Entertainment Law & Finance, August 2001
By Steve Gordon, Esq.

Leaping into the vacuum that Napster's demise has created, the multinational record companies that control the music business are launching Internet sites for sound recording downloads. But the record companies must first make sure that agreements with their artists have granted the labels such rights. Generally, recording agreements provide that the label shall have the sole and exclusive right to sell an artist's recordings delivered under the agreement. But many of the relevant contracts for recordings that the labels would like to sell online are subject to contracts that were negotiated and drafted before computers were in common use. Therefore, it is unlikely that any contracts, except those written in the last several years, will refer to the Internet, digital downloading or anything similar. However, because the music business has for many years had to contend with different formats of music, such as audiocassettes, even contracts from several decades ago will often provide that the label receives the right to "distribute and manufacture records in any field of use, by any method and by any means or format now or hereafter known." This broad grant of rights can reasonably be interpreted as giving the label the right to sell recordings through the Internet as well as on such traditional formats as vinyl, cassettes and CDs. Of course, more recent agreements specifically provide for the label's right to sell records "electronically" and may well refer specifically to the Internet. However, each agreement for each artist, and all the modifications of such agreements that may occur during the course of the artist's relationship with the label, must be evaluated separately to assure that the label does indeed have a reasonable basis to support its distribution of records on the Internet.

Royalties Issues
Even if a recording agreement includes grant-of-rights language that could reasonably support the label's right to sell records by downloading them over the Internet, there must still be a separate identifiable royalty that rea-sonably applies to the digital downloading of music. This is because the core of virtually any recording agreement is the principle that the artist receives compensation for the label's commercial use of his or her recordings. If no means of calculating compensation can be found in a recording agreement, the artist would have a strong argument that the he or she did not intend to transfer digital rights, or that the parties reached no clear agreement with respect to those rights.

Almost any standard recording agreement will include specific royalty provisions for sales of records "through normal retail channels" (i.e., sales through record stores, record clubs, television ads, etc.). Of course, recent agreements will have specific royalty provisions dealing with electronic distribution, and these provisions will generally be carefully scrutinized and negotiated by the artist's attorney. Many older agreements will include a "catch-all" royalty provision providing that for any sale of a record not specifically enumerated in the agreement, the label shall pay the artist a certain percentage of net receipts (usually 50 percent). This kind of provision in conjunction with a broad grant of rights could be reasonably construed to give the label the right to digitally download music.

Singles Restrictions
Certain artists' recording agreements, especially those with superstars or highly successful artists, may include a provision for the artist to approve any release of a commercial single from an album delivered under the agreement. This provision is meant to assure that the artist will be involved in a key marketing and commercial decision. The release of a single is a very important factor in how the artist's image and talent is marketed. It can also be a financial decision because the artist is, of course, paid royalties for commercial singles. And if the artist wrote the song, he or she would be entitled to additional monies for mechanical royalties.

The paradigm of Napster was to allow consumers of music to select their favorite tracks for download. The labels may wish to follow this successful model. Therefore, even if the label has a reasonable basis for maintaining that it has the right to sell music by digital download, it may be limited to selling entire albums instead of individual tracks unless it acquires the artists' consent under the singles restrictions clause.

Artist Relations
Even if a recording contract does not include a right for the artist to approve a certain action that the label would like to take-such as release of a compilation of the artist's promotional videos as a home video-as a courtesy, the label will often go to the artist for consent. The principal reason for showing such courtesy is that the record label needs the artist's cooperation. Such cooperation can take many forms, including delivery of an album in a timely manner, getting on a plane for a talk show, waking up early to arrive at a publicity appearance, etc. For all this, the label will need the artist's good will. So, even if the label does not need the artist's approval under contract, the label may wish to at least inform the artist of its plans for digital delivery. In the case of a superstar or highly successful artist, however, the artist's clout may be so great that the label does not dare sell the artist's records by digital delivery without express approval, even if the contract authorizes it.

Generally, recording agreements give the label the right to distribute records on a worldwide basis. Sometimes, however, an artist will have a recording agreement with more than one record company. For example, an artist may enter into an exclusive recording agreement with a label for the distribution of recordings in the United States and Canada, and enter into an exclusive recording agreement with another label for distribution of those recordings in the rest of the world. In this situation, a label must scrutinize each recording agreement's territorial restrictions, if any, when determining whether it can download recordings in a specific geographic region. Although the Internet is a worldwide medium, the technology does exist to limit downloads to certain geographic regions. So, for example, if a label controls only North American rights, it can limit downloads to the United States and Canada, even though its web site is available throughout the world.

Guest Artists
A record label's "exclusive" recording agreement with an artist generally means that the artist may not per-form as either a "side" artist (i.e., background vocalist and/or instru-mentalist), or featured guest artist on another performer's records during the term of the exclusive agreement, without the consent of his or her label. Therefore, if an artist would like to perform on another artist's record, and the other artist is signed to a different label, the other artist's label must generally acquire the consent of the guest or side artist's label. Although these consent agreements are usually brief and generally do not limit the grant of rights to exclude any media, they often restrict the single release of the tracks on which the side artist or guest artist appears.

The reason for this is that a record company does not want its artist to be associated too closely with another label. Therefore, if another artist's label wishes to make any individual side or guest tracks available for sale, each side artist agreement must be scrutinized to determine whether the release of the track separate from the album would violate that agreement.

Using samples (i.e., excerpts of another recording or song in the creation of a new track) usually consists of brief tidbits, such as a few notes of a well-known tune. But samples can also be more elaborate. If a sample involves an actual master as well as the underlying song, generally permission must be obtained from the owner of the master as well as from the owner of the song. These agreements must be scrutinized to make sure that digital downloads of the sample are authorized and, if the track is to be made available separate from the album, that singles rights were granted. In addition, sampling agreements generally involve payment to the owner of the sampled recording for any commercial use of the track. Selling tracks by digital download would generally trigger the payment provisions in such sampling agreements.

Musical Compositions
Record companies must also deal with the underlying songs or musical compositions embodied in recordings. Such songs are subject to a separate copyright, and those that are still protected by copyright are usually owned by the songwriters or their music publishing representatives. Clearing songs protected by copyright for downloading on the Internet involves a license for the mechanical duplications of those songs and perhaps an additional license for the "public performance" of such songs. In addition, the necessity of obtaining an additional license for the right to "synchronize" those songs to a visual image may be involved.

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