MECHANICAL ROYALTIES TODAY

by Bruce E. Colfin, Esq. & Jeffrey E. Jacobson, Esq.

What is a mechanical royalty and why is it so important? Historically, the mechanical royalty was the amount paid to a music publishing company for the right to mechanically reproduce a song or musical composition on a player piano roll. The publishing company would issue a "Mechanical License" and collect mechanical royalties from the manufacturers of the piano rolls. The rolls were the means by which the player pianos mechanically reproduced the underlying musical composition.

Today, mechanical royalties are paid by the "record" company (or label) to the publisher for the reproduction of musical compositions which appear on compact discs (CD), cassette tapes, vinyl phonorecords, digital audio tapes (DAT), and other manufactured formats.

The first recorded version of a song, and its distribution to the public will be considered unauthorized and illegal unless the consent of the copyright owner is requested and received. The record label must first obtain a mechanical license from the copyright "proprietor" (publisher or owner) or it may be held liable for damages in a suit for copyright infringement.

Many people confuse a mechanical license with a "compulsory" license. A mechanical license, is a "negotiated license" between the publisher of a song and the record company for the first time use or release of the composition. Mechanical licenses are completely negotiable. The owner of a composition may indeed refuse to allow a composition to be recorded at all. However this is only applicable on the first recording.

A "Compulsory" license is a mandatory mechanical license that is issued on behalf of the copyright owners after the public release of the first recording of that musical composition. Once a song has been recorded and released to the public with the consent of the copyright owners, any other party may "cover" or re-record the same musical composition by obtaining a compulsory mechanical license. These licenses are routinely issued. Nonetheless, a new recording may not change the basic melody or fundamental character of the composition. If changes are made, the "new" version would be considered a "derivative work" and as such would require the music publisher's approval which is within their sole discretion.

A compulsory mechanical license, and the computation of royalties derived from the license, are based upon a rate that is set by law and known as the "statutory rate". From time to time, the statutory rate, is increased to reflect changes in the economy with its eyes on the Consumer Price Index. The U.S. statutory rate, effective as of January 1, 2004, through 2005 is 8.5 cents ($.085) per track, up to five minutes or a part thereof (counting as sixth minute) per disc (or tape) made, or 1.65 cents ($.0165) per minute of playing time or fraction thereof, whichever is higher.

The statutory rate may amount to only a few cents (per song), but it can add up to thousands of dollars if there are substantial sales of recordings. The potential amount can increase dramatically if the song's copyright owner has several "cuts" on a best selling album.

In Canada, the compulsory mechanical royalty rate is based upon the terms of a Mechanical Licensing Agreement between the Canadian Music Reproduction Rights Agency, Ltd., and members of the Canadian Recording Industry Association. The Canadian rate, effective until December 31, 2005, is 8.5 cents (Canadian) per recording in which the running time is five minutes or less, plus 1.70 cents (Canadian) for each additional minute or part thereof. In other countries, the rates are usually based on a percentage of the sales price.

A compulsory mechanical license is valid as long as the recording company pays the license fees. Failure to pay these "mechanical royalties" could result in revocation of the mechanical license. After revocation of the mechanical license, the continued manufacture of recordings bearing the subject composition(s) constitutes copyright infringement.

Quite often, labels and music publishers negotiate a reduction in the mechanical royalty rate to be paid by the recording company for the use of the songs. As there is no prohibition against negotiating for reduced rates, the statutory rate has effectively become a ceiling. The commonly referred to "3/4 rate" is frequently paid by labels on "controlled compositions". These compositions are generally owned, in part or in whole, by the label's recording artist who is also the composer. The recording or distributing deal will also generally have a clause which requires the reduced rate. The 3/4 rate is frequently permitted by a publishing company in order to encourage covers of its writers' and composers' tunes by artists signed to a particular label.

In negotiations, many labels seek to further reduce their royalty payments by paying mechanical royalties only for product sold, paid for and not returned. Labels also seek a waiver of royalty payments or reduced rates for record club, budget goods, mid-priced sales, as well as free goods.

An additional clause in the artist's contract also routinely limits the amount the company is obligated to pay for mechanical royalties for an album to a total of ten times the reduced rate, and for singles, to two times the reduced rate. The effect on the writer is that it limits the amount that he may receive from an album's worth of recorded material. The effect on the recording artist, if the music publisher is not willing to accept the reduced rate, is that the artist may be responsible for paying the amount, over and above the mechanical royalty limit set by the label, to other publishers. These excess mechanical royalties are generally deducted from an artist's recording royalties.

An artist/writer with leverage is generally able to negotiate a higher rate when recording his/her own song(s) for the initial release but cannot subsequently require any label to pay higher than the statutory rate for the re-recording of that tune once it has been commercially released.

Mechanical royalties are either received by the publisher directly from the recording company or through the collection services of a mechanical rights agency, such as the Harry Fox Agency, AMRA, OR ACEMLA. The Harry Fox Agency is a large clearing- house established by the National Music Publishers Association for the purpose of issuing synchronization and mechanical licenses and collecting royalties. The publisher is charged a commission of approximately 4.5% of the gross mechanical royalties collected. Either way, the royalties received by the publisher include the writer's share, and thereafter, the royalties are generally split 50/50 between the writer(s) and the publisher pursuant to their songwriting agreement.

Jacobson and Colfin is an entertainment law firm that operates on the highest level of integrity and is trusted completely by I Write the Songs and many of our partners. If you have any legal questions or issues that need to be discussed please do not hesitate to contact them directly at 212-691-5630 or visit their website by clicking here.