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Net Profit Deals:
A Recent Alternative to the Traditional Record Deal
by Bart Day - Entertainment Attorney, October 2009


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Part Three (of Three Parts. Read Part One or Part Two)

Miscellaneous Other Deal Points in Net Profit Deals, and the Overlap with Traditional Record Deals

Despite the differences between Net Profit Deals and traditional record deals, there is a certain amount of overlap between the two. This is because many of the issues that need to be addressed in a traditional record contract also need to be addressed in a Net Profit Deal - for example, how much the recording budgets will be, who will be in charge of the artist's official website, and so on.

Some other examples:

The "Term"
In recording contract parlance, both in traditional deals and Net Profit Deals, "the Term" means how long the artist will be recording for the label, and how many albums the artist will be obligated to record for the label.   

In both traditional deals and Net Profit Deals, "the Term" is usually for one initial album, with the label entitled to a series of options for a certain number of follow-up albums. The contract usually contains complex provisions that essentially create a timetable for the recording and release of those albums.

Sometimes, particularly in indie deals where the artist has already recorded and self-financed an album prior to entering into a recording contract, the deal may be just for one record (aka a "one off deal"). But this rarely happens with major labels.

After the label has released all of the albums that it has optioned, the so-called "Term" ends. But even after the end of "the Term," the label is usually entitled under the contract to continue selling the albums that were recorded during "the Term" and to continue owning the copyrights in those albums. (See the "Ownership of Masters" section below.)

It is crucial, from an artist's point of view, that the recording agreement contain clearly defined termination provisions in case the deal is unproductive or if the label fails to perform its obligations. The contract should specify what the artist's rights will be if the record doesn't get released, or if it goes out of print, or if the label ceases to have bona fide national distribution, or if the label defaults on certain other obligations stated in the contract.

The "Territory"
Both traditional deals and Net Profit Deals typically allow the record company to sell records worldwide. But if the artist has significant negotiating clout, the contract might allow the label to sell only in certain territories (e.g., North America). This is most likely to happen in a one-record indie deal, where the artist had already made the record, at the artist's expense, prior to the signing of the deal.

Ownership of Masters
In traditional record deals (major and indie), the label usually owns the masters and the copyrights in the masters. The ownership will typically continue for the full life of the copyrights of the masters, i.e., a very long time, and long after the parties are no longer actively working together.

In Net Profit Deals, the masters are either owned by the artist and label jointly, or far more commonly, by the record company alone.

If an artist has already financed a recording, then the artist has a strong argument for owning any such masters. This is based on a working assumption common in the entertainment industry that whoever is paying for the production costs should own the resulting work - i.e. the master recordings. And, if the artist will own the masters (and the copyrights in the masters), then the artist will only be licensing the masters to the label, giving the label the right to sell copies of the record for a certain specified period of time.

By the way, you should know that Section 203 of the U.S. copyright statute allows artists and writers in certain instances to terminate any post-1978 copyright transfers and licenses (and thereby get reversion of the copyrights in their masters) after 35 to 40 years. The artist must follow certain procedures in order to make such a reversion happen.

Section 203 is complicated, but something that more artists need to be aware of, especially artists who signed record deals and/or publishing deals in the late 1970's and the 1980's. Section 203 will start getting a lot more public attention in the next year or two, as these reversions will start happening in 2013. Even now, though, there is substantial action behind the scenes with artists and songwriters giving reversion notices and, in some instances, renegotiating their deals.

Marketing and Promotion Issues
In either a traditional deal or a Net Profit Deal, the artist should seek the right to approve (or at least be consulted about) major marketing and promotion decisions, and to have the contract guarantee that the label will spend at least a certain specified amount of money each year for marketing and promotion.  

Sometimes the contract will provide that if the label fails to make the guaranteed "spends," the label will not be entitled to exercise any options for follow-up records.

Approval Rights
Both traditional deals and Net Profit Deals usually contain other clauses relating to the artist's approval rights - for example, whether the artist has a right of approval over the studios and producers to be used, and over the label's issuance of licenses to third parties allowing them to use the artist's music in film and television productions, commercials, compilation records, computer games, etc.

Accountings
In most cases the agreement requires the label to regularly provide (usually semi-annually) artists with an itemized accounting for record sales, along with payment of any monies (if any) then owed to the artist.

Co-Publishing Rights
Sometimes, a label will demand that the artist also enter into a co-publishing deal (usually a separate contract), giving the label a part-ownership interest in the artist's songs and hence the right to share in the publishing income earned from outside sources, such as when an artist's songs are used in a film or TV show, or when a song is "covered" by another artist.

This happens far more often with indie labels than with major labels, and I see it most often in indie deals involving country, hip hop/rap, and Christian music.

As a general rule, it is not in an artist's best interests to give away co-publishing rights to the label, and particularly so if the artist is not receiving a substantial cash advance for giving away those rights.

Conclusion
Net Profit Deals have become common only fairly recently, and so there are not yet any established industry standards concerning the exact terms of such deals. Instead, there is often a lot of improvising done during contract negotiations, in terms of exactly how any particular deal will be structured or exactly what terms will be included in the contract.

For an artist considering the advisability of entering into a Net Profit Deal, and particularly when comparing a Net Profit Deal offer from one label and a traditional deal offer from another label, it is crucial to "crunch the numbers" and evaluate carefully all of the various financial, legal and logistical issues lurking under the surface.

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Editor's Note: Bart Day is a veteran entertainment attorney and represents numerous national recording artists, publishers, labels, managers, producers, and others active in the music industry. He has a Portland, Oregon-based entertainment law practice and presently divides his time between Portland and Los Angeles.  

From 2002-2008, Bart was the Vice-President of Legal and Business Affairs for Media Creature Music, a prominent Los Angeles music publisher and catalog administration company specializing in the licensing of music for film and television productions. He has also been outside music counsel for a number of major entertainment companies, including Vivendi Universal Games, the computer games unit of Universal Studios, and counsel for a major concert promotion company.

From 2000 to 2004, Bart served two terms as an elected member of the Governing Board of the Recording Academy, Pacific NW Chapter, presenter of the Grammy Awards.

Bart co-authored a chapter ("Contracts and Relationships between Major Labels and Independent Labels") in "The Musician's Business and Legal Guide," a book compiled by the Beverly Hills Bar Association and published internationally by Prentice-Hall Publishing (New York). He also recently co-authored with Chris Knab (founder of 415/Columbia Records) the book "Music Is Your Business: The Musician's FourFront Strategy for Success," published in late 2007. It is available for purchase at musicbizacademy.com    

Bart can be reached at 503-224-4900 and by email at bart@dayandkoch.com.

More information about Bart can be obtained at: http://www.avvo.com/attorneys/97204-or-bartley-day-1490758.html.

DISCLAIMER: The reader is cautioned to seek the advice of the reader's own attorney concerning the applicability of the general principles discussed in this article to the reader's own activities. This article does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to adequately evaluate a contract or legal problem without comprehensive consultation and a thorough review of all the facts and documents at issue.  

2009 ALLMEDIA LLC

NOTICE TO MUSIC ACADEMY WEBSITE VISITORS: The above information is offered for general informational purposes only, and not for the purpose of providing legal advice. You are cautioned to seek the advice of your own attorney concerning the applicability of the general principles discussed above to your own particular activities.


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