The 7 Year Statute and Protracted Exclusive Contracts

What is the 7 year rule?

Under California Labor Code section 2855, a company cannot bind someone to a personal services agreement for longer than 7 calendar years, unless that person happens to be

a recording artist

This law states that if a recording artist ends their record deal after 7 years and still owes the label a specific number of undelivered albums, the label has the right to sue within 45 days to recover damages to any undelivered albums. The language of the statute is vague as to what “damages” mean: actual and/or lost profits. Record labels have claimed damages include lost potential profits of the undelivered albums, which could be in the tens of millions of dollars for some.

This is would be true even if the label is responsible for any delay in producing another album. The label could even collect damages for undelivered albums that it did not contractually commit to producing. See Explaining Options.

Why don’t recording artists get the benefit of the 7 year rule?

In 1987, the major record labels got together and hired lobbyists to go up to Sacramento to exclude recording artists from the protections of the long-standing 7 year rule.

• The labels argue that the music industry is unique from all other industries because recording artists are agreeing to produce a specific number of delivered albums. This requirement stands even if it takes the artist 20 years and they are stuck with terms they agreed to when they were 19 years-old.

• The labels argue that they cannot profit off of an artist until after a few albums, even though a label will not exercise an option for a 2nd album if the initial album is not profitable.

• The labels assert that they invest in artists and by cutting a contract off prematurely, the label loses the full value they feel entitled to. Even though the label gets to own the published and unpublished masters and to profit from the exploitation of the existing work. This rent collecting is not enough, apparently.

In other words, the record labels treat recording artists as products, not creative human beings. These corporations go so far as to argue to lawmakers that freeing artists from this situation ought to constitute an unconstitutional taking of private property under the 5th Amendment. They are saying the quiet part out loud.

There can be big money in music, but too often the recording artist is cut out from the profits.

The music market is dominated by three major labels. These corporations are conservatively valued at over $100B and control 68% of the global music market.

Streaming has transformed the industry and labels have been the main beneficiaries. In 2020, U.S. streaming revenue grew 13.4% to $10.1 billion. The labels enjoy substantial revenue growth with reduced expenses now that physical product sales (CDs and vinyl) only make up 9% of revenue.

These contracts skew heavily in the favor of the record labels. Unlike customary deals where the costs are recovered “off the top” from gross revenues, these contracts require that the artist actually pays back the vast majority of the monies from the artist’s small share of royalties, leaving the artist with a negative balance while the label reaps all the profits. The contracts also mandate that the label gets to continuously unilaterally extend the term of the agreement and retains ownership of the copyright in the artist’s music.

How is a record deal different from a standard sales or commissioned work agreement?

Record deals are not as simple as a recording artist promising to deliver a certain number of finished products. These are exclusive, long-term all-consuming commitments. Unlike a chair manufacturer who can go sell chairs to multiple customers, a recording artist is agreeing to deliver songs for only one company for what may end up being the entire length of their music career.

There is also no guarantee the label will pay for these albums. The label also controls the album release date and the options period, which can delay album production considerably. See Explaining Options

While the label makes no real commitments to the artist, the artist commits that the label owns every recording they make during the term. This means that while under contract:

• The label can stop an artist from doing other creative projects that the fans love, including performing in a film, collaborating on a song with another artist, or performing at a festival that is recorded.

• More often, emerging artists are signed to a 360 agreement wherein the label is entitled to money from the publishing, touring, brand opportunities, and merchandise sales.

The record labels can get out of record deals. It’s called built-in options.

The label is actually not committing to a certain number of albums. The label only commits to the initial album (and they can get out of that, too!) and then a series of options where the label alone can decide whether to end the deal. Options are irrevocable for the artist. See Explaining Options

The record deals are one-sided.

Record deals are not a partnership. The label holds all the cards, can be lackluster in releasing and promoting the album, can end the deal after each new product, will make most/all of the money, and it can sell the copyrights to the sound recordings without permission. Throughout the life of the record deal, the label may hire entirely new executives or staff and the company itself may be sold to a new entity.

The artist, however, cannot walk away.