BMG axes 'unfair' controlled composition clause from its recording contracts

By Emmanuel Legrand

BMG's initiative to eliminate what is known as the "controlled composition" clause in its US recording contracts could lead to radical changes in the way contracts between recording artists and labels were structured. 

In principle, the controlled composition clause, which goes back to the seventies, was meant for labels to be able to license the mechanical rights of an artists who was also a songwriter when records were released. According to BMG, in practice "it has become a mechanism by which labels force artists who are also songwriters to accept a reduced royalty on physical product, typically with a 25% discount." 

  Bertelsmann's music division said that, with immediate effect, it would "voluntarily refrain from applying the reductions to any new record deals and remove them from its entire catalogue over the next year. " The company said the move "forms part of BMG’s ongoing program to rebalance the music industry in favor of artists and songwriters by abandoning longstanding practices designed to reduce the incomes of musicians." 

Getting rid of unfair terms

  “It is unacceptable for the record industry to continue to apply deal terms which are solely designed to reduce the incomes of musicians," said BMG CEO Hartwig  Masuch (pictured, below; photo credit: Barbara Dietl). "We have heard a lot during the coronavirus crisis of initiatives by music companies to support artists. The best way to support artists is not to subject them to unfair terms in the first place.”

  Basically, an artist who had signed a "controlled composition" clause would see a reduction in mechanical royalties when physical records were manufactured. The controlled composition clause granted record labels a 25% reduction (and sometimes more) on mechanical royalties owed to a songwriter in the US. The minimum statutory mechanical rate is currently at $.091 per track sold, and has not changed since 2006. 

  The clause is mainly applicable to mechanical licenses related to physical product. The clause had no relevance in the digital world, where streaming services have to obtain mechanical licenses from publishers. The clause is an issue in the US and Canada and does not apply elsewhere. 

An antiquated provision

  BMG estimated that across the US industry, the various discounts and caps which are contained in the "controlled composition" clause did cost songwriters an estimated $14m in 2019. "Because it often establishes a cap on the total royalties payable on a given album, if artists record songs by third party songwriters they can in extreme cases end up not only earning no money for their own songs but even owing their labels money," explained BMG is a statement. 

  For Los Angeles-based music lawyer activist Dina LaPolt, co-founder of Songwriters of North America (SONA), the "controlled composition" clause is "an antiquated and restrictive provision in virtually all recording artist deals that seek to further reduce the songwriter’s mechanical royalties which, already regulated by the government, are much lower than any other income stream in recorded music. I sincerely hope the other record companies follow their lead.” 

  BMG's move was supported by David Israelite, President and CEO of the National Music Publishers' Association (NMPA), who praised BMG "for eliminating this poisonous practice." He added: "Controlled composition clauses in recording contracts have been one of the most harmful things to ever happen to songwriters. While their impact has been minimised thanks to NMPA’s efforts to make them illegal for digital products, there is still enough of a physical product market for controlled composition clauses to continue to plague the songwriting community. This is a wonderful pro-songwriter move by BMG.” 

A step towards dignity

  Bart Herbison, Executive Director of  Nashville Songwriters Association International (NSAI), urged "every record label to follow [BMG's] lead and fully eliminate controlled composition immediately.”  

  Crispin Hunt, Chair of the UK's The Ivors Academy, which represents music creators in the UK and Ireland, and who is leading a campaign asking for fair treatment for creators in the UK, welcomed BMG’s "determination to cease industry-sanctioned practices which uphold inequality for creators. The controlled composition clause has disadvantaged songwriters across music’s history. It belongs in a museum along with many other ‘tricks of the trade’. BMG’s abandonment of this regressive practice is a huge step on music’s journey to dignity. Music can’t change its past but we can change its future.”

  Moving forward, Masuch said that eliminating this "unfair practice" was just "the latest in a series of measures BMG is taking to make the music industry fairer to artists and songwriters.” To that effect, BMG has set up a taskforce headed by COO Ben  Katovsky  to specifically look into music contracts with the goal to "improving fairness."

Treating artists fairly

  Said Katovsky, “If you know your music industry history, it’s hard to dispute the fact that music companies have had a problem with treating artists fairly. As the youngest of the big international companies, we were able to start from scratch and design out many of the worst aspects of the old business from our new deals. But inevitably we sometimes find examples of historic bad practice lurking in some of the catalogues we have acquired.” 

  He continued: “We have to be realistic – we cannot right all the wrongs of the past – but we’re going to try our damnedest. We are delighted to finally get rid of the controlled composition deduction. It is an anachronism which has no place in the new music business.” 

[Austin, Texas-based lawyer Chris Castle provided an good overview of how controlled composition clauses work for labels and songwriters/artists in a recent blogpost.]

 

[BMG's decision will have a limited impact on the livelihoods of artists and songwriters (we are talking about $14 million a year in the US), but it is widely symbolic.

  There is a growing call for a fairer music industry (hello Kanye!), with pressure on record companies to give recording artists fairer contracts and better royalty rates. Many independent music companies abide by a WIN pledge to provide fair clauses to artists for their digital royalties.

  So, in the footsteps of BMG, it would be significant if the three majors, through the RIAA, announced that they renounced, like BMG, to apply the "controlled composition" clause not only in future contracts, but in all existing contracts from the past. That would set a precedent and would show a real desire for change.

  When you think about it, the clause was a crooked one. It was just there to make sure labels paid less mechanical royalties to the artists, since it was not part of the recoupable package.

  And while we are at it, how about reviewing the notion of recoupable expenses?

  The recoupable concept as currently set by labels is genius: everything spent on and by artist ends up in a recoupable box, and the artists will be working endlessly to erase that debt. Fair enough, a label believes in you and pays for your expenses with the hope that future income with offset these costs. But once the artists have recouped the advance, what's left? Nothing but the royalty rate agreed between parties (usually quite low). No assets, nothing. It's like if you had a 20-year mortgage on a house that you eventually manage to pay off, but you still don't own the house.

  Fairness in the music sector also means that artists, who are the initial creators of works, will also be shareholders in their creative works and own them after a certain period of time. As we have seen in recent years, the value of catalogues has gone up and up, even in times of Covid. But most of the time, the artists who contributed to the value of these catalogues do not see a penny from these transactions. This has to change.

  Progressive labels should work with artists as partners. The times when artists were tied to antiquated contracts has to end. Artists who were badly served in the 60s and 70s should see their royalty rates re-evaluated. And artists, not only Kanye West or Taylor Swift, should be able to get their masters reverted to them since they already have paid for them through recoupable advances. And even if they have not recouped the advances, labels would show which side they are on if they agreed to a reversion clause after 30 or 35 years of exploitation.

This would set the foundation for a fairer, artist-centric industry.

E.L]