The ABCs of NFTs (Understanding "Non-Fungible Tokens")

NFTs are suddenly headline news! Artists and musicians are using NFTs as a new way to release their products into the marketplace. NPR reports that the artist Grimes recently sold several NFTs for over $5 million and an NFT video clip of LeBron James making a historic dunk for the LA Lakers earned more than $200,000. Rolling Stone reports that the rock band Kings of Leon is releasing its new album in the form of an NFT. At the auction house Christie's, bids on an NFT by the artist Beeple are already reaching into the millions. It appears that what started as an online hobby among a certain group of tech and finance geeks is now being catapulted into the mainstream.

The best way to try to understand an NFT is to break it down to its essentials. The term NFT stands for non-fungible token. It is "non-fungible" meaning you cannot exchange it for another item of equal value. The "token" refers to a unit of currency on the blockchain, which is how cryptocurrency like Bitcoin is bought and sold. In other words, unlike monetary currency or other items which you can exchange, swap or trade, an NFT is unique and one of a kind.

However, even if you think you can understand how to define an NFT, understanding the valuation of an NFT can be even more evasive and nebulous. To wit, an NFT is a type of cryptocurrency that, instead of holding money, can hold assets such as art, tickets and music. NFTs operate on a blockchain which is a publicly accessible and transparent network. In other words, anyone can see the details of any NFT transaction. Each computer involved in the transaction becomes a part of the network, which keeps updating and cannot be hacked due to its inherent nature as a multi-part system. The bottom line is that an NFT, by its nature, has a value that is subjective and fluctuates much like a share of stock on Wall Street.

Therefore, when you purchase an NFT you are essentially purchasing a kind of bar code, a form of certificate of authenticity that serves as proof that a certain version of something unique belongs to you. What you purchase is a unique code that manifests as art or music, but in a different format. However, when you buy an NFT in most cases you are not getting the copyright or the trademark to the item, you simply own a piece of code in a blockchain that the marketplace deems to be a valuable item.

Not to over-simplify, but it might help to think of procuring an NFT as somewhat akin to acquiring a collectible. However, not all NFTs are originals, many are the digital equivalent of a reprint. In the case of an NFT, however, even the reprint has what is essentially a unique barcode or token on the blockchain. Keep in mind, the blockchain is a type of decentralized record keeping so that, instead of one institution like a bank having a ledger of all transactions, the blockchain uses a vast network of computers that all hold each other accountable on a shared public record. That makes it hard to remove an NFT from the internet entirely, and it also means that there is a way to trace an NFTs origin and transaction history - reinforcing the uniqueness and value of a given NFT.

With millions of dollars pouring into NFT transactions, many enthusiasts believe NFTs will soon expand beyond trading art, memes, music and video clips. There is an expectation that NFTs could be used as collateral for loans in the not too distant future. Silicon Valley investors, of course, believe the NFT possibilities are limitless. Then again, there is always the risk that this tech frenzy is just a passing fad or another speculative bubble. Although many NFT backers believe the system's built-in scarcity will keep values up, that is only true as long as the surge of interest persists. If you bid on and pay for an NFT but enthusiasm then plummets, so will the value.

It seems that every day some newfangled invention arrives to bedazzle us, but whether it is the next big thing, an iPhone-like quantum leap forward, or just another snake oil salesman's charade remains to be seen. Buyer beware. As for me, although I might dabble a bit in cryptocurrency investment, it is probably best to watch how NFTs perform in the marketplace until the dust settles. In the meantime, I will just enjoy the artwork that hangs on my wall and vibe to the music I play on my sound systems - I understand how to measure the value of that experience.

Wallace Collins is an entertainment 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

WHAT IS A MUSIC PUBLISHING DEAL? & DO I REALLY NEED ONE?!

The term "publishing", most simply, concerns the business of copyrights. As a songwriter you own 100% of your song copyright and all the related publishing rights until you sign those rights away. Under the 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 or record it on tape.) With respect to music, 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).

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 1993."

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 is also required for a lawsuit to be commenced in Federal court and, under Federal law, allows an award of attorney’s fees to the prevailing party. The easiest way to register your copyright is directly online at www.copyright.gov

As defined by the copyright law, the word "publish" most simply means "distribution of copies of a work to the public by sale or other transfer of ownership, or by rental lease, or lending". As a practical matter, music publishing consists primarily of all administrative duties, exploitation of copyrights, and collection of monies generated from the exploitation of those copyrights. If you make a publishing deal and a publisher takes on these responsibilities then it "administers" the compositions. Administrative duties range from filing all the necessary registrations (i.e., copyright forms) to answering inquiries regarding the musical compositions.

One of the most important functions of music publishers is exploitation of a composition or "plugging" a song. Exploitation simply means seeking out different uses for musical compositions. Music publishers have professional quality demos prepared and send them to artists and producers to try to secure recordings. They also use these tapes to secure usage in the television, film and advertising industries.

Equally important as exploitation is the collection of monies earned by these musical usages. There are two primary sources of income for a music publisher: earnings that come from record sales (i.e., mechanical royalties) and revenues that come from broadcast performances (i.e., performance royalties). Mechanical royalties are collected directly from the record companies and paid to the publisher. Performance royalties are collected by performing rights organizations - ASCAP, BMI, and SESAC - and then distributed proportionally to the publisher and to the songwriter. In addition to plugging and administrative functions, it is also important to know that there is a creative side to music publishing. Since producing hit songs is in the best interest of both the writer and the publisher, good music publishers have whole departments devoted to helping writers growing and develop. The creative staff finds and signs new writers, works with them to improve their songs, pairs them up creatively with co-writers and hopes the outcome will be hit records.

If you decide to do a publishing deal then the main issue for negotiation is going to be the language pertaining to the calculation and division of the monies. In the old days, most deals were 50/50 because there was a concept that the "writer's share" was 50% and the "publisher's share" was 50%. This, of course, was an invention of the publishers. Legally, these terms have no such inherent meaning but their calculation is defined in each individual agreement. Most modern publishing deals, however, are referred to as "co-publishing" deals and the monies are usually calculated at around 75/25 meaning the writer gets 100% of the 50% writer's share and 50% of the publisher's 50% share for a total of 75%. It is best for the writer to insist that all calculations be made "at source" so that there are not too many charges and fees deducted off the top before the 75% calculation is made. fees additional. Keep in mind, however, that the advance paid to the writer by the publisher is later recouped by the publisher out of the writer's share of income from the song. So, the net business effect is that the publisher pays the writer with the writer's own money to buy a share of the copyright (and the right to future income) from the writer.

Although a writer can be his own publisher and retain 100% of the money, the larger publishers in the music business usually pay substantial advance payments to writers in order to induce them to sign a portion of their publishing rights to the publisher - and this can be a good thing for the writer. Although a deal for a single song may be done with little or no advance payment (provided there is a reversion of the song to the writer if no recording is released within a year or two), there should be a substantial advance paid ($5,000-$25,000+) to a writer for any publishing deal with a longer term (e.g., 3-5 years).

Publishing deals have to do with more than just the money though. Since every music publisher is different, it is important for the songwriter to assess both the business and the creative sides of a music publisher before signing a deal.

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

SOUND RECORDING AND SONG PUBLISHING TERMINATION RIGHTS UNDER U.S. COPYRIGHT LAW

      The 1976 Copyright Act provides for the termination of copyright transfers. Even if an artist or songwriter signed a contract with a record company or music publisher which purports to transfer all rights in a work in perpetuity, the Copyright Act provides that the author can terminate that grant and demand that the rights revert to the author in a shorter period of time. Recording artists and songwriters are now entitled to terminate their contractual transfers and demand back control of their copyrights; songwriters can demand return of their musical compositions from music publishers and recording artists and record producers can demand return of their sound recordings from the record companies.

     Generally speaking, for copyright grants made on or after January 1, 1978 (the effective date of the 1976 Copyright Act) the termination period is 35 years under Section 203 of the Copyright Act. For pre-1978 works the termination period is 56 years after copyright was originally secured under Section 304 (c)-(d). For grants on or after 1978, termination may be exercised anytime during a 5 year period beginning at the end of 35 years from the execution of the grant or, if the grant concerns the right of publication of the work, then the period begins on the sooner of 35 years after publication or 40 years after execution of the grant. Although there are certain formalities which must be complied with to effectuate transfer, this essentially means that recording artists and songwriters were entitled to start exercising their right of termination on post-1978 works as of the start of 2013.  

     Not unexpectedly, the record companies as well as the music publishers are not pleased with the copyright termination provision and the inevitable ramifications thereof. With respect to songs and music publishers, some seminal cases have already been decided. In Scorpio Music S.A. v. Willis (11 CV 1557 (C.D. CA 2012), California Federal District Judge Moskowitz determined that original Village People member, Victor Willis, could terminate his transfers and recapture a direct copyright interest in many of his group's songs, including "YMCA."  In this case, after Willis notified Scorpio that he was terminating the prior transfers, Scorpio sued arguing that Willis could not terminate because a majority of each song's authors had not also agreed to terminate their transfers. The court sided with Willis, ruling that an author can unilaterally terminate the transfer of his share in a copyrighted work without his co-writers. Willis stands to become the undivided owner of a one-half to one-third interest in 33 song copyrights. Although the Scorpio decision addressed a fairly narrow point concerning multi-author transfers, the decision sets the stage for the bigger battles looming on the recorded music side of the business. The same termination procedures apply to all copyrighted works, including the separate and equally lucrative sound recording copyrights transferred to record labels as part of typical recording artist contracts over the years.

     Back when the 1976 Copyright Act was drafted, few practitioners would have envisioned a world where the artists might not need the record companies to finance, manufacture, warehouse and distribute their records. Back then the expectation was that, although any particular artist could exercise the termination right, what would effectively happen is that the label and artist would simply be forced to renegotiate a deal to continue working together (either with the artist or with the heirs of the deceased songwriter or artist). Now, in the current digital transmission age, this is no longer necessarily true. Any artist can demand back the copyright in the masters and then simply offer them directly to fans on the artist’s website or the artist can license the rights to an online aggregator or digital streaming service with little or no expense. This is particularly true in the case of the recordings of certain well-established artists because those artists would not need the record company’s ongoing support to finance the recording costs to create recordings, store product nor require the funds for promotion and marketing. The more digital the music business becomes the more obsolete the large record labels may become for established artists. High profile artists with established fan bases and large catalogs of music like Blondie, the Cars, Bruce Springsteen and others would have no need for much in the way of advertising and marketing, and no need for manufacturing, distributing or warehousing of their product. Simple ownership and possession of the digitized masters would be sufficient to conduct business.

      Unlike song publishing contracts which generally provide for the assignment and transfer of a song copyright to the publisher, most record contracts provide that the sound recording is created as a “work for hire” for the record label. Under the 1976 Copyright Act the termination provision is not applicable to certain types of copyrights, including a genuine “work for hire” grant. However, this does not preclude recording artists from exercising their right of termination. Sound recordings are not listed under section §101(2) which identifies various works that constitute a work for hire. Moreover, several years ago I litigated a case, Ballas v. Tedesco (41 F.Supp.2d 531 (D.C.N.J. 1999)), where a New Jersey Federal District Court addressed this issue and Judge Greenaway held that the sound recording in that case did not qualify as a work for hire. There is a great deal of case law addressing the applicable legal employer/employee issues involved including those established in the seminal Supreme Court case Community For Creative Non-Violence, 490 U.S. at 738, 109 S.Ct. 2166 ("CCNV") which held that a statue did not satisfy the terms of §101(2) because it "does not fit within any of the nine categories of ‘specially ordered or commissioned' works enumerated in that subsection, and no written agreement between the parties establishes [the statue] as a work for hire.” Most case law that addresses the subject of “work for hire” holds that whether a work created by an employee is a work for hire or not depends on various factors as well as the circumstances of the relationship - and not just the language of the contract. This area of law appears to be ripe for litigation by recording artists who want to exercise their termination rights where the facts suggest that no genuine work-for-hire relationship ever existed. 

    From what I have researched, it appears that in most cases the artist has a fair likelihood of prevailing over the record company on this point when the CCNV "work for hire" factors are applied (i.e., artist not an employee (e.g., no unemployment benefits paid/withheld, etc.), artist not under the direct supervision and control of the record company during the creative process, etc.) - so I expect that the record companies will make a decision to negotiate with the bigger superstar artists and then turn the other cheek with the recordings generating less income and just let them revert back to the artists (since a bad precedent in a lawsuit could open the floodgates for other artists to demand back their masters).

     The termination rights of an artist or songwriter are generally subject to a 5 year window. Termination must be made effective within the termination window or the right to terminate the grant is forfeited. To be effective, the artist or songwriter must serve a written notice of termination on the original record company or publisher (and/or any successors) no more than 10 and no less than 2 years prior to the effective date stated in the notice. The notice of termination must state the effective date of termination. Perfection of the termination requires that a copy of the written notice also be filed with the U.S. Copyright Office prior to the effective date of termination.

     Although the termination rights of an artist under the 1976 Copyright Act would only be effective for the U.S. territory, the size of the U.S. consumer market for recorded music still makes this a valuable right to reclaim. However, what is good for the artists and creators might further erode the influence of the major record labels and prove detrimental to them as music industry powerhouses in the future.

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

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 

Benefits for Producers and Recording Studio Engineers in the Music Modernization Act

The Music Modernization Act (“MMA”) is now the law of the land. The MMA is comprehensive and sweeping in its scope. The MMA revamps Section 115 and repeals Section 114(i) of the U.S. Copyright Act. It creates a public data base to facilitate and expedite payments to songwriters and it overhauls the rate Court system and changes the standard for setting rates to a free market standard. The MMA also incorporates several other major pieces of legislation including the CLASSICS Act (Compensating Legacy Artists for their Songs, Service, & Important Contributions to Society Act) which grants copyright protection to pre-1972 sound recordings so songwriters and artists can receive royalties on pre-1972 recordings and the AMP Act (or Allocation for Music Producers Act), which improves royalty payouts for producers and engineers from SoundExchange when their recordings are used on satellite and online radio.

Most importantly for record producers, the MMA codifies into law the right of music producers and recording studio engineers to collect digital royalties through a consistent, permanent process. The MMA is an amalgamation of several bills including the AMP Act. This portion of the MMA guarantees that producers and engineers not only receive credit but also proper compensation for their contributions to the making of a sound recording. SoundExchange, which administers royalties from non-interactive streaming recordings, will provide direct payment of royalties owed to producers and engineers upon direction by the featured artist.

Music producers have never been mentioned in any part of the copyright law prior to the MMA. The MMA has codified the producer’s right to collect those royalties due to them and formalizes SoundExchange’s current voluntary policy. As explained by the Recording Academy, which advocated for the AMP Act, “Since 1995, featured performers have had a statutory right to 45 percent of the performance royalties collected from non-interactive, digital music services. Subject to their contract with the artist, producers often collect royalties from that 45 percent because they were not included in the 1995 law for a statutory right.”

Record producers who are also songwriters should affiliate with a performing rights society (e.g., ASCAP, BMI, SESAC, etc.) in order to collect their performance royalties as well as the Mechanical Licensing Collective (the "MLC") in order to collect all monies that are due to them for their musical compositions.

For sound recordings older than 1995, the AMP Act establishes a procedure for producers and engineers to seek permission from featured artists or their heirs to receive appropriate royalty payments.

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

THE MUSIC MODERNIZATION ACT: A BREAKDOWN OF THE BENEFITS AVAILABLE FOR ARTISTS AND SONGWRITERS

The Music Modernization Act (“MMA”) passed both the Senate and the House after the herculean efforts of some individuals and organizations who worked tirelessly to negotiate compromises to accommodate all sides, and was signed into law. The MMA finally moved the recorded music industry forward in a way that facilitates more artists and songwriters being able to make a fair living from making music. The MMA proposes to reform the music licensing landscape in several substantive ways -  and vigilance is required to ensure that composers, songwriters and other copyright creators receive all the benefits available to them under the MMA.

The MMA is comprehensive and sweeping in its scope. The MMA revamped Section 115 and repealed Section 114(i) of the U.S. Copyright Act. It creates a public database to facilitate and expedite payments to songwriters and it overhauls the rate Court system and upgrades the standard for setting rates to a "free market" standard. The MMA also incorporates several other major pieces of legislation including the CLASSICS Act (Compensating Legacy Artists for their Songs, Service, & Important Contributions to Society Act) which grants copyright protection to pre-1972 sound recordings so songwriters and artists can receive royalties on pre-1972 recordings and the AMP Act (Allocation for Music Producers Act), which improves royalty payouts for producers and engineers from SoundExchange when their recordings are used on satellite and online radio. Notably, this is the first time producers have ever been mentioned in copyright law.

Here are some details of the highlights of the MMA’s benefits explained:

Section 115 Reform and the Public Database

The MMA ends the bulk Notice of Intent (NOI) process through the Copyright Office, which can prevent songwriters from being compensated or compensated in a timely manner for uses of their works. Under the MMA, the digital services would fund a Mechanical Licensing Collective (MLC), and, in turn, be granted blanket mechanical licenses for interactive streaming or digital downloads of musical works. The MLC would be governed by publishers and self-published songwriters. The MLC would address the challenges digital services face today when attempting to match songwriters and publishers with recordings. The MMA also creates business efficiencies for the digital services by providing a transparent and publicly accessible database housing song ownership information. Additionally, because the database would publicly identify songs that have not been matched to songwriters and/or publishers, publishers would also be able to claim the rights to songs and get paid for those songs. Songwriters and publishers would also be granted an audit right which is not currently available under Section 115 of the US Copyright Act.

Willing Buyer/Willing Seller Standard

The MMA upgrades the current standard to a free market standard. Section 115 of the Copyright Act has regulated musical compositions since 1909—before recorded music even existed. Section 115 allows anyone to seek a compulsory license to reproduce a song in exchange for paying a statutory rate. Current law directs the Copyright Royalty Board (CRB)—the government body responsible for setting the statutory rate—to apply a legal standard to determine rates that does not reflect market value. The MMA replaces the current flawed legal standard with a standard that requires the Court to consider free-market conditions when determining rates.

Rate Court System Overhaul & Section 114 Repeal

The MMA overhauls the rate Court system. Currently, ASCAP and BMI are each assigned to a single, respective rate court judge. Every case must be adjudicated before each performance rights organization's (PRO’s) respective designated consent decree judge. Under the MMA, a district judge in the Southern District of New York would be randomly assigned from the wheel of district judges for rate setting disputes. The “wheel” approach would enable BMI and ASCAP, as well as licensees, to go before any judge in the Southern District of New York on a rotating basis - rather than being assigned to a single judge - for the purpose of rate setting disputes. This approach ensures that the judge will find the facts afresh for each rate case based on the record in that particular case, without impressions derived from prior cases. The MMA would also repeal Section 114(i) of the U.S. Copyright Act which prevents rate courts from considering sound recording royalty rates as a relevant benchmark when setting performance royalty rates. As a result, the playing field has been uneven, at the expense of songwriters. The MMA moves the industry to a fairer system under which PROs and songwriters would have the opportunity to present evidence about the other facets of the music ecosystem to judges for their consideration. This repeal creates the opportunity for songwriters to obtain fairer rates for the public performances of their musical works.

Wallace Collins is a lawyer with 30+ years’ experience specializing in entertainment law and copyright, trademark and internet law matters. He was a teenage recording artist for Epic Records before attending Fordham Law School. T: (212)661-3656 / www.wallacecollins.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