SELLING YOUR PUBLISHING (OR OTHER INTELLECTUAL PROPERTY) COMPANY
IVAN HOFFMAN, B.A., J.D.
The best entrepreneurs see things backward. They know that if their plans for their company or venture include “cashing out” in a number of years, say 5 years, that they have to ask themselves the questions: “If I want to sell out after say 5 years, what do I have to do in 4 years, then in 3 years, then in 2 years and ultimately, what do I have to do today to make my 5 year plan successful?”
And as an integral part of that strategy and those questions, the best entrepreneurs know that in today’s world, the means of production and wealth is intellectual property (IP). A hundred or so years ago, if you wanted to be rich you owned gold mines. Later it was steel mills or railroads. Today it is IP. Entrepreneurs know that even though they may be selling books, computer software etc., in fact the real business they are in is the intellectual property business. (Read “What Business Are You In?”) They know that in the intellectual property business, especially if the business itself or its owner is not the actual creator, that the rights of ownership of that intellectual property come from acquiring copyrights, trademarks and other forms of intellectual property rights. In order to so acquire those rights, the entrepreneur knows that thorough and legally appropriate contract rights are essential.
So selling your business is about positioning your business in such a way as to make the sale a realistic possibility and in the intellectual property business, if your chain of title to the rights that form the essence of your business and its potential value to a buyer is shaky, if there are potentials for uncertainty and, in the worst case, litigation, you can probably kiss the sale goodbye.
Thus, let me examine some of the intellectual property issues involved in such a sale. I will primarily focus on rights of copyright since those rights are often the heart of the business. Where appropriate I will discuss trademark and related issues. (Patents are beyond the scope of this article). I will also refer to several articles I have written that explain some of the issues in much greater detail rather than go over those same points in this article, which would make this article very long and more complex.
Of course, there are many other issues involved in selling a publishing business including but not limited to valuation and corporate issues, but I will focus on the IP issues indicated. While this article talks about selling your company, the same issues are presented if you contemplate merging with another company or if your company is the acquiring company in an acquisition of another IP company. These issues are likely also to arise in other forms of business relationship such as joint ventures, partnerships or other forms of “strategic alliance.” (In the latter regard, read “The Strategic Alliance”) Finally, although I refer to the “publisher” and talk about publishing companies in this article, the term can be applied to any company that markets and distributes products of intellectual property.
The Reason Clear Title Is Important
This may seem self-evident but before you can sell something, you should own it. Yet, many publishers may actually believe, quite innocently and in good faith, that they own rights which they do not own. During the process of a sale, however, the buyer is likely do an intellectual property audit and if there is a gap in the ownership that shows up during that examination, that is going to come at a very inconvenient time for the parties, especially the seller. If, at that time, the seller has to approach the creator of rights to seek an after-the-fact agreement because it turns out that the publisher does not actually own that which it believed it owned, the negotiating leverage is entirely within the realm of that creator and the seller may find that the deal then is much, MUCH more expensive to make. Having been making deals for the entirety of my several decades long legal practice, I can say that once there are a few dollars on the table, making a deal is often very difficult indeed. Any creator, knowing that the other party, the publisher in this instance, has to make a deal in order to complete the sale, will almost assuredly make requests in the negotiation that increase the cost to the publisher. There is nothing wrong with that strategy. It is called free-market capitalism and the publisher has only itself to blame for making itself vulnerable by not acquiring all the rights at a time when the negotiating tables might have been to its advantage.
Further, as part of the deal, the publisher is very likely going to have to represent and warrant that it actually owns what it is selling, that there are no other parties that own rights to the IP assets and other forms of representations and warranties as to title and other elements. The publisher will also likely have to indemnify the buyer against any breach of warranty as to any such claims and other of the publisher’s obligations. Thus, if any part of the rights that are being sold are not in fact owned by the publisher, the publisher is likely to be in breach of the warranty, the indemnity is likely to commence right away and the publisher may then find that it has to spend many, many thousands of dollars in attorneys fees (the publisher’s as well as the buyer’s attorneys) and perhaps damages and costs to the seller and perhaps to the creator (and maybe even the creator’s attorney’s fees as well) rectifying the situation that could have been handled much less expensively had it been done right in the first instance.
There may of course be other consequences to lacking a clean chain of title including but not limited to dealing with heirs of deceased creators (see discussion below) and other consequences. But the point should be clear: Taking care of legal obligations at the inception of the relationship between creator and publisher is the best way to make a problem not a problem.
Help me is almost always cheaper than fix me.
Acquisition of Rights
If you are not the actual creator of the copyrightable material, you do not own the exclusive rights to that copyrightable material. Put another way, just because you paid for it, does not mean you own it. The ownership of the physical embodiment of the material is completely different than the ownership of the rights of copyright to that embodiment. (17 USC section 202)
Let me give just one example. I believe that the single biggest failure of publishers to acquire exclusive rights to copyrightable material is the publisher’s failure to have a valid, thorough, written and signed agreement with cover artists. “But I paid for it!” is the general reply. Read “The Cover Artist/Illustrator Contract”. Cover art can be and often is the single most important and valuable intellectual property, often more important than the text since it is from cover art that merchandising rights spring.
Additionally, publishers often fail to have such contracts with other parties who may have rights of copyright including editors. Read “The Book Editor Contract”.
Thus, the issue becomes how to you validly acquire all rights exclusively to the copyrightable material.
Again assuming that the creator is different than the publisher in this example, the publisher can acquire exclusive rights to the material either because the creator is a bona fide employee of the company and the work that the creator has done is within the course and scope of his or her employment or because the publisher has acquired such exclusive rights via a valid, written agreement. (Read the series of articles dealing with “work made for hire agreements” on my site.) Merely declaring some relationship to be a work made for hire relationship does not make it legally so. This is a very complex matter and can be subject to interpretation and in turn to the clouding of rights. Thus, the publisher should always have a valid, thorough, written and signed agreement even with employees that includes, among other provisions, the transfer of exclusive rights to the employee’s work product.
However, in many instances the creator will not in fact be an employee but an independent contractor and thus the ownership of all rights to the copyrightable material vests in that creator and the only exclusive rights the publisher has are those rights that it obtains via a valid, thorough, written and signed agreement. Without such agreement, what the company may end up with is a non-exclusive set of rights to use the material in undefined ways and such a license is unclear, confused and likely to be economically less valuable than exclusive rights. Read “A Legal Nightmare: The Unwritten License”. As a result of having no such written and signed agreement, the chain of title to the relevant creation is unclear and this can reduce the chance of completing the sale to the buyer.
And while the primary assets in the realm of the publishing business may be author and cover artist, illustrator and editor agreements, the publisher must also be aware that rights to the company’s web site are also generally involved in the sale. Thus, the same issues about acquiring exclusive rights to the work of all contributors to that site present themselves. These contributors include web designers, marketers, programmers and all other such parties.
Further still, often the publisher has engaged the services of an independent contractor graphic artist to develop the publisher’s logo and other forms of company identification and image. Here too, without the acquisition agreements discussed above, the publisher may find that it does not own exclusive rights to its own logo etc. While there may be trademark issues such as whether or not the creator has rights to use the trademark logo presented in such a scenario, the last thing the publisher wants to do is to get involved in a litigation with the designer over trademark and other rights, especially when a sale is pending. And especially since the legal issues could have been handled much more easily by having a legally sufficient agreement in the first instance.
The publisher must also examine its chain of title as to any third party materials contained in the publisher’s books, web site or other products. All third party material should be the subject of previously entered into written licenses to use the same. Reliance on defenses of “fair use” as to such materials is quite unwise since there is no way to determine, in advance, whether such defense will be held valid by the courts. Read the several articles dealing with “fair use” on my site. Additionally, if there are such third party materials that are used without having a valid, written license to do so, such claims, if they are presented during or even after the sale, can result in breach of warranty claims, indemnity claims as well as claims from the third parties.
Further, to the extent that the publisher may have claims to trademark rights including trade dress rights, rights to characters and other such trademark rights, these should be appropriately registered. The publisher’s rights and remedies are significantly greater with registration. Read “Do I Need To Register My Copyrights?” and “Should I Register My Trademarks?” and “The Protection of Trade Dress” on my site.
If there are outstanding trademark licenses, these should be examined as well. Read “Naked Licensing of Trademarks” on my site.
There are of course many other forms of acquisition and in turn exploitation agreements that should be in place including agreements between the publisher and the creator even if they are the same and certainly if the publisher is a separate entity even if owned by the creator. These should not be lingering unsettled.
Termination of Transfers And Other Issues
Under the United States copyright law, the creator of copyrightable works has the right to terminate the transfer to those works during a statutorily stated time. Read “Terminations of Transfers.”
Further, if there are situations in which creators have died, there are significant other legal issues that have to be cleared, which issues should have been cleared before the sale process begins for the leverage and other reasons set forth above. Read “The Problems with Old Publishing Contracts.”
Thus, any agreement for sale must have first evaluated the status of these “older” situations to make certain that when the publisher warrants that it owns what it is selling, it owns what it is selling.
And all rights of any kind should be fully transferable and assignable on the part of the publisher. If there are no clauses allowing such transfer and assignment, the opportunity to sell the company is clouded at best. If there are provisions prohibiting the said transfer and assignment, the opportunity to sell the company, at least with the assets represented by such agreements, is probably non-existent without renegotiation.
There are a number of other articles on my site under the link “Articles About Being an Entrepreneur” that you should read including “Private Laws,” “The Need for Vision” and “Exit Strategies” that may help to widen the lens a bit.
Clearly this article and the articles referred to in this article are merely a broad overview of the intellectual property issues involved in a transaction described. The issues discussed are not intended to be exhaustive of the many issues that might be presented. Any seller, buyer or any other party should have all of these and of course all the other issues thoroughly examined by an attorney experienced in these matters. The time for a publisher to have these reviewed is now, before a buyer begins to nibble.
The consequences of trying to “do it yourself” can be quite significant.
Copyright © 2002 Ivan Hoffman. All Rights Reserved.