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by Ben McLane, Esq.

Every record contract includes a hazy and mysterious concept called "reserves". Since this concept can have such a negative impact on the artist's ability to be paid royalties, it is important that an artist be aware of this clause and know how to limit it.

The language of a record contract generally sets forth that royalties will be paid to the artist only on records that are actually sold to the general public, not on records that are manufactured and shipped but eventually returned because they are unsold (i.e., "returns"). Depending upon the particular artist, the number of records that might be returned can be substantial. For example, if the label ships 300,000 records to the stores, 150,000 might be returned as unsold goods. Imagine what would happen if the label based its royalties payable to the artist only upon the amount of records shipped; it would have paid royalties on 300,000 units instead of 150,000, resulting in an overpayment of 150,000 records. Hence, since the label knows that there will normally be returns, to protect itself it withholds a certain percentage of an artist's royalties in anticipation of such returns. This ensures that the label will not overpay an artist.

Generally, the label does not state any percentage limit on reserves in the contract. Instead, it is common to see that "reasonable" reserves will be held back. If a percentage is stated, it will be lower for established artists and higher for new artists. Additionally, different configurations have different reserves percentages because of the return history for that type of recording. For example, usually more singles and EPs are returned than CDs and cassettes.

An artist needs to be mindful of the reserves percentage because it can substantially reduce the initial royalty payments and it postpones the date that the artist will be paid. An artist can negotiate protections into the contract. First, the artist should have a specific reserves percentage in the contract (25% is common for an album). Second, the artist should limit the amount of time that a label can withhold royalties (i.e., "liquidation period"). Instead of just accepting that reserves will be liquidated within a "reasonable" amount of time, the artist should ask for a specific liquidation period (12 to 24 months is common).

Copyright 1998, Ben McLane
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