London fashion law firm Crefovi is delighted to bring you this law of luxury goods & fashion law blog, to provide you with forward-thinking and insightful information on the business and legal issues for the fashion and luxury sectors
London fashion law firm Crefovi has been practising the law of luxury goods & fashion law since 2003, in London, Paris and internationally. Crefovi advises a wide range of clients, from young fashion entrepreneurs in search of financing, to mature luxury houses in need of legal advice to negotiate and finalise licensing or distribution agreements and/or to enforce their intellectual property rights.
Annabelle Gauberti, founding partner of London fashion law firm Crefovi, regularly lectures on the law of luxury goods & fashion at the Institut de la Recherche sur la Propriété Intellectuelle (IRPI), as well as to the Master and MBA students enrolled in HEC’s Luxury Certificate and to the students of the top master Luxury, Innovation & Design of the University Marnes la Vallée. These courses and lectures are an important testimony to the recognition of the legal discipline that is the law of luxury goods & fashion.
Crefovi has industry teams, built by experienced lawyers with a wide range of practice and geographic backgrounds. These industry teams apply their extensive industry expertise to best serve clients’ business needs. One of the industry teams is the Consumer products & retail department, which curates this fashion law blog below for you.
What are business owners obligations, in terms of registering beneficial ownership of their companies? How do these obligations differ, in France and the United Kingdom, even though such obligations stem from the same European legislation, i.e. the European Directive 2015/849 dated 20 May 2015 on money laundering ?
1. What is this all about?
On 20 May 2015, the Directive (EU) 2015/849 of the European Parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, was published (the “Directive“).
As set out in the recitals of the Directive, and in order to better fight against money laundering, terrorism financing and organised crime, “there is a need to identify any natural person who exercises ownership or control over a legal entity (…). Identification and verification of beneficial owners should, where relevant extend to legal entities that own other legal entities, and obliged entities should look for the natural person(s) who ultimately exercises control through ownership or through other means of the legal entity that is the customer”.
In addition, “the need for accurate and up-to-date information on the beneficial owner is a key factor in tracing criminals who might otherwise hide their identity behind the corporate structure”.
Chapter III (Beneficial ownership information) of the Directive relates to such topic.
In particular, article 30 of the Directive provides that “member states shall ensure that the information (on beneficial ownership) is held in a central register in each member state, for example a commercial register, companies register or a public register (…). Member states shall ensure that the information on the beneficial ownership is adequate, accurate and current” and accessible “to competent authorities, without any restriction; (…) and to any person or organisation that can demonstrate a legitimate interest”.
These persons or organisations shall access at least the name, the month and year of birth, the nationality and the country of residence of the beneficial owner as well as the nature and extent of the beneficial interest held.
2. Registration of beneficial ownership in French companies
With typical Gallic nonchalance, and while the deadline to transpose the Directive in each member-state was 26 June 2017, France transposed the Directive almost one year later, through its Ordinance n. 2016-1635 of 1 December 2016 reinforcing the French mechanism against money laundering and the financing of terrorism and of the Decree n. 2017-1094 of 12 June 2017 relating to the registry of effective beneficiaries as defined in article L. 561-2-2 of the French monetary and financial code (the “Ordinance” and the “Decree” respectively), with a compliance deadline of 1 April 2018.
The Ordinance and Decree, which have now been incorporated in the French monetary and financial code, compel all companies operating in France to register their beneficial owners with the Registry of Commerce and Companies of the competent Commercial court (the “Registry“).
2.1. Beneficial ownership and filing with the Registry
The notion of beneficial ownership is not defined in the Decree, although is it defined in the Directive as including each natural person who either ultimately owns, directly or indirectly, more than 25% of the share capital or voting rights of the company, or exercises, by any other means, a supervisory power on the managing, administrative or executive bodies of the company or on the shareholders general assembly.
The information that must be filed is essentially identical to that required by financial institutions and other entities such as law firms, in order for them to carry out their mandatory Know-Your-Client (KYC) procedures.
2.2. The initial filings
The declaration of beneficial ownership must be filed at the Registry when a company is first registered with the Registry or, at the latest, within 15 days as of the date of issuance of the receipt of registration (article R. 561-55 of the French monetary and financial code) i.e. when it is created or opens a branch in France.
2.3. Corrective filings
For companies already registered, the deadline for the declaration is 1 April 2018. If subsequent updates are required, new filing must be made within 30 days as of the fact or the act giving rise to a required update (article R. 561-55 of the French monetary and financial code).
2.4. On the beneficial owner
The declaration must set out the owner’s name and particulars, as well as the means of control exercised by the beneficial owner and the date on which s/he became a beneficial owner (article R. 561-56, 2. of the French monetary and financial code).
2.5. Persons having access to the register of beneficial owners
Access to the register of beneficial owners is limited to magistrates of the civil courts and the Ministry of Justice; investigators working for the Autorite des Marches Financiers (French financial markets regulator); agents of the Direction Generale des Finances Publiques (Directorate-General for Public Finances); qualifying credit institutions, insurance and mutual insurance companies and investment services providers; and any person authorised by a court decision to this effect.
2.6. Penalties for non-compliance
The new provisions of the French monetary and financial code provide remedial penalties with the possibility for any person having a legitimate interest to bring an action in order to force the defaulting company to fulfil its obligation to declare its beneficial owners (article R. 561-48 of the French monetary and financial code).
Punitive provisions have also been introduced: failure to declare the beneficial owners to the Registry or filing a declaration involving incomplete or inaccurate information is punishable by 6 months of imprisonment and a fine of Euros 7,500 (article 561-49 of the French monetary and financial code).
3. Registration of beneficial ownership in British companies
Well within the deadline to transpose the Directive in each member-state of 26 June 2017, the United Kingdom transposed the Directive on time, through its new paragraph 24(3) of Schedule 1A of the Companies Act 2006, as amended by Schedule 3 to the Small Business, Enterprise and Employment Act 2015 (the “Companies Act” and “Enterprise Act” respectively), with a compliance deadline of 30 June 2016.
The Companies Act and Enterprise Act, compel all companies operating in the United Kingdom to keep a register of Persons with Significant Control (“PSC register“) and to file this PSC information via their confirmation statements, upon the due filing date of their respective confirmation statements with Companies House, i.e. the British equivalent to the French Registry of Commerce and Companies of the competent Commercial court (“Companies House“).
3.1. Beneficial ownership and filing with Companies House
The notion of beneficial ownership, or significant influence or control, as set out in the Companies Act, is defined in the Companies Act as including each natural person who either ultimately owns, directly or indirectly, more than 25% of the share capital or voting rights of the company, or exercises, by any other means, a supervisory power on the managing, administrative or executive bodies of the company or on the shareholders general assembly.
UK companies, Societates Europaeae (SEs), Limited liability partnerships (LLPs) and eligible Scottish partnerships (ESPs), will be required to identify and record the people with significant control.
3.2. The initial filings
The PSC information must be filed with the central public register at Companies House when a company is first registered with Companies House or, i.e. when it is created or opens a branch in France.
In addition, new companies, SEs, LLPs need to draft and keep a PSC register in relation to them, in addition to existing registers such as the register of directors and the register of members (shareholders).
3.3. Corrective filings
For companies already registered, on 6 April 2016, the Companies Act required all companies to keep a PSC register and, from 30 June 2016, companies started to file this PSC information via their confirmation statements.
As each company has a different filing date, based on the anniversary of their respective incorporation, it took up to 12 months (i.e. 30 June 2017) to develop a full picture of all UK companies’ PSCs.
3.4. On the beneficial owner
Before a PSC can be entered on the PSC register, you must confirm all the details with them.
The details you require are:
- date of birth;
- country, state or part of the UK where the PSC usually lives;
- service address;
- usual residential address (this must not be disclosed when making your register available for inspection of providing copies of the PSC register);
- the date s/he became a PSC in relation to the company (for existing companies, the 6 April 2016 was used);
- which conditions for being a PSC are met;
- this must include the level of shares and/or voting rights, within the following categories:
- over 25% up to (and including) 50%;
- more than 50% and less than 75%;
- 75% or more;
- the company is only required to identify whether a PSC meets the condition relating to the control and significant influence, if they do not exercise control through the shareholding and voting rights conditions;
- this must include the level of shares and/or voting rights, within the following categories:
- whether an application has been made for the individual’s information to be protected from public disclosure.
3.5. Persons having access to the register of beneficial owners
A company’s PSC register should contain the information listed in paragraph 2.4 of for each PSC of the company. However, that may not always be possible. Where for some reason the PSC information cannot be provided other statements will need to be made instead, explaining why the PSC information is not available. The PSC register can never be blank and such information must be provided to Companies House.
PSC information is freely available, for each company, on Companies House’s website.
As the PSC register is one of the company’s statutory registers, each UK company must keep it at its registered office (or alternative inspection location). Anyone with a proper purpose may have access to the PSC register without charge or have a copy of it for which companies may charge GBP12.
If compared with the French situation, it is therefore much easier to obtain the PSC register for a UK company, than for a French company.
3.6. Penalties for non-compliance
Company officers who fail to take all reasonable steps to disclose their PSCs are liable to be fined or imprisoned (by way of a prison sentence of up to two years) or both. If an investigated person fails to respond to the company’s request for information, the company is allowed to “freeze” the relevant shares by stopping proposed transfers and dividends in relation to those shares.
Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their corporate and business law requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.
Annabelle is also the president of the International association of lawyers for the creative industries (ialci).
Tel: +44 20 3318 9603
Alternative dispute resolution in entertainment and the creative industries | ADR – mediation and arbitrationCrefovi : 07/01/2018 8:00 am : Art law, Articles, Consumer goods & retail, Copyright litigation, Employment, compensation & benefits, Entertainment & media, Fashion law, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, News, Trademark litigation
In the aftermath of the Harvey Weinstein’s revelations, which triggered many more about sexual predators killing it in Hollywood and other creative industries, it is topical to look into the pros and cons of alternative dispute resolution in entertainment. While Weinstein and other top brass in the entertainment industry used to do away with accusations of predatory sexual behaviour made against them, by signing non-disclosure and out-of-court settlement agreements with their victims, the crux of the matter is that creative endeavours rely heavily on the goodwill, reputation and other intangible assets owned by the above-the-line personnel (film director, producers, scriptwriter) and by the casted actors.
In this context, how to make the most of ADR, in the entertainment and creative industries, while retaining and respecting work ethics and human values?
How to balance the need for secrecy and protection of the goodwill and reputation of top creatives, with the moral obligation to ensure that they are held accountable for their actions and business endeavours in the creative community and beyond?
1. What is alternative dispute resolution in entertainment, and why use it?
Alternative dispute resolution (ADR) is the use of methods such as mediation, negotiation or arbitration to resolve a dispute without resort to litigation.
ADR procedures are deemed to be usually less costly and more expeditious than litigation, especially in Anglo-Saxon countries where merely the court costs represent a substantial portion of the financial budget to allocate, in order to resolve a dispute through litigation.
ADR procedures, unlike adversarial litigation, are often collaborative and strive to allow parties to understand each other’s positions. ADR also allows the parties to come up with more creative solutions than a court may not be legally allowed to impose.
ADR also offers the option of confidentiality and secrecy to the parties involved in a dispute, while such option very rarely exists in court, especially in common law litigation proceedings which rely heavily on broad, expensive and virtually unlimited discovery such as in the USA and, to a degree, England & Wales. Instead of draining the financial resources and competitiveness of your creative business, which could well be invested in job creation or Research & Development for example, why not use ADR to limit the reputational impact and financial consequences of resolving a dispute?
For these reasons above, ADR procedures are increasingly being used in disputes that would otherwise result in litigation, including high-profile labor disputes, divorce actions and personal injury claims.
While arbitration is a process similar to an informal trial where an impartial third party – the arbitrator – hears each side of a dispute and issues a decision, mediation is a collaborative process where a mediator works with the parties to come to a mutually agreeable solution.
2. In which context should you use ADR services?
ADR services are becoming increasingly en vogue, with courts strongly pushing antagonised parties to resolving their disputes out of court, in a move to unclog court dockets. Many judiciary stakeholders complain that court dockets are heavily and unjustifiably congested as a result of the indiscriminate filing and delayed processing of cases in the courts of justice.
While English courts made it compulsory for parties, a long time ago, to have complied with the Practice Direction on Pre-Action Conduct and any relevant of the 14 Pre-Action protocols before commencing legal proceedings, as well as to have considered ADR (such as mediation) both before commencing litigation and during the litigation process, French courts have finally caught up with such trend further to the entering into force of the new articles 56 and 58 of the French civil procedural code: on 1 April 2015, at last, it became compulsory for parties to attempt to resolve their disputes out-of-court, through ADR, and for any claimant to prove and justify that he attempted to solve the dispute out-of-court with the defendant, prior to litigation.
This reform remains wishful thinking in France though, since these articles 56 and 58 of the French civil procedural code do not even clearly define the notion of “attempting to resolve the dispute out-of-court”. However, I have noticed that my French peers, “avocats a la cour” in France, tend to send one or two “lettres de mise en demeure” (letters before court action) before filing a litigation claim with a French court, instead of merely sending court summons without any warning to helpless defendants being sued for tens of millions of euros by aggressive French claimants and their French counsels, as was usual practice and totally acceptable in France prior to that reform!
Even French bars promote mediation and “collaborative law” to their lawyer members, coaxing them into registering as lawyers trained for ADR.
The entertainment sector is notorious for the considerable number of pending court cases, arguments, disputes it generates, and for the sheer variety of conflicts that arise in this business, as any reader of major trade papers Daily Variety and The Hollywood Reporter would attest. Consequently, the creative industries are a particularly fertile soil for ADR proceedings, and ADR has grown substantially over the past 15 to 20 years in these industrial sectors.
3. Who can provide ADR services?
While the two most common forms of ADR are arbitration and mediation, negotiation is almost always attempted first to resolve a dispute. It is the preeminent mode of dispute resolution. Negotiation allows the parties to meet in order to settle a dispute. The main advantage of this form of dispute settlement is that it allows the parties themselves to control the process and the solution.
As explained below in section 4, negotiations are better conducted by French “avocats” in France, since the without prejudice privilege rule does not apply to any communication exchanged between contractual parties, prior to filing a lawsuit. Only communications exchanged between French lawyers is protected by confidentiality and secrecy.
In England & Wales, however, parties can conduct negotiations directly, by making use of the without prejudice rule explained below in section 4, which will prevent all their attempts and negotiating communications from being used in court by the other party.
Mediation is also an informal alternative to litigation. Mediators are individuals trained in negotiations, who bring opposing parties together and attempt to work out a settlement or agreement that both parties accept or reject. The leading mediation institution in England is the Centre for Effective Dispute Resolution (CEDR).
Arbitration is a simplified version of a trial involving limited discovery and simplified rules of evidence. The arbitration is headed and decided by an arbitral panel. To comprise a panel, either both sides agree on one arbitrator, or each side selects one arbitrator and the two arbitrators elect the third.
As a result, several bodies have sprung up over the years, specialising in providing either mediation and/or arbitration services and panels to the creative industries, such as:
- the American Arbitration Association (AAA), which has an entertainment panel, and its international posting The International Centre for Dispute Resolution (ICDR) ;
- the Judicial Arbitration & Mediation Service (JAMS), in the USA and JAMS International in London, UK;
- the Independent Film & Television Alliance (IFTA) in Los Angeles, USA, which has a panel of arbitrators in all regions of the world;
- the Mediation and Expedited Arbitration for Films and Media Centre, for the resolution of all types of disputes in the entertainment and media sectors, as well as the Domain name dispute resolution services, exclusively for the resolution of domain name disputes, from the World Intellectual Property Office (WIPO) in Geneva, Switzerland;
- the London Court of International Arbitration (LCIA), in London, UK, which is the major arbitration institution in England;
- Trademark mediation services of the International Trademark Association (INTA), exclusively for the resolution of trademark disputes;
- and, of course, the dispute resolution services of the widely-renowned International Chamber of Commerce (ICC), which has offices all over the world.
Even online platforms have been set up, in the last 5 years, to offer ADR services to natural persons and businesses who want to avoid the intricacies, costs and lengthy duration of fully-blown litigation, such as eJust and Mediaconf. It is a little early to assess whether such online ADR platforms do provide adequate resolution services to members of the public and the business community at large, but it is telling that they even managed to get financing from tech investors and venture capital and seed funds.
4. How does ADR support you in resolving your dispute?
ADR refers to any means of settling disputes outside the courtroom. It typically includes early neutral evaluation, negotiation, conciliation, mediation or arbitration.
While the two most common forms of ADR are arbitration and mediation, negotiation is almost always attempted first to resolve a dispute. It is the preeminent mode of dispute resolution. Negotiation allows the parties to meet in order to settle a dispute. The main advantage of this form of dispute settlement is that allows the parties themselves to control the process and the solution.
In England & Wales, any pre-litigation negotiation process should be conducted on a “without prejudice” basis, pursuant to the without prejudice principle. Indeed, if a communication between negotiating parties has without prejudice privilege, it will not be admissible in court and therefore cannot be used as evidence against the interest of the party that made it. The rationale behind this form of legal privilege is that it is in the public interest that disputing parties should be able to negotiate freely, without fear of future prejudice in court, with a view to settling their disputes wherever possible.
It works! Many parties in England & Wales who have disputes, in particular employment disputes which can be conducted through the robust ACAS dispute resolution process, make the most of the without prejudice privilege during negotiations, and settle their claims out-of-court.
Even mediation, which, at its most basic level, is nothing more than a negotiation conducted through an intermediary (the mediator) to resolve commercial matters and even, sometimes, family disputes, benefits from the without prejudice privilege rule in England & Wales, according to which no communications made during the proceedings can be disclosed without the express agreement of the mediating parties in the event that no settlement is reached. If successful, a mediation concludes with a settlement agreement, which is enforceable as a contract.
In France, such without prejudice rule does not apply, which means that any attempt to negotiate and settle out-of-court must be lead by French “avocats a la cour” representing the parties, since only the discussions and negotiations of French lawyers are protected and confidential, and therefore not disclosable in court. This is a serious hindrance to the emergence of sturdy ADR in France, since parties cannot confidentially negotiate an out-of-court settlement without French lawyers and since all their direct communications will be disclosable in court. ADR is therefore a costly process in France because parties must instruct French “avocats” from the get-go, especially when the parties put in the balance the fact that litigation is free in France, i.e. that the French court costs are close to nil. Why then bother with ADR when filing a lawsuit would result in a cheaper process to obtain a 100% enforceable judgment?
Of course, both the UK and France must comply with Directive 2008/52/EC on certain aspects of mediation in civil and commercial matters (the European Mediation Directive), which objective is the facilitation of access to ADR and the promotion of the amicable settlement of cross-border disputes, by the promotion of the use of mediation as well as of a balanced relationship between mediation and judicial proceedings. It seeks to protect the confidentiality of the mediation process and ensures that when parties engage in mediation, any limitation period is suspended.
In England, arbitration proceedings are governed (“law of the seat”) by the Arbitration Act 1996, which applies to both domestic and international arbitration. In France, articles 1442 to 1527 of the French civil procedural code, govern arbitration proceedings. Apart from the Arbitration Act in England and articles 1442 to 1527 of the French civil procedural code in France, and depending on the parties’ arbitration agreement, various institutional arbitration rules may find application, such as the rules of the LCIA, ICC, etc. In England and France, virtually all commercial matters are arbitrable, while disputes involving criminal and family law matters are generally considered non-arbitrable.
Parties can decide to use arbitration when they have agreed to do so in a contract, in particular in the dispute resolution clause (“clause compromissoire” in French) set out in such contract. If there is an international aspect to the commercial transaction, depending on the type of disputes which are likely to arise between the parties, depending on who the parties are as well as the secrecy of their contractual commitments and obligations, parties may be inclined to set out a dispute resolution clause which chooses arbitration over litigation, in their contract. Such dispute resolution clause would ousts jurisdiction of courts except for purposes of supporting and/or supervising arbitration proceedings and would define the seat (legal place) of any future arbitration. In addition, the dispute resolution clause would clearly set out the governing law, the applicable procedural rules (LCIA, IFTA, ICC, etc.), the number of arbitrators, the language of the arbitration and whether some rights of appeal apply.
If and when a dispute arises, the aggrieved party would merely refer to that dispute resolution clause set out in the contract and, probably after a few attempts to negotiate and resolve this dispute directly with the other party, would file an arbitration with the arbitration body designated in this dispute resolution clause, pursuant to the designated institutional arbitration rules.
Arbitration is very often used in the entertainment sector and creative industries, where reputation and goodwill are some of the most important assets owned by a creative business, and therefore where confidentiality and secrecy are of the essence.
For example, on 19 July 2017, an arbitration panel from the Mediation and Arbitration Centre of WIPO decided a matter in dispute between major and independent music publishers BMG, Peermusic, Sony/ATV/EMI Music Publishing, Universal Music Publishing and Warner/Chappell Music as well as AEDEM (over 200 small and medium sized Spanish music publishers), on one side, and the Spanish collective rights society SGAE, on the other side. The binding arbitration focused primarily on two claims:
- the inequitable sharing of money received by SGAE from a user of music and distributed by SGAE back to the user of that music as a copyright holder and
- the improper distribution of royalties for the use of inaudible or barely audible music.
After considering the evidence, the three WIPO arbitrators decided:
- to have an equitable distribution, so as not to prejudice other authors, there must be changes in the SGAE distribution rules. These rules must change so that the broadcasters receive via their publishing companies for music uses in the early morning hours (when there is no significant audience or commercial value) a variance between 10% and 20% of the total collected from them, respectively. The arbitrators unanimously agreed it should be 15%. After applying this limitation, new distribution rules also should reflect an equitable value for music broadcast during other programming blocks of time;
- Distributions must stop for inaudible music, as identified by the technology used by Spanish company BMAT or a company using similar technology;
- SGAE should disperse its ‘scarcely audible fund’ as described in the written decision.
5. Are ADR decisions enforceable? How binding are the available methods of ADR in nature?
An arbitral award is final and binding but a party can appeal to the courts on a point of law, unless the arbitration agreement excludes this ability. Leave of the court to appeal the award is severely restricted under the Arbitration Act 1996 in England & Wales, and under articles 1442 to 1527 of the Civil procedural code in France (and can even be excluded by the arbitration agreement) and the applicant must show, among other things, that the determination of the question of law will substantially affect the rights of the parties and that it is just and proper for the court to determine the question/dispute.
The arbitral award may also be challenged on the basis that the arbitral tribunal did not have jurisdiction to decide the dispute, or that there was a serious irregularity affecting the arbitral tribunal, the proceedings or the award (for example, the tribunal failed to deal with all the issues that were put to it or was biased).
The Convention on the recognition and enforcement of foreign arbitral awards 1958 (the “New York Convention“), to which both England and France are parties, allows the enforcement of either an English arbitration or a French arbitration award across the 157 Convention countries in accordance with those countries’ own laws. Likewise, the Arbitration Act provides for enforcement in England of an arbitration award rendered in another New York Convention country. The most common method of such enforcement is to seek judgment of the English court in terms of the award (and that judgement can then be enforced as a judgement of the English court. Meanwhile, articles 1442 to 1527 of the French civil procedural code provide for enforcement in France of an arbitration award rendered in another New York Convention country, further to the issue of an exequatur order (“ordonnance d’exequatur”) by the competent “Tribunal de grande instance” in France.
Settlement agreements which are reached through mediation or negotiation are contracts and are therefore enforceable if the requirements for a valid contract are satisfied. If, by extraordinary, one of the parties breaches the provisions of the settlement agreement, the other parties will be entitled to file some contractual breach claims with the courts.
To conclude, ADR proceedings are especially adapted to the requirements of the entertainment sector and creative industries at large, where cross-border deals are the rule and the need to protect the reputation and goodwill of contracting business partners is paramount. While the legitimacy of non-disclosure and confidentiality provisions set out in existing settlement agreements is hotly debated at the moment, in relation to sexual harassment cases against Harvey Weinstein, Bob Weinstein, Brett Ratner, Dustin Hoffman, James Toback, Kevin Spacey, Louis C.K., etc., it is wise to set out well-drafted arbitration clauses in film production agreements as well as employment agreements with the above-the-line film team and casted actors, in order to avoid promotional and marketing disasters, such as that suffered by Lionsgate upon the release of “Exposed”, a thriller starring Keanu Reeves, after the film’s actual director asked for his name to be removed.
Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their personal data and cybersecurity requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.
Annabelle is also the president of the International association of lawyers for the creative industries (ialci).
Tel: +44 20 3318 9603
The GDPR is upon us: what is it? How is it going to impact you and your business? What do you need to do in order to become GDPR compliant?
There is not a moment to waste, as the stakes are very high, and since becoming GDPR compliant will definitely bring competitive advantages to your business.
On 27 April 2016, after more than 4 years of discussion and negotiation, the European parliament and council adopted the General Data Protection Regulation (“GDPR”).
Why the GDPR?
The GDPR repeals Directive 95/46/EC on the protection of individuals with regards to the processing of personal data and on the free movement of such data (the “Directive”).
The Directive, which entered into force more than 20 years’ ago, was no longer fit for purpose, as the amount of digital information businesses create, capture and store has vastly increased.
Data, the bigger the better, is here to stay. Today’s data more and more greases our digital world. Control of data is ultimately about power and data ownership does seriously impact competition on any given market. By collecting more data, a firm has more scope to improve its products, which attracts more users, generating even more data, and so on. Data assets are, today, at least as important as other intangible assets such as trademarks, copyright, patents and designs, to companies. The stakes are way higher, today, as far as data ownership, control and processing are concerned, and GDPR addresses that data flow in the 21st century, as we all engage with technology, more and more.
Moreover, many legal cases, brought up in various member-states of the European Union (“EU”), pinpointed the severe weaknesses and gaps in providing satisfactory, strong and homogeneous protection of personal data, relating to EU citizens, and controlled by companies and businesses operating in the EU. For example, the Costeja v Google judgment, from the Court of Justice of the European Union (“CJEU”), commonly referred to as the “right to the forgotten” ruling, was handed down on 26 November 2014. This ground-breaking judgment recognised that search engine operators, such as Google, process personal data and qualify as data controllers within the meaning of Article 2 of the Directive. As such, the CJEU ruling recognised that a data subject may “request (from a search engine) that the information (relating to him/her personally) no longer be made available to the general public on account of its inclusion in (…) a list of results”. Through this decision, the CJEU forced search engines such as Google to remove, when requested, URL links that are “inadequate, irrelevant or no longer relevant, or excessive in relation to the purposes for which they were processed and in the light of the time that has elapsed”. It was a huge step forward for personal data protection in the EU.
In addition, data breaches at, and cyber-attacks of, thousands of international businesses (Sony Pictures, Yahoo, Linkedin, Equifax, etc.) as well as EU national companies (Talktalk, etc.) make the news, consistently and on a very regular basis, dramatically affecting the financial and moral wellbeing of millions of consumers whose personal data was hacked because of these data breaches. These attacks and breaches raise very serious concerns as to whether businesses managing personal data of EU consumers are actually “up to scratch”, in terms of proactively fighting against cyber-crime and protecting personal data.
Finally, the GDPR, which will be immediately enforceable in the 28 member-states of the EU without any transposition from 25 May 2018, unlike the Directive which had to be transposed in each EU member-state by way of national rules, standardises all national laws applicable in these member-states and therefore provides more uniformity across them. The GDPR levels the playing field.
When will the GDPR enter into force?
The GDPR, adopted in April 2016, enters into force on 25 May 2018, ideally giving a 2-year preparation period to businesses and public bodies to adapt to the changes.
While many EU business owners take the view that the changes brought by the GDPR onto their businesses, will be of little or no importance or just as important as other compliance issues, there is not a minute to spare to prepare for compliance with the new set of complex and lengthy rules set out in the GDPR.
What is at stake? Which organisations are impacted by the GDPR?
A lot is at stake. All businesses, organisations or entities which operate in the EU or which are headquartered outside of the EU but collect, hold or process personal data of EU citizens must be GDPR compliant by 25 May 2018. Potentially, the GDPR may apply to every website and application on a global basis.
As most if not all multinationals have customers, employees and/or business partners in the EU, they must become GDPR compliant. Even start-ups and SMEs must be GDPR compliant, if their business model infer that they will collect, hold or process personal data of EU citizens (i.e. customers, prospects, employees, contractors, suppliers, etc).
The stakes are very high for most businesses and, for many companies, it is becoming a board-level conversation and issue.
To ensure compliance with the new legal framework for data protection, and the implementation of the new provisions, the GDPR introduced an enforcement regime of very heavy financial sanctions to be imposed on businesses that do not comply with it. If an organisation does not process EU individuals’ data in the correct way, it can be fined, up to 4% of its annual worldwide turnover, or Euros 20million – whichever is greater.
These future fines are way larger than the GBP500,000 capped penalty the UK Data Protection Authority (“DPA”), the Information Commissioner Office (“ICO”), or the maximum 300,000 euros capped penalty that the French DPA, the “Commission Nationale Informatique et Libertés” (“CNIL”), can currently inflict on businesses.
What are the GDPR provisions about?
The GDPR provides 99 articles setting out the rights of individuals and obligations placed on organisations within the scope of the GDPR.
Compared to the Directive, here are the new key concepts brought by the GDPR.
4.1. Privacy by design
The principle of privacy by design means that businesses must take a proactive and preventive approach in relation to the protection of privacy and personal data. For example, a business that limits the quantity of data collected, or anonymises such data, does comply with the “privacy by design” principle.
This obligation of “privacy by design” implies that businesses must integrate – by all appropriate technical means – the security of personal data at the inception of their applications or business procedures.
Accountability means that the data controller, as well as the data processor, must take appropriate legal, organisational and technical measures allowing them to comply with the GDPR. Moreover, data controllers and data processors must be able to demonstrate the execution of such measures, in all transparency and at any given point in time, both to their respective DPAs and to the natural persons whose data has been treated by them.
These measures must be proportionate to the risk, i.e. the prejudice that would be caused to EU citizens, in case of inappropriate use of their data.
In order to know whether a business is compliant, it is therefore necessary to execute an audit of the data processes made by such company. We, at Crefovi, often execute some audits certified by the CNIL or the ICO.
4.3. Privacy impact Assessment
The business in charge of treating and processing personal data, as well as its sub-contractors, must execute an analysis, a Privacy Impact Assessment (“PIA”) relating to the protection of personal data.
Businesses must do a PIA, a privacy risk assessment, on their data assets, in order to track and map risks inherent to each data process and treatment put in place, according to their plausibility and seriousness. Next to those risks, the PIA sets out the list of organisational, IT, physical and legal measures implemented to address and minimise these risks. The PIA aims at checking the adequacy of such measures and, if these measures fail that test, at determining proportionate measures to address those uncovered risks and to ensure the business becomes GDPR compliant.
Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests.
4.4. Data Protection Officer
The GDPR requires that a Data Protection Officer (“DPO”) be appointed, in order to ensure the compliance of treatment of personal data by public administrations and businesses which data treatments present a strong risk of breach of privacy. The DPO is the spokesperson of the organisation in relation to personal data: he or she is the “go to” point of contact, for the DPA, in relation to data processing compliance, but also for individuals whose data has been collected, so that they can exercise their rights.
In addition to holding the prerogatives of the “correspondant informatique et liberté” (“CIL”) in France, or chief privacy officer in the UK, the DPO must inform his/her interlocutors of any data breaches which may arise in the organisation, and analyse their impact.
Profiling is an automated processing of personal data allowing the construction of complex information about a particular person, such as her preferences, productivity at work or her whereabouts.
This type of data processing can generate automated decision-making, which may trigger legal consequences, without any human intervention. In this way, profiling constitutes a risk to civil liberties. This is why those businesses doing profiling must limit its risks and guarantee the rights of individuals subjected to such profiling, in particular by allowing them to request human intervention and/or contest the automated decision.
4.6. Right to be forgotten
As explained above, the right to be forgotten allows an individual to avoid that information about his/her past interferes with his/her actual life. In the digital world, that right encompasses the right to erasure as well as the right to dereferencing. On the one hand, the person can have potentially harmful content erased from a digital network, and, on the other hand, the person can dissociate a key word (such as her first name and family name) from certain web pages on a search engine.
4.7. Other individuals’ rights
The GDPR supplements the right to be forgotten by firmly putting EU citizens back in control of their personal data, substantially reinforcing the consent obligation to data processing, as well as citizens’ rights (right to access data, right to rectify data, right to limit data processing, right to data portability and right to oppose data processing), and information obligations by businesses about citizens’ rights.
Is there a silver lining to the GDPR?
5.1. An opportunity to manage those precious data assets
Compliance with GDPR should be viewed by businesses as an opportunity, as much as an obligation: with data being ever more important in an organisation today, this is a great opportunity to take stock of what data your company has, and how you can get most advantage of it.
The key tenet of GDPR is that it will give you the ability to find data in your organisation that is highly sensitive and high value, and ensure that it is protected adequately from risks and data breaches.
5.2. Lower formalities and one-stop DPA
Moreover, the GDPR withdraws the obligation of prior declaration to one’s DPA, before any data processing, and replaces these formalities with mandatory creation and management of a data processing register.
In addition, the GDPR sets up a one-stop DPA: in case of absence of a specific national legislation, a DPA located in the EU member-state in which the organisation has its main or unique establishment will be in charge of controlling compliance with the GDPR.
Businesses will determine their respective DPA with respect to the place of establishment of their management functions as far as supervision of data processing is concerned, which will allow to identify the main establishment, including when a sole company manages the operations of a whole group.
This unique one-stop DPA will allow companies to substantially save time and money by simplifying their processes.
5.3. Unified regulation, easier data transfers
In order to favour the European data market and the digital economy, and therefore create a favourable economic environment, the GDPR reinforces the protection of personal data and civil liberties.
This unified regulation will allow businesses to substantially reduce the costs of processing data currently incurred in the 28 EU member-states: organisations will no longer have to comply with multiple national regulations for the collection, harvesting, transfer and storing of data that they use.
Moreover, since data will comply with legislations applicable in all EU countries, it will become possible to exchange it and it will have the same value in different countries, while currently data has different prices depending on the legislation it complies with, as well as different costs for the companies that collect it.
5.4. A geographical scope extended by fair competition
The scope of the GDPR extends to companies which are headquartered outside the EU, but intend to market goods and services in the EU market, as long as they put in place processes and treatments of personal data relating to EU citizens. Following these residents on internet, in order to create some profiles, is also covered by the GDPR scope.
Therefore, European companies, subjected to strict, and potentially expensive, rules, will not be penalised by international competition on the EU single market. In addition, they may buy from non-EU companies some data which is compliant with GDPR provisions, therefore making the data market wider.
5.5. Opening digital services to competition
The right to portability of data will allow EU citizens subjected to data treatment and processing to gather this data in an exploitable format or to transfer such data to another data controller if this is technically possible.
This way, the client will be able to change digital services provider (email, pictures, etc.) without having to manually retrieve all the data, during a fastidious and time-consuming process. By lifting such technical barriers, the GDPR makes the market more fluid, and offers to users enhanced digital mobility. Digital services providers will therefore evolve in a more competitive market, inciting them in providing better priced and higher quality services, as their clients will no longer be hostages to their initial provider.
5.6. Labels and certifications
The European committee on data protection, as well as EU institutions, will propose some certifications and labels in order to certify compliance with the GDPR of data processes performed by businesses.
Cashable recognition and true asset for the brand image of a company, labels and certifications will also become a strong commercial tool in order to gain prospects’ trusts and to win their loyalty.
What are the actionable steps to take, right now, to become GDPR compliant?
There is not a moment to lose to implement the following steps, below:
- Decide on the ownership of implementing the GDPR provisions in your organisation; assign ownership to the best suited department or team (Legal? Compliance? Technology?);
- Liaise with your one-stop DPA, as several of them have prepared useful explanatory information or guidance to comply with GDPR, such as the ICO in the UK, the CNIL in France and the Data Protection Commissioner in Ireland (the latter being the DPA of many a digital giant, such as Google, Facebook and Twitter);
- Draft a map of the data processes in your organisation, and identify the gaps in GDPR compliance in relation to these various processes – we, at Crefovi, have drafted some detailed documents on how to make this mapping of data processes and treatments and to support you on identifying the gaps in GDPR compliance;
- Value the various data processes and treatments and assess which ones are high risk and make a list of your high-risk data assets;
- Execute a PIA on those high-risk data assets (such as Human resources’ data, customers’ data) – Crefovi supports companies in performing PIAs and in checking the efficiency of the security and protection measures, thanks to the execution of intrusion tests;
- Implement legal, technical, organisational and physical measures to lower risks on those data assets and become GDPR compliant;
- Ensure that your contractors and sub-contractors have put compliant security measures in place, by sending them a list of points to check;
- Do privacy awareness training for your employees as they must understand that personal data is anything that can be linked directly to an individual and that there will be some consequences if they break the GDPR provisions and steal personal data;
- Develop a Bring Your Own Device policy (“BYOD”) and enforce it within your organisation and among your employees, since you are accountable for all data user information stored in the cloud and accessible from both corporate devices (tablets, smartphones, laptops) and personal devices. Also, when employees leave or are terminated, make sure that you have included BYOD in your off-boarding process, so that leaving staff lose access to company confidential data immediately on their devices;
- Check and/or redraft the information notices or confidentiality policies in order that they set out the new information required by the GDPR;
- Put in place automated mechanisms in order to obtain explicit consent from EU citizens, especially if your business deals with behavioural data collection, behavioural advertising or any other form of profiling;
- Put in place a solid management plan in case personal data breaches happen, which will allow you to comply with the mandatory requirement to notify your DPA within 72 hours – our in-depth experience of alert, risk management, analytical and notification plans, in France and the United Kingdom, put us, at Crefovi, in a great position to support our clients to prepare for the demanding requirements set out in the GDPR.
 “The world’s most valuable resource is no longer oil, but data”, The economist, 6 May 2017.
 “Preparing for the general data protection regulation: a roadmap to the key changes introduced by the new European data protection regime”, Alexandra Varla, 2017.
Annabelle Gauberti is the founding partner of Crefovi, our London and Paris law firm specialised in advising the creative industries in general, in particular on their personal data and cybersecurity requirements. She is a solicitor of England & Wales, as well as an “avocat” with the Paris bar.
Annabelle is also the president of the International association of lawyers for the creative industries (ialci).
Tel: +44 20 3318 9603
Crefovi partners up with Les Echos Formation to present cutting-edge one-day training on the law of luxury and fashion marketing: how to secure your practices
This ground-breaking training day will provide a complete view on the legal aspects to pay attention to, when planning and organising marketing and advertising campaigns, as well as catwalk shows.
From image rights, publicity rights to brand ambassador deals, endorsement deals, as well as managing the brand’s relationships with agencies (modelling agencies, advertising agencies, music supervisors, etc), no stones will be left unturned by Crefovi during this seminar.
Dates of this training day:
- Tuesday 25 April 2017
- Thursday 30 November 2017
Goals of this training:
- master the essential aspects of a win-win negotiation with stars and models, their agents, as well as advertising agencies, sync agents and music supervisors
- Understand who are the stakeholders, their positions and differents roles in the decision taking process, in relation to the choice of brand ambassadors and endorsers, music tracks which will feature during the catwalk show or the advertising campaign, fashion models
- Compare the various strategies and negotiation tactics, in order to obtain the maximum investment in the advertising campaign or the partnership, from the brand ambassador or celebrity endorser, while fully complying with image rights and publicity rights
- Maximise the “marketing” potential of social media while minimising legal risks, in particular copyright infringement risks
- Use anti-counterfeiting campaigns as a marketing strategy of luxury wares
Outline for the daily programme:
09:30 – 11:30: the advertising campaign – a breeding ground for legal issues
- Relationships between the luxury brand and advertising agencies: how to ensure that the “brief” written by the luxury house is well understood?
- The deal with the celebrity: manage the agents, talent agencies and the contractual relationship with the start
- Synchronising music in the advertisement: a marked path
- Relationships with the media, image rights and intellectual property: written press, TV, streaming sites (YouTube, Vimeo)
- Social media and law: how to maximise the potential of digital while keeping legal risks down
11:45 – 13:30 – the fashion show each season – an important legal challenge!
- Agreements with models and other service providers: an important stake
- Photographers and catwalk shows: image rights, counterfeiting and royalties
- Music in fashion shows: how it works, from a legal standpoint?
Witness talk: a general counsel from a top luxury house shares his experience on negotiating and structuring various partnership agreements with brand ambassadors. He will detail the existing legal challenges during such negotiations
14:30 – 15:30 – case study
- Rihanna v Topshop.
- Catherine Zeta-Jones v Caudalie
- Why complying with image rights and publicity rights is paramount in the luxury and fashion sectors
15:45-17:15 – Fight against counterfeiting as a marketing and advertising tool
- Status of the fight against counterfeiting in the luxury and fashion sectors
- New tools to fight against counterfeiting – legal and non-legal
- Lobbying actions against counterfeiting with ECCIA, the Walpole, Comité Colbert, etc
17:15-18:00 – Final summary
Final summary of key points and takeaways, in order to best structure marketing and promotional campaigns for a luxury and fashion brand, while complying with existing laws and regulations
Annabelle Gauberti is a solicitor of England & Wales as well as a French “avocat” with the Paris bar. She focuses her practice on providing legal advice, either contentious or not contentious, to companies and individuals working in the creative industries in general, and the luxury and fashion sectors, as well as the music, film, TV and digital industries, in particular.
Ms Gauberti has more than thirteen years of experience in practicing the law of luxury goods and fashion. Since 2003, she has written numerous articles about this legal field.
Ms Gauberti is at the forefront of the expansion and development of the law of luxury goods and fashion, in particular by providing courses and seminars to luxury professionals at the Institut de la Recherche de la Propriété Intellectuelle (IRPI) and to MBA students in Luxury Brand Management, around the world.
Below are a few links to the seminars that Ms Gauberti organised and to which she participated as a speaker:
Les Echos Formation
Since 2003, Les Echos Formation works alongside large companies and public servants in developing their managerial capabilities with training sessions and conferences. Les Echos Formation is a content publisher (online and offline), aggregator and animator of customised and tailored training sessions focused on the needs of managerial teams, while leveraging its many resources and networks.
Tel: +44 20 3318 9603
Crefovi strikes back with presentation on how to make your fashion brand lawfully omnichannel at Pure trade show on 26 July 2016, attended by trade show goers and press
Annabelle Gauberti, founding partner of London fashion law firm Crefovi, presented a talk on the legal stuff to think about, when a fashion business wants to go omnichannel and, in particular, to launch e-commerce functions on its website. This presentation was delivered at Pure, the top bi-annual fashion trade show in London.
Check out here our slides!
Tel: +44 20 3318 9603
On 23 June 2016, during an epic day of flooding in London and South East England, which did not deter a record 72.2 percent of voters to turn out, Little Britain decided to terminate its 43-year membership with the European Union (EU). What are the Brexit legal implications that creative industries need to know about?
Now, the United Kingdom (UK) – or possibly, only England and Wales if Northern Ireland and Scotland successfully each hold a referendum to stay in the EU in the near future – will join the ranks of the nine other European countries which are not part of the EU, i.e. Norway, Iceland, Liechtenstein, Albania, Switzerland, Turkey, Russia, Macedonia and Montenegro. Of these, two countries, Russia and Turkey, straddle Europe and Asia.
What are the short-term and long-term consequences, from a legal and business standpoint, for the creative industries based in the UK or in commercial relationships with UK creatives?
The two main treaties of the European Union, which are a set of international treaties between the EU member states and which sets out the EU’s constitutional basis, are the Treaty on European Union (TEU, signed in Maastricht in 1992) and the Treaty on the Functioning of the European Union (TFEU, signed in Rome in 1958 to establish the European Economic Community).
The TFEU in particular sets out some important policies which guide the EU, such as:
- Citizenship of the EU;
- The internal market;
- Free movement of people, services and capital;
- Free movement of goods, including the customs union;
- Area of freedom, justice and security, including police and justice co-operation;
- Economic and monetary policy;
- EU foreign policy, etc.
How is the ending of those policies, in the UK, going to change and affect UK creative professionals and companies, as well as foreign citizens and companies doing business in the UK?
1. Removal of EU citizenship for UK citizens and of freedom of movement of people coming in and out of the UK
Citizenship of the EU was introduced by the TEU and has been in force since 1993.
EU citizenship is subsidiary to national citizenship and affords rights such as the right to vote in European elections, the right to free movement, settlement and employment across the EU, and the right to consular protection by other EU states’ embassies when a person’s country of citizenship does not maintain an embassy or a consulate in the country in which they require protection.
By voting out of the EU, Little Britain has made it difficult for EU citizens to come to the UK, as a visa or work permit may be required in the future, depending on the agreement that the UK will strike with the EU. However, it will also be much more difficult for UK citizens to travel to EU member states, for work, studies or leisure.
Probably, the majority of people in the UK who voted out of the EU do not travel much out of the UK, either for work or leisure, so there was definitely a class battle going on there, during that Brexit referendum, as high flyers and Londoners (who have to be quite wealthy to live in such an expensive city) wanted to remain in the EU, while the working class population and English & Welsh regions were firmly on the Leave side. That’s democracy for you: one individual, one vote and the majority of votes always has the upper hand!
If we look at the example set by some of the other nine European states which are not part of the EU, we see that several options are available. Although Norway, Iceland and Liechtenstein are not members of the EU, they have bilateral agreements with the EU that allow their citizens to live and work in EU-member countries without work permits, and vice versa. Switzerland has a similar bilateral agreement, though its agreement is slightly more limited. At the other end of the spectrum, the decision about whether to permit Turkish citizens to live and work within member countries of the EU is left to the individual member nations, and vice versa.
So what’s it going to be like, for the UK?
Time will tell but as we now know that David Cameron, a relatively “mild” member of the conservative party, will step down as the UK prime minister in October 2016, we are under the impression that his leadership will be replaced with an atypical and highly-strung right-wing and nationalistic team, probably led by hard-core conservatives such as Boris Johnson. Mr Johnson not being renowned for his subtlety and impeccable political flair, we think that negotiations for new bilateral agreements between the UK and EU as well as non-EU countries will be a difficult, protracted and ego-tripped process which may take years to finalise.
The UK will try to reduce immigration from the EU, probably with a points-based system such as the one in place in Australia. It means giving priority to high-skilled workers and blocking entry to low-skilled ones. But first, the UK will have to clarify the status of the nearly 2.2 million EU workers living in the UK. The rules for family reunions may get tougher. Also, 2 million UK nationals also live abroad in EU countries – so any British measures targeting EU workers could trigger retaliation against UK nationals abroad.
This, of course, may have an extremely negative impact on the freedom of movement of people, in and out of the UK, which may have a catastrophic impact on trade, human rights and political relationships with other states, for the UK.
Article 50 of the Lisbon Treaty, another treaty from the set of international treaties between the EU member states and which sets out the EU’s constitutional basis, relates to the rules for exit from the EU and provides that:
“1. Any Member State may decide to withdraw from the EU in accordance with its own constitutional requirements.
2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the EU shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the EU. That agreement shall be negotiated in accordance with Article 218(3) of the TFEU. It shall be concluded on behalf of the EU by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.
3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.
4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it. A qualified majority shall be defined in accordance with Article 238(3)(b) of the TFEU.
5. If a State which has withdrawn from the EU asks to rejoin, its request shall be subject to the procedure referred to in Article 49″.
Therefore, the UK nows needs to notify its intention to withdraw from the EU to the European Council. We understand that such notification will be handed over by the new prime minister in the UK, therefore after October 2016.
The UK will have, at the latest, a period of two years from such notification date to negotiate and conclude with the EU an agreement setting out the arrangements for its withdrawal, taking out of the framework for its future relationship with the EU. After this period of two years or, if earlier, the date of entry into force of the withdrawal agreement, the EU Treaties will cease to apply to the UK.
Let’s hope that the new UK government will have the ability and gravitas to strike a withdrawal agreement with the EU, in particular in relation to free movement of people coming in and out of the UK, which will be balanced and ensure fluid and constructive relationships with its fellow neighbours and main import partners.
Companies which have – or plan to have – employees in the UK, or which staff often travels to the UK for business reasons, should monitor the negotiation of the bilateral agreements relating to the freedom of movement of people, between the UK and EU member-states, as well as non-EU countries, very closely, as costs, energy and time to secure visas and work permits could become a significant burden to doing business in and with the UK, in the next two years.
2. Removal of free movement of goods, services and capital?
The EU’s internal market, or single market, is a single market that seeks to guarantee the free movement of goods, capital, services and people – the “four freedoms” – between the EU’s 28 member states.
The internal market is intended to be conducive to increased competition, increased specialisation, larger economies of scale, allowing goods and factors of production to move to the area where they are most valued, thus improving the efficiency of the allocation of resources.
It is also intended to drive economic integration whereby the once separate economies of the member states become integrated within a single EU wide economy. Half of the trade in goods within the EU is covered by legislation harmonised by the EU.
Clearly, the internal market and its wider repercussions have gone totally over the head of Little Britain, who wiped out 43 years of hard-won progress towards economic integration in 12 hours on 23 June 2016! “Put Britain first”, which was what the mentally ill racist and right-wing extremist shouted when he murdered Jo Cox, a Labour politician and campaigner for the rights of refugees, a week and a half ago, summarises what Little Britain had in mind, when they voted out of the EU.
Having said that, it is possible that the internal market remains in place, between the UK and the EU, as such market has been extended to Iceland, Liechtenstein and Norway through the agreement on the European Economic Area (EEA) and to Switzerland through bilateral treaties.
Indeed, the EEA is the area in which the agreement on the EEA provides for the free movement of persons, goods, services and capital within the internal market of the EU. The EEA was established on 1 January 1994 upon entry into force of the EEA Agreement.
The EEA Agreement specifies that membership is open to member states of either the EU or European Free Trade Association (EFTA). EFTA states, i.e. Iceland, Liechtenstein and Norway, which are party to the EEA Agreement participate in the EU’s internal market. One EFTA state, Switzerland, has not joined the EEA, but has a series of bilateral agreements with the EU which allow it to participate in the internal market. The EEA Agreement in respect of these states, and the EU-Swiss treaties have exceptions, notably on agriculture and fisheries.
2.1. Free movement of goods?
Thanks to the internal market, there is a guarantee to free movement of goods.
If the UK decides, during its withdrawal negotiations with the EU, to become a party to the EEA Agreement, then such freedom of movement of goods will be guaranteed.
If the UK decides, during its withdrawal negotiations with the EU, to put in place a series of bilateral agreements with the EU, then such freedom of movement of goods may be guaranteed.
Otherwise, there will be no freedom of movement of goods, between the UK and the EU, and non-EU countries, which would be an extremely perilous commercial situation for the UK. The EU is also a customs union. This means that member-states have removed customs barriers between themselves and introduced a common customs policy towards other countries. The overall purpose of the duties is “to ensure normal conditions of competition and to remove all restrictions of a fiscal nature capable of hindering the free movement of goods within the Common Market“.
Article 30 TFEU prohibits EU member-states from levying any duties on goods crossing a border, both goods produced within the EU and those produced outside. Once a good has been imported into the EU from a third country and the appropriate customs duty paid, Article 29 TFEU dictates that it shall then be considered to be in free circulation between the EU member-states.
Neither the purpose of the charge, nor its name in domestic law, is relevant.
Since the Single European Act, there can be no systematic customs controls at the borders of EU member-states. The emphasis is on post-import audit controls and risk analysis. Physical controls of imports and exports now occur at traders’ premises, rather than at the territorial borders.
Again, if the UK becomes a party to the EEA Agreement, or signs appropriate bilateral agreements with the EU and other countries party to the internal market, customs duties will be prohibited between the UK, the EU, the EEA states and Switzerland. Otherwise, customs duties will be re-instated between the UK and all other European countries, including the EU, which would be again a very disadvantageous situation for UK businesses as the cost of trading goods with foreign countries will substantially increase.
The same goes for taxation of goods and products which will be reinstated if the UK does not manage to become a party to the EEA Agreement or to sign appropriate bilateral agreements with the EU.
This is going to become a major headache for the UK’s new leadership: goods exports of the EU, not including the UK, to the rest of the world, including the UK, are about 1,800bn euros; to the UK, about 295bn euros, or a little under 16 percent. So, in 2015, the UK accounted for 16 percent of the EU’s exports, while the US and China accounted for 15 percent and 8 percent respectively.
The UK would, indeed, become the EU’s single largest trading partner for trade in goods. However, this would probably not be the case for trade overall. Including services would probably reduce the UK’s share somewhat (the EU ex UK exports over 600bn euros in services, while the UK imports only about 40-45bn euros in services from the rest of the EU). Moreover, the US will very probably overtake the UK as the EU ex UK’s largest single export market.
What does this tell us about the UK’s bargaining power with the EU after a Brexit?
It certainly confirms that the UK would become one of the EU’s largest export markets, even if not necessarily the largest. But the UK would still be far less important to the EU than they are to the UK – the EU still takes about 45 percent of UK’s exports, down from 55 percent at the turn of the century. And, if you treat the EU as one country, as this analysis does, “exports” become considerably less important overall (intra-EU trade is far more important to almost all EU countries). Indeed, as this Eurostat table shows, only for Ireland and Cyprus does the UK represent more than 10 percent of total (including intra-EU) exports. So how important will exporting to the UK be to the EU economy after Brexit? EU exports to the UK would represent about 3 percent of EU GDP; not negligible by any means, but equally perhaps not as dramatic as one might think. The EU, and even more so the UK, would certainly have a strong incentive to negotiate a sensible trading arrangement post-Brexit. But no-one should imagine the UK holds all the cards here.
Bearing in mind that the EEA Agreement and EU-Swiss bilateral agreements are both viewed by most as very asymmetric (Norway, Iceland and Liechtenstein are essentially obliged to accept the internal single market rules without having much if any say in what they are, while Switzerland does not have full or automatic access but still has free movement of workers), we strongly doubt that currently feisty UK and its dubious future leadership (wasn’t Boris Johnson lambasted for being a womanising buffoon by both the press and members of the public until recently?) are cut from the right cloth to pull off a constructive, seamless and peaceful exit from the EU.
Creative companies headquartered in the UK, which export goods and products, such as fashion and design companies, should monitor the UK negotiations of the withdrawal agreement with the EU extremely closely and, if need be, relocate their operations to the EU within the next 2 years, should new customs duties and taxation of goods and products become inevitable, due to a lack of successful negotiations with the EU.
The alternative would be to face high prices both inside the UK (as UK retailers and end-consumers will have to pay customs duties and taxes on all imported products) and while exporting from the UK (as buyers of UK manufacturers’ goods will have to pay customs duties and taxes on all exported products). Moreover, the UK will face non-tariff barriers, in the same way that China and the US trade with the EU. UK services – accounting for eighty percent of the UK economy – would lose their preferential access to the EU single market.
While an inevitably weaker pound sterling may set off some of the financial burden represented by these customs duties and taxes, it may still very much be necessary to relocate operations to another country member of the EU or EEA, to balance out the effect of the Brexit, and its aftermath, for creative businesses which produce goods and products and export the vast majority of their productions.
Fashion and luxury businesses, in particular, are at risk, since they export more than seventy percent of their production overseas. Analysts think that the most important consequence of Brexit is “a dent to global GDP prospects and damage to confidence. This is likely to develop on the back of downward asset markets adjustments. Hence, more than ever, the fashion industry will have to work on moderating costs and capital expenditures“.
2.2. Free movement of services and capital?
The free movement of services and of establishment allows self-employed persons to move between member-states in order to provide services on a temporary or permanent basis. While services account for between sixty and seventy percent of GDP, legislation in the area is not as developed as in other areas.
There are no customs duties and taxation on services therefore UK creative industries which mainly provide services (such as the tech and internet sector, marketing, PR and communication services, etc) are less at risk of being detrimentally impacted by the potentially disastrous effects of unsuccessful negotiations between the EU and the UK, during the withdrawal period.
Free movement of capital is intended to permit movement of investments such as property purchases and buying of shares between countries. Capital within the EU may be transferred in any amount from one country to another (except that Greece currently has capital controls restricting outflows) and all intra-EU transfers in euro are considered as domestic payments and bear the corresponding domestic transfer costs. This includes all member-states of the EU, even those outside the eurozone providing the transactions are carried out in euro. Credit/debit card charging and ATM withdrawals within the Eurozone are also charged as domestic.
Since the UK has always kept the pound sterling during its 43 years’ stint in the EU, absolutely refusing to ditch it for the euro, transfer costs on capital movements – from euros to pound sterling and vice versa – have always been fairly high in the UK anyway.
Should the withdrawal negotiations between the EU and the UK not be successful, in the next two years, it is possible that such transfer costs, as well as some new controls on capital movements, be put in place when creative businesses and professionals want to transfer money across European territories.
It is advisable for creative companies to open business bank accounts, in euros, in strategic EU countries for them, in order to avoid being narrowly limited to their UK pound sterling denominated bank accounts and being tributary to the whims of politicians and bureaucrats attempting to negotiate new trade agreements on freedom of capital movements between the UK and the EU.
To conclude, we think that it is going to be difficult for creative businesses to do fruitful and high growth business in the UK and from the UK for at least the next two years, as UK politicians and bureaucrats now have to not only negotiate their way out of the EU through a withdrawal agreement, but also to negotiate bilateral free trade deals that the EU negotiated on behalf of its 28 member-states with 53 countries, including Canada, Singapore, South Korea. Moreover, it would require highly-skilled, seasoned, non-emotional and consensual UK leadership to pull off successful trade negotiations with the EU and, in view of the populist campaign lead by a now victorious significant majority of conservative politicians in the UK up to Brexit, we think that such exceptional and innovative UK leaders are either not yet identified or not in existence, at this point in time. The pains and travails of the UK economy may last far longer than just two years and, for now, there is no foreseeable light at the end of the tunnel that all this fuss will be worth it, from a business and trade standpoint. Did Little Britain think about all that, when it went out to vote on 23 June 2016? We certainly do not think so.
On 2 June 2016, Annabelle Gauberti, founding partner of London luxury law firm Crefovi, was invited to present a talk on “How to make your fashion brands lawfully omnichannel” during the MonteCarlo Fashion Week in Monaco
The MonteCarlo Fashion Week is an annual event in Monaco, during which fashion brands and buyers, as well as the press, meet up, in showrooms, at catwalk shows, during presentations on the fashion and luxury business and, more generally, to celebrate the world of fashion and luxury!
The afternoon of 2 June 2016 was dedicated to the presentations of the MonteCarlo Fashion Week, which key theme was the evolution of global fashion retailing. Members of the Chambre Monégasque de la Mode, Davide Jais (its treasurer) and Federica Nardoni Spinetta (its president) moderated with brio the following presentations:
- Redefining market opportunities and dynamics in fashion retail, Yingting Cheng, Istituto Marangoni Paris
- Building omnichannel strategies, Magali Ginsburg, President & Founder, VFA – Victoire Fashion Agency
- The value of Made in Italy in the retail ooffer, Alessandra Guffanti, President GG Sistema Moda Italia
- Creating extraordinary customer’s relationships, Lorenzo Glavici, Visiting professor MFI – Milano Fashion Institute
- The omnichannel communication ecosystem, Nicolas Kenedi, President L’Agence Française
- How to lawfully make fashion brands omnichannel, Annabelle Gauberti, Founding partner Crefovi
- Round table, ready to buy:
Moderator Muriel Piaser, Global Fashion Developer
Claudio Betti, VP Camera Italiana Buyer Moda
Mathilde De Saint Athost, Lambert & Associates group Paris
Aurélie Sikli, Galeries Lafayette Paris
Song Pham, 10 Lines Buying Office
Saturday 3 June 2016 was dedicated to the fashion catwalk shows of the MonteCarlo Fashion Week, as well as the award ceremony, in particular to Philip Plein (International MCFW award) and Stella Jean (Ethical fashion brand MCFW award).
Tel: +44 20 3318 9603
On 10 March 2016, Annabelle Gauberti, founding partner of London law firm for the creative industries Crefovi, will organise and present a day course on “Luxury and intellectual property” in Paris, at the prestigious French research institute in intellectual property IRPI.
The objectives of this training day, on luxury and intellectual property, will focus around:
– Assessing the economic and legal stakes in the law of luxury goods,
– Selecting the appropriate protection system to define a growth strategy for the luxury brand,
– Acquiring a methodology allowing to identify, anticipate and treat the risks, linked to the intellectual property of the luxury maisons and
– Knowing how to react in case of counterfeiting.
Please note that this course will be in French.
Tel: +44 20 3318 9603
In the music ecosystem, the record label is the “facilitator” and the “doer” that produces, manufactures, distributes, promotes and markets music tracks and albums
The term “record label” derives from the circular label in the centre of a vinyl record, which prominently displays the manufacturer’s name, along with other information. While the label business model has substantially changed, since the day when the term “record label” was spinned, some things are immune to the passing of time: the corporate structure of a record label is still the same, with a president in charge of the business of the whole company at the top, and various vice presidents in charge of different departments such as:
- A&R (artists and repertoire) – in charge of discovering new talent, assisting the artist with song selection, choosing the people who will produce the tracks and deciding where the album will be recorded;
- Art department – in charge of all the artwork that goes along with producing songs (including CD, MP3 and streaming cover art, advertisements and displays at music stores and websites);
- Artist development or Product development – responsible for planning the careers of the artists who are signed to the record label, by promoting and publicizing the artists over the course of their career;
- Business Affairs – which deals with the business side of things such as bookkeeping, payroll and general finances;
- Label liaison – which acts as the liaison, between the label’s distribution company responsible for getting the vinyls, CDs, MP3 files into brick and mortar or online stores or aggregators, and the record company;
- Legal department – responsible for all the contracts that are made between the record label and the artist, as well as contracts between the record label and other companies, and for managing any litigation or legal issues that may arise for the record label;
- Marketing department – which creates the overall marketing plan for every album that the record company will release and coordinates the plans of the promotion, sales and publicity departments;
- New media – in charge of dealing with the newer aspects of the music business, including producing and promoting music videos for the artist, supporting an artist in creating a presence on the internet and dealing with new technologies in which artists can stream music and music videos through the internet (YouTube, Vimeo, etc);
- Promotion department – which main purpose is to make sure that an artist, and in particular his/her new songs, are being played on the radio and the artist’s videos are being played on MTV or VH1 channels as well as video streaming on demand websites (the latter in coordination with the New media team);
- Publicity – which is responsible for getting the word out about a new or established artist, by arranging for articles to be written in newspapers, blogs and magazines, by dealing with radio and television coverage of an artist and
- Sales – which oversees the retail aspect of the record business, working with record store chains and other music stores to get new albums onto retailers’ shelves, in coordination with the efforts of the Promotion and Publicity departments.
As the going got tough, due in part to the rise of music piracy and democratisation of free music online, consolidation of the record label sector occurred: many record companies, now, are huge conglomerates that own a variety of subsidiary record labels. These record corporations are majorly composed of a parent or holding company that owns more than one record label and are, for the most part, located in New York, Los Angeles, London or Nashville. For example, Warner Music Group owns three main labels, Atlantic Records Group, Warner Bros. Records and Parlophone. In turn, Warner Bros. Records owns, among many other record labels, Maverick Records (originally founded in 1992 by Madonna), Sire Records (founded in 1966 by Seymour Stein who went on to sign the Ramones and Talking Heads) and Reprise Records (founded in 1960 by Frank Sinatra to allow “more artistic freedom” for his own recordings).
This ruthless consolidation of the music label industry has now left three major labels in the playing field, since 2012: Universal Music Group, Sony Music Entertainment and Warner Music Group, which control about 60 percent of the world music market and about 65 percent of the United States music market.
Record companies that are not under the control or umbrella of the big three are considered to be independent, even if they are large corporations with complex structures. The most successful indie record label of all time is, without contest, A&M Records, founded in 1962 by trumpeter Herb Alpert and record promoter Jerry Moss. Over its 37-year run, A&M signed acts such as The Carpenters, Cat Stevens, The Police, Sting, Bryan Adams, Suzanne Vega and Sheryl Crow. Alpert and Moss sold A&M to Polygram in 1989 with the caveat that they would continue to manage it independently. As Polygram was later bought by Universal Music Group in 1998, A&M died the next year as a label and a brand. Today, some successful independent labels that cut out a market share for themselves are Beggars Group (which released Adele’s albums 19, 21 and 25) in the UK and Because Group in France.
A new paradigm is causing a revolution in the music industry, which record labels are desperately trying to grasp and cash in on. Since independent peer-to-peer file sharing service Napster was invented by Shawn Fanning and Sean Parker in 1998, retail consumers have collectively forced and pressurised the music and tech industries into re-thinking the offering of music distribution and music consumption tools. This disruption radically and irrevocably annihilates the traditional cash cow music business model, based on physicals (CDs, mini-discs, vinyls, cassettes, etc.), brick and mortar retail points (Virgin, HMV, etc.) as well as paraphernalia to listen to said physicals (CD and cassette players, HI-FI systems, etc.), to trade it for a much more competitive, virtual, lean, complex and data driven music tech business model based on digital revenues (streaming, downloads, internet radio, etc.), online distribution points (Amazon, iTunes, digital service providers such as Spotify and Deezer, etc.) and online consumption (on tablets, laptops, smart phones, ipods, etc.).
After much whining and denial from the vast majority of stakeholders in the music industry, in particular from music top management and acts who are baby-boomers and who differ in their core values from Generation X and Millennials, in that they prefer to “own” things rather than embrace the exponentially successful “sharing” and “access” economy favoured by their juniors, record labels are putting their act together to survive and adapt to this new paradigm.
In this context, I am offering here a snapshot of the most recent and astute evolutions and strategies engineered by record labels to play their cards right. Meanwhile, tech mega-successful and cash-rich multinational corporations such as Google and Apple watch at bay, already going after record labels in order to cut the middle man between precious and highly sought-after musical content and catalogues, and billions of retail customers who stubbornly refuse to fork in any substantial amount of money to listen to said music material.
Record labels and the recording artists: what record deals are on the table today?
Today, more than at any other period historically, a wide range of choices and options is at the disposal of both record labels and talent, to find an agreement on how to make music together, as well as promote, market and distribute it.
1.1. Traditional deal
Recording contracts are legally binding agreements between recording artists and/or bands and a record label, enabling the label to exploit an act’s performance in a sound recording, in return for royalty payments.
Under most exclusive recording and traditional contracts, the recording artist will assign copyright in the sound recordings to the record company. An assignment is an irreversible transfer of ownership for the full life of copyright. In the case of sound recordings, this will be 50 years from release in the UK, and 70 years from release in France. So, even once the artist has repaid all recording costs, the label will still own the masters.
In a traditional deal, exploitation is achieved through physical sales, such as CDs, vinyls and cassettes, the public performance and broadcasting of works, the sale of digital products such as downloads and mobile ringtones and streaming of tracks. The contract will define a record to include audio-visual devices as well, so “Dualdisc”, DVD, online videos and other new technologies will be caught by this definition.
The recording contract will usually require the artist to sign to the label exclusively. As this means that the artist can neither record for another label without permission nor leave the contract if unhappy, record labels justify this exclusivity with the “huge” sums of money invested in breaking an act and by claiming that they need this level of control in order to improve the chances of making a profit or cut their losses. This strategy can backfire though, if record labels cannot justify this exclusivity through factual investments in their acts, as illustrated by the very public showdown between British songstress Rita Ora and Jay Z’s label, Roc Nation.
Major labels, which are the record companies in the strongest position, and with the strongest inclination to offer traditional deals, will normally sign the act to a worldwide deal. Companies such as Universal and Sony Music Entertainment have offices in all key markets, together with the vast distribution network capable of delivering their latest offerings to a supermarket near you. Split-territory deals are less likely with major record labels, but independent labels may be more willing to agree so such an arrangement.
As far as the term is concerned, it is calculated by reference to an initial fixed period of usually 12 months – when the recording artist will make his first album – followed by further option periods, also usually of 12 months, allowing the labels to extend the contract if they so wish. There will be a minimum commitment within each period, requiring the act to deliver a certain number of tracks, to a releasable standard, with perhaps a total of five or six albums expected under the deal.
Advances are sums of money paid to the recording artist on account of future royalties, in a traditional record label deal. They are paid when the act signs to the label, and again as and when further options are exercised.
If the traditional record agreement is well negotiated by the entertainment lawyer representing the artist, the advances will solely be repaid by the recording act when his record sales generate sufficient royalties to cover them; failing that, the label bears the loss. In a traditional deal, the talent is paid royalties based on record sales. In a typical major-label deal, the artist will earn somewhere between 10 and 25 percent of the record’s dealer price, which may be between GBP6.50 and GBP8.50 a unit. Before they’ll see any money, acts will have to recoup recording costs, advances and usually 50 percent of all video costs. The label will make additional deductions, reducing the real royalty rate still further. Standard deductions include a packaging deduction of 20 to 25 percent on CDs, a reduced royalty rate on foreign sales, budget records and record clubs, a reduced royalty on TV-advertised albums, and often no royalty at all on free goods (records given away to retailers and the media). Overall, an act may only get paid on 90 percent of actual sales, since retailers are able to return records they don’t sell. The record label holds on to a portion of the act’s royalties, usually 10 percent, as a reserve, until all sales are verified. Moreover, the act is expected to pay the producer royalty from their own royalty share: for example, if a producer is paid a 3 percent royalty and the artist 15 percent, then the artist will end up with an actual rate before deductions of 12 percent (the producer, however, will be earning this healthy 3 percent from the first record sold, while the act will only get paid once the deductions and any cash advances have been recouped).
In reality, most “deductions” are artificial and in no way reflect the true cost to the label. Packaging on CDs manufactured in volume is cheap. Similarly, as more records are sold through digital channels, a reserve for breakages and the allocation of free digital goods ceases to make any sense at all, other than boost the label’s profits.
Which means, that today, many acts just refuse flat out to sign what they think is an antiquated and disadvantageous traditional record deal, even with a major, and prefer to either self-release – leveraging social media to target their audience and fans, such as very successful hip hop act Macklemore & Ryan Lewis, whose debut single Thrift Shop peaked at number one on the US Billboard Hot 100 chart in 2014 (the first song since 1994 to reach the top spot without the backing of a major label in the US) – or look at alternative record deals which better match their own expectations, aspirations and sense of fairness.
Reportedly, Macklemore & Ryan Lewis are signed to their own imprint, Macklemore LLC, but have a deal with Warner Bros. Records, which sees the major label take a chunk of their sales in exchange for distribution funding for their debut album, the Heist. Speaking about the deal, Macklemore said at the time “Warner had never done this. That’s the interesting thing about where the music industry is right now: you have major labels that are willing to take unconventional approaches because the old model is crumbling in front of us. They’re open to it”.
Indeed, if majors want to keep signing successful new or seasoned acts, they need to become more flexible while negotiating record deals. Also majors need to understand that their strength lies in their global, impactful and far-reaching distribution network as well as in the massive economies of scales that they make, as a result of their conglomerate business model, which is structured around dozens, even hundreds, of subsidiary record labels that share promotion, manufacturing, PR, new media, digital media, sales and marketing services together.
1.2. Net profit deal
Speaking of alternative record deals, this is where the indie record net profit deal comes into play.
As mentioned above, an independent label is a record label that is not affiliated in any way with a major and which uses independent distributors and/or digital distribution methods to get their releases into stores, both online and into traditional brick and mortar music retailers.
The net profit deal, proposed by indie labels, had rapidly increased in use, as an alternative to the traditional type of record deals, at the beginning of the 21st century.
To compute the net profits in a net profit deal, the record company deducts off the top its actual out-of-pocket costs for recording, manufacturing, promotion, marketing, etc. Some labels also deduct a so-called “overhead fee” of 10 to 15 percent of the gross record sales income. After the record company deducts all of these expenses and reimburses itself, the label then pays the recording artists whatever percentage of the profits their contract requires (usually 50 percent of net profits).
Though this percentage is obviously much larger than the 10 to 25 percent royalty range mentioned above for traditional record deals, the recording artist in a net profit deal is getting 50 percent of the income from records sold, but only from what is left after all expenses are paid. In traditional record deals, on the other hand, the act starts getting their artist royalties after the label has recouped the recording costs – and any cash advances to the artist – from the talent’s royalties. Major record labels absorb most other costs out of their own pocket – such as duplication, shipping and staff costs – and those costs do not factor into the calculations of what is to be paid to the artist.
In most net profit deals, a label does not have to pay the artist anything (neither hefty advances nor, under many contracts, any mechanical royalties from internet downloads or physical sales) until the label has recouped all costs fronted by it. This is, of course, appealing to labels, particularly in the current music business climate when the foremost concern of indie labels are front-end costs and just trying to survive financially.
This advantage needs to be weighed against the back end – that is, if the record is successful and the costs relatively small in comparison, then the net profit deal will be less profitable for the label than would be the case with a traditional record deal.
Like in a traditional record deal, the default situation in a net profit deal is that the recording agreement sets out that the record label is the copyright owner of the performances recorded during the term of the recording agreement, by way of assignment of copyright. In cases where the artist is able to cause a reversion of ownership of his recorded performances contractually via negotiation (an occurrence that usually happens only with the biggest superstars or in the case of a licensing of preexisting masters agreement), that right is often subject to the record company having recouped all costs paid on behalf of the artist.
Almost all record labels, when entering into a deal with a recording artist, will insist on the right to handle the artist’s product not just in the physical medium, but also will want to have the right to distribute and sell the artist’s recordings in the digital medium through outlets such as iTunes and YouTube, including downloads to computers and over-the-air downloads to mobile devices for both full track downloads, ringtones, ringbacks and other wireless uses. On a traditional label deal, most labels that work on a royalty basis will try to maintain the payment of just a royalty to the artist in the same way that a royalty is paid on a physical sale, but generally without factoring in packaging deductions and free goods, since these elements are irrelevant. Payment of a 15 percent royalty on a 99 cents download (i.e. 15 cents), plus statutory mechanicals, leaves a nice margin for the label, with the digital music service downloader paying the label 70 cents on the download. However, on a net profit deal, the artist will do much better than a royalty deal of 15 percent. On a 50-50 split of net, the artist will see about 25 cents plus mechanicals, whereas with the royalty traditional deal, the artist will see just 15 cents plus mechanicals.
As digital income is the fastest and exponentially growing area in music revenues, it is likely that more and more acts will be drawn to the net profit deal option, which ensures a 50-50 split on streaming and download revenues, rather than the traditional record deal option.
Recording artists, such as Eminem and “Weird Al” Yankovic, as well as managers, such as 19 Entertainment founded by music mogul Simon Fuller, have swiftly brought this issue relating to the split of earnings on digital revenues to the attention of the general public, by filing high-profile lawsuits against the three majors. The defendants later settled these lawsuits out-of-court, consenting – under confidential terms – to hike up artists’ share of earnings on digital revenues, but their reputation got tarnished in the process.
As there is a clear dichotomy between the labels’ view that royalties for both downloads and streams should be accounted for to the artist as sales, and the point of view of recording artists and their collecting societies which errs on the side of a stream or download being considered as “mechanical reproduction” or as “performance” under a license, it is well worth for labels to make time in order to clarify, and lobby about, the subject matter with the European Union’s Commission and the United States Copyright Office. Indeed, the European Commission currently plans to examine whether action is needed on the definition of the rights of “communication to the public” and of “making available” under copyright law, as well as to assess the role of alternative dispute resolution mechanisms. Both major and indie labels should join forces, in order to lobby the European Commission and other European and US institutions, about that issue of defining what digital revenues are in law, (license or sales or a hybrid of both?) since this single point may seriously impact their future overall revenues, which will increasingly be derived from digital income.
1.3. 360 deal
A 360 deal is a boon for any record label. Mostly favoured by major labels, a 360 deal has two components:
- the first part of the 360 deal contract relates to record sales and contains basically the same terms than those of a traditional record deal and
- the second part of the 360 deal contract gives the label a right to receive a percentage of certain other income streams which labels have not historically shared in, such as artist’s touring and merchandising income as well as the artist’s songwriter and music publishing income (if the recording artist is also a songwriter).
The first reported 360 deal was Robbie Williams’ agreement with now-defunct major EMI in 2002. Acts such as the Pussycat Dolls and Paramore have been reported in the media as having been signed to 360 deals and, in 2007, it was confirmed that Madonna had signed a USD120mn 360 deal with concert promotion company Live Nation. It was reported that in exchange for cash and shares, Madonna gave Live Nation distribution rights for 3 future albums as well as rights to promote live concerts, sell merchandise and license her name and image.
While the sell of a 360 deal to an artist may be a tough call, majors and their affiliates justify their offer of the 360 deal by citing significant investments they make in an artist’s career as well as the dramatic decline in income from sales of recorded music. Factually, it is true that income from sales of pre-recorded music reached its peak in 1999 at approximately USD14.5bn. By 2012, that amount had shrunk to only approximately USD7bn – a decline of more than 50 percent, not accounting for inflation.
Under the traditional paradigm, the label would pay the recording artist a small royalty, which was even smaller after all the deductions. Hence, the artist could expect to receive no recording royalty at all, unless his album was a major commercial success. However, the act got to keep everything else: publishing, merchandising, touring, endorsements, etc.
Since recording artists, especially in the USA where the physical market is moribund and where no neighbouring rights are paid on terrestrial broadcast, often generate more money from other activities than record sales and performance, major and indie labels have insisted on taking a piece of the action, by concocting 360 deals. For instance, Lady Gaga’s Monster Ball Tour grossed over USD227mn of touring income, and 50 Cent’s endorsement deal with Vitamin Water turned golden when he accepted shares in the company in exchange for authorizing the use of his professional name in “Formula 50”: when Coca-Cola purchased Vitamin Water’s parent, Glacéau, for USD4.1bn, 50 Cent’s shareholding became worth over USD100mn.
These developments have spurred labels to seek to participate in all the possible revenue streams generated by the artist. Even small labels, known as production companies, get in on the action and insist that new artists sign 360 deals with them, even if they put little or no money into recording and make no promises in regard to marketing or promotion, while getting an assignment of copyright on the master recordings!
There is no standard 360 deal as the terms vary substantially from deal to deal, and from label to label. A lot depends on the track record and negotiating power of the artist, plus how much of an advance is being paid.
A “full” 360 deal allows the label to share in all entertainment industry income, including touring, music publishing, merchandising, product endorsements, book publishing income (if the artist writes a book), songwriter and music publisher income (if the artist is a songwriter), etc.
Usually, the label’s share of those non-record kinds of income is in the range of 10 to 20 percent, but for new artists if can get as high as 50 percent. A typical 360 deal record agreement would set out the following splits, in relation to the label’s take for various streams:
- 50 percent merchandise;
- 25 percent touring and live performance;
- 25 percent “digital products” such as ringtones and sales from the artist’s fan site;
- 25 percent publishing;
- 25 percent endorsements;
- 25 percent of any other income from the entertainment business including appearances on TV and movies, theatre, book publishing, etc.
Today, all major labels and their affiliates usually demand 360 terms, especially when dealing with emerging artists. So the artist may not have much choice, especially if his strategy is to leverage the formidable distribution channels and economies of scales offered by a major, to achieve wide-reaching and fast success.
1.4. Record deal in the EDM world: still the wild west
In 2010, the acronym “EDM” was adopted by the music industry and music press as a buzzword to describe the increasingly commercial electronic dance music, club music or simply dance, scene.
Major EDM acts, called DJs, such as David Guetta, Deadmau5, Calvin Harris, Steve Aoki, Avicci or Skrillex, often make appearances on main stages during the final nights of high profile festivals such as Lollapalooza or Coachella and, in December 2015, EDM was reported to be a USD6.2bn global industry. In a nutshell, EDM is one of the most lucrative genres in the music industry today.
While top DJs can demand GBP50,000 to GBP200,000 per gig – with hardly any overheads -, record deals relating to some of the EDM tracks that these DJs play during those live gigs are either non existent or incredibly pro-label.
For example, in 1996 artist and songwriter CoCo Star (real name Susan Brice) released a track “I need a miracle” under Greenlight Recordings in the US, which became a club hit. It was then re-recorded and release on EMI’s Positiva imprint in the UK a year later. In 1999, a British DJ mashed up Brice’s vocals from the song with German act Fragma’s track Toca Me. The mash-up was released without Brice’s permission on a bootleg white label for which she was never paid. This sparked a buzz in clubs, and Fragma released their own version of the bootleg, Toca’s Miracle, on Tiger Records in Germany and Positiva in the UK in 2000. It went to N.1 in 14 countries worldwide. While Toca’s Miracle has reportedly sold more than 3 million copies, Brice claims she was never paid for any of these remixes.
While major labels and large indie labels may take a bit of convincing to enter the underground – and drug-fuelled – EDM sector, there is an untapped opportunity here that they can no longer ignore. The public wants and is prepared to pay for EDM, EDM has grown to become a USD6.2bn to USD6.9bn global industry and it is still an Eldorado largely untapped by reputable labels, meaning that the best talent may want to focus on other “more respectable” musical genres for fear of being “screwed” by bootleg white labels which currently populate the EDM scene.
1.5. Label services deal: à la carte and en vogue
At the other end of the spectrum of a 360 deal, lies the label services deal which is a very palatable alternative to business savvy artists. Indeed, the rise of social media, digital distribution, online platforms and direct-to-consumer technology has empowered artists like never before and brought them closer to fans.
The services model sees the record deal flipped on its head: instead of assigning the copyright on their sound recordings for an upfront advance and the label footing the campaign bill, acts will receive the lion’s share of royalties (often 100 percent) from a release and pay a company for a range of services from an à la carte menu of promotion, distribution, marketing, press and a wide range of other essentials.
Interestingly, the services model is not just reserved for artists with enough capital behind them to fund a whole campaign and an already established fanbase likely to ensure a decent return. This services deal is being used by record companies too, as a quick and convenient way to establish an office abroad, push releases into international territories after domestic success, or to simply augment their in-house functionality with new capabilities as and when needed.
Although a relatively new idea in the music industry’s history, the number of companies offering services to both artists and labels has skyrocketed, making the sector fiercely competitive.
PIAS Artist & Label Services, Believe Digital, Republic of Music are some of the most representative label services companies out there, with aggregators, such as the Orchard (now fully owned by the major Sony Music Entertainment), and majors’ owned companies, such as Universal’s Caroline International, Sony RED and Warner’s ADA, very much active in this market.
Even independent rights management groups, such as Kobalt and Fintage House, are widening their services offering, adding label services to their roster. Kobalt in particular, plays the transparency card with brio, by setting out on its website the key characteristics of Kobalt’s “new model” contracts, contrasting them against the key terms of a traditional label deal. For example, as explained on Kobalt’s website, while the term of the label services deal is 3 years with Kobalt, a traditional deal will have a term of 7 years (for a license, a rare occurrence) to the life of copyright. While the talent gives up ownership and control over their recordings, in a traditional deal, Kobalt highlights, on its site, that artists retain full ownership and control of their recordings. While a traditional deal provides for semi-annual accounting with minimal detail, says Kobalt, it commits to provide quarterly accounting with line-by-line detail on every type of income. And the last straw: while a traditional record deal will not cater for any pay-through of neighbouring rights income, Kobalt says that it will collect and pay to artists the label share of neighbouring rights income!
What’s not to like? Of course, major acts are totally smitten with Kobalt’s offering and the likes of 50 Cent, Paul McCartney, Boy George, Busta Ryhmes, Maroon 5, Skrillex, Courtney Love, Dr Luke, Max Martin and Foo Fighters have jumped on the bandwagon of Kobalt’s label services deals.
Personally, I am not surprised that it is a private equity-owned company, such as Kobalt, that is currently delivering some of the act-friendly record deals to the talent, as far as transparency, fairness and redistribution of neighbouring rights and digital revenues are concerned: Kobalt is not managed by “pure” music people!
If majors want to attract legendary artists, nowadays, they must up their game in terms of transparency, redistribution of digital income, auditing and reporting of revenues. Their old ways may work on new talent, who wants to make a fast buck, but seasoned acts will not go anywhere near a 360 or traditional deal those days – especially since they have the cash to auto-finance their distribution and marketing campaigns through label services companies such as Kobalt. What these acts are interested in, is to keep the rights to their recordings and catalogues and monetize those rights to the fullest, through music publishing, neighbouring rights, performance revenues and mechanicals.
Record labels and digital service providers: where the wild things are
As mentioned above, the major beef that artists and their managers have against labels and digital service providers is the lack of transparency, especially as far as digital revenues and neighbouring rights are concerned.
Digital service providers, or “DSPs” are tech companies providing music streaming subscription services. Apple Music, Spotify, Deezer, Tidal, Google-owned YouTube Red are some of the largest DSPs in the music streaming sector.
The stakes are getting higher by the minute, with digital revenues – which comprise income from both digital downloads and streaming –growing by 6.9 percent to USD6.9bn in 2014, and now on a par with the physical sector. Indeed, globally, like physical format sales, digital revenues now account for 46 percent of total music industry revenues. In 4 of the world’s top 10 markets, digital channels (streaming and downloads) account for the majority of revenues (i.e. 71 percent of total 2014 industry revenue in the US; 58 percent of total 2014 industry revenue in South Korea; 56 percent of total 2014 industry revenue in Australia and 45 percent of total 2014 industry revenue in the UK).
In particular, streaming is going from strength to strength, with music digital subscription services – including free-to-consumer and paid-for tiers – growing by 39 percent in 2014, while downloading sales predictably declined by 8 percent but remained nonetheless a key revenue stream as they still account for more than half of digital revenues (52 percent). However, streaming subscription revenues offset declining downloading sales to drive overall digital revenues, pushing subscription at the heart of the music industry’s portfolio of businesses, representing 23 percent of the digital market and generating USD1.6bn in trade revenues.
Music industry analyst Mark Mulligan predicts that streaming and subscriptions will grow by 238 percent from the 2013 levels, to reach USD8bn in 2019, with download revenue declining by 39 percent. He concludes that streaming and subscriptions will represent 70 percent of all digital revenue by 2019.
Universal Music Group is capitalising on the growth of streaming with impeccable flair, naming music and media industry executive Jay Frank, who founded the music and marketing analytics companies DigSin and DigMark, to the newly created role of Senior Vice President of Global Streaming Marketing. His role will be to get UMG acts on playlists, in particular through Digster, a company that creates themed playlists featuring mostly MHG recordings.
While this evolution towards more music streaming is very customer-friendly (who does not want to have the option to select and potentially hear millions of tracks, anywhere in the world, on a device no bigger than the size of a jean’s pocket?), new legal and business issues have arisen as a result.
In particular, right owners in the recorded performance of a composition – typically, the record label, the recording artist-performer and non-featured musicians and vocalists – repeatedly ask themselves how they are financially benefiting from this surge in streaming consumption and income. How do they get paid?
Also, more and more DSPs want to know how they can access high-quality musical content and obtain the right to stream the widest music catalogues on their platforms, at a reasonable price. Since scaling up is the key to success for any technology company, DSPs also want to have the right to stream such musical content all over the world.
Finally, as the surge in musical digital consumption and income is becoming factual evidence, certain categories of income streams are developing and taking more of a preponderant role. For example, sound recording performance rights, or “neighbouring rights”, are a growing source of global revenue for recording artists and record labels. While recorded music sales of physical products have declined 66 percent since their high in 1999, revenues from overall neighbouring rights have increased dramatically, reaching Euros2.034bn globally in 2013. Musical rights represent around 90 percent of the royalties collected in relation to neighbouring rights. Audio-visual rights are worth around Euros200mn, benefiting mainly to performers, while the rest of these royalties (around Euros1.834bn) relate to musical neighbouring rights. Where are these musical neighbouring rights going? How are they collected then distributed?
2.1. Streaming equity
As a preliminary remark, it is worth noting that labels, in particular majors, were very prompt in renewing their grip on music distribution: they invested massively in DSPs, whenever the opportunity was arising.
For example, Warner Music Group acquired up to 5 percent of Soundcloud in October 2014, and Warner, Universal and Sony have quietly muscled out stakes in the hottest digital streaming services, such as Spotify but also in choose-your-own-adventure music video purveyor Interlude and song-recognition giant Shazam – valued at USD1bn in its latest round.
What have the labels been giving the startup DSPs, aside from legitimacy, to secure these “sweet deals”? All-encompassing access to the artists and their songs. As explained in point 2.3. (Neighbouring rights and digital performance of sound recordings) below, the artists derive some minimal amount of royalties from these new distribution channels, but they were not getting any of the ownership.
Until February 2016 at least, when, during his latest investor conference call, Warner Music’s CEO Stephen Cooper announced that the label will pay its recording artists a portion of any income it earns from equity stakes in services such as Spotify and Soundcloud. With Spotify planning on announcing its IPO during the second quarter of 2016, such commitment on Warner’s end is more than a token gesture, as it owns a 2 to 3 percent stake in Spotify’s shareholding, which will probably be valued at around USD200mn.
This is a very smart PR move indeed from Warner because it means that this major understands that it needs to have all its recording artists on board, as far as streaming services are concerned.
Streaming is where consumer behaviour and affinities are going, but currently Google-owned YouTube is growing quicker than everyone else, while labels need premium and freemium services to make up ground fast. Which is why they cannot afford the Black Keys-Taylor Swift-Adele- Coldplay-Radiohead trickle to turn into a free torrent available at will to fans. They need artists to be as vested as they are into streaming and DSPs.
It remains to be seen whether Sony and Universal will follow suit, as far as sharing streaming equity with their respective acts is concerned.
In May 2015, the Verge revealed details of the contract signed between major label Sony Music Entertainment and DSP Spotify, giving the streaming service a license to utilize Sony’s catalogue.
The 42-page licensing agreement was signed in January 2011, written by Sony Music and revealed that Spotify had to pay USD42.5mn in yearly advances to Sony for the two years of the contract. It also detailed the subscriber goals that Spotify had to hit and how streaming rates were calculated. Most interestingly, the contract detailed how Sony used a Most Favoured Nation clause to keep its yearly advances from falling behind those of other music labels, how Spotify could keep up to 15 percent of revenues “off the top” from ad sales made by third parties, and the complex formula that determines how much labels get paid per stream. What the contract between Sony and Spotify did not stipulate was what Sony could and would be doing with the advance money. Did the money go into a pot to be divided between Sony Music’s artists, or did the major keep it to itself?
These revelations sent a shockwave in the music industry, with artists and their managers up in arms because they had already complained that earning on average less than one cent per stream play – between USD0.006 and USD0.0084 according to Spotify Artists – was neither reasonable nor fair. Top talent such as Taylor Swift and Radiohead, in particular, left Spotify with fracas, in 2014 and 2013 respectively, complaining that end-consumers did not pay enough to access their catalogues on Spotify.
But that is just one reason why artists did not get paid much at all per stream, the other reason being breakage: indeed, DSPs, which are always on the lookout for top music catalogues and content to stream to their retail consumers, readily paid hefty “minimum revenue guarantees” to labels, over the past years, to get access to, and be able to license, their music recordings.
For example, French streaming service Deezer, which planned to organize a (later on aborted) IPO from its home city in Paris during the last quarter of 2015, revealed on its “Autorité des Marchés Financiers” registration documents, that it had paid a Euros257mn advance to record companies in instalments over a period of 3 years (2012: Euros57.1mn, 2013: Euros87.4mn and 2014: Euros112.5mn). In 2013, Deezer even had to pay 94 percent of its total revenues to record companies as minimum guarantees (no wonder that IPO went south)! Meanwhile, royalties from subscriptions and ads fell short of this advance payment in 2012, 2013 and 2014 – totally approximately Euros236.4mn. In total, the deficit between the two numbers amounted to Euros20.6mn across the 3-year period (2012: Euros5.4mn; 2013: Euros13.2mn and 2014: Euros2mn). This Euros20.6mn deficit is unallocated “breakage”.
Therefore, while the payment of an advance by a DSP to record companies is justified if the streaming platform then generates the same or even more revenues through subscriptions and ads, the system is inherently flawed if the advance ends up exceeding the annual streaming royalty income. When that happens, the label is inevitably left with a lump sum – in this case over Euros20mn – sitting in record company bank accounts, but which cannot be attributed to any specific artists.
One of the three majors, Warner, feeling the heat, was the first to share this breakage with their acts as standard company policy since 2009, even attributing a line to “breakage” on their artists’ royalty statements. Sony has also agreed to share with its talents proceeds from an upcoming sale of its equity in Spotify. Meanwhile, over 700 indie labels have signed up to the Fair Deal Declaration from the Worldwide Independent Network, which pledges to “account to artists a good-faith pro-rata share of revenue and other compensation from digital services”, and the French ministry of culture issued a voluntary agreement in October 2015 requesting that music industry stakeholders agree to share with artists all income received from online music services and to guarantee them a minimum wage, in return for the digital use of their recordings.
These reactions from both private and public stakeholders in the music industry demonstrate that labels, in particular, majors, will not get away with egotistically keeping all advance income paid by DSPs for themselves. Either the labels self-regulate, and redistribute a portion of this extra income to their recordings artists, or European Union regulators – busy bees with their ongoing general overhaul of copyright law in the 28 member-states of the EU – will eventually make it compulsory, in law, for labels to redistribute a portion of the breakage as well as minimum revenue guarantees to their acts.
2.3. Neighbouring rights and digital performance of sound recordings
Neighbouring rights, also called “related rights”, were consecrated in law, step by step, in order to ensure that people who are “auxiliaries” to the creation and/or production of content (artists, performers, music producers, film producers, non-featured musicians and vocalists, etc.) could have more control over their creative endeavours.
There is no single definition of neighbouring rights, which vary much more widely in scope between different countries than authors’ rights or copyright.
However, the rights of performers, phonogram producers and broadcasting organisations are certainly covered by related rights, and are internationally protected by the Rome Convention for the protection of performers, producers of phonograms and broadcasting organisations, signed in 1961. Aside from the Rome Convention, another international treaty addresses the protection of neighbouring rights in the musical sector: the WIPO performances and phonograms treaty (WPPT) signed in 1996.
At the European Union level, three directives have been instrumental in developing a harmonized legal framework relating to neighbouring rights: the directive of 27 September 1993, relating to the coordination of certain rules on author’s rights and neighbouring rights applicable to satellite broadcasting; the directive of 29 October 1993 – replaced by the directive n. 2006/116/EC of 12 December 2006 – on the term of protection of copyright and certain related rights; the directive n. 2001/29/EC of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society.
As mentioned above, sound recording performance rights represent the bulk of all neighbouring rights collected worldwide, and they are a growing source of global revenue for recording artists and record labels. For example, in the US, SoundExchange, the organisation responsible for collecting and distributing sound recording performance royalties, distributed USD590mn in 2013, a dramatic increase from the USD3mn the organisation distributed in 2003. In the decade since SoundExchange’s inception, the organisation has generated USD2bn in royalties to artists and record companies.
Out of a total of Euros2.034bn of neighbouring rights collected in 2013, 48.9 percent originate from Europe (Euros1.101bn), 30 percent from North America (Euros681mn), 11.9 percent from South America (Euros268mn) and 8.6 percent from Australasia (Euros192mn).
With a 28 percent share of worldwide royalties, the US is the main market for neighbouring rights, even though the collection of such rights is limited to the public performance of sound recordings on digital medium only (such as online radio like Pandora, satellite broadcasting like Sirius/XM and also online streaming of terrestrial radio transmission like iHeartRadio). Unlike most of the world, the US does not apply sound recordings performance rights to broadcast radio, terrestrial radio and performance of sound recordings in bars, restaurants or other public places.
The market of neighbouring rights is mainly concentrated in 10 countries, which control 82 percent of worldwide royalties, with a strong concentration in Europe. Apart from the US, the United Kingdom (12 percent), France (11 percent), Japan (7 percent), Brazil (7 percent), Germany (7 percent), Argentina (3 percent), the Netherlands (3 percent), Canada (2 percent) and Norway (2 percent), are the top 10 worldwide markets. Outside the US, sound recordings enjoy broader performance rights for broadcast (including terrestrial radio), public performance and so-called communication to the public.
Globally, sound recording performance rights are administered by music licensing companies or collecting societies. These organisations are responsible for negotiating rates and terms with users of sound recordings (e.g. broadcasters, public establishments, digital service providers) collecting royalties and distributing those royalties to performers and sound recording copyright owners, i.e. record labels.
There are around 60 collecting societies around the world focused on sound recording performance royalties. These collecting societies may provide a statutory license to DSPs.
However, neighbouring rights deriving from streaming revenues generated on the DSPs’ platforms are almost always managed directly by the record labels and their representatives. Indeed, it is important to note that statutory licenses do not apply where there is a direct licensing deal between the DSP and the record label. So, for example, the 3 major labels have each directly signed a licensing agreement with each of the DSPs, while other direct deals have been signed between Clear Channel, the owner of digital radio IHeartMedia, and labels such as Glassnote (the label for Mumford and Sons) and Big Machine (Taylor Swift’s label). Independent labels have teamed up to create global digital rights agencies such as Merlin, which offer the attractive option of globally licensing, via a single deal, the world’s most important and commercially successful indie labels to DSPs. Among those that have a license with Merlin, feature Soundcloud, Vevo, Google Play, Deezer, YouTube and Spotify.
In 2014, internet radio Pandora entered its first direct deal with record labels, outside the statutory system, by establishing a partnership with Merlin. Meanwhile, neighbouring rights collection body SoundExchange keeps a tight leash on Pandora, arguing that the USD0.0014 paid by Pandora to record labels for every stream is too low and should be increased to USD0.0025. As a result, in December 2015, the US Copyright Royalty Board increased the basic per-song rates paid by Pandora (and its competitors such as iHeartRadio) to USD0.0017, or slightly more than 20 percent.
While Pandora is now willing to sign direct deals with record labels, as explained above, it does not mean that the cordial relationship is devoid of any strain: the three majors and the RIAA filed several copyright infringement lawsuits against Pandora and its competitors in 2014, for playing pre-February 1972 recordings without making any royalty payments. The labels said both Pandora and competitor SiriusXM took advantage of a copyright loophole, since the master recording for copyright was not created federally, in the US, until 1972. However, the labels claimed that their master recordings are protected by individual state copyright laws and therefore deserve royalty payments. Several court decisions were released since, and the federal courts unanimously found against SiriusXM and Pandora, and for the payment of royalties on play of pre-February 1972 recordings.
Since direct deals are signed between record labels and DSPs, this means that it is down to the parties to organise their licensing contractual agreements as they see fit. These licensing deals between DSPs and labels, which are 3 to 4 years old at best, have so far had almost no impact on the way recording deals signed between label and recording artists, are drafted, as far as digital revenues are concerned.
Indeed, the way the licensing agreement between the DSP and the label is drafted is automatically going to have an impact on the record deal signed between the record label and the recording artist. If a record deal was signed more than 4 years ago, it will most definitely not provide for a clear and transparent redistribution of digital income to the artist, by the label.
As I mentioned in point 1.2. (Net profit deal) above, labels and recording artists are currently fighting hard to establish whether streaming is replacing radio or sales. Currently, labels typically pay artists on either one or the other of those models, and more often on the basis of a stream being a sale. Why are labels most commonly treating streaming as sales (which is rather counter-intuitive since streaming is all about “access” not “ownership”)? Because, as explained in point 1.2. above, the percentage that labels have to pay artists is so much lower, often in the 10 to 15 percent range if the artist is signed on a traditional or 360 record deal, rather than around 50 percent for a license. Music industry experts propose to assimilate streaming to a hybrid between sale and license, with a hybrid rate that sits in the middle. Doing so would double the amount of money more artists make from streaming, instantaneously transforming its revenue impact for many.
It is highly probable that new record deals will be negotiated at length, in particular by major acts, as far as digital revenues are concerned, in the very near future, especially in the aftermath of the breakage “scandal” and the controversy over the sale or license nature of a stream.
Record labels and collecting societies: How to collect micro-payments around the world
As mentioned above, there are around 60 collecting societies around the world focused on sound recording performance royalties. These collecting societies may provide a statutory license to public venues, DSPs or radios, etc. from which they later collect neighbouring rights royalties, which are later paid back to record labels, performers and non-featured musicians and singers.
3.1. How are neighbouring rights protected and collected on a territorial-basis?
While it could appear that neighbouring rights are protected and remunerated in a very homogenous way around the world, thanks to the structured international and European legal framework described in point 2.3. (Neighbouring rights and digital performance of sound recordings) above, in fact these related rights and the business practices of collecting societies are very different and vary from territory to territory.
Each of the 60 collecting societies operates in a territory that recognises performances in slightly different ways and has a specific business practice.
For example, the US Copyright act grants owners of sound recordings an exclusive right to “perform the copyrighted work publicly by means of a digital audio transmission“. This right is limited by a statutory license for so-called “non-interactive digital audio transmissions“. Therefore, services which comply with the statutory license may stream sound recordings without permission of the copyright owner, subject only to remitting data and payment to SoundExchange. The US Copyright act specifies how SoundExchange divides and distributes the royalties: 50 percent go to the sound recording copyright owner – i.e. the record label; 45 percent is distributed to the featured recording artist; and 5 percent is sent to an independent administrator which further distributes those royalties to non-featured musicians and vocalists.
In the United Kingdom, the UK copyright, designs and patents act grants sound recording copyright owners exclusive performance rights in their sound recordings. In addition, the UK act gives performers on those sound recordings a right of “equitable remuneration” for a share of the licensing proceeds for uses of the sound recordings. Therefore, when a sound recording is broadcasted in the UK, the performers on those sound recordings have a right against the producer (i.e. the record company) of the recording as to a share of the producer’s revenue from that usage. From a legal standpoint, it is very different from the US statutory license regime where the featured artist’s share is as against the user of the sound recording, not the record company. As mentioned above, the UK is the second largest market for neighbouring rights globally. According to the 2014 financial results of UK collecting society PPL, it collected a total of £187.1mn total license fee income (from broadcast, online, public performance and international revenue sources).
In Germany, the Law on copyright and neighbouring rights similarly grants performers and producers rights to remuneration for the performance of their sound recordings. While this German law grants performers rights of equitable remuneration for the broadcast of communication to the public of their fixed performances (i.e. sound recordings), it grants producers (i.e. record labels) a share of the performer’s proceeds from the licensing of broadcast and communication to the public rights. Therefore, the producers’ revenue from such activity is as against the performer, not the user of the sound recording. This is the exact opposite to the UK regime, and nothing like the US system.
In France, the Intellectual property code also grants sound recording copyright owners exclusive performance rights in their sound recordings, through a statutory license. Like in the US, digital service providers which comply with the statutory license may stream sound recordings without permission of the copyright owners, subject only to remitting data and payment to SCPP (when the record producer is a major), SPPF (when the record producer is an independent label), ADAMI (for performers) and SPEDIDAM (for non-featured musicians and vocalists). The Intellectual property code provides that 50 percent of the royalties go to the sound recording copyright owner (the label), while the other 50 percent go to the performers and non-featured musicians and vocalists.
3.2. How are neighbouring rights protected and collected on a cross-border basis?
One of the recurring questions that artists and labels ask themselves is how they are protected from one territory to the other. Indeed, music is a global business, especially in the digital era: artists successful in one territory often are successful in others.
Worldwide success implies that the sound recordings of artists are going to be performed publicly in other territories than where they reside. How, then, can performers and producers collect sound recording performance royalties in territories where they are not nationals and may not have direct agreements with the relevant societies?
The answers are complex and derive from the application of the provisions set out in the Rome Convention and the WPPT above-mentioned.
Article 2 of the Rome Convention details the level of protection that it grants nationals of contracting states in each others’ territories. In short, contracting states owe nationals of other territories the same level of protection they recognise for their own nationals. This concept of “National Treatment” is key to international copyright treaties and works to ensure that members do not unfairly discriminate against nationals of other contracting states.
Articles 4 and 5 of the Rome Convention specify that sound recordings made by nationals of contracting states, first recorded in contracting states, or first published in contracting states, are eligible for National Treatment. Similarly, a performer’s performance will be granted National Treatment if it was rendered in a contracting state, incorporated in a protected sound recording, or if not recorded, broadcast from a contracting state.
Article 12 of the Rome Convention sets out the equitable remuneration for performers, producers (or both) for secondary uses of their sound recordings (e.g. broadcasting, communication to the public). The US is not a signatory to the Rome Convention because, in 1961, this country did not recognise sound recordings as copyrightable subject matter (only in 1995 were sound recordings granted a limited digital public performance right in the US). Article 4 of the WPPT sets out the treaty’s national treatment requirements. Contracting parties must grant nationals of other contracting parties the same level of protection they grant to their own nationals. Article 3 of the WPPT imports the qualification criteria for performers and producers from the Rome Convention (articles 4 and 5). Thus, performers and producers who would be entitled to National Treatment under articles 4 and 5 of the Rome Convention are entitled to National Treatment under article 3 of the WPPT, as if all members of the WPPT were Rome Convention members. This ensures that US performers and producers eligibility is analysed in the same way, even though the US is not a Rome Convention signatory. Article 15 of the WPPT details the equitable remuneration right of performers and producers and largely follows the provisions of article 12 of the Rome convention. A contracting party may recognise an equitable remuneration right for secondary uses of sound recordings (e.g. broadcast, communication to the public) for performers, producers or both, or may choose not to recognise such a right at all. Contracting parties may choose to limit their application of article 15 by depositing a notification detailing the scope of its limitation. Such notifications may have implications for the level of national treatment member states owe each other’s nationals under article 4.
Article 4 of the WPPT requires contracting parties to provide full national treatment to each others’ nationals. However, article 4(2) states that contracting parties may limit the scope of national treatment to the extent another contracting party has availed itself of a reservation under article 15. For example, because the US does not recognise a terrestrial broadcast right for its own nationals or those of any other country, most WPPT members choose not to grant terrestrial broadcast rights to US nationals, even though they are recognised for their own nationals. This concept of “like-for-like” treatment is often referred to as “reciprocity” and is distinct from “national treatment”.
When seeking to maximise the amount of royalties one collects for artists and record companies abroad, these concepts of “national treatment” and “reciprocity” are critical to keep in mind. Understanding what qualifies for full national treatment and what qualifies for limited reciprocity can have an impact on the amount of neighbouring rights revenue an artist or label realises.
For example, a US performer recording in Europe would be qualified for performer royalties (or a European performer recording in the US). Eligibility for royalties is often a fact-based, case-by-case analysis focused on the nationality of performers and producers, where recordings took place, and where they were first published. Knowing these important facts is crucial to ensuring that artists and labels receive what they are owed.
Collecting societies play an important role here: not only do they collect fees from users in their own territories and distribute those to their domestic royalty recipients, but they often act on behalf of their member artists and labels to collect undistributed royalties abroad.
In particular, PPL in the UK, and SAMI, in Sweden, have a share of international royalties above 20 percent in their respective total amount of royalties collected. This is explained by the fact that both UK and Swedish music are great exports around the world. Consequently, PPL has identified international income as a growing source of revenue and has set up a very dynamic policy of royalties’ collection abroad, signing dozens of reciprocity agreements with sister collecting societies.
3.3. A la carte: how record labels are cherry picking the services that collecting societies will provide them with
In its latest report on neighbouring rights in the digital era, French collecting society ADAMI highlighted that the worldwide market of neighbouring rights in collective management should grow exponentially in the next few years. However, the report noted that the share of sound recording public performance royalties attributed to digital is still quite low, apart in the US where related rights in collective management only come from digital sources (i.e. streaming and digital radio).
As more and more consumers use streaming – as opposed to music downloads and physical formats -, ADAMI forecasts that the share of sound recording public performance royalties deriving from streaming will become an essential part of the income paid to performers and record labels.
As mentioned in point 2.3. (Neighbouring rights and digital performance of sound recordings) above, most labels elect to negotiate the collection of sound recording public performance rights, neighbouring rights, directly from digital service providers.
For now, most of the sound recording public performance royalties collected by collective management societies originates from equitable remuneration, which is in part linked to advertising revenues of commercial radio and TV.
As highlighted by co-founder of the French top indie label Because Group, Emmanuel de Buretel, labels should register directly with foreign collecting societies which manage neighbouring rights in key territories where their sound recordings are played, streamed and used, in order to have quicker and more transparent access to those sound recording public performance royalties. For example, Because Group, which main neighbouring rights collecting society is SPPF, is directly registered with PPL in the UK and SoundExchange in the USA, which are key territories for its acts.
Record labels, brands & ad agencies: let’s synch!
Music is an important part of audio-visual projects such as films, television programs, television or internet advertisements, video games and internet websites. So much so, that Universal Music Group recently named some veteran film producers to lead its development and production of film, television and theatrical projects.
In order to be able to use an existing musical composition and existing sound recording in an audio-visual project, the producer of the project will need to get a license from the people or entities that own or control the rights to that musical composition and that master sound recording.
This is what is called a synchronisation license, or synchronisation and performing rights license, or master use and synchronisation license or just sync license. Such license gives the right to the producer of the project to synchronise the composition and existing sound recording with, or include them in timed relation to, the images in the audio-visual project.
Such use of compositions and master sound recordings in audio-visual projects is not subject to collective or statutory licensing schemes. Each use is freely negotiated between the parties involved: the owners of the musical composition and master sound recording on the one hand, and the producers of the audio-visual project on the other hand.
As sound recordings are usually owned or controlled by record labels, producers of audio-visual projects often negotiate the master use license with them.
4.1. Synch as a viable business model
Master use licenses can be an important source of income and exposure for labels and their recording artists. In an era of shrinking sales of physicals, and still insufficient revenue from downloads and streaming to make up the difference, master use licenses can be welcome and even vital sources of revenue. In particular, unlike sales and neighbouring rights which bring in small amounts of money on a delayed basis, master use licenses often bring in upfront lump sum payments, which can support the labels’ cash flow.
Also, having a placement in a film or television program means that the artist and label can benefit from the promotion and marketing for that project, especially if the artist and label receive prominent written credit within the audio-visual project and in advertisements for the project, and if the sound recording is used in audio-visual ads for the project (such as a film trailer). Such promotion can lead to further physical sales, downloads or streams of the recording. Further, a placement in a successful film or TV show can bolster the credibility of the label and its recording artist, paving the way to obtaining additional master use licenses for that or other sound recordings.
For example, even Adele, who openly said that she will never “sell out” by endorsing consumer goods products, had readily agreed to synch her song Skyfall in James Bond’s movie with the eponymous name in 2012. The song quickly went to the top of the Billboard Hot 100 and it became the first Bond theme to win at the Golden Globes, the Brit Awards and the Academy Awards. It also won the Grammy Award for best song written for visual media.
For bands such as the Rolling Stones, the Beatles and Led Zeppelin, master use licenses of one of their sound recordings into an audio-visual project can reach up to GBP1mn per deal.
Labels are therefore strongly incentivised to have tight links with music supervisors, ad agencies and even music aggregators such as the Orchard, in order to multiply opportunities to place their sound recordings in attractive and cash-rich audio-visual projects.
Labels also need to be reactive and efficient when dealing with sync and master use licensing requests, because brands often contact them at the eleventh hour, sometimes just one or two weeks before the advertising campaign is launched, to negotiate music rights.
4.2. The pros and cons of sound-a-like litigation in the synch context
The other side of the coin of the sync business is that many producers of audio-visual projects do not bother to ask for, and negotiate, a sync and master use license with right owners. In this internet-era, and with a proliferation of user-generated TV channels on platforms such as YouTube, right owners are faced with an ever-increasing number of unlicensed uses of commercial music by brands and individuals.
Often, the artist and record label discover unlicensed commercials via fans who may stumble across them and share via their social networks or even tweet the artist directly. These uses can be incredibly damaging for an act, in particular those who choose not to have their music used in association with brands.
It is not uncommon for a brand or advertising agency based in a country where there is very little IP protection simply to use a sound recording in their advert without asking. Even in the US or the UK it sometimes happens, mainly due to a mistake or simply a misunderstanding of music copyright and sync rights in particular.
Also, there is an increasing use of “sound-a-like” songs in advertising. This is when a brand records a piece of music with the intention of making it sound very similar to an existing – and often famous – song. Ad agencies and brands may think that they will be able to bypass asking for a license to the record label and other right owners of the copied song that way, but recent litigation has proved them wrong. In 2007, for example, Tom Waits objected to the use of a sound-a-like of one of his songs in an advertisement feature Opel cars and successfully settled the claim.
For a record label, non-authorised use of one of its sound recordings or use of a sound-a-like to one of its sound recordings by a brand or ad agency can be a great opportunity to monetise its rights. While this scenario is not for the faint-of-heart though, since it may involve litigation, it is well worth initiating a frank and constructive dialogue with the infringer, in order to assess whether any license – and licensing royalty – may be agreed upon. Since any license would be granted post use of the copyrighted sound recording, labels usually ask for a higher licensing fee, as a penalty for not proactively seeking a licensed use in the first place.
Sometimes these issues cannot be settled out of court, resulting in full-blown litigation which may very well hurt the reputation of the infringing brand, defeating the whole purpose of setting up a marketing campaign in the first place, which is – ultimately – to make more consumers like your brand and its products. Labels and recording artists are in strong positions, here, because if they have valid evidence to demonstrate the copyright infringement of their sound recordings, they can obtain sizable damages allocated by IP-friendly judges, in court judgments, in particular in jurisdictions such as France, the US and the UK.
To conclude, it is obvious that labels must reinvent their business models if they are to thrive, in the new paradigm of the music business. While the three majors seem to have the upper hand, at this game of reinvention and first mover’s advantage in tech and streaming services, independent labels can play their cards well by leveraging their existing know-how in proposing innovating label services, monetising their back catalogues through sync and streaming, exploring uncharted EDM waters and maximizing royalties from sound recording public performance by striking advantageous deals with DSPs and collecting societies alike.
 Independent labels trounce UMG, Sony and Warner in US market share, MusicBusinessWorldwide, 29 July 2015.
 Downloaded, 2013 documentary by Alex Winter about Napster and the downloading generation and the impact of filesharing on the internet.
 Copyright, Designs and Patents Act 1988, s. 13A.
 Article L211-4 French intellectual property code
 Rita Ora demands freedom from Roc Nation, citing Jay Z’s new pursuits, Billboard, 17 December 2015.
 Macklemore & Ryan Lewis crash radio with “Thrift shop”, Steven Horowitz, Billboard, 8 January 2013.
 Neighbouring rights in the digital era: how the music industry can cash in, A. Gauberti, July 2015
 What is a music stream? Artists and labels in battle over digital income, The Guardian, Helienne Lindvall, 12 March 2014
 Universal settles influential Eminem digital-revenue lawsuit, Spin, Marc Hogan, 31 October 2012.
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 Sync masterclass, MIDEM 2015, Bernard Resnick, Tom Foster, Annabelle Gauberti: http://crefovi.com/articles/law-of-luxury-goods/london-music-law-firm-crefovi-to-speak-at-midem-2015-book-your-place-now/
Tel: +44 20 3318 9603
ialci and Tranoï become official partners for 2016 trade shows worldwide | London fashion and luxury law firm CrefoviCrefovi : 23/01/2016 8:00 am : Banking & finance, Capital markets, Consumer goods & retail, Copyright litigation, Emerging companies, Employment, compensation & benefits, Events, Fashion law, Fashion lawyers, Gaming, Hospitality, Hostile takeovers, Information technology - hardware, software & services, Intellectual property & IP litigation, Internet & digital media, Law of luxury goods, Litigation & dispute resolution, Media coverage, Mergers & acquisitions, News, Outsourcing, Private equity & private equity finance, Product liability, Real estate, Restructuring, Tax, Technology transactions, Trademark litigation, Unsolicited bids
ialci, the international association of lawyers for creative industries, and Tranoï, fashion and luxury trade shows’ organiser and platform, partner up on all trade shows for 2016 worldwide
ialci, the international association of lawyers for creative industries, was founded by Crefovi’s founding partner, Annabelle Gauberti, in 2013. Today, ialci is a dynamic association, which members are currently drafting a book on the law of luxury goods and fashion (to be released in 2016) and which organises several high-profile seminars from the law of luxury goods and fashion series. ialci’s president, Annabelle Gauberti, struck a partnership with fashion and luxury goods platform and trade shows’ organiser, Tranoï. Tranoï is a series of international fashion trade shows as well as an artistic platform with a stern selection of more than 1000 premium designers from all over the world, created for them to meet the most influential fashion ambassadors. As set out on its website, Tranoï is more than trade shows. “It also includes artistic installations, designers exhibitions, catwalk shows, fashion parties and all sorts of events which arouse the dreams and desires inherent to fashion“. It was founded by the Hadida family, renowned for establishing multi-labels concept stores L’Eclaireur. L’Eclaireur founder, Mr Armand Hadida, is its creative director while his son, Mr David Hadida, is its general director. The objectives of Tranoï are to:
- Facilitate connections between fashion businesses and the right professionals to support them with their challenges;
- Present highly curated fashion products, sold by the exhibitors, to the most high-profile and sought after multi-label stores, department stores, online stores in the world;
- Showcase the French and international innovations that serve the fashion industry.
ialci’s lawyers will attend all trade shows in 2016, worldwide, in order to provide free legal advice, short one-to-one introductory meetings as well as workshops on hot topics pertaining to the law of luxury goods and fashion, to all Tranoï’s exhibitors and visitors. With more than 80% of exhibitors at Tranoï New York and Paris coming from Europe, and most visitors to New York and Paris trade shows coming from the US, Japan, Italy, France, Germany and the UK, Tranoï’s clients will benefit from responsive, international and expert legal advice and services provided by several member lawyers of ialci, qualified under English law, French law, New York law, Brazilian law, Belgium law, Italian law and German law. Already, in September 2015, the lawyers from ialci, including Crefovi’s founding partner Annabelle Gauberti, had a booth at New York trade show at the Tunnel in Chelsea. During that September trade show, ialci lawyers were delighted to have their booth visited by numerous exhibitors and visitors, who asked them many legal questions relating to fashion law and their business affairs and/or were simply curious to know more about ialci. Exhibitors and visitors also attended with great curiosity and interest ialci’s workshops held at Tranoï New York Show, on 19 and 20 September. These 40 minutes’ seminars focused on which types of intellectual property rights are worth protecting for a luxury and fashion brand, as well as tips to negotiate well an agency or distribution agreement in the fashion sector. The presence of ialci on the trade show in New York, in September 2015, was duly noticed and even got press coverage! Now that an official partnership has been signed between ialci and Tranoï, ialci will attend and participate to all trade shows worldwide in 2016, as follows:
- Tranoï Homme and Preview, from 23 to 25 January 2016, at Cité de la Mode et du Design and Palais de la Bourse in Paris ;
- Tranoï New York, from 21 to 23 February 2016, at the Tunnel, Chelsea, in New York City;
- Tranoï Femme, from 4 to 7 March 2016, at Cité de la Mode et du Design, Palais de la Bourse and Carrousel du Louvre in Paris.
In order to organise an appointment with ialci’s lawyers, please fill out and send us an online contact form. Crefovi and ialci will revert back to you in due course, with some suggested appointment times, in order to meet up during the trade shows, and with some questions and points about your legal enquiries in order to address them adequately during those appointments. In addition to being present at ialci’s booth during the whole duration of each trade show, for free advice and consultations to Tranoï’s exhibitors and visitors, ialci’s lawyers will also organise various workshops on legal topics of particular interest to the exhibitors and visitors of Tranoï’s trade shows, on intellectual property, fashion finance, agency and distribution agreements, lawful use of social media, etc. Annabelle Gauberti, founding partner of London fashion and luxury law firm Crefovi, will coordinate ialci’s and her law firm’s presence at Tranoï. She will be present on ialci’s booth at all times. Tranoï’s goal is to welcome more than 4,000 visitors over three days at its multiple sites in Paris, and more than 1,000 visitors over three days at the Tunnel, Chelsea, in New York. One of the USPs of Tranoï events is the focus on creating a real dialogue between attendees and speakers, so if you happen to attend some panel discussions or workshops Annabelle is participating in, or if you see ialci’s booths on Tranoï Paris and New York, please don’t hesitate to ask her a question! You can also catch her afterwards if you have anything specific you would like to discuss. See you there!
Highlight trailer of ialci and Tranoi partnership during Paris and New York fashion weeks, in January, February and March 2016
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