Rules of Royalty

In All, Intellectual Propertyby lowndestechLeave a Comment

By Ahmad El-Gendi

Royalty agreements sound nice. After all, the term royalty indicates a high status and superiority.  But the truth is, many royalty agreements are a disaster waiting to happen. The essence of the agreement is for one party to promote and sell the product or talent of another party for a reoccurring fee per sale. For example, if an artist creates a song, or an author writes a book, they may sign a royalty deal with a company to promote that song or book in exchange for a royalty fee. Although this seems like a win-win situation, here are some key contract clauses to watch out for:

  1. Audit Rights. When it comes to getting paid royalties, “trust but verify” is a good model. In order to make sure you are getting your fair cut, there must be clear audit rights that allow you to confirm you are getting the right amount of royalties. A simpler form of this right is to be entitled to monthly sales report. This is appropriate when there is significant trust between the parties (because there is always the risk the sales reports could be filled with false information). Another option is to have the right to bring in an independent accounting professional to analyze the books of the party promoting and selling the work of the artist or author. This option may be more expensive and more of a hassle, but will likely ensure greater accuracy and accountability. Finally, a moderate solution which potentially could provide the greatest assurance of royalty payments in the proper amount is giving both parties direct access to the sales portal and corresponding inventory database. If the inventory was automatically linked to sales, it removes the opportunity for anyone to get “creative” with the data. This area may be covered by Blockchain applications in the near future.
  2. Built In Re-Negotiations. At the beginning of a deal the dynamics between parties are often different than they are a couple of years later. What if the product or song being sold takes off? One way for a young artist or author to make sure that their financials of the deal stay consistent with the level of success is to build in re-negotiations of the royalty rate. For example, the parties could agree that the royalty rate is initially one dollar per sale, but if sales reach over two million dollars, the royalty rate would increase to two dollars per sale.
  3. Performance Standards. Disputes often arise from royalty agreements because one party is not getting the level of performance they were expecting out of the other party. For example, if the artist is supposed to participate in promotional efforts and they fail to do so, there can be a built in deduction of royalties owed (so long as it is a legally compliant liquidated damages clause and not a penalty provision). On the other hand, if the company promoting and handling distribution of the product is not being responsive or is not performing its duties in a timely manner, the artist should be given an option to terminate the agreement if those deficiencies are not fixed within a certain amount of time (like 30 days). While the standards expected and corresponding consequences may vary, defining both in writing before the contractual relationship begins can save you from a lot of hassle down the road.

For more information on royalty agreements and other entertainment law considerations click here.

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