"Gimme' A Break"
A musical artist, under certain circumstances,
by Ben McLane, Esq. and Venice Wong, Esq.
For a new musical artist, securing a recording agreement with a record or production company is the golden ticket. Often, however, the gilt wears thin due to a panoply of circumstances, and the artist will seek freedom from the agreement. Typically, an unknown artist has limited negotiating power, and a first record deal is usually one-sided in favor of the label. Later, after a hit record, the artist might feel that the agreement is adverse in light of the artist's newfound notoriety. In addition, the artist might believe that another record company would be better suited to further the artist's career, or, more simply, pay the artist a greater amount of money. This situation has caused many an artist to seek (or threaten) some sort of legal recourse against the record company as a means to leave the contract, or else to force a renegotiation of the agreement. Over the years, various tactics have been used by artists as a way of cancelling a record contract.
Recently, a novel and highly publicized approach has been taken by a small group of best selling recording artists in their attempt to leave an exclusive contract situation. They have filed for bankruptcy. The Federal Bankruptcy Code states that existing contracts may be rejected if they impair a debtor's ability to get back on his feet or recover financially. 1.Bankruptcy law has thus armed an artist seeking to break or renegotiate a contract with a powerful weapon.
In January 1998, best-selling vocalist Toni Braxton filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court in Los Angeles. Although her bankruptcy petition ostensibly was filed on the grounds that her liabilities exceeded her assets, music industry pundits believe that the core reason she filed was so the bankruptcy court would void her existing recording agreement with her record label LaFace. 2.
Braxton's 1993 debut album and her 1996 follow-up have sold an estimated 15 million units worldwide.3. This enormous success begs the question: How can an artist who has sold approximately 15 million albums go bankrupt? According to her label, following the success of the 1996 release, Braxton demanded more money and said that she would no longer record for the label if it did not meet her demands.4. She made this demand even though she contractually owed the label more albums. The label did not acquiesce and Braxton apparently implemented the bankruptcy action in an attempt to extricate herself from what she viewed as an inequitable contract.
Braxton is not the first successful recording artist to file for bankruptcy while engaged in a contract dispute. In 1993, the members of the act Run-D.M.C. filed for bankruptcy and emerged from the proceeding with a new contract with Profile Records. 5. Likewise, in 1995, the trio TLC filed for Chapter 11 protection in Atlanta and sought to have its contract with its label LaFace abrogated by the court. In 1996, the group settled out of court with LaFace by securing a new contract. 6.
Such a strategic move is risky because there is no guarantee that the bankruptcy court will reject the contract in question. In 1986, actress Tia Carrere, who was seeking to improve her contract with ABC-TV, filed a bankruptcy petition in the U.S. Bankruptcy Court in Los Angeles. The judge dismissed the petition, saying she did not file in good faith, but rather for the primary purpose of rejecting a personal services contract. This ruling was cited by I.R.S. Records in the label's successful bid to have a Chapter 7 petition filed by the members of its then exclusive recording act Concrete Blonde dismissed.7. However, the gamble paid off for Braxton who signed a new contract with LaFace in November 1998.8.
The serious issues raised by the Braxton scenario may one day result in new statutory law. In 1999 there was a bankruptcy bill pending before the House Judiciary Committee which would prevent existing recording contracts from being made void within bankruptcy proceedings. The Recording Industry Association of America (RIAA) sought this special interest legislative relief for what its officials have said is a growing problem of artists and artists' representatives either threatening bankruptcy or filing bankruptcy to get out of their contracts.9. Should this or a similar bill one day pass, it would be the death knell for the use of bankruptcy as a technique for breaking contracts.
Another common technique to cancel a recording contract is the use of Civil Code Section 2855, the so called "Seven-Year Statute". According to this statute, "a contract to render personal service...may not be enforced against the employee beyond seven years from the commencement of service under it."10. Hence, the Seven-Year Statute prevents a record contract from being enforceable against an artist for longer than seven years.
In general, most recording agreements run for a period of one year, followed by at least four one year optional periods (the "term"). Often, the periods are contingent upon delivery of recorded product. In other words, instead of providing that a period of the agreement will be one year, the term provision may read that a period will last, for example, "one year, or a period of eight months after delivery of a specific number of recordings, whichever is later." A term based on delivery would be open-ended, because the period is dependent upon an unknown future date when the recordings are actually delivered. However, because of Section 2855, few artist contracts are written for a period of more than seven years.11.
Furthermore, under Section 2855, any employee (i.e. artist) who is a party to a contract to render personal service in the production of phonorecords may not invoke the code as a means of departure until the employee first gives "written notice to the employer... specifying that the employee from and after a future date certain specified in the notice will no longer render service under the contract" by reason of the expiration of the seven year time limit.12.
Nevertheless, it is important to note that Section 2855 does allow for a record company to sue an artist for monetary damages if, after seven years, the artist terminates the contract and signs with a new company but still owes the first company one or more records. 13. Obviously, however, since the music industry is generally unpredictable with respect to sales, such damages would be speculative.
Interestingly Braxton, who signed her recording agreement in August 1989, initially utilized Section 2855 when - prior to her bankruptcy petition - she filed a suit against LaFace in the Los Angeles Superior Court on the basis that her agreement became invalid in August 199614.. Apparently, before the civil action was filed she had held discussions with her label about adjusting the terms of the contract, but the talks had reached an impasse. (Again, it would appear that the filing of the Section 2855 action was a negotiating ploy.) LaFace countersued Braxton for breach of contract and then Braxton filed the bankruptcy action which put a stay on the lawsuits.
In the same fashion as Braxton, other high profile artists have used Section 2855 as a lever in the renegotiation of - or exit from - an existing agreement. In 1992, recording star Luther Vandross filed a suit against Epic Records in Los Angeles Superior Court claiming he was no longer bound to his 1981 contract15.. The very next year, former Eagle Don Henley became embroiled in a Los Angeles Superior Court action with his label, Geffen Records, wherein Henley sought to terminate his 1984 contract 16.. Thereafter, in 1994, Henley's Eagle brethren Glenn Frey was involved in a similar lawsuit when MCA Records sued Frey after he attempted to end his deal. In that same year, the band Metallica challenged its contact with Elektra Records when it asked the court to dismiss the band from its contract17. . In 1997 the Smashing Pumpkins notified Virgin Records that it would not render future services to the label under the contract it signed in 199119.. These disputes have all been settled out of court, and thus the judiciary has not had a chance to rule on the implications of Section 285520.. (That might change, however, because in January 2000 Geffen Records sued Courtney Love of the band Hole for breach of a 1992 record contract in response to her assertion that as of January 2000 she was excused under the Seven Year Statute from further performance to Geffen21.. Geffen is not backing down and the case is still alive.)
Equally important, the Vandross, Henley and Frey cases involved an interesting issue that was not adjudicated because of the settlements, but which might impact the outcome of such a situation if it went to trial. In these three matters, although the original contracts between the artist and label were more than seven years old when the artist attempted to leave the deal, there had been subsequent amendments made to the contracts, and the amendments were not seven years old. Hence, the labels argued that the amendments counted as new contracts. Fortunately, on this point there is some guidance. In a New York case involving singer Melissa Manchester and her record company Arista, the court held that an amendment to a contract can stop the seven year clock (or start it anew) if the amendment is so all- encompassing as to amount to a new contract, and if the artist freely elected to extend the term from an equal bargaining position22.. The amendment issue notwithstanding, Section 2855 is the device most commonly introduced by a disgruntled artist when seven years has elapsed since the date of contract execution.
California Civil Code Section 3423 provides an artist with another tactic to terminate a record deal. Equity will not require a party to perform under a personal service contract, such as a recording agreement23.. Equity can, however, stop an artist from performing personal services (i.e. recording) for someone else if a valid contract exists which makes the artist's services exclusive to the first party. Such a remedy is in the form of an injunction which would prevent an artist from jumping ship to another label.
Section 3423, nicknamed the "$9,000 Plus Provision", requires that a record company must make increasing minimum annual payments to an artist in order to obtain an injunction. 24. Although somewhat complicated, the new law essentially reads that a record company can get an injunction only if it contractually guarantees the artist $9,000 in the first contract year, $12,000 in the second year and $15,000 per year in years three through seven. In addition, in years four through seven, the company must have paid the artist additional sums of between $15,000 and $90,00025..
An important case discussing Section 3423 is Foxx v. Williams26. , involving comedian Redd Foxx and his record company Dootone. A lawsuit for a declaration of rights was filed by Foxx, and Dootone attempted by cross-complaint to enjoin Foxx from performing for another company. The court found that the Dootone contract did not meet the requirements of the injunction statute because it did not guarantee Foxx any compensation, and thus Dootone could not enjoin Foxx27.. In expounding on the purpose of the statute, the court stated:
"An injunction which forbids an artist to accept new employment may be a harsh and powerful remedy. The monetary limitation in the statute is intended to serve as a counterweight in balancing the equities. The legislature has concluded that an artist who is not entitled to receive a minimum of $6,000 per year by performing his contract should not be subjected to this kind of economic coercion28. ."
A similar case which sided with the label is MCA Records, Inc. v. Newton-John. 29. There, singer Olivia Newton-John, unhappy as a recording artist on MCA, tried to terminate the relationship. MCA sought to enjoin her from recording for another record company. The contract between MCA and John did not expressly guarantee her $6,000 per year minimum compensation and thus John argued that she could not be enjoined. On the other hand, her contract did provide her yearly six figure nonreturnable monetary advances from which she was to record albums and pocket the difference between the actual recording costs and the advance (i.e., the "recording fund").30. Moreover, the contract gave her exclusive control over the allocation of production costs. Under these facts, the court decided that John was, therefore, guaranteed a minimum of $6,000, and consequently MCA was entitled to injunctive relief.31. On the basis of this case, in order to determine whether the minimum annual payments were made under a recording fund scenario, one would have to deduct reasonable recording expenses to see if the remainder is in excess of $6,000.32. Practically speaking, this method to break a contract is quite common when an artist records for a small independent label that cannot afford to pay an artist an advance.
Being a minor under contract also provides a loophole for dissatisfied artists. In the current marketplace, there is a high consumer demand for teen idols such as Brandy, Hanson, LeAnn Rimes and Johnny Lang. As a result, many minors are signing recording agreements. The major risk in entering a contract with a minor is that generally under California Family Code Section 6751 the contract is voidable at the option of the minor either "during the minority of the person entering the contract, or at any time thereafter...."33. In California, the age of majority has been 18 since 1971.34. Hence, once success is achieved, an artist could use to his advantage the fact that the contract was signed during minority, thereby opting to disaffirm the contract.
David Cassidy, the 1970s pop star, used this exact scenario to his advantage. As a teenage unknown, he signed a production contract to act on the TV show The Partridge Family, and to record on Partridge Family records. The contract granted the producers of the show and the recordings the right to use Cassidy's name, image and likeness. Partly as a result of Cassidy's teen idol good looks, the show and records became a runaway success and the producers cashed in by selling millions of dollars worth of recordings and merchandise. In order to force the producers to renegotiate his deal, Cassidy notified them that since he had signed the contract as a minor (21 was still the age of majority when he executed his agreement in 1970) he was disaffirming the contract and thus the producers would have to remove his name, image and voice from everything manufactured up to that point. Not having a legal leg to stand on, the producers renegotiated his deal, making Cassidy the highest paid young performer at that time.35.
In order to avoid a situation like the above, recording agreements in which a minor "is employed...to render artistic or creative services"36. (e.g., singer or performer) can be approved by the superior court, as allowed for by Section 6751, which prevents the minor from disaffirming the contract. (i.e., as if the minor had signed the contract as an adult).37. Approval of the court may be given on petition of either party to the contract and after a hearing.38. Although court approval of a minor contract is routinely done in the entertainment industry, not all record companies make the effort to protect their investment, and thus the artist can use this failure to the artist's advantage.
The charge that the label committed a material breach of contract can also be a successful mechanism for an artist to utilize in a bid to leave a record company. A material breach can be alleged in many different forms, but the most common is the lack of proper payment of royalties by the label.39.
Just such a breach was highlighted in the recent court decision involving the band the Kingsmen who had a big hit with the song "Louie Louie" in the 1960s. The Kingsmen won a five year court battle in November 1998 when the U.S. Supreme Court upheld a Ninth Circuit Court ruling that cancelled the record company's contract with the group because the company neglected to pay royalties.40. The suit was based in part on the law of rescission which states that a party may unilaterally rescind a contract if there have been "breaches of the contract so material and substantial in nature that they affect the very essence of the contract and serve to defeat the object of the parties."41. This was a most egregious case because the record label - G.M.L./Gusto - had apparently never paid any royalties under the contract, even though the band's recorded version of "Louie Louie" had generated considerable sums over the years through usages in compilations, movies, and TV. In particular, the ruling called for the return to the band the ownership in the master tape of "Louie Louie" and other recordings. 42.
In a similar 1996 dispute, the multimillion selling group the Offspring attempted to exit its contract with Epitaph Records, an independent label. The group fired the first salvo by initially declaring in no particular detail that Epitaph breached its contract. 43. Although the matter was settled, the pressure move worked because the band later signed a lucrative deal with the major label Columbia Records.
A breach argument might also exist if there is a provision in the record contract whereby the label guarantees that a minimum amount of recorded product will be commercially released by the record company. If the company does not fulfill its commitment to release, the company may not be able to pick up the next option. However, unless there is a specific definition of "release" included in the contract, this would not be a definitive escape route.
Another situation akin to breach that frequently arises in an artist deal (and which somewhat relates to the Seven Year Statute) involves a dispute over the expiration date of the agreement. As mentioned, many recording agreements provide for a minimum term of one year, with separate options of one year each, sometimes tied to the delivery of product. The record company generally has the privilege of either exercising the right to continue the contract, or to let it lapse. Most contracts have a specific provision for the exercise or non-exercise of options. If the exercise provision is not properly complied with by the label (e.g., the label fails to give written notice of its intent to pick up an option), the artist can argue that it is free to sign a new contract.
Similarly, an artist could also allege that it has fulfilled its recording commitment to the label. Every artist agreement bestows on an artist the duty to record and deliver a specified number of masters to the record company during the term. Unless the contract provides for a detailed schedule of how many records to deliver in any given period, if the artist is signed, for example, to a five album deal, the artist could theoretically deliver the five albums at any time and fulfill the delivery requirement. Legend has it that Frank Zappa once pulled this stunt when he delivered multiple albums at one time so that he could claim he fulfilled his obligations. Apparently, the record company had not safeguarded against this occurrence. On the flip side, when an artist is trying to fulfill the delivery commitment, and the label is not reciprocating, the artist could argue that the label is refusing to let the artist record and wrongfully attempting to suspend the artist for non-delivery of product. If there is no possible basis for failure to accept the recording, this could be a breach of a good faith duty or obligation by the label.
It is important to note that buried within most record contracts is a notice provision whereby any claim of breach by the artist must be submitted in writing to the label with the label having an opportunity to cure the alleged breach. If a notice is not timely and properly served on the label by the artist, the artist may have failed to fulfill a condition precedent to support a legal action for breach of contract.
Obviously, a breach of a recording contract can be argued under a myriad of instances, so the underlying contract should be closely scrutinized for potential cracks.
Since recording agreements first came into existence, an oft heard clarion call by an artist is that the contract is patently unfair. A record contract that is one-sided and skewed heavily in favor of the record company could be argued to be a contract of adhesion. A contract of adhesion is a standardized contract which, if imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.44. Generally, a contract of adhesion would be valid unless it is ambiguous45. , or it is "unduly oppressive or unconscionable under applicable standards of equity." 46. In conjunction with this scenario, an artist who was not represented by an attorney before signing the adhesion contract could also argue that he was too unsophisticated to understand what he was signing.
In a pertinent dispute, singer George Michael filed a suit in England to get out of his long-term recording agreement with Sony. His argument was that certain practices in the music industry were so obnoxious that they amounted to a restraint of trade. These practices included tying up an artist for a long period of time at the company's option, and computing royalties in ways that pay the artist far less than the royalty rate implies. The court held that the terms of his deal were reasonable, and thus there was no restraint of trade.47. Apparently, the court agreed with the argument set forth by the label that current deals are for a term of six to eight albums at the company's sole option because a label cannot afford to promote new artists unless they are assured the benefit of the artist's success in later years. 48. The foregoing court's rationale in the Michael's matter is evidence that unfairness alone may not be enough to allow an artist to jettison a contract.
A conflict of interest approach might hasten the termination of a recording agreement. At times in the music industry, because of the small number of specialized practitioners, instances occur when there might be a conflict of interest whereby one attorney will represent both the label and the artist in a contract negotiation. In such a case, an artist could postulate that he got a raw deal because the attorney was in bed with the label and hence the contract should be rescinded. This argument would be based on Professional Conduct Rule 3-310 which regulates avoiding the representation of adverse interests. In essence, this Rule states that an attorney shall not, without the "informed written consent of each client", represent more than one client in a manner in which the "interests of the clients potentially conflict."49. However, unless the contract is one of adhesion, it is doubtful that a court would invalidate a contract on this ground alone.
A final tactic would be for an artist to simply walk away from a contract and leave it up to the label to stop the artist from recording elsewhere. This technique would normally only occur when a contract is extremely unfair, and when there are several arguable grounds for termination. In particular, the artists Boston and Donna Summer were successful in using this technique to break away from their respective recording contracts.
In the Boston case, although arguably the contract period between Epic and the band had elapsed by time, Boston went ahead and signed a new recording contract with MCA 50. instead of waiting for a resolution of the term conclusion and other disputed issues. Epic thereafter moved for an injunction, but it was denied and MCA released Boston's next album.51. Similarly, in the Summer matter, although it appeared that her Casablanca contract had terminated because of a key man clause which went into effect when the president left the label, Summer signed a new recording contract with Geffen52. instead of waiting for of a resolution of the key man and other disputed issues. Casablanca thereafter moved for an injunction, but it was denied, and Geffen released the next Summer album.53. No doubt many artists have utilized this scorched earth approach based upon the practical consideration that, after a cost-benefit analysis, the label will opt not to seek legal relief.
The downside to the contract dissolution methods discussed herein is that when an artist enters into a legal battle with a record company, the resulting action can take years to settle and can often temporarily derail the artist's career because it takes the artist out of the public eye for a period of time. Knowing this, labels frequently use stalling tactics in such contract disputes because they understand that since an artist's career usually only lasts for a few years, time is on the label's side, and an artist involved in a protracted legal battle might get frustrated and discontinue the dispute.
The practitioner representing a nascent artist at the initial contract negotiation stage should consider building artist protections - such as monetary enhancements or an "out" clause - into the agreement which can be triggered by the artist having a hit record, or the label not fulfilling its end of the agreement, whichever is applicable. In the final analysis, although it might seem easy, "Breaking Up Is Hard To Do."54.
(The authors wish to thank attorneys Don Engel, Barbara Greenwald and Neville Johnson for their assistance with this article.)
Copyright 1998, Ben McLane
11135 Weddington Street, Suite #424
North Hollywood, CA 91601
Telephone: 818.587.6801 Fax: 818.587.6802