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California, home to Hollywood, remains the epicenter of the entertainment industry. It is no surprise that an extensive number of contracts in the industry are governed by California law. For an industry that is based on the services of actors, actresses, musicians, and other artists, any change in the State’s labor laws are pivotal. Over the years, one such law has been of great concern to the industry: California Labor Code Section 2855 (the “Seven Year Rule”), which limits the length of time for a personal service employment contract to seven years.

What is Section 2855 of the California Labor Code?

In 1937, California enacted Section 2855 of the Labor Code. The new law essentially captured the purpose and intent of its predecessor, Section 1980 of the Civil Code, which is to curtail an employer’s ability to bind their employees to indefinite contracts. Section 2855(a) limits the term of personal service employment to seven years, i.e. a personal service employment contract may not be enforced for a period exceeding seven years. This is the reason the statute is famously known as the “Seven Year Rule.”

Section 2855 states that a contract for personal services of a “special, unique, unusual, extraordinary, or intellectual character” that have a “peculiar value” such that the “loss of these services cannot be adequately compensated in damages” cannot “be enforced against the person contracting to render the service, for a term [that] exceed[s] seven years from the commencement of service under it”. In other words, if an actor or artist enters into a personal service contract with a studio or record label, then the company cannot make the artist work for them beyond a period of seven years.

Interpretation of Section 2855

The seminal case of De Havilland v. Warner Bros. Pictures involved actress Olivia De Havilland and the exclusive 7-year contract she entered into with Warner Brothers in 1936. De Havilland grew dissatisfied with the quality of the roles she was being offered and refused several roles, during which period the studio declared her contract was “suspended.” In 1943, after seven years had passed, Warner claimed that De Havilland owed them an additional six months for the time she was under suspension. The studio argued an actress had to render seven years of “actual” service, and accordingly, her suspension extended the contract term. De Havilland argued that the contract was limited to seven years irrespective of any suspensions, and that under California state law, employment contracts were only enforceable for up to seven calendar years. The Court found the black and white language of the Labor Code limited to the contract to seven years, no exceptions, and sided with De Haviland.

After De Haviland, studios attempted to avoid violating the 7 Year Rule by amending contracts during the initial term to extend the relationship. Courts interpreting Section 2855 have made clear that this practice does not get around the law.   The purpose of the law is to give employees the opportunity to seek other employment before they re-enter into another long-term contract with the employer. As a response, many employers have implemented a “lag” day during which the employee is technically unemployed, and on the following day, the employer re-engages the employee.  Whether this move is sound is subject to some debate—high-profile cases are settled, and scarce case law exists providing guidance.

1987 Amendment and its Impact on the Music Industry

The De Havilland decision bestowed unprecedented power on artists.  Recording artists had some leverage, in that they were able to use the Seven Year Rule to force the renegotiation of contracts after seven years had passed.  Without the Seven Year Rule, artists could be forced to remain indefinitely.

Naturally, record companies were not happy by the limitations imposed on them.  In 1987, the Recording Industry Association of America (RIAA) successfully lobbied to amend Section 2855. The RIAA argued that recording artists shouldn’t be treated like other talent in the entertainment industry as recording contracts were traditionally based on the delivery of a set number of records, as opposed to a fixed number of years. They further added that recording labels invest heavily in an artist’s career, and it is unfair to have the artist walk out of the agreement without delivering a certain agreed upon number of albums. The RIAA’s efforts convinced the California legislature to enact subsection (b).

Section 2855(b) is music industry-specific and provides less freedom for at least some types of music artists.  The subsection states: persons providing services for “the production of phonorecords may not invoke the [Seven Year Rule] without first giving written notice to the employer” [1] and further, the company “shall have the right to recover damages for a breach of the contract occurring during its term in an action commenced during or after its term…”.  Meaning, while record companies can’t force artists to work beyond seven years, they can recover damages for material required under the contract that wasn’t delivered.  This significantly weakens an artist’s leverage.  However, it isn’t a lost cause for artists. Record companies may be entitled to damages, but the question is, what damages do they incur?  Lost profits have a well-earned reputation of being tough to quantify.  You would think that a pop artist that fails to deliver albums would amount to significant losses for the record company—but, sales are always speculative, and there is always some degree of uncertainty into how much those losses actually are.  And, the amount of damages to be awarded is generally a factual question which will always be a coin toss in front of a jury. Put another way, even if it determined that the record company suffered “harm,” the damages might be zero.  Only time will tell if artists push cases forward and record companies choose to fight rather than avoid unfavorable precedent being set.

[1] “Phonorecords” are defined in 17 U.S. Code § 101 as “material objects in which sounds, other than those accompanying a motion picture or other audiovisual work, are fixed by any method now known or later developed, and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The term “phonorecords” includes the material object in which the sounds are first fixed.”

Authors: Krishna Parekh and Brandon Anand

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