Trickle-Down: Written By New York Music And Entertainment Lawyer And Film Attorney
John J. Tormey III, Esq.

© John J. Tormey III, PLLC.
All Rights Reserved.

This article is not intended to constitute, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.

Reports in the press of contract disputes of years past - one favorite of this music, film, and entertainment lawyer which is entitled “Dixie Chicks Sue Sony” - discussed another installment in the seemingly-perennial process of music recording artists suing the record labels with which they previously signed contracts. According to “Dixie Chicks Sue Sony”, the Dixie Chicks claimed that they were due at least US$4.1 million in royalties under their contract, from music label See, e.g.:

There is a commonality between this type of music dispute, and a “net profits” or “points” dispute in the context of film or television. This music, film, and entertainment lawyer article, on the other hand, can offer no opinion on the merits of the Dixie Chicks litigation or contract, or opine with regard to the oft-wondered question in litigations of “which side is in the right?”. The statistical odds in any music, film, or other contract litigation about royalties, net profits, or “points”, are that the case will settle pursuant to a stipulation of confidentiality.

Even if we learn of the details of the Dixie Chicks contract or the case’s resolution, we’ll therefore never really know for sure about how other similar music royalty or other contract disputes may have been reconciled. Yet notwithstanding the sizable amounts of money at stake, the Dixie Chicks-Sony case will likely be governed by certain principles common to all music and film industry contract disputes of its kind, as any entertainment lawyer like myself will tell you.

It really boils down to the timing of when a music artist, film talent, or other artist for that matter, is or should be paid under the contract. Though this may sound pedestrian, the equation is simple. The music and entertainment lawyer opines that, “Agreeing in a contract to be paid the bulk of one’s compensation later rather than sooner, increases the odds that one will be unhappy with the dollar amount of the royalty, 'back end', 'net profits', or 'points' payment(s) at that later date”. Would the Dixie Chicks-Sony music contract litigation have never occurred, if the band’s paid-up-front recording advances had been larger? No one – not a music and entertainment lawyer, and perhaps not even the parties to the lawsuit themselves - will ever really know that answer for sure, either. Yet one cannot argue with the equation. As argued and hammered-out between music or other entertainment lawyer counsel in the contract negotiation, a larger up-front advance to the artist or group at least reduces the magnitude of later artist dissatisfaction with the “net profits”, “points”, or royalty stream of payments that follow. Arguably the Dixie Chicks would be in a better economic position, if suing under the contract for “only” US$1.1 million rather than US$4.1 million. The general form of equation holds up across film, television, publishing, and all other entertainment, media, and related realms. You are better off the earlier you are paid.

Holding aside the Dixie Chicks contract dispute example for a moment, the practical reality for other artists in the music industry is that they often sign record contracts - or now, "360 deals" - without the help of a music and entertainment lawyer, before they become commercially successful. Every successful recording artist in the music industry has historically had a “breakthrough” album. What looks like a huge advance in a contract to a starving music artist in the context of an earlier record deal, may later look like a per diem to that same artist several years later after she or he has “made it”. Indeed, the record label’s frugality is understandable. Few if any economically-rational record labels are willing to plunk down a huge contractual advance for an artist who has yet to “make it” commercially, even if they have already retained the services of the best of music and entertainment lawyers. The music and entertainment lawyer can protect the artist. Yet under most all circumstances (apart from one great band and keyboard player that I know in Pittsburgh), the music and entertainment lawyer is not the one also making the music.

Again, these artist-payment contract disputes, in the music industry, film industry, and otherwise, are a function of time and timing. In this light, the Dixie Chicks are essentially fighting the economic identities that elements within the music industry unilaterally assigned to them several years ago, before they were hugely famous and successful. I do not know at what point in the timeline the Dixie Chicks may have retained high-powered music and entertainment lawyer counsel. Yet if the band was comparably famous and successful several years ago when they signed their deal, they would have likely commanded much more by way of sizable contractual advances, and would presumably thereby have been better secured against the risk of (alleged) back-end royalty payment deprivation by the record label.

It is ironic that within the past several months prior to the suit, the Dixie Chicks were the subject of a TV news magazine show, in which at least two relevant things were said: (1) one band member suggested that the ladies in the band might soon want to leave the music and entertainment business; and (2) one band member boasted on-camera about having procured the “best [recording contract] deal in Nashville”, or words to that effect. As far as the viewer of the TV program could see, no music or entertainment lawyer was physically present on-camera along with the ladies when these statements were made.

The thrust of the news magazine program was that even with “the best deal in Nashville”, (and presumably able music and entertainment lawyer counsel), an internationally-famous musical recording act had to endure a contractual situation wherein their label was accused of holding most of the money. According to press reports, the Dixie Chicks albums “Ready to Run” and “Wide Open Spaces” sold more than 19 million units, resulting in more than US$175 million in revenue. That approaches a quarter of a billion dollars, and would normally seem to justify the retention of music and entertainment lawyer counsel, at least for future deals. Yet the band’s lead singer dolefully attested on camera that she didn’t “even” have US$1 million in the bank herself at the time of the interview. She jokingly added that her label must have remodeled its Nashville offices based upon the success of her band’s music.

“Where is all of this money going?”, asks the artist-side music and entertainment lawyer, particularly. Well, we know or suspect where it is going. It is true that launching and promoting albums, and developing artists, requires major expenditures by the record label, likely in the millions of dollars. The label has to spend money to make money. The label has to spend money on its own music and entertainment lawyers to draft and negotiate the contracts, for that matter. The film studio or television production company will deploy similar rationales when defending “net profit”, “points”, or other back-end payment arrangements. Yet in the case of a successful recording and touring act, at least some of the incremental money above expenditures is going towards someone’s profit. It is reasonable to assume that the Dixie Chicks sued because they didn’t think they were receiving their fair share under the signed contract, and then convinced one or more music and entertainment lawyer litigators to same effect.

What logical deductions can we make from this case study, that apply to other individual musicians and bands – and perhaps to other media and art forms like film, television, and publishing in the context of royalties, “net profits”, and “points”? First, we need to back up, and keep in mind the first thing that music and other entertainment lawyers learn in practice. There are two principal ways for an artist to get paid for services under a contract:
(1) “fixed compensation”, and (2) “contingent compensation”. Royalties are “contingent compensation”, and in the traditional but now fast-evaporating record contract model usually contingent upon either the manufacture or the sale of (non-returned) units. Strictly defined, “contingent” also means that it is possible they will never get paid. In film, television, and other realms, “points”, “back-end”, and “net profits” are all terms suggestive of forms of contingent compensation in a contract. One of my law professors back in the 1980’s was a well-known practicing entertainment lawyer with a music, film, and television practice, and much of our classroom workshops were comprised of haggling over proposed net profit definitions in draft contracts. The song remains the same today, in large part.

Music royalty calculations and film and TV “net profit” or back-end “points” definitions often take many pages of contract text to define - as a music, film, or entertainment lawyer will tell you. In defense of the companies, this verbosity is not always simply a product of the labels and studios and their entertainment lawyers so conspiring. Rather, the income streams in the music and film and TV businesses are truly hydra-headed and fairly sophisticated, and take some care and patience to define. As an entertainment lawyer I realize that this is all scant consolation to a screenwriter working through a studio’s or network’s 50-page written contract definition of “net profits” - or, in the music context, a recording artist immersed in arcane label record contract text purporting to delineate methods of royalty computation. Yet the complexity of calculating contingent compensation is a reality of the industry to which the film net profit or music royalty definition relates.

However, make no mistake about it. Accepting any form of contingent compensation, be it net profits, “points”, music royalties, or otherwise, is tantamount to accepting someone else’s “trickle-down”, as any artist-side music and entertainment lawyer will argue. That is, the artist deputizes the company to collect the artist’s money, hold it (presumably) in trust, and then remit it in installments to the artist over time on a deferred basis. Do most people even do that with their own family members? As the music and entertainment lawyer will attest from observing others, and human nature and greed being powerful motivators that they are - the company will often thereupon pay the musical or other artist when it feels like it, how much it feels like, and sometimes no matter what the contract says. Company “deductions” from the gross payment stream to arrive at “net” or “royalties”, can become extremely creative to say the least. Music and other entertainment industry audit contract disputes often revolve around the acceptability and fairness of such “deductions” from “net profits” or “points”, as fought and argued between entertainment lawyers on either side.

There are contractual ways for musical and other artists to even the proverbial scales of justice regarding their royalties, “net profits”, “points”, or other form of contingent compensation - typically best deployed through the artist’s entertainment lawyer. The most familiar method is the deployment of contractual “accounting” and “audit” clauses or provisions. The music or other artist can endeavor to contractually require the company to remit detailed written accountings of all revenues collected, and (carefully-circumscribed) deductions taken therefrom, on a regular basis. The clauses can be drafted by the artist’s entertainment lawyer. Accordingly, the music artist can also endeavor to reserve the contractual right to audit the books and records of the record company to ensure correct remittance of royalties. In the professional entertainment industry context, audits like this take place all the time, thus ensuring a livelihood for many entertainment industry accountants, entertainment lawyers, and others. It has been reported that wholly two-thirds of all entertainment industry audits result in findings of underpayments. Usually thereafter, the parties reach an economic settlement and move on with their lives. Sometimes, they don’t, and they litigate using music or entertainment lawyers instead. As indicated above, the majority of litigations themselves settle before going to trial.

There is hope. Industry custom, and film, music, and entertainment lawyer practice, does often contemplate that recording and other artists may also be paid on a “fixed” as well as on a “contingent” basis. In theory, the contractually-specified recording “advance” represents a fixed up-front payment to the music artist. Yet many - uh - “creative” record label forms transform the advance into a contingent payment as well, at least in part. This is sometimes referred to as the “recording fund” concept. Film producer compensation may be manipulated by the studio in similar fashion, by payment into a budget as opposed to payment directly to a producer’s bank account. For example, if the musical artist receives a US$300,000 “advance” under the contract, but must himself or herself direct-pay for the first album’s recording expenses out of his or her “own” pocket, then it would behoove the artist not to blow all US$300,000 on one weekend at Monte Carlo. In other words, the bulk of that US$300,000 may not in fact be a fixed payment to the artist, but instead may need to be applied to things like studio time and fees for session musicians. There are many artists out there who briefly thought they were rich for this reason, until the record contract was actually read and reviewed with their music and entertainment lawyer. Similarly, maybe the film producer should not write a check for that Lamborghini just yet, either.

What independent and unsigned artists will discover with or without a music or entertainment lawyer, particularly those music artists with talent, is that there may be plenty of folks along the road who will be willing to bargain for their exclusive recording services, promising no money in advance, but some fuzzy and inchoate “points” later on – with or without waving a proposed contract in front of the artist. This phenomenon is usually exactly what it sounds like - Wimpy’s “I will gladly pay you Tuesday for a hamburger today”. Would-be entertainment company impresarios try to play actors and writers like this all the time, too.

Sure, the music company and its entertainment lawyer may have a valid point that the artist should be required to share in some of the down-side risk that the recorded finished product will not sell. Yet by that analysis, the artist-side entertainment lawyer must also conclude that the musical artist should be paid some fixed compensation or “earnest money” up-front, and then some additional contingent compensation later should the project succeed. Otherwise, what assurance does the artist have that this company is truly serious, committed to the music project, and acting in good faith? Arguably, the up-front fixed payment to the artist should be at least sufficient to enable the artist to retain music and entertainment lawyer counsel to draft and negotiate an agreement clearly specifying how the back-end contingent compensation should be paid, and what the artist’s accounting and audit rights should be. The same rationale applies for back-end “net profits” or “points” deals in the film and television realms. The up-front payment at minimum should be the glue that cements the contract.

It is astounding, however, how many artists, typically without music or entertainment lawyer counsel, will agree to be paid for their hard work and their music or other work-product by “points”, or “net profits”, or other “back-end” alone, perhaps commemorated with writing on the back of a cocktail napkin, or even (gasp) on a handshake alone. Why are these artists selling themselves so short? Perhaps because they are dying for their first big break, and perhaps because they do not have sufficient confidence in their abilities such that they believe that another valuable opportunity will come along. So they don’t enlist the help of a music or entertainment lawyer, and often sign bad contracts or otherwise agree to bad deals.

Yet the point is, there should be some minimum standard of decency, perhaps along the lines of a well-known California case on point, Foxx v. Williams, and a California statute on point, Civil Code Section 3423:

Some deals are simply not worth an artist’s making. Some contracts are not worth signing, and perhaps shouldn’t even be allowed to be signed. Even a Santa Monica tenant desperate for a beachfront apartment should not move into a condemned premises where the floor is in danger of collapsing. In that real estate situation, the local government - through the building code or equivalent - serves as “watchdog”, and prevents those tenants from striking those bad lease deals even if the tenant otherwise wants to do so. However, there is typically no governmental or other “watchdog” that prevents a music artist from entering into a bad recording contract, only perhaps case law and statutes that can be invoked only if the question is ever later litigated – and additionally perhaps, only an artist-side music and entertainment lawyer, if ever enlisted for the situation. Rather, as a practical matter, in the recording agreement context, the “watchdog” needs to be prospective and internalized. So too must the watchdog be internalized in every artist, in the film, television, and other industries and art forms. The music or other artist can only look to his or her common sense, and hopefully in some cases the artist’s music or entertainment lawyer’s experience and judgment - and this assessment must be made before signature of any contract.

In any case, the following is for certain. If a proposed music recording agreement with royalty covenants as exchanged between the music and entertainment lawyers does not contain these three components:

(A) an up-front advance “fixed compensation” payment to the music artist, (if only to show the company’s good faith, but sufficient enough that the artist will have been happy to have done the deal even if no back-end compensation is ever later collected by the artist); and

(B) an accounting clause; and

(C) an audit clause with teeth;

then, serious doubts should be raised as to whether the music artist should indeed look elsewhere for other career opportunities. At minimum, the proposed deal, as the Dixie Chicks might say, needs fixin’.

Additionally, the music artist should take heart, I suppose. Getting the “back-end payment”, “net profits”, or “points” bum’s contractual rush from a company, happens to music artists and other types of artists in all media and sectors, at all calibers and levels of experience and success, whether or not they are represented at the time by a music or entertainment lawyer. No matter how commercially-successful a musician becomes, there may always be doubts as to whether he or she is being royaltied or otherwise paid correctly – and sometimes it takes the music and entertainment lawyer litigators and the court system to scrutinize the contract to find out.

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My music and film law practice as an entertainment lawyer includes the drafting, editing, negotiation, and closure of all contractual matters relating to film, music, television, publishing, Internet, and all other media and art forms.

If you have questions about legal issues which affect your career, and require representation, please contact me:

Law Office of John J. Tormey III, Esq.
John J. Tormey III, PLLC
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New York, NY 10128 USA
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