Entertainment Licenses: Better to Ask Questions Before Signing…and Avoid Those Nagging Worries Later

October 2002
The Licensing Book

[This is the first of two articles addressing some basic considerations in negotiating license agreements for entertainment character merchandising.]

Not long ago, a new Client called, obviously quite upset, saying he had been referred to me by an existing Client.  He went on to say that he would like to send an entertainment-character license for review, and that some of the content worried him.  I assured him that I would be happy to help, would review the draft and point out any concerns.  If he wished, I would then help him to negotiate changes in the draft. 

He said, "Oh, no, it isn't a draft.  I've already signed it and need to understand what I have to do now."

How many times have you endured worries - or even sleepless nights - after signing a license for an entertainment property?  Did I pay too much?  Will the property be a success?  Will the licensor support it?  Will they undercut my line with other licenses or with premiums?  Will I cover the guaranty?  Are there hidden costs?

Only you can decide how much you're willing to pay for a property, but this article may at least help you understand better what you're paying for.  What follows is a discussion of only a few of many major areas of focus that can determine whether or not you're getting your money's worth.

Issue:  Will the Property be a Success?

If the license is for a new movie or TV property, there is no way to know in advance whether it will capture the imaginations of your target audience.  However, the presence or absence of certain media elements can certainly be evaluated in determining the likelihood of the desired outcome.

Here are some questions to consider if the property is a theatrical release:

Are major stars promised for the "lead" and supporting roles?  Will the licensor promise a minimum number of "screens" the first-run theatrical release?  Will the release date occur within the preferred "window" for the type of property - Memorial Day through summer for boys' "action" pictures, pre-holiday for younger-age or "softer" features?  Will the licensor specify a minimum for production and promotion budgets?  While there are no "sure things", all of these elements can give a picture the best chance to be a "major event".

Then there are elements that can reinforce the theatrical impact.  Will the DVD and video release be timed to continue the "heat" of the theatrical release and enhance your merchandise sales?  Will there be a related QSR premium promotion during or following the release?  Are there plans for a TV special to promote the picture - a la "The Making of . . . ."?

If the property is a TV series, there are parallel questions regarding the number of episodes, broadcast coverage of major TV markets and total percentage of U.S. homes, daily or weekly broadcast, favorable and consistent time period, second-season guaranty, measurable production values, cross-promotion in other programs, etc.

Pinning it down . . .

Of course, when you try to pin down licensors on these issues, you will hear arguments like "We can't guaranty what we can't control.  We don't make decisions for the theatres or the networks.  We can't tell you how many people will see the movie or what the TV ratings will be.  If the network doesn't want to carry the series in all markets, we can't force them to."

This may be accurate, but in the next breath, they'll be telling you how much you'll have to guaranty to pay them in royalties.  Two suggested answers:  You can't guaranty retail results any more than they can guaranty ticket sales or TV ratings.  Nevertheless, while you're willing to guaranty royalties anyway, you want portions of the guaranty tied to the fulfillment of certain of the above criteria.  For example, if the theatrical release doesn't achieve a certain number of screens, the royalty guaranty would be ratcheted down a notch.  If the promised TV market coverage isn't met, a similar reduction would be appropriate.

You aren't asking for a favor; you're just asking that the licensor fulfill the sales pitch they've given you on the property, or else cut back your financial commitment in like measure.  And contrary to their protestations, you are not asking them to "guaranty" these things will happen, only to relinquish part of your guaranty if they don't happen.

Issue: Are Your Exclusive Rights Really Exclusive?

Hypothetical situation: The licensor has pitched you hard, and you have decided to make a proposal for exclusivity in your action figure products.  As you are deciding what levels of advance, guaranty and royalty rate to offer, here is another thing to ask yourself:  When I pay for exclusivity, will I get it?

Who controls "the Property"?

Let's assume that you're talking with a movie studio distributing a sequel to a motion picture based on a character made famous by comic books on which a previous TV series was based, in addition to the earlier motion picture.  When the studio offers you "exclusivity" for the sequel, what does that really mean?

Let's also assume that the sequel is a huge success, and one or more of your competitors would love to market a figure line that could ride your coattails.  Can anyone along the chain starting with the comic publisher and ending with the studio also sell a license to the sequel?  Probably not, assuming you're dealing with a reputable studio, but that isn't your only concern.

Might the comic publisher retain rights to forms of the hero character that could be licensed to your competitor?  Their figures might not use the likeness of the actors in the motion pictures or the name of the sequel, but if they're sold in the action figure aisle in packages labeled with the name of the main character, you will wish they weren't.

 Here are some questions to ask the studio rep.  Can the:

In order to be sure that your figures aren't merchandised against any of these others, you will need due diligence and appropriate contract language, possibly including signoffs from other members of the chain of development of the property.

What are your "Exclusive Products"?

Continuing the hypothetical: Your proposal described to the licensor your concept for a first-year line of 5-inch figures with 3 scaled vehicles, 2 playsets and a sculpted carry case.  The draft agreement that you received says you have exclusive rights for "5-inch articulated action figures, toy vehicles and playsets scaled to the figures and hard-sided carrycases".

Is this the exclusivity you want?  Not if you would object to your competition selling a licensed line of 3-inch or 7-inch or 12-inch articulated figures and accessories or a line of bendable figures, or a soft-sided carry case, all of which might bear artwork and the title from the sequel.  None of these would be precluded if your rights are defined as above.

What are your "Channels of Trade"?

If the draft agreement says that you have exclusivity for "National Discount/Mass Retailers, Regional Discount/Mass Retailers, Chain Toy Stores and Toy Wholesalers" do you have the exclusivity you want?  Not if you would object to a competitor's licensed figure products showing up in Warehouse Clubs, Chain Drugstores, Non-Chain Toy Stores, Hobby Stores, Gift and Specialty Stores, etc., etc.  And in this case, the competing products can be identical to yours.  The concept of parsing the various wholesale and retail outlets this way is a fairly recent development, but some licensors have already divided the marketplace into more than 75 such channels and in fine print inform licensees that all channels not specifically licensed to you are reserved for third-party exploitation with "similar or identical products".

What about Premiums?

Many character licenses reserve QSR and other premiums to the licensor.  It doesn't matter whether you sell toys, tee shirts or tumblers - if someone is giving away millions of a substitute product, how successful will you be in selling yours?

Your ability to identify and understand these limitations and "loopholes" should enable you to negotiate proper protections for your product line and/or adjustments to your financial commitments for the license.

[The second of two articles will help you identify other ways your rights might be diluted as well as how to recognize and avoid "hidden costs" in your license agreements.]

The writer is a veteran of 20 years representing licensors and licensees in negotiating entertainment, sports, artwork, brand, invention and technology agreements.  Mr. Kipling is with Frost Brown Todd LLC in Cincinnati, Ohio and can be reached at jkipling@fbtlaw.com, (513) 651-6101.

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