ARE YOU PAYING (OR GETTING PAID) ON LICENSING INCOME?
Ivan Hoffman, B.A., J.D.
Often book and other print publishing agreements contain provisions that provide for royalties based on “sales.” Read “Royalty Calculations in Book Contracts” on my site. Often as well those agreements fail to actually define “sales” leaving significant gaps in understanding and leading to the “I thought you meant….” disputes that can be problematical to the relationship.
I represent writers as well as publishers and this article is not intended to favor one party or the other. My goal, no matter what party I represent, is to have clear agreements, agreements that solve problems that inevitably arise. Read the numerous articles on my site under the general titles “Precise Contract Language.” Click on “Articles for Writers and Publishers.” Let me quote from “Precise Contract Language:”
A contract should solve more problems than it creates and you never want to have any contract so vague and uncertain that it leads to litigation and, in the worst case scenario, a situation in which some other party, some trier of fact, be it judge or jury, is going to be able to interpret that which should have been expressly set forth in the agreement. A contract should be clear and thorough, spending the extra few words to make it so complete that, as much as possible, no one can interpret it in any other way than the way the draftsperson intended.
Editorial Note: There are many other royalty agreements that involve the issues discussed in this article but I will focus on book and other print publishing agreements for the sake of simplicity. The reader is encouraged to review articles on my site under the link “Articles for Recording Artists and Songwriters” for examples of other forms of agreements.
But even if the parties have agreed on what is a “sale,” there are a wide variety of other sources of income to the publisher that are not “sales.” Read “Is It A Sale or a License?” on my site. For purposes of this article, these other forms of transaction will be referred to as “licenses.” Thus the issues are whether the respective agreement even covers licensing matters and even if it does, does it also cover how the income received from those licenses is to be shared as between publisher and writer. Remember: just because a writer gives to the publisher certain rights in one part of an agreement does not necessarily mean that the writer has obtained the right to be paid for those rights in another part of the agreement.
Licensing income can be very lucrative since, by definition, the income received by the licensor (in this example, the publisher) is essentially cost-free. There are virtually no expenses incurred by the licensor (except of course for the publisher’s attorney, which fees are always justified). Examples of licensing income in the context of publishing agreements are: foreign translation and reprint deals, merchandising deals, other media deals such as film and television uses, soft and hard cover deals by parties other than the publisher and so on. In short, any relationship in which the publisher is not directly engaged in the creation and production of the product but agrees to allow a third party to do so, subject to limitations such as the right of approval and so on, could be considered license.
Many publisher/writer agreements do not cover this source of income. Those agreements talk only of “sales” and often merely “sales by the publisher” and thus would not cover licensing situations since in those situations, by definition, the publisher is not “selling” anything. The publisher may be receiving a percentage of “sales” by the licensee, but those “sales” would not be covered under the provisions dealing with “sales” or “sales by the publisher.” Thus if the writer is entitled to be paid only on such “sales” or “sales by the publisher,” the writer would probably not be entitled to any share of this income received by the publisher from the licensee. It is worth repeating that just because a party has given up certain rights does not mean that that party has bargained for the right to be paid on those same rights. This is still free market capitalism and each party is responsible for itself in the negotiation.
But let’s be optimistic and assume that there are provisions providing for a share of licensing income to be paid to the writer. Often this share may be part of the overall royalty provisions and thus may simply provide that the writer receives the same share of such income as the writer does from “sales” or “sales by the publisher.” However, since licensing income is almost cost free as discussed above, the share due to the writer should be higher than royalty income from “sales” or “sales by the publisher” in which the publisher incurs significant costs in regard to such “sales,” such as printing, binding, distribution and similar costs.
Suggestions on How To Structure These Provisions
Of course of most importance is to define what would be a license vs. a sale including providing some examples without limiting the generality of those examples.
Then the agreement should define the percentage of the licensing “income” shared in by the writer.
However, it is not sufficient to talk about “income” because that term is nowhere defined or universally understood. The term “income” is not self-evident. Is that “gross income” (and if so, how is that defined?) or “net income” (and if so, how is that defined?)?
“Gross” would generally mean 100% of all monies or other considerations received by or credited to the publisher. However, this can also lead to uncertainty. Does this include advances received by the publisher or only monies or other considerations received but not the advance. This latter point creates issues for both the writer as well as the publisher. If the publisher receives an advance which represents an advance against royalties but does not pay the writer on that advance, then the publisher will have to account to the writer for the writer’s share of the royalties against which that advance was paid even though at the time the statements to the publisher are sent, those royalties would not be payable since the advance was payable against that share. That means that the publisher will have to make a payment to the writer for the writer’s share of those royalties even though the publisher will not be receiving the monies thereon at that time.
If, on the other hand, the writer’s share is based on “net,” how is “net” to be defined? Without limiting the foregoing, clearly a specification about what sort of deductions are allowed from “gross” before the “net” is determined is required. Generally, the writer would ask that these be only expenses directly related to the work being licensed and even in those circumstances, the negotiations would likely involve further limitations. What about “overhead” charges? Not so much in book publishing but in the film and television industries, this is often a significant issue in negotiations.
And irrespective of whether it is “gross” or “net” or some intermediate formulation, the agreement should further refine the provisions to cover situations in which income is received by or expenses are incurred for, parties and entities that may be owned or controlled by or related to the publisher. Especially in today’s vertically and horizontally integrated business structures, these issues are of significant importance. The issues relate to what is “received” and what expenses would be deductible.
Suppose for example, a translation deal is made by the publisher with a company in another country that is a subsidiary or division of the publisher. The deal may not be an “arms length” deal as it would in an “unrelated” transaction. Also, the foreign owned subsidiary may receive income that the publisher actually would benefit by were it not for the relationship between the entities. Is receipt by the foreign entity receipt by the publisher so that the writer gets a share of that income computed “at the source” as it were? This is just one of many issues related to the owned and controlled situation. Read “Owned and Controlled Licenses” on my site.
Negotiating writer/publisher agreements is a complex matter and it is in both parties’ interests to utilize the services of an attorney with experience in drafting and negotiating the same. If the agreement is carefully and clearly drafted, it can be worth the cost. One of my favorite “Hoffman-isms” is “Help me is almost always cheaper than fix me.” Read “Hoffman-isms: 35 Additional Words That Can Help You Make Money” on my site.
Publishers and writers alike should each review their agreements.
Copyright © 2018 Ivan Hoffman. All Rights Reserved.
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. You should not rely on this article in any manner whatsoever and you should not draw any conclusions of any sort from this article. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on United States laws but the laws of other countries may be different. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.
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