Why Do I Need An Agreement?

In a perfect world, written agreements might be unnecessary. Even given the best of intentions, however, misunderstandings have a way of surfacing during the course of a license. In summary, a written agreement is needed to provide structure for how business dealings are to transpire, and provide a level of support and protection should one or both ends of the deal go awry. A well-executed licensing agreement protects BOTH parties.

We strongly suggest that potential licensors and licensees have a licensing attorney look over EVERY licensing agreement, no matter how trivial, before presenting it to the other party. Your lawyer can make sure you understand the details and that all agreed-to terms are clearly and accurately represented. At Pemberton & Oakes, we inevitably perform this crucial step prior to entering a licensing agreement.

Structuring License Agreements – What To Include…

A basic tenet in crafting a license agreement is the principal of retaining control over your work. In their eagerness to close a deal, artists new to the licensing field often feel obliged to relinquish more than they need to in the licensing agreement. Not only is this often unnecessary, it may be detrimental to your program in the long run. In fact you may help your reputation within the licensing community if you are “firm on your terms”. Of course, some companies may cut off talks the moment you put your foot down. We think this is OK – these are not the companies you want to deal with anyway. There are plenty of companies to work with that appreciate a professional approach on your end, so spend your time seeking these ones out!

Initially, Pemberton & Oakes composes and sends to a potential licensee a non-binding letter of “business terms”. This states in non-legal language major points of the deal, such as the name and nature of the product using the licensed work, the images to be used, the royalty rate, advance or guarantee, and length or term of the license.

It is normally recommended that the licensor take the lead in drafting the initial licensing agreement. Often the licensee may want to do this. However, starting with your own agreement strongly increases the likelihood of the final agreement being structured more closely to your terms and conditions.

When deciding how to structure your licensing agreement, look for opportunities to include “triggers” that will maintain protection of your trademark and copyright rights. Use of a property in commerce is by itself the main criterion for protecting trademark rights, however it is recommended you take this a step further and register your trademarks with the United States Patent and Trademark Office.

Have one or more “outs” that you can fall back on in case things go poorly during the term of the license, for instance, if product quality does not meet your standards, or if the products are not brought to market in a timely manner.

We would recommend drafting your own “boilerplate” agreement, with the help of a competent attorney or licensing professional experienced in developing licensing agreements. Such a boilerplate can be used to structure most if not all of your licensing agreements, and can evolve over time to better meet your licensing needs. Please feel free to share our website content with your attorney to begin your discussion.

Realize that any licensing agreement, whether drafted by you or by the potential licensee, may involve several back-and-forth iterations of changes with the potential licensee, until both parties are comfortable with it. This is a perfectly normal in the evolution of any licensing agreement.

…And What to Avoid

Generally, be cautious about including language in a licensing agreement that compromises your copyrights in the artwork. This includes any language that transfers some portion of the copyright ownership to the licensee, or otherwise diminishes your copyright rights in the art in favor of another party. Common examples of language to avoid include:

• Language that compromises your right to reproduce the art in favor of the licensee
  
• Language that “assigns” the copyright for your work to the licensee.
  
• Language that refers to your art as a “work for hire”. In essence, work for hire is work you perform while under the employ of others (this could include work as a self-employed “contractor”). Copyright rights for a work for hire become property of the employer, not the artist.
  

Also, unless you fully understand the consequences and additional vigilance you must exert, be particularly wary of language that allows a licensee to license your art to other companies (i.e. to sublicense your art). This is another means of potentially losing control over how your artwork is ultimately used. If unavoidable in an agreement, make sure you as the licensor retain the ability to accept or reject the proposed sublicensee.

Elements of a Licensing Agreement- An Introduction:

The main element in any licensing agreement is the “grant of rights” from you, the property owner to a licensee, the party using your artwork. Terms of the licensee’s duties and responsibilities that go hand in hand with their use of your artwork are spelled out here. Beyond this, much of the remaining language is to stipulate how the licensee can use the property. The following parameters are often used in licensing agreements to give the licensor the desired level of control over that art’s use:

• The name of the specific piece of artwork itself;
  
• The product the art will be used with (or the purpose for its use);
  
• The timeframe for use of the art (start date and finish date);
  
• The territory where the product can be sold;
  
• Whether or not the license is exclusive (often warranting a larger guarantee or higher royalty rate).
  
• The royalty rate with which the property owner is compensated for the grant of these rights. Typically, the rate can be based on a percentage of the retail price of each product sold, or it can be a fixed sum based on each product sold.
  
• If applicable, the amount of the advance and/or the minimum guarantee the licensee is responsible for paying the licensor. Generally grant of an exclusivity provision with a license warrants a higher guarantee, since the art/category combination is “tied up” from generating income with another company for the term of the license.
  
• If applicable, allowable deductions against sales made by the licensee that can be applied to royalty payments, such as for product returns or shipping charges.
  

Summary of Components for a Typical Licensing Agreement

Main components include:

• The names of the parties bound by the agreement (i.e. yourself and the licensee);
  
• The term of the license, including a definite termination date;
  
• Grounds for premature termination of the license;
  
• The territory in which the products will be sold, and the distribution channels to be used;
  
• A definition of the property, including names of the artistic works to be licensed;
  
• The product or product category that the artwork will be used with by the licensee;
  
• The maximum time period over which the licensee has to bring these products to market;
  
• The amount of advance, if any, to be paid to you, the licensor;
  
• A statement requiring the licensee to place the licensor’s copyright notice on:
  
  • Every product sold that includes the licensor’s art
    
  • Every piece of advertising and promotional media mentioning the product
    
• A statement of the royalties to be paid to the licensor and the frequency of payment;
  
• A statement giving the licensor the right to audit the books and records of the licensee, for the purpose of verifying royalty compliance;
  
• An indemnification clause, protecting the licensor from any claims or lawsuits arising from the licensor’s activities in conjunction with the product, including product liability;
  

Optional components (depending upon circumstances) may include:

• Quality control procedures and a timeframe for product approvals by the licensor;
  
• Sell-off rights, or the period over which the licensee has to sell materials still on-hand at the end of the licensing term;
  
• An option to renew the license at the end of the stated term, usually tied to one or more performance criteria achieved by the licensee, i.e. a minimum number of sales.
  

Is That All There Is to a Licensing Agreement?

Not by a long shot! There's no "formula" for developing a solid and profitable licensing agreement. In fact, we feel it's crucial that every licensing opportunity be looked at on the basis of its own merits prior to considering a licensing arrangement. For all but the very simplest licensing agreements, an artistic property owner is best served by being intimately familiar with the current industry standards and guidelines, by understanding the licensing market specific to their subject matter and style, and obtaining qualified legal review of written agreements. For these and other reasons, a licensing agent and attorney experienced in licensing law working together can be well worth having on your side!