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.

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.

             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.