Music Labels Urged to Revise Royalties

The California Senate Select Committee on the Entertainment Industry issued a report Monday calling on record labels to reform accounting practices or face legislative penalties in the future.

The report was released by Sen. Kevin Murray (D-Culver City), the chairman of the committee. It follows a trio of hearings in Sacramento attended by more than a dozen music stars, including Courtney Love and Don Henley, who complained about being cheated by their record labels.

“I urge the record companies to consider ... changes on their own to avoid ... legislative action,” Murray says in the report.

During the hearings, representatives from the nation’s five largest record corporations -- Vivendi Universal’s Universal Music Group, Bertelsmann’s Bertelsmann Music Group, Sony Corp.’s Sony Music Entertainment, AOL Time Warner Inc.’s Warner Music Group and EMI Group -- denied to legislators that they gouge artists of earnings. Last month, however, BMG and Universal announced plans to revise their royalty accounting practices.

In the report, Murray chastises labels for forcing artists to reimburse them for the cost of recording albums and videos. He also criticizes record companies for compelling artists to pay back costs associated with marketing and independent radio promotion.

Above all, though, the report focuses on the problems surrounding accounting for artist royalties. Murray says that artists believe they are forced to sign agreements that favor the record company, and that acts are not even paid the royalties due under these contracts.

“In our legislative hearings, it was clear that artists feel they are being systematically cheated out of their royalties,” Murray says in the report. “The hearing showed that at the very least there is purposeful neglect on the part of the record company accounting departments.”

During the hearings, auditors said firms often capitalize on contracts that are loaded with royalty policies designed to override provisions benefiting artists. And because few artists can afford to audit their labels, the report says, these practices often result in windfalls for the record companies.

Murray also chides the labels for lacing contracts with clauses that essentially preclude any penalty for the underpayment of royalties -- even if caught.

“Each recording contract contains a clause that the record company, no matter how egregious their behavior, will never be liable for more than the amount of royalties due,” the report says. Such clauses protect companies and entice labels to hide money from artists.

The report suggests two potential solutions. One is to introduce legislation defining the practice of paying royalties to an artist as a fiduciary duty. The second is to write a law designating severe penalties to those companies that engage in a pattern of underpayment.

“Government is usually loath to actually dictate the terms of contracts between private parties,” the report says, “but when the relative leverage of the parties significantly favors one party, government often steps in to protect the party with the least leverage.”