Navigating the Potential Traps in Licensing Content for Online Uses

Copyright owners who are considering licensing their content for online exploitations must understand that they are venturing into still largely uncharted waters with few reliable partners. It's better than it was in 2000 ' or even 2003 ' but it's still not an entirely stable environment with dangerous shoals along the route. Don't assume that words you have seen in contracts for decades have the same meaning to your online licensee as they would to a court.

Licensing content to many online distributors or retailers is much the same decision as licensing to unscrupulous distributors in small third-world countries. Experienced licensors will likely try to get the biggest advance they can, on the assumption that they will be robbed blind on actual sales by licensees. Many such licensees go into their deals with the intent to deceive ' like so many other aspects of the Internet culture the business question is often not what's right, but what you can get away with. There are some bright spots in the market, such as iTunes Music Store, MusicNet and others, but they are few and far between.

A good example of this is a deal I did a few years ago with a large online company. I pointed out in the negotiation that there was no audit provision in the contract that would have applied to the online company. I was told that the reason there would be no audit clause is that the company had decided that being audited was not an efficient use of its resources.

This is clearly not true of companies like Apple, but when a potential licensee cannot demonstrate how they intend to account, or even use, the content, the choices are usually don't make the deal or make sure you have a very large ' non-returnable ' advance. And then expect that the online licensee will use your catalog anyway and launch a smokescreen sounding in 'fair use' or 'DMCA.'

Another example of the disconnect between the tech world and the content world when it comes to audits is a conversation I had with the CFO of a tech company (who was also a CPA). I mentioned the need for good record keeping in the case of audits, and he said he wasn't worried about it because he could get a SAS 70 certificate (which relates to the federal Sarbanes-Oxley record-keeping law for businesses), and that there wouldn't be any need for licensors to audit. When I told him he had completely missed the point, he argued with me vigorously. I eventually prevailed.

All too often in this environment, the licensor finds itself forced to grant a de facto license to an infringer simply because the licensor lacks the ability or financial wherewithal to pursue claims or even to send 'takedown notices' to the infringer. In the case of Google's YouTube, this means sending a continuous stream of such notices to YouTube ' hopefully ending when there is a resolution of the issue in the Viacom litigation. This 'Mars Attacks' strategy is common with Internet companies who seek safety in the massive numbers of the mob of people who want to get music for free. Unfortunately, rather than bring their business in line with established business practices, I fear that the only way to enforce rights against Google is by means of winning a final, non-appealable judgment after millions of dollars in litigation costs.

Unplanned Subdistribution

A licensor may also find itself entering into a distribution agreement with a third party that itself has a license agreement with one of the offending services, such as YouTube. If a licensor does not use care in their negotiation, they may inadvertently find themselves being distributed in a manner they did not anticipate or intend to authorize. This is a problem because YouTube claims that they cannot filter content; and it would be a good guess that if they can't filter, they can't account on any basis for a revenue share, as such calculations require a numerator as well as a denominator. [Just prior to press time, YouTube announced that it is testing a copyright filtering system.]

If, for example, a copyright owner is asked to clear the use of a sound recording or musical work for broadcast on television, the copyright owner must now ask where that broadcast signal is going to appear. If the signal is going to be rebroadcast or syndicated on a television network that has a deal with, say, YouTube, but the copyright owner doing the clearing does not, then the copyright owner should take this into account.

[IMGCAP(1)]

A simple solution to this problem is to include 'downstream' provisions that would be binding on the syndication partner ' or at least create an obligation in the licensee to act on behalf of the syndication partner. For example, while a licensor may not object to a simple rebroadcast of a television program on Joost or another IPTV service that is essentially a rebroadcast of the original TV signal, the licensor may prohibit clips being shown on YouTube (if for no other reason than this may create a 'reuse' payment obligation with AFTRA or SAG).

Tips for Licensees

On the other side of the table, licensing content rights is a very complex process. It always takes longer than a licensee thinks, sometimes a lot longer. And do not forget that the Internet is a worldwide medium, so a licensee must be sure to get all the rights it will need in all the countries in which it wishes to operate.

Too many tech companies approach music and motion-picture rights licensing like they are setting up a glorified lemonade stand. But these content industries have been around for decades, and in the case of the music industry, even longer. There are well-settled business practices that are slightly or greatly different from country to country. Just because a licensee is on the Internet doesn't mean it can magically make the rights go away.

There is a very long line ahead whenever a potential licensee jumps into the licensing game. The licensee's job is to wheedle its way up to the front. Be nice. Be patient. It can be very, very frustrating by how long everything takes. For example, it is very cumbersome to license musical works in the current regime in the United States except for permanent download purposes. There are lots of people with lots of ideas trying to get the attention of relatively few people at the record labels and music publishers. Don't be tempted to just launch without licenses unless your name is Google, and then you know who you are and you can get your own advice.

SIDEBAR

Licensing-Issues Checklist for Licensors

1. What's the point of doing the licensee's online marketing or sales program? (What is the call to action for the consumer?)
2. How does the program make money and for whom? How am I being deceived?
3. What content is being licensed for the program? Can I specifically identify my content so that it can be tracked as it is being sold or given away?
4. Where can the licensee use my content and what else can the licensee do (or think it can do) with my content besides use it in the program?
5. Who controls the security solution? How can I audit the security solution? What happens if there is a security breach? What rights do I have to compel the licensee to act?
6. What happens if the licensee doesn't respond to e-mails or phone calls? What if the licensee abandons the company but leaves the Web site running with my content up?
7. How do I get at the sales data from the program? Who controls that and what systems are in place to ensure the accuracy of that data?
8. Who owns the consumer data derived from the program?
9. How do they account and when do I get paid?
10. How can I audit?

' Christian L. Castle

Copyright owners who are considering licensing their content for online exploitations must understand that they are venturing into still largely uncharted waters with few reliable partners. It's better than it was in 2000 ' or even 2003 ' but it's still not an entirely stable environment with dangerous shoals along the route. Don't assume that words you have seen in contracts for decades have the same meaning to your online licensee as they would to a court.

Licensing content to many online distributors or retailers is much the same decision as licensing to unscrupulous distributors in small third-world countries. Experienced licensors will likely try to get the biggest advance they can, on the assumption that they will be robbed blind on actual sales by licensees. Many such licensees go into their deals with the intent to deceive ' like so many other aspects of the Internet culture the business question is often not what's right, but what you can get away with. There are some bright spots in the market, such as iTunes Music Store, MusicNet and others, but they are few and far between.

A good example of this is a deal I did a few years ago with a large online company. I pointed out in the negotiation that there was no audit provision in the contract that would have applied to the online company. I was told that the reason there would be no audit clause is that the company had decided that being audited was not an efficient use of its resources.

This is clearly not true of companies like Apple, but when a potential licensee cannot demonstrate how they intend to account, or even use, the content, the choices are usually don't make the deal or make sure you have a very large ' non-returnable ' advance. And then expect that the online licensee will use your catalog anyway and launch a smokescreen sounding in 'fair use' or 'DMCA.'

Another example of the disconnect between the tech world and the content world when it comes to audits is a conversation I had with the CFO of a tech company (who was also a CPA). I mentioned the need for good record keeping in the case of audits, and he said he wasn't worried about it because he could get a SAS 70 certificate (which relates to the federal Sarbanes-Oxley record-keeping law for businesses), and that there wouldn't be any need for licensors to audit. When I told him he had completely missed the point, he argued with me vigorously. I eventually prevailed.

All too often in this environment, the licensor finds itself forced to grant a de facto license to an infringer simply because the licensor lacks the ability or financial wherewithal to pursue claims or even to send 'takedown notices' to the infringer. In the case of Google's YouTube, this means sending a continuous stream of such notices to YouTube ' hopefully ending when there is a resolution of the issue in the Viacom litigation. This 'Mars Attacks' strategy is common with Internet companies who seek safety in the massive numbers of the mob of people who want to get music for free. Unfortunately, rather than bring their business in line with established business practices, I fear that the only way to enforce rights against Google is by means of winning a final, non-appealable judgment after millions of dollars in litigation costs.

Unplanned Subdistribution

A licensor may also find itself entering into a distribution agreement with a third party that itself has a license agreement with one of the offending services, such as YouTube. If a licensor does not use care in their negotiation, they may inadvertently find themselves being distributed in a manner they did not anticipate or intend to authorize. This is a problem because YouTube claims that they cannot filter content; and it would be a good guess that if they can't filter, they can't account on any basis for a revenue share, as such calculations require a numerator as well as a denominator. [Just prior to press time, YouTube announced that it is testing a copyright filtering system.]

If, for example, a copyright owner is asked to clear the use of a sound recording or musical work for broadcast on television, the copyright owner must now ask where that broadcast signal is going to appear. If the signal is going to be rebroadcast or syndicated on a television network that has a deal with, say, YouTube, but the copyright owner doing the clearing does not, then the copyright owner should take this into account.

[IMGCAP(1)]

A simple solution to this problem is to include 'downstream' provisions that would be binding on the syndication partner ' or at least create an obligation in the licensee to act on behalf of the syndication partner. For example, while a licensor may not object to a simple rebroadcast of a television program on Joost or another IPTV service that is essentially a rebroadcast of the original TV signal, the licensor may prohibit clips being shown on YouTube (if for no other reason than this may create a 'reuse' payment obligation with AFTRA or SAG).

Tips for Licensees

On the other side of the table, licensing content rights is a very complex process. It always takes longer than a licensee thinks, sometimes a lot longer. And do not forget that the Internet is a worldwide medium, so a licensee must be sure to get all the rights it will need in all the countries in which it wishes to operate.

Too many tech companies approach music and motion-picture rights licensing like they are setting up a glorified lemonade stand. But these content industries have been around for decades, and in the case of the music industry, even longer. There are well-settled business practices that are slightly or greatly different from country to country. Just because a licensee is on the Internet doesn't mean it can magically make the rights go away.

There is a very long line ahead whenever a potential licensee jumps into the licensing game. The licensee's job is to wheedle its way up to the front. Be nice. Be patient. It can be very, very frustrating by how long everything takes. For example, it is very cumbersome to license musical works in the current regime in the United States except for permanent download purposes. There are lots of people with lots of ideas trying to get the attention of relatively few people at the record labels and music publishers. Don't be tempted to just launch without licenses unless your name is Google, and then you know who you are and you can get your own advice.

SIDEBAR

Licensing-Issues Checklist for Licensors

1. What's the point of doing the licensee's online marketing or sales program? (What is the call to action for the consumer?)
2. How does the program make money and for whom? How am I being deceived?
3. What content is being licensed for the program? Can I specifically identify my content so that it can be tracked as it is being sold or given away?
4. Where can the licensee use my content and what else can the licensee do (or think it can do) with my content besides use it in the program?
5. Who controls the security solution? How can I audit the security solution? What happens if there is a security breach? What rights do I have to compel the licensee to act?
6. What happens if the licensee doesn't respond to e-mails or phone calls? What if the licensee abandons the company but leaves the Web site running with my content up?
7. How do I get at the sales data from the program? Who controls that and what systems are in place to ensure the accuracy of that data?
8. Who owns the consumer data derived from the program?
9. How do they account and when do I get paid?
10. How can I audit?

' Christian L. Castle