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The murky, opaque and, for most people, incomprehensible royalty and audit provisions contained in major record company recording contracts are to come under the scrutiny of the High Court, with Radiohead suing its former record label, Parlophone. The label’s application for summary judgment has recently been dismissed, and the case will proceed to trial.
Radiohead signed a long-term recording agreement with Parlophone (then an EMI label) in the early 1990s. The relevant contractual clauses state that:
- the record company must provide the artists with bi-annual royalty statements;
- the artists may appoint an accountant to inspect the record company’s books with regard to their sales;
- 10 days’ notice must be given for any such examination;
- an examination by an accountant of the books may occur once in a 12 month period and cannot extend beyond three years from the date of the statement being inspected;
- where the artists fail to challenge a royalty statement within three years it becomes final, binding and conclusive, and no proceedings challenging the accuracy of statements or accounting may be brought unless within four years of the date of the statement
The above provisions are fairly commonplace in long-term recording contracts. Solicitors acting for artists invariably argue that the statutory limitation period (i.e. six years) should apply, but record companies argue that they should not have to wait for six years to finalise their accounts. The respective three and four year periods negotiated by the lawyers acting for the band at the time could not be considered a poor result, particularly for a new band.
The artists audited Parlophone in September 2011 for the period January 2008 to December 2012. The audit concluded in 2014. The auditor’s examination disclosed unsubstantiated charges of £744,000 in 2008 and 2009, extraordinarily incurred in 1992 and 1998. The artists sought explanation and repayment.
This aspect would appear to form the first limb of the case.
The second issue concerns royalties in respect of digital exploitation of Parlophone’s recordings of the band.
At the time the parties entered into the Agreement, digital exploitation of music was not in existence. The contract entitled Parlophone to exploit the artists’ work in new media, and the parties would negotiate the basis for calculating royalties. In 2004 Parlophone began to make some of the artists’ work available by digital download, and by 2007 it was all available online, including a Greatest Hits compilation.
No agreement was ever reached regarding these royalties.
For the benefit of readers who are not music lawyers, there are many deductions made against royalties pursuant to recording agreements; primarily advances previously made to the band, recording costs, video production costs and possibly certain marketing and promotional costs.
What seems extraordinary here is that unexplained charges of £744,000 incurred in 1992 and 1998 were set against royalties arising more than a decade later.
Parlophone argued that the artists were out of time to audit the accounts for the period, and therefore those royalty statements were final, binding and conclusive. The record company further argued that the claim for unsubstantiated charges was a challenge to the accuracy of the royalty statements, which was also time-barred.
The artists successfully argued that Parlophone’s obligation to account for digital royalties would only arise when the relevant terms were declared by the court, and could therefore not be time-barred. Further, the artists argued that the contractual limitation also applied to Parlophone, and it had lost the right to claim for the charges in 1992 and 1998 long before the statements had been submitted.
Every cynical music lawyer is familiar with the maxim: “a record contract is an agreement where the first page gives the artist the money and the other 59 pages take it away”; however it is extraordinary that a major record company would be so bold as to unilaterally declare what the digital royalty was to be when no agreement had been reached with the artists. To further attempt to deduct undisclosed and unexplained charges incurred more than a decade before digital download royalties arose was a move guaranteed to provoke the ire of the artists.
Whilst there have been many artists/record company royalty disputes over the years (e.g. the famous successful challenge by the Beatles, again against Parlophone, in the 1980s when CDs were a new media format) the outcome of this case will be keenly awaited.
The fact that Radiohead’s contract with Parlophone ended many years ago may explain why the matter has become litigious and not settled amicably.
Now that this case is now moving forward it may well encourage other artists to mount legal challenges against record labels over their royalty payment practices, but only the biggest acts are likely to have the funds to be able to do it.