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This is a multi-part blog series, “§115 of the U.S. Copyright Act Overrides Controlled Composition Clause?”
In Part One, we explored a brief history of songwriters and songs in the record business, and introduced the potential impact that §115 of the U.S. Copyright Act may have on the application of record labels’ Controlled Composition Clause to “digital phonorecord delivery”. Part Two explored the rights granted under the Copyright Act, with a particular focus on the right of reproduction in a musical work; and then introduced the compulsory license, its associated mechanical royalty rate, and how record labels established the Controlled Composition Clause to limit the impacts of the mechanical rate.
As we discussed in Part Two of this series, mechanical (or compulsory) licenses are the result of Congressional action to prevent a monopoly over the physical (or digital) reproduction of musical works by songwriters (and those that owned songwriter catalogs). To compensate these song owners, Congress provided a mechanical royalty – an amount of money set by law (i.e. the “minimum statutory rate”) to be paid by someone wishing to record some else’s song – like a cover song. Initially, under the Copyright Act of 1909, this rate was set at 2.0¢ per song per record “made and distributed” and over time has increased to its current rate of 9.1¢. Although not effective until January 1st, 1978, the Copyright Act of 1976 provided the first increase in the minimum statutory rate to 2.75¢ per song per record. Not wanting to pay extra money for songs, record labels devised a way to resist this increase in the mechanical royalty…
Enter the Controlled Composition Clause
It is a generally accepted practice for record labels to provide a controlled composition clause in a recording contract. This clause provides that the record label will pay the artist/songwriter a reduced mechanical royalty (typically 75% of the minimum statutory rate) for each controlled composition. As defined in an actual recording contract, a controlled composition is “any Composition or material recorded pursuant to this agreement which, in whole or in part, is written or composed, and/or owned or controlled, directly or indirectly, by you and/or any individual member of Artist and/or any producer of a Master and/or anyone affiliated with you or any such producer.” Note that this clause extends to not only compositions that the artist writes or co-writes, but also to compositions written by anyone “affiliated” with the artist. As a result, the controlled composition clause applies across the board to all songs on an album…even if the artist didn’t write all of them!
The function of these clauses is to limit (or “cap”) the amount of mechanical royalties a record label will pay to an artist/songwriter or on behalf of an artist to third-party songwriters. To illustrate this concept, let’s look at a twelve-song album that is subject to a controlled composition clause. The label will calculate two different values: a maximum amount of mechanical royalties allowed (the “cap”) and a total amount of mechanical royalties payable. Because the controlled composition clause applies to all songs on the album, the maximum amount of mechanicals allowed per record for this example would be 81.9¢ (12 songs x 75% of 9.1¢). What this cap designates is that the record label will not pay out mechanical royalties above and beyond 81.9¢ per record (and if it does, the difference typically comes out of the artist royalty, as discussed below). Because the artist wrote all twelve songs, the total amount of mechanical royalties payable is also 81.9¢ (12 songs x 75% of 9.1¢). As a result, we have a straightforward calculation and the artist/songwriter will receive all amounts payable (this is, however, still less than the minimum statutory rate that would have been otherwise owed the artist/songwriter were it not for the controlled composition clause). Not all releases are this smooth. For example, once a third-party songwriter enters the equation, things can get shaken up.
The Collaboration: Artist/Songwriter and Third Party Songwriter
It is not uncommon to find an album with songs written by both the artist and by third-party songwriters. This type of collaboration can affect the allocation of the mechanical royalties. There are three factors to consider when collaborating with third-party songwriters: (1) if the artist agreed to a controlled composition clause, it applies to each and every song, even if the artist didn’t write all of the songs; (2) third-party songwriters, unlike the artist/songwriter, are not subject to the controlled composition clause and will likely not accept a mechanical royalty below the minimum statutory rate; and (3) because of the limiting effect of the controlled composition clause, the amount of mechanical royalties that the record label agrees to pay is typically less than the amount of mechanical royalties that would otherwise be due to the artist/songwriter and third-party songwriter. As a result of these factors, the allocation of mechanical royalties becomes less than straightforward.
Let’s take a twelve-song album, with eight (8) songs written by the artist (“inside” songs) and four (4) songs written by a third-party songwriter (“outside” songs). Because the artist agreed to the reduced mechanical royalty rate, the inside songs will only be entitled to receive 54.5¢ (8 x 75% of 9.1¢). Since third party songwriters are not subject to the controlled composition clause, the four (4) outside songs will be entitled to the full statutory rate of 9.1¢ per song, or 36.4¢. These values reflect the amounts that each party is entitled. However, as mentioned above, the controlled composition clause applies to the entire album, making the maximum mechanical royalties allowed to be 81.9¢ (12 x 75% of 9.1¢). This poses a question: if the label is only to pay out a maximum of 81.9¢, and the artist and third-party expect a combined 91.0¢, who gets what? As stated earlier, third-party songwriters are not obligated to accept less than the minimum statutory rate. Therefore, in this example, the label must pay the third-party 36.4¢, which would leave the remaining 45.5¢ for the artist/songwriter (81.9¢ – 36.4¢). This scenario illustrates a situation in which the artist/songwriter could actually receive less than the already-reduced percentage provided for in the clause. In this example, the artist/songwriter only received 5.6875¢ per song (45.5¢ ÷ 8 songs) or 62.5% of the statutory amount (and not 75% as was originally agreed to).
Royalty Caps on the Album
In addition to limiting the amount of mechanical royalties per song, the controlled composition clause typically limits the number of songs per record a mechanical royalty will be paid out for. Let’s take the above example of a twelve-song album, with eight (8) songs written by the artist and four (4) written by a third-party songwriter. However, in this example, the recording contract called for a limit on the number of songs (let’s say 10) per record for which the label is willing to pay mechanical royalties. The maximum amount of mechanical royalties allowed would be 68.75¢ (10 songs x 75% of 9.1¢). As stated earlier, third-party songwriters will be paid the full statutory rate (unless they agree to a reduced rate), which in this example amounts to 36.4¢ (4 songs x 9.1¢). That leaves the artist/songwriter with the remaining 32.35¢. Once again, the artist/songwriter is subject to a reduction in mechanical royalties. Here, the artist/songwriter received 4.04¢ per song (32.35¢ ÷ 8 songs) or 44.4% of the statutory amount.
These numbers start to hint at the possibility that an artist/songwriter’s mechanical royalty may vanish completely. In fact, that is exactly what happens when the outside compositions start to outnumber the inside compositions. Let’s take the previous example – we still have a twelve-song album subject to a controlled composition clause and a 10-song limit per record, but this time the artist only wrote four (4) of the twelve songs and a third-party songwriter wrote eight (8). This breakdown would provide for 27.3¢ of mechanical royalties payable to the artist/songwriter (4 songs x 75% of 9.1¢) and 72.8¢ payable to the third-party songwriter (8 songs x 9.1¢), for a total of $1.01. Due to the reduced mechanical royalty and 10-song cap, the artist/songwriter may end up owing more mechanical royalties for outside songs than is allowed under the controlled composition clause. The maximum amount of mechanical royalties allowed is 68.7¢ per album (10 songs x 75% of 9.1¢). When the label goes to pay the third-party songwriter, it will realize that it paid out more than it agreed to pay pursuant to the controlled composition clause. In this situation, the label passes the burden of paying the outstanding balance to the artist/songwriter. As a result, not only does the artist not receive a mechanical royalty payment (it all went to the third-party songwriter(s)!), but the artist also incurs a debt to be recouped by the label. In this example, the artist/songwriter would be responsible for covering 4.1¢ per album (68.7¢ – 72.8¢) – this comes out of artist record royalties!
Lighten the Load: Negotiating the Controlled Composition Clause
While a controlled composition clause tends to favor record labels, artists with some leverage should be able to negotiate this clause to make it less burdensome. Some strategies are as follows:
- Increase the Maximum Rate per Song: As mentioned earlier, controlled composition clauses generally set the mechanical royalty payable to 75% of the minimum statutory rate. However, this percentage is not a hard-and-fast rule and an artist can negotiate for a greater amount.
- Increase the Maximum Rate per Album: If the recording contract contains a provision limiting the number of songs for which the label is willing to pay mechanical royalties (e.g. 10, like in our example above), a strategy might be to try to increase or eliminate this benchmark number.
- Reduce or eliminate the penalty for using outside compositions when staying within an album cap: As shown throughout the above examples, the inclusion of outside compositions typically reduces an artist/songwriter’s mechanical royalties to below the agreed upon rate. Try to negotiate for full payment of the agreed-to mechanical royalties, regardless of whether the compositions are both “inside” and “outside”, when the total number of compositions are within the album limit.
Overall, a controlled composition clause remains an effective method for labels to reduce their costs when working with artists who are both the singer and songwriter. This clause can have a great effect on an artist/songwriter’s royalty income, the relationship between the artist and the record label, and other areas that contribute to the development of an artist. With some foresight and guidance, artists, and those who represent them, can take steps to help lighten the burden of this clause and other similar provisions.
Now that we have a better understanding of the role played by the controlled composition clause, and its relationship to mechanical royalties, we are now ready to delve into provisions of the Copyright Act that seem to override the controlled composition clause as it applies to “digital phonorecord delivery”, aka downloads. In Part Four, we’ll introduce §115(c)(3)(E) of the U.S. Copyright Act – its application to mechanical uses of musical works, as well as its implications to the controlled composition clause (or other restrictive mechanical royalty provision). And then Part Five will conclude the series by determining whether §115 provides the record executive with loopholes to sustain the status quo of the controlled composition clause as applied in the digital landscape.
Written by Justin Traino, Legal Intern
 The ripple effects of controlled compositions have found there way into the world of publishing. With many publishers calculating the recoupment of their advances on full mechanical royalties, controlled compositions have caused publishers to revamp their advancement structure to incorporate the effects of controlled composition clauses.