All About Licensing Part II: The Contract

by Justin Sevakis, Jun 13th 2012

Other parts in this series:
Part 1
Part 3

When we last left our two companies, licensor/producer AniProduce Co., Ltd. and American DVD publisher 1Up Pictures had just agreed on a deal. AniProduce will give 1Up the North American publishing rights to their new show Saliva Princess, and 1Up will pay them money.

But at this point, nothing is actually accomplished. Before anything can actually happen, the two parties must come together on a written contract. While people who have never had to deal with contracts might think of them a something of a formality, the truth is that creating them is the hard part. At this stage, every detail of how the two companies are to cooperate needs to be worked out and agreed to on paper, and then signed off on by a senior executive at the company (and the creator's agent, and possibly the production committee). Needless to say, this is where things can get seriously messy.

So where do we begin? With a template, of course. Nobody in their right mind would write out a 15-20 page document of legal jargon from scratch every time. Every company that does a lot of licensing deals has a working draft of an agreement that has every element laid out in advance exactly how they like it. Which side gets to use their own template for a deal depends on a combination of politeness, and which company is larger: a large company will doubtlessly need to jump through a lot more hoops to sign off on an unfamiliar contract, rather than one they already know and just need to tweak a bit. (This is usually because they have an in-house legal team that's tasked with doing pretty much everything at the company and is always weeks behind.)

Legal documents can be constructed in a number of ways, but they all must cover three major areas in great detail:
            • The terms of the deal (i.e., the fees, the length of the term, the territories, etc.)
            • The logistics of the deal
            • The "boilerplate" legal clauses

We covered the terms pretty well in part 1, so by this point those should be pretty easy to lay out. Both parties have already settled on them, so they just need to be written out formally. It's the logistics where things get hairy.

 

Logistical Nightmares

These items are all about the meat and potatoes of how everything is going to work. How will the publisher get the materials? When does the producer need to be paid? Who pays for music rights? When is the Minimum Guarantee due? All these questions and more need to be answered in this section. Whether anyone actually adheres to what's written here is another matter.

            • Materials - If there's any one section that drives foreign publishers crazy, it's this one. The Materials section lays out exactly what the licensor is obligated to give them, in what format, and by when. Planning to release a Blu-ray? Then you'll need an HD master. Want to make promotional posters? Better get high-resolution artwork.

The producers are not always cooperative. With Japanese companies terrified about their own domestic consumers importing much cheaper American-made discs, there's no shortage of paranoia and passive-aggression on both sides. Accusations abound, from intentionally delaying materials, to intentionally adding video problems to the masters, to just never sending anything at all. For older shows, a licensor might not automatically want to send the nice new remastered version overseas -- or they might try to charge a huge fee to try and make back what they spent on the remastering.

It's not just the video that can be a problem. Want those gorgeous illustrations from the Japanese boxed set? They might cost extra. What about all those extra features? The director notes? The commentary track? The 5.1 mix? What ever it is you want, now is the time to make a want list, and put it in writing, while you still have the option of pulling out. Should you ask for something new after the contract is signed, the producer is under no obligation to give it to you. (To be fair, most Japanese producers are pretty easy to work with, but as with every job, you tend to remember the horror stories.)

Some contracts require that the publisher use absolutely nothing but the materials the licensor gives them. Other limitations here might include how the supplied artwork can be used (most creators HATE it when the approved artwork gets flipped backwards), and other details most people would never think about.

With older shows, publishers ask for (and usually require) some more flexibility. Many shows over 10-20 years old tend to have little to no artwork available, so the producer might actually find themselves hunting down old issues of Newtype or Animage and scanning the artwork in from there. Some licensors might balk at this, but with some shows there's little choice – you have to work with what's available.

            • Approvals - Back in the dark ages of the anime business, Japanese producers didn't check in much with their international release partners. This meant that publishers could work without adult supervision and do pretty much anything they wanted to a show. This ultimately made for some nasty surprises later on. Producers were dismayed to discover edits, replaced music, and all sorts of translation weirdness -- some of it by accident or negligence, but just as often by design.

So around the time anime was just getting big in the States -- around 1999 or so, the licensors started cracking down. At first it was packaging, then it was print advertising, and eventually translations, dub script and casting choices, trailers, and pretty much everything else that the publisher would do ended up being subject to licensor approval.

This sounds like a good thing, and it usually is -- licensors can help catch mistakes, and ensure that everything is the way the creators intended. But just as often, it can introduce new headaches. Licensors with limited English ability might question a figure of speech that they've never heard before, or suggest a clearly wrong grammar choice. In other cases, a licensor might hate the publisher's menu or package design, and insist on a redo. Or several.

Frustrating though they might be, such approvals are now an expected part of doing business with Japan, so there's not much a publisher can do about it. However, most try to prevent an overzealous licensor from playing havoc with their production schedules by building in limits: a licensor will only get a set amount of time to voice their concerns before the publisher can stop waiting for feedback and move on.

            • Copyright language - You've no doubt seen them, on boxes, on artwork, and even on ANN. They're the sometimes-incomprehensible jumble of company names, people names, and production committee names that must, at all times, accompany a show's artwork, footage, or anything else related to the show. The copyright line is sacrosanct: you cannot change it, you cannot correct or modify the capitalization or punctuation on it, and God help you if you forget it.

The copyright line is entirely symbolic. All creative works are legally protected by copyright without it, and while it's a good idea to legally include a reminder that the work is copyrighted, there's no legal reason for it to absolutely be a certain way. But for the Production Committee, who spent a long time aligning themselves and arranging the funds to produce the show, it's a reflection of their hard work, and they're fiercely protective of it.

So yeah. The copyright line. It's a part of every contract and every interaction. And it's defined here.

            • Reports - It's common sense that, since the whole goal of releasing a show in foreign markets is earning money, a licensor would want a regular progress report of how things are going: how sales are, what revenues look like, how much money was spent on subtitling and dubbing and marketing.

And so, the publisher must provide a breakdown of all the numbers on a monthly basis. Since it sometimes takes a while for retailers to pay their bills, and collect the royalties from online services like Hulu, these reports are usually delayed by a few months. If royalties are owed, those typically get sent out a few months later.

Trust is a big issue here. The publisher could pull these numbers out of their butt, and the producer would be none the wiser. Therefore most contracts include a provision where, should the producer smell a rat, they can send over an auditor to go over the books and then present a claim for more money. This is relatively rare in the small and insular anime business, but in the larger entertainment world it's so common that every major film studio has dedicated office space for outside auditors, who literally work there year 'round trying to decode the studio's funky accounting.

Long story short: nobody wants to rely on royalties, and most licensors would rather have a bigger up-front payment if they can help it.

 

The Boilerplate

They call these sections "boilerplate" because they're meant to just be mindlessly stamped on every agreement without any changes. That pretty much never happens in real life, though -- every time two companies without a previous working relationship come together in a contract, somebody inevitably has SOME problem with the boilerplate language, and that part has to be renegotiated.

While the name implies a bunch of boring and inconsequential details, there are a few pretty major points in here that can drastically affect the relationship between the two companies, especially should something bad happen. And bad things happen all the time.

            • Force Majeure - French for "superior force," this clause basically spells out that if one or both parties are affected by riots or a natural disaster or some other cataclysm and can't fulfill their obligations, they get a free pass.

            • Bankruptcy and Insolvency - This is a big one. Most contracts have a clause where, if the publisher goes out of business or declares bankruptcy, the contract is over and the rights go back to the licensor. While that makes sense (a bankrupt company won't be able to pay royalties), that means that, should a publisher find themselves in financial trouble, Chapter 11 bankruptcy reorganization is not an option -- if they did that, they'd lose all of their rights and never be able to sell anything again, effectively committing suicide. This is why struggling publishers have to resort to all sorts of financial black magic to keep going -- the normal methods to heal a troubled business are not open to them.

            • Attorney-In-Fact Privilege - This allows the publisher to protect the show they're licensing by legal means. (i.e. sue a bootlegger) Some licensors are fine with this, others don't want to give another company the power to sue in their name. More often these days, any legal action will have to be done in consultation with the licensor anyway.

            • Non-disclosure - A promise to keep the contents of the agreement secret. Information about the amount of money paid for a show could be really embarassing, or cause problems with other negotiations. Nobody ever seems to balk at this one.

            • Arbitration - A pledge to use an arbitrator to resolve legal disputes, rather than go straight for the jugular with a potentially insanely expensive lawsuit. Arbitration is basically a single neutral third party acting as a mediator.

 

So yes, licensing is a complicated, horrifyingly detailed ordeal, but it's a necessary step. After both sides have had their lawyers pour over this agreement, one of them prints out two copies, they both sign and keep one, and the deal is done.

And then the real work can begin. Next time, we'll take a look at what happens when people ignore the contracts, and things go entirely out of control.


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