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Artists, Get Your Money Up-Front - John J. Tormey III
"This article is not intended to, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally".

Recent reports in the press, one of which is entitled “Dixie Chicks Sue Sony”, discuss another installment in the seemingly-perennial process of recording artists suing the record labels to which they have signed. According to “Dixie Chicks Sue Sony”, the Dixie Chicks claim that they are due at least US$4.1 million in royalties from their label.

This article can offer no opinion on the merits of the Dixie Chicks litigation, or with regard to the oft-wondered question in litigations of “which side is in the right”. (The statistical odds are that, like most litigations, the case will settle pursuant to a stipulation of confidentiality, and we’ll therefore never really know for sure). But notwithstanding the sizable amounts of money at stake, the Dixie Chicks-Sony case will likely be governed by certain principles common to all music industry disputes of its kind.

It really boils down to the timing of when an artist is or should be paid. Though this may sound pedestrian, the equation is simple. Agreeing to be paid the bulk of one’s compensation later rather than sooner, increases the odds that one will be unhappy with the dollar amount of the “back end” payment(s) at that later date. Would the Dixie Chicks-Sony litigation have never occurred, if the band’s paid-up-front recording advances had been larger? We will never really know that for sure, either. But one cannot argue with the equation. A larger up-front advance at least reduces the magnitude of later artist dissatisfaction with the stream of payments that follow. Arguably the Dixie Chicks would be in a better economic position, if suing for “only” US$1.1 million rather than US$4.1 million.

The practical reality for artists, is that they often sign record deals before they become commercially successful. Every successful recording artist has a “breakthrough” album. What looks like a huge advance to a starving artist in the context of an earlier record deal, may later look like a per diem to that same artist several years later after she or he has “made it”. And indeed, the label’s frugality is understandable. Few if any economically-rational record labels are willing to plunk down a huge advance for an artist who has yet to “make it” commercially.

Again, these artist-payment disputes are a function of time and timing. In this light, the Dixie Chicks are essentially fighting the economic identities that the music industry unilaterally assigned to them several years ago, before they were hugely famous and successful. If the band was this famous and successful several years ago when they signed their deal, they would have likely commanded much more by way of sizable advances, and would presumably thereby have been better secured against the risk of (alleged) back-end payment deprivation.

It is ironic that within the past several months prior to the suit, the Dixie Chicks were the subject of a TV news magazine show, in which at least 2 relevant things were said: (1) one band member suggested that the ladies in the band might soon want to leave the entertainment business; and (2) one band member boasted on-camera about having procured the “best [recording contract] deal in Nashville”, or words to that effect.

The thrust of the news magazine program was that even with “the best deal in Nashville”, an internationally-famous recording act had to endure a situation wherein their label was holding most of the money. According to press reports, the Dixie Chicks albums “Ready to Run” and “Wide Open Spaces” sold more than 19 million units, resulting in more than US$175 million in revenue. That approaches a quarter of a billion dollars. And yet the band’s lead singer dolefully attested on camera that she didn’t “even” have US$1 million in the bank herself. She jokingly added that her label must have remodeled its Nashville offices based upon the success of her band’s music.

Where is all of this money going? Well, we know or suspect where it is going. It is true that launching and promoting albums, and developing artists, requires major expenditures by the label, likely in the millions of dollars. The label has to spend money to make money. But at least some of the incremental money above expenditures is going towards someone’s profit. It is reasonable to assume that the Dixie Chicks sued, because they didn’t think they were receiving their fair share of same.

What logical deductions can we make from this case study, that apply to other individual musicians and bands? First, we need to back up, and keep in mind that there are two principal ways for an artist to get paid for services: (1) “fixed compensation”, and (2) “contingent compensation”. Royalties are “contingent compensation”, usually contingent upon either the manufacture or the sale of (non-returned) units. In film and other realms, “points”, “back-end”, and “net profits” are all terms suggestive of other forms of contingent compensation.

Music royalty calculations and film “net profit” definitions often take many pages of text to define. In defense of the companies, this verbosity is not always simply a product of the labels and studios so conspiring. Rather, the income streams in music and film are hydra-headed and fairly sophisticated, and take some care and patience to define. I realize that this is all scant consolation to a screenwriter working through a studio’s 50-page written definition of “net profits”, or a recording artist immersed in arcane label record contract text purporting to delineate methods of royalty computation. Yet the complexity of calculating contingent compensation is a reality of the industry.

However, make no mistake about it. Accepting any form of contingent compensation, royalties or otherwise, is tantamount to accepting someone else’s “trickle-down”. That is, the artist deputizes the company to collect the artist’s money, hold it (presumably) in trust, and then remit it in installments to the artist over time on a deferred basis. Human nature and greed being the powerful motivators that they are, the company will often thereupon pay the artist when it feels like it, and how much it feels like it. And company “deductions” from the gross payment stream to arrive at “net” or “royalties”, can become extremely creative to say the least. Music audit disputes often revolve around the acceptability and fairness of such “deductions”.

There are contractual ways for artists to even the proverbial scales of justice regarding their contingent compensation. The most familiar method is the deployment of contractual “accounting” and “audit” provisions. The artist can endeavor to require the company to remit detailed written accountings of all revenues collected, and (carefully-circumscribed) deductions taken therefrom, on a regular basis. Accordingly, the artist can also endeavor to reserve the right to audit the books and records of the company to ensure correct remittance. In the professional entertainment industry context, audits like this take place all the time, thus ensuring a livelihood for many entertainment industry accountants and others. It has been reported that wholly two-thirds of all entertainment industry audits result in findings of underpayments. Usually thereafter, the parties reach an economic settlement and move on with their lives. Sometimes, they don’t, and they litigate instead. And as indicated above, the majority of litigations themselves settle before going to trial.

And there is hope. Industry custom does contemplate that recording artists may also be paid on a “fixed” as well as on a “contingent” basis. In theory, the recording “advance” represents a fixed up-front payment to the recording artist. But many creative record label forms transform the advance into a contingent payment as well, at least in part - this is sometimes referred to as the “recording fund” concept. For example, if the artist receives a US$300,000 “advance” under the contract, but must himself or herself direct-pay for the first album’s recording expenses out of his or her “own” pocket, then it would behoove the artist not to blow all US$300,000 on one weekend at Montecarlo. In other words, the bulk of that US$300,000 may not in fact be a fixed payment to the artist, but instead may need to be applied to things like studio time and fees for session musicians. There are many artists out there who briefly thought they were rich for this reason, until the record contract was actually read and reviewed.

What independent and unsigned artists will discover, particularly those with talent, is that there may be plenty of folks along the road who will be willing to bargain for their exclusive recording services, promising no money in advance, but some fuzzy and inchoate “points” later on. This phenomenon is usually exactly what it sounds like - Wimpy’s “I will gladly pay you Tuesday for a hamburger today”.

Sure, the company has a valid point that the artist should be required to share in some of the down-side risk that the recorded finished product will not sell. But by that analysis, one must also conclude that the artist should be paid some fixed compensation or “earnest money” up-front, and then some additional contingent compensation later should the project succeed. Otherwise, what assurance does the artist have that this company is truly serious, committed to the project, and acting in good faith? And arguably, the up-front fixed payment to the artist should be at least sufficient to enable the artist to retain counsel to draft and negotiate an agreement clearly specifying how the back-end contingent compensation should be paid, and what the artist’s accounting and audit rights should be.

It is astounding, however, how many artists, typically without counsel, will agree to be paid for their hard work by “points” alone, perhaps commemorated with writing on the back of a cocktail napkin, or even (gasp) on a handshake alone. Why are these artists selling themselves so short? Perhaps because they are dying for their first big break, and perhaps because they do not have sufficient confidence in their abilities such that they believe that another valuable opportunity will come along.

But the point is, there should be some minimum standard of decency, perhaps along the lines of a well-known California statute on point. Some deals are simply not worth an artist’s making. Even a Santa Monica tenant desperate for a beachfront apartment should not move into a condemned premises where the floor is in danger of collapsing. And in that real estate situation, the local government - through the building code or equivalent - serves as “watchdog”, and prevents those tenants from striking those bad lease deals even if the tenant otherwise wants to do so. However, there is typically no governmental or other “watchdog” that prevents an artist from entering into a bad recording contract, only perhaps case law and statutes that can be invoked only if the question is ever later litigated. Rather, as a practical matter, in the recording agreement context, the “watchdog” needs to be prospective and internalized. The artist can only look to his or her common sense, and in some cases the artist’s attorney’s experience and judgment - and this assessment must be made before signature.

In any case, the following is for certain. If a proposed recording agreement with royalty covenants does not contain these 3 components:

(A) an up-front advance “fixed compensation” payment to the artist, (if only to show the company’s good faith, but sufficient enough that the artist will have been happy to have done the deal even if no back-end compensation is ever later collected by the artist); and

(B) an accounting clause; and

(C) an audit clause with teeth;

then, serious doubts should be raised as to whether the artist should indeed look elsewhere for other career opportunities. At minimum, the proposed deal, as the Dixie Chicks might say, needs fixin’.

And the artist should take heart, I suppose. Getting the “back-end payment” bum’s rush from a company, happens to artists at all calibers and levels of experience and success. No matter how commercially successful a musician becomes, there may always be doubts as to whether he or she is being royaltied or otherwise paid correctly.

My law practice includes the fields of entertainment and publishing. If you have any questions about copyright law or any other legal issues which affect your career, and require representation, please contact me:

John J. Tormey III, PLLC
217 East 86th Street, PMB 221
New York, NY 10028
(212) 410-4142 (phone)
(212) 410-2380 (fax)
e-mail: brightline@worldnet.att.net
http://www.tormey.net


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