The mythology of the “record contract” with a major record label may have largely run its course, but it still plays a large role in shaping the industry. The myth of the record contract has both a positive and negative spin: the positive is that of the young artist finally “making it,” being recognized for her talent and launched into a career of fame and fortune; the negative spin is that of the “evil” record company squashing the fragile creativity of the artist through the deceptions and greed of the record contract, subjugating the artist to a life of servitude and dashed dreams. Like all myths, there are kernels of truth in both the negative and positive spins on the record contract.
In this chapter, I will summarize some of the most common and most important terms that govern record contracts, and some of the ways in which these terms have failed to achieve the intent of one or the other party to the contract. (Note that the use of the word “term” is often used it to describe the provisions of a contract generally, as in “What are the terms of your contract?”. However, sometimes the word “term” is also used to describe the duration of a contract (how long it lasts), such as in “How long is the term of your contract?”. So be sure not to confuse the two uses of the word, as they will used in both ways below.)
The most important concept to understand about record contracts is that they are negotiated agreements (contracts) between independent parties. With very few exceptions, the law places very few obligations on the terms of a record contract, so they may be freely negotiated in or out of the contract, or altered to reflect the agreement of the parties. Record contracts contain common terms that end up in nearly all instances, but that does not make them required or non-negotiable.
Because nearly everything in a record contract is negotiable, the different relative bargaining positions of the parties frequently determines the terms of the contract. The term “bargaining position” describes the strength of one party’s power to shape the contract relative to another’s. Typically, the record company has a stronger bargaining position than the artist, but that is sometimes not the case. Artist’s with proven track records or hot new singles may wield a great deal of bargaining power and be able to leverage that power to obtain contract terms that are more favorable to the artist than to the record company, and certainly more favorable to the artist than if they were unknown newcomers.
The best way to think about bargaining position is by considering who is in the better position to “walk,” that is to leave and say “thanks, but no thanks” (or perhaps expressed in saltier language) when the negotiations aren’t going their way. Young artists desperate to sign any record deal will often agree to just about anything and will rarely walk away from the table until they sign. Older, more experienced, artists come to the discussion with certain items they know the record company won’t want but that they will insist on. Such negotiations can get difficult when each side is willing to walk away, but both know there is some deal that could be reached that would favor both of them. In such cases, personalities can be tested and the fate of the negotiations will often rest on the ability of highly-trained (and highly-paid) lawyers to help find compromises that will allow both parties to consider the negotiation a success. In discussing the terms of a typical record contract below, I will sometimes refer to how these terms may change with different bargaining positions.
Breach of Contract.
Before we get to the specifics of record contract terms, we should consider what happens when a contract is broken or, to use the legal term, when there is a “breach of contract.” A breach of contract means simply that one party to the contract has not fulfilled her obligations under the contract. Some contract breaches can be minor (e.g., the artist failed to notify the record company of a change of address) and nothing other than a phone call or letter is required to fix the problem. Other contract breaches are significant (e.g., the artist fails to make a record within the time specified by the contract) and this will trigger what is known as a “default.”
A contract default occurs when there is a major breach of a contract, such that the parties are now in an adversarial (contested) position. Typically, lawyers will get involved again when there is a contract default. Sometimes, the contract can be amended (altered) to fix the default, or maybe the parties to the contract will agree to terminate (end) the contract and go their own ways, sometimes with an agreed upon exchange of money to remedy any financial inequities resulting from the default. Of course, sometimes that parties cannot fix the problem that led to the default and one or both parties may file a lawsuit against the other in court. This, of course, often leads to long, drawn-out, and expensive legal battles. The parties more often than not will settle the lawsuit after discovery (the exchange of information early in a lawsuit), but sometimes the case will go to a trial.
Contract law is typically governed under state, as opposed to federal, laws. (But, as we will see, copyright is a federal legal framework because it was created by federal statute.) Because record contracts are governed by state law, law suits that occur after contract defaults are filed in state courts (often in California or New York, where many record companies are located). The state court system is entirely separate from the federal court system, and differs from state to state. Every state has its own system of municipal (city) courts, state trial courts, and state courts of appeal (the highest referred to as the state supreme court). The federal system has its own trial courts (District Courts), courts of appeal (Circuit Courts), and of course the United States Supreme Court. This is why when we discuss record contract cases, they will typically be from state trial courts or courts of appeal, and when we discuss copyright cases, they will typically be from federal Circuit Courts or the Supreme Court.
Record contracts nearly always require that the artist signing the contract agrees to be under contract exclusively with only the record company who is offering the contract. This is only very rarely negotiable, regardless of the artist’s bargaining position. The following economic dynamic lies behind this non-negotiable provision and many other common record contract provisions as well: the record industry relies on the record company’s role in assuming the risk of failure by putting its own money up to finance the recording, distribution, and marketing of the record. In exchange for taking the risk that the record might not sell, and thus that the company will be unable to recoup its investment, the record company will demand certain assurances to minimize that risk. The exclusivity clause assures the record company that its only competition in making a successful record with the artist will come from other artists, not from the same artist making records with other companies. If the artist is going to make a successful record, the company wants to be sure they will be rewarded for taking the risk on that artist, not some other company.
If the artist is a group of two or more musicians, the record company will also likely insist that the exclusivity applies not only to the group, but to each of its individual members. In other words, the contract will likely specify that band members cannot record independent projects (such as “solo projects”) outside the scope of the band’s record contract. Some band members may wish to perform as “side musicians” with other groups, so many contracts will require band members to receive permission from the record company for such work. This is why records that have guest appearances by other non-regular band members will typically specify that the performance is “Courtesy of XYZ Records”. That “courtesy” is the record company having agreed to that instance of working outside the exclusive arrangement.
Term (Duration of Contract)
One of the most essential provisions of any contract is its duration. The duration of the record contract follows from the concept of exclusivity discussed above. If the artist and the record company tie themselves together exclusively, as in a marriage, they will want to spell out exactly how long that exclusive relationship will continue (unlike a marriage, which is presumed to last forever!). The record company will want the term to be long enough so that if the artist’s records at least break even, the company will be able to benefit from multiple recordings with the artist to turn its investment into sustainable profits. The artist, in turn, will want some assurance that if their first effort at recording ends up losing money (not breaking even), then the artist would have one or more chances to improve that result on subsequent recordings without being dumped by the record company.
On the other hand, if the first and maybe even the second recording is unsuccessful, the record company will want to have a short enough contract that they are not stuck with a band that cannot make commercially successful records (whatever the record company’s standard for success for that artist might be). And the artist might also wish to get out of a contract with a record company that the artist feels is not doing enough to successfully market or distribute their recordings. (when records fail to succeed, artists often blame a lack of marketing on the record company’s part for that failure, rather than their own inability to make a record people want to listen to.)
Record contracts typically state their duration as a requirement for the artist to make an initial recording within a certain time frame (often one year), followed by successive one-year (or occasionally multi-year) options to extend the contract for up to seven total albums for a total of seven years. (I will explain the reason for the typical seven-year limit below.) The use of extension options provides flexibility for the record company to cancel the contract after deciding the potential returns no longer justify the continued investment in recording and other costs of further albums.
Note that record contracts and the industry still use the concept of an “album” today, even though the physical album (or even a downloaded album) is not typically what the consumer buys (most music is consumed one song at a time in the era of streaming). The album still serves as a useful concept for marketing a collection of songs recording at roughly the same time. The album is typically defined in the record contract to mean at least 10 individual songs totaling 50 minutes. Of course, those numbers may vary according to the genre and style of the individual artist (pop songs are typically three minutes long, while jazz or “alternative” rock songs may be significantly longer).
Typically, a record contract will contain a provision that the artists’ recordings must be acceptable to the record company “as technically and commercially satisfactory” (or some other similar phrase) before they will count towards the recording requirement under the contract. The record company will have a specified length of time (usually more than a month and less than a year) within which to review the recording and determine whether it meets whatever standard has been agreed upon. The record company, of course, wants to make sure that the recording represents the artist’s best work and that it is of a sufficient artistic and technical quality to be commercially successful. Record companies will apply different measures of success to reflect the context of that artist and their previous work, the genre’s commercial potential, and realistic expectations of the market.
We might think it unfair for a record company to have the ability to reject an artist’s recording under a contract, but we must remember that the company has risked its money up front in the relationship and so has an expectation that the artist will do their best work in the partnership. Record companies rarely reject an artist’s work — the company wants a record to sell and wants to have a successful relationship with the artist. However, sometimes record companies do reject an artist’s recording as unacceptable, or may even sue an artist for providing recordings that do not rise to the artistic level expected by the record label.
One infamous case that demonstrates the importance of this provision in a record contract occurred in the early 1980s: In 1983, David Geffen, owner of Geffen Records, sued Neil Young for failing to make commercially marketable records under their recent contract. Young signed with Geffen’s new label in 1982 when both Geffen and Young were interested in reviving their respective careers that had somewhat stalled after their peaks in the 1970s. In 1982, Neil Young provided Geffen with an unusual first album under this new partnership, Trans, which revealed a very different musical style from the one Young had crafted with great success in the ‘70s. The album sold poorly and got bad reviews, so Geffen criticized Young for not providing him with a more marketable product. Young’s response to this criticism was to intentionally overcompensate in the other direction, giving Geffen a second album, Everybody’s Rockin’ (1983), that was a bizarrely deliberate throw-back to ‘50s-era rock ’n’ roll and equally distant from Young’s 1970s style. Geffen’s response was to sue Young for failing to deliver recordings representative of Young’s style. In turn, Neil Young countersued, arguing that his contract gave him complete artistic freedom. Young and Geffen settled their law suits, which included Geffen apologizing for his criticism of Young. But Young went back to his old label, Warner/Reprise after the conclusion of the ill-fated Geffen contract.
Granting of Sound Recording Master Rights.
Record contracts almost always provide that the artist grants and assigns to the record company the sound recording copyright (known as a “master” right) to any recordings made under the contract (whether or not those recordings are released). This assignment will typically last the full length of the statutory copyright term, currently the life of the author plus 70 years. Because the record company owns the master copyright to the sound recordings, it is the record company that negotiates and collects licensing fees and royalties resulting from the ownership of the copyright (unless otherwise specified by statute, such as for non-interactive streaming). An artist with a great deal of bargaining power may be able to negotiate a reversion of the master copyright to the artist at some future date (for example, 20 years after the date of the contract), but such concessions are rare.
On the extreme end, the record company may also ask the artist to agree that their work product (that is, recordings and songwriting) under the contract will be considered “work for hire.” This phrase means that the artist would be considered a contractor or employee under the contract and that all work produced by the artist would be owned by the record company, rather than licensed to the recording company by the artist. In a case where the record company is already getting a license of the master rights for the term of the copyright, the difference between these two might be minimal, but the artist should avoid their work product being considered “work for hire” under most circumstances. A licensing agreement is preferred, where the recording artist retains her right of ownership in the work product even if the master right is licensed for the full copyright term. At least then there will be some theoretical reversion to the artist at the end of the copyright term.
The record company may also want to include a provision that prevents an artist from re-recording the material recorded under the contract for some time period after the termination of the contract (e.g., 10 years). This will prevent an artist from creating new sound recordings of the same songs whose copyrights would be then be owned by the artist (or another record company) and could be re-released to compete with the original recordings.
Advances; Recording Costs
Some of the most important provisions in a record contract, and the ones that are highly negotiated and variable depending on bargaining position, relate to the payment of the various costs associated with recording, distributing, and marketing a record, and the relationship of those costs to royalty income derived from the recording. This issue again reflects the underlying economic reality of the record contract relationship — the record company is investing its money up front and assuming most of the risks of failure and therefore desires to both limit those risks and ensure that its investment yields maximum potential returns from sales.
Record contracts typically provide that the record company will make a cash payment to the artist upon signing of the contract, known as an “advance.” The use of the term “advance” is important, because this is more like a loan than a payment for services. However, unlike most loans, the record contract advance will not necessarily have to be paid back. Record contracts typically provide that the artist will use the advance to pay for the costs of making the recordings called for under the contract, as well as any other up-front costs (including paying the artist’s manager, lawyers, etc.). The advance represents the record company’s investment in the potential success of the partnership with the artist.
How much do artists typically get as an advance? There is no easy answer to this question, because there is such a wide range of advances. The amount depends greatly on the bargaining position of the artist, the record company’s expectations of success, and the level of competition with other companies to sign the artist. An untested new band that has not made a recording before might get as little as $20,000 to $50,000 (or maybe even no advance at all), but an established recording artist with a proven track record might get a $1,000,000 advance (or more). Most advances will fall somewhere between these two extremes but the amount will likely be determined by the perceived level of risk being taken by the record company. In making the determination as to the size of the advance, the record company will estimate the number of records it expects to sell throughout the length of the contract and sizes the advance as a percentage of those expected revenues. The less confident the company is about its ability to sell the artist’s records, the smaller the advance will be. Another factor in this will be competition: if the record company knows that the artist is getting competing offers from other record companies, they will make a more generous advance offer in order to ensure that the artist signs with them. This is where a good lawyer or manager for an artist can make a difference — negotiating a record deal by maximizing the perception of competition to sign an artist.
The contract typically specifies that the artist will use the advance to pay any and all recording costs associated with making their first record. Sometimes the record company will make additional recording funds available in addition to the advance (but within a specified budget); this would be the case if the record company wanted to exert more control over the recording process. The contract may specify which recording studio will be used (particularly if the company owns its own studio). The recording costs paid by the record company’s advance (and which will be recouped from sales — see below), include the studio time, the producer, the engineer and any assistant engineers, instrument rental and maintenance (including piano tunings), and the payment of any additional studio musicians who will play on the recording (in addition to the signed artist or band). If the artist is able to make the recording “under budget,” the artist will typically be able to keep any amount of the advance left over. The artist’s manager typically gets his percentage cut from this remainder of the advance after recording costs (though some might insist on being paid up front).
An artist may be able to negotiate additional advances to be paid by the record company prior to the artist making any subsequent recordings, whether or not the costs of the previous recording have been recouped.
Royalties; Recoupment of Costs
Typically, the artist will not earn any royalties from sales or other distribution of the recording unless and until the record company has earned back the recording and most other costs associated with producing the album (including the advance). This is called “recoupment of costs,” and gives the record company the incentive to put its money up front for the advance and costs associated with the album. Before the artist makes a dime from the record (other than through the advance), the record company assures that it will at least break even (recoup its investment). If the record never sells enough to recoup the record company’s costs, the artist will not owe the record company for those un-recouped costs, but neither will the artist make any additional money from the recording.
In addition to the advance, other costs that will need to be recouped before royalties are distributed to the artist typically include any artwork or photography associated with the recording, the cost of manufacturing the physical product (if any), the cost of mastering the recording, the cost of distributing the recording, any touring support costs the record company has agreed to pay, and some portion (often 50%) of the cost of any video associated with the recording. Obviously, to the extent that physical sales are now a smaller percentage of total sales when compared to internet streaming, those costs will be lower than they were in the past.
Marketing costs are often not part of the costs that will need to be recouped; that is, they are often assumed by the record company because the company often has an in-house marketing staff or a relationship with a marketing company that it relies on for those services.
Once the costs specified in the contract have been fully recouped by the record company, the artist will then begin earning a specified percentage share of the royalties associated with the sale and distribution of the recording. Those royalties will be distributed to the artist by the record company on an agreed-upon schedule (typically once per quarter). The royalties earned by young, unproven artists range between 10% and 20% of the gross revenues earned by the recording from sales (including streaming). This is a wide range, which indicates the different levels of expectation of success for the artist as well as the artist’s relative bargaining position, which might be greater if more than one record company is attempting to sign the artist.
The royalty rate may be higher or lower depending on other aspects of the contract. For example, the record company may agree to a higher royalty rate if the artist agrees to a smaller advance. Some contracts might provide for a royalty rate as high as 50% if the artist agrees to no advance at all, putting her own money up for the costs of recording. Again, nearly all the terms of the contract are negotiable, so an artist confident of their success might bargain away some items in exchange for a higher royalty percentage.
The record producer also typically receives a 3% royalty in addition to any up-front payment they receive during the recording. Traditionally, the producer’s royalty share will be taken out of the artist’s royalty share. So, for example, if the artist’s share is 12%, then the producer will be paid his 3% from that, bringing the artist’s actual share to 9%. The Music Modernization Act of 2019, however, contains a provision that the record company can specify to streaming services that the producer be paid their royalty share directly from the streaming service, rather than by the record company.
In 2021 and 2022, the three major record companies — Universal, Sony, and Warner — all announced that they were initiating new policies that would allow legacy (i.e., older) recording artists to receive their full contractual royalties on future sales regardless of any unrecouped balances on their advances. That is, these legacy acts would receive the royalties going forward that they would receive if their advances were fully recouped (paid back), even if that were not the case. These new policies were likely a response by the record companies to the increasing complaints about the high profits earned by those companies while some acts had yet to earn any royalties due to unrecouped advances. These new policies were purely voluntary on the part of the record companies; they were under no contractual or other legal obligation to make the changes. As such, they are part of a corporate “good will” campaign in response to consumer and artist complaints about unfairness and inequity in the record business. It should also be pointed out that the record companies are unlikely to lose much money due to these policy changes: Legacy artists with unrecouped balances are by definition artists whose recordings have not sold extremely well in the past. If those artists had chart-topping hit songs or albums, then the advances would have long been recouped. Legacy artists with unrecouped balances are likely not going to enjoy high volume sales in the future, so these new policies will likely have more impact as corporate public relations than actually achieving a meaningful change in distribution of record company profits to artists.
We learned above that record contracts nearly always provide that the artist assigns all interest in the sound recording copyright (the “master” rights) to the record company. But what about the royalties that follow song copyrights for songs on a recording that the artist has written? Songs written by the recording artist are known as “controlled compositions” (because the artist controls the song copyright) and they are dealt with differently than master rights.
To understand this concept, we must understand a vitally important point about music copyright that will underly much of the rest of this book. There are two different copyrights inherent to recorded music: there is the copyright in the songs (or “works”) that are recorded and there is a separate copyright in the recording itself (known as the “sound recording” copyright). There are separate royalties (also sometimes referred to as licensing fees) payable for each of those copyrights.
To further complicate this picture, there are two separate statutory royalty streams that flow from the song copyright: mechanical royalties (from the reproduction of the song on a recording) and performance royalties (from the public performance of the song, including the performance that occurs when a recording is played in a public context). Record companies are not concerned about the public performance royalties, because they don’t receive income from that royalty stream (except to the extent they own a publishing company). However, record companies do have to pay mechanical royalties to the holder of the song copyright when they sell a recording. So, when negotiating a record contract with an artist who writes her own songs, the record company will try to contractually reduce the amount of mechanical royalties it will have to pay the artist (as songwriter). The reasoning for this is that the record company is already paying for the recording of the song, so they feel they should get a break on the song copyright mechanical royalties they would otherwise have to pay that same artist for selling the recording.
Record contracts will typically provide that the record company will only have to pay 75% of the mechanical royalties to the artist/songwriter that would otherwise be owed to an unaffiliated songwriter (thus, a 25% discount). Again, an artist with a strong bargaining position may be able to negotiate a lower discount (or none at all), but that is rare.
The record company will also typically put a cap on the number of controlled compositions on a particular album for which they are willing to pay mechanical royalties. That cap might be in the range of 10 songs per album, such that the record company will not pay any mechanical royalties on controlled compositions above that number.
One major limitation of the controlled composition clause is that it only applies to physical sales of recordings, not to digital sales and streaming. This restriction was part of the 1998 Digital Millennium Copyright Law that we study in more detail in a later chapter. This makes the clause antiquated in the digital age and of limited value to the record company as physical sales represent a small source of revenue.
In October of 2020, record company BMG announced that it would eliminate the “controlled compositions” clause from its record contracts as part of a review of contract clauses that might be unfair or inequitable to artists. BMC urged other record companies to follow their lead, but whether that occurs is unknown as of this writing. Note that this concession from BMG sounds better than it is due to the fact that the provision they are giving up only applied to physical sales, as explained above. BMG is only conceding a provision that affects a very small portion of their business, and one that is rapidly decreasing. So, this is a good example of publicly trumpeting a change as a major concession to artists that actually costs the company very little, while gaining favorable attention and free press in the process.
Secondary Income; 360 Contracts
The record contract will also likely deal with how income from sources other than traditional sales of the recording will be treated. Income from any use of the recording in a video production (so-called “synch rights,” such as film, television, advertising, etc.) will typically be split 50/50 between the artist and the record company. Revenue from merchandise sales related to the recording might also be covered in the contract. Lastly, revenue from live performance tours might be included in the contract, often tied to a certain level of touring support from the record company.
Name, Likeness, and Image.
Just as the artist will likely license their master rights to the recording to the record company for the term of the copyright, the artist will also be asked to license to the record company the use of the artist’s name, likeness, and image for the purposes of promoting and marketing the recording. It will be important for the artist to limit this license to uses only related to marketing the recordings made under this contract. Without such a limitation, the record company could argue that it has the right to use the artist’s name and image for a broader range of uses and even after the end of the contract. The artist might further want to explicitly retain the right to use their own name, likeness, and image in their own independent marketing efforts to sell the recordings (such as an artist’s YouTube channel).
Likewise, the record company may wish to broaden the license of the artist’s name and image to include marketing efforts on behalf of the company as a whole, rather than just a particular recording (such as listing the artist on the company’s web site roster, etc.). The greater the specificity about the scope of this license, the less likelihood there will be disagreement about how the artist’s name and image are used during and after the contract.
Key Man Provisions; Group Members
Both the record company and the artist may have an interest in including what is known as a “key man” provision in the contract. For the record company, if the artist is a collection of two or more people, it may be essential to the contract that all members of the group continue to be bound by the contract. One can imagine a record company signing the band U2 to a new contract: the record company would certainly insist that the contract would be terminated if Bono were to leave the band.
Similarly, an artist may feel that their relationship with a certain executive at the record company is essential to their continued success. The artist may try to negotiate a provision that they can terminate the agreement if that executive ever leaves the record company (for whatever reason).
One of the eternal complaints about record contracts from the artist perspective is that they provide too little creative control or freedom to the artist. We can also understand why a record company would want to limit the artist’s creative control: the record company has made a substantial financial investment in the recording and wants to make sure any creative decisions are made in a way that will maximize the commercial potential of the recording. There are many areas about which creative decisions can become difficult: which producer to hire; which songs to record; when and in which order to release songs; what album cover art to use; which recording studio to use; which photographer to use for marketing photographs; how to market the album; etc. Each one of these creative decisions are possible points of negotiation for a record contract. As always, the relative bargaining power of the company and the artist will determine the outcome of those negotiations.
Accounting and Audits.
Artists negotiating a record contract will want to make sure that they receive regular accounting reports from the record company (semi-annual reports, every 6 months, would be typical), detailing the costs incurred by the record company, the number of sales, the amount of any royalties received and paid out, etc. The accounting reports should occur even before there has been recoupment of costs and royalties paid to the artist, so that the artist and manager can track the financial progress of the recording. Further, the artist will want to make sure they have the ability to hire an independent accountant to audit the record company’s books if there is reasonable evidence of a discrepancy. There will likely be negotiations regarding who is responsible for paying for the costs of any such audit.
Any well-written legal contract will contain provisions that govern how, when, and why the contract may be terminated by either party prior to its negotiated end date. The most obvious reason typically provided for termination by either party is when the other party has defaulted on their obligations under the contract. The contract will typically require the terminating party to provide notice to the defaulting party of a default with some period of additional time for the defaulting party to correct whatever situation gives rise to the default. In a recording contract, the default might be that the artist fails to deliver a recording within a stated time period, which would then trigger a default notice and a time for the artist (e.g., 90 days) to remedy the default and deliver the recording. On the other hand, the record company may default by failing to pay royalties when promised, in which case the artist would have the right to terminate the contract (and sue for unpaid royalties) after giving the company notice and a set period of time within which to correct the nonpayment.
Other events which might give one of the parties the right to terminate the contract could include the record company filing bankruptcy; the artist being convicted of a crime; the artist becoming incapacitated by illness, injury, addiction, etc.; the artist engaging in certain examples of notorious behavior or immoral activity that generate negative publicity; the record company failing to market or publicize the artist as expected; or the artist failing to cooperate with the record company’s marketing and publicity efforts.
Breaking a Contract;
Over the past 50 years, there have been a handful of high-profile legal battles waged over whether an artist has the right to get out of a record contract. Typically, these are relationships between high-profile, successful artists and large record companies who do not want to give up their rights to the earning potential of those artists. Less successful artists and their record companies rarely get into these battles because the stakes are so much lower. A less-successful artist is typically happy to have a contract and not too worried about getting out of one. And if a less successful artist does want out of their contract, the record company is often willing to either renegotiate or simply let the artist go because there is little potential earnings at stake and the costs of fighting such a battle can be high. This section explains some of legal concepts that typically come into play when a recording artist wants to break their record contract.
Record Contracts as Personal Service Employment Contracts.
Courts have consistently construed record contracts to be personal service contracts, within the realm of employment contracts. The significance of this is that courts typically will refuse to allow the “employer” in such a contract (here, the record company) to force the employee (here, the artist) to remain under contract against their wishes. The public policy behind this is clear: people should have the right to quit a job if they wish for either personal or economic reasons and should not be forced to work in any capacity against their will.
However, courts have also found that some employer/employee relationships are different than others and they have carved out the principal that in contracts for artistic services, where the employee is not readily replaceable due to their particular skill or talent, the employer is entitled to be compensated for the loss of potential income if a skilled artist terminates a contract before providing the artistic services specified in the contract. Courts in such cases have held that an employer may sue an employee for the value of the undelivered artistic product (such as a recording) after an artist terminates a contract before its contractual end date.
In California, the state in which a majority of record contracts are signed and thus whose laws govern most of them, this principal has been codified into statute, resulting in several high-profile conflicts between record companies and artists. Section 2855 of the California Labor Code provides that personal service contracts “to perform or render service of a special, unique, unusual, extraordinary, or intellectual character” can be enforced by an injunction against the employee (artist) performing that service for anybody else within a seven year period (including any options to extend the term up to seven years).
This statute leaves open the question of what happens when a recording artist terminates a contract after seven years but has not delivered the required number of albums specified in the contract. A high-profile lawsuit in the late 1970s by pop singer Olivia Newton-John (star of the movie version of the musical Grease in 1978) resulted in a court decision stating that her record company could not sue her to force her to deliver late recordings after the stated term of her contract had expired. This result caused record companies to write their contracts differently, so that the term of the contract was stated as requiring the delivery of albums within a certain length of time, rather than the contract running for a certain number of years with an expectation of a certain number of albums per year.
Record companies also reacted to this uncertainty over record delivery within the statutory seven-year personal services contract limit by lobbying the California legislature to add a new provision to Section 2855 dealing specifically with record contracts. This provision (Section 2855(b)) gives record companies the ability to sue artists who terminate their contracts under section 2855 after seven years for damages to recover the value of any recordings the artists has failed to deliver under the terms of the contract.
Section 2855(b) was tested in court in 1999 when Courtney Love (wife of the late Kurt Cobain of band Nirvana) invoked Section 2855(a) to terminate her band Hole’s contract with Geffen Records after the statutory seven-year period. David Geffen in turn sued Courtney Love under section 2855(b), the new damages provision, claiming that Love owed Geffen for failing to deliver five albums required by the record contract. Love in turn challenged the constitutionality of Section 2855(b) and organized state-wide protests against the law, some led by Eagles lead singer and drummer Don Henley, and inspiring legislative efforts to repeal it (which did not happen). Love’s lawsuits with Geffen were settled out of court (for an undisclosed amount).
The result of Section 2855 means that, at least in California, artists can terminate their contracts after seven years, but if they have not delivered the required number of records (typically seven after that many years — one per year), then they will face the prospect of being sued for the value of those undelivered records. As we can imagine, it is very unrealistic for a record company to expect an artist to record an album once every year given the need to tour a previous album, write new material, etc. Most record companies would probably not even want an album every year, as it requires a great deal of money and most fans would not expect it. Section 2855(b) thus may have the effect of tying successful artists to record contracts for longer than seven years because the recording requirements are unrealistic and difficult to fulfill. Yet, they may be sued if they try to leave the contract before the recordings are made.
Other artists, such as Metallica, Don Henley, and Kesha have been involved in disputes with their record companies involving the artist’s desire to get out of a contract before all albums have been delivered, but these have so far all been settled out of court so the application of these statutes remains uncertain. Several legal commentators and organizations representing recording artists have continued to call for Section 2855(b) (the provision allowing damages for undelivered albums) to be repealed. In 2022, the California State Legislature considered a bill to repeal Section 2855(b), called the Free Artists From Industry Restrictions (FAIR) Act. However, the bill faced predictably strong opposition from the powerful recording industry and did not make it out of committee for a vote. Artist rights groups in support of that bill vowed to continue their fight against Section 2855(b) despite this most recent legal setback.
Note that the Section 2855 issue typically only comes up with respect to very successful artists, those whose record companies would like to keep them under contract for multiple albums. Given that at least 90% of all albums end up losing money for the record company, most artists will not have their options for additional albums exercised by their record company and the seven-year limit will never be reached. Further, the record company will not want to sue for damages even if the seven-year limit is reached because the recordings of most artists are not profitable so the damages to be recouped from such a law suit would be unlikely to exceed the attorney fees required to sue and collect damages.
California Civil Code Section 3423 (the “$9,000 Plus Provision”) provides another level of protection for artists who wish to break their record contracts (at least those signed in California). As explained above, California law (and in most other states as well) will not typically enforce a personal services contract beyond seven years. However, this does not always mean that an artists will then be able to sign another contract with another record company for similar services. Although the artist may be free of an unwanted contractual obligation after seven years, if there are remaining services that the artist has not provided under the contract (such as recordings), the record company may be able to obtain a court-ordered injunction (sometimes referred to as “equitable relief”) to prevent that artist from working under the same capacity for another record company. The legal reasoning for this is that it would be unfair to allow an artist (or other personal services employee) to get out of a contract they signed simply because they can earn more money somewhere else. The court might not force you to work for a record company under a contract after seven years, but they might prevent you from using that as a legal loophole just to make more money doing the same service for someone else.
However, California Civil Code Section 3423, limits the ability of record companies to obtain an injunction preventing an artist from signing to another record company after terminating a contract. The law states that in order for a record company to obtain such an injunction, they must have made guaranteed payments under the broken contract of $9,000 the first year (previously $6,000), $12,000 the second year, and $15,000 for any remaining years up to year seven. A California court held in 1979 that the guaranteed payments required by a record company to obtain an injunction under this statute could be met by the payment of advances if the artist has the reasonable ability to control the costs in order to retain enough of the advance to meet the statutory payment amounts (MCA Records, Inc. vs. Newton-John (1979)).
Bankruptcy as a tool to get out of a contract. Most people believe that bankruptcy is a last-resort legal situation that people find themselves in when they have no money, high debt, and the next step might be homelessness. However, both personal and corporate bankruptcy is often used as a legal tool to restructure debt and other obligations, even when the bankrupt’s financial situation is far from what most people would consider to be dire. One of the little-understood aspects of declaring bankruptcy is that it allows not only for the restructuring of debt but also the termination of ongoing contracts that might be encumbering the bankrupt’s financial future. Several recording artists have used bankruptcy as a legal means to break or force renegotiation their recording contracts.
For example, in 1998, seven-time Grammy award winning R&B vocalist Toni Braxton filed bankruptcy in what many observers assume to have been primarily motivated by her desire to be free of her record contract to BMG’s LaFace Records label. The bankruptcy filing came after Braxton’s unsuccessful attempt to renegotiate her contract following two very successful album releases in 1993 and 1996 (with combined sales of over 15 million units). Braxton’s bankruptcy filing succeeded in its goal, as LaFace agreed to renegotiate the contract with higher royalty payments to Braxton. Remarkably, Braxton filed for bankruptcy a second time in 2010, claiming debts of over $50,000,000! Other artists who have used bankruptcy filings to get out of or renovated record contracts include rap trio Run-D.M.C. in 1993 and R&B girl-group TLC in 1995.
Bankruptcy filings are not a fail-safe method of getting out of or renegotiating a contract, however, as the bankruptcy judge may not be willing to go along with the strategy. If the judge feels that the bankruptcy filing is in bad faith, that is not actually motivated by the need to get out of difficult financial situation, the judge may decide that the contracts should remain in place.
Unenforceable Contracts (such as with a minor). Another potential way that recording artists can get out of unfavorable recording contracts is to assert that the contract is unenforceable due to some unusual condition being present when the contract was signed. Broadly speaking, a contract is unenforceable if it is made under duress (when one party feels forced to sign), made when one party is incapacitated (by illness, intoxication, etc.), or when a party is a minor (the age of contractual consent varies by state, but is typically 18). The parties to a contract may proceed with their contractual relationship without a problem, but if one party decides to abandon the contract, they may be able to prevent the other party from enforcing the contract legally if they assert one of these conditions.
A well-known instance of this occurred in the mid-1979s when bubble-gum pop and TV superstar David Cassidy asserted that his contract was unenforceable because it was originally signed when he was a minor (under 21, the age of consent in California at that time), even though he had been releasing records under that contract for several years including after he turned 21. He was then able to renegotiate the contract on more favorable terms. Because it is not uncommon for pop stars to be under 18 years old when signed to contracts, record companies will sometimes protect themselves by having a judge certify the enforceability of a contract with a minor to make sure its terms are fair, that the parents or guardian of the minor have agreed, and that there has been no coercion. For example, Billie Eilish signed her first record contract with Interscope Records (a Universal Records label) when she was 15, so the contract was presented to a family law judge in Los Angeles County to have it verified to be a fair contract with the approval of her parents. This legal process would make it very difficult to Eilish to later claim that her contract is unenforceable because she was a minor when she signed it.