Apple’s Key to Success—Taking a Third of the Pie From Its Developers?

By: Eric Le

App stores have become a robust place of commerce. In 2021, consumers spent $133 billion dollars on in-app purchases. Apple and Google launched the iOS App Store and the Google Play Store in 2008, respectively. Since then, many coding wizards have become millionaires before they hit the legal drinking age.

Samantha John is a classic example of an entrepreneur who created a successful career through app development. In 2012, she launched HopScotch, an educational app that teaches children to develop games, stories, and art. Initially, John did not monetize the app in order to build a customer base. The strategy worked. Hopscotch gained 20,000 downloads within the first week. In 2015, John monetized the app by introducing a subscription for $7.99 per month, or $79.99 per year.

The subscription model turned an app into an investable business. And it wasn’t just any investable business; it was a business that drew Shark Tank’s Mark Cuban in as an investor. Cuban and John agreed on a deal of $550,000 for 11% equity, putting the valuation of the company at $5,000,000.

App developers who want to list their app on the iOS App Store must sign a Developer Product Licensing Agreement (“DPLA”) with Apple. Pursuant to the DPLA, app developers (1) must pay a commission on in-app purchases; (2) are prohibited from putting a store within the App Store; (3) are prohibited from sideloading apps onto iOS devices; and (4) are required to use Apple’s commerce technology for any payments.

Apple takes a 30% commission fee out of every transaction made through the App Store. There are over 30 million registered iOS developers, all of whom, with very few exceptions, must agree to the contractual terms. Consequently, the 30% commission fee that Apple takes from its developers can quickly add up. In 2020, Apple collected an enormous $64 billion dollars from its 30% commission fee.

Small developers benefit from the DPLA and working with Apple, too. They enjoy the developer tools provided by Apple, such as promotional support and a massive customer base of iOS users. These perks draw smaller developers to Apple and Apple’s in-app purchasing system, but not the bigger players like Google or Facebook.

In 2020, Epic Games, a multi-million-dollar game developer took Apple to court to challenge, among other things, Apple’s 30% mandatory commission fee. Epic largely lost at the District Court level because the court rejected most of its antitrust claims, including technological tying or willful maintenance of monopoly. Epic and Apple are appealing different parts of the decision to the Ninth Circuit Court of Appeals and arguments are scheduled for Oct. 21. (see below)

Epic’s one victory came in the form of an injunction against the anti-steering provision within the DPLA. The provision read, in pertinent part, “Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase.” Simply put, the court held that Apple’s anti-steering provision that prohibited developers from directing customers to a website to make payments or completing the transaction outside of the in-app purchasing system, was anticompetitive.

This major win for Epic will also affect smaller developers, as it applies to all iOS app developers. 30% of revenue for a small business trying to get off the ground is a large chunk. Take, for example, HopScotch. If the app gained 20,000 downloads in one week and converted a quarter of downloads into subscribers. Let’s say the subscribers pay $7.99 per month. That would compute to a gross revenue of $31,960 (4,000 x $7.99) per month. Of that $31,960 monthly revenue, Apple would take 30%—roughly $10,000 every month. For a small business, $10,000 is a significant sum. Epic’s victory here should be a huge boon to all entrepreneurial app developers on the iOS App Store.

Smaller app developers certainly have a stake in the fight between the two tech giants. These developers banded together and created the Coalition for App Fairness (CAF). The group celebrated the injunction for lifting Apple’s “stranglehold on the app market as a whole.” In its amicus brief, CAF gave the example of an app called Knitrino, “a Washington state-based company that hosts online interactive knitting communities.” Developers of Knitrino “had to scratch its plans to offer both digital and physical goods through its app after being told by Apple that digital goods had to be purchased through Apple’s own payment systems while physical goods could only be bought through an external system.”

Apple, in response, cited security concerns and asked the Ninth Circuit to stay the injunction. The app store operator asserted that external payment systems “do not necessarily include the anti-fraud, parental control and other protections provided by Apple’s in-app system.” In a last-minute decision, the Ninth Circuit stayed the injunction pending the outcome of the Court of Appeals ruling. At least for now, Apple can delay “making major changes to the App Store to allow developers to include links or advertisements directing users to outside websites where they can make purchases.” But the issue will certainly be litigated extensively before the Ninth Circuit.

As of September 2022, the U.S. Department of Justice and the state of California have joined the fray. Both the DOJ and California received approval from the Ninth Circuit to participate in oral argument. The DOJ plans to use the opportunity to “address the proper legal framework governing [antitrust] claims under . . . the Sherman Act.” California plans to address the District Court’s application of California’s Unfair Competition Law (“UCL”). Neither the DOJ nor California will be advocating for Epic or Apple.

The stakes are high. Oral argument is scheduled for October 21, 2022. App developers, big or small, will have to wait with bated breath to find out if the world’s most valuable company will, pun intended, continue to get a bite of the apples.

This post has been reproduced and updated with the author’s permission. It was originally authored on February 10, 2022 and can be found here.


Minh “Eric” Le, at the time of this post, is a third-year law student at Penn State Dickinson Law. He has interned for the Federal Public Defenders, and the Pennsylvania Office of the Attorney General, in the Financial Enforcement Section. Eric also worked as a Summer Associate with Buchanan Ingersoll & Rooney. Eric is a first-generation college and law student. He was born in Vietnam and raised in Ho Chi Minh City, before moving to Brooklyn, New York, in 2002. Eric enjoys playing competitive badminton, skiing, traveling, and ice skating.

 

Sources:

Taylor Locke, ‘Shark Tank’: Mark Cuban ‘Looks Up To’ the Founder of Hopscotch–So He Invested $550,000 in Her App That Teaches Kids to Code, CNBC (Mar. 1, 2021, 10:44 AM), https://www.cnbc.com/2021/03/01/shark-tank-why-mark-cuban-did-6-figure-deal-with-hopscotch-app.html.

Shadab Rabbani, Users Spend $133 Billion on Apps as Apple’s App Store Continues to Lead Revenue Shares, BUSINESS INSIDER (Dec. 8, 2021, 10:33 AM), https://www.businessinsider.in/tech/apps/news/users-spend-133-billion-on-apps-as-apples-app-store-continues-to-lead-revenue-shares/articleshow/88157952.cms.

Sarah Perez, App Stores to See Record Consumer Spend of $133 Billion in 2021, 143.6 Billion New App Installs, TECHCRUNCH, (Dec. 7, 2021, 2:48 PM), https://tcrn.ch/3B1U3tD.

Bryan Koenig, App Makers Backing Epic ‘Controlled By Epic,’ Apple Says, LAW360 (Dec. 1, 2021, 8:19 PM), https://www.law360.com/articles/1444721.

Matthew Perlman, Apple Asks 9th Circ. To Pause Epic App Store Order, LAW360 (Nov. 17, 2021, 6:44 PM), https://www.law360.com/articles/1441407/apple-asks-9th-circ-to-pause-epic-app-store-order.

Hailey Konnath, Apple Gets Epic App Store Order Paused Pending Appeal, LAW360 (Dec. 8, 2021, 10:46 PM), https://www.law360.com/articles/1447084/apple-gets-epic-app-store-order-paused-pending-appeal.

Hailey Konnath, DOJ, Calif. Get OK to Join Arguments in Apple, Epic Appeals, LAW360 (Sept. 16, 2022, 9:37 PM), https://www.law360.com/articles/1531427/doj-calif-get-ok-to-join-arguments-in-apple-epic-appeals.

 

Signatories – Who do you trust?

By: Ashli Lyric Jones

Starting a business can be challenging. If you’ve ever thought about creating your own business, there are three crucial things you should always keep in mind to help provide the foundation for your business. First, you will need to establish a business plan. Next, you will need to determine a target audience. Last, you will need to assess your finances to determine profitability. Assessing your finances can help you determine whether or not you need to borrow or raise capital. When accessing your finances, it is important to create separate bank accounts that clearly separate your personal income and your business income.

Creating a business bank account can limit an entrepreneur’s personal liability because it keeps the entrepreneur’s business and personal finances separate. Having separate accounts can help provide the protection of your legal entity, make your accounting easier, and provide more services. When establishing separate bank accounts, it is important to designate authorized signatories. In this article, we will specifically discuss the importance of having signatories for your business bank accounts.

What is an Authorized Signatory?

An authorized signatory is a person who has been given the legal right to sign documents on behalf of the authorizing organization. They do not need to get permission before signing off on a legally binding document or contract, as the employer has already entrusted them with that. They’re expected to make smart decisions based on the company’s behalf that will serve to benefit the company and its employees in the future. Within a company, a signatory may take on many roles. These roles include:

      • Signing and delivering official documents and agreements with third parties and serving as a company’s agent
      • Signing/authorizing goods/product orders
      • Signing/authorizing permits, passes, or timesheets
      • Giving any notices
      • Executing any specific undertakings and approvals

Authorized Signatory for Bank Accounts

When establishing a business bank account, it is important to designate individuals that you trust to manage your account. These individuals will also be known as “authorized signatories.” Authorized signatories are able to do basic functions such as signing checks on the company’s behalf, making deposits, or even doing basic online banking.

Authorized signatories typically have the same amount of access to the bank account as the account holder, which is why it is crucial to only choose individuals that you trust as authorized signatories for your business bank accounts. The most common types of permissions that are held by authorized signatories are:

      • The ability to close the account
      • The ability to sign checks
      • Access to transaction history
      • Access to the account balance
      • The ability to cancel payments on checks

Authorized Signatories for LLC(s) and Corporations

A Corporation or LLC is an entirely separate entity from the actual business owner, and the entity itself is the owner of the business bank account. Signature authority can be given by an LLC to one or more individuals for all legal and financial documents, or rights can be approved for only certain accounts or transactions. It is important to be careful who you are choosing as your authorized signatory because banks are not required to verify the underlying purpose of a given transaction. As long as the authorized signer is “on the record” as being authorized, they can complete the transaction.

When choosing your authorized signatory, be clear about what type of access you want authorized signatories to have. If you have more than one signatory, you can require them to access your accounts together.

Adding an Authorized Signatory to Your Bank Account

A bank mandate is a document that lets a bank know who is authorized to access an account. Adding a new authorized signatory can be fairly easy. Typically, only the business owner or an authorized signer can add an additional signatory to a company account. In order to add a signatory to the account, a business owner must:

      1. Call your bank to ask about their requirements for adding a signatory.
      2. Fill out the information the bank requires.
      3. Have all relevant parties sign the forms.

Authorized signatories do not need to get permission before signing off on a legally binding document or contract, as the employer has already entrusted them with that. They’re expected to make smart decisions based on the company’s behalf that will serve to benefit the company and its employees in the future.

The bank must always act in accordance with the mandate. If there are unauthorized transactions, a bank is responsible for any resulting loss. If it can be established that a transaction in breach of mandate benefited the account holder, then generally there is no loss. Sometimes, a bank will not be responsible for all of a loss if a customer has contributed in some way to the breach or failure to mitigate the loss.

Conclusion

When starting a business, it is important to separate your business accounts from your personal accounts to limit liability. When establishing separate bank accounts, it is important to designate authorized signatories. Authorized signatories are able to do basic functions such as signing checks on the company’s behalf, making deposits, or even doing basic online banking. You can determine how much authority the signatory has and include that in the bank mandate.

Be sure to always choose a highly trusted individual as your authorized signatory.

This post has been reproduced with the author’s permission. It was originally authored on March 29, 2021, and can be found here.


Ashli Jones, at the time of this post, is a recent graduate of Penn State Dickinson Law. She is from Long Island, New York, and is a graduate of Spelman College in Atlanta, Georgia. At Dickinson, Ashli earned a certificate in Entrepreneurship with an Intellectual Property and Technology concentration. She is interested in intellectual property within the entertainment law field. Ashli was the President of the Sports & Entertainment Law Society, Mentorship Chair for the Women’s Law Caucus, and Social Chair for the Black Law Students Association.

Sources:

https://www.telleroo.com/blog/what-is-a-bank-mandate-and-should-you-be-using-it#:~:text=A%20bank%20mandate%20is%20a,mandate%20are%20called%20account%20signatories.

https://bankomb.org.nz/guides-and-cases/quick-guides/bank-accounts/account-mandates/

https://www.upcounsel.com/authorized-signatory

https://thejacobslaw.com/do-you-know-your-bank-signatories/

https://www.seacoastbank.com/resource-center/business-insights/business-bank-account

https://www.thebalancesmb.com/why-separate-business-personal-banking-2951179

https://www.sba.gov/business-guide/10-steps-start-your-business

https://smallbusiness.chron.com/add-signatory-bank-account-39144.html

Photo Sources:

https://www.salesforce.com/ca/blog/2019/07/business-benefits-complementary-partnerships.html

https://www.consumerfinance.gov/about-us/blog/denied-bank-account-heres-what-you-should-know/

https://goremote.virtualpostmail.com/article/physical-address-to-open-business-bank-accounts

 

Setting the Tone for a Successful Landlord-Tenant Relationship

By: Tom Gish

As a landlord, it is important to know your legal rights and responsibilities so that you don’t get in a bad situation when an issue with a tenant arises. The beginning of the relationship is critical, because it sets the tone and lays the groundwork for how issues will be resolved when they do arise.

Screening tenants 

Choosing the right tenant is a big consideration for a landlord, because they want someone who will pay on time, take good care of the property, and follow the rules of the lease. However, there are some legal restrictions that landlords need to follow when screening tenants.

The Fair Housing Act creates protected classes for tenants, including race, color, religion, national origin, familial status, age, disability, and sex. A landlord can not advertise or make a statement that indicates a limitation on a protected class. This means that a landlord cannot set more restrictive standards for selecting tenants or refuse to rent to members of a certain group. According to the Fair Housing Act, a landlord also may not falsely deny that a rental unit is available.

Even though landlords need to stay away from discriminatory questions, they can still thoroughly screen tenants by asking the right questions. As a general rule, it is ok for landlords to ask questions that would objectively indicate the tenant’s ability to pay rent as long as it doesn’t include superficial information that wouldn’t be relevant to the tenancy. This means that a landlord should be asking about things like income, credit history, and criminal record in order to determine whether the applicant would be a good fit. Landlords can deny an application based on these criteria, but can’t withhold from the tenant the information that caused denial.  In addition, a landlord can check for nonverbal signals, like how the tenant maintains their vehicle, in order to get an idea of how they will take care of the property.

The lease

What goes into the lease is essential for a good landlord-tenant relationship because it creates the authority for how a landlord can control the tenant’s behavior and establishes the legal basis for eviction if it becomes necessary. Every situation will require unique provisions to be included in the lease, but there are a few components that every lease should have to protect the landlord legally:

  • Named parties on the lease.

This is important to include because it defines who the agreement has authority over. It also creates liability for each individual tenant to be responsible for the entire agreement if one of the tenants defaults.

  • Term of the tenancy.

This provision controls how much notice each party needs to provide before ending the relationship. This should be considered carefully by the landlord because it establishes how long the tenant has the right to stay.

  • Rent

The lease should clearly describe how much rent will be, when it is to be paid and how it should be paid. The terms need to be specifically described so that there is no room for debate if a dispute ever arises. The landlord also must be consistent when enforcing late rent policies so that the tenant doesn’t have the excuse that the landlord let it slide before. Being specific and consistent will help a default be clear and actionable if it needs to be resolved in court.

  • Repairs and Maintenance

The lease should clearly describe whose responsibility repairs and maintenance of the property will be. This creates the basis for the landlord to use the security deposit to cover costs if necessary. It also allows the owner to make sure that they know what’s going on inside their property. That way the landlord can be the one making decisions about who is doing what work, instead of the tenant making modifications to the property without permission.

Eviction

A landlord may terminate a tenant’s right to remain on the rental property, but only if the legal basis is appropriate. Just like screening tenants, the decision to terminate tenancy can’t be based on a discriminatory reason. The legal basis for eviction comes from a breach or default of the lease agreement. Before evicting a tenant, the landlord has to give proper notice and allow the tenant an opportunity to fix the default. If forcible removal is required, the landlord should follow these steps:

  • File a complaint or petition with the local court, which includes paying a filing fee.
  • The tenant must be served with the court documents.
  • If the tenant fails to file a written notice or answer, the landlord will prevail without a hearing.
  • In some jurisdictions, a tenant may request a jury trail to determine whether eviction is appropriate, or
  • The court will hold a hearing to determine whether the tenant should be evicted. The court will take into account any defenses that the tenant may raise.
  • The court may grant monetary awards for rent owed, attorneys’ fees and costs.
  • The court may grant a writ for possess of the premises in favor of the property owner.
  • Tenant has the opportunity to leave voluntarily.
  • Once the writ is issued, it may be executed by law enforcement officials.

A landlord may never enforce a writ themselves. When a landlord takes action into their own hands, such as by changing the locks on the house, the eviction is illegal. These actions called “self-help” are outlawed in nearly every state and can result in liability for the landlord, even if the underlying reasons for eviction were valid. In order to perform an eviction successfully, a landlord should follow all the legal steps. Setting out the terms in the beginning will help the legal process go smoother or be avoided altogether. The best way to lay the groundwork is by carefully screening tenants through legal methods and including all the necessary provisions in the lease. This can create a long and trouble-free relationship that benefits both the landlord and the tenant.

Photo Sources:

Rent Sign

Lease photo

https://assuredlockandkeyservices.com/

This post was originally posted here on March 31, 2019, and has been reproduced with Tom’s permission. 


Tom Gish, at the time of this post, is a rising third-year JD/MBA student at Penn State Dickinson School of Law. He is focused on business law, real estate, and other issues that affect entrepreneurs. He has years of experience as the operations manager of his family’s small business, as well as the managing member of his own real estate investment company, Greenacre Properties LLC. He lives near Hershey, Pennsylvania with his wife and daughter.

So You’ve Invented Something… Now What? (Licensing Your Product)

By: Kamron Abedi
Photo credit: https://www.score.org/blog/product-licensing-beginners

Many people think that if you invent something you should start a company.  But you actually have two options: start a company or license the product to another company.  Starting a company can be costly and inefficient for singular products or products in certain industries, so it’s important to keep your mind open to another alternative – Licensing.

Licensing entails partnering with another business that has the capacity to produce and sell your product. In establishing this kind of relationship, you will need a licensing agreement. In licensing relationships, you as the inventor will be the “licensor” and the person you enter into the contract with is the “licensee.” In return for the use of your product, the licensee will pay you a negotiated percentage of all product sales revenues in the form of royalties. The main reason licensing is so attractive is because you do not have to do the work, and you still receive a percentage of the revenue generated from the use or sale of your product or invention.

How do you decide what to do?

Photo Credit: ipwatchdog.com

It’s helpful for you to decide whether you will be able to bring in more revenue producing your product yourself, or if you will be able to create a larger stream of revenue by licensing your product to an established company. Once you determine that licensing is the best avenue, the three main issues to consider are: protection of intellectual property, finding a licensee, and negotiating the agreement.

Protecting your intellectual property prior to licensing

 If you are licensing a brand name, logo, art, or a product that is eligible to be patented, you should ensure that your intellectual property is protected and registered with the United States Patent & Trademark Office prior to beginning licensing negotiations. This process requires consulting an intellectual property attorney who can take the proper steps to register your intellectual property. If you begin to negotiate contracts with other companies prior to registering your patent or trademark, then your potential business partners could steal your invention and become a competitor. Once the intellectual property is protected, you can begin to enter into negotiations to license your product.

Requiring potential business partners to sign Confidentiality agreements is a good idea as well.

How do you choose a licensee?

 After you have protected your intellectual property, the next step is to decide who will be the licensee. Many licensing agreements have an exclusivity clause, which means that the licensee will have the exclusive rights to your product. For this reason, it is important to choose the licensee that can generate the most profit possible. You should research potential licensees to confirm that they have the operational capabilities to distribute the product to a wide enough share of the market (your attorney will refer to this research as due diligence). Inquiries into the potential licensee’s past sales records, supply chain data, and overall reputation in the industry will reveal whether the potential licensee has the capabilities to produce and/or distribute the product.  It’s usually a good idea to ask the potential licensee to provide sale projections as well.

If you license a product to a company that cannot properly distribute the product, then the licensing agreement will be detrimental to both parties.

Negotiating the licensing agreement

Photo Credit: http://crosnt.com/management-team/business-deal/

 There are certain provisions you need to negotiate and include in your licensing agreement.  You should discuss royalty computations with your attorney to determine the best strategy possible for your situation. Sometimes it makes sense to take a straight percentage of revenue, however, royalty computations can be much more complicated depending on the industry and circumstances.

Most licensing agreements provide protection for the licensor by including sales performance requirements.  Such requirements allow you to assess penalties or even terminate the agreement if a licensee fails to meet agreed upon requirements. Performance requirements can vary depending on what is being licensed and what the industry is. For example, in the toy industry, licensors may require that the licensee meet certain sales goals. Such sales performance requirements allow for you to take a larger share of the profits if the licensee fails to meet them.

If a potential licensee fails to agree to performance clauses, you should reconsider entering into an exclusive licensing agreement with that licensee. It raises concerns when a potential licensee doesn’t have the confidence to agree to performance levels.  To maximize potential revenue, it would be more prudent to reserve the ability to work with additional licensees rather than one exclusively. In these circumstances it is customary to allow exclusivity only in certain markets or territories.  Sometimes no exclusivity is granted at all.

In most cases, the protection of intellectual property, finding a licensee, and negotiating the agreement are the most important issues to tackle, but they are not the only issues to consider before entering a licensing agreement. If you are looking to license a product, brand, or other intellectual property, consult an attorney prior to entering into any agreement.  An attorney can be instrumental in drafting and negotiating the best agreement possible.


*This post was authored on October 21, 2018.

Kamron Abedi, at the time of this post, is a third year law student at Penn State’s Dickinson Law. He is originally from Southern California and will start his legal career at Stevens & Lee in Reading, PA as an associate in their Corporate practice group. He is also the Founder & President of the Business Law Society at Dickinson Law.

 

Sources:

https://www.upcounsel.com/blog/top-things-to-consider-when-entering-into-licensing-agreements

https://www.entrepreneur.com/article/230557

https://www.amanet.org/training/articles/intellectual-property-licensing-and-confidentiality-agreements-an-overview.aspx

https://www.inc.com/stephen-key/why-having-a-performance-clause-is-more-critical-than-your-royalty-rate.html

 

Trump’s Tariffs are Going to Kill My Profit Margins! What Can I Do?

By: Sarah Zomaya

Tariffs are taxes on foreign goods designed, in part, to incentivize U.S. buyers to purchase from domestic companies rather than import goods. When the government imposes a 25% tariff on an imported product, the U.S. buyer must pay an additional 25% before the imported product can be taken off the cargo ship.

President Trump imposed tariffs on $200 billion worth of Chinese products, effective September 24, 2018. The tariffs start at 10% but will increase to 25% on January 1, 2019, allowing many small businesses to make it through the holiday season with lower costs. Analysts speculate that consumer electronics, appliances, and furniture will bear the brunt of most of the tariffs.

Potential Effects of the tariffs

While big businesses, such as Target and Best Buy, will also feel the weight of these tariffs, small businesses are much more vulnerable because of their smaller profit margins. With already low profit margins, small businesses may not be able to make a large enough profit to stay in business once the tariffs increase to 25%. The tariffs likely will force small businesses to raise their prices even more, compelling consumers to purchase from larger retailers like the Amazons and Walmarts who are able to absorb the costs of the tariffs.

In response to the Trump tariffs, the European Union and other countries slapped the U.S. with tariffs of their own. These “revenge taxes” are the cause of Harley Davidson moving its production out of the country. If a large business, like Harley Davidson, has difficulty offsetting the tariffs, the future does not look very bright for small businesses. Even if a small business is not affected by the revenge taxes, the small business may still be forced to move production out of the U.S.  Small businesses will see a decrease in profits following the tariffs and may have to move production outside of the U.S. in order to cut costs and stay in business.

Check out this map if you’re interested in how the tariffs have impacted industries across the U.S.

What to do about the tariffs – Economics

Economically, business owners can use multiple vendors to assure better pricing, implement pricing strategies, closely monitor inventory levels, and may even consider taking out a business line of credit in order to combat the tariffs.

What to do about the tariffs – Federal Waiver

You may have read that businesses can apply for a tariff waiver so that their imported products are not impacted by the tariffs. The deadline to apply for a tariff waiver was October 9, 2018. Don’t let this get you down because only 550 of 20,000 waiver applications were approved. Commerce Secretary, Wilbur Ross, has said that most of the application waivers were denied because a higher product price is not a good enough reason to grant the tariff waiver.

What to do about the tariffs – Breaching your Contract

 What if you placed an order prior to the tariffs being imposed?  With tariffs as high as 25%, many small businesses may not be able to account for this unexpected, additional cost. If a small business can’t afford to fulfill the contract because the price is too high or the profit margin will disappear, it may have no option but to breach the contract.  If you don’t have a defense (legal reason for breaking the contract), you will incur damages for the contract breach.  Those damages should be outlined in your contract.

Your contract language is important for another reason.  If your contract contains a “force majeure” clause, you may be able to break the contract without any penalty. Force majeure clauses relieve a party from its contract when performance is prevented or hindered by circumstances beyond the party’s control. A force majeure clause may state that a party is not liable for breaching its contract if the breach is a result of “war, strike, fire, Act of God, earthquake, flood, embargo, governmental acts or order or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control of the party.” Even if a contract includes a force majeure clause, a court may not relieve a party from its contract just because the deal is economically burdensome.

If the Uniform Commercial Code (UCC) governs your deal, you may have another way out.  The UCC may relieve a small business from its contract if the small business is complying with a governmental regulation or order. This will depend on whether the court determines that the tariff is a “governmental regulation or order,” but in the past, courts have been more willing to relieve a party from its contract when there is some form of governmental action.

Additionally, the small business may have the legal defense of “impracticability” or “frustration of purpose.” A small business will only have this legal defense if the contract would result in a substantial, unanticipated cost increase, thereby making it impracticable to go through with the contract. Tariffs that are implemented after the signing of a contract would seem to meet the “unanticipated” element but it needs to be substantial as well.

If you are unsure whether you should breach your contract and if you would have any legal defenses, you should discuss this possibility with your lawyer.

——–

*This post was authored on October 14, 2018.

Sarah Zomaya, at the time of this post, is a second year law student at Penn State’s Dickinson Law. She is from Southern California and is interested in corporate transactional law. Sarah is currently serving as Vice President of the Business Law Society and as an Associate Editor of the Dickinson Law Review.

 

Sources:

https://blog.trade.gov/2018/08/13/what-small-businesses-should-know-about-tariffs/

https://www.biz2credit.com/blog/2018/09/06/how-tariffs-impact-small-business/

https://smallbiztrends.com/2018/09/impact-of-tariffs-on-small-businesses.html

https://www.nav.com/blog/how-new-tariffs-could-affect-your-small-business-31001/

https://www.washingtonpost.com/business/2018/09/20/this-could-be-catastrophic-small-businesses-say-new-tariffs-will-make-it-even-harder-compete/?utm_term=.6db70db1ab99

https://www.inc.com/why-small-manufacturers-are-particularly-vulnerable-to-trumps-latest-trade-policies.html

https://www.nytimes.com/2018/09/17/us/politics/trump-china-tariffs-trade.html

https://www.jsonline.com/story/money/2018/06/25/response-tariff-harley-davidson-moving-more-production-overseas/729995002/

https://www.cnbc.com/2018/09/23/small-business-owner-thrilled-by-trumps-tariffs-on-china-others.html

https://www.law.cornell.edu/ucc/2/2-615

https://www.nytimes.com/2018/06/22/us/politics/trump-tariff-waivers.html

https://reason.com/blog/2018/07/30/tariff-waivers-flawed-steel-shortages

Charles L. Knapp, Nathan M. Crystal & Harry G. Prince, Problems in Contract Law: Cases and       Materials, (7th ed. 2012).

Photo Source: https://smallbiztrends.com/2018/09/impact-of-tariffs-on-small-businesses.html

Photo Source: https://www.maraudermirror.org/4755/spotlight/pros-and-cons-of-tariffs/

 

Royalties & Recording Contracts: How to Make Money and Keep Artists Happy

By: Devon Kenefick*
As small businesses, independent record labels need all the money they can get to put back into their business. Royalties detract from profits but are necessary when creating a contract with artists/bands. Artists will not work for free and labels should ensure that the artist will continue doing business with them.

How Do Royalties Work?

Artists are paid a percentage of each album sold, which is determined, and negotiated, by the artist and the label in the recording agreement. Typically, the percentage ranges between 10% and 20%, with newer artists seeing the lower end of the range. The artist or band may receive an advance in royalties prior to the label making money from CD sales, with this advance being returned to the label, a process called “recoupment.” When the time comes for the artist to receive royalty payments, the band manager also takes a percentage, and the remaining money is divided among any band members.

This system can be problematic to artists whose albums do not go “gold” (500,000 albums sold) or “platinum” (1,000,000 albums sold), and labels only have a 1-in-20 chance of producing a gold or platinum album. So, when deciding on how to calculate royalties, a record label owner needs to consider: the percentage, how this percentage is calculated (wholesale or retail), any recording expenses imposed on the artists, and any advances paid as well as if they want the artist to stay with them.

If this royalty system does not sound right for your label, you might consider a mutually beneficial approach. Independent labels sometimes split the net profits of an album (either 50/50 or otherwise) with the artist. To determine net profits, the label takes the gross sales of albums sold and deducts its direct costs which include production costs, packaging and shipping, marketing, storage, legal, taxes, and personnel costs.

Another thing to remember is that royalties are paid to the recording artist as well as the songwriter. If these artists are separate people, then the royalties are going to be smaller for both individuals. The recording artist and songwriter are paid royalties from CD sales, but only the songwriter receives royalties when the recording artist gives a public performance.

Royalties is a key provision in the recording agreement and artists in the music industry are typically unhappy with the traditional system which favors the label’s success over the artist’s. If you are in the business to make money as well as build relationships, then it may be in the label’s best interest to negotiate fairly.

Why Does My Label Need Recording Contracts?

Recording contracts between the label and the artist are extremely important because they establish the professional relationship between the two parties and are legally binding. While it may be tempting to find a contract template online to use for your label, it is crucial to understand what every provision in the agreement means. It is also important to understand that contracts are between the artist and the label as a company, not between the artist and the label owner. Labels also need to realize that these agreements create specific obligations for both parties. Basically, artists agree to record an album in exchange for royalties.

Arguably, the most important clause in the contract is “exclusivity,” which requires the artist to sign to your label only. The label has exclusive rights to the artist’s music, name, merchandising, image, and likeness for the entirety of the contract. If an artist wants to appear on another artist’s track (who is signed to another label), then the artist should negotiate what is known as a “sideman” provision.

Other provisions of the agreement include: the territory; the length of the agreement; rights granted; advances and royalties; recording costs; warranties; and termination, to name a few.

Contract Provisions

Usually, recording agreements are for year-terms which allow the label to extend the contract if the artist does well after the release of an album. Artists may be contractually required to release a certain number of albums in a particular period of time. For example, the first term of the contract might be for the first album, the second term for the second album, and so on. As a new and small business, it might be a better idea to give your label this type of flexibility when creating recording agreements with new artists.

Artists also assign the copyright in their music to the label. The label will own the copyright in the sound recording once the track/album is recorded. The label owns this copyright for 50 years from the date of its release, and the same goes for any unreleased recordings. There may also be a contract provision on licensing, allowing the label to license the album or song to others, but it may owe a fee to the artist depending on the contractual language. A label may also want to include what is known as a “lock-out” clause which prevents the artist from re-recording any of the songs on the album, and unreleased tracks, for 5 to 10 years following the end of the contract.

Recording costs can also be a point of contention since it is common for a label to charge artists for a variety of costs associated with the production of an album, such as promotion costs, music video production, and touring expenses. The costs may be deducted from the artist’s royalties before they even receive them. Keep in mind that independent labels typically spend around $15,000 when making a record, depending on the associated costs.

As a small business owner, it is up to you how to craft recording agreements and how flexible you want to be with various provisions, such as royalties. Following traditional approaches taken by larger labels will yield more profit, but might scare away potential artists from signing with you. So, it is best to seek advice from outside counsel and ultimately determine what is best for your company.

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*This post was checked for currency on September 7, 2018 and reproduced with permission by author Devon Kenefick. Original post can be found here.

Devon Kenefick, at the time of this post, is a third year law student at Penn State’s Dickinson Law.  Originally from Maryland, she plans to take the bar exam in Maryland. She is interested in Business Law, Intellectual Property Law, and Entertainment Law. She is currently the Student Bar Association Secretary and a member of the Intellectual Property Society. A more complete bio can be found here.

Sources:

Photo: https://www.maxpixel.net/Picture-Stan-Record-Sheet-Music-Music-Disco-1428660

https://www.soundonsound.com/music-business/recording-contracts-explained

https://entertainment.howstuffworks.com/recording-contract2.htm

https://entertainment.howstuffworks.com/music-royalties6.htm

https://www.taxi.com/music-business-faq/music-business/money-record-companies.html

http://www.mccormicks.com.au/blogs/record-deals-how-music-royalties-are-calculated-on-record-sales

http://smallbusiness.chron.com/divide-percentages-record-label-39258.html

https://www.thebalance.com/indie-label-contracts-2460760