Many recording agreements still calculate royalties based on a percentage of the retail price, although there appears to be a slow migration to ward wholesale-based contracts. Considering there are no

Many recording agreements still calculate royalties based on a percentage of the retail price, although there appears to be a slow migration to ward wholesale-based contracts.
Considering there are no "retail prices" in most countries of the world, this gives the record company much leeway in calculating retail-based royalties.

Since there are no retail prices upon which royalties can be calculated, record companies use "uplifts" in order to approximate the retail price. The problem is that "uplifted" wholesale prices rarely have any relation to the price at which records are sold in stores.

When we research the prices at which records are sold to consumers, the selling prices are invariably higher than the "constructed retail prices" used to calculate royalties. Furthermore, during audits, record companies will not provide any substantiation for the "uplift" percentages used to calculate royalties.

The answer to this is to have royalties calculated on the wholesale price rather than the retail price. There is no question as to the wholesale prices at which records are sold. Problems arise when "constructed" retail prices are used to approximate consumer prices. If a wholesale-based contract is not possible, try negotiating a fixed "uplift" percentage outside the U.S. and Canada. This enables an objective calculation rather than having to accept the record company's "uplifts."

One more area of contention during audits is what income the artist is entitled to share. Record companies receive significant amounts of income from numerous sources for the use of their entire catalogs. Although such income is not attributable to any specific artist, this income would not exist without the work of artists.

Record companies receive payments from MTV and other video outlets, foreign public performance income, blank tape levies, income from the use of its catalogs on airlines, background uses, settlements from unauthorized uses of recordings and record club "trademark fees." Although none of these types of income would be collected without the work of artists, record companies do not share these types of income with artists unless there is explicit language in the agreement. Even then, it is generally not paid without having to first conduct an audit.

It's a simple calculation to allocate unidentified income to specific artists, as long as the appropriate information is made available.

Without an explicit right to this type of income in the contract, information required for the calculation will be denied during an audit, and any claims of this type will be strongly disputed. Therefore, it is important to have a clause in the agreement that entitles the artist to an allocated portion of 50% of all income received by the record company, especially non-artist specific income. To be safe, include examples in the clause.

This type of "catch-all" clause is also important due to the rapidly-evolving nature of online sales. What was recently thought to be the next business model, subscription services, has not developed as expected. Now, a la carte download services, such as iTunes and Napster, are starting to have some success.

Contracts written two years ago when subscription services were the next big thing may not adequately address a la carte download services, and contracts being written now, when a la carte download services are popular, may not adequately address a yet-to-be invented type of sale.

Contracts reflect the issues that were important at the time they were written. Therefore, it is important to have a "catch-all" clause that covers all types of income received by the record company.

Finally, limitations should be put on all discretionary items, such as reserves, special program free goods, TV advertising deductions and independent promotion charges. Without explicit limitations, these deductions and costs can become excessive, and there will be no objective basis upon which to base a claim. "Reasonable" reserves are usually not reasonable to artists, but are to the record companies that set the parameters.

By having an auditor review the royalty provisions of contracts during the early stages of contract negotiations and provide comments, your clients' earnings can be maximized and future disputes may be avoided.

Perry Resnick is a senior manager with RZO LLC.