The Artist & Record Label Relationship – A Look At the Standard “Record Deal” [Part 1]

[Editors NoteThis is a guest blog written by Justin M. Jacobson, Esq. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. He also runs Label 55 and teaches music business at the Institute of Audio Research.]

 

In our prior installment, we examined the artist and manager relationship and explored a variety of standard clauses as well as negotiations tactics. We now start our initial examination of a few selected clauses from a standard recording industry agreement, better known as a “record deal.”

Once a musician has finished its product (music), the music is then distributed to the public for sale, either physically (CDs, vinyl), digitally (MP3 downloads, internet streams) or in both formats. Distribution is generally handled by a third-party on behalf of the artist unless the artist independently distributes their own music themselves. If an artist utilizes a third-party distributor, one of the industry’s most dominant distributors of recorded music is the recording or “record” label. These companies dispense the musician’s recorded music through a variety of channels, including to “Big Box” Retailers such as Best Buy and Target. Record labels are also involved in digital distribution by providing the work as digital downloads (MP3 format) in digital stores such as iTunes Store and on digital music streaming platforms, such as Spotify and Pandora.

Today’s recording industry landscape has significantly changed from its earlier roots, with many of the older, independent labels being sold and merged into each other. For instance, there are still a variety of major recording labels, such as Capitol Records, Columbia Records, Interscope Records and Atlantic Records; however, most of these are owned by other larger entertainment entities such as Warner Music Group, Universal Music Group or Sony Music Entertainment. In addition, many major labels have also established “vanity” labels. These act as smaller distribution companies where a producer or an artist signs additional artists or producers to this imprint and the “vanity” label then is dispensed to the public by a larger entertainment entity. For example, “Cash Money Records” is a “vanity” label distributed by Republic Records, which is under the Universal Music Group umbrella. There are also a variety of independently owned record labels such Sub Pop Records, Epitaph Records and Norton Records, who operate and distribute works on their own. In addition, there has been a recent rise in “digital only” record labels that function like traditional record labels; but, solely distribute music digitally.

Once an artist selects the appropriate distribution entity, it is standard practice for the parties to enter into an agreement outlining the deal points. To better comprehend this contractual relationship, let us now review a series of common clauses included in many standard record label agreements.

Similar to management agreements, the “term” or length of the agreement is of paramount importance.

TERM – (a) The Term will consist of an initial contract period (“First Contract Period”) and each of the renewal contract periods (“Contract Periods”) for which we will have exercised the options set forth in the next sentence. LABEL will have three (3) separate and successive irrevocable options, each to extend the Term for a further Contract Period. Each option to extend the Term for an additional Contract Period will be exercised automatically. The second Contract Period will be called the “Second Contract Period,” the third Contract Period will be called the “Third Contract Period” and the fourth Contract Period will be called the “Fourth Contract Period”.

(b) The First Contract Period will commence upon the date of Execution and will continue through the later of:
(i) The date twelve (12) months from the date hereof; or
(ii) The date six (6) months after the last day of the month in which Record Label
commercially releases the Album made in fulfillment of the Recording Commitment for the first Contract Period in the United States.

(c) Each subsequent Contract Period will run consecutively, commencing upon the expiration of the immediately preceding Contract Period, and will continue through the later of:
(i) The date twelve (12) months from the commencement of the particular Contract Period; or
(ii) The date six (6) months after the last day of the month in which Company commercially releases the Album made in fulfillment of the Recording Commitment for the first Contract Period in the United States.

This language states that the record label shall have one “firm” or “committed” album release with the “option” for up to three additional albums, totaling a potential four album deal. As it is written, these options are in the label’s sole discretion. In addition, this provision means that the agreement shall commence upon signing and shall end at either the expiration of one year from the signing of the agreement or six months after the last commercially released album. It also states that any subsequent option shall run for a similar period of time.

Since most record distribution deals contain similar language, an artist can attempt to negotiate specific parameters that are required in order for the record label to exercise one of its options. For instance, an artist could provide language that affords the label with the right to exercise an option for an additional album if the prior album reaches a specified sales figure (i.e., selling 20,000 copies of an album) or if the release recoups a certain specified percentage of an advance provided to the artist by the label (i.e., 75% of the preceding advance was recouped).

Once the “term” of an agreement is established, another important clause to decipher is the definition of what constitutes “delivery” of an “album” to satisfy an artist’s “recording commitment.”

Delivery Requirement – During each Contract Period, Label will cause the Artist to record and Artist will Deliver to Label Masters sufficient to constitute one (1) Album (the “Recording Commitment”). An “album” shall consist of approximately twelve (12) tracks with a total duration of approximately seventy five (75) minutes (the “Album”). In order for an Album to be “Delivered” under this Agreement, it must be contained in such format of which the Label advises the Artist, in the proper form for the production of the parts necessary for the manufacture of commercial Records, which shall be delivered to Label together with all materials, clearances, consents, approvals, licenses and permissions necessary to commercially release the applicable album. Each Album shall be subject to the Label’s approval as being technically and commercially satisfactory.

Further, unless Label otherwise expressly consents in writing, Artist will ensure that the Artist does not record Performances in fulfillment of the Recording Commitment that are: (1) not recorded in a recording studio (i.e., “In Concert” or “Live” performances); (2) instrumental Performances; (3) solely speech or spoken word; (4) not in the English language; (5) remixed or re-edited or mixes (e.g., extended mixes of an Album Master) or otherwise altered versions of Performances previously recorded; (6) based on an overall theme (e.g., a Christmas Album); or, (7) Performances of more than one Composition (e.g., a medley).

Under a recording agreement, the “delivery” of an album is an important point of contention between the label and artist. For instance, traditional language, such as in the clause above, requires that any album submitted to the record label must be both “technically” and “commercially” satisfactory to constitute a “delivered” album under an artist’s “album commitment.” An album is “technically” satisfactory when the master is technically well-made and able to be utilized to manufacture CDs, records, etc. This is fairly easy to satisfy, as any track that was recorded, mixed and mastered at a reputable recording studio or by a reputable professional, should suffice. Conversely, an album is only “commercially” satisfactory, if and only if, the label believes the album will sell. This means that the album is “satisfactory for commercial exploitation,” which is highly subjective. In negotiating this clause, an artist could try to limit the satisfaction of the “delivery” with an album that is “technically” satisfactory as opposed to one that is both “technically” and “commercially” satisfactory. This is especially important in emerging musical genres, such as electronic-dance music, where there are often quick and unpredictable listenership shifts whereby an artist or a type of musical genre which was once highly marketable is now no longer. If the label rejects an artist’s delivery of an album, it prevents any additional progress within the contract, such as the issuance of additional monetary advances. This situation may also arise where an artist is signed to a record label and then takes several months to finalize their album. If during this time period, the entire musical landscape shifts, the artist’s music may become outdated and not commercially satisfactory to the label, who feels they can now no longer sell this material.

In addition, the above clause defines one “album” as approximately twelve songs totaling seventy-five minutes; however, there are a variety of recordings that do not constitute a “track” sufficient to count toward an artist’s “album commitment” to the record label. For example, the language above states a “live” recorded performance does not constitute an acceptable track unless the record label permits it. Furthermore, a track that is solely instrumental or solely acapella will not count unless the label says so. Additionally, any foreign language tracks, remixes of original tracks or “theme” tracks, such as a Christmas or holiday album, will not count without approval from the label. An artist can always attempt to negotiate that a particular “live” version of a track counts toward the “album;” but, ultimately, the label may not agree or may only agree to allow this one particular track as opposed to removing the restriction entirely.

Another essential clause in a standard recording contract is the “advance” or “advance of recording funds” section. The negotiation of this paragraph has the potential to severely impact an artist’s career as this is the “money” the artist gets for signing the deal and are the funds the musician has available to actually record and finalize their album.

Advances/Recording Funds: Label will provide to Artist the following Recording Funds (inclusive of all producer advances and recording costs), which shall be recoupable from any and all royalties and any other agreements between the parties hereto. “Any other agreement,” in this paragraph, means any other agreement with Label relating to Artist’s Recordings or relating to Artist as a recording artist or as a producer of Recordings of Artist’s own performances.

(a) “Recording fund” advances for the Albums shall be subject to the following “minimums” and “maximums”:

(b) No respective recording fund shall exceed the “maximum funds” set forth in Paragraph(a). If the Artist fails to earn an amount which is the equivalent of one hundred (100%) percent of the proceeding “Recording Fund” advance as earned artist royalties in respect bearing units through normal retail channels in the United States of the Album, then the “Minimum” amount listed in Paragraph(a) shall be provided to Artist by Label. If the Artist earns an amount which is the equivalent of at least one hundred the proceeding “Recording Fund” advance as earned artist royalties in respect bearing units through normal retail channels in the United States of the Album, then the “Maximum” amount listed in Paragraph(a) shall be provided to Artist by Label.

(c) Label shall pay Artist one-half (1/2) of each Recording Fund advance listed in Paragraph(a) hereunder upon commencement of recording for each respective Album. The balance of each respective recording fund advance will be payable to Artist within thirty (30) days of the technically and commercially satisfactory delivery of each completed Album to Label.

As it is stated above, each album released by the label coincides with an additional “advance” of recording costs so that the artist may complete its album obligation to the label. Typically, most labels want approval over the recording budget; and, if any money remains from the recording funds after paying all the associated recording, mixing, editing and mastering costs, the artist gets it. If the musician requires additional funds to record and finalize the album, the artist must usually go into their own pocket to pay the difference. However, in select situations, the label may choose to pay the difference; and, in those instances, the label treats the additional payment as an additional recoupable advance. This situation could arise when there is no other way for the artist to obtain the funds to finish the album; and, the label would rather accept a finished album that costs a bit more than originally budgeted for than an unmarketable, unfinished album. The “minimum” amount listed above is known as the “floor.” As the above clause states, if an artist fails to fully recoup their entire prior advance from the label, they will only receive the “minimum” amount listed for their next album. Conversely, the “maximum” listed above is known as the “ceiling.” This is the highest amount that the label will provide to the artist for their next album no matter how good the prior albums sales were. As the proceeding clause states, if an artist does fully recoup their prior advance, they will receive the “maximum” amount listed for their next album.

In most instances, any advance provided by the label to an artist is fully recoupable from the royalties earned on the material. This means that after the label advances a specified amount to the artist, the label keeps any and all royalties earned by the artist for the recordings until the original amount is paid back. This is further exemplified as most clauses state that the amounts subject to recoupment by the label include “all amounts paid to you or on your behalf, or otherwise paid in connection with this agreement.” Thus, all the expenses the label pays including, to name a few, any
recording costs, music video production costs, studio session players and marketing and promotions for the album. They are generally all recouped prior to the artist receiving any additional monies. This is why the actual “minimums” and “maximum” are subject to extensive negotiations, since the amount the artist initially takes subsequently impacts what they will receive in the future, if anything.

The royalties earned by an artist under this agreement and in most standard ones are typically subject to cross-collateralization. This means that any monies advanced by the label “under this or any other agreement between the parties” shall be recouped from any and all streams of income that the label is entitled to. For instance, if the label has a publishing deal with the artist, the recording company could recoup the funds it advanced to create an album from the artist’s publishing monies. Similarly, if an ancillary income arrangement exists with the artist, the label could potentially recoup the funds it advanced to create the recorded music from the artist’s touring monies or from the artist’s merchandise sales, or any other income that is included in the agreement with the artist. Conversely, an agreement that is not cross-collateralized permits the label to only recoup the funds it advanced for the creation of recorded music from the funds earned from the sale of the music instead of the label recouping the funds of any potential stream of income the label is entitled to. Ideally, an artist should attempt to negotiate that the agreement not be cross-collateralized; but, this may be a hard bargaining point, as the label may insist on cross-collateralizing any income earned to reimburse itself for the costs it has already advanced to the talent.

In addition, it is a common industry practice that in most every recording deal that an advance is non-returnable. Therefore, there is no need for the artist to re-pay the money provided to the artist by the record label. This is true even if the artist ends up “flopping” and never recouping the original advance amount from the royalties it earns from the sale of its music.

These are just a few of the main points that need to be agreed upon between the parties. We will explore some additional clauses typically included in many standard recording agreements in our next installment.

This article is not intended as legal advice, as an attorney specializing in the field should be consulted. Some of the clauses have been condensed and/or edited for content purposes, so none of these clauses should be used verbatim nor do they act as any form of legal advice or counseling. We are also aware of the importance of streaming recordings; but, we will need to leave that for another day.

Part 2: The Artist & Manager Relationship – A Look At Recording Industry Management Agreements

[Editors Note: This is a guest blog written by Justin M. Jacobson, Esq. Justin is an entertainment and media attorney for The Jacobson Firm, P.C. in New York City. He also runs Label 55 and teaches music business at the Institute of Audio Research. Read the Part One of this two-part installment here.]

 

We will continue from our prior installment on “The Artist & Manager Relationship.” We will now explore some additional contract clauses included in most management agreements as well as a few negotiation tactics for these clauses.

Another essential matter that needs to be ironed out is the “term” that the artist is signed to the manager. Typical language outlining the term and options is below:

Term – The term of this agreement will be for an initial period of one (1) year commencing on the date hereof (the “First Contract Period”) plus the additional “Contract Periods” if any, which Term may be extended by Manager’s exercise of one or more of the options granted to Manager below.

Options – Artist hereby irrevocably grants to Manager three (3) separate consecutive options to extend the Term for a “Second”, “Third”, and “Fourth” Contract Period. Each such option consist of one (1) year each and will be exercised automatically by Manager at the end of the then current Term unless Manager gives Artist written notice to the contrary no later than thirty (30) days prior to the date that the then current Contract Period would otherwise expire.

A typical management agreement term can last for as little as 1 or 2 years. But, it can be for as long as 5 or 6 years, or even more. The terms of an agreement are traditionally structured with a minimum of one year followed by several options for additional years. Sometimes, the “term” is based on “album cycles” rather than specified calendar years. In this situation, the “term” starts with the commencement of recording the album and lasts until the end of the tour or associated promotional activities for that album. This time period could end up lasting longer than one calendar year. Similar to the language above, usually the options are automatically exercised by the manager. This provides the manager with the right to choose to terminate the agreement by providing notice to the artist.

If they do nothing, than the option is exercised and the agreement continues. Ultimately, this is a point that should be negotiated between the parties as the agreement could require mutual approval to exercise an option or it could include a set milestone that must be reached for an option to be exercised (i.e. artist must earn $10,000 during the one year term for the option to be exercised or obtain a recording/distribution agreement).

Other possible limitations on the term of the agreement could be that if the artist doesn’t earn a specified amount in a given time frame, then the artist is free to terminate the agreement. If this option is selected, a manager should ensure that any offers that the artist turns down as well as those that are accepted are included in this total amount. This protects the manager as an artist cannot simply turn down valid offers to reduce the income earned in order to get out of the contract. Conversely, an artist should insist that for an offer to count toward this minimum, it must be similar to those the artist had previously accepted. This prevents a manager from simply providing nominal or unsatisfactory offers in an attempt to continue extending the management arrangement.

Since a manager is entitled to receive compensation for any agreement entered into or substantially negotiated during the term of the agreement, a “sunset” clause can be included to reduce the amount that a manager is entitled to after the expiration of the term of the agreement.

Typical language for a “sunset” clause is as follows:

Following the expiration or termination of the Term hereof, Artist agrees to pay Manager for a period of three (3) years a commission of fifteen percent (15%) from any contracts entered into during the Term and all renewals, extensions, additions, modifications, amendments, substitutions or supplements of all contracts, engagements and commitments entered into or substantially negotiated for during the Term hereof. Subsequent to the termination of this first three (3) year period, there shall be modifications downward of Manager’s commission percentage in the following manner: (i) a reduction to twelve (12%) percent for the second three (3) year period subsequent to termination, (ii) a reduction to ten (10%) percent for the third three (3) year period following termination, and (iii) Subsequent to the end of the third three (3) year period the Manager shall no longer be entitled to receive commission.

A “sunset” clause is used to reduce a manager’s commission in the years following expiration of the term of the management agreement. This clause reduces the percentage the artist owes to the manager over time and eventually extinguishes this obligation entirely. This is important for an artist who is leaving one manager and signing with another, as the new manager would typically want their standard commission rate (15-20%) and your prior manager would still be entitled to their percentage under the “sunset” clause (15-20%). This situation severely limits the amount an artist earns; and, therefore, it is prudent to ensure that the prior manager’s percentage reduces and eventually ends at a specified time.

Another method an artist can utilize to potentially terminate a management agreement early is the inclusion of a “Key Man” clause. This clause protects a musician’s relationship with a particular individual by stipulating that the personal manager (the “key man”) must represent the musician or else the musician may terminate the contract.

This applies if the “key man” is deceased, terminated or otherwise is no longer affiliated with the management company that the artist is currently signed to. The particular individual needs to be listed by name in the agreement for this clause to be operative. However, the inclusion of this type of language does not obligate the artist to leave the management company; it just provides the artist with the opportunity to do so if they choose.

A standard “key man” clause could reads as follows:

During the Term, John Doe shall be primarily responsible for Manager’s activities under this Agreement. Notwithstanding the foregoing, it is understood and agreed that John Doe may delegate day-to-day responsibilities to other employees of Manager provided John Doe remains primarily responsible for the activities and services provided by Manager. Notwithstanding anything to the contrary contained herein, in the event that John Doe shall cease to be employed by Manager or shall cease to be primarily responsible for Manager’s activities hereunder (“Key- Man Event”), Artist shall have the right to terminate the Term of this agreement effective upon the date of Artist’s notice to Manager of such Key-Man Event.

Overall, a personal manager is an essential member of your music business team and one that can truly make or break your career. They can be a driving force behind your success or a stumbling block to your advancement; consequently, the negotiation of a written management agreement helps to ensure that an initial managerial arrangement doesn’t have a negative impact on an artist’s career going forward and that all parties fully understand what they sign and feel protected.

This article is not intended as legal advice, as an attorney specializing in the field should be consulted. Some of the clauses have been condensed and/or edited for content purposes, so none of these clauses should be used verbatim nor do they act as any form of legal advice or counseling.