Family Lawyer: Meet Copyright Royalty

March 26, 2015

Community property comes in all forms. including copyright royalty income from copyrights, as well as participation rights in music, film, television, and books.  In California, copyrights for works created during the term are considered community property. Of course, royalty assets are not limited to California residents, and successful musicians, songwriters, composers, book authors, writers, producers, photographers, fine artists, and inventors have found themselves in a messy dissolution proceeding where future income streams are key marital assets.

Royalty income accounting is laden with pitfalls even for savvy copyright owners. When it comes to marshaling copyright assets in a marital settlement agreement, the devil is in the details. For family law attorneys tasked dividing copyright royalty income in dissolution proceedings, the challenge is two fold. The first is to divide the assets. The second is to make certain there are rights that safeguard accurate payment of  future income. 

The devil may wear Prada, but she hides in the details.

Litigation abounds by artists who have been cheated out of royalties. My favorite first client as a young talent agent was John Stewart of Kingston Trio fame. His widow recently sued EMI based upon claims John was cheated out of foreign copyright royalty income.  EMI sued over foreign royalties.  He’s not alone. DJ Khaled Sues Former Record Label Over Unpaid Royalties

For the former spouse not in privity of contract with the publisher or label, there are no such rights without expert negotiation and drafting. Counsel must first accurately identify the nature of the asset in order to insure that the right to future copyright royalty income is accurately spelled out in the Marital Settlement Agreement, along with means to guarantee enforceable implementation of the MSA. 

Always ask for a piece of the gross. Not the net. The net is fantasy.

Sources of royalty income are numerous, and custom and practice with respect to payment vary for each type of copyright royalty income stream. The key objective for the family lawyer is to marshal title to the assets and set up a verifiable means of collection of future revenues. For example, there are cases in which representatives of the author spouse have provided less than full disclosure of assets by using industry specific accounting practices that divert funds. In others, there are efforts to deprive the non-author spouse of accurate and verifiable accountings once the settlement agreement has been signed.

‘Hollywood accounting’ is a neat trick the studios use to avoid paying back-end profits to those contractually obligated to them.

Regardless of the nature of the copyrighted work involved, each has one of two things in common, the nature of which frames the rights, as well as the preferred structure of the settlement agreement. Every royalty income stream involves either 1) an ownership interest in a copyright, no less real than income producing real estate that generates rents in the form of royalties; or 2) a royalty income stream from a copyright that is owned by a third party by reason of transfer of ownership of the copyright by the author at some time after the work was created.

Understanding these two key distinctions are vital to structuring a marital settlement agreement that divides the assets equitably, and equally important, insures the client will receive proper accountings. Tupac Shakur’s Mother Suing Over Royalties


Copyright as Community Property


When family assets include title to copyrights, either in the name of the author, or by means of a company formed to own such assets, always insist upon an transfer of undivided interest in specific assets in order to access the legal rights that flow from an ownership interest in the copyright. Another means of settlement is to give full ownership of specific assets to each spouse to manage and control for the future. In some cases, former spouses may end up tied together in pursuit of future income. The right to administer and collect income is equally important.

Former Spouses Tied to Royalty Income

The rights in a copyright are governed by the Copyright Act, 17 USC §106, and include the right to issue future licenses (leases), collect income (rents) from the licensees (lessees), and verify the terms of payments being received from third parties (audit rights). Other rights are contractual, or in some cases, based upon industry specific custom and practice. For example, terms such as “administration” and “co-publishing” are contractual creatures of crafted by entertainment industry attorneys in years past, now fully ingrained as custom and practice in the industry. Understanding them can mean every difference the outcome for the client.

Ask these questions:  Who has the right to collect income, and from what sources? Is it better to divide specific assets or maintain an undivided joint ownership in the whole? Who will manage the assets, and how will he or she be compensated? For example, I have seen agreements in which the business manager of the former author spouse is allowed to collect all income from the assets and account to the former spouse. In most cases, this is not a smart decision. How will the non-managing owner be able to insure they are being fairly paid?

In cases where former spouses jointly own title to copyrights, independent third party administration may be the best approach, together with recording transfers of title.  In cases where the asset is an income stream, other rules apply to secure direct payment from licensors or copyright owners.


Contractual Right to Receive Income


Where the community estate is an income stream payable by third parties that own exclusive rights or title to the copyrighted works, the considerations are different but equally important. Was the work of the author spouse a “work made for hire?” If not, there may well be a right of recapture of the asset 35 years from the date of the original grant by the author. Will the non-author spouse be deprived of the increased in income realized after the underlying asset created during the marriage is recaptured? What happens when that right is exercised years following the dissolution?

Artful drafting dramatically impacts future earnings following execution of the final marital settlement agreement. In one case, the former author spouse’s business manager was collecting all royalties and making payments of “net” share to the non-author spouse.  There was no audit provision in the MSA, and no means of verifying income from third party payers. The Hollywood “shell company” is often used to collect administration or production fees off the top from amounts owed to the royalty participant.  

       Copyright Royalty Audit Rights  1. Audit rights. Audit rights are a vital component to any agreement that includes payment of royalties, whether or not a dissolution is involved. Without the right to directly audit, or participate in an audit of the source of the income stream, there is no means of verifying the accuracy of receipts, or the payments received by the spouse. Access to the contracts that create the income stream and piggyback rights on direct audit rights is imperative.

        2. Earnings Periods. The MSA should address dates governing receipts and payments prior to the date of dissolution since payments may be earned long before they are received. For example, in the case of foreign performance royalties from the broadcast of music on television and in film, earnings during the term of the marriage may not be received or paid in the United States for a year or even longer. Who gets the later received payments?

        3. Transfers of Title. A court order detailing rights in the divided assets should be drafted in a manner that is both clear, detailed, and binding upon third party payees of royalties. Entertainment related companies are often loathe to make changes in existing payment instructions without clear agreements, letters of directions, and in many cases, a court order that clearly identifies the assets and the parties covered.

Dissolution, or not, collecting royalty income due from exploitation of copyrights is not for the faint of heart. Most important, one must never assume that you will get paid, or that if you do, the amount received will be fair and truthful.

Moral of the story:  Don’t expect the former spouses will live happily ever after. Going back to court for a royalty accounting from a family law judge is not a viable option for the spouse who doesn’t get paid.