Bo's bLAWg - What should be in an art licensing contract with a manufacturer

MJ Bogatin (“Bo”) of Bogatin, Corman & Gold, is an Arts and Entertainment Attorney in San Francisco.  He is also Co-President of California Lawyers for the Arts.  www.calawyersforthearts.org  Bo is available to answer some of your questions surrounding the business of Art Licensing. - THANKS BO!

 

I have a list of some 30 issues that should be covered one way or the other in a visual art License Agreement with a manufacturer.  Some of them are what you would consider “legal boilerplate,” but there are good reasons for such provisions to be included.  Others are more particular to most any agreement that pertains to a copyrighted image.  Then there are some that are unique to a visual artist’s agreement with the manufacturer of goods.  I will identify the most important to me from the last two groups.

Exclusive and Non-Exclusive Rights

The first and most important issue to me is whether or not the license is to be Exclusive or Non-Exclusive, and whether the referenced exclusivity pertains to the goods for which the designs are intended, or the designs which are being licensed, or both.  On occasion the nature of the exclusivity is uncertain.  Consider the following provision:

“Artist grants to Manufacturer the exclusive right to Artist’s illustrations on Schedule A attached hereto to reproduce, manufacture, have manufactured, use, sell, advertise, promote, and distribute in domestic and/or foreign markets in the Licensed Products in accordance with this Agreement.” 

What exactly is the exclusive right that is granted?  A literal reading could be interpreted to mean that the Artist has licensed exclusively only her Scheduled illustrations to this manufacturer, but retains the right to license other of her images, whether or not similar to those licensed in this agreement, to a competing manufacturer of the same kinds of Licensed Products!

If the Grant of Rights is Non-Exclusive, then the Artist maintains her right to license to other manufacturers of the same or similar goods.  If Exclusive as to goods, then the artist will not be able to license to competing manufacturers for the duration of the agreed-upon Term of the license. 

A well-drafted Grant of Rights provision, in concert with a set of Recitals (“WHEREAS” provisions that I recommend at the start of an Agreement that identify the parties and the underlying intentions of the Agreement), should clearly state the nature of the Exclusive Rights that the manufacturer expects to acquire and the limits on their use.

If the Exclusive Grant of Rights bars the artist from licensing the same or other illustrations, make sure that the bar extends only to competing goods rather than any other kind of manufactured goods.  The goods that are encompassed under the license should be listed.  These are often called “the Licensed Products.” 

Furthermore, depending on the length of the Term, make sure that the Exclusive Agreement requires a minimal level of sales for each year of the Term.  You do not want to tie up your best illustrations (much less all of them!) in a deal that does not net you a reasonable minimum income.  Where the manufacturer is unwilling to guarantee minimums, it is possible that they will accept the prospect of the License becoming Non-Exclusive as to your illustrations and their goods if the royalties do not come to an amount that the manufacturer itself believes is the minimum you should be earning for Exclusive Rights on its anticipated sales.  The minimum for each year can change, depending on the kind of goods, expected promotional efforts and the market.  It is not unusual for me to come up with an acceptable ‘bell-shaped curve’ of a minimum in royalties, low the first couple years, spiking at years three and four, then receding again as the product is supplanted. 

A significant Advance on sale royalties is another way to insure a decent income on the license, particularly if the Advance can be recouped only on the first year or two of sales.

 

Sub-licensing 

The next most critical consideration is whether or not the manufacturer will be sublicensing manufacturing rights to another entity.  As you can imagine, such sublicenses can result in significantly diluted royalties to the Artist.  You might expect to negotiate for the right to pre-approve proposed sublicensing terms.  To be more attractive to you, a sublicensing arrangement could involve a big up-front fee in which you would share.  Otherwise, look to establish a minimum royalty per unit sale regardless of manufacturer sub-licensing rights.

 

Discounts

A related issue is the manufacturer’s right to discount its wholesale goods.  Sales to big chains and Amazon can include huge discounts due to the volume of sales involved.  Again, as long as the Artist is entitled to a minimum $um on each unit sold, discounts need not grossly decrease the Artists 4 or 5% royalty rate.

 

Audit Right

It is one thing for a manufacturer to supply an Artist (and her accountant!) with statement of sales and computations of royalties due; another for the Artist to have the right to audit the manufacturer’s records to assure the accurate reports on sales.  While I have nothing to support the opinion, I think that the threat of an Audit, particularly with a financial penalty attached in the event of the discovery of any erroneous accounting, helps to insure that the accountings are in fact accurate; while absence of the provision pretty much assures the licensor Artist that they will never know if the accountings were accurate or not.

 

Copyright Notice / Trademark

Wherever possible the Artist should look to include a legible copyright notice associated with the illustration being used in the product.  Don’t forget to include the notice in product packaging that might well include the artwork.  I urge clients to include their own trade name as long as they are certain that it does not infringe another entity’s trademark.  The Artist can expect to warrant that she has rights to any trade-name and trademark used.  Including a URL as part of the name credit in the copyright notice (or otherwise) can be a significant promotional benefit to the Artist.

 

Quality Control

The quality of the item and the Artist’s illustrations as used is not the issue it was back in the Analogue Age.  Correct use of Digital files pretty much assures that the reproduction of the illustration will be decent.  However, the product itself may not be.  The Artist will want to satisfy herself up front that the manufacturer makes quality goods and that her reputation will not be sullied by association with crappy goods.  The right to pre-approve the product and quality of the reproduction and copyright notice and name credit, along with free samples after approval and manufacture are still legitimate terms to include.

 

Dispute Resolution

If there is a dispute that crops up, whether on name credit or accountings or termination rights, it is likely to be an unreasonably expensive proposition unless there is a prevailing party cost and fees provision included in the Agreement.  Otherwise, to bring a claim, the Artist will be out-of-pocket for attorney’s fees and costs to bring an action in court on a dispute that cannot be resolved between the parties.  A prevailing party costs and fees provision makes it much more likely that a party will not have to pursue a meritorious matter in court, or sue on one that lacks  merit.  

A much better alternative than the threat of court process, however, is the prospect of mediation and/or arbitration as the contracted way to resolve disputes.  Such Alternative Dispute Resolution process has become much more acceptable to manufacturers over the last few years.  95% of the matters that I have had occasion to refer to mediation – a three-way discussion facilitated by a trained mediator -- are resolved in the course of that process. Arbitration, if necessary, is a quick, private and relatively inexpensive alternative to court.  Prevailing party fees and costs can still be awarded in arbitration if provided in the Agreement.  I strongly recommend that provision still be included as a means to leverage settlement of a legitimate claim and avoid specious ones.

As mentioned at the top of this bLAWg, there are many more issues that need to be included in the typical Manufacturer’s Licensing Agreement, but they are for the most part all reasonably included by both parties if requested (or required).  If you have raised these listed issues in negotiations, I suspect you will be respected for your level of sophistication about licensing terms, and may well be able to get better terms than other Artists of whom the manufacturer’s business rep might otherwise take advantage.

If you have further questions about this that you want to direct to me personally, I can be contacted through my website linked below.

Disclaimer: The information contained in this website is not intended as legal advice. Because the law is not static, and one situation may differ from the next, we cannot assume responsibility for any actions taken based on information contained herein. Also, be aware that the law may vary from state. Therefore, this website cannot replace the advice of an experienced attorney. Receipt of this information does not create an attorney-client relationship. MJ Bogatin, Bogatin, Corman & Gold, www.bcgattorneys.com.