LICENSING 

IVAN HOFFMAN, B.A., J.D.


        Here is the situation: you have either created or have acquired some or all of the rights to a work or a body of work. You may have acquired such rights by virtue of being a publisher of a creator’s work (with a legally appropriate publishing agreement with your author, cover artist, illustrator etc.), or a web site designer or owner, also operating under a valid agreement giving you rights.  You now wish to exploit that work by licensing some or all of the rights to a third party.

        In addition to the legal complexities, it is also very apparent that in today’s world of content ownership, effective marketing is no longer simply about having that content reside on your site and waiting for others to arrive there or publishing it in one place, whether hard copy or digitally and hope for sales.  Those may be viable business models but today the Net has made content syndication almost essential.  Once you’ve got the content on a server, it is a simple matter to license that content, in whole or in part, to other sites thereby multiplying the reach of that content and presumably, increasing revenue.

        Indeed, there may be some sort of implied obligation to the creator of and other royalty participants in the work to expand and exploit that content and failing to do so may expose you to some claim from them.  Read “Publisher Liabilities To Authors And Others.”

        What then are some of the essential terms of that third party license?

Definition of Licensed Rights

        Clearly the license must define, with particularity, what rights are being licensed.  Is it the right in the licensee to carry the content only on the licensee’s site or can the licensee further sublicense to other sites?

        Can the licensee use the content in non-Internet uses such as for CD-ROMs and DVDs or in hard copy formats?

        Can the licensee use the content only in English or can the licensee translate or have translated that content into other languages?

        Can the licensee carry content that is competitive with that of your content?

        Does the licensee have exclusive rights to the content or may you license that content elsewhere on the Net or in other media including using it on your own site?  If you give away exclusive rights to the content, you may be preventing yourself from using that content even on your own site.  Keep in mind that if you have granted even non-exclusive rights to this content, you cannot thereafter, during the term of that license, grant exclusive rights to anyone else.

        Can the licensee license the content to companies and entities that are “owned and controlled” by or which own and control the licensee?  This is an essential issue to face (as it relates to the payments discussed below) since if this is permitted, often the related entities may make deals that, while favorable to them because of internal accounting procedures, may in fact be unfavorable to you.  Read “Owned and Controlled Licenses.”

        Can the licensee use the content not only in whole but can the licensee take only parts of the content and combine those parts with other parts?  Read “Compilation Rights in Book Contracts.”

        What is the term of the license?  Can the licensee extend the term into some form of option and if so, what are the conditions for the licensee doing so?  Suppose that the licensee pays you, the licensor, a certain amount of royalties or option pickup monies, can the term be extended?  Do any of the provisions of the initial term change during the extended terms such as your share and so on?

What Are The Payment Provisions?

        Prior to making the license, you must review your written agreements (hopefully written.  If not, you’ve probably got plenty of other legal issues to face) with your creator and other royalty participants to see how, when and on what basis they get paid.  You cannot make a deal with a licensee that extends beyond your rights that you have acquired from your creator and other royalty participants.  Similarly, you don’t want to be making deals that may require you to take money out of your pocket to pay your creator and these other participants while you wait to get paid from your licensee. Read “The Gap Trap.”

        What is your share of any revenue derived from your content?  Is it a per use royalty or do you share in a more general category of income such as advertising revenue and if the latter, how is that calculated?

        Do you get paid on “gross” or “net” and if the latter, how is “net” defined?  What costs and expenses are allowable deductions from “gross” when arriving at “net?”

        Back to the owned and controlled situation discussed above.  Suppose the licensee has sublicensing rights and is part of a larger organization to which some or all of the content is sublicensed?  Do you get paid based on the amount received by your licensee or based on what the law refers to as an “arms length transaction?”  This latter term means that the measuring standard is based not on the terms of the deal made by the related parties but on the terms on which 2 unrelated parties might have made a deal.  Suppose for example that in an “arms length transaction” it would have been normal for your licensee to get an advance against some distributive share and in your deal with your licensee you get a piece of all income including advances.  But suppose that your licensee made a deal with an owned and controlled sublicensee and got no advance (or even a less than high royalty) because the 2 related entities have no reason to pay to each other any advances (or high royalty) but instead simply adjust their economic relationship internally, via a bookkeeping entry.  Does this mean you don’t get paid a portion of what should have been an advance (or a higher royalty) had the parties not been related?  It might unless such issues are addressed in your license.  And if they are not and you don’t get paid in this example, do you have some liability to the creator and other royalty participants from whom you acquired rights because you have failed to maximize earnings?

        If the licensee has rights to make compilations, meaning that it can take some of your content and combine it with content belonging to other parties, how shall your royalties be calculated?  In today’s world where content is fully combinable in nearly infinite ways, this is a very relevant issue to be covered in your license.

        How often is an accounting and payment due?

Representations and Warranties

        If you are asked to make representations and warranties (and corresponding indemnities) about the content (i.e. that it does not infringe on others rights, etc. etc.), then you must be certain that you have corresponding provisions in your agreement with the content creator or creators.  Otherwise, should there be a claim, you may find yourself obligated to the licensee without having a corresponding right and remedy against the creators.

        In all instances, whether you are the party making these representations and warranties (and corresponding indemnities), how is “breach” to be defined?  Does your liability kick in when a third party merely makes a claim and then you have to pay attorneys fees etc. merely to respond, no matter how unfounded the claim might be?  Or does your liability commence only after a finally adjudicated decision finding you in breach of your representation and warranty.  This can be a significant difference.

        And as above, you must review your agreement with the content creators to make certain you have at least as broad a protection from the creators as you are granting to the licensee.

Conclusion

        There are of course many, many other provisions that are or should be included such as confidentiality provisions and others but without at least the provisions I discussed, you run the risk of coming up way short in terms of protection.  Without a thorough agreement, often the worst thing that can happen is that the content becomes successful.  If nothing happens, no one’s probably going to make much of a fuss.  But if the content becomes “hot,” you can’t count the number of claims that are likely to come crawling out of the woodwork.  In those instances, you had better have a thorough agreement.  Why anyone would put themselves in a lose-lose situation without such a thorough agreement is totally unclear to me.

        Look ahead.  See with vision.  Read “The Need for Vision.”

© 2000, 2001 Ivan Hoffman

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This article is not intended as a substitute for legal advice.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  You should consult with an attorney familiar with the issues and the laws.
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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

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