Reserves
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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