SUBSIDIARY RIGHTS LICENSING

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



        Whether you are a book publisher, author, graphic artist, web site designer, site owner or any other creator of copyrighted intellectual property, you have what the law refers to as a “bundle of rights” that comprise that property.  What are deemed to be primary rights and secondary rights will vary depending on the initial form of exploitation you choose for your bundle.  For instance, if the first rights you exploit are to turn your work into a book, then the rights that are not “book” rights hard and soft cover rights, are often referred to as subsidiary or ancillary rights.  If, on the other hand, you are a screen writer, then the primary rights might be for motion picture use and book rights would then be considered secondary or ancillary.  In truth, the distinction is often not truly relevant since what you are selling or reserving has to be described with precise particularity in any agreement with regard to all your rights.  Merely referring to rights as primary or subsidiary is wholly insufficient.

        You can exploit your subsidiary rights on your own and, if you have royalty participants in those rights (such as authors, artists, illustrators etc.), you will share with those participants their contractual shares.  However, the purpose of this article is to explore the terms of the agreement whereby you license, that is, grant to third parties, some rights as part of your “bundle.”  The article also presumes that you are not the sole creator of all aspects of the material being licensed but in fact have some third party creator or creators with whom you have contracted to obtain certain rights.

        This article is also relevant to those third parties who are the licensees of such material.

        As used in this article, “you” refers to the “licensor,” i.e. the owner of the rights. The term “licensee” refers to the party to whom certain rights are being granted.

Definition of Licensed Rights

        Clearly the license must define, with particularity, what rights are being licensed.  Is it for some hard copy, off line use or for the Internet?  If the former, is it to make some form of derivative work out of the underlying work? For instance, if a book, is it to be turned into a movie?  If a movie, is it to be turned into a book?  Are there language rights?  Territory rights? Media rights?  Are there rights to sublicense? If it is for the Internet, is it the right in the licensee to carry the material only on the licensee’s site or can the licensee further sublicense to other sites? Can the licensee use the material in non-Internet uses such as for CD-ROMs and DVDs?  Read “Electronic Issues in Publishing Contracts” as but one example.

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

        Does the licensee have exclusive rights to the material or may you license that material elsewhere on the Net or in other media including using it on your site?  If you give away exclusive rights to the material, you may be preventing yourself from using that material even on your own site or in your own or other projects.

        Can the licensee license the material 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 material not only in whole but can the licensee take only parts of the material 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 other legal issues to face) with your creator if you are not the 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 grants rights beyond your rights that you have acquired from your creator and other royalty participants and 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 material?  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 an advance?  Actually, let me rephrase it: what is the advance you get?  It would be a very, very unusual situation in which the licensee did not get an advance.

        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?”  This is a potentially huge area for negotiation and structuring this provision may often mean the difference between getting royalties and not.

        Back to the owned and controlled situation.  Suppose the licensee has sublicensing rights and is part of a larger organization to which some or all of the material 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 material and combine it with material belonging to other parties, how shall your royalties be calculated?  In today’s world where material 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 material (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 material 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 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 material becomes successful.  If nothing happens, no one’s probably going to make much of a fuss.  But if the material 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 any licensor would put themselves in a lose-lose situation without such a thorough agreement is totally unclear to me.

© 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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