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"The Monopolization of the Music Industry--360 Deals: A Potential Game-Changer When Establishing a Fiduciary Duty?" by Jessica Termini



The Monopolization of the Music Industry--360 Deals: A Potential Game-Changer When Establishing A Fiduciary Duty?

by Jessica Termini

I The Music Industry's Introduction of the 360 Deal

In the late 1990s, the music industry went digital - literally. See Jim Caroompas, Surviving the Music Industry in the Digital Age, MARTINEZ NEWS-GAZETTE (2009). According to the International Federation of the Phonographic Industry (IFPI) Digital Music Report, digital music sales accounted for 26.5% of all album sales in the U.S. in 2010. See Music at the Touch of a Button, IFPI DIGITAL MUSIC REPORT (2011). The IFPI Digital Music Report found that for the first time, more than one quarter of record companies' revenues in 2009 came from digital channels. See id. As a result, major record label companies began actively seeking to form new business techniques that will continue profitability with the rapidly-growing digitally-geared music environment. See William Henslee, Marybeth Peters Is Almost Right: An Alternative to Her Proposals to Reform the Compulsory License Scheme for Music, 48 WASHBURN L. J. 111 (2008).

One recent development that is becoming increasingly common is the enforcement of a label contract called the 360 deal, also known as a "multiple rights deal" or "multiple services deal." See Jeff Carter, Strictly Business: A Historical Narrative and Commentary on Rock and Roll Business Practices, 78 TENN. L. REV 246-47 (2010); see also Jeff Leeds, The New Deal: Band as Brand, N.Y. TIMES (2007). The name derived from the record companies' "complete encircling of each of the artist's revenue streams, revenue which was historically not included as part of the traditional record deal such as touring, merchandising, and music publishing." Carter, supra, at 246-47.

This type of recording contract enables a record label to receive a percentage of the earnings from all of the artist's activities rather than just record sales. See id. at 247. In essence, the label acts as a "pseudo-manager," overseeing the artist's entire career by providing financial support, direct advances, and funds for marketing, promotion, and touring. See THOMAS WILLIAM HUTCHISON, AMY MACY & PAUL ALLEN, RECORD LABEL MARKETING 101, 302 (2009). In return, the artist agrees to give the company a percentage of all their income, including that from non-record activities such as endorsement deals, live performances, and merchandising deals. See id. at 101. The enforcement of the 360 deal has become the new standard of business in the music industry during the digital revolution of the 21st century, as well as new avenue for record labels to once again monopolize the industry with their bargaining power. See Donald S. Passman, ALL YOU NEED TO KNOW ABOUT THE MUSIC BUSINESS 96 (7th ed. 2009).

As a result, the adoption of this relatively new emerging business model is seen as highly controversial. Opponents of this type of deal have characterized artists into these arrangements as "label slaves," paying the price for record labels that failed to manage their business and react appropriately to the changing industry. See Jake Fischer, The End of Sound Slavery, THE JOURNAL OF EDUCATION, COMMUNITY, & VALUES (2011); see also Peter K. Yu, Digital Copyright and Confuzzling Rhetoric, VAND. J. ENT. & TECH. L. 935-36 (2011) (stating that there was no excuse for the entertainment industry to ignore the negative enforcement-related ramifications of its outdated business model).

When contracting a 360 deal, most record labels take anywhere between 10 and 35 percent of their artist's net income from non-record sale sources, depending on the bargaining power of the artist, which is mostly non-existent among new talent. See DONALD S. PASSMAN, ALL YOU NEED TO KNOW ABOUT THE MUSIC BUSINESS 96 (7th Ed. 2009); see also Sarah Karubian, 360° Deals: An Industry Reaction to the Devaluation of Recorded Music, 18 S. CAL. INTERDISC. L.J. 442 (2009) (stating that new artists are further disadvantaged in a 360 deal negotiation because they lack material evidence showing their current or projected worth at the time of contractual execution). Essentially, a 360 deal may incorporate a record agreement, management agreement, and music publishing agreement bundled into a single contract. See Edward Pierson, Negotiating a 360 deal: Considerations on the Promises and Perils of a New Music Business Model, 27 ENTERTAINMENT AND SPORTS LAWYER 4 (2010).

These deals can be categorized in two forms: (1) passive-interest deals and 2) active-interest deals. See Douglas Okorocha, A Full 360: How the 360 Deal Challenges the Historical Resistance to Establishing a Fiduciary Duty Between Artist and Label, 18 UCLA ENT. L. REV. 10 (2010). Under a "passive-interest"360 deal, labels have no control over the rights involved and merely contract for a percentage of the net income generated from record and non-record sales, thus, allowing the artist to freely contract with third parties without seeking approval from the label. See id. Alternatively, under an "active -interest" deal, labels contract for a grant of rights as well as a percentage of net income, thus, the labels have ultimate control over the rights granted. See id. These rights typically include final approval over decisions falling outside the recording of music, including those involving promotion and marketing. See id.

II. Balancing the Rights of the Artist: Establishing a Fiduciary Duty

Courts have consistently rejected the existence of a fiduciary relationship between recording artists and their record label without evidence of either (1) a formal relationship, such as a partnership or attorney/client relationship, or (2) the existence of special circumstances warranting such a heightened duty. See Cooper v. Sony Records Int'l, No. 00 Civ. 233(RMB), 2001 WL 1223492, at *5 (S.D.N.Y. Oct. 15, 2001). Establishing a fiduciary relationship between a record label and their artist balances the rights of the latter by creating the availability of additional remedies. See Okorocha, supra, at 1. These remedies include "punitive damages, rescission of contract, and establishing the basis for a claim of conversion or constructive trusts." Id.

A fiduciary duty arises as a matter of law in formal relationships; however, the court has been less definitive when distinguishing the type of special circumstances that give rise to fiduciary duties in a contractual relationship. See Reuben H. Donnely Corp. v. Mark I Mktg. Corp., 893 F. Supp. 285, 289 (S.D.N.Y. 1995) (holding that a conventional business relationship does not create a fiduciary relationship in the absence of additional factors). A "simple contract" does not create a fiduciary relationship giving rise to special duties. See Cooper, 2001 WL 1223492, at *25. Additionally, the mere assertion that an artist's relationship with their label was one of trust and confidence, absent any evidence of specific conduct or circumstances upon which "trust elements are implicated," is not alone sufficient to prove the existence of a fiduciary relationship. See Cooper, 2001 WL 1223492, at *5 (citing Mellencamp v. Riva Music Ltd., 698 F. Supp. 1154 (S.D.N.Y.1988)).

New York courts have characterized the relationship between record companies and their artists as purely commercial, arms-length business transactions. See Sony Music Entm't, Inc. v. Robison, No. 01 CIV. 6415(LMM), 2002 WL 272406, at *3 (S.D.N.Y. Feb. 26, 2002). However, these courts have found the existence of a fiduciary duty in cases where there was evidence of a special relationship beyond that which normally exists between contracting parties in an arms-length business transaction. See CBS, Inc. v. Ahern, 108 F.R.D. 14, 25 (S.D.N.Y. 1985); see also Apple Records Inc., v. Capital Records Inc., 137 A.D.2d 50 (N.Y. App. Div. 1st Dep't 1988).

For instance, in Ahern, a record company filed a breach of contract claim against a rock band for failing to deliver the last three records agreed upon in their recording contract. See 108 F.R.D. at 17. The rock band filed a counterclaim on the basis of a breach of fiduciary duty and claimed, among other claims, that they reposed trust and confidence in the record label with respect to the royalties. See id. at 24-25. The court held that a fiduciary relationship existed based on evidence that the record company took royalties for itself that it had contracted to hold separately in a special account for the group's benefit. See id. at 25. The court reasoned that a special relationship arose where one party had a duty to handle money for another. See id.

Additionally, in Apple Records Inc. v. Capital Records Inc., members of the music group, The Beatles, along with their record company filed suit against a record company whom they contracted with to manufacture and distribute their records. See 137 A.D.2d at 50-51. The group asserted that the record company breached a fiduciary duty by selling an excessive amount of promotional records for personal gain, which diluted the legitimate market sale of their recordings. See id. at 56-57. The court held that a fiduciary relationship existed based on evidence of extensive business dealings between the group and record company that began before they were acclaimed, and continued on after the group attained great success. See id. at 57. The court reasoned that the long and enduring relationship between the label and artist created a special relationship of trust and confidence that existed independent of the contract. See id.

As 360 deals rapidly begin to replace traditional recording contracts as the new standard contract in the music industry, the court must determine whether this new recording contract structure creates legal implications that give rise to the existence of a fiduciary relationship. See Douglas Okorocha, A Full 360: How the 360 Deal Challenges the Historical Resistance to Establishing a Fiduciary Duty Between Artist and Label, 18 UCLA ENT. L. REV. 10 (2010). In particular, active interest 360 deals allow record companies to "participate in previously untapped areas" that in effect grant a greater disparity of control over the artist than ever before. See Sarah Karubian, 360° Deals: An Industry Reaction to the Devaluation of Recorded Music, 18 S. CAL. INTERDISC. L.J. 422 (2009). Courts must now consider whether a recording contract that permits a record label to receive a percentage of the net income generated from an artist's record and non-record sales, as well as active rights governing the development of that artist's career -is considered more than just a "simple contract." The result? A finding that the legal implications surrounding active interest 360 deals, as a result of the record label's in depth participation and control under these contracts, give rise to a special circumstance warranting the existence of fiduciary duties.

Essentially, under an active interest 360 deal, the record label and their artist have a special relationship that goes beyond basic contract obligations when the record label actively assumes the duty of controlling and managing every aspect of the artist's career. Under this type of recording contract, record labels retain complete control over an artist's publishing rights, touring rights, as well as merchandising rights, which greatly differs from the traditional recording contract that only gave the record label the right to share in the income from their artist's record sales. See Pierson, supra, at 4; see also Okorocha, supra, at 11 (stating that labels are contractually unable to share non-record sales income under a traditional record deal).

For instance, rights that belonged to the artist under traditional recording contracts, such as the hiring and firing of employees, contracting with third parties, and decision-making involved with booking tours and merchandising products, are being assigned and compromised under this type of 360 deals. In effect, upon the signing of an active interest 360 deal, an artist is entrusting a record label with their entire livelihood - so to speak - "by putting all of their eggs in one basket." The artist relinquishes ultimate control regarding the development of their career into the hands of the record label; therefore, creating a special relationship of trust and confidence that exists independent of basic contractual duties.

One argument may be that record labels tend to contract away any affirmative obligation to assist the artist with promotion, instead opting to merely reject or approve artist activities. See Kelsi Bohnen, 360 Deals: It's Time to Go All-in, THE NEW BUSINESS OF MUSIC, Oct. 20, 2011, http://myportfolio.usc.edu/bohnen/2011/10/360_deals_title.html. At least one court in California has addressed this issue in a case where the court ultimately refuses to find the existence of a fiduciary relationship. See Wolf v. Superior Court, 107 Cal. App. 4th 25, 43 (2003). However, the case includes a noteworthy dissent that may suggest a new direction for courts - ultimately leading to the recognition of a fiduciary relationship in this type of recording contract.

In Wolf, a novelist filed a breach of fiduciary duty claim against Walt Disney, asserting that Disney breached a contract relating to contractual assignment of rights to a novel, under which Disney was required to pay the novelist contingent compensation based on future gross receipts earned from merchandising and other exploitation rights after the release of a movie based on the novel. See id. at 28. The novelist asserted that a fiduciary relationship existed because he reposed trust and confidence in the integrity of Disney due to their "exclusive control over the books, records and information concerning the exploitation of the novel;" however, Disney failed to provide access to such records. See id. The court held that a contractual right to contingent compensation for the exclusive control of exploitation rights, absent a showing of any obligation to maximize profits or obtain approval from the novelist to enter into contracts, was similar to that of a mere debtor/creditor relationship and did not give rise to a fiduciary duties. See id. at 32-33. Moreover, the court rejected the existence of a fiduciary relationship based on evidence that the studio had complete control over financial books and records concerning the exploitation of a novel. See id. at 36. The court held that such evidence did not create a fiduciary relationship where one would otherwise not exist. See id.

Nevertheless, in the dissent, an appellate justice argued that evidence of the record label's contractual duty to maintain the books and records did in fact characterize a relationship that was fiduciary in nature; stating that, "because fiduciaries manage or have some control over very substantial property interests of others, they have the potential to inflict great losses on those property owners. [The] economic interests of fiduciaries are frequently substantially affected by the discretionary decisions they make on behalf of others. As a result, fiduciaries have unusually great opportunities to cheat without detection and they have unusually great incentives to do so." See Wolf, 107 Cal. App. 4th at 41 (Johnson, J., dissenting in part). The dissent also argued that there is a great need to impose fiduciary duties in relationships that involve an "inherent conflict of interest," in order to prevent one from "from taking unfair advantage of their special position." See id. at 42. The dissent paralleled this "special position" to partners who manage a partnership business, and trustees who keep the books for a beneficiary's property interests. See id.

The reasoning applied in Wolf's dissent supports the notion that record companies operating under active interest 360 deals undertake an extensive role in the management and control of all artist activities that create revenue; therefore, the record label is placed in a "special position" that may create the potential for opportunism - possibly resulting in the exploitation of the artist for the record label's personal gain. See Wendy V. Bartholomew, Fiduciary Duty: Can It Help Calm the Fears of Underpaid Artists?, 6 VAND. J. ENT. L. & PRAC. 246, 253 (2004). In particular, courts have seen this potential unfold in cases such as Apple Records, where The Beatles reposed trust and confidence in a record company that exploited the band's music to the label's own advantage. See Apple Records, 137 A.D.2d 50, 57 (N.Y. App. Div. 1988) (finding that the record company's act of selling excessive amounts of the Beatles recordings was done to gain promotional advantages for other of its artists). In the context of 360 deals, the court can effectively distinguish active interest contracts on a case-by-case analysis, and categorize such cases as those involving evidence of a special relationship beyond that of which exists in an arms-length business transaction or "simple contract," therefore, warranting the existence of a fiduciary relationship. See Douglas Okorocha, A Full 360: How the 360 Deal Challenges the Historical Resistance to Establishing a Fiduciary Duty Between Artist and Label, 18 UCLA ENT. L. REV. 21 (2010) (stating that since 360 deals vary amongst each other, they must be taken on a case-by-case basis). In effect, this determination would provide additional remedies for an artist to enforce their rights.

Conclusion

The evolution of the music industry in the 21st century has triggered record label companies to adopt a new standard recording contract, the 360 deal, in an effort to maintain profitability, as well as their standing in the new digital era. As a result, courts must reconsider existing legal standards in order to effectively protect and ensure the rights of the artist. Recognizing a fiduciary relationship between record labels and their artist in the context of active interest 360 deals will effectively balance the rights of the artist and serve as a deterrence against the potential for opportunism in the record label's pursuit to monopolize the music industry.

Jessica Termini is a third-year student at St. John's University School of Law, where she is a senior staff member of the New York Real Property Law Journal. Currently, she is working as a Research Assistant at St. John's University and interning at New York City Administration for Children's Services in the Youth and Family Services Division.


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This page contains a single entry from the blog posted on February 17, 2012 5:23 PM.

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