John J. Tormey III, Esq. - Entertainment Lawyer and Entertainment Attorney in New York
In any case, the following is for certain. If a proposed music recording agreement with royalty covenants as exchanged between the music and entertainment lawyers does not contain these 3 components: (A) an up-front advance “fixed compensation” payment to the music 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 music artist should indeed look elsewhere for other career opportunities. At minimum, the proposed deal, as the Dixie Chicks might say, needs fixin’.
And the music artist should take heart, I suppose. Getting the “back-end payment”, “net profits”, or “points” bum’s contract rush from a company happens to music artists and other types of artists in all media and sectors, at all calibers and levels of experience and success, whether or not they are represented at the time by a music or entertainment lawyer. 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 – and sometimes it takes the music and entertainment lawyer litigators and the court system to scrutinize the contract to find out.
It is astounding, however, how many artists, typically without music or entertainment lawyer counsel, will agree to be paid for their hard work and their music or other work-product by “points” or “net profits” or other “back-end” 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. So they don’t enlist the help of a music or entertainment lawyer, and often sign bad contracts or otherwise agree to bad deals.
There are contractual ways for musical and other artists to even the proverbial scales of justice regarding their royalties, “net profits”, “points”, or other form of contingent compensation - typically best deployed through the artist’s entertainment lawyer. The most familiar method is the deployment of contractual “accounting” and “audit” clauses or provisions. The music or other artist can endeavor to contractually require the company to remit detailed written accountings of all revenues collected, and (carefully-circumscribed) deductions taken therefrom, on a regular basis. The clauses can be drafted by the artist’s entertainment lawyer. Accordingly, the music artist can also endeavor to reserve the contractual right to audit the books and records of the record company to ensure correct remittance of royalties. In the professional entertainment industry context, audits like this take place all the time, thus ensuring a livelihood for many entertainment industry accountants, entertainment lawyers, 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 using music or entertainment lawyers instead. And as indicated above, the majority of litigations themselves settle before going to trial.
“Where is all of this money going?”, asks the artist-side music and entertainment lawyer, particularly. 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 record label, likely in the millions of dollars. The label has to spend money to make money. The label has to spend money on its own music and entertainment lawyers to draft and negotiate the contracts, for that matter. The film studio or television production company will deploy similar rationales when defending “net profit”, “points”, or other back-end payment arrangements. But in the case of a successful recording and touring act, 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 under the signed contract, and then convinced one or more music and entertainment lawyer litigators to same effect.