The Royalty Battle Rages

Legislation could make record companies open books

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A bill set to go before the California State legislature this summer could fundamentally alter the nature of recording contracts. State Senator Kevin Murray, an entertainment lawyer before entering politics, initiated the legislation, which seeks to make the obligation to accurately account for artists' royalties under a recording contract a fiduciary duty. This higher obligation would give record companies greater incentive to account properly by granting artists the right to sue for punitive damages (up to ten times the amount owed on the contract) in the event that record companies are found to have improperly withheld payments.

Murray argues that the current system is flawed. "There's no disincentive for the record company to underpay the artist because the worst thing that could ever happen to them is that they would have to pay what they already owe," says Murray. "Artists argue that they are routinely underpaid on purpose, kind of like 'We'll underpay you and if you catch us, we'll pay you what we owe you . . . maybe.'"

This week's settlement in New York -- where the major labels agreed to pay $50 million in unpaid royalties to thousands of artists including David Bowie, the Dave Matthews Band and Dolly Parton -- would seem to underscore the need for Murray's bill.

"I don't run around saying there's some guy in the back room trying to steal money from artists," says Murray. "But it's a question of how much effort you put into being accurate. Life happens in the gray areas, and in an eighty-page contract, there's a lot of gray areas."

For most bands, the expense of hiring lawyers and demanding audits is prohibitive (between $50,000 and $150,000 for accounting fees alone on average, with costs higher if legal counsel is required) and yet in many cases necessary.

Twenty-five years of auditing -- and finding only two instances where a record company had overpaid an artist -- has Charles Sussman of the Nashville-based firm Sussman and Associates convinced that the new bill could have a positive impact. "It's important for a few reasons," he says. "It makes record companies more accountable to account properly and it puts some penalties in if they don't. Also, when you go in and do examination of the record company books, the process now can take anywhere from a year to a year and a half before you get the information, and another two years to get it settled. This would speed up the process."

Artists including Babyface, Lucinda Williams and members of No Doubt and the Backstreet Boys have voiced their support for the bill, but it's the smaller artists that stand to most benefit from it.

"Superstar groups that have the money and the power to go in and force the issue do get paid what they should be paid, nearly, sometimes," says Simon Renshaw, manager of the Dixie Chicks, who battled with Sony over royalties in 2001. "But if you go and look at the ninety-eight percent of the recording artists out there, these people cannot afford to be paid. They don't have a million dollars to put on the table and say, 'Deal with it.' The record companies will spend that money to fight you in a heartbeat and therein lies the huge wrong that is being committed."

The opposition to the bill thus far consists of the RIAA, BMG and EMI. "A fiduciary obligation requires one party to act for the other's benefit and that's fundamentally inconsistent with the arm's length business relationship that exists between labels and artists," says Steven Marks, general counsel for the RIAA. "Fiduciary obligations exist between attorney client agent principle, between business partners. The relationship between an artist and a label is a contractual one. Those contracts are entered into usually after each party has had adequate counsel and discussed issues and therefore is just not the type of relationship that gives rise to a fiduciary obligation."

Attorney Don Engel -- who, in addition to the Dixie Chicks, has represented Don Henley, the Beach Boys, Babyface and Boston in contract disputes -- disagrees: "The reasons that duty is fiduciary by application of general legal principles include the fact that the company is in sole possession and control of the information necessary to report the income and royalties; the contracts are such that the artists have to rely on the integrity and honesty of the companies to be paid for their artistic product; and, when the artists are signed, the companies make express and implied representations that they are part of the artists' team and that they will, at least, account to them fairly and properly so they will be adequately paid for their services."