Navigating Royalty Audit Issues
for Record Producers
by Chris Castle, Esq.
The Letter of Direction
Producers typically do not want to have to go after artists to be paid
royalties and certainly not to audit, much less sue. The producer's response
to this development was to require the artist to direct the artist's record
company to pay the producer at the source. So, producers continue to be
paid by record companies under a letter of direction from the artist that
directs the record company to pay the producer a share of the artist's
royalties specified in the producer's services agreement with the artist.
It appears to the producer that he or she is paid directly by the record company and would logically have an audit right against the record company. However, this isn't usually the way it works. Producers must audit the artist unless the producer specifically negotiates an audit right against the record company. Record companies will strongly resist agreeing to permit producers to audit them directly for a number of reasons. The most legitimate reason is that the record company could be put in a position of having a producer audit the artist's income stream when the artist has not, or has not yet, chosen to audit the record company for the same units - a situation that could get very untidy.
So producers don't usually audit record companies and have good reason not to audit an artist. What a producer often does is to wait until the artist audits the label and then expects to participate in a share of the artist's audit recovery.
But many producer agreements do not require the artist to notify the producer that the artist is conducting an audit. Because many artist audits are actually precursors to renegotiation of the artist's recording agreement, the artist and record company may fold the audit settlement into the renegotiation, and never formally settle the audit. If the artist does not have a contractual obligation to notify the producer of the audit, the producer may miss out on a prorata share of what the audit settlement would have been paid had the audit been conducted and concluded separately from the renegotiation of the artist's contract.
Audits based on particular royalty statements must be conducted within a contractual-limitations period of time that is fixed in the artist's agreement with the record company (and as between the producer and the artist, in the producer's services agreement). This is usually anywhere from 12 months to 36 months after the date that an audit statement was (or should have been) rendered by the record company to the artist. If the artist does not audit the record company during that time period, the artist waives his or her right to audit that royalty statement again.
Another provision of artist agreements limits the period in which an artist may sue the record company for non-payment, or inaccurate payment, of royalties. That period should extend at least a few months, if not a year, beyond the end of the audit period, but sometimes is the same period of time as the audit period.
The same is true of the producer's right to audit the artist, although the producer audit periods are often slightly shorter than the periods that apply to the artist against the record company. An artist who has not audited a record company at the time that the producer notifies the artist of an audit will want to have enough time to give notice of his or her own audit of the record company. This is because the money to pay the producer on the producer's audit will frequently come from the artist's recovery against the record company -- otherwise the artist must pay the producer's recovery out of pocket-not a favored result. (See sidebar on page * for the stages of auditing a record company.)
If the artist is conducting a renegotiation,
the renegotiation process will probably get started after audit field
work has commenced, or possibly following the submission of the audit
report if the audit is to be part of the leverage the artist wishes to
exert against the record company in the renegotiation. As a result, it
is worth producers negotiating a provision in their services agreements
to deal with the situation in which the artist commences -- but does not
conclude an audit -- or waives the right to audit as part of a renegotiation
or otherwise. This is particularly true in that if the producer does not
audit the artist but rides the coattails of an artist's audit of a record
company, the costs of the audit are taken off the top, so the producer
is in effect paying for the audit, too. If a producer is paying a share
of the audit costs, there is no reason why a producer should not get the
necessary information and notices needed to properly protect the producer's
interests.