If your business works in the entertainment industry, the oil and gas industry, or certain other industries, you may become a party to a contract involving royalties. This article highlights what they are and how they work.
When a person creates a book, song, play, or painting, the creator generally owns the intellectual property rights (unless an agreement has been signed to transfer the rights). Similarly, when an inventor receives a patent on an invention, the inventor has intellectual property rights.
For example, a singer who records an album might get a royalty of 15 percent from CD sales. Actors starring in a television show might get a royalty from merchandising products sold with their images on them. But today’s royalty calculations and contracts can be much more complex as these two cases illustrate.When a business obtains the right to market the creation of another business, the creator (and in some cases, other individuals involved) usually receive compensation in the form of a royalty.
In 1995, F.B.T. Productions LLC signed the rap artist known as Eminem, gaining exclusive rights to his recordings. F.B.T. signed an agreement transferring the recordings to Aftermath Records. Provisions of the contract provided for different percentages of royalties — 12 to 20 percent for “records sold” (such as a CD) and 50 percent on “licensed music” (such as songs used in a television commercial).
The production company filed a lawsuit arguing that it should receive 50 percent of royalties from “permanent digital downloads” of Eminem recordings. The producers claimed that the record label should treat these downloads (from stores such as Apple’s iTunes) and sales of cell phone ringtones as licensed music, which received the higher royalties.
A jury verdict ruled for Aftermath Records. However, an appeal, the U.S. Ninth Circuit ruled that F.B.T. Productions was owed a 50 percent royalty on the permanent downloads, ringtones and other third-party uses. The case was remanded for further proceedings on the damages. In October of 2012, the producers and the parties settled the case but the terms of the agreement were not revealed. (F.B.T. Productions LLC v. Aftermath Records, Nos. 09-55817, 09-56069, U.S. Ct. of App, 9th Cir.)
The television show Happy Days, which ran from 1974 to 1984, has remained popular decades later. Episodes are available for purchase on DVDs and merchandise, including t-shirts, games and lunch boxes, has also been sold.
Some of the actors claimed they did not receive royalty money owed to them as a result of the sale of show-related items with their images on them.
A lawsuit was filed in April of 2011 after the actors discovered a Happy Days slot machine at a casino in Las Vegas. Some, but not all, of the regular actors in the sitcom joined forces in the suit and sought $10 million in unpaid merchandising royalties.
According to the lawsuit, the actors signed contracts giving them between 2.5 percent and 5 percent of net proceeds from items with their images on them. The suit was filed against CBS Studios Inc. and Paramount Pictures, which had a division that produced the sitcom.
Shortly before the trial was scheduled to begin in July of 2012, the case was settled. Although the exact terms were not revealed, the plaintiffs’ attorney announced that each actor received payment and an agreement that the original contract terms would be honored on future sales. (Anson Williams et al v. CBS Studios et al, Superior Court of the State of California, No. BC459841)
Today’s recording and actor contracts would almost certainly include provisions about digital downloads, ringtones, DVD sales and merchandising. But as the F.B.T. Productions and Happy Days cases illustrate, when parties are signing a contract, they can’t imagine what future issues and technologies might involve. That is why written agreements are so critical.
Here are some basics about royalties and the related contract provisions:
Some of the different types of royalties involve:
One of the major issues is how to value royalties or how to derive the royalty percentage or rate. Generally, there are three approaches to determine the applicable royalty rate in the licensing of intellectual property. They are:
Even when determining a royalty rate using the various approaches, it is always best to have a legal adviser who knows the standard for your industry.
In a fair evaluation of the royalty rate, the relationship of the parties to the contract should: