Sunset Clauses in the Music Industry

I recently represented a talented young musician in his negotiations with an indie label. The label wanted to manage him as a producer. The musician wanted to make sure he was getting a fair deal and also wanted to be able to independently pursue other musical endeavors (for example, he also had a band, but he did not want the band to be managed by the indie label). Both my client and I learned a lot about music industry contracts, and I wanted to share some of that knowledge over my next few blog articles.

The way an artist manager gets paid is most typically by commission. The manager (which could be an individual person or, like with my client, a label) gets paid a percentage of the artist’s gross earnings.

The first thing to figure out in negotiating the terms of the commission fee is how to define “gross earnings.” For example, there are times when a label may pay an artist an advance for recording a new album. Part of the advance is frequently meant to cover production costs. So, should the artist’s manager take his percentage from the full advance, or should his percentage come from the money that remains after production costs have been paid? This can make a really big difference in the amount of money netted by both the artist and the manager.

Another issue to address is whether the manager will continue to be paid a commission after the relationship ends, and if so, how much. After all, if the manager negotiates a multi-album deal between her artist and a major label, but then she and the artist split up before all the albums are produced, shouldn’t she still receive some of the income from those future albums? On the other hand, the artist doesn’t want to pay a former manager for years and years into the future.

Entertainment lawyers have solved the above problem with a mechanism called “The Sunset Clause.” They put a clause into the management contract entitling the manager to a commission (often a reduced commission) for a certain number of months or years beyond the contract term for any earnings related to deals closed by the manager. For example, a standard management commission is 20%, so the Sunset Clause might say that the manager will receive 15% for the first year after the contract ends for any earnings on deals closed by the manager, then 10% for the second year, then 5% for the third, and then nothing beyond three years. Of course, all these figures and time ranges are negotiable and both parties would be well advised to seek the advice of counsel before signing any contract.

The Sunset Clause is a creative way to deal with a unique issue. It goes to show that, in the music industry (and all other industries), creativity is not limited to the actual artwork being produced, but can and should flow through the entire process in order for all parties to derive the greatest benefit.