"Mechanical" royalties, so called from the days when the only recordings sold were piano rolls which mechanically triggered a player piano, now represent royalties due to songwriters and their publishers for each copy of a record sold. Effective January 1, 2004, the statutory mechanical royalty rate in the United States was increased to $.085 per song. Pursuant to the U.S. Copyright law, this higher mechanical rate is applicable to all recordings made and distributed on or after 2004. However, due to certain ambiguities in the Copyright law, almost all record companies use their substantial leverage over new recording artists to cause them to enter into record contracts which substantially reduce this statutory mechanical rate pursuant to a controlled composition clause, often referred to as the "3/4 rate" since it typically reduces the amount to 75% of the statutory rate.
Under U.S. Copyright law, Congress established a statutory mechanical royalty rate for songwriters and their publishers based on an upward-sliding scale tied to a cost-of-living index on a per song per record basis. However, the controlled composition clause, one of the many royalty-reducing provisions in any record contract, contractually reduces the mechanical rate for a songwriter/ recording artist and its publisher on songs written or otherwise "controlled" by the artist. Most such clauses not only reduce the payment per song, but may also put a limit on the total number of songs on which payment will be made and may fix the point in time at which the calculation will be made (thereby circumventing the cost of living index increase).
A detailed analysis of a controlled composition clause is beyond the scope of this article. However, for a simplified example of how it works, lets assume a typical clause which might say that the songwriter/artist will receive 3/4 of the minimum statutory mechanical rate payable on a maximum of 10 songs per LP.
The mechanical royalty on the artist's entire LP has a cap of 60 cents (3/4 rate x 10 songs) so that, even if the songwriter/artist writes 12 songs for its own album, the artist's publishing which should be worth about 96 cents an album at the full rate is only allocated 60 cents under this clause.
To further illustrate, assume the 12 song album has 6 songs written by the artist and 6 songs from outside publishers. The outside publishers are not subject to the artist's 3/4 rate so the 6 outside songs get the full rate and are entitled to a total of about 48 cents. Since the mechanical royalty on the entire LP has a contractual cap of 60 cents, the recording artist's publisher is limited to applying the remaining 12 cents to the artists's 6 songs, so that the artist's publishing is worth 2 cents per song.
To take it another step further, imagine a case where 8 of the 12 songs on the LP were from outside publishers. The outside publishers would be entitled to about 64 cents in mechanical royalties. Since the artist's contractual cap is 60 cents, then for each LP sold the songwriter/record artist would actually owe its record company 4 cents which would be deducted out of its recording royalties. In addition, the artist's own 4 songs receive no mechanical royalties at all.
Some controlled composition clauses also contain language which further reduces the mechanical rate on mid-priced and budget sales, etc., providing for a 3/4 rate on the 3/4 rate. In addition, record contracts often contain several subparagraphs that eliminate royalty payments for free goods and records sold below wholesale price, etc. Several of these categories would ordinarily be subject to mechanical royalties absent the controlled composition clause and, although this provision reduces mechanical royalties on the artist's publishing, it does not reduce payments to outside publishers and writers since they are not subject to the terms of the artist's contract.
The most treacherous dilemma for the songwriter/artist is that, even if the record company does not expressly acquire the artist's publishing rights in its contract, the value of the artist's publishing may so greatly be reduced by the controlled composition clause that the artist may find it difficult to get a publishing deal elsewhere. This is particularly true if the mechanical royalties are cross-collateralized with the artist royalties which means that, until the artist is recouped, no mechanical royalties are payable on the recording artist's publishing.
The foregoing scenarios raise numerous legal concerns for the record labels. The specter of antitrust and restraint of trade claims arises since virtually all labels have the three-quarter rate in their contracts giving the artist little, if any, choice. Since the controlled composition language is almost identical in each label's contract, it might not be all that difficult for a plaintiff to establish circumstantially that the labels conspire to fix the rate. A claim of interference with prospective financial advantage could be raised since the controlled composition clause devalues an artist's publishing rights. Another pertinent issue to be considered is whether, under partnership law (where one partner can bind the partnership), an artist's co-writer who is not actually a signatory to the record contract is subject to the 3/4 rate by virtue of being a "partner" in the song's creation.
Although a controlled composition clause can be made somewhat less onerous through some tenacious negotiating, record companies are generally inflexible on this provision and their obstinacy can only be mitigated if they have an ardent desire to sign a particular artist.
In fairness to record companies, with the exorbitant cost and high risk of the record business, the companies need to cut costs where they can to try to make a profit on the few artists who do succeed. However, the question is one of whether devaluing the artist's publishing is a fair way of doing it. Record companies contend that, since they are financing the production and marketing of the artist's recordings, the artist should give them a break on the publishing royalties they would otherwise have to pay. However, whether the contractual reduction by a record company of the Congressionally legislated mechanical royalty rate would hold up if challenged in a court of law has yet to be tested.
Moreover, in the wake of Congress amending the Copyright law last session to allow for performance rights for digital transmissions, the time is right when Congress reconvenes for lobbying efforts by songwriter organizations and publisher groups to bring attention to the 3/4 rate issue and the need to clarify certain ambiguities in the copyright law so as to better protect songwriters and their publishing rights.
Wallace Collins is an entertainment lawyer . He was a recording artist for Epic Records before attending Fordham Law School.
Wallace E. J. Collins III, Esq.
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Email: Wallace Collins