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05/2004 |
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E. Scott Johnson Appeared in the Maryland Bar Journal
One of the many stories, probably apocryphal, about Morris Levy, the infamous late music mogul, has him negotiating in the 1950's with a recording artist who demanded an 8 percent royalty to Levy's percent offer. Exasperated, Levy finally capitulated, exclaiming "Okay, so I'll put 8 percent in the contract, but I'm still going to pay 5 percent!" The truth was probably worse, summed up in Levy's classic rejoinder to artists looking for royalty checks: "Royalty? You want royalty, go to England!" The music business has changed considerably since the 1950's. Royalty rates are much higher. Major corporations dominate the popular music industry and have replaced the colorful, if not always ethical, pioneering independent labels that first brought R&B, rock'n roll and blues recordings to wider audiences. A corps of music business savvy lawyers, accountants and business managers are helping ensure that the bad old days when artists were routinely swindled out of their royalties are not repeated. Some major record companies have rewritten their lopsided early contracts to benefit aging artists who didn't fully participate in the success of their hit records, and some contribute to organizations like the Rhythm & Blues Foundation, which helps financially strapped artists who recorded during the 1940's-60's. But tracking and collecting royalties remains a contact sport. It is a given that record company royalty audits will reveal underpayments. The Internet has fostered an anticopyright culture that insists music should be free and has resulted in a global decline of record sales, and losses in revenue for the record and publishing companies and the songwriters and recording artists that depend on them for royalties. And, despite the arrival of the suits, the music business is still noted for sharp operators who exploit recording artists and songwriters. Anyone who has reviewed a royalty statement from a music publisher, record company or performing rights organization will understand the old saw "music is a business of pennies." Commercially successful recordings earn revenues from many, sometimes millions, of small transactions that produce revenue streams for the record company, music publisher and, ultimately, the recording artist and songwriter. Performing rights organizations such as ASCAP and BMI issue Blanket licenses to radio and television broadcasters and employ sophisticated tracking technologies and statistical sampling methods to identify and allocate performance credits. These represent only pennies, but can add up to substantial earnings or the writers and publishers of popular music. In the United States, the Copyright Arbitration Royalty Panel sets the "statutory rate" for mechanical licenses to reproduce songs on "phonorecords" (defined in the Copyright Act as audio-only sound carriers such CDs, tapes and vinyl records). The 2004 rate is 8.5 cents per song/phonorecord manufactured and distributed or 1.6 cents per minute for recordings over five minutes in length. Earnings in the recording industry principally flow from the two copyrights — sound recording and musical composition — that coexist in recorded music. Sound recording copyrights protect the actual recorded performances and sounds on the master recordings, and derive from the performances and creative contributions made by the performers and producers of the recordings. Typically, an "unsigned" artist's sound recordings are joint works of authorship in which copyright is owned by all of the participants in the recorded performances. Once an artist signs a recording contract, the record company acquires the sound recording copyright. Copyright protection for sound recordings did not exist in the U.S. prior to 1972 (other state and federal laws filled this gap), but contemporary recordings are protected under copyright law, and most successful sound recording copyrights are owned by record companies such as Universal, EMI and Arista. The musical compositions embodied in sound recordings are separately copyrightable and derive from the authorship of the songwriter. The recording artist and songwriter are often the same, but need not be. For example, if a contemporary group performs a "cover" version of a Lennon and McCartney song, a mechanical license must be secured from Sony/ATV Music Publishing, the company owned by Michael Jackson and administered by Sony, which owns the Beatles' music copyrights. Even Capitol Records, when it sells Beatles CDs, must pay mechanical royalties to Sony/ATV. The term "mechanical" as used in the music industry was originally associated with music boxes and piano rolls, which mechanically reproduce music. The Supreme Court rocked the music industry when it held in 1908 that piano rolls were in effect components of a machine and not visually perceptible "copies" of musical compositions that could not infringe the copyrights in the music they reproduced. Congress remedied this in the 1909 Copyright Act, which provided music copyright owners the right to control mechanical reproduction of music and included the right to reproduce music on records, subject to a compulsory "mechanical royalty" rate of two cents per phonorecord — a rate that remained in effect until 1978! The classic split was one cent for the publisher, and one cent for the writer — truly a business of pennies. Today, digital downloads of recordings of music are treated as equivalent to a type of mechanical reproduction even though no physical sound carrier is involved. The term "publisher" is a holdover from the days when music publishers physically printed and sold sheet music, something most music publishers do not do today. A few music publishers specialize in sheet music (e.g., Hal Leonard, Belwin-Mills and Cherry Lane), and license print rights from the administering publisher, which pays a portion of print licensing revenues to the songwriter, but print license revenues today, pale in comparison with other license revenues. Publishing companies today essentially are copyright owners that administer and license rights. Recording artists negotiate with their record companies for royalties from phonorecords and for a percentage of licensing revenues for uses of their recordings in commercials, television, film, audiovisual works and the like. Because record companies recoup advances and recording costs from artist's royalties, but not from mechanical royalties, it is quite possible that a four-member group with one principal songwriter, after selling 300,000 albums, will be unrecouped (i.e., will receive no "artists royalties"), while the songwriter member will receive as much as $200,000 in mechanical royalties (not to mention performance royalties). The amount is dependent upon the number of songs on the album and the terms of the band's recording agreement. Some groups negotiate amongst themselves for a common share of the publishing income, on the theory that the entire group contributed to the initial success of the music, and should share in the earnings from a hit song beyond the life of the original recording. U.S. record companies demand a reduced mechanical royalty rate (75-85 percent of the statutory rate) from their recording artists, pursuant to a "controlled compositions" clause in the recording contract. This practice not followed by record companies in other countries. Public performances of sound recordings by U.S. television and radio broadcasters do not produce royalties for the owners of the sound recording copyrights or featured artists, while they do produce earnings for the owners of the musical composition copyrights. This reflects a distinction in U.S. copyright law between sound recording and musical composition copyrights, which denies a performing right to sound recording copyright owners while granting a performing right to musical composition copyright owners. Some foreign countries provide a performing right for sound recordings, and in those countries sound recordings produce license revenues from airplay, in which the record companies and recording artists share, just as composers and publishers share in the performing license revenues from airplay of musical compositions. With the advent of Internet webcasting of music, U.S. record companies saw the opportunity to change the second class status of U.S. sound recording copyrights and sought legislation that would treat "digital transmissions" as a special category of performances to be controlled by the owner of the sound recording copyright. ASCAP and BMI were already licensing the performing rights for Internet webcasts of music in the same manner as they license to radio broadcasters. The Digital Performance Right in Sound Recordings Act of 1995 gave sound recording copyright owners a performance right applicable only to digital audio transmissions, and subject to a compulsory licensing scheme for "non-interactive" subscription of digital audio transmissions. The Digital Millennium Copyright Act of 1998 expanded the statutory compulsory license to nonsubscription transmission services that meet certain criteria relating to the nature and content of the transmissions. Digital broadcasters whose transmissions do not qualify for the non-interactive compulsory license must negotiate separately with each record company. The Recording Industry Association of America has formed SoundExchange, a copyright collecting organization, to assist record companies and recording artists in collecting royalties for certain digital transmissions. At present, earnings are relatively small, but this should change. Phonorecord sales are in global decline, and revenues from digital transmissions and other secondary licensing revenues are becoming increasingly important. SoundExchange is partnering with Phonographic Performance Limited (PPL), the UK rights collection organization that administers the sound recording performance rights of UK record companies and recording artists. United States artists can register with PPL at its website, wwwroyaltiesreunited.co.uk, to collect public performance royalties allocable to the artist's recordings in the UK. A successful song will "out-earn" a successful sound recording over time. Sales of popular recordings from the 1960's are insignificant today compared with their early sales figures, but successful musical compositions from the 1960's, such as Respect, Yesterday and Summer in the City are valuable copyrights. Scores of new uses including covers by new artists, synchronization in films, television commercials and constant radio airplay, all produce income for the owner of the musical composition copyright. However, unless the original sound recording is digitally transmitted or specifically licensed for the new use, no income is earned by the owner of the original sound recording (or the non-writer recording artist). By the way, synchronization license fees are an exception to the "business of pennies" maxim. "Synch" fees for national commercials commonly exceed $100,000, and for feature films, can be as much, in each case with performance "pennies" to follow from airplay on television broadcasts and from theatrical licensing in countries other than the United States. For television, synch license fees are considerably lower, in part because of the greater opportunity for performance royalties. For network television programs, a series theme can generate substantial performance earnings during the life of the series and afterward, in syndication. The publisher or composer would be well advised to make that deal even if the original synch fee was nominal. Songwriter John Sebastian has often remarked that royalties from the "Welcome Back" television series theme music paid for his house in Woodstock. In the United States, ASCAP, BMI and SESAC license virtually all public performances of music. Comparable performing rights organizations exist in most countries in the world, although the U.S. is unusual in having three, competitive performing rights organizations. In most countries, a single rights organization collects all public performance royalties, and, through reciprocal arrangements with the U.S. performing rights organizations, funnels royalties to their members. Some of the major overseas performing rights collecting organizations (some, but not all of which also collect mechanical royalties) include PRS in the United Kingdom, SACEM in France, GEMA in Germany, SIAE in Italy and JASRAC in Japan. In the United States, the Harry Fox Agency, affiliated with the National Music Publisher's Association, represents the majority of music publishers in collecting mechanical royalties from record companies, and maintains reciprocal arrangements with foreign mechanical rights collecting societies. Even though reciprocal arrangements exist between collecting organizations for the collection of public performance royalties and mechanical royalties, it is prudent to have a publisher with foreign affiliates, or a network of foreign subpublishers, to oversee the collection of foreign royalties. A sub-publisher "on the ground" in the territory will be incentivized to police, collect and account faster than a passive collection society. To capture revenues from musical compositions, songwriters and publishers must determine likely sources of earnings. If, for example, a song will be released on an album in Europe, it is necessary to make arrangements to collect the performance royalties and the mechanical royalties for phonorecords manufactured and distributed in each country. Public performances primarily consist of radio and television broadcasts, although Internet streaming, live performances, music-on-hold (yes, that requires a license), theatrical performances and "storecasts" (instore play of recorded music or radio broadcasts in retail establishments) account for a portion of public performance revenues that flow to collecting societies for distribution to the publishers and writers. In the United States, music publishers and songwriters do not receive income from movie theater performances of their music in films, but in other countries, such theatrical performances are licensed by the local performing rights organizations. To effectively collect royalties internationally, a songwriter generally enters into an agreement with a music publisher and assigns the right to administer his or her musical compositions. Often, there is a transferring of a copyright interest to a publishing company in exchange for an advance against royalties and a share of revenues. While most successful compositions are administered by established publishers, songwriters today are more likely to retain their publishing, or a major share of publishing, and convey only a partial "co-publishing" interest in the copyright, or in some cases, only the right to "administer" the copyright for a term of years. Major record companies have publishing company affiliates, but do not require their recording artists to assign publishing to the affiliated publishing company. Independent labels almost always require their recording artists to assign at least some publishing interests to an affiliated publishing company. Although such arrangements are sometimes desirable (and in many cases unavoidable), it is comforting when vetting royalty statements to compare statements from unrelated companies. For example, if an ASCAP or BMI statement shows network television performance credits for a television series, it is useful to crossreference the statement from the music publisher to determine whether a synchronization license was issued, and whether the songwriter was paid an appropriate share of the sync fee. One can also review the record company royalty statement to determine whether a master use license was issued and whether an appropriate share (generally 50 percent) of the master use license fee was credited to the artist's royalty account. If a publishing statement shows mechanical earnings based on sales of 20,000 phonorecords, and the record company statement for the same period only pays artist's royalties on 11,000 for the same time period, some investigation is warranted. When the publishing and record companies are independent, the comfort gained from consistent statements is greater. While musical composition and sound recording copyrights are the starting point, these are not the only rights involved in the commercial use of recorded music. For example, an advertiser could secure a synchronization license to use a song widely associated with a particular recording in a television commercial, and avoid paying a master use fee for the popular recording, by using studio musicians and vocalists to perform a new sound recording. Frito Lay learned the hard way that the right to use a song does not include the right to imitate the distinctive sound of the vocalist associated with the original popular recording. A court awarded $375,000 in compensatory damages and $2 million in punitive damages to Tom Waits after Frito Lay ran an ad for Doritos using a Waits sound-alike vocalist. Efforts to imitate distinctive vocalists in advertising may constitute unfair competition, false endorsement, and/or infringement of the artist's right of publicity. Even if master use and synchronization licenses are secured, union payments to the vocalists and musicians are often required. While musicians union (AFM) payments to the musicians are generally low, vocalists union AFTRA/SAG payments to featured vocalists can be substantial. The music industry is a worldwide business, with differing national copyright laws, industry practices and rights collection organizations in each country. This reality requires considerable familiarity with such practices and a comprehensive strategy to successfully capture earnings from music and recordings. The Internet has promoted the internationalization of the music industry and has changed the way music is experienced, purchased and infringed. Although, the Internet has enhanced the copyright owner's ability to track uses and police infringement, it has also facilitated more efficient and diffuse infringement and produced a significant demographic that refuses to pay for music. So far in the digital era, collecting royalties remains a challenge, even in England. Mr. Johnson is a Principal of Ober|Kaler, and Chair of the firm's Intellectual Property Practice Group. |
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Ober, Kaler, Grimes & Shriver Maryland
Washington, D.C. Virginia |
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