Here’s the scenario: you sell your screenplay, comic book, musical composition, or other artistic work and the producer, publisher, record company, or other party offers you some form of contingency compensation in exchange.
Whether we call this contingent compensation "net profits," "residuals," "royalties," or “fantasy fun bucks,” it doesn’t matter, the concept is the same: you are being promised a certain percentage of money from the option, sale, licensing, or other commercial exploitation of your work.
There are two very important aspects to making sure you get paid that you must keep in mind when negotiating this provision in your contract:
1. Understanding the payment formula
2. Making them prove it
The first part, “understanding the payment formula” may require the most negotiation on your part. For instance, net profits are paid after certain expenses are deducted, so the trick is negotiating what expenses can be deducted before you are paid. There are countless variations to royalty provisions, net profit calculations, and residual computations (many can be found in my books The Pocket Lawyer for Filmmakers and The Pocket Lawyer for Comic Book Creators). As a matter fact, most people will spend the majority of their time negotiating the formula provision, while neglecting the second step: making them prove it.
Whenever you’re being promised contingent compensation, your contract should also have an audit clause. If you are receiving royalties, residuals, net profits, or any other contingent compensation, you’re going to want to be able to keep track of the other side’s financial records to make sure you’re getting paid what you are owed. This provision specifies how frequently the parties must provide each other with a detailed accounting of profits, costs, and revenue streams. It also regulates how often a party can send a certified public accountant to perform an audit of the other party’s financial records.
In a typical audit provision, the party with audit rights has the right to hire a CPA to perform an annual audit. If the audit uncovers an underpayment of more than, say, 5%, the party being audited has to pick up the cost of this audit (as well as make good on the underpayment that was discovered).
Example: Accounting and Audit. Pub Co. shall keep complete and accurate financial records relating to the exploitation of the Comic Book and shall send Artist a semiannual Royalty statement and, if applicable, Royalty payment. Artist shall have the annual right, upon 30 days advance written notice, to cause a certified public accountant, at Artist’s expense, to inspect the books and records Pub Co. keeps with respect to the accounting of the exploitation of the Comic Book. In the event that such inspection reveals an underpayment by Pub Co. of the monies owed Artist, Pub Co. shall pay the difference. If such underpayment shall be in excess of 5% of the amount owed Artist for any payment period, Pub Co. shall also reimburse Artist for the directly attributable, verifiable, out of pocket third party cost of such inspection.
Failure to include an audit clause may leave you relying only upon the accurate accounting and upstanding ethical character of the other party to the contract. And when money is involved, it’s always good to “trust, but verify.”
Parts of this post were excerpted from The Pocket Lawyer for Comic Book Creators.
© 2017 Thomas A. Crowell, Esq.
Thomas A. Crowell, Esq. (tcrowell@lanesash.com) is a partner at the law firm of Lane Sash & Larrabee, LLP. He focuses his practice on intellectual property and media law.
NOT LEGAL ADVICE