Comments prepared for a July 23, 2002 joint hearing of the California Senate Judiciary Committee and the Select Committee on the Entertainment Industry in order to investigate the record industry’s accounting practices. In these comments, FMC argues that the music industry in America is fundamentally broken. One crucial mechanism that establishes and props up the legal framework of this failed model is the major label contract. FMC points out some of the most egregious contract clauses to underscore how the standard 60-plus page contract is a monument to legalese, intentionally designed to be obtuse, if not inscrutable. Many artists that sign these contracts, even with the best possible counsel, enter long-term deals that leave them vulnerable to egregious exploitation by the major label system.

The Future of Music Coalition (FMC) joins the Recording Artists’ Coalition (RAC), AFTRA and AFM in supporting State Senator Kevin Murray’s efforts to convene today’s joint hearing of the California Senate Judiciary Committee and the Select Committee on the Entertainment Industry in order to investigate the record industry’s accounting practices.

Any serious examination of these practices must consider the fact that the music industry in America is fundamentally broken. In 1999, less than 1 percent of the total number of albums released sold more than 10,000 copies (1), this in a world where any record selling less than 500,000 copies is considered a commercial failure. Commercial radio airplay is often sold to the highest bidder through a shadowy network of “independent radio promoters.” (2) The dreams of stardom chased by many are met head on with the sad reality that an estimated 75 percent of releases on major labels are not even currently in print, leaving artists with a huge debt to the record companies for which they have no means to pay back and prohibiting consumers from ever purchasing works they may wish to own.

One crucial mechanism that establishes and props up the legal framework of this failed model is the major label contract. The standard 60-plus page contract is a monument to legalese, intentionally designed to be obtuse, if not inscrutable. Many artists that sign these contracts, even with the best possible counsel, enter long-term deals that leave them vulnerable to egregious exploitation by the major label system.

Many entertainment attorneys would agree that there are clauses in the standard industry contract that are completely unilateral and absolutely non-negotiable. Emerging artists are often presented with a “take-it-or-leave-it” scenario when they sign to one of the five major record labels, leaving them little or no room to contest specific clauses. Established, successful artists can use their leverage to negotiate better deals on subsequent contracts, but many clauses in the initial contracts make it difficult for artists – even the successful ones – to know even the most basic information about their position in the contracted arrangement. Many of these clauses involve artists’ access to proper and complete accounting records generated by their label.

For the purposes of today’s hearing we will highlight an example of a clause in major label contracts that relate to accounting:

Auditing By The Artist Clause

A typical “auditing by the artist” clause reads:

Company will maintain books and records which report the sales of Phonograph Records, on which royalties are payable to you. You may, but not more than once a year, examine those books and records… You may make those examinations only for the purpose of verifying the accuracy of the statements sent to you under paragraph 10.01…You may make such an examination for a particular statement only once, and only within one (1) year after the date when Company is required to send you that statement under paragraph 10.01… You will be required to notify Company at least thirty (30) days before the date when you plan to begin it. Company may postpone the commencement of your examination by notice given to you not later than five (5) days before the commencement date specified in your notice; if Company does so, the running of the time within which the examination may be made will be suspended during the postponement. If your examination has not been completed within one (1) month from the time you begin it, Company may require you to terminate it on seven (7) days’ notice to you at any time; Company will not be required to permit you to continue the examination after the end of that seven (7) day period…You will not be entitled to examine any manufacturing records or any other records that do not specifically report sales or other distributions of Phonograph Records on which royalties are payable to you. [emphasis added]

An artist’s royalties are calculated, and certain deductions are made from those royalties, based on the amount of CDs the company has manufactured. Such calculations are beyond the scope of this document. However, if an artist chooses to investigate the validity of his/her royalty payments and deductions, the actual number of CDs manufactured is not verifiable by the artist. This would be the equivalent of the IRS auditing a corporation, but only checking the accuracy of the calculations themselves and not the actual underlying profits and revenues the calculations are based on, which really isn’t an audit at all.

Moreover, there is no audit right applicable to major label foreign affiliates, and no specific obligation to require the foreign affiliates to pay royalties to the U.S. company, which also causes a major financial impact on artists. Thus, an artist is left with no real way of knowing how many records were manufactured, which is crucial to determining what royalties may actually be due, or how much should be deducted from his/her royalty payments with respect to the excess manufacturing cost clause cited above. The artist is forced to take the label’s word on faith.

This is only one example of the clauses in the standard industry contract and the effects they have on the livelihood of recording artists, but there are many more. In September 2001, Future of Music Coalition attempted to cut through the confusing language by crafting a major label contract critique, which translated the most onerous and confusing contract clauses into plain English and paired them with easy-to-understand critiques written by practicing entertainment attorneys. The contract critique is available on our website at:

http://www.futureofmusic.org/article/article/major-label-contract-clause-critique

We hope this document can be used as a tool to by even those who are completely unfamiliar with the music business can better understand the dangers of signing a standard major label contract, and encourage the dialogue that is beginning to emerge from a better-educated public.

Notes

1. David Segal, “They Sell Songs the Whole World Sings: Mass Merchants Offer Convenience, Less Choice,” Washington Post, February 21, 2001, Page A1.

2. Eric Boehlert “Pay for Play,” Salon, March 14, 2001.