If an exclusive recording agreement is being proposed, there are certain key issues that should be addressed and negotiated, if possible. As in all music-related agreements, all provisions are negotiable, but largely dependent on your clout. The following are the most important:
(1) Term: "Term" is the length the recording artist is required to provide personal service contract. The artist should watch out for the "open-ended" term provisions, which allows record companies to define a "year" as "8 months after delivery of the minimum recording obligation, whichever is later" or similar language. The artists should attempt to limit the initial fixed term to 12 (not 18) months.
(2) Artist's Recording Commitment: This is the provision specifying how long an artist must exclusively record for a certain record label. It obligates the artist to record and deliver a certain number of masters to the record company. If a long term and substantial albums are sought by the record company, the artist with sufficient clout should ask for "promotional" provisions, such as guaranteed release, promotional budget, advertising, support, publicity, and/or video. The artist should also try to limit the delivery commitment to one or two albums per five-year term. If the artist cannot limit the recording commitment to a comfortable number, ask the record company for broad and favorable "suspension" terms.
(3) Record Companies Commitments: The artists should ask for a "guaranteed" release clause, defining "recording" to include "releasing." The artists should also avoid "minimum commitment" language.
(4) Delivery: "Delivery" of a master recording at certain times is required of the recording artist by every recording contract. Failure to deliver product on time may prevent the record company from timely manufacturing and selling records. This may affect the artist in a number of ways, including extending options dates, expirations dates, and payments of advances.
(5) Suspension and Extension: These clauses are usually triggered by some failure of the artist to record or the artist committing an immoral act. Generally, care should taken by the artist to avoid automatic "suspension" clauses for non-delivery or late product. Instead, request that the suspension applies only if the non-delivery was the failure of the artist and/or that it is excused if the record company bars the artist from recording.
(6) Injunction and Equitable Relief: Record companies try to prevent the artist’s breach of a recording contract by restraining the artist from recording elsewhere. They do this by inserting a clause stating the artist's personal services are "unique" and "special" and exclusive to the record company. Recording agreements with this language entitles the record company to injunctive and other equitable relief. The artist should limit this to provide that the record company is only entitled to "seek" injunctive or other equitable relief.
(7) Royalties: The "base royalty rate" is the gross or starting royalty for "regular full-price sales". It is negotiable, and varies from artist to artist. Generally, it may range from 5% to 10% for a new unknown artist, to 15% for a hot new artist in a bidding war, or up to 18% for a seasoned recording artist. The base royalty rate is usually severely reduced by various other royalty provisions and definitions.
The packaging deduction is another common provision. Record companies usually deduct what is known as a "container charge", "packaging deduction" or "jacket charge." This is the single largest reduction of the base royalty percentage and is usually non-negotiable.
An artist may also rarely avoid a "free goods" clause; this allows the record company to give away free CDs and tapes to radio and retailers for promotional purposes that can result in as much as a 15% reduction on the base royalty rate.
Royalties from the sale of CD’s are often computed by many record companies on the basis of less than 100% of the sales. For example, royalties for CD’s are commonly calculated on the basis of only 85%, or even as low as 75% of sales. Try to avoid this historical practice. There is really no justification today for this reduction since the price of making CD’s is negligible compared to other formats.
Record club royalties are usually reduced by 50%, and are further calculated on the basis only 85% of sales. The right artist with sufficient clout may be able to ask for 100% sales on record club royalties, and should also place limits of freebies.
There are reductions for foreign royalties. For example, because of extra costs involved with over seas distribution, the royalty on foreign sales of records is usually reduced to one half (½) of the normal domestic rate.
And, if possible, try to insert a provision that accounts for countries with blocked currency or funds. Some countries require royalties remain in their countries or at least be spent in their country. To be protected against these blocked royalties, the artist should negotiate a clause that requires the deposit of these blocked royalties in the name of the artist.
(8) Controlled Compostition Clause: Mechanical royalties are paid by the record company to the artist based on US sales of records. Under copyright law, there is a statutory minimum. However, under the so-called "controlled composition clause", or "reduced rate, " a record company usually gets the artist to take a negotiated or reduced mechanical license rate. There are several types of reductions in your statutory rate.
A. The rate is reduced by percentage; instead of 100% of the statutory US rate. The mechanical rate is commonly 75% of the minimum statutory rate, as of one of the following dates:
(1) commencement of recording;
(2) date of delivery;
(3) date of initial release; or
(4) date of sale.
Obviously, the latter date is more advantageous to an artist, as the statutory rate may go up from the date of recording to the date of sale.
B. The rate is reduced further to a certain number of songs. Thus, the "rate" is usually limited to 10 to 11 songs per record, even though you may have 15 songs on the album.
C. The reduced "x 10 min stat" rate is also further reduced depending on the configuration (format). Thus, a typical reduced mechanical license rate would be: 10 songs x 75% rate on LP’s, 5 songs x 75% on EP’s, and 2 songs x 75% rate on singles.
D. Mechanicals are payable only on records for which record royalties are payable, which usually means no payment on "free goods" and promotional copies.
E. There is usually a further reduced rate for secondary markets, such as for record clubs sales, budget lines, and sometimes mid-priced records. And, there may also be special treatment for multi-record packages. There is also a special rule regarding "Greatest Hits" or other re-releases.
(9) Advances: Royalty "advances" are basically pre-payments of estimated royalties. They are non-refundable but recoupable, meaning they can be paid back to the record company from artist’s earnings only. They come in different forms, the obvious being an advance payable upon execution of an exclusive recording agreement.
(10) Reserves: Currently, most record companies limit returns to 20% to 22% of records shipped. Because record companies do not know how many records will be returned by retailers, they compute mechanical royalties based on net sales "less returns" so as to avoid any overpayment of royalties. They maintain what is known as a "reserve" against future returns. The reserves is a percentage of gross sales of a record. These reserves may range from 30% to 75%. Since most record companies are not going to accept more than a 22% return privilege from retailers, the artist should try to limit these to "reasonable" reserves, not to exceed a certain percentage (e.g., 20% to 25%), and include a specific liquidation clause ensuring full payment after a certain period of time (e.g., within three or four accounting periods.).
(11) Cross-collateralization: This clause should definitely be avoided. A cross-collateralization clause compromises the song writer's otherwise independent royalty income. Under this clause, the record company is allowed to recoup mechanical royalty advances from sources other than from the actual sales of the record in question. For example, if an artist owes the record company for unrecouped mechanical royalties from LP1, the record company can use sales from LP2 or even publishing income to get paid. This obviously substantially reduces and sometimes eliminates the likelihood that the artist will receive any royalties. This clause is never called by its name. It is usually recognizable by the term, "all agreements between artist and record company heretofore or hereafter entered into shall be deemed to be one accounting unit." Always try to get these clauses removed from the recording contract.
(12) Accounting: This is the provision that tells the artist when he/she gets paid. Record companies usually pay semi-annually (e.g. a specified number of days after June 30 and December 31). Others account on a quarterly basis, every three months.
(13) Audit: An audit provision allows the artist to contest and investigate a royalty dispute by looking at the record company’s books. Most audit provisions limit the audit period to and require the artist to actually pay for and use only a certified public accountant. In order to deter vexatious or litigious artist, many record companies also place restrictions on how may audits can take place in a give time period. Some agreements also exclude manufacturing records from the audit. The artist should try to include a provision whereby the cost of the audit is paid for by the record company if the audits reveals a substantial underpayment of royalties (e.g. a minimum of a 10% variance.) There is usually an express limitation on the period the artists may object to or question a particular accounting statement. The time to object will vary from 90 days to 3 years or more.
Whenever possible, a qualified music lawyer should be consulted before any recording agreement is signed. With the right counsel and bargaining power, you should be able to land better deals.