Royalty Audit Law Takes Effect In California

On January 1, 2005, the Recording Industry Accounting Practices Act took effect in California. (See Title 10, commencing with Section 2500, of Part 4 of Division 3 of the California Civil Code.) The law, which was proposed by California State Legislator Kevin Murray (D-Culver City), gives artists minimum statutory audit rights that override several of the disputed audit provisions of standard recording agreements.

The legislative intent of the measure was to “authorize a royalty recipient under a contract for the production of sound recordings, notwithstanding any provision of the contract, to audit the books and records of a royalty reporting party … to determine if the royalty recipient has earned all of the royalties due pursuant to the contract.” The legislature also found, “This act is important public policy and establishes minimum audit procedures that apply to all royalty contracts in the recording industry.”

The statute defines a “Royalty Recipient” as “a party to a contract for the furnishing of services in the production of sound recordings … who has the right to receive royalties under that contract.” This portion of the law may provoke argument and challenges as to who may be considered a royalty participant. Presumably, producers signed directly to a record company to produce the company's featured artist would be covered under the act. But a question could be raised as to the rights of a producer who has contracted with the featured artist's production company and not the label directly.

For example, in the case in which a producer executes a Producer's Declaration absolving the record label from any liability and obligation to pay royalties directly, will the record company not be subject to the act? Questions might also arise as to the rights of guest artists who render their services through a featured artist's production company. Other concerns could develop regarding the language. Does the act apply to the co-writer of a composition entitled to mechanical royalties pursuant to the controlled composition clause in a featured artist's recording contract protected under the act? These questions may only be answered through future litigation.

Portions of other key provisions of the statute are as follows:

“A royalty recipient may audit the books and records of the royalty reporting party to determine if the royalty recipient earned all of the royalties due the royalty recipient pursuant to the contract, subject to the following:

• A royalty recipient may conduct an audit not more than once per year;
• A royalty recipient shall request an audit within three years after the end of a royalty earnings period under the contract;
• A royalty recipient may not audit a particular royalty earnings period more that once;
• The royalty recipient shall retain a qualified royalty auditor of the royalty recipient's choice to conduct an audit described in this section;
• The royalty recipient may enter into a contingency fee agreement with the auditor;
• A qualified royalty auditor may conduct individual audits of the books and records of a royalty reporting party on behalf of different royalty recipients simultaneously; and
• Except as required by law, a qualified royalty auditor shall not disclose any confidential information obtained solely during an audit without the express consent of the party or parties to whom that information is confidential.”

Proponents of the law maintain that they achieved several key objectives, including, as noted above, allowing artists and producers to hire an auditor on a contingent-fee basis ' thereby eliminating the necessity of paying expensive upfront retainers that had proved to be a major barrier to most artists exercising their right to audit ' and extending the period to request an audit from the standard 1- or 2-year contractual period to 3 years after the end of a royalty accounting period.

While the act states that it shall apply to all royalty contracts in the recording industry, it does not include language stating that the parties cannot agree to waive the act's provisions. Senator Murray's bill, as originally introduced with the support of the Recording Artists' Coalition (RAC) as well as the Artist Empowerment Coalition (AEC), imposed a fiduciary duty for labels to accurately report and pay royalties. The bill also sought statutory penalties of treble damages and attorney fees for labels that routinely and systematically underreport royalties. However, vigorous opposition by the Recording Industry Association of America (RIAA) ultimately led to the removal of the fiduciary and penalty language from the final version of the approved measure.

New York Legislation On Recording Contract Terms

California hasn't been the only state with legislative activity that would affect the rights of recording artists. In 2003, a measure limiting the term of years of recording agreements was introduced into the New York State Legislature. Over the past two years, the legislature has debated the merits of this “Artistic Freedom Act of 2003,” which would amend N.Y. Labor Law, Article 20-D, as follows:

Section 743. Applicability. This article applies to all residents of New York State and also applies to all contracts entered into in New York State.

Sections 744. Enforcement. A contract to render personal services executed by an artist and an employer shall be enforceable for a period of not more than three years from the date of execution, unless the artist was represented in the negotiation and execution of such contract by qualified counsel experienced with entertainment industry law and practices, in which case the contract shall be enforceable for a period of not more than seven years from the date of execution.

Section 745. Waiver. The time frame established by this article concerning the enforcement of contracts shall not be waived, and any clause, covenant, or agreement to waive such time limit shall be null and void and may not be enforced against the parties in any court or other adjudicative proceeding.

The Artistic Freedom Act was designed to protect recording artists from the restrictions of overly long personal service contracts by replicating the current New York law restriction on personal service contracts for minors that establish a time limit of 3 years for unrepresented artists and 7 years for artists represented by qualified counsel. Of course, the interpretation of who is qualified counsel and who is not will likely be the cause for argument from both record labels and artists, should the legislation be approved.

The RIAA opposes this legislation arguing that, due to the high-risk nature of the recording industry, labels need long-term contracts to recoup their investments in artists. In addition, the RIAA contends that the economy of the states that enact such legislation would be negatively impacted by the relocation of label operations to states that don't have such restrictive regulations.

The Artistic Freedom of Act was referred to the NY Assembly's Labor Committee in early 2004 where it never proceeded to a vote. But AEC general counsel L. Londell McMillan indicates that it will be reintroduced into the state assembly in early 2005.

On January 1, 2005, the Recording Industry Accounting Practices Act took effect in California. (See Title 10, commencing with Section 2500, of Part 4 of Division 3 of the California Civil Code.) The law, which was proposed by California State Legislator Kevin Murray (D-Culver City), gives artists minimum statutory audit rights that override several of the disputed audit provisions of standard recording agreements.

The legislative intent of the measure was to “authorize a royalty recipient under a contract for the production of sound recordings, notwithstanding any provision of the contract, to audit the books and records of a royalty reporting party … to determine if the royalty recipient has earned all of the royalties due pursuant to the contract.” The legislature also found, “This act is important public policy and establishes minimum audit procedures that apply to all royalty contracts in the recording industry.”

The statute defines a “Royalty Recipient” as “a party to a contract for the furnishing of services in the production of sound recordings … who has the right to receive royalties under that contract.” This portion of the law may provoke argument and challenges as to who may be considered a royalty participant. Presumably, producers signed directly to a record company to produce the company's featured artist would be covered under the act. But a question could be raised as to the rights of a producer who has contracted with the featured artist's production company and not the label directly.

For example, in the case in which a producer executes a Producer's Declaration absolving the record label from any liability and obligation to pay royalties directly, will the record company not be subject to the act? Questions might also arise as to the rights of guest artists who render their services through a featured artist's production company. Other concerns could develop regarding the language. Does the act apply to the co-writer of a composition entitled to mechanical royalties pursuant to the controlled composition clause in a featured artist's recording contract protected under the act? These questions may only be answered through future litigation.

Portions of other key provisions of the statute are as follows:

“A royalty recipient may audit the books and records of the royalty reporting party to determine if the royalty recipient earned all of the royalties due the royalty recipient pursuant to the contract, subject to the following:

• A royalty recipient may conduct an audit not more than once per year;
• A royalty recipient shall request an audit within three years after the end of a royalty earnings period under the contract;
• A royalty recipient may not audit a particular royalty earnings period more that once;
• The royalty recipient shall retain a qualified royalty auditor of the royalty recipient's choice to conduct an audit described in this section;
• The royalty recipient may enter into a contingency fee agreement with the auditor;
• A qualified royalty auditor may conduct individual audits of the books and records of a royalty reporting party on behalf of different royalty recipients simultaneously; and
• Except as required by law, a qualified royalty auditor shall not disclose any confidential information obtained solely during an audit without the express consent of the party or parties to whom that information is confidential.”

Proponents of the law maintain that they achieved several key objectives, including, as noted above, allowing artists and producers to hire an auditor on a contingent-fee basis ' thereby eliminating the necessity of paying expensive upfront retainers that had proved to be a major barrier to most artists exercising their right to audit ' and extending the period to request an audit from the standard 1- or 2-year contractual period to 3 years after the end of a royalty accounting period.

While the act states that it shall apply to all royalty contracts in the recording industry, it does not include language stating that the parties cannot agree to waive the act's provisions. Senator Murray's bill, as originally introduced with the support of the Recording Artists' Coalition (RAC) as well as the Artist Empowerment Coalition (AEC), imposed a fiduciary duty for labels to accurately report and pay royalties. The bill also sought statutory penalties of treble damages and attorney fees for labels that routinely and systematically underreport royalties. However, vigorous opposition by the Recording Industry Association of America (RIAA) ultimately led to the removal of the fiduciary and penalty language from the final version of the approved measure.

New York Legislation On Recording Contract Terms

California hasn't been the only state with legislative activity that would affect the rights of recording artists. In 2003, a measure limiting the term of years of recording agreements was introduced into the New York State Legislature. Over the past two years, the legislature has debated the merits of this “Artistic Freedom Act of 2003,” which would amend N.Y. Labor Law, Article 20-D, as follows:

Section 743. Applicability. This article applies to all residents of New York State and also applies to all contracts entered into in New York State.

Sections 744. Enforcement. A contract to render personal services executed by an artist and an employer shall be enforceable for a period of not more than three years from the date of execution, unless the artist was represented in the negotiation and execution of such contract by qualified counsel experienced with entertainment industry law and practices, in which case the contract shall be enforceable for a period of not more than seven years from the date of execution.

Section 745. Waiver. The time frame established by this article concerning the enforcement of contracts shall not be waived, and any clause, covenant, or agreement to waive such time limit shall be null and void and may not be enforced against the parties in any court or other adjudicative proceeding.

The Artistic Freedom Act was designed to protect recording artists from the restrictions of overly long personal service contracts by replicating the current New York law restriction on personal service contracts for minors that establish a time limit of 3 years for unrepresented artists and 7 years for artists represented by qualified counsel. Of course, the interpretation of who is qualified counsel and who is not will likely be the cause for argument from both record labels and artists, should the legislation be approved.

The RIAA opposes this legislation arguing that, due to the high-risk nature of the recording industry, labels need long-term contracts to recoup their investments in artists. In addition, the RIAA contends that the economy of the states that enact such legislation would be negatively impacted by the relocation of label operations to states that don't have such restrictive regulations.

The Artistic Freedom of Act was referred to the NY Assembly's Labor Committee in early 2004 where it never proceeded to a vote. But AEC general counsel L. Londell McMillan indicates that it will be reintroduced into the state assembly in early 2005.