Group Tops Charts but Claims Bankruptcy

It was a bittersweet victory, singer Lisa “Left Eye” Lopes recalls, when rhythm-and-blues/rap sensation TLC stepped onstage to pick up two Grammy awards in February.

Winning the prestigious honor marked a milestone in the swift rise of the hot trio, whose “Crazysexycool” last year ranked as the nation’s second-biggest album. But it also confirmed some of TLC’s worst suspicions about the music business.

Lopes says her Atlanta act, which filed for bankruptcy protection last year after a bitter contract dispute with its record company, plunged even deeper into debt simply by performing at the ceremony.

Tens of thousands of dollars will be deducted from the group’s future royalty earnings to reimburse its record company for expenses incurred by TLC, its dancers and road crew to play at the event.

“I hope we go down in history for being something more than just another famous act that got ripped off,” said Lopes, whose group is awaiting a final decision from a federal judge in Atlanta on its bankruptcy claim. “It’s hard to believe that a group can sell 14 million records and still be treated so badly. But guess what? This is a cutthroat business full of greedy individuals who take advantage of naive young artists.”

TLC’s predicament shines a light on a harsh side of the music business. Industry critics say it illustrates just how little power artists actually wield over their careers. Although record companies often upgrade the contracts of best-selling artists in exchange for additional albums, they have no legal obligation to do so. Once an act locks itself into a long-term pact, it is almost impossible to get free.

However, many record industry executives argue that without low-paying, long-term contracts they would have no incentive to underwrite the enormous costs of developing an unknown artist’s career. At the same time, they contend they try to negotiate contracts that are fair and lucrative for the artist.

Representatives for Arista Records and LaFace Records, the companies that distribute TLC’s music, insist that the group has been paid properly under the terms of its contract, which both characterize as a “fair, industry-standard agreement.”

“These girls are certainly not living in impoverishment,” said Roy Lott, executive vice president and general manager of Arista Records, a division of German entertainment behemoth Bertelsmann Music Group. “This bankruptcy case is nothing but a ploy to break their contract.”

LaFace and Arista executives suggested that the group has no desire to resolve the dispute but is hoping to use its bankruptcy claim to ultimately land a better deal elsewhere. They said the group was out of line at the Grammys by running up a $200,000 tab at the Four Seasons Hotel, including a $22,000 tab at the gift shop.

Even by industry standards, TLC’s case stands out. After five years, Lopes says, the trio has received less than 1% of the estimated $175 million in revenues that the group’s music has generated around the world. Analysts say that’s about 40 times less than the profit that has been divided among the management, production and record companies that represent TLC.

TLC signed a contract in 1991 that pays the group about 7% on the sale of each album--or about 60 cents after the company takes contract deductions for packaging, promotional giveaways and other costs. However, like most acts, TLC is not paid a single penny until after the company is reimbursed for cash advances spent on studio recording, video production, radio promotion and tour support. Analysts say that breaks down to about 20 cents per album that the three TLC members get to split as profit.

Typically, an unknown act is required to sign a deal that gives the company options for eight albums at a low royalty rate--between 11% to 15% of the suggested retail price. Most artists pay about 6% of that royalty to the people who manage their careers and produce their records.

TLC is paid only 7% because the trio signed an agreement with Pebbitone Inc., an Atlanta company that managed the group and hired the producers to write and record their music. Pebbitone was founded by singer Perri M. Reid, who at the time was married to the owner of LaFace Records.

Reid discovered the trio--Lopes, Tionne Watkins and Rozanda “Chile” Thomas--when they were teenagers in Atlanta. Acting as their manager, Reid advised the trio to sign a production and publishing deal with Pebbitone and then negotiated her own deal with her husband’s label. Under that agreement, LaFace was required to pay Pebbitone a 15% royalty each time a TLC album was sold.

“When you first start out, you are so trusting. You feel lucky just to get your foot in the door,” said TLC member Thomas. “But the bigger you get, the more hands want to pick your pockets. We know our producers helped us create these records, but we’re tired of watching everybody cash in on our success but us.”

TLC’s first album, “Ooooooohhh--On the TLC Tip,” was a smash from the second it reached the airwaves in 1992. Spawning three hit singles, the album has sold an estimated 4 million copies around the world. The songs were written and produced by some of the hottest rhythm-and-blues composers in the business.

Their second album, “Crazysexycool,” did even better, selling an estimated 10 million copies worldwide since its release last year. Those sales surpass the recent showings of such superstar acts as Janet Jackson and Madonna.

“Everybody treats us like stars now, except our own record company,” said TLC’s Watkins. “When we signed our contract, we were under the impression that if we sold a bunch of records they would give us a better deal. No matter how many records we sell or awards we win, they just treat us like dirt.”

Record companies typically reach out to new acts that prosper and offer to renegotiate their contracts. In recent years, such budding stars as Green Day, Offspring, Boyz II Men, the Cranberries and Hootie & the Blowfish have all been given retroactive bonuses plus higher royalty rates in exchange for making an additional album or two.

But attorney Eric Greenspan, who represents such acts as Stone Temple Pilots and the Red Hot Chili Peppers, says not all companies operate so benevolently.

“One of the great lies in the music business is when an executive tells an artist during negotiations not to worry about contract details and promises to renegotiate later,” Greenspan said. “This is not just a problem for TLC, it’s a problem for every unknown artist in the industry. Once you sign on the dotted line, you are at the company’s mercy.”

After attempting to renegotiate its contract last year, TLC filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, claiming that its contract was unfair and prevented the group from being able to pay its bills.

The filing came a year after Lopes made headlines when an Atlanta mansion owned by her boyfriend--professional football player Andre Rison--burned to the ground. Lopes pleaded guilty to one count of first-degree arson and has been sued for $1.3 million by Lloyd’s of London, which carried insurance on the house.

LaFace and Arista returned to the negotiating table last winter. The companies volunteered to pay the trio $10 million in advances, all of which must be paid back from future royalties. The trio was also offered an 18% royalty rate in exchange for two additional albums.

TLC attorney Don Engel, who has previously resolved contract disputes for such music stars as Don Henley, says he rejected LaFace’s proposal because, among other things, it contained no retroactive bonus offer.

“I’m not privy to how these four companies are splitting up all the profits they made on TLC, but they haven’t offered one nickel in recompense to the act,” Engel said. “It’s an onerous proposal. Don’t they understand how bad this looks?”

TLC raised eyebrows in February when word got out that the trio and several friends stormed the office of Arista Chief Executive Clive Davis and took every plaque bearing the group’s likeness off his walls. The trio claims they never received any platinum awards from their record company and that they barged in on Davis because they were frustrated with what they said was lack of progress in their contract negotiations.

“Everybody in this thing keeps pointing the finger at everybody else, so we decided to confront the guy at the top,” Lopes said. “Clive told us that our problem was that we didn’t understand what a good deal was and when to accept it.”

In April, a U.S. district judge in Atlanta upheld TLC’s bankruptcy claim and is expected to issue a ruling sometime this summer on whether TLC’s contract is unfair. Meanwhile, a $2-million payment owed the trio is being held by the record company until the court’s ruling.

Even if the judge allows TLC to break its contract, it is unlikely that the trio will be inundated with offers from other companies. LaFace executives say they plan to file an appeal, and the case could take several years before being resolved.

Any company that signed TLC in the meantime could be responsible for millions of dollars in damages stemming from a lawsuit by LaFace, should the ruling be overturned on appeal.

Attorney Peter Paterno, who has negotiated deals for such acts as Offspring and Metallica, says that young acts that try to challenge the system rarely win.

“The way many record companies size the situation up is like this: They think, ‘Well, I’ve got 100 big artists to fill the pipeline with product, and you’ve got only one tiny career,’ ” Paterno said. “Who do you think usually wins? They just stall the starving artist out with every legal delay possible until they finally crumble and give in.”

“It’s like you’re trapped no matter which way you turn,” TLC’s Thomas said. “My advice to any new artist about to sign a contract is, Baby, you better watch your back.”

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1995’s Top 10

TLC’s album “Crazysexycool” was the nation’s second-best seller last year. Top 10 albums of 1995 at U.S. retail stores:

1. Hootie & the Blowfish “Cracked Rear View”: 7 million units

2. TLC “Crazysexycool”: 4.8

3. Alanis Morissette “Jagged Little Pill”: 4.3

4. Mariah Carey “Day Dream”: 3.9

5. Garth Brooks “Hits”: 3.8

6. Live “Throwing Copper”: 3.5

7. Boyz II Men “II”: 3.4

8. Beatles “Anthology”: 2.9

9. Eagles “Hell Freezes Over”: 2.8

10. Shania Twain “The Woman in Me”: 2.8

Source: SoundScan

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Where the Money Goes

An artist typically receives a percentage of the suggested retail price of every record sold. That percentage is usually based on the number of albums sold. The more records an artist sells, the more money he or she can usually expect to be paid. TLC’s sales rival those of Garth Brooks and Janet Jackson, but the trio has been paid only a fraction of what those superstars make.

ESTIMATED TOTAL TLC SALES, INCLUDING RECORD CLUBS: “Ooooooohhh--On the TLC Tip,” 2.5 million in United States; 1.5 million overseas. “Crazysexycool,” 6.5 million in United States; 3.5 million overseas.

TOTAL RETAIL PIE: 14 million albums generates an estimated $175 million at retail.

RECORD COMPANY TAKE: The record company grosses about $140 million on the sale of 14 million units and racks up about $49 million in profit (not including profit on manufacturing or distribution.)

ARTIST’S TAKE: The artist is paid no money until after the company is reimbursed for cash advances spent on studio recording, video production, radio promotion and tour support.

SUPERSTAR: Theoretically, the sale of 14 million albums should generate about $22 million for such superstars as Garth Brooks, Janet Jackson and Metallica, who receive an estimated 25% royalty, minus marketing, packaging and other costs.

MID-RANGE: Theoretically, the sale of 14 million albums would generate about $8 million for such stars as Green Day, Hootie & the Blowfish or the Cranberries, whose initial 12% contracts have been bumped to an estimated 18% royalty.

BOTTOM-RUNG ENTRY: TLC has been paid only $1.2 million after selling an estimated 14 million albums. The group still receives a meager 7% royalty rate.

Sources: SoundScan and other industry sources