September 2002
FIRST BLOOD IS SPILLED AT RECORD INDUSTRY HEARINGS - THE WAR IS ON!!!
By Moses Avalon
September 26 - Los Angeles. Absent the penalty of perjury, Major Label
lawyers testified to a panel of senators in Los Angles that most artists
are happy with their recording contracts. The panel this past Tuesday,
was assembled to entertain arguments as to wether legislation might
be necessary to keep major record labels honest when reporting to their
artists the amount of money earned on their exclusive record contracts.
If enacted this would be the beginning of government regulation of
the music business. A concept that, ironically, artists are initiating.
The hearing was an informal Joint Hearing of the Senate Committee
and Senate Select Committee on the Entertainment Industry. Lawyers
and spokespersons from both sides were invited to air their points
of view.
Major
Labels emphasized that artists, by and large, are "happy
with the current system," and based this on the fact that so few
artists audit their labels or sue for breach of contract. Meanwhile,
the artists representatives indicated that this was only the case because
many feel intimidated or, in the case of older, more powerful stars,
believe that an audit would be useless. The following three points
were the center piece of the day's comments:
1)
By contract, artists are prohibited from showing royalty statements
to third parties.
Normally this would not include their mangers, lawyers,
consultants, or others who could aid them in getting paid, but apparently
this is not necessarily the case. Senator Kevin Murray, leading the
initiative for artists' rights, claimed the that Cary
Sherman, Chief
Counsel for the RIAA himself, said to him in an interview, that RIAA
members (the major labels) would sue any artist that broke ranks and
shared information with the Committee. This claim was rejected by Sherman
but supported by others in the room. Don Henley among them, outwardly
dared his record company to sue him for bringing royalty statements
to the hearing. He presented his most recent royalty statement for "Hell
Freezes Over," which showed the panel that even though his contract
called for a no more than a 10% "reserve" on sales of records
shipped, Universal Music had held back more than that for eleven pay
periods (roughly under three years) and that, even though his contract
calls for no free goods in Europe, they had deducted $87,000 in free
goods charges to Europe.
2) All boiler plate recording contracts stipulate that manufacturing
records are exempt from an audit. Senator Battin took particular interest
in this point, wondering how can an artist get an accurate account
of sales if they don't know the number of units produced to start with.
3) Even after an artist has gone through the audit and has found recoverable
money, they are expected to negotiate a settlement with the record
company. Furthermore, their auditors are required to meet with label
executives BEFORE they can release findings to their clients. (Wow?!?)
The net result is that even after an audit the artist can expect to
get only a fraction of what they are owed. Most would rather not rock
the boat.
Another
interesting contractual speed-bump is that most contracts regulate
who the artist
can hire to do the audit. The proverbial "list" seems
limited to a small cartel of accountants and financial managers who "understand
the way the record business works." The auditor can not be simultaneously
auditing the record company for any other artist or any other record
company. This makes scheduling the few "qualified accounts" on
par with booking Russell Crow for your next motion picture.
Record companies claim that this standard avoids conflicts of interest,
makes the audit process cheaper for the artist--as the auditor's time
will be minimized--and the company's royalty accounting process will
not be held up. But a more likely strategy, as voiced by artist representatives,
is that they are trying to deflect auditors from exaggerating their
claims, in hopes that the settled-upon amount will be somewhere near
what is believed to be owed.
The seasoned artists who testified, admitted that holding out for
large advances on second and third albums acts as an enfilade against
accounting rip-offs. But it is not always successful. This strategy,
however, would exclude artists past their prime and deceased artists,
whose money can be kept by the record companies with virtual impunity.
In
addition, the common strategy of "renegotiation" after
the record is a hit, has meet with opposition as consolidation has
caused record companies to get "mean and lean" in the troubled
economy. Artists' lawyers have reported that they are having "some
tension" with the tradition of getting better terms for their
clients after they have a proven hit. In a shocking statement made
by Back Street Boy, Kevin Richardson, he testified that they have NEVER
received a royalty check, and that they only took a large advance after
their third hit album in a row failed to earn them a penny in royalties.
(Case in point, three albums on a major label is generally about 5
contract years into the term.)
Also,
the wife of Lester Chambers of The Chambers Brothers claimed to have
never
received a royalty check, nor an advance, in upwards
of 30 years. Ms. Chambers claimed that Columbia told her there were
no overseas sales to report because The Chambers Brothers records were
never licensed to an overseas distributor. She believed them until
she started seeing her product on E-Bay and found 22 different foreign
pressings of Chambers Brothers recordings, all by foreign affiliates
of her label, Columbia Records a subsidiary of Sony. Similarly, a member
of The Olympics, of the hit "Hully Gully," was present and
complained that he found his recording on 94 different compilations
world-wide, yet has never received a royalty check.
To defend their actions record companies hired Linda
McLaughlin an
Economist to do a study of record industry profits. She testified that,
on the whole, record companies get only 9% of profits while artists
get 17%. Upon questioning by Senator Murray she admitted that when
calculating the profits artists earned she was including their publishing
money earned from song writing, but when calculating the record company's
earnings she broke apart the record sales profits and excluded publishing
revenue, even when the artist's account was earning money for both
the record and publishing divisions of the same company.
She was also asked to produce comparisons to other industries where
royalties are accruable to vendors and furnishers of product. Sighting
examples like the book publishing industry, where authors are only
required to recoup the actual advance they receive for each book, and
not money that is spent on their behalf (i.e.: promotion). She had
not included such research in her study. Her study was also only limited
to US record labels and not foreign affiliates.
In the afternoon session, representatives of artists steered the conversations
towards establishing government regulated penalties for labels clearly
trying to defraud their artists. A solution that makes everyone uneasy.
Senators on the panel made it clear that Big Brother peeking in their
financial records was probably going to make everybody miserable. But
the tone was clear: unless the majors labels come up with a system,
whereby they agree to a penalty for underreporting royalties, then
the Senators are likely to introduce a bill making the collection of
royalties, especially overseas royalties, a fiduciary duty. This would
give the artists who are victimized by chronic underreporting of royalties
legal remedies beyond submitting to a 2-4 year auditing process, which
normally costs them $30-$40 thousand dollars before the audit begins.
(Most contracts expressly prohibit artists from hiring auditors on
contingency).
An
insider present at the hearing commented, "It was kinda pathetic
watching all the major suits try and defend the indefensible...it was
clear that the Senators want no part of any legislation, but that they
feel it's inevitable if the majors refuse to address any of the artists'
concerns."
Research and commentary for this piece was provided by Pat Spear.
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