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Record Label Agreements – Understanding that Stuff above the Dotted Line

Tuesday, May 31st, 2016

Contributed by Byron Pascoe, Edwards PC, Creative Law

Being a musician is a business. One way to increase your likelihood of having a sustainable career as a musician is through the support of a record label, including things like recording funds, distribution, and promotion.

Resources such as Canadian Musician are great to help artists attract label attention, discover what the labels are looking for from artists, and find an optimal fit for the artist-label partnership. If you have what they’re looking for and they’re the right partner for your needs and aspirations, you’re that much closer to signing on the dotted line.

Before signing the agreement they send you, it’s important to understand what the label is proposing to help you make an informed decision about how to respond to the label. This blog summarizes some of the topics above the dotted line.

For a complete analysis, speak to an entertainment lawyer regarding your specific circumstances.

Master Recording License

You may be asked to give the label an exclusive license to use the master recordings of your music in a territory (ex: Canada or the world) for a period of time (ex: 10 years after your final deliverables). An alternative that is less in your favour is if you assign all rights including copyright in the music to the label.

Initial Term & Option Periods

The agreement’s initial term will likely cover a specific set of music. The label will also likely want the opportunity to exclusively represent your future music by having the opportunity to extend your commitment by way of a number of “option periods.” Once you have agreed to provide the label with option periods, it will generally be the label’s decision – not yours – regarding whether the relationship will extend. During each option period, you will be required to deliver music, which at minimum will likely be an album or a certain number of songs.

Advances

A key reason to work with a record label is that they believe enough in you, and their ability to sell your music, that they give you money up front in the form of an advance against money they will generate from selling your music. The funds are generally used to pay off the costs of making existing or new music. As such, you may consider the advance as recording funds. As the advance should be non-returnable, you aren’t required to pay the advance back to the label if the album doesn’t sell. The label is taking the risk.

As the advance is recoupable, if the advance is $15,000, the first $15,000 that would otherwise be paid to you (which is not the first $15,000 generated from sales!), is kept by the label to reimburse them for the advance.

The initial term advance will likely be a specific amount of money. The amount of each option period’s advance is generally based on a formula, which takes into account how well the music from the previous term is performing financially. There should be a minimum dollar value (“the floor”) that the label will be required to provide as an advance for each option they choose to exercise. Also key is when the option fees need to be paid to you. Preferably you’re paid sooner rather than later. If the label decides it’s not worth the option fee to extend the agreement, they won’t exercise the option, and generally, you are free to pursue other leads for your future music.

Grant of Rights

It’s reasonable to provide the label all of the rights it reasonably requires to exploit the master recordings of your music. Regarding your artwork, it may be reasonable to allow the label access so long as it’s non-exclusive. It may be reasonable that the label be given the right to edit the music, but that its rights are contingent upon your prior approval. It may be reasonable that the label can use your photos, so long as the photos are approved in advance by you.

Some rights that you may want to resist providing include: publishing rights (if you want to keep such rights for a publishing partner); copyright in the underlying musical compositions; the right to remix a song without your involvement; using a master in connection with any merchandising, sponsorships, or endorsements; approving the right for the master to be used as sample; and selling the music for less than a certain threshold.

Sales

Generally speaking, the payment of funds generated from sales of your music is subject to the recoupment of advances paid to you by the label. There are various ways these royalties can be structured, including providing you a portion of the net profits, or a percentage of the suggested retail selling price or the wholesale price.

Regarding the net profit route, the label pays you a percentage of the net profit. The net profit is calculated by taking the gross revenue and subtracting the label’s expenses. It’s important to clarify the formulas used to calculate the gross revenue and expenses. Subject to how the rest of the agreement is drafted, the gross revenue should include all money received by the label from sales of the master recordings in all formats, from digital to physical sales. You will be most protected if the expenses are limited, both regarding what types of expenses may be included and a limit (a “cap”) on the amount of expenses used in the formula.

Regarding two of the other routes, SRLP is the “sug­gested retail list price,” which is the approximate price charged by the retailer (ex: Walmart). PPD is the “pub­lished price to deal­ers,” which is the approximate price dis­trib­u­tors charge their deal­ers, or the “whole­sale price.” Generally speaking, the SRLP dollar value is about double the PPD dollar value. As such, the percentage you may be offered if it’s a PPD deal should be about double the percentage offered if it were a SRLP deal. The percentages vary based on the artist’s track record, genre, and other factors.

Deductions to these SRLP and PPD calculations, which generally may be reasonable but may need to be adjusted in order that the percentages are more reasonable, include a packaging deduction for physical goods (with further deductions for vinyl), foreign territory deductions, and free goods allowances.

Mechanical Rights

The owner of a copyright-protected musical composition has the sole right to reproduce it in any material form. If you want to manufacture an album that includes a cover song, you need to obtain permission from the person or people holding the copyright in the song. This permission takes the form of a mechanical license, which is a contract between the party making the reproductions and the party administering the copyright in the song.

You may be familiar with the Canadian Musical Reproduction Rights Agency (CMRRA) if you covered a song for a physical album. CMRRA issues mechanical licenses on behalf of the copyright owners represented by the organization for 8.3 cents per song, per copy manufactured (CDs, cassettes, and vinyl), where the playing time is 5 minutes or less.

As the copyright holder in your music, you want the label paying you a mechanical royalty. The label may try to limit this amount, for example by having you accept getting paid up to a certain limit of songs, even if your album has more songs (they will pay you for 10 songs even if your album has more than 10 songs). Another way is through the concept of controlled compositions, which generally refers to musical compositions written or composed, in whole or in part, by the performing artist. A label may require that if the song is a controlled composition, you should be entitled to less than the statutory rate (the 8.3 cents). When negotiating this, consider what you have promised from these mechanical royalties to others, including your producer. When negotiating your producer agreement, take future potential controlled compositions clauses into consideration.

Release & Marketing

Ideally, you’ll receive a commitment for a specific release, with consequences should that promised release not be fulfilled. If you are signing a deal for a specific territory, which isn’t the biggest territory in your world domination plan, one consideration is having the ability to control the release date so that it’s consistent with the release date in that specific other territory (hint: the U.S.). For marketing, ideally there’s a specific commitment and, to the extent possible, you’re involved with the plan.

 

Accounting & Audits

The label should provide you statements outlining everything related to the sales of your music and pay you concurrently. Questions here include how often, what if any money will be held back (reserved) by the label in case there are returns, the process you can take should you believe the statement is inaccurate, and who pays for an audit depending on what it reveals. The time limits to start a dispute (such as getting paid) should be no less than what the law provides as a minimum.

Representations & Warranties

This section covers commitments you and the label are making to each other. Generally speaking, it’s reasonable that you confirm that you’re not prohibited from entering into the agreement. The label doesn’t want you to have prior obligations that overlap their rights. They also want to ensure the original music you provide is actually original. It’s reasonable that the label also provide you representations and warranties, from confirmation of its authority to enter into the agreement to not being entitled to incur third party expenses that are actually related party expenses.

Breaching the Agreement

If you think the label didn’t fulfill their obligations, namely paying you sufficiently and/or on time, there should be a process in place. Likewise, the label should have a process in place if you don’t fulfill your obligations, namely not delivering the required music. There is generally an opportunity to fix the problem, referred to as curing the breach or default. The consequences for uncured breaches should be clearly set out.

In Summary

This blog merely scratches the surface of some of the topics to keep in mind when reviewing and negotiating a record label agreement. Even presented to you as standard form, or if you’re being told to take it or leave it, it’s important to understand the terms of the deal. Once it’s understood, either on your own or with the assistant of an entertainment lawyer, you may wish to obtain more favourable terms for what will hopefully be a very successful relationship.

Being a musician is a business, and from the start, you should plan for success – but you should also be prepared should the relationship not pan out as planned.

Byron Pascoe is a lawyer with Edwards PC, Creative Law. This boutique law firm provides legal services to Music, Digital Media, Game, TV, Film, and Animation industry clients. For more information and articles, please visit www.edwardslaw.ca or email Byron at byron.pascoe@edwardslaw.ca.

This article is for general informational purposes only and is not to be construed as legal advice. Please contact Edwards PC, Creative Law or another lawyer, if you wish to apply these concepts to your specific circumstances.

© 2016 Edwards PC

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