California Codifies Audit Rights

A new California law codifies some customary audit provisions in recording contracts and requires other provisions that many contracts forbid.


NEW YORK -- A new California law codifies some customary audit provisions in recording contracts and requires other provisions that many contracts forbid.

Beginning Jan. 1, 2005, a party that agrees to furnish "services in the production of sound recordings" and has the right to receive royalties under a contract has certain legal auditing rights. This appears to include artists, producers, production companies and engineers who negotiate a royalty.

Regardless of the contract terms, the party may audit the company's books and records to determine if all royalties earned have been reported. The customary provisions included in the law restrict the royalty recipient from conducting an audit more than once per year, requesting an audit more than three years after the end of the royalty earnings period under the contract and auditing a particular period more than once. The party must also retain a "qualified royalty auditor" of his own choice to conduct the audit.

Contrary to the terms of most contracts, the party may now enter into a contingency fee agreement with the auditor. Also, the auditor engaged may conduct individual audits on behalf of different parties simultaneously. Many companies have restricted this right because they reportedly fear that the auditor will be motivated by his own commission to find a higher amount due.

The provisions are in addition to any other rights the party has under the contract, and do not extend any limitations period applicable to royalty accounting or payments not specifically addressed in this statute.

The law becomes Civil Code sections 2500 and 2501.

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