Just how widespread is the practice of underpaying artists for their royalties? Last week, the legendary Quincy Jones won a $9.4 million lawsuit against the Michael Jackson estate for royalty underpayments. If Quincy Jones is getting shortchanged, chances are you are too.
These aren’t isolated incidents. There are hundreds of less high-profile audits, complaints, and lawsuits ongoing almost daily over similar offenses. Earlier this year, Warner/Chappell claimed EMI hasn’t paid as much as half of what it owes. And most recently, Bluewater Music hit Spotify with a suit claiming the digital music service hasn’t paid it at all for hundreds of songs.
Welcome to the music business, where underpaying for royalties is a matter of course.
How and why are royalties underpaid?
It’s a complicated question and the answer depends on the involved parties and the royalty streams in question. Most of the time, the reasons for underpayments fall into three categories: Incompetence, accounting errors, or malicious intent.
Incompetence and laziness are far more widespread in the music industry than malicious intent. Lawyers with no music industry experience often express shock at how “loose” the music business is when it comes to royalty payments. Corner-cutting that other industries would never get away with is commonplace in the music biz.
One of the primary problems is that while companies may have royalties listed as due on their books, they don’t have the correct data to pay it out (i.e., names, addresses, bank accounts, representatives, copyright splits, etc.). On the other side of the coin, some also fail to update their records, respond to requests to do so, or just have sloppy record keeping and organization. Some folks are just too lazy, busy, or disorganized to update the information or track down the money.
Underpayments are sometimes due to data entry mistakes, software glitches and/or the accounting schedules each company adheres to. Take for example, the aforementioned Quincy Jones v. Michael Jackson case. In court, the defendants admitted to some $400,000 in royalty underpayments due to “accounting errors.” That sounds like crazy talk, but it’s not uncommon for major record companies to make $100,000+ mistakes in royalty payments. To them, that’s like you and I losing a couple of wadded up $1 bills around the house or losing some quarters between the couch cushions. They hardly notice the error until someone brings it to their attention.
Just about all the major music companies (record labels and music publishers) account semi-annually, 90 days after the semi-annual period ends. Of course, the “90 days” is just what it says on paper. Some companies will go past 120 days after the semi-annual period ends. Other companies usually account quarterly--45, 60 or 90 days after the calendar quarter ends.
Many of these “accounting errors” might be attributed to where the company is in their distribution cycle, when the money is actually received, from where, how it is received (wire, check, direct deposit, wads of cash, etc.). Finally, how far behind are they in actually processing these payments and the endless lines of royalty data? Years? Could be.
Willful acts of copyright infringement for commercial gain, or to earn extra interest on the royalties, may not be as common, but they happen. There are rumors that some accounting departments are actually trained to sit on money as long as possible (long past when they were supposed to pay), in addition to purposely underpaying those very late royalties.
If that company has a nice, fat, interest-bearing bank account, the more money that “floats” in the account, the more money they earn on the interest. This allows the company to earn as much interest as possible before the royalty distribution actually goes out.
Underpaying also gives their bank accounts some extra “reserve” or “cushion.” Of course, there is nothing malicious or illegal about earning interest on your bank account. Where this crosses the line into maliciousness is when they intentionally don’t pay on time or accurately to essentially borrow (or steal?) your royalty money to earn interest on it. Of course, intent is always hard to confirm vs. the incompetence factor (see above).
What You Can Do About It
First off, resist the urge to sue. Obviously, lawsuits are always a dead-last resort. They’re time consuming, expensive, and carry uncertain outcomes.
Routinely audit specific royalty sources
Sometimes the only recourse is to audit the company. Audits almost always find evidence of underpayments. That’s why any licensing deal must include an audit clause. Auditing is a very basic business right and an absolute necessity in the world of music industry royalties.
(But you might get a fight. Big companies don’t want thousands of audits going on perpetually from thousands of licenses they have in place.)
Now auditing can be expensive. Many times, if the license dictates it, the entire cost of an audit could be covered if underpayments over a certain percentage are found. So it’s possible under some circumstances that you wouldn’t have to pay for the audit out-of-pocket.
All artists and royalty payees must find a way to audit if the money gets significant enough. One way to accomplish this is to join a network of music industry professionals or hire an administrator, accountant, attorney or business manager that routinely works with/around music royalty audits. Depending on the amount of royalties, the companies and the licenses involved, a music royalty administrator like Kobalt or Bluewater, may provide collection services to find missing royalties or even include clients in ongoing audits. Business management firms are also in the routine of auditing or helping track down money for their clients.
Always read the royalty statements line by line, make notes and ask questions - LOTS AND LOTS OF QUESTIONS. For example, some companies allow their clients to review the source royalty documents if they have any questions or doubts about their royalty payments. This means if a company was paid from a record company or TV/film company, the client could view that royalty statement from the actual source the royalties were generated from.
This is as transparent as it gets, and of course not every company will be cozy and comfortable with that request. Nevertheless, it is your right, it is your money. Demand more information and demand more transparency. One of the best ways to do this is to view the source royalty documents to see where the money originated, and connect the dots to how much you were actually paid. Some companies, like Kobalt, have online portals that allow a client to see source royalties in real time. If you watch the royalties like a hawk, as you do your personal bank account, sometimes the underpayments can be avoided altogether, or at the least corrected in a timely fashion, without expensive audits or lawsuits.
The overlying point here is that you will be underpaid. Just count on it. Prepare yourself mentally, emotionally, and financially for that unsettling fact. Get ready to fight for your money and welcome to the music business!
Are you earning royalties and are interested in finding out how much they’re worth? Contact us today for a free royalty consultation.