my understanding of their arrangement was that it was what might be called a reverse democracy: each member had one vote but if any member voted against doing something then the band would not do it. In other words, their arrangement required unanimous consent to proceed with an activity.

     Another issue of control that must be decided for the band agreement concerns the hiring and firing of band members: how votes are calculated (e.g., will each member get one vote or will a particular member's vote count double) and how many votes are needed (e.g., a majority or a unanimous vote) to fire a group member and/or hire a new member. In most cases, a new member voted into the group will then be required to sign on to the internal group contract. It must also be decided how to vote on any amendments to the band agreement since this may materially effect the relationship between the members after the group has started. In most cases, a majority vote will be deemed determinative but some members may prefer a unanimous vote on such things as amending the agreement (as well as hiring or firing). This will have to be decided between and among the members of the group.

     Finally, the group’s internal agreement should contain a comprehensive Buy-out/Pay-out provision that deals with departing members. In most cases, whether the leaving member quits or is fired the agreement will provide that the leaving member waives all rights in the intangible assets of the partnership (e.g., the group name, the group contracts, etc.). If the member quits, he might waive any right to and benefit derived from the hard assets such as band sound equipment. If the leaving member is fired, the agreement might provide that he or she is entitled to the pro rata percentage of the current value of the hard assets. With respect to this payout, the band agreement may provide that if the valuation exceeds a certain amount (e.g., $25,000.00) or would put the band partnership in financial distress, the payout would be in a certain number of equal monthly installments (e.g., over 12 months).

     Again, this Buy-out/Pay-out provision can be as simple or as complicated as the band members deem necessary. There are as many variations in this as there are differences in personalities between the members of a group. Each member and each group must find its own balance.

     Inter-band issues and disputes are many and varied. Recently, a member of the Eagles sued the remaining members saying he was forced out of the Eagles’ corporation by the other shareholders (and invoked provisions of the California corporate law pertaining to minority shareholders in close corporations). Years ago an ex-member of The Black Crowes sued his former band mates claiming that he was entitled to an equal share of all the money they made after they threw him out of the band. His contract claim was based on nothing more than a pie chart drawn on a napkin. Legend has it that, years before while eating at a diner after a band rehearsal, each member had signed his name on his slice of the "pie" drawn on the napkin allegedly agreeing that they would stay together and share all of the money equally come what may. Of course, when circumstances changed the fired member used that napkin to assert his rights.

     It is difficult to form a good band and to achieve a successful career in the music business. Any group of two or more musicians working together would be well-advised to create and sign a good Internal Band Contract so that the band does not later self-destruct over money and ego issues and forfeit its hard-earned career success. In a perfect world, each member could afford its own lawyer to quickly and inexpensively prepare and sign such an agreement. In the real world, that may not be the case. In any event, some kind of basic band agreement is a good starting point for any new band.

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