http://www.twolouiesmagazine.com/pdfs/1999/2L_4_1999.pdf
RECORDING CONTRACTS AND “RECOUPABLES”
By Bart Day
As mentioned in previous articles, the typical
recording contract will allow the record company to
reimburse itself (recoup) certain specified costs from
the artist’s future royalties, before any artist royalties
are actually paid to the artist.
For example, if an artist is due $100,000 in royalties,
and at the same time $80,000 of recoupable expenses
have accumulated, the record company will reimburse
itself the $80,000 off the top, and pay the artist
the remaining $20,000 (i.e., the $100,000 minus the
$80,000).
If, on the other hand, the artist’s future royalties
are $30,000, and the total recoupable expenses are
$80,000, then the record company customarily will
have to eat the $50,000 shortfall (i.e., the $80,000 minus
the $30,000), and will not be entitled to go after
the artist personally to collect from the artist any part
of the shortfall.
When negotiating a recording contract, it is of
course in the artist’s best interests to limit as much as
possible the costs which the record company can later
recoup from the artist’s royalties. The outcome of such
negotiations on the issue of recoupable expenses will
depend in part on the artist’s negotiating clout, and
on the particular record company involved. Even so,
there are some customary parameters on what can be
negotiated on the various issues relating to
recoupables, and there are customary limits beyond
which record companies will generally not negotiate.
The most common recoupables are as follows:
1. Recording Costs. The most common traditional
recoupable item is recording costs. This usually includes
not only the recording studio’s time charges
and recording materials (such as tape and outboard
gear), but also rehearsal studio expenses, session fees
paid to session musicians, the cost of transporting
equipment, and miscellaneous other recording-related
expenses. However, “mastering” is not generally considered
a recoupable expense.
In some situations, the producer’s fees will also
be treated as a recoupable expense, depending on how
the deal is structured.
2. Personal Cash Advances. Major labels often
pay cash advances to artists above and beyond the actual
recording costs. For example, the advance for an
album might be $150,000, with $125,000 of that
amount allocated to the estimated out-of-pocket recording
costs, and the remaining $25,000 to be considered
a cash advance to the artist, to be used by the
artist for living expenses, etc. These personal advances
are almost always recoupable from future royalties, at
least for new artists. However, if the artist has substantial
negotiating clout, some or all of the cash advance
may be treated as a non-recoupable signing
bonus.
3. Production Costs of Music Videos. Typically,
one-half (50%) of the cost of producing music videos
will be recoupable from the artist’s future record sales
royalties. Recording contracts often also provide that
the other one-half of the video production costs are
recoupable from video-related monies potentially
payable by the record company to the artist — for
example, royalties payable to the artist from acrossthe-
counter music videos sales (though as a practical
matter such royalties are rarely generated in any significant
amounts, except in the case of very successful
artists).
4. Independent Promotion. If the record company
hires outside (“independent”) promotion people
to promote a record to radio stations, usually onehalf
(and sometimes all) of the “independent promotion”
costs will be recoupable. The exact percentage
will depend on the artist’s negotiating leverage. If the
artist has any negotiating clout at all, recoupability can
usually be kept to 50%, and if possible, independent
promotion costs should be totally non-recoupable.
It should also be mentioned that typically none
of the costs of the record company’s own in-house
normal promotional efforts should ever be considered
recoupable.
5 “Special Promotion”. Some contracts will provide
that “special promotion” expenses (but not “normal”
promotion expenses) will be recoupable. It is
very important that the term “special promotion” be
specifically defined in the contract. Otherwise, there
are likely to later be disagreements between the artist
and record company, as to whether particular expenses
should in fact be considered “special promotion” expenses
(as opposed to “normal” promotion expenses),
and hence recoupable.
6. Tour Support. Years ago, tour support for
concert tours was almost always totally non-recoupable.
Today, however, tour support is often one hundred
percent (100%) recoupable.
The 100% recoupability of tour support for concert
tours is to be distinguished from tour support for
so-called “talk tours,” where the record company at its
own expense sets up tours for press interviews, radio
station visits, “meets and greets,” in different locations,
not involving any concert performances. Due to the
high cost of performance touring, these “talk tours”
have become increasingly common in recent years for
certain genres of artists. The cost of such “talk tours”
is generally not recoupable from the artist’s future royalties.
7. Artwork. Artwork costs are generally not recoupable.
However, many recording contracts provide
that if the label incurs extra and unusual expenses
due to the fact that the artist has requested or approved
“special” artwork or packaging, the label will be entitled
to recoup the additional and non-standard costs
involved.
RED FLAG ISSUES
Sometimes one will encounter an independent
label contract providing that the record company will
be entitled to recoup not only the various expenses
mentioned above, but also in-house promotion expenses,
and even sometimes the cost of mastering and
(in extreme cases) the cost of manufacturing records.
These types of costs (particularly manufacturing
costs) should, of course, never be recoupable. If
they are, it is extremely likely that the artist will never
earn a significant amount of royalties, if any at all. In
effect, what the record company is doing here is making
the artist shoulder the large bulk of the total costs
from the artist’s relatively small share of the total
record sales income. No reputable record company
will try to recoup manufacturing costs and in-house
promotion costs from the artist’s royalties.
The comment just made assumes, however, that
the contract involved is an artist-record company recording
agreement, which typically gives the artist a
royalty of somewhere between twelve percent (12%)
and fifteen percent (15%) of the list price of records
sold. However, there are other types of common agreements
in the music business, such as “artist-producer
development agreements,” “artist-label joint venture
agreements,” and “pressing/distribution (“P & D”)
agreements,” which do allow the recoupment of costs
not normally recoupable under the traditional recording
contract. However, these other types of contracts
are structured very differently than the typical artistrecord
company recording contract, and the artist’s
royalty percentage share is usually much higher under
those other types of agreements.
Therefore, when determining what is reasonable
and what is not reasonable in terms of recoupable
costs, it is extremely important to know exactly what
kind of contract you are looking at, since the appropriate
percentages will vary dramatically from one
kind of contract to the next. You’ll just need to “crunch
the numbers,” and on that basis determine whether
the deal makes economic sense for you or not.
Also, it is extremely important to remember that
any recoupable expenses are normally recoupable only
from “artist royalties,” and not from “mechanical royalties”
(i.e., those royalties paid by a label to band
members because they have written songs on the
band’s records). As a result, band members who wrote
material on the band’s records will typically start receiving
mechanical royalties before they receive any
artist royalties. These “mechanical royalties” should
never be affected by a label’s recoupment rights.
RECOUPABLES AND ROYALTY
ACCOUNTINGS
It is important for an artist (and/or his/her manager
or accountant) to review very carefully all royalty
statements received from the record company, since
record companies sometimes try to recoup expenses
which are clearly not properly recoupable under the
terms of the recording contract.
Sometimes, also, a review of a royalty statement
will indicate that the record company is attempting
to recoup an expense of questionable recoupability. In
other words, the recording contract may not be
particularly clear about whether or not that particular
expense may properly be recouped by the record company
under the terms of the recording contract. In
this situation, the issue will need to be negotiated and
resolved with the label.
Editor’s Note: Bart Day is a Portland-based entertainment
attorney in private practice. He is also the
co-owner of ALLMEDIA, Ltd., a company with offices
in Portland and Los Angeles. ALLMEDIA specializes in
administering the licensing of music for film, television,
commercials, and computer games.
Bart also co-authored a chapter in the new edition
of The Musician’s Business and Legal Guide, a
book compiled by the Beverly Hills Bar Association
and published by Prentice-Hall Publishing (New
York)
The reader is cautioned to seek the advice of the
reader’s own attorney concerning the applicability of the
general principles discussed in this column to the reader’s
own activities.
RECORDING CONTRACTS AND “RECOUPABLES”
By Bart Day
As mentioned in previous articles, the typical
recording contract will allow the record company to
reimburse itself (recoup) certain specified costs from
the artist’s future royalties, before any artist royalties
are actually paid to the artist.
For example, if an artist is due $100,000 in royalties,
and at the same time $80,000 of recoupable expenses
have accumulated, the record company will reimburse
itself the $80,000 off the top, and pay the artist
the remaining $20,000 (i.e., the $100,000 minus the
$80,000).
If, on the other hand, the artist’s future royalties
are $30,000, and the total recoupable expenses are
$80,000, then the record company customarily will
have to eat the $50,000 shortfall (i.e., the $80,000 minus
the $30,000), and will not be entitled to go after
the artist personally to collect from the artist any part
of the shortfall.
When negotiating a recording contract, it is of
course in the artist’s best interests to limit as much as
possible the costs which the record company can later
recoup from the artist’s royalties. The outcome of such
negotiations on the issue of recoupable expenses will
depend in part on the artist’s negotiating clout, and
on the particular record company involved. Even so,
there are some customary parameters on what can be
negotiated on the various issues relating to
recoupables, and there are customary limits beyond
which record companies will generally not negotiate.
The most common recoupables are as follows:
1. Recording Costs. The most common traditional
recoupable item is recording costs. This usually includes
not only the recording studio’s time charges
and recording materials (such as tape and outboard
gear), but also rehearsal studio expenses, session fees
paid to session musicians, the cost of transporting
equipment, and miscellaneous other recording-related
expenses. However, “mastering” is not generally considered
a recoupable expense.
In some situations, the producer’s fees will also
be treated as a recoupable expense, depending on how
the deal is structured.
2. Personal Cash Advances. Major labels often
pay cash advances to artists above and beyond the actual
recording costs. For example, the advance for an
album might be $150,000, with $125,000 of that
amount allocated to the estimated out-of-pocket recording
costs, and the remaining $25,000 to be considered
a cash advance to the artist, to be used by the
artist for living expenses, etc. These personal advances
are almost always recoupable from future royalties, at
least for new artists. However, if the artist has substantial
negotiating clout, some or all of the cash advance
may be treated as a non-recoupable signing
bonus.
3. Production Costs of Music Videos. Typically,
one-half (50%) of the cost of producing music videos
will be recoupable from the artist’s future record sales
royalties. Recording contracts often also provide that
the other one-half of the video production costs are
recoupable from video-related monies potentially
payable by the record company to the artist — for
example, royalties payable to the artist from acrossthe-
counter music videos sales (though as a practical
matter such royalties are rarely generated in any significant
amounts, except in the case of very successful
artists).
4. Independent Promotion. If the record company
hires outside (“independent”) promotion people
to promote a record to radio stations, usually onehalf
(and sometimes all) of the “independent promotion”
costs will be recoupable. The exact percentage
will depend on the artist’s negotiating leverage. If the
artist has any negotiating clout at all, recoupability can
usually be kept to 50%, and if possible, independent
promotion costs should be totally non-recoupable.
It should also be mentioned that typically none
of the costs of the record company’s own in-house
normal promotional efforts should ever be considered
recoupable.
5 “Special Promotion”. Some contracts will provide
that “special promotion” expenses (but not “normal”
promotion expenses) will be recoupable. It is
very important that the term “special promotion” be
specifically defined in the contract. Otherwise, there
are likely to later be disagreements between the artist
and record company, as to whether particular expenses
should in fact be considered “special promotion” expenses
(as opposed to “normal” promotion expenses),
and hence recoupable.
6. Tour Support. Years ago, tour support for
concert tours was almost always totally non-recoupable.
Today, however, tour support is often one hundred
percent (100%) recoupable.
The 100% recoupability of tour support for concert
tours is to be distinguished from tour support for
so-called “talk tours,” where the record company at its
own expense sets up tours for press interviews, radio
station visits, “meets and greets,” in different locations,
not involving any concert performances. Due to the
high cost of performance touring, these “talk tours”
have become increasingly common in recent years for
certain genres of artists. The cost of such “talk tours”
is generally not recoupable from the artist’s future royalties.
7. Artwork. Artwork costs are generally not recoupable.
However, many recording contracts provide
that if the label incurs extra and unusual expenses
due to the fact that the artist has requested or approved
“special” artwork or packaging, the label will be entitled
to recoup the additional and non-standard costs
involved.
RED FLAG ISSUES
Sometimes one will encounter an independent
label contract providing that the record company will
be entitled to recoup not only the various expenses
mentioned above, but also in-house promotion expenses,
and even sometimes the cost of mastering and
(in extreme cases) the cost of manufacturing records.
These types of costs (particularly manufacturing
costs) should, of course, never be recoupable. If
they are, it is extremely likely that the artist will never
earn a significant amount of royalties, if any at all. In
effect, what the record company is doing here is making
the artist shoulder the large bulk of the total costs
from the artist’s relatively small share of the total
record sales income. No reputable record company
will try to recoup manufacturing costs and in-house
promotion costs from the artist’s royalties.
The comment just made assumes, however, that
the contract involved is an artist-record company recording
agreement, which typically gives the artist a
royalty of somewhere between twelve percent (12%)
and fifteen percent (15%) of the list price of records
sold. However, there are other types of common agreements
in the music business, such as “artist-producer
development agreements,” “artist-label joint venture
agreements,” and “pressing/distribution (“P & D”)
agreements,” which do allow the recoupment of costs
not normally recoupable under the traditional recording
contract. However, these other types of contracts
are structured very differently than the typical artistrecord
company recording contract, and the artist’s
royalty percentage share is usually much higher under
those other types of agreements.
Therefore, when determining what is reasonable
and what is not reasonable in terms of recoupable
costs, it is extremely important to know exactly what
kind of contract you are looking at, since the appropriate
percentages will vary dramatically from one
kind of contract to the next. You’ll just need to “crunch
the numbers,” and on that basis determine whether
the deal makes economic sense for you or not.
Also, it is extremely important to remember that
any recoupable expenses are normally recoupable only
from “artist royalties,” and not from “mechanical royalties”
(i.e., those royalties paid by a label to band
members because they have written songs on the
band’s records). As a result, band members who wrote
material on the band’s records will typically start receiving
mechanical royalties before they receive any
artist royalties. These “mechanical royalties” should
never be affected by a label’s recoupment rights.
RECOUPABLES AND ROYALTY
ACCOUNTINGS
It is important for an artist (and/or his/her manager
or accountant) to review very carefully all royalty
statements received from the record company, since
record companies sometimes try to recoup expenses
which are clearly not properly recoupable under the
terms of the recording contract.
Sometimes, also, a review of a royalty statement
will indicate that the record company is attempting
to recoup an expense of questionable recoupability. In
other words, the recording contract may not be
particularly clear about whether or not that particular
expense may properly be recouped by the record company
under the terms of the recording contract. In
this situation, the issue will need to be negotiated and
resolved with the label.
Editor’s Note: Bart Day is a Portland-based entertainment
attorney in private practice. He is also the
co-owner of ALLMEDIA, Ltd., a company with offices
in Portland and Los Angeles. ALLMEDIA specializes in
administering the licensing of music for film, television,
commercials, and computer games.
Bart also co-authored a chapter in the new edition
of The Musician’s Business and Legal Guide, a
book compiled by the Beverly Hills Bar Association
and published by Prentice-Hall Publishing (New
York)
The reader is cautioned to seek the advice of the
reader’s own attorney concerning the applicability of the
general principles discussed in this column to the reader’s
own activities.