John P. Strohm is a transactional entertainment and intellectual property attorney with the firm Johnston Barton Proctor & Rose LLP . John’s practice focuses on the representation of musicians, songwriters and independent record labels. Prior to becoming an attorney, John was a professional musician and producer for over a decade. He performed and recorded as a member of several notable alternative pop/rock acts, including The Lemonheads and Blake Babies. Follow John on Twitter @JohnPStrohm.

             I get a lot of calls from bands I’ve never heard of, and there’s a recurring conversation I’ve been having ever since I started practicing entertainment law.  It generally goes something like this:

Band dude: “I got your number [from a friend, from an industry resource, off the bathroom wall, etc.], and I want to talk to you about hiring you to be my lawyer.”

Me: “Great.  Why do you feel that you need a lawyer?” 

B.D.: “Because we’re getting our team together.” 

Me: “Well, that’s fantastic; but what exactly do you need a lawyer for?  Do you have a contract to negotiate/a dispute to resolve/ product to shop?” 

B.D.: “Right now we’re just getting my team together because big things are about to happen.  We have 30,000 MySpace friends, a tight set, and a great image.  We’re doing you a big favor, because I can feel it – we’re going to be huuuuuge.” 

            One of the most difficult aspects of working with musicians is managing expectations, which is especially true of young bands.  Pretty much every band believes they are going to be huge, which raises all sorts of issues – not the least of which is artists’ tendency to perceive any business opportunity as a potential “big break.”                 

  But what do they mean by the “team,” and when should a band or solo artist worry about assembling a team?  This article provides a quick introduction of the members of the typical business team (which should be distinguished from the creative team, e.g. producers, choreographers, lighting directors, makeup artists, etc.), along with some guidance regarding when these advisors may become necessary or desirable.   

              Attorney:  Please feel free to take this with a grain of salt: an attorney is often the first professional an artist will require to assist him with his career.  In my opinion, an artist should consult with a competent (i.e. knowledgeable about the music business) attorney whenever he is asked to sign a document with respect to his career or even to enter into a verbal agreement (which may be binding).  I’ve often been retained to get an artist out of a lousy agreement that the artist signed without the benefit of an attorney’s review.  You should regard signing any legal document with respect to your career without consulting an attorney as very risky.

              Other than reviewing legal documents and in the absence of a lawsuit or potential lawsuit, when does an artist need an attorney on his team?  First off, attorneys are by no means uniquely qualified to shop product to labels and publishers.  Historically, attorneys have played a big part in shopping deals for artists; however, their role has diminished in recent years.  These days labels are primarily interested in artists who have already done a great deal of work in terms of self-development; as such, even a fantastic demo tape will beg the question, What has the artist done to establish a career? 

  Rarely do labels actually sign artists who don’t have a sales history, a significant touring footprint, and/or a significant online presence.  If an attorney does shop an artist, generally the attorney will require a contingent fee, i.e. the artist must pay the attorney a percentage of their advance money, sometimes in addition to a percentage of gross income and/or hourly billing for certain services.  In short, it is generally far less expensive to find your own deal or have your manager (who gets paid a percentage regardless) shop for you.  If you bring an attorney a deal that’s already on the table, then you should be able to pay the attorney by the hour, rather than a percentage of the deal.  But beware: if you accept an informal offer of business terms (even delivered via email or MySpace), you might lose the opportunity to have your attorney negotiate the terms later. 

  In short, any successful artist must retain an attorney or attorneys to deal with the myriad legal issues that arise with regard to their many contractual relationships.  Less successful or newer artists generally only need an attorney when their business dealings expose them to risk, such as when they are faced with legally binding agreements, or for business planning purposes.  Such artists should generally retain attorneys as needed by the hour, as opposed to retaining attorneys who require payment of a percentage of the artist’s gross income. 

  Most music attorneys charge between $200 and $400 per hour, though some charge upwards of $500.00 per hour.  Keep in mind that many music attorneys are willing to negotiate flat fees or fee caps to work with a limited budget – though don’t be offended if an attorney requires a percentage of the projected fees as a retainer.    

  Personal Manager:  The personal manager is the artist’s principal advisor and agent with regard to both day-to-day and long-term matters relating to the artist’s career.  The personal manager (often referred to simply as the “manager”) generally acts as a conduit and communicator between the artist, the other team members, the record company and publisher, and all other parties involved in the artist’s career (including the creative team and parties providing specific services, such as publicists and licensing agents). 

  The personal manager generally commissions a percentage of the artist’s gross earnings – which can range from 10% on the very low end to 20% or more on the high end.  Established managers usually don’t get interested in artists until the artist has consistently shown the ability to earn income.  Management contracts often have rather long exclusive terms (generally measured in album cycles rather than years), and contracts generally entitle the manager to at least some income even after the term has expired. 

  When it makes sense for an artist to enter into an agreement with a personal manager should be analyzed on a case-by-case basis.  It’s almost never a good idea for an artist to enter into a long-term agreement with a less established personal manager without first determining whether the manager will be a good “fit” with the artist.  Many younger managers will work on a handshake basis for a period of time to allow the artist (and manager) to make an educated decision as to whether there is such a fit.  Most protections in management agreements benefit the manager, though there are usually some protections for the artist as well.  If a manager is not consistently generating enough of an increase in income to cover their commission, then they are probably not doing a good job (that is to say they are costing you money).

  Unlike lawyers, agents and (generally) business managers, personal managers are not required to be licensed.  As such, be aware that you should do plenty of research with respect to a prospective manager.  Researching a lawyer is far easier – you can simply call the state bar to confirm that the lawyer is in good standing.  With a manager, you should take the time to follow up with references.  If the manager won’t give you references, that should be regarded as a bad sign.

  Business Manager:  The business manager’s role is generally limited to managing an artist’s finances: including receiving income, paying bills, preparing tax returns, and general investment/financial planning.  If a business manager is not a CPA, you should probably regard that as a red flag. 

Business managers generally charge a fee in the amount of 5% of an artist’s gross income for their services.  An artist generally doesn’t need a business manager until he earns substantial income (i.e. six figures annually), and similarly good entertainment business managers generally aren’t interested in clients who are not earning substantial income.  Most services provided by business managers, such as tax preparation, can be obtained by accountants who will bill at an hourly rate.

Often personal management agreements require even newer artists to retain a business manager.  Such a requirement clearly benefits the personal manager, who wants to ensure payment of his commissions; however, it’s not always in the artist’s interest to give up an additional 5% of gross income to the business manager primarily for the manager’s benefit.  Assuming the artist has good money management skills and habits and delegates some important financial duties to an accountant, a music business manager sometimes constitutes an unnecessary expense, even for moderately successful artists.

Agent:  The role of the agent varies from one entertainment industry (e.g. film, literary publishing, television) to another (e.g. music).  Nevertheless, in every entertainment industry agents are subject to strict licensure requirements by statute in certain states such as New York and California.  The role of agents in the music industry is generally limited to booking live engagements, for which agents are generally paid 10% of the gross income generated by such engagements. 

           Unless your state does not have licensure laws and bookings will be limited to your state, it is important to confirm that a booking agent or agency is licensed in the relevant states.  Another important matter to keep in mind is that personal managers are prohibited from booking engagements in states with licensure requirements.  If managers violate state licensure laws and is sued by the artist, a possible remedy is that the management contract (regardless of the term) is void.

              It’s a buyer’s market for booking agents, because there are relatively few agents that have sufficient contacts and experience (and interest) to book less established acts.  As with other potential team members, agents rarely become interested in artists until the artist is able to generate significant income from live performances.  Most artists must book their own engagements until they establish a significant touring base, at which time agents are likely to pursue the artist.

              If your band becomes financially successful, it will probably become clear which of these advisors you need and when.  Keep an eye out for conflicts of interest among your advisors – especially lawyers and managers.  It’s probably a good idea to seek a lawyer referral from someone other than your manager, since the first order of business with your manager may be negotiating the terms of a management agreement.  Attorneys are bound by ethical rules that prohibit representing clients when such conflicts exist, but that doesn’t mean that all attorneys abide by the rules. 

              In sum, take your time and ask a lot of questions when forging professional relationships.  Although there is a documented history of dishonest or incompetent music industry professionals, I have met many solid, honest and respectable lawyers, managers, business managers and agents.  Make sure that you end up with good people that make sense for your unique needs and circumstances.

John P. Strohm is a transactional entertainment and intellectual property attorney with the firm Johnston Barton Proctor & Rose LLP . John’s practice focuses on the representation of musicians, songwriters and independent record labels. Prior to becoming an attorney, John was a professional musician and producer for over a decade. He performed and recorded as a member of several notable alternative pop/rock acts, including The Lemonheads and Blake Babies. Follow John on Twitter @JohnPStrohm.

            I have a vivid memory of the first time I visited a major label office.  It was 1990, and various major labels were courting my indie buzz band, the Blake Babies.  The A&R guy from one of the labels, Elektra, invited us to their New York office for a meeting.  I remember the sleek, modern architecture of the office, the impossibly beautiful receptionist, the state-of-the-art sound system in the A&R guy’s office, the vault of promo product they let us pillage.  It was nothing short of thrilling to breathe that air; I felt a bit like Dorothy (or more accurately the Scarecrow) in the Emerald City.  That office held the promise of everything I’d dreamed about since childhood: stardom, wealth, opportunity, free shit… 

            My band never signed that deal, or any deal.  We broke up, and eventually our independent label sold to a major (Disney), so all of our records ended up in the major label vaults anyway.  Our singer quit the band, signed her own deal, and became famous for a time.  Shortly after that courtship period the business changed dramatically when Nirvana became a surprise success.  Suddenly, to the major labels anyway, “alternative” rock went from a risky prospect with limited expected returns to a full-on gold rush.  I was stuck in my own deal, but I watched from the sidelines as modest, formerly independent bands cashed seven-figure checks from labels willing to bet on unproven acts.

          With the CD the dominant format and singles all but unavailable, the labels had money to burn.  The business model went like this: sign a shitload of bands and assume that maybe one in ten will make any money.  But the one-out-of-ten will make a ton of money.  That was actually a sustainable model for a time.  What it didn’t take into account, however, was all the heartbreak it caused musicians.  Most musicians shared my feelings of destiny when embarking on their major deal.  They’d worked for…this.  Sign a deal, and then things fall into place.  But for the vast majority of bands that signed deals in the nineties, the major deal meant maybe a little money in pocket, a lot of money to managers, producers and (yes) attorneys, and then…nothing.  Heartbreak. 

            Things were weird (and pretty awful) in those days, but it was pretty easy to understand.  The major labels acted as the industry’s gatekeepers.  They had more money than God, and they could afford to bet heavily on something totally unproven, and write it off if it didn’t work out.  Because the controlled the all-important physical distribution and could provide access to all-important commercial radio, an artist’s commercial success depended upon the resources only the majors could provide.  “Going the indie route” in those days meant either you chose to take a vow of poverty to maintain artistic integrity or you couldn’t get a deal.  Musicians felt ashamed to admit that self-release was their only option.  In those days, self release meant failure.

            You hear a lot today about the failure of the music industry, and it’s true, in a sense, that the industry described above has utterly failed.  But that’s the major recording industry, and it’s a business model that has become obsolete thanks to technological changes.  Revenue is down, but as revenue has diminished the excesses in the major industry have decreased.  The role of the majors has changed, and musicians no longer perceive the majors as the sole gatekeepers.  “Going indie” and self-release thankfully no longer carry stigma, and musicians are less inclined to perceive a major deal as an end in itself.  “Making it” in the industry is beginning to mean what it should have always meant: consistently making a living from actual revenue rather than borrowed funds.

             I don’t think it’s a stretch to say over the past decade the industry has fundamentally changed.  Major labels still thrive to some extent, though as digital distribution becomes more and more common, the majors’ lock on physical distribution becomes less important.  Physical product still exists, but it’s more or less relegated to the late adopters and audiophiles – we’re moving quickly towards a world where physical product will be an afterthought.  Commercial radio is but one way people find out about music, and the Internet is still something like a level playing field.    The net result of this fundamental change is that there are now many gatekeepers and many paths to success.  This should come as good news to independent artists, but it’s also scary as hell.  We used to focus on the “big break” – the bigtime manager or A&R person “discovering” the act; now we’re still looking for that break, but it’s not clear what form it will take.  How do you pursue something when you don’t even know what it will look like?

            By way of example, I represent several independent bands that most people inside and outside the industry would regard as “successful” (i.e. selling hundreds of thousands of albums, selling out large venues, placing songs in major motion pictures, television shows and ads, etc.).  I asked the manager of one such client recently what he saw as his client’s big break.  “Easy,” he said, “the Pitchfork review.”  I’d worked with this particular band before and after Pitchfork, a popular tastemaker online publication, reviewed their debut album.  After the rave review appeared, things fell quickly into place for the group – recording and publishing offers from independent and major companies, opening slots for major tours, synchs…it’s like the review provided the momentum that made everything else possible.  Pitchfork definitely acted as the gatekeeper. 

            That particular client never seriously considered signing with a major (though it certainly was an option), but they’ve enjoyed major success.  Prior to the Pitchfork review I could never have shopped their music to major labels.  The style of music didn’t have a precedent as “hit” product (i.e. they didn’t sound like an established act, such as Kings of Leon), and they didn’t have anything quantifiable “going on.”  Even if the A&R person totally loved the music, they wouldn’t have signed the act.  Once upon a time major labels spearheaded what was known as “artist development,” meaning they financed an artist over the course of several albums and tours before deciding if the artist was commercially viable.  Artist development died gradually over several decades, its demise hastened by corporate acquisition and consolidation in the recording industry.  Development is just not a good fit when a company must justify quarterly earnings reports to shareholders.  So today majors pretty much only sign acts with something already going on, meaning that development has already occurred – on someone else’s dime.

            These days majors want to see that the artist has developed a following in ways that are quantifiable, such as SoundScan sales figures, attendance at shows, gross income, etc., and they want to participate in all existing and foreseeable revenue streams.  Therefore, for the artists just out of the starting gate, the majors don’t really exist even as prospective gatekeepers.  Artists are expected to work social media, interact in person with potential fans, develop a cottage industry – so that the majors can take something that’s already happening “to the next level” (meaning huge commercial success).  But in order to get things started, artists must appeal to these smaller gatekeepers before becoming even potentially desirable to major labels and publishers.  I know from hundreds of conversations with indie artists that this chicken and egg conundrum is extremely vexing.  Bands that could use a deal to get things rolling are too risky and expensive for majors to sign, but bands that have developed themselves to the point where majors would be interested often reach the conclusion that it’s in their interest to remain independent.

            So who are these smaller gatekeepers?  I mentioned Pitchfork, which is an obvious example.  Pitchfork is not genre-specific, but it takes its role as a tastemaker publication very seriously and is often accused of snobbery.  Pitchfork has a large and devoted readership, so getting a positive review is a bit like winning the lottery for a small, independent artist.  Nevertheless, a positive review in Pitchfork by no means guarantees commercial success, and the vast majority of acts (particularly overtly commercial acts) will never appeal to the editors of Pitchfork.  But Pitchfork is far from the only online publication acting as a potential gatekeeper.  There are hundreds of respected music blogs and publications that desire to get credit for discovering the next important act.  It’s rare for the major online publications such as Pitchfork to cover an act before the act has received a groundswell of coverage in other, smaller publications. 

          On the Internet, with a vast sea of options, gatekeepers are the agents that focus our search for new music.  Sometimes independent labels serve a filtering function as quality distinguishers, and that is a sort of gatekeeper function as well.  If an artist releases a record through a small independent label with a loyal following, then the people who follow the label presume that the artist is of a certain quality simply because they are on the label.  This is a function that independent labels have served since the dawn of recorded music.  It’s also a bit ironic, because many of the current major imprints, including Atlantic, Motown, A&M and Blue Note, began as independents that served the same filtering function for consumers.  

            Another class of emerging gatekeepers is the music supervisors who place music in television programs, motion pictures, advertisements and video games.  The cliché is that these media have “become the new radio,” and there is some truth to that.  It’s rare that a single “synch” placement will provide the elusive big break for an artist, but one placement often leads to other placements, and there certainly have been instances where a single placement has provided that momentum, such as the Pitchfork review did for my client.  New companies seem to crop up every day offering to “pitch” music to supervisors for synch placements for a percentage of the take, and some of these companies are very good.

            The point is there are many gatekeepers and many ways to get music out to a broad audience.  There’s also an enormous amount of competition.  It’s a good thing, in my opinion, that musicians make money when they actually connect with fans and sell products and tickets.  The problem is taking advantage of these new opportunities – finding ways to be heard above the din.

            It is a frustrating situation – we know that there are numerous opportunities to be “discovered” on the Internet.  Still, it’s a challenge to kick open the doors.  You simply can’t force the sort of success my client had in receiving a breakthrough review in a prominent publication.  But you can figure out ways to get out there and get noticed.  The crucial fact to understand is that at least 90% of the music being promoted on the indie level is shit.  The people and companies trying to provide a filtering function are constantly fatigued by the barrage of aggressively marketed bullshit, but the upside is that the good, thoughtful, well-crafted music that contributes to the culture is fairly easy to quickly recognize.  I’m personally turned off by aggressive marketing gestures, and the vast majority of the time the music that’s aggressively marketed is awful.  The point is, if it’s good and you make focused, reasonable efforts to reach the people who are likely to respond, the music will get noticed.

            Here’s another music industry myth: there are no overnight successes.  In the old industry that was absolutely true, but these days overnight successes do happen.  The problem is that it typically takes years for an artist to get the right breaks to find that sort of success.  Once you get that review or synch or your video goes viral or some mega-prominent artist name-checks your band, then things can happen very quickly – literally overnight.  But the challenge is finding those essential gatekeepers to enable things to happen on that level.

So here’s my advice: don’t put it out there until it’s actually good and original.  There’s a glut of shit out there right now; don’t contribute to that.  Make good, thoughtful music and then make a clear, focused plan to get it out there.  Then it might or might not happen – but at least you’re not sitting around waiting to be discovered by some douchebag wearing a $500.00 hoodie who only listens to the first ½ of a song at your showcase.  And the best part: an artist can be successful without transferring ownership of songs and recordings.  The new industry is just taking shape, but at the moment it’s possible for artists to find success on their own terms and to remain in charge of their careers, and that’s definitely a good thing.  

John P. Strohm is a transactional entertainment and intellectual property attorney with the firm Johnston Barton Proctor & Rose LLP. John’s practice focuses on the representation of musicians, songwriters and independent record labels. Prior to becoming an attorney, John was a professional musician and producer for over a decade. He performed and recorded as a member of several notable alternative pop/rock acts, including The Lemonheads and Blake Babies. John is on Twitter @JohnPStrohm.

A great deal of what I do as a music business attorney involves negotiation.  Negotiation is such a common component of my work that I rarely reflect on the process of negotiation, or even pause to think to myself “hey, I’m negotiating right now!”  Nevertheless, although I’ve achieved a certain day-to-day comfort level, I know I have plenty left to learn.  In this article I’ll share some observations regarding the process of negotiating music deals that I hope will prove helpful.  As a disclaimer, I don’t purport to be the world’s foremost expert or to have superior knowledge to my music lawyer colleagues.  I’m simply presenting a few things I’ve noticed in navigating these particular wooly swamps.   

I took a class in negotiation in law school, which was pretty much pure bullshit.  I had high hopes for the class, because I knew my desired practice as a transactional (i.e. deal) lawyer in the music industry would require sharp negotiation skills.  I learned a lot of terminology to describe things that I understand intuitively.  I learned a bit about game theory and certain abstract, philosophical underpinnings.  But when I actually began negotiating deal terms for clients, I’d forgotten all of the terminology and most of the concepts.  For all practical purposes I knew next to nothing.  I did what we all must eventually do: I jumped in head first. 

Now that I’ve negotiated countless music industry agreements, I’ve learned that no two negotiations are exactly the same.  It’s never easy to accurately predict how things will go – each negotiation requires preparation.  I handle some negotiations that seem practically effortless, and some that may lead to post-traumatic stress symptoms.  If I took the class again, I’d probably relate better to the arcane terminology as it relates to my experiences.  But my point is you don’t really need all that terminology and philosophy: you just need to pay attention and keep a few basic things in mind.

I’m writing from the perspective of a lawyer negotiating on behalf of client, but you can apply these principles and ideas just as well if you are an artist’s manager or if you are negotiating on your own behalf.  In addition to being a music lawyer, I’m a working musician.  Sometimes I negotiate deals on my own behalf, though to be honest I probably do a better job negotiating on behalf of someone else.  The old saying goes (something like) “any lawyer who represents himself has a fool for a client” – yeah, I suppose there’s some truth to that, but I digress.

 The key, if you’re negotiating on behalf of yourself, is to treat the situation as if you’re negotiating on behalf of a client.  That is to say, mentally separate your business interests from any self-esteem issues or fears of confrontation/failure that dog most of the musicians I know (myself included).  When I state in this article that I have a duty to my client, I really mean my ethical obligation as an attorney; but that could just as easily mean that you owe it to yourself to get the best deal you can.  As a practical matter, however, I strongly suggest that if you are asked to sign a contract that transfers rights or includes ongoing obligations, you should hire an industry lawyer to review the document.   

I’ve learned that being a good negotiator in any sort of deal requires a thorough understanding of your client’s goals and sensitivities, and of the risks and your client’s risk tolerance.  It also requires and deep understanding of certain specific factors, including the actual people or parties involved (both directly and indirectly), the relationship of the adverse parties, the unique set of facts and the culture of the business in general.  It also takes a strong stomach and a willingness to be confrontational when necessary (or to respond effectively to confrontation).            

As far as the people involved, I mean the attorneys or others who take the lead in the negotiation as well as those who stand to benefit or could be harmed from the result, whether they are directly or indirectly invested in the actual subject matter of the deal.  If I’m negotiating on behalf of a client, then the client is clearly directly affected; however, others may also have a dog in the fight.  I try to take a broad view and consider who will be affected by or take an interest in the outcome. 

If I’m negotiating a record deal for a recording artist client, the artist’s personal manager is clearly affected even though the manager is not my client.  If the artist is a writer with a publishing deal, then the publisher is affected as well (for example, by the mechanical royalty rate I negotiate).  It’s crucial to understand how each party is affected and how it will affect your client, keeping in mind that your duty to pursue your client’s interests should remain paramount.  For example, if my main point of contact to a client is his manager and the manager is pushing me to close a deal, I’d better communicate directly with my client and make sure the client is comfortable with the terms.  The manager benefits short term in the form of a commission, but I shouldn’t let that sort of pressure distract me from protecting my true purpose.  The manager may be gone in a month, but the artist could be stuck in a shitty deal for many years.

The relationship of the “adverse” (meaning opposing) parties and the facts are interrelated and relate to the respective leverage (aka bargaining power) of the parties.  It’s absolutely crucial to understand who has the leverage in any given negotiation.  The way I’ve come to define leverage is the existence (or apparent existence) of viable alternatives to closing the deal.  Sticking with the record deal example, if an artist has five or six record labels frothing at the mouth for his services, he has great leverage with respect to each potential deal.  The source of his leverage is his ability to walk away from one deal to sign another deal that’s already on the table.  An artist in this sort of situation will have a greater opportunity to negotiate favorable terms, and the artist’s representative can afford to take a more aggressive position without fearing consequences such as losing the opportunity.  On the other hand, if there is only one label in the picture, then the artist will likely not be as successful and will likely not be as well-served with an aggressive approach. 

Sometimes it’s clear who has the leverage in a negotiation, but there’s a skill in creating the appearance of leverage – which necessarily involves convincing the adverse party of your client’s willingness to walk away from the deal.  In the second example above, when there’s only one label bidding for the artist, I need to have a talk with my client and get a real sense of whether my client is actually willing to walk away from a deal.  If my client is strongly averse to losing the opportunity and is comfortable with the terms, then I’m probably not going to push hard for better terms – and I certainly won’t make a power move such as demanding the adverse party agree certain aspirational terms or my client will walk away from the deal.  If they refuse the demand, then there’s really no going back to the original offer without losing all credibility.  On the other hand, if the client is willing to take a risk, then it’s a matter of convincing the other side that there are credible alternatives to signing the deal (such as, perhaps, private investors or self-release).  One age-old way is to simply say “take it or leave it.”  Keep in mind, as a general matter, that attempts to orchestrate a bidding war can be perceived as crass and heavy-handed. 

It’s also worth mentioning that it’s a different dynamic if two parties frequently negotiate with one another, such as a vendor and buyer in a retail setting.  Because there’s an ongoing relationship, the parties are less likely to play hardball.  They’ll have to deal with one another next week or next month – why blow the relationship for a short-term gain?  This also holds true when attorneys frequently encounter one another in negotiations.  I encounter the same attorneys again and again in my own niche practice; it would not serve my clients well in the long-term to take an extremely adversarial, aggressive approach to each isolated negotiation.  Nevertheless, I must keep in mind that I have an obligation to represent my client.  So when balancing the conflicting goals of preserving a relationship with opposing counsel and pursuing the goals of my client in a particular negotiation, my duty really lies with my client.

Regarding the culture of the particular industry, there are many subtle variables.  When I first started practicing law most of the work I did was in commercial real estate and lending, working on mega-huge deals.  I didn’t seek out work in those industries; I went to work for a firm that placed me in that practice.  I had absolutely no background in commercial real estate, so I had to learn the very corporate culture from scratch.  After a couple of years I’d learned enough about the culture of negotiation in that industry to be somewhat comfortable, including how to determine who has leverage, what’s appropriate to ask for, means of communication, and other factors.  Then as my music practice started to pick up steam, I had to learn the culture of music industry negotiations from scratch as well.  Since I’d been heavily supervised as a new lawyer in the commercial real estate industry, it was a shock to be totally unsupervised in my music practice – nobody at my firm had any experience to offer.  Suffice to say I made a few gaffs along the way.  Like learning a new language or the rules to a complex game, there’s no way to avoid a few mistakes.

The culture of the music industry is generally very informal compared to the corporate world.  It can be informal to a fault as deals sometimes take forever and there’s a greater tolerance for sloppy work, but it’s a nice change from the pressure-cooker of the big money corporate deal.  Negotiation styles of music industry lawyers vary wildly, however, from extremely laid-back and cooperative to extremely aggressive.  My own style tends to be more cooperative if I have the opportunity to set the tone; however, I’m always prepared to respond to aggression with aggression in kind.  I’ve seen potentially good deals die as a result of overly aggressive lawyers, so it’s disappointing when a negotiation becomes trench warfare.  My attitude is, with respect to each negotiation (taking into account the interests and leverage of the parties), there is always a way for both parties to “win.”  It’s usually a matter of figuring out the goals and interests of your adverse party and making smart compromises.  If you can give on a point that doesn’t really matter for your client and get something of great value in return, then you’ve done well.  That sort of cooperation isn’t possible when one party or the other forces a zero-sum game.

Industry culture can also become a negotiation tactic in certain situations, such as claiming certain terms are “industry standard.”  Just today an attorney tried to convince me that it’s “industry standard” for a manager to commission 20% of an artist’s gross income.  Just because people have agreed to such a term in the past does NOT mean that it is the industry standard.  Certain things really are industry standard, but generally specific business terms do not constitute the industry standard – business points are negotiable.  It’s important not to confuse a “take it or leave it” deal offered by a party with superior leverage from industry standard.  If someone tries to claim that something is industry standard, then by all means ask around.  For the most part, claiming industry standard is just a lazy and overtly aggressive tactic.  Our industry is changing by the day – practically everything is, at least on some level, negotiable.

One thing that bears mentioning regarding the culture of music industry negotiations is that they rarely occur around a table or even over a conference call.  Typically the bulk of the negotiation occurs by email and by sending marked-up documents back and forth.  I generally prefer negotiating by email, because I have more of a chance to think through my responses and consult with my client than if I were negotiating across a conference table.  But then I’m sure the greatest of poker players prefer to sit at the table sizing up their opponent to playing an unseen opponent online.  Nonetheless, that sort of negotiation occurs so rarely these days that it’s hard to develop the skills that must have once been essential to negotiating lawyers. 

In summary, the key is to really understand your clients’ (or your) goals, sensitivities, and leverage in each situation.  Lawyers are necessarily competitive, but we must keep in mind that our desire to “win” can produce bad results for our clients.  If I take an aggressive approach and a client loses an opportunity as a result of my style, it’s a bad result of poor negotiation.  Conversely, if I take a weak position and fail to get the most value out of a deal without damaging relationships in the process, then that is a bad result from poor negotiation as well.  You’re looking for that sweet spot in the middle, where ideally everyone can walk away from a deal feeling good about the result, but you know that you did everything you could to create value.  As with pretty much anything in law practice and business in general, it’s mostly a matter of preparation and paying attention.  And of course it’s crucial to be ethical, both in terms of the rules of professional responsibility and our obligations to each other as fellow human beings.

John P. Strohm is a transactional entertainment and intellectual property attorney with the firm Johnston Barton Proctor & Rose LLP . John’s practice focuses on the representation of musicians, songwriters and independent record labels. Prior to becoming an attorney, John was a professional musician and producer for over a decade. He performed and recorded as a member of several notable alternative pop/rock acts, including The Lemonheads and Blake Babies.

The first recording agreement I had the pleasure of signing as a recording artist was a typical, label-friendly, multi-option contract. The anemic royalty, based on the “suggested retail price,” was further depleted by container deductions, deductions for so-called “free goods,” and paid on only 90% of net sales to account for records damaged in shipping (as they often were in the dark ages of shellac discs).  In essence, it was a scam, though a scam that had evolved and had become accepted as industry standard.  I had no idea how lousy the financial terms were for my band at the time. When I finally learned enough about the business to understand the deal terms, I felt duped and angry at our attorney for failing to adequately explain the contract to my band.

I felt much better about the terms of my next deal: a handshake agreement with a startup indie to split all profits from any releases 50/50. We didn’t address territory, ownership of the masters, mechanical royalties, what constitutes the label’s “costs,” or even exclusivity between artist and label. Not surprisingly, we eventually had to fill in some of these terms under somewhat less amicable circumstances.

Now that I spend most of my time representing artists and labels in recording agreement negotiations, I have realized that my experience reflects the two basic types of recording agreements in the late 1980s/1990s industry. On the one hand, majors and some independents insisted upon very formal, generally label-friendly and traditionally-structured deals, and on the other hand certain independent labels offered rather informal net profit split agreements, which were often verbal agreements striving to provide the antithesis of what was widely regarded in the indie community as the outmoded major label-style deal. Both of these models have flaws, and both basic structures exist today, albeit often in slightly more evolved forms.

The challenge that enlightened indie labels, career-minded artists, and counsel for both face today is how to structure and draft a workable written agreement that retains the independent spirit and intrinsic “fairness” of the aforementioned handshake deal. This article is the first of several I will write about net profit split recording agreements; future articles will focus on certain specific issues that are briefly addressed in this introductory piece. Below I will summarize certain key terms that should be considered and addressed in any such agreement.

Ownership of Master Sound Recordings

The question of ownership of the master sound recordings is a key term in any recording agreement. The trend today with independent labels is toward record companies licensing the exclusive rights in master recordings from artists instead of owning the copyrights in the underlying masters. Nevertheless, often a first draft of the contract – even in net profit split deals – is structured so that the label owns the masters. Thus, retaining ownership becomes a key negotiation point. Typical license terms for master recordings range from five to thirty-five years.

Significantly, under United States law any transfer of ownership of sound recordings must be in writing and signed by the transferor to be effective. Thus, any verbal agreement that purports to transfer ownership of masters is void. Furthermore, any license agreement with respect to sound recordings must be in writing or is terminable at will by either party. In a recent federal case, the Butthole Surfers won on appeal in a suit against Touch and Go Records to terminate a verbal license agreement with respect to numerous valuable albums recorded by the band. As such, it is enormously important for any label to insist upon a signed contract for any recording agreement.

Controlled Compositions Clause

In recording agreements, songs that are written in whole or in part by the artist are called “controlled compositions.” Traditionally, labels pay the writers of controlled compositions a royalty – referred to as a “mechanical royalty” in exchange for the writer granting a license to the label to sell recordings of the composition.

The typical approach under net profit split recording agreements to the controlled composition clause is that the artist waives mechanical royalty payments with an acknowledgment that mechanicals are a part of the artist’s share of the net profits. This becomes problematic for the artist/writer because publishers often rely on mechanicals as a guaranteed revenue stream. Without a mechanical royalty stream, the writer/artist is less marketable to publishers. It is often favorable to the artist to establish a separate, recoupable mechanical royalty stream to address this problem.

Definitions of “costs” and “advances”

In net profit split agreements, the difference between “costs” and “advances” can be unclear and confusing. Generally, costs are broadly defined to include all expenses of the label with respect to a project except general overhead. Sometimes, however, labels pass through general overhead expenses to artists on a pro-rata basis.  Costs are recouped “off the top” from the first sale. It’s important to note that the definition of recoupable costs under a net profit agreement can be far broader than a traditional royalty model. As such, the “fairness” of the net profit split can prove somewhat illusory.

In contrast, advances are generally understood to be monies that have been advanced to the artist, which the label recoups solely from the artist’s share of royalties once the label has recouped all costs. It is in the artist’s interest to have as many expenses as possible treated as costs that are shared by artist and label.

Non-Traditional Revenue Streams

The newest model for recording agreements, the so-called 360 deal or all-in deal, can pose problems for artists. It’s no secret in the music industry that it is becoming increasingly difficult for labels to sell sound recordings.  As such, labels may justify commissioning non-traditional revenue streams in their recording agreements, such as touring, publishing and merchandise by citing the generosity of a 50/50 net profit split. Whether or not these emerging deal structures make sense in any particular situation requires a factual analysis.  Depending on the strength of the label, existing fan base of the artist, and other issues, an all-in deal may benefit the artist. Nevertheless, there are many situations in which the all-in deal primarily benefits the label.

Conclusion

As the mainstream music industry struggles to find a new paradigm in the digital age, the indie business is quickly evolving – often to the artist’s advantage.  In the coming months, I will provide more in-depth analysis regarding the points mentioned above and others in future blogs. Please keep in mind, however, that any agreement transferring or licensing copyrights in sound recordings should be in writing, prepared by an attorney with music industry experience, reviewed by competent counsel, and signed by all parties. While I very much appreciate the spirit and intentions with which net profit deals are generally approached, it is crucial to carefully consider and review (and execute a writing with respect to) the material terms of these contracts.