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UNVEILING THE VEIL: NAVIGATING THE INTRICACIES OF COPYRIGHT ROYALTY FOR UNDERLYING ARTISTS

Updated: Aug 28, 2023

BY: ISHETA T BATRA


INTRODUCTION

Among other advantages of owning a Copyright to any literary, dramatic, artistic or musical work is the benefit of receiving a regular monetary value for every authorized use of that copyrighted work. This is known as ‘Royalty’. In addition to the bundle of rights conferred upon a Copyright owner under Section 14 of the Copyright Act, 1957, there exists a right of the owner to receive certain on-going payments in lieu of the license granted in respect of a copyrighted work, such as a film or piece of music, for public display or for use in another work. Thus, royalties are the agreed percentage of the sales, or profits paid by the licensee to the licensor, in exchange of continuous use of the licensed work.


But, why pay such regular fee in addition to the upfront licensing charges? Licensing a copyrighted work is merely a method of economic exploitation adopted by the rightful owners of the copyright. This clearly indicates the existence of a commercial intent and ‘royalties’ form a ‘profit point’ of this commercial venture. They not only act as a source of regular income but also cover the recurring cost of providing support services to the licensees. [1] Royalty fee is often used for offsetting the administrative cost incurred in building a license network in first place. Additionally, from advertisements and promotions, to sale of new products and services, etc., every activity undertaken by the licensor that helps make a licensee’s business profitable is covered through the royalty payments. [2] In short, apart from regular remuneration, royalties act as re-investments into the copyright owner’s venture aimed at expanding its franchise business and multiplying its profit prospects.


ROYALTIES UNDER THE COPYRIGHT LAW

In India, the Copyright landscape is governed by the Copyright Act, 1957. Section 18(1) of the 1957 Act, deals with the assignment of copyright. It states that a copyrighted work can be assigned to anyone -

a) by the owner of an existing work or a prospective owner of a future work;

b) either in whole or in part;

c) with or without limitations, either for the whole term of copyright or part thereof.


However, in case of a future work, the assignment would have effect only when the work comes into existence. Section 18 (1) underwent an amendment in the year 2012, leading to the inclusion of two proviso(s). The newly added provisos apply to two classes of authors -

a) author of the literary or musical work included in a cinematograph film ; and

b) author of the literary or musical work included in the sound recording but not forming part of any cinematograph film.


These provisos state that the assignment, or the waiver of right by an author, to receive royalties for any utilization of the above mentioned work, shall not be permitted and any agreement to the contrary would be void, except-

1) in case (a), where utilization is done for communication to the public of the work along with the cinematograph film in a cinema hall,

2) in cases (a) and (b), where the assignment is made in respect of the legal heirs of the authors or to a copyright society for collection and distribution.


This provision is further supplemented by Section 19 that deals with the mode of assignment. Among other things, clause (3) of Section 18 mandates that the assignment of copyright in any work-

i) must also specify the amount of royalty and any other consideration payable, to the author or his legal heirs during the currency of the assignment and,

ii) that the assignment be subject to revision, extension or termination on terms mutually agreed upon by the parties.


Furthermore, the 2012 amendment to the Copyright Act also added Section 38 to the Statute which now recognizes what is known as the Performer’s rights. The Act defines ‘performers’ under Section 2(qq) to include singers, musicians and actors, etc. basically, anyone who makes a performance. Additionally, Section 38 A lists down the exclusive rights of such performers. Apart from having the right to record the performance (audio/visual); reproduce and store in it any material form; issue copies of it; broadcast or communicate the performance to public, sell or give it on commercial rent, the performers are entitled to receive royalties in making the performances for commercial use.


Thus, after the amendment of 2012, the Copyright Act 1957 has entitled the authors of literary and musical work along with the performers of the work to receive certain payments in the form of royalties in exchange of the commercial use of their work.


ISSUES VERSUS EXISTENT REALITY

Although, the Copyright Act, 1957 entitles various participants to the payment of royalty and Section 19 mandates the incorporation of royalty payments within the gamut of assignment of the copyrighted work but they leave certain practical issues unaddressed. In fact, none of the provisions in the Copyright Act, 1957 deal with the actual calculation of Royalties, nor do they lay down any parameters for making such assessment. Furthermore, how and by whom such payments are to be made still remains a grey area.


Consider a practical scenario- if someone is a singer/songwriter with music on a streaming app. The app will pay a variety of royalties for each play, but there will almost certainly be a record label, publisher, distributor, and collective management organization and a number of other entities between the artist and the broadcaster before the payment reaches them. To make matters even more complicated, there are numerous layers of negotiations and calculations between all of these individuals that determine exactly what they get.


Today, these issues have spawned a debate among various stakeholders especially, in the music industry regarding the calculation of royalties and its payment thereof to underlying artists associated with a specific / a set of musical compositions which is subject to copyright.


PAYMENT TO UNDERLYING AUTHORS OF LITERARY OR MUSICAL WORK IN SOUND RECORDING

Creation of music is a long drawn process involving the participation of songwriters (lyricists), music composers, singers, publishing labels, etc. While the 2012 amendment to the Copyright Act finally gives these underlying actors their due share by recognizing their right to receive continuous payments for the commercial use of their work, the actor who would initiate such payment and make such distribution is unclear.


For the ease of issuing licenses and distribution of related fee (license fee, royalty, etc.), Section 33 of the Copyright Act, 1957 enables the setting up of a Copyright Society in any area of artistic, literary, musical and dramatic work. Administering under the collective control of the [author and the other owners of rights] [3] under the Act, upon receiving the exclusive authorization of such authors and right holders to administer any right in any work [4], such registered Copyright Societies can -

(i) issue licenses under section 30 in respect of any rights under the Copyright Act;

(ii) collect fees in pursuance of such licences;

(iii) distribute such fees among [author and other owners of right] after making deductions for its own expenses;

(iv) perform any other functions consistent with the provisions of section 35. [5]


While this provision facilitates the allocation of license, collection of fee and its distribution thereof, what must be noticed is that it operates only with respect to the authors who give their consent to administer any of their rights. The question- What would happen in the case of authors who don’t authorize their rights? - remains open ended. How would collection and distribution then be made? Furthermore, neither the establishment of these societies, nor their drafted tariff and distribution schemes state clearly as to who would be liable to make the royalty payments- the licensor (individual copyright owner/ music label/ music company) in case they grant licenses directly; or the licensee (say, broadcaster)? Furthermore, in the case of International Confederation of Societies of Authors and Composers (CISAC) v. Aditya Pandey and ors. [6], the Supreme Court while answering an ancillary question re- affirmed the Delhi High Court’s judgment that a third party, such as an event organizers/management, playing a song in a public event, is required to pay royalty only to the music recording company and not to the lyricists and music composers of the particular song. [7]


So, how would the royalties end up in the artist’s pocket?

In such circumstances, the issue of collection and distribution of royalties to underlying workers become the creature of mutual agreement and operate only through the mode of express contracts. It is through the modalities of the contract that the two parties- licensor and lincensee agree as to who would pay up the continuous charges for economic use of the work.


Should the music label acquire the payments and then deal with the further distribution of royalties (sometimes by the way of Copyright Societies); or should the Broadcasters like – streaming apps, radio stations, restaurants etc., deal with the distribution directly?- all such questions are then left at the mercy of mutual understanding.

However, in case where the obligation to make the royalty payment falls on either of the above mentioned actors, certain points have to be kept in mind which are elucidated below.


ACTOR

STEPS TO BE COMPLIED

SOLUTION

BROADCASTER PAYS

​Has to trace the underlying artists- composer, lyricist, singer, etc. and enter into a series of contracts with each one of them; identify the share of each in the royalty to be paid; , agree upon a mode of payment and the dates on which such continuous payments would be rendered, etc.

​Enter into a single contract with the Music Company/ Label from whom such license of use has been procured and pay the royalty amount so negotiated, directly to the Company. Let the Music Company and the underlying actors mutually agree upon the shares and other aspects of royalty payment and execute separate agreements for it. In case the right to receive royalty has been assigned to the Copyright Society, enter into a similar contract, as mentioned above, with the society and leave the modalities of payments to them, including the decision of share/percentage.

MUSIC COMPANY PAYS

The music label being aware of the authors, right holders and contributors to a piece of musical composition can easily trace them.

The issue that remains is - entering into lengthy and sometimes recurring agreements for the payment of royalties with each contributor simultaneously, deciding upon various modalities, like the percentage of share.

To top things off, these agreements are in addition to the contracts entered into for thedistribution of one time upfront fee (license fee), or the hiring cost paid by the Music Company.

The Music Company, at the time of granting license also enter into a composite agreement with all the stakeholders (entitled for royalty) involved in the musical composition(s) and decide as to what percentage of the royalty would be allocated to them , (whether continuous or lump sum) and when, how and under what circumstances would the promise be executed, and they themselves make the pay-out.


OR,


Assign the right to receive/ distribute royalties on behalf of underlying actors to the Copyright Society, simultaneously quote separate or higher price of royalty from the broadcasters and then either allocate the agreed amount of fund to the Society, or ask the broadcaster to allocate the said fund as a term of the licensing agreement.

PARAMETERS OF CALCULATING ROYALTY PAYMENT

As is evident, the entire legislation on copyright is bereft of any mentions of the calculation of copyright royalties making it subject to negotiations. Before delving into some of the commonly adopted practices for calculating the royalty, it is important to understand that what we are dealing with is not a single transaction but layers of it. Not to complicate things at the outset, if broadly put, at the primary level the royalty transaction works in two steps –


a) the royalty amount that is paid up to the Music label / licensor, by the licensee’s institution,

b) percentage of shares from this royalty payment that each of the underlying right holders would get.


Adding to the complexity of carrying out a web of numerous transactions between the licensee and the underlying author/artist/right holder, is the compulsion of paying out the same type of royalty in different forms, depending on the context of use. [8] For example, royalties for broadcast are paid out both by radio and mobile based streaming applications but the processes are different. Furthermore, the rates of payout vary greatly depending upon the jurisdiction of the licensor and licensee.


In India, for example, most of the negotiations regarding royalty payments, whether between the licensee and the licensor, or licensor and the underlying artists- are contractual. However, in certain cases like - statutory licensing for broadcasting of literary and musical works and sound recording [9], for production and publication of translation [10], and reproduction and publication of works for certain purposes [11], etc. the royalty rates payable by the applicant to the owner of copyright may be decided by the Appellate Board. Furthermore, artists who are part of the Copyright Societies like – The Indian Performing Rights Society Ltd., Indian Singers’ Rights Associations, etc. the rates at which royalties are to be collected and distributed is decide by the Tariff Scheme and Distribution scheme, respectively, as tabulated by the Societies. These rates may be based on the percentage of utilization of the ‘performance’/work, or hourly utilization of the ‘performance’/work, or percentage contribution of the song to the total revenue of the broadcaster/ licensee, etc.


For instance, in the USA for streaming services like Apple, Spotify etc. the royalty is calculated as hereunder- [12]

i. Content owners negotiate global payout rates with digital streaming platforms (this rate for the Music Recording Company is typically around 50% of the platform’s revenue).

ii. All artists whose music is available on the platforms share the revenue pool.

iii. The ‘share of content,’ or the amount of streams a certain artist has on the platform divided by all streams on the site, determines the split.

This mechanism varies greatly with the kind of royalty to be paid which ultimately depends on the context for which the license of the copyrighted work has been procured.

In short, there is no hard and fast rule or methodology of calculation that can be applied to the calculation of royalties. It will differ according to the usage of the copyrighted work, the platform on which it is being used, the time period of its usage, the contribution it makes to the gross revenue of the user and sometimes also upon the associated laws in various jurisdictions.


CONCLUSION

The recognition of Copyright royalties as a legal right, especially in context of musical compositions comes as a sigh of relief to the underlying (small scale) artists who are often sidelined. Today, the songwriters/ composers, singers, recording companies, etc. are being given their due credit for their contribution and rewarded accordingly.


However, the law relating to the underlying artists’ right to receive continuous remuneration in the form of royalty is not without its share of challenges and ambiguities. Foremost, is the problem related to the parameters of calculating royalty which today is either decided by the Copyright Societies, or by the parties themselves. There is no legal stipulation guiding the process. Next is the problem relating to distribution of the funds so collected, as there is no express law dealing with how and who should make such distributions. Although for some of the member artists, the distribution process is being handed by the Copyright Societies, but the debate around who should allocate these funds to these societies, or to the underlying artists directly remains active. Neither of the licensor (copyright owner),nor the licensee (broadcaster) seems forthcoming.


So long as there is no specific law around the matter, ambiguities will continue to prevail. However, it is the opinion of the author that matters like these are best left to the mutual agreement between the parties. This would give them the freedom to decide upon the methodologies of royalty calculation, the rates, the payment obligations, etc. taking into account a number of factors, especially the market forces, the rapidly changing trend, consumer choices etc. Not being limited by legislative thresholds, the parties stand a chance to negotiate an agreement that tilts in their favour and fetches them returns which the legislative stipulations might not. This would also save the legislative resources required to draft a lengthy, complex and strict determination mechanism for each and every form of broadcast or usage of copyrighted work, relentlessly trying to gauge the rapidly changing market, and yet be not to the satisfaction of its target population.


(Assisted by legal intern at TBA Ms. Asmita Srivastava)


REFERENCES

  1. https://www.forbes.com/sites/fionasimpson1/2018/10/08/franchise-royalty-fees-percentage-versus-fixed/?sh=394114811a93

  2. https://www.pointfranchise.co.uk/articles/franchise-costs-royalty-fee-1521/

  3. https://www.forbes.com/sites/fionasimpson1/2018/10/08/franchise-royalty-fees-percentage-versus-fixed/?sh=394114811a93

  4. https://www.pointfranchise.co.uk/articles/franchise-costs-royalty-fee-1521/

  5. Section 35 of the Copyright Act 1957.

  6. Section 34(1)(a) of the Copyright Act 1957.

  7. Section 34(3) of the Copyright Act 1957.

  8. CIVIL APPEAL Nos.9412-9413 OF 2016.

  9. https://selvams.com/blog/supreme-court-re-affirms-no-royalty-lyricist-music-composers/.

  10. https://soundcharts.com/blog/music-royalties

  11. Section 31D of the copyright Act, 1957.

  12. Section 32 of the copyright Act, 1957.

  13. Section 32 A of the copyright Act, 1957.

  14. https://soundcharts.com/blog/music-royalties

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