LOST OPPORTUNITY COSTS

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


        Making deals involves 2 components.  The first is knowing what to ask for.   The second is having the marketing clout to get what you ask for.  The first can be knowledge or talent the party has or may instead involve being represented by someone with that knowledge or talent.  The second is a factor of the party itself.  This marketing clout can be either real or perceived.  Read “Leverage In Contract and Other Negotiations.”

        One negotiating point that brings the 2 components into sharp focus is seeking paying for lost opportunities.   Negotiating deals on behalf of parties who contribute creativity to the transaction— parties such as authors, artists, musicians, actors and the like—clearly always involves seeking payment for the work of these parties.  Such payment most often takes the form of being paid royalties and other shares of the revenue generated by the other party to the transaction, the distributor of the creativity—such as publishers, record companies, film studios and the like.   However, many parties contributing that creativity often fail to seek payment for lost opportunities.

One Example

        Let me posit an agreement whereby the creative party, an author in this instance, agrees to write a book in exchange for which the distributing party, a publisher in this instance, agrees to pay the author a share of the revenue derived from the sale and other exploitation of the book.  In many instances, the publisher may pay the author an advance to be recouped from the author’s potential share.  This situation is also common in other areas of intellectual property exploitation such as in the recording industry, the film making industry and the like but for the sake of simplicity, I will limit this article to the book publishing business.

        Often the advance is paid in steps—a part on signing of the agreement and the rest at other milestones, the last of which is often tied to the publication of the book.

        Clearly the writing of the book takes some time on the part of the author.  Presumptively the advance, if there is one, is intended to compensate the author for some part of the author’s time in doing the writing.

        However, the publishing agreement may contain provisions that excuse the publisher from not actually publishing the book.  (Read “Failure to Publish Provisions in Book Contracts”).  In the event that the publisher elects not to publish the book there are generally provisions that say what rights the author has in the event of such election on the part of the publisher.  Some of these provisions may provide that the author may notify the publisher of the publisher’s failure to publish the book and then the publisher has some further period of time in which to decide whether or not to publish the book but if, during that extended period, the publisher fails to publish the book, then the author has the right to have the rights to the book revert to the author.  (Keep in mind that reversion of rights is definitely not the same thing as the termination of the agreement.  Read “Reversionary Rights in Book Contracts”)

        The said failure to publish provisions may also provide that the author gets to retain any monies paid to the author prior to the termination.  But if the book is not published, what happens to that last payment?

        Even if the book had already been written, in whole or in part, at the time of the original agreement, the author could claim that the author took the book off the market as a result of the publisher’s commitment to the author (in the form of the publishing agreement) and if the publisher fails to publish the book, the market for that book may no longer be viable.  This may be because the topic is no longer marketable or because the book is tarnished by having been once acquired and then failed to get published or for any number of other reasons.

        If the publisher fails to publish the book, the author could claim that it was because the publisher has made a determination, outside of the control of the author, not to do so.  Accordingly, the author could claim that it is reasonable that the author be entitled to that part of the advance that would otherwise have been due on the publication of the book.

        Moreover, given that one of the reasons often given for not publishing the book is that the book has lost “market viability,” providing that the Author has the right to get the rights to the book back is often illusory since if the original publisher did not see the market, the chances that another publisher will see that market diminish with each passing day.

        Thus, given the time spent from first word to completed delivery and during the pendency of the publisher’s getting the book ready for publication and then failing to do so, the author may have foregone other opportunities to make money or shop the work or both.  Thus the author could claim that, in addition to the payment of the full advance including the unpaid portion that might have been due on publication and the return of the rights to the book and the termination of the agreement, the author should be entitled to a payment of a certain sum as payment for such lost opportunity.

Another Example

        Depending on a wide variety of factors, the publishing agreement may involve the transfer of all rights in and to the work to the publisher.  What happens if the publisher publishes the book in print format but fails to use or otherwise exploit or license the use or exploitation of other rights in and to the book?  Under the language in most publishing agreements, those unused and unexploited rights remain dormant and unused and remain rights belonging solely and exclusively to the publisher without any right on the part of the author to exploit the same or allow others to exploit the same.  Such lost rights are, in a very real sense, lost opportunities.

        Assuming that the author knows what to ask for, the author could request that if some of the rights are not used or exploited during some stated time, the unused or unexploited rights would revert to the author (even if the rights to the printed book as published remain with the publisher) and the author should be entitled to a lost opportunity payment for the failure of the publisher to have exploited those rights.

        In both these instance, I would remind the reader that although this article presents the “what” to ask for, the ability of the author to command the “what” depends on the market value, real or perceived, of the author.  However, if all the factors are aligned, in an appropriate circumstance the otherwise expected response of the publisher—“We don’t do that for anyone”—can become “We don’t do that for anyone…else!”

Yet Another Example

        But there is another form of lost opportunity costs that are not related to contract negotiation.

        There are countless publishers and other parties who believe that they cannot afford an experienced publishing or other attorney especially at the commencement of their business.  This is like saying “I want to be in the real estate business but I cannot afford the land.”  If you are going to be in the real estate business, an essential expenditure is land.  However, since the intellectual property business is all about rights and agreements for those rights (read “The Fundamental Principal Under the United States Copyright Law” on my site.  It is so important, it is on the home page and most other pages), an essential expenditure is a high quality intellectual property attorney. You would clearly not consider going into the real estate business without land and you should not consider going into the intellectual property business without such an attorney. Thus unless you budget for attorneys fees in a realistic amount, the amounts you spend on the other areas of your business may be potentially put at substantial risk.

        So the party attempts to become a “do it yourself publishing (or other) lawyer” and then attempts to draft contracts on their own (Read “The Do It Yourself Publishing Lawyer” and “Dignity for Designers”)  The party will often spend countless hours researching the often complex legal issues related to publishing (and other) agreements.  They will often seek free legal advice from non-lawyers, who are often the only ones who will provide free legal advice thus forming the foundation for the cliché that “free legal advice is generally worth what you have paid for it.”  They will then cut and paste and try to draft language that fills in the blanks.  The sum of it all is that they may spend all this time, let’s just say 20 hours, trying to draft an agreement that ultimately is vague, unclear and likely fails to cover all the appropriate provisions.  (Read “Precise Contract Language,”“Precise Contract Language-Again,” “Set To Fail” and “The Fear of Winning”)

        What is significant, for purposes of this article is that the party fails to place any value on their own time, which even at 20 hours in this example, would likely be better spent generating business.  So they “waste” these hours, producing an agreement that is often useless and prejudicial to themselves and is often subject to legal challenge which can result in claims and in the worst case scenario, litigation, that can eat up any “savings” the party may have believed it was “saving” by doing it themselves.  Often these issues do not become apparent until much later, at a time that is at best inconvenient for the original party doing the home made drafting and when that party has little or no leverage in terms of negotiation.  Read “Leverage In Contract and Other Negotiations as indicated above.

        What kind of way is that to run a business?

Conclusion

        Clearly these issues are not for everyone.  These issues are for parties who have marketing strength.  However, beyond that, these issues are for those who are ready to move beyond the “standard contracts” approach to their work and their business.  (Read “Standard Contracts” and “Dignity In The Deal” and “Self-Interest”)

Copyright © 2005 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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