Specimen Merchandising Agreement

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When most bands start out it is likely that the job of organising the sale of merchandise at gigs will fall to their manager or, in the absence of a manager, to their girlfriends/boyfriends, siblings or parents. However, once a record contract has been secured and the band is starting to play reasonably sized venues and co-coordinated tours it is likely that one of the merchandising companies will make an approach. It is worth remembering that merchandising can be a significant source of income which record companies and music publishers don’t get to see and so can’t recoup advances from. (This is of course provided that you have not already assigned your merchandising rights to a record or production company and they are likely, unless you put up a fight, to “require” such rights). For many bands it can be the difference between existing and making a reasonable living.

A brief explanation of the key clauses 

These notes are for guidance only; they are not intended to be a treatise on such agreements and do not replace the need to get independent legal advice on any agreement you thinking of signing as there are almost inevitably going to be particular circumstances which need to be addressed.

Clause 1: Definitions

This agreement assumes that the artist signing will be playing together as a band and are entering into the deal in relation to a particular tour or series of gigs. It also envisages that the Territory for which the rights are granted will be the whole world. If you are only planning to tour in the UK it would probably be sensible to limit the scope of the deal to the UK in the hope that, if your record takes off overseas and you decide to undertake a tour to support it you can do a further deal and get a further advance.
You will see that reference is made in the definitions to “Trademarks”. Once a band or artist begins to take off, it is important that trademarks – such as the band’s name or any logo associated with them – are protected by registering them as trademarks.

Registration in the UK is relatively inexpensive (although costs can mount up for registration in other territories) and ensures that no one else can profit from the band or artist’s name.

Clause 2: Grant of Rights

This clause deals with the rights that are granted to the Merchandiser. You will note that the right to sell goods through the fan club and through any website are reserved to the Band however where merchandisers allow this they will generally insist that the goods are sourced from them. If this is the case it is important that the Band make sure that they get such goods as near to cost price as they can. Obviously if the Band are selling the goods at a profit through these channels it is not unreasonable that the price paid to the merchandiser should not be included in gross income for the purpose of calculating royalties due to the Band.

The rights are granted for the Term which in this case is the later of the date of the last gig of the tour (or that leg of the tour if the agreement is for a limited territory forming part of a larger tour) or the date of recoupment of the Advance (as defined in the agreement). It is very important to beware of this. It is highly unlikely that a new or relatively new band will have the negotiating clout to make the Term a fixed period without reference to whether advances have been recouped or not (as would invariably be the case with Recording or Publishing agreements). It is therefore necessary to ensure that the band can terminate the Term by paying back any unrecouped advance (sometimes the merchandising company will want interest on such amounts but this can usually be avoided by telling them that they can’t have it). Failure to secure such a right might well mean that the merchandising company may get your next tour on the same royalty rate and without having to pay an advance.

Clause 3: The Products

It is important that you should retain some control over the type and quality of products to be sold – remember the public will identify the product with the band which means that if it’s shoddy or offensive its your reputation that suffers (unless of course you’re aiming to be offensive). Balanced against this is the need for decisions to be made quickly and for artwork to be supplied promptly. In some cases the artwork used for “T” Shirts etc will be that of the latest album cover which will probably belong to your record company. Most record companies will allow their artists to use such artwork on payment to the record company of fifty percent of the cost of the artwork to the record company and it is useful to get this right included in your recording agreement. (You generally have to ask for it – it does not appear in many first-draft recording agreements). It is therefore sensible to make sure that, where appropriate rights have been obtained prior to the start of the tour.

This clause contains an obligation on the part of the merchandising company to use a copyright notice. In the event that any of the products include a logo or name for which the band have registered a trademark there should be an obligation to include a trademark notice – if there is no such registration the “TM” symbol can still be used but “R” cannot be used.

Clause 4: The Advance

See comment above. It is important to ensure that advances can only be recouped from royalties under the agreement and cannot be recovered from you as a debt.

Clause 5: Royalties

The rate of royalty will vary depending upon the type of sales involved – the rates included here are given purely as a guide to what a band with some track record and following might achieve.
Live Performance Sales – the headline royalty rate may seem high for these sales but it should be remembered that they are calculated upon “Net Profits” (as defined in the agreement) which means that most of the merchandiser’s costs have already been deducted.
Wholesale/Retail Sales and Mail Order Sales – the royalty rate here is lower because the rate is calculated upon gross income.
Sub Licences – here the royalty rate is relatively high and the rate is calculated upon gross income – the justification for this is that the merchandiser does not have to do much work for these sales – they just sub-licence and wait for the money to roll in, although strangely merchandisers don’t always see it this way.

Clause 6: Accounting

This clause deals with the merchandiser’s obligation to account to the band. In this agreement accounts are to be prepared and delivered four times a year although it might be that the merchandiser will account monthly which would help the band’s cashflow.
Under English law artists would normally have six years in which to bring proceedings against the company for any discrepancies or inadequacies in the accounts. However merchandisers always try to limit the time in which any objection must be made to incorrect accounts, often to as little as one year. From the band’s point of view this period should be as long as possible but it really should not be less than three years and you should try for four years.
It is also important to ensure that the agreement contains provision for the band to carry out an audit of the merchandiser’s books and for the company to pay the cost of such audit if a material underpayment is discovered.

Clause 8: Suspension of Payment

This clause is important in that it allow the merchandiser to suspend the payment of royalties in the event that the band are in material breach of their obligations or a third party makes a claim that if successful would constitute a material breach by the band. It is important to ensure that if the merchandiser is to withhold royalties it should only be in an amount reasonably commensurate with what they are likely to lose and that there is a cut off period by which such sums must be released if no proceedings are issued within, say, six months.

Clause 9: Sell-Off Period

The merchandiser will want the sell-off period to be for as long as possible and the band will want as short as possible – three to six months is the usual compromise. It is important that the right to sell at live performances is reserved during such period as this will mean that no other merchandiser will look at the band. If possible the merchandiser should be restricted from selling off the merchandise at reduced prices.

The band should ensure that merchandiser does not manufacture more goods in the last three months of the Term than are reasonably necessary as the sell-off period is supposed to be a chance to dispose of overstocks not an extension of the Term. It is also usual for the band to have the right to buy the excess goods at cost price (this is important as a new merchandising company may insist on this being done).

Clause 10: Warranties

The warranties in this agreement are fairly standard but they are important and the band should make sure that whatever warranties they give are true and sustainable and that, in particular they entitled to grant the rights granted.

Clause 11: Termination

The first part of this clause deals with the merchandiser’s right to terminate in the event that the band splits up. Unusually there is a requirement to repay any unrecouped advances. Bands should try to resist such provisions but are unlikely to get very far.
The second part deals with fairly standard contractual provisions for termination in the event of breach of any material obligation or insolvency.

Clause 13: Miscellaneous

Again the contents of this clause are fairly standard however it should be noted that neither party can assign the benefit of the agreement without the consent of the other party.