The Basics Behind Cross Collateralization Clauses

Last week I lectured to a group of attorneys during a Continuing Legal Education (CLE) seminar about Entertainment Law.  During that lecture I referenced “Cross Collateralization Clauses” and instantaneously heads exploded.  When attorneys look confused – I take notice.  Either I did an extremely poor job presenting the material or I simply stumbled upon a term that is difficult to identify within the entertainment law context.   Regardless, I realized if some attorneys where unfamiliar with the term, Artists may be unaccustomed to the concept as well – hence the explanation today.  Without further ado, brace yourself for a quick Cross Collateralization 101.  I’m hopeful a brief understanding can help others prevent a tangled mess of problems.

Cross Collateralization Clauses are often embedded in Recording Agreements, however it’s not uncommon in today’s industry to see them injected into any sort of agreement when an advance applies.  When applicable in a Recording Agreement, Cross Collateralization Clauses allow a label to hedge their beat should their investment in an artist/band prove unfavorable.   New signings are traditional analyzed through a variety of revenue streams – recorded music only being one of them.   These revenue streams include: fan clubs, merchandise, collateral entertainment activities (aka. CEA Agreements), touring, publishing and so forth.  Essentially all of these components represent different accounts.  Cross Collateralization Clauses merge the otherwise disconnected accounts into one.  Sounds fair, right?  Practically speaking, this puts the Artist at an extreme disadvantage, making it near impossible to sustain a successful career with label intervention.  For discussion purposes, let’s assume Band X receives a recording advance of 1 million dollars.   Remember – advances must be recouped (ie. paid back) before the Band receives a dime from “record” royalties.  IF the Recording Agreement contains a Cross Collateralization Clause, this means the label will dip into the Artist’s other accounts (fan club, publishing, merchandise, touring, etc.) in order to recoup their failed recording investment of $1 million.  Rest assure you don’t want this to happen.  Money is not in recorded music; money lives in the “other” accounts.

Pending on the Artist’s career strengths, they do have some negotiation leverage.  Often Cross Collateralization Clauses remain unchallenged due to the fact Artists and some attorneys have a difficult time identifying them in a contract because they’re hidden in the dark abyss of the agreement (i.e. – Page 67, Section 12, Subsection (iii)).  The reader is exhausted at this point, and 9 out of 10 times, they gloss right over the language.  If you see a Cross Collateralization Clause, dispute it.  Ask to have it removed.  If they tell you “it’s industry standard” – DO THIS.  If they claim it must stay, make them pay more for the rights on that particular revenue stream or limit the amount of revenue streams that can be cross collateralized (Recording Agreement only crosses with merchandise, etc.).

If you have questions or want to know more (i.e. Cross Collateralization 2.0), send me an e-mail.

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