The history of the music-production deal has evolved through attempts to reward celebrity producers who could get new artists signed to record labels simply through their affiliation with those artists. For example, if a producer with the stature of Quincy Jones, Simon Cowell or Dr. Dre agrees to produce a previously-unknown and unsigned artist, then it is highly likely that a coveted major-label deal will soon follow. Celebrity producers normally receive a 6 percent producer’s royalty to produce an album by an established artist like Mariah Carey. Therefore, they should be entitled to extra consideration if it is their status as celebrity producers that cause the new artist to be signed to a major label deal. Thus, the concept of the production agreement is born.

Consider the following example: in a hypothetical case, an artist is signed directly to a label and offered a signing advance of $100,000, a recording fund of $400,000 ($360,000 of which goes pay third-party recording costs, leaving $40,000 in “back-end” money left over to distribute to the artist) and a retail record royalty of 12 percent. That means that, in this direct artist-to-label signing, the artist winds up with $140,000 and a 9 percent royalty (after deducting 3 percent for an outside producer). If that same artist signed the same deal with identical terms but did it through a production agreement in which the production company is entitled to 50 percent of whatever the artist receives, the artist would be lucky to net $70,000 and a 6 percent royalty.

Many production agreements provide that all costs (including recording costs) are recoupable solely against the artist’s share of royalties. It is also common for production deals to require that the royalty payable to the producer of the album (usually 3 percent) comes solely out of the artist’s share of royalties (thus reducing the artist in the hypothetical case to a total royalty of 3 percent).

The effect of these provisions is that the entire $500,000 paid out by the record company so far will be recouped only against the artist’s meager royalty share rather than on an equal basis with the production company.

A sharp music-industry attorney can improve such a production deal in the artist’s favor. For example, the production company might agree to split the financial responsibility for the royalties paid to the producer, even though this is still more disingenuous than generous, since the artist’s principal motivation for signing with a production company in the first place was to allow it to handle all production responsibilities and to be compensated for doing so out of its share of the proceeds.

Unfortunately, many artists come from disadvantaged backgrounds and cannot afford to pay what often amounts to sizable legal fees. As a result, these artists often sign retainer agreements whereby they agree to pay their attorney between 5 percent to 10 percent of all gross royalties and gross advances (in perpetuity). Although this represents a gamble for the attorney, the compensation sometimes works out in the end.

Applying this arrangement to the hypothetical production deal, an artist who used this retainer plan would pay his or her lawyer $50,000 (i.e., 10 percent of the gross sign advance of $100,000 and 10 percent of gross recording fund of $400,000) and a royalty of 1.2 percent (10 percent of the gross royalty of 12 percent).

So, assuming that the artist’s attorney was able to get the production company to reduce its share of record royalties by one-half of the producer’s royalty (i.e., by 1.5 percent), the 6 percent royalty due to the artist for his half of the original 12 percent royalty would then amount to 4.5 percent. Reduced by the 1.2 percent due to the lawyer, the artist’s royalty would equal an embarrassingly low 3.3 percent. And upon deducting the attorney’s share of the advances (i.e., $50,000) from the $70,000 that the artist was due to receive, the artist will actually net a paltry $20,000.

But there is more bad news for the artist. Most production agreements allow the production company to recoup any costs that it incurred prior to entering into the recording/distribution agreement. Conceptually; this makes sense, because anyone who makes a capital investment in an artist’s career should have the opportunity to recover that investment. At this point, it would likely surprise no one that the entire amount of the production company’s investment (say, $20,000) can be recovered 100 percent out of the artist’s share of income, despite the fact that the production company stands to gain 50 percent of all the monies earned under this deal.

So if the production company exercises its right to deduct this $20,000, the artist in the hypothetical case is now left with a royalty of 3.3 percent and an advance of zero dollars. What is more, it is not uncommon for artists under these circumstances to also sign a management agreement with a “division” of the production company at the same time they enter into the production agreement, making matters worse for the artist.

One hopes the production company would avoid the outright conflict of interest and not commission the artist’s income from the production deal. But if the company does commission it, or if a third-party manager is involved, the artist’s royal points (which are currently 3.3 percent) could be diminished by an additional 20 percent, leaving the artist with a low royalty of only percent. In other words, the artist – the engine that drives this entire process – may actually wind up receiving only 17 percent of the total royalty points in the deal and 0 percent of all the money that the record company handed over to the production company in order to acquire the artist’s services.

But the situation for the artist declines still further. Most production agreements contain a clause that allows the production company to award itself a substantial portion of the artist’s publishing rights for free (this, even though in many cases the production company already owns half of the publishing because it provided the “tracks.”). And most artists simply still do not understand that in handing over these rights for little or no consideration that they are:

(1) Giving up administrative control to a production company that is free to do whatever it wishes with the artists’ song, title, lyrics, etc.;

(2) Allowing the production company the right to change an administration fee for doing the above;

(3) Allowing a production company to collect the artist’s publishing money and trusting that production company to engage in accurate accounting; and

(4) Granting the production companies the right to “cross-collateralize” the artist’s share of publishing royalties against any un-recouped balances.

As you can see, understanding and negotiating a music-production deal can be a tricky process.

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Paul W. Gardner, II, is Managing Partner of the Gardner Law Group in Baltimore. He focuses his practice on entertainment and business law matters.

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Publications : Bar Bulletin: September 2005