Blood is Spilled at Record Industry Hearings - The War is
By Moses Avalon, MusicDish.com
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, held this past Tuesday, was assembled to entertain
arguments as to whether 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
Tuesday's panel 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, 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 managers, 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 (! ro! ughly 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
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
under-reporting 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 under-reporting 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."
and commentary for this piece was provided by Pat Spear.
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