Managers, Agents & Attorneys

Posted on 11-25-2015

By: Christiane Cargill Kinney, LeClairRyan

LEXIS PRACTICE ADVISOR RESEARCH PATH: California Business & Commercial > Entertainment Law > Practice Notes > Managers, Agents and Attorneys

Before drafting any agreement for services to be provided to an artist by a personal manager, agent or attorney in the field of entertainment, it is important to understand the nature of these respective roles within the industry.

A PERSONAL MANAGER HELPS SHAPE AN ARTIST’S CAREER, provides advice and guidance to artists in their day-to-day career choices and development, and also assists in the creation of their public personae. Personal managers are often empowered to enter into binding contracts on behalf of the Artist through power of attorney. However, in contrast to agents, managers are not presently required to be licensed in California, nor are they regulated by the various guilds. Accordingly, while personal managers still owe a fiduciary duty to the artist and can be found liable for breach of those duties, the risk of aligning with an inexperienced manager is high. If you are representing an artist who is in search of a personal manager, make sure to do your homework to ensure the personal manager is well connected and experienced in their particular niche of entertainment. Artists in the entertainment field can include actors and actresses, musicians, directors, writers, models, comedians, cinematographers, and more. As such, you and your client should feel comfortable asking a prospective manager basic qualifying questions, such as: (1) What other acts/artists does that manager currently represent? (2) How long have they been in the business? and (3) What types of connections do they have in the Artist’s particular field of entertainment? If they are well connected in one area of entertainment, but not in another, attempt to limit the scope of their services (and their ability to generate revenue from the client) to only the areas they have experience in. An artist with some clout may also be able to negotiate approval rights and eliminate or substantially reduce a manager’s ability to act through power of attorney.

Because the majority of jurisdictions, including California, regulate and license booking agencies, managers are generally precluded from providing booking services directly, and if such services are provided in violation of a state’s licensing requirements, their management contract may be invalidated. (See, e.g., Talent Agencies Act, Cal. Lab. Code § 1700 et seq. (providing that any activity in procuring employment for an artist is subject to regulation and requires a license, even if no commissions were ever received for that service); Park v. Deftones (1999) 71 Cal.App.4th 1465 (finding management contract void where personal manager secured performance engagements for music group without being licensed as a talent agency)). A standard management agreement will include as a term that the Artist acknowledges that the manager is not a talent agent and that his duties do not include procuring employment for the Artist. That said, California Labor Code Section 1700.4(a) acknowledges that the activity of “procuring, offering or promising to procure recording contracts for an artist” shall not of itself subject a person or a corporation to regulation and licensing under the statute, and thus this is an appropriate function for a manager to perform.

Personal Management Agreement

A personal management agreement will often be written in letter form, with a typical term ranging from three to five years in length. Managers will want the longest possible term to ensure a return on their investment of time. However, when representing an artist, you may want to explore annual options for renewal or termination within the three- to five- year term, to ensure the manager is not causing the Artist’s career to stagnate. In the music industry, managers may seek to negotiate the automatic extension of a contract term once their Artist enters into a recording agreement, often to be extended until the end of the then-current Album Cycle of that Recording Agreement. When dealing with any service contract, it is also important to note that such contracts may not exceed seven years in California. Cal. Lab. Code § 2855; De Haviland v. Warner Brothers Pictures (1944) 67 Cal.App.2d 225.

Managers are paid a percentage of an artist’s “gross compensation,” and accordingly, a manager will want an agreement to encompass as many entertainment-related activities as possible, allowing for the highest possible return on their investment of time. In contrast, when representing the Artist’s interests, you will want to limit the scope of your client’s industry-related activities encompassed by the agreement. For example, if the manager is representing a music artist and helping make connections within the music industry, you may want to carve out exceptions to the scope of the agreement if your client also wishes to start his or her own fashion line, fragrance, or other industry-related offshoot. This will factor into how the Artist’s “gross compensation” is defined within the agreement. Managers normally earn between 10-25% of an artist’s gross income, and this variance is generally reflective of a manager’s experience and connections within the industry.

Many personal management agreements allow the Manager to receive all monies payable to the Artist, and to pay themselves their share before the Artist is paid. If you represent the Artist and want all money to be filtered directly through them, most Managers will seek the appointment of an independent third party business manager or certified public accountant to collect the Gross Earnings and render all accountings and payments to the Manager. This can be an expensive proposition for an artist at the earlier stages of their career, and therefore, you should ensure that the Artist’s Gross Earnings achieve a certain platform before the formal retention of a business manager or CPA is required.

Another heavily negotiated deal point involves how long a personal manager is entitled to receive Gross Earnings collected by the Artist after the expiration of the contract term. Oftentimes, deals are substantially negotiated, or extended contracts are entered into, during the term of the management agreement, and managers will often expect continued payments under those contracts. If you represent the Artist, you will want to negotiate a reasonable cap to post-term payments if possible.

Other important clauses to consider in management agreements are the early termination of such agreements. For example, some Artists may wish to negotiate for a “key man” clause, particularly when an Artist is signing with a well-known or successful manager, which provides that if their manager leaves the management company or retires, the Artist is free to stay or walk away. Other common grounds for early termination of management agreements include material breach of the agreement by a party and failure of that party to cure within a reasonable time, as well as the Manager’s unreasonable refusal to permit their Artist to negotiate, accept or execute any agreement for the offer of employment related to the Artist’s career in entertainment. Service contracts between artists and managers should also address the Artist’s name and likeness rights, and whether express approval is required, how financial audits will be handled, as well as how disputes will be handled under the agreement. The choice of law provision can be particularly important in management agreements, as certain states may be considered “pro- manager” or “pro-artist.” Alternative dispute resolution remains a popular alternative to litigation that the parties may agree upon as well. While many practitioners will find an arbitration provision most beneficial to companies who may be subject to multiple lawsuits, the process is generally less expensive for both parties, will often result in a final, binding ruling that is rarely subject to appeal, and allows for a resolution much earlier than traditional litigation outlets (depending upon the language of the agreement and the precise arbitration rules to be enforced).

Agreement Between Talent Agent and Artist

In the entertainment field, an agent seeks to procure employment for their client. They are the dominant dealmakers in the world of theater, book publishing, film, and television. In film and television, agents find actors roles or pitch screenwriters’ works to studios, producers, and other actors. In music, agents may procure live engagements for musicians. In book publishing, agents may attempt to secure publishing agreements for authors. The relationship is generally exclusive as between the agent and artist for a particular field (although commercial and theatrical agents in TV and film are generally separate), and agents will often serve many artists at one time.

Representation contracts between talent agents and artists must be in writing. The only notable exception in which an oral agreement will be given effect is pursuant to 8 CCR 12002, where an agent directly procures employment for the Artist and the parties’ oral agreement is ratified in writing within 72 hours. If the oral agreement is not ratified within 72 hours, it is voidable.

Agents are regulated by state statutes and required to be licensed. Accordingly, contracts between agents and talent are highly standardized with little room for negotiation. In California, talent agencies are subject to regulation by the Labor Commissioner pursuant to California Labor Code §§ 1700-1700.47, and must comply with detailed licensing requirements. In order to acquire a license to operate as a talent agency, one must complete a Talent Agency License Application with the Division of Labor Standards Enforcement (DLSE) of the California Department of Industrial Relations, and submit certain required documentation along with payment of the applicable fees.

The Department of Labor provides all of the necessary forms on the following website: http://www.dir.ca.gov/dlse/Talent_

Agency_License.html. Detailed instructions for filing and renewal can be found at http://www.dir.ca.gov/dlse/Talent/ Talent_Instructions_and_Info.pdf. You can also call the Licensing & Registration Unit at (415) 703-4846 or email DLSE. licensing@dir.ca.gov to request that a package be sent to you via U.S. mail.

Any contract forms to be used by a talent agency in California must first secure approval from the Labor Commissioner and must set forth the fact that the talent agency is licensed by the Labor Commissioner of the State of California, as well as the date upon which the contract form was approved by the Labor Commissioner. 8 CCR 12003.1. Sample contract forms are provided on the California Department of Industrial Relations website, www.dir.ca.gov. (See Form DLSE 315A) (See Form DLSE 315B).

To submit contracts for approval, one must submit three copies of each form general services contract, one of which will be certified and returned to the newly approved agency. All contracts submitted must contain the provisions set forth in section 12001 of the California Code of Regulations and should be sent to the DLSE Licensing & Registration Unit at P.O. Box 420603, San Francisco, California 94142. Notably, a Labor Commissioner cannot withhold approval of a contract unless its terms would be unfair, unjust or oppressive to the Artist. (See Cal. Lab. Code § 1700.23; 8 CCR 12003). Copies of SAG, AFTRA, AFofM, AGVA, Writers’ Guild, and Directors’ Guild contracts need not be submitted for approval by the Labor Commissioner. Instead, if a talent agency intends to use these contracts, they must submit a letter to the Labor Commissioner stating which of the guild contracts they intend to use.

If a modification is made to an existing form, any substantial changes in the form of a previously approved contract must be submitted to the Labor Commissioner for approval and written consent. (See Cal. Lab. Code § 12003.2). Certain minor modifications of contract forms previously approved by the Labor Commissioner that do not substantially change the substance do not require further approval. Such modifications are listed under Labor Code Section 12003.3 and include things such as a provision for the commencement of the term of the contract at some specified date in the future, which may be fixed by the occurrence of an event or contingency; the deletion of certain fields of endeavor from the scope of the agent’s representation; a reduction in the compensation to be paid by the Artist to the talent agency; a waiver by the talent agency of commission or compensation to be received by the Artist; a reduction in the four-month termination period required by 8 CCR 12001(e); any provision for additional or special services, facilities, or benefits to be rendered by the talent agency on behalf of the Artist; and any other modification which operates to the Artist’s advantage. Because such modifications do not require further approval by the Labor Commissioner, these deal points are generally open for negotiation.

Agents are effectively subject to regulation by the various guilds or unions, which may require agents to agree to a code of conduct and restrictions on terms included in agent-talent contracts. In the majority of jurisdictions, an agent is limited to 10% of whatever employment they book for their client, and 10% is the norm. In California, a talent agency must file the Schedule of Commission Fees with the Labor Commissioner, and its fee schedule must be posted in the agent’s office. Generally, the Labor Commissioner will approve up to a maximum fee of 20%, but guild franchise agreements limit the commission to 10%. Many times, an agent will negotiate that their client will get “scale plus 10 percent,” but the agent may not take any portion of a client’s per diem or living expenses for out-of-town employment opportunities. There is no “double-dipping” for an agent who tries to take on the role of manager as well. The two must be completely separate, and agents are not permitted to take on the role of personal manager in addition to their role as talent agent in order to exceed the 10% cap. The fee schedule defining how an agent is to be paid under the agreement must be approved by the Labor Commissioner, including the details of any payments to be made after termination of the agreement for employment procured during the agency term.

A talent agent agreement will often be written in letter form, signed by both parties with a typical term ranging from one to five years in length. In California, any representation agreement between a talent agency and an artist must include the term of the agreement, the compensation of the agent (see above), a termination clause, an arbitration or dispute resolution clause, and general provisions stating that the talent agent may advise, counsel, or direct the Artist in the development of their professional career; and that, subject to the Artist’s availability, that agent will use “all reasonable efforts” to procure employment for the Artist in the field(s) specified in the agreement. (See 8 CCR 12001.)

California Code of Regulations, Title 8, Section 12001(e) sets forth a four-month minimum termination period for agency agreements. As such, the termination clause must be mutually exclusive, providing that if employment is not found for the Artist in four or more consecutive months and that artist was willing and available to accept employment during those four months, either party may terminate the agreement (though neither is required to terminate).

With respect to arbitration or dispute resolution, such agreements are required to include a provision for all disputes to be submitted to arbitration under the California Arbitration Act pursuant to the terms of a contract or collective bargaining agreement (Cal. Lab. Code § 1700.45; Cal. Code Civ. Proc. §§ 1280-1294.2; see also Ferrer v. Preston (2006) 145 Cal.App.4th 440, 446)), or if not applicable, to be submitted to dispute resolution by the Labor Commissioner (Cal. Lab. Code § 1700.23; 8 CCR 12001(f); Cal. Labor Code § 1700.44(a)).

Agreement Between Attorney and Artist

Attorneys in the entertainment field routinely provide legal services for an artist in the performing arts, handling a wide range of transactional, litigation, and arbitration matters. An entertainment practice can touch upon intellectual property, contract law, employment, bankruptcy, immigration, securities issues, product placement, advertising, clearance of rights, defamation, right of privacy issues, tax laws, and everything between. Entertainment attorneys are the dominant dealmakers in recording contracts and music publishing deals and should be skilled transactional attorneys well versed in entertainment contracts and the industries’ customs and practices.

In California, agreements between a client and an attorney must be in writing and signed. The agreements often take the form of a letter signed by the client acknowledging acceptance of the terms. The agreement should specify the scope of services the attorney is being retained to provide and that the attorney has been retained primarily for legal services to ensure that an attorney’s work is covered by their professional liability insurance. As with managers and agents, an attorney owes a fiduciary duty to their client. However, in distinction to other service contracts, there is no effective term of the agreement, as a client can always fire their attorney.

There are a number of different methods by which attorneys charge for their services, and the agreed-upon method of compensation must be set forth in the written agreement between the parties. Generally, attorneys will charge an hourly rate (often requiring a retainer before commencing work), a contingency-fee arrangement, a flat-fee arrangement, or some combination thereof. The fee structure of an attorney’s engagement is by far the most frequently negotiated term of such an agreement.

Hourly rates can vary significantly, depending upon the type and complexity of the case, the attorney’s special skills and experience, and the average rates for legal services in that particular geographic area. Contingency fees often range from 5-10% of the client’s “gross compensation,” as defined within the agreement. In many entertainment contracts, “gross compensation” is defined broadly. Gross compensation may include things such as cash, salaries, advances, fees, royalties, residuals, repeat and/or rerun fees, gifts in lieu of compensation or other in-kind payments, bonuses, license fees, shares of profit, shares of stock, partnership interests, percentages derived from record, television, motion picture or other entertainment packages, and so on. However, it is common to exclude income that is not derived from or enhanced by the attorney’s professional services. The percentage to be earned will depend largely upon the client’s record for commercial success, with an attorney often taking a smaller percentage of gross compensation from a well- established artist. Sometimes the attorney may couple a smaller percentage of gross compensation with a reduced hourly fee arrangement. In both hourly and percentage fee arrangements, the client commonly pays all out-of- pocket costs. However, the fees charged cannot be illegal or unconscionable. The determination of conscionability of a particular fee is generally based on a weighing of various factors, including the amount of the fee in proportion to the value of services performed; the relative sophistication of the attorney and client; the novelty and difficulty of questions involved and the skill required to perform the legal services; the likelihood, if apparent to the client, that acceptance of the particular employment will preclude other employment by the attorney (for example, if it creates a conflict of interest with other potential clients); the amount involved and results obtained; the time limitations imposed by the client or circumstances; the nature and length of the professional relationship; the experience, reputation, and ability of the attorney performing services; whether the fee is fixed or contingent; the time and labor required; and the informed consent of the client to the fee. (See Cal. Rules of Prof’l Conduct, Rule 4-200(A)).

The terms of any pro bono arrangements (also known as free legal services, derived from the Latin pro bono publico, or “for the public good”) should likewise be set forth in a written agreement. It is common for entertainment and intellectual property attorneys to handle matters on a pro bono basis, particularly where the prevailing party may be entitled to recover their attorney’s fees, such as provided for under the Copyright Act. Importantly, for purposes of recovering such fees, several courts, including the Ninth Circuit, have recognized that a party can “incur” fees even though the party was represented on a pro bono basis when that client’s obligation to repay fees is contingent upon a party’s successful recovery of fees under the statute. (See Morrison v. Commissioner, 565 F.3d 658, 662-666 (9th Cir. 2009)). Thus, the inclusion of any contingent repayment agreement should be contained within the written agreement.

A word of caution to attorneys: Rule 7.3(a) of the Model Rules of Professional Conduct provides that a lawyer shall not by in- person, live telephone, or real-time electronic contact solicit professional employment when a significant motive for the lawyer’s doing so is the lawyer’s pecuniary gain, unless the person contacted is a lawyer, or has a family, close personal, or prior professional relationship with the lawyer. Pursuit of clients through these methods of solicitation, even when services are offered on a pro bono basis, may be considered in violation of Rule 7.3(a) when the case allows for the prevailing party to recover their attorney’s fees, as this may be considered a significant motive for pecuniary gain.

Conflicts of interest routinely arise in this area of law, and attorneys should be cautious to clear all conflicts and/or obtain all necessary waivers, where appropriate. You should not represent a client if that representation will be directly adverse to a relationship with another client. (See Cal. Rules of Prof’l Conduct, Rule 3-310(D)). If a conflict exists, but you believe that your representation of a new client would not be adverse to a current client, you must disclose the conflict and each client must consent in writing to the dual representation. Attorneys should also undertake updated conflict checks on a routine basis, particularly when there is a new party to a case or deal that has not been previously searched, or an adverse situation has occurred that changes a party’s role in the matter.

Other common clauses within a legal services agreement include choice of law provisions, providing for the agreement to be governed by a specified law, if the contract has a substantial relationship to the place whose law is chosen or there is another reasonable basis for the parties’ choice of law, and application of that law will not contravene any strong California public policy. (See Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464-465). The agreement also routinely includes a clause providing for the parties to submit any fee disputes to arbitration. The State Bar of California has established procedures for arbitrating disputes over attorneys’ fees in California, which are discussed in greater detail at Cal. Bus. & Prof. Code § 6200 et seq. Additionally, an attorney should indicate in writing, for both new clients and new engagements with returning clients, if an attorney and/or law firm does not carry professional liability insurance pursuant to California Rule of Professional Conduct 3-410.

Special Considerations When Representing Minors

The entertainment industry is replete with talented child actors or pop stars under the legal age of majority (18 years of age in most jurisdictions, including California) and, accordingly, there are special considerations that an attorney should understand when dealing with contracts involving minors.

As a general rule, minors lack the capacity to enter into a legally binding contract and, accordingly, they may attempt to “disaffirm” or “void” the contract upon reaching the age of majority. Even when a parent or legal guardian approves the contract on the minor’s behalf, many jurisdictions, including California, do not require the minor to honor it (though it would be binding upon the adults themselves).

Where a parent or legal guardian executes a valid release agreement with respect to a minor’s performance or likeness, the minor’s right to disaffirm that contract is inapplicable. However, with respect to the right to future services, such as the personal service contracts discussed in this section, a minor’s right to disaffirm these agreements is the cause of true concern for many companies and entertainment professionals.

To respond to this growing concern, many states have now passed legislation in an effort to provide some reasonable certainty to employers in the entertainment industry. For example, in California, parties to a contract involving a performing artist or professional athlete under 18 years of age may seek court approval of the minor’s entertainment contract, which limits the minor’s right to repudiate or cancel the contract on the basis of their age at the time of signing. (See Cal. Fam. Code § 6751). The court-approval process is available to contracts in which a minor is employed “to render artistic or creative services” within any field of the entertainment industry.

Court approval in California may be sought by way of a petition filed in superior court by any party to the contract, after reasonable notice to all other parties to the contract as fixed by the court, with an opportunity for such other parties to appear and be heard. The petition should be filed in the county in which the minor resides or is employed or in which any party to the contract has its principal office. For purposes of such proceedings, a parent or legal guardian shall be considered the minor’s guardian ad litem for the proceeding unless the court determines that appointment of a different individual is required in the best interests of the minor. As an extra safeguard, many contracts will also require the parents to guarantee future performance by the minor and not to interfere with their performance under the agreement, which would then be binding as between the adults entering into the agreement.

Many jurisdictions also have a maximum term of employment involving a minor. However, in California, there is no specific limitation relevant exclusively to minors, but rather the general seven-year limitation to any personal service contract would apply.

California Family Code Section 6752, also known as the “Coogan Law” (after child-actor Jackie Coogan), was enacted to protect the earnings of minors performing in the entertainment industry. This law requires the parents or guardians of such minors to establish a “Coogan Trust Account” and to notify the minor’s employer once that account is set up. The employer of the minor must then set aside and deposit 15% of the minor’s gross earnings into their trust account. If employers do not receive proper notification from parents within a specified time, they must send the set- aside funds to the Actors’ Fund of America, which then has an obligation to locate and notify parents of their obligations under the statute.

Christiane Cargill Kinney is a partner at LeClair Ryan and Chair of the Firm’s Entertainment Industry team.

LEXIS PRACTICE ADVISOR RESEARCH PATH: California Business & Commercial > Entertainment Law > Practice Notes > Managers, Agents and Attorneys