THE NEED FOR WRITTEN AGREEMENTS

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


        There are an amazing number of parties involved in the intellectual property business who continue to operate without sufficient or indeed any written agreements.  Moreover, there are also an amazing number of parties who operate and commence or continue work in a transaction before any written agreement is signed even if discussions are ongoing.

        By “intellectual property business,” I refer to the business of publishing, whether of books, music, recordings or other publishing, web site design and ownership, artistic work of any kind and many, many other forms of that intellectual property business.  If you have found this article, then it is very likely you are in the intellectual property business.

        In the intellectual property business, legally appropriate contracts are not add-ons to your business, not something you do if you have any money left over; legally appropriate contracts are your business.  Without a thorough and valid contract, what you have is nothing but an illusion and a house of cards.  It only appears you are in business but in reality, you are not since given a controversy between you and the other party (and there is almost always a controversy-indeed the more money that is involved, the greater the likelihood of controversy and my sense is that when there is more than $1.82 on the table, everyone runs to their attorneys :-)), the house of cards can collapse and you risk losing your rights and the money that goes along with those rights.  Further, you may put yourself in a lose-lose situation:  if your project is a failure, you lose.  But if your project is a success (or even if it is not), you may find that the other party, not you, ends up making all the money or you may open yourself up for more claims than you can even imagine and in which event, you lose because you pay all your profits to lawyers and/or damages to the offended parties.  What kind of a way is that to run a business?  It seems self-evidently self-defeating.

        Remember: It never matters...until it matters...and then it matters!

        In Lyric Studios, Inc. vs. Big Idea Productions, Inc., these were the facts in summary form:

        Big Idea was formed to finance and market a series of children’s cartoons called “VeggieTales.”  Originally Big Idea distributed these cartoons itself, to an organization called Christian Bookstores Association (“CBA”) but later entered into a distribution agreement with another party to do so.  Eventually, Big Idea decided to seek further distributon of the cartoons and opened discussions with Lyric.

        In the words of the Court:

With this success, Big Idea wanted to sell its products to a larger audience. To do this, Big Idea began negotiating with Lyrick Studios, which had experience with its own successful children’s programs. In February 1997, Tim Clott, Lyrick’s CEO, sent Big Idea the first of three documents that are critical to this case. This document was a proposal for distribution of VeggieTales to the “general marketplace.” It ended with the caveat that “for both of our protection, no contract will exist until both parties have executed a formal agreement.” Big Idea’s vice president of licensing and development, Bill Haljun, sent the second critical document——a fax that listed several issues still to be decided. The next day, the parties discussed the issues in a phone call and agreed to resolve them. Haljun faxed Clott a few days later, noting that “Phil is ecstatic.”

Shortly afterwards, Lyrick prepared a 16-page contract. This draft agreement was never signed.  In fact, several draft contracts (and suggested revisions to the drafts) were sent back and forth over the years. There were several sticking points, including DVD distribution rights, rights to stuffed animals, the possibility of a “key man” provision, and even the term of the contract. The parties agree that no formal “long-form” contract was ever signed.  Despite lacking a formal signed contract, in March 1998, Lyrick began distributing VeggieTales videocassettes. The cassettes were immediately successful; both parties made a significant profit from the relationship.

The negotiations over a written contract continued until June 1999, when the fourth and final draft was prepared by Lyrick. Like the other drafts, this one was never signed.  At some point around this time, the parties’ relationship became strained. [Editorial comment about the last sentence: Duh!] One point of contention involved the rights to stuffed animals, or as the parties referred to them, plush. The parties eventually signed an agreement (“the plush letter”) transferring plush rights in VeggieTales from Lyrick to Big Idea. [emphases added] throughout the above]

In March 2001, Lyrick was acquired by HIT Entertainment, a London-based children’s entertainment company, but it continued to distribute VeggieTales. In December 2001, Big Idea informed Lyrick that it was going to use a new distributor. In response, Lyrick sued Big Idea.

This lawsuit is primarily based on Lyrick’s claims that Big Idea breached its exclusive license/distribution agreement by entering into an agreement with the new distributor. During discovery, Big Idea produced a document that Lyrick now contends is the third crucial document——a November 1997 internal memorandum by Bill Haljun. Haljun wrote this memo in response to a Big Idea employee’s question about the 10-year term with Lyrick. In his memo, Haljun replied that “[w]e agreed over the phone to his contract . . . . I would say that we have an agreement in force.” Lyrick had not seen this internal memorandum before litigation.

The Law

        Thus, the primary issue in the case was whether Big Idea had granted an exclusive license to Lyric to distribute the cartoons.  If it had, then Big Idea could not have entered into a new distribution agreement.  If it had not, then Lyric had no exclusive rights to distribute the same and Big Idea had the right to enter into that other distribution agreement.  [NOTE:  there are of course follow on consequences for the respective parties depending on the result of that issue above.  Each party may have made representations and warranties in their respective distribution agreement about their respective rights and any breach of those representations and warranties would likely also involve indemnification of the other party in the respective distribution agreement.  Thus, it is not merely a dispute between Lyric and Big Idea that is involved here.  No matter what the outcome of this case, the dispute is likely to widen considerably for at least one of these parties.]

        The Court cited the Copyright Act and stated:

Under § 204(a) of the Copyright Act, “[a] transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner's duly authorized agent.” 17 U.S.C. § 204(a). A grant of an exclusive license is considered a “transfer of copyright ownership.” 17 U.S.C. § 101 (2005). Section 204(a)’s requirement, while sometimes called the
copyright statute of frauds, is in fact different from a statute of frauds. Konigsberg Int’l, Inc. v. Rice, 16 F.3d 355, 357 (9th Cir. 1994). Rather than serving an evidentiary function and making otherwise valid agreements unenforceable, under § 204(a) “a transfer of copyright is simply ‘not valid’ without a writing.” Id. The writing in question “doesn’t have to be the Magna Charta; a one-line pro forma statement will do.” Effects Assocs., Inc. v. Cohen, 908 F.2d 555, 557 (9th Cir. 1990). Nor does the writing have to contain any particular language. Radio-Television Espanola S.A. v. New World Entm’t, Ltd., 183 F.3d 922, 927 (9th Cir. 1999) (“No magic words must be included in a document to satisfy § 204(a).”). It must, however, show an agreement to transfer copyright. Id; see also Playboy Enters., Inc. v. Dumas, 53 F.3d 549, 564 (2d Cir. 1995).1 An after-the fact writing can validate an agreement from the date of its inception, at least against challenges to the agreement by third parties. Billy-Bob Teeth, Inc. v. Novelty, Inc., 329 F.3d 586, 591 (7th Cir. 2003); Magnuson v. Video Yesteryear, 85 F.3d 1424, 1429 (9th Cir. 1996); Imperial Residential Design, Inc. v. Palms Dev. Group, Inc., 70 F.3d 96, 99 (11th Cir. 1995); Eden Toys, Inc. v. Florelee Undergarment Co., Inc., 697 F.2d 27, 36 (2d Cir. 1982).

Here the parties dispute whether Big Idea and Lyrick have a writing that meets § 204(a)’s requirement. Lyrick contends that § 204(a) is satisfied with a series of documents——the letters between Haljun and Clott and the internal Haljun memorandum. Big Idea responds that the letters were just proposals and never showed a final agreement. Big Idea also argues that Haljun’s internal memo is not the kind of writing that can satisfy §204(a).

        The Court reviewed the various documents involved in the dispute and concluded that none of those documents satisfied the requirements of section 204 (a) and thus Big Idea had not granted Lyric an exclusive license to distribute.  The Court said that all of the documents were either expressly not binding or were merely part of the negotiations.  The Court reviewed a number of cases dealing with these issues and concluded:
In general, this case is similar to Radio Television Espanola——preliminary faxes indicated that a contract would be entered into but did not provide a final contract; an internal memo, never intended to be given to the other party, described some of the terms.
        And for those parties who operate during the pendency of negotiations, the Court stated as follows:
Lyrick alternatively argues that the parties acted as if they had a deal for several years, making it unfair for Big Idea to rely on a “hyper-technical” § 204(a) argument. The Ninth Circuit rejected a similar argument in Konigsberg when it
required a writing even in the face of ample evidence of an agreement, including that Rice had written the bible and had been paid for it. Konigsberg, 16 F.3d at 356. Section 204(a) requires a writing.  Although Lyrick argues that enforcing this requirement would be unjust, we will not add an exception to the statute.
Conclusion (And Moral)

        Beyond the legal fact that without valid writing a party cannot transfer exclusive rights of copyright, operating without a thorough written agreement is foolish in the extreme since in almost every instance, none of the parties to the transaction will understand the transaction in the same way.  And, as indicated above, the more successful the transaction, the more likely it is that each party may have the incentive to not understand the transaction in the same way.  In my over 3 decades of practicing law I have found that it is not contracts that break up relationships; it is the “I thought you said….” stuff that comes from no written contracts or poorly written ones.

        If you are a party operating without a formal, written agreement or you are a party operating without any written agreement even if an agreement is in the process of being negotiated, you should consult with an experienced intellectual property attorney immediately about the situation you are in.  And this applies to all sides to those kinds of transactions since if one side is not happy, by definition that unhappiness is going to make all sides unhappy since that unhappiness is likely to become a dispute and ultimately litigation and the net result for all sides is destruction of the relationship, time, aggravation, uncertainty (preventing further development of the project) and of course enormous cost in terms of attorneys fees, court costs and damages.

        Talk about self-defeating behavior!

        Also read “The Right to Transfer Copyright Licenses” and “The Fundamental Principle Under the United States Copyright Law” and “The Need for a Written Web Design Contract. ”

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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