music and entertainment law Mclane and Wong - Entertainment Law

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Flow Through

In the music industry today, producers and production companies are signing a large number of artists to production deals, which are essentially record contracts. Then, the production company will enter into a recording agreement with a record company in order to obtain distribution and marketing for the production company's releases. Hence, the artist is actually released by a label with which it has no direct contact or contract. This situation presents a unique problem both to the artist and the production company with respect to royalty computations in particular. I will explain.

The artist fears that the production company will receive a higher royalty percentage from the record company than the artist receives from the production company. Oppositely, the production company fears that it has given the artist a higher royalty percentage than it will receive from the record company. For example, the artist's agreement with the production company reduces royalties paid on foreign sales by 50%. Yet, the production company's contract with the record company only provides for a 25% reduction in royalties on foreign sales. In this instance, the production company gets a windfall because it gets seventy five cents on the dollar, while the artist only gets fifty cents. In another example, the artist's agreement with the production company caps free goods at 20%. Yet, the production company's contract with the record company limits free goods at 30%. Here, the artist receives the windfall because the production company must pay the artist on the basis of one extra record for every ten records sold.

There are various ways to handle this inconsistency so that the playing field is level. First, and most popular, is what is known as the "flow through" provision. This means that no matter what the agreement between the artist and production company, the artist will receive the benefit of any more favorable royalty computation in the production company's contract with the record company.

Second, the production company and artist agree that the artist's royalties will be a set percentage of what the production company receives from its agreement with the record company. For example, 50% of the money received by the production company from the record company will belong to the artist.

Third, and least definite, is for the artist to attempt to negotiate the highest royalty percentage it can get from the production company.

The "flow through" model can be applied to other main provision of the artist's contract with the production company (e.g. term). The key is to make sure that the provision offered by the production company will match the provision the production company receives from the record company.

Copyright 1998, Ben McLane
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