More and more recording artists are taking legal action against the major record label Universal for underpaid royalties. The issue concerns the interpretation of accounting provisions in recording contracts entered into before (i) the internet was invented and (ii) the consequential digital sale or licensing of recordings was ever contemplated.
Record labels take the view that where a recording contract is silent on the internet and how royalties will be calculated for digital/non-physical exploitation (downloads), then recording artists should be paid the same royalty rate for downloads as they are paid for physical sales. In other words, the royalty paid to the recording artist is calculated in the same way irrespective of whether their album was downloaded from iTunes or bought as a physical CD from HMV.
Some recording artists on the other hand have been arguing that on further consideration these two methods of exploiting music (physically vs. digitally) are quite different, so the way the respective royalty rates are calculated should be different too -
- A physical sale involves the record label having to go to the expense of manufacturing and distributing something physical, such as a record or CD. Some recording artists say that this therefore justifies the traditionally lower royalty rate paid to an artist, usually being between 18% to 25% of the sale price.
- Where music is downloaded from an online store, these recording artists argue this is more akin to a licence of a recording. Pre-internet recording contracts (which did not give any royalty rate for non-physical sales/downloads) usually gave the recording artist a much higher royalty rate for income arising from the licence of recordings, because there are little or no related distribution or manufacturing costs involved and usually the rate is in the region of 50% of net licence fees received.
One such artist involved in litigation is Chuck D. Together with the rest of the hip hop band Public Enemy, he signed a recording contract with the former independent record label Def Jam back in the 1980’s when it was only possible to buy music in a physical format as a record etc. Def Jam’s recording contract was not ‘future-proofed’ and said nothing about internet sales or digital rights licensing and how the band would be paid for such future exploitation via a non-physical formats.
Universal Music bought Def Jam in 1998, thereby acquiring the rights to 5 of Public Enemy’s albums together with the legal rights and contractual obligations contained in the original recording contract. Universal has been paying Public Enemy in the same way they pay their other artists signed to pre-internet recording contracts, treating a download not as a licence but instead the same as a physical sale (i.e. meaning they have to pay only the much lower royalty rate which in the case of Public Enemy is 18% of net sales).
Chuck D is therefore fighting for the higher royalty rate of 50% of net income. The rapper claims Universal owes its artists and producers "hundreds of millions of dollars" from the sale of downloads and ringtones. The case is due to be heard later this year.
Recording contracts entered into after the internet was invented specifically provide for a royalty rate for downloads. Music lawyers often also try to future-proof their contracts by giving a fixed royalty rate for the sale or licence of recordings in other unknown ways usually, using the words “exploitation in any other format now known or yet to be invented” to be on the safe side.
For more information about recording contracts, digital licensing and royalties please contact Chris Phillips on 020 7288 4706, chrisphillips@boltburdon.co.uk