Game Development Business and Legal Guide (Premier Press Game Development)

Key Concepts and Contract Terms

The most important thing in licensing contracts is to articulate the rights granted with extreme specificity; otherwise , you could end up giving away a whole stick and getting paid for a splinter. Terms and concepts that appear in most licenses include:

Definition of the Licensed Property

The definition of the property identifies what assets a licensee may use. The licensor is generally looking to define the property narrowly; the licensee, broadly. In a technology license, this could be something as simple as "the Shake engine and all modifications, upgrades, and fixes not sold as stand-alone products." In a content license, the definition will center around copyrights, trademarks, and the ideas they represent. Example: "the property "Binky the Vampire Slayer" and all related copyrights, trademarks and symbols, including without limitation characters , plots, story lines, concepts, designs, backgrounds, locations, sets, weapons, and artwork."

Sloppy language can result in what amounts to a free license. For example, the definition of the licensed technology property in this paragraph might be insufficient for a single platform licensewithout limitations like "the Shake engine for the GameCube platform and all modifications, upgrades, and fixes not sold as stand-alone products," the licensor could inadvertently grant rights to all versions of the engine.

In defining a content property, time is an important consideration. For example, if the above definition had been used to grant a merchandise license to the original film, that licensor might not have rights to any aspects of the property later created by the television show. Had there been language like "the property 'Buffy the Vampire Slayer' and all related copyrights, trademarks and symbols which are created now or in the future for the Property , including without limitation characters, plots, story lines, concepts, designs, backgrounds, locations, sets, weapons, and artwork," that merchandise licensor might have been able to argue that it owned the merchandise rights to the television series as well.

Rights Granted

This is where the parties specify those products that a licensee is allowed to create, as well as the associated rights like duplication, promotion, distribution, and the right to sublicense any of those rights to third parties. Again, specificity is key: If the parties have agreed to a price for an animated network television series, don't just grant rights to "motion pictures for television" that could include a live action series, movie of the week, or mini-series, and could be broadcast on cable or network television. This is not to say that you shouldn't include these associated rights in the grant, but they should each have a separate price.

A producer may demand an exclusive option or right of last refusal to create associated merchandise and productions to allow it to take advantage of a successful production.

Definitions of Gross and Net

This is particularly important in content licenses, where parties are frequently sharing pieces of a pie that has already been split several times. Certain product-specific, non-overhead expenses should be shared pro rata (according to the profit allocation) and should come off the top of gross revenues before licensor shares, such as:

• Agent's Fees. Agents may be used to handle the merchandise licensing, and their fees can range from 30 percent on the low end to 45 percent or more in some territories , such as Japan. Entertainment agents, such as those used to sell a game property to a film licensee, typically receive around 10 percent.

• Distributors . These are the parties who get the product, whether it is merchandise or entertainment, to retailers, be they Wal-Mart, Blockbuster, or the local television station. The fee for their services is usually in the range of 20 to 35 percent.

• IP Enforcement and Registration. As you may recall from Chapter 5, "Protecting Intellectual Property," protecting and registering intellectual property can be very expensive, particularly for global properties. Registering and protecting a successful property worldwide can cruise by the $100,000 mark with just enough time for a nod and a wink.

• Licensor's Administrative Fee. Licensors may receive a reasonable administration fee 10 percent off the topfor overseeing the property.

Territory and Languages

Specify both the territory and any permitted languages. A global marketplace means that every territory and language has value and the licensor should be adequately compensated. A licensor should only receive rights to those areas/languages where it commits to exploiting the product in other words, it might not make sense to grant the worldwide book publishing rights to a publisher with U.S.-only, English-language distribution.

Term

Setting the term of rights correctly is important for two reasons: to be sure that parties only share in the benefits that they create; and that any rights not being adequately exploited revert back to the licensor for use elsewhere. A term should generally be set for every licensed product category (example: movie of the week or animated network series).

The term for entertainment licenses may be further subdivided into pre-production, production, and distribution terms. This enables the licensor to gauge the licensee's commitment to completing a production, and allows it to get its rights back earlier. Example: A licensor can grant film rights as a three month option, a four-year production period, and a permanent distribution period. If the licensee can't raise financing for a production, it doesn't pick up its option and the licensee gets the rights back in time to get a film made by another party within the same time frame. If it picks up the option but doesn't produce a film within a certain amount of time, the rights revert after four years . If it picks up the option and produces a film, it may distribute that film in perpetuity.

Extensions and early terminations should be considered when negotiating the term, such as:

• Renewal. A licensor will want a licensee to earn the right to any term extensions and may set performance thresholds (money received by licensor, number of productions, aggregate production budget, and so on).

• Reversion. A licensor will also want to provide for the reversion of rights after a set time if the licensee does not use the rights or meet a certain threshold of payments to the licensor.

Sequels, Prequels, Re-makes, Ports, and Conversions

If the license includes rights to make follow-on content like sequels and the like, this should be elaborated (how many sequels, when does the option to make sequels lapse, what are the fees for sequels). For merchandise, if licensee gets a right of first refusal for sequel-related merchandise, include that right in the contract. For technology licenses, if the licensee gets a reduced price for ports, conversions, or sequels of the title, make a note.

Other Terms

• Approvals. A licensor must exercise some approval over a licensee's use of its trademark or risk losing its trademark rights. If the licensor is granting rights that will be subli-censed, it may request some influence over sublicensing activityeven if it is just timely , meaningful consultation rightsover key creative elements and business contracts.

• Quality Assurance. Manufacturers of merchandise and toys, or the agent hired by the licensor to deal with those parties, must give assurances that any products created will meet certain safety and quality standards.

• Marketing Guarantees. A licensor may want to see a marketing and advertising guarantee to ensure the licensee's commitment to the product.

• Ownership of Derivative Works. A licensor must have the right to own and incorporate all new intellectual property created by licensees . It is common for the licensor and licensee to co-own the copyrights to licensed entertainment such as films.

• Reservation of Rights. To protect against misinterpretation or inadvertently over-broad license language, a licensor may want to include a clause noting that it reserves all rights not specifically granted in the license.

• Representations and Warranties. The most important representations and warranties from licensor to licensee are that the licensor owns the property and has the legal authority to grant the license, and that nothing in the property violates the rights of any third parties. The most important representations and warranties from licensee to licensor are that the licensee will make no additions or modifications to the property that would infringe on the rights of any third parties and that it will manufacture only safe and appropriate products.

• Execution of Further Agreements. The licensor will want the licensee to agree in writing to execute any other documents necessary to secure the licensor's ownership of any intellectual property. This can avert annoying games later in the development process.

• Assignment and Sublicense. Licensees often need the right to sublicense or assign rights, for example, a production company licensing the right to make, exhibit, and distribute a film needs to be able to sublicense the exhibition and distribution rights to the film's distributors. Sublicensing these rights should be no worry to the licensor, as long as the rights to produce the entertainment stay with the production entity. If the production rights can be freely assigned or sublicensed, the quality control that a licensor exercises in selecting a producer is negated.

• Audit Rights, Governing Law, Dispute Resolution. These provisions are extremely important and can vary significantly. See Chapter 6, "The Publishing Contract," for a discussion of what to ask for in a contract.