Licensing - A Holistic Approach
BY: JOSHUA KAUFMAN, ESQ. © 2003
There is more to licensing than simply a license agreement. The vast majority of licensors (artists, licensing agents, celebrities, brands, sports figures or small licensing companies) view the Licensor/Licensee Agreement as the beginning and end of the licensing business. This viewpoint is shortsighted and can prevent long-term opportunities, cause great difficulties down the road, result in excessive taxes being paid, licenses needlessly being caught up in bankruptcy and/or ownership of license properties ending up in the wrong hands.
Licensing is a business while unique on one hand, is really no different than any other business in most aspects. If one thinks about how traditional businesses are run, there generally has been a team of individuals with expertise in different fields assembled. This approach is often lacking in the licensing field. Can you imagine a business that does not have a corporate plan where ownership rights have not been thoroughly contemplated or developed? What was the last time a successful business did not consider tax implications to transactions and acquisitions before they entered into them? Almost all businesses today have various forms of employment agreements to cover their full-time employees and/or independent contractors. Without such agreements in place trade secrets can walk out the door and assistants can claim ownership and end up being one’s fiercest competitors. In licensing, businesses are often based on one individual or a family business but are without proper estate planning and correctly drafted wills. If one of the principals dies, a successful business can be rendered into a shambles very quickly by fighting heirs. Long-term planning in all of these areas is essential for the licensor who plans to be successful.
The center of any successful licensing operation has to, first and foremost, be the creative talent. Be it an artist, designer, celebrity, or sports figure without them, their creative spark, their genius, nothing else really matters. From their creative force, all else flows. Their eye, their instinct, their skill whether they are born with them or developed them over years of sweat, their talent is at the core of every successful licensing operation. However, being a creative genius, being brilliant, as an artist or designer athlete or personality does not necessarily endow one with the same brilliance and abilities in the various business and financial aspects of the licensing world. If one wants to believe the left side/right side theories of the brain, having an over-developed right side or creative side of the brain, in fact, in many instances, limits the development of the left, the more analytical side of the brain. It is important for the creative person to recognize their weaknesses as well as their strengths and seek out those who can fill in the gaps and provide the talent, brilliance, and expertise in their own respective fields. Letting go of control is difficult for many people. Especially, those in the creative field where they view their creative works with a possessiveness not found in any other field, but letting go sharing responsibilities, accepting the advice of experts, is essential for long-term stability and success.
The team that should be compiled should be comprised of lawyers, accountants, agents, and financial advisors. Often that will entail more than one person in each of those categories. For example, your licensing lawyer may have a great deal of familiarity with the nuances of a licensing deal, but he or she may not have the same level of sophistication or expertise you require when it comes to structuring the type of business entity you create; anticipating tax issues or planning for inheritance problems. What if you are concerned about protecting assets in the case of a divorce, and wish to draft an ante-nuptial agreement so you keep control of your business in the event of a divorce. You might find that you will need lawyers from several different firms or need a firm that has lawyers with the different areas of expertise that you need.
The same goes for accountants, while your everyday accountant might be good for helping prepare your tax returns, you will probably want a special accountant well-versed in royalties and royalty audits. If you conduct an audit, you certainly will not want to use your general accountant who is not an expert in the nuances of doing a royalty audit; it is a specialty unto itself. There are a number of very qualified CPAs who specialize in the field and they should certainly be utilized when doing an audit.
Let us examine the various areas of the law that need to be considered. As mentioned above, the epoch center should be a lawyer very well-versed in the licensing business, in copyright, trademark and rights of publicity law. These areas of expertise are necessary in order to negotiate an advantageous licensing agency agreement and favorable licensing agreements. These contracts reach the core of the business and the foundation upon which the rest of the enterprises lies. As such, if we use a football analogy, your licensing-copyright lawyer should be the quarterback of your outside expert team. It is your licensing lawyer who will assist in the negotiation of your licensing agent agreement. If one uses a licensing agent, rather than obtaining their licenses in-house, that agreement is probably the most important outside agreement that a licensor will negotiate. Great care needs to be exercised in choosing a licensing agent and negotiating the terms of the contract. They, after all, will be the licensor’s public face. They will be, to a great extent, managing the licensor’s licensing career and direction.
One of the first decisions that a licensor must make is the nature and structure of the entity under which they will be doing business. By default, of course, one is a sole proprietor, but that is not necessarily the best format in which to do business. There are a number of other structures, such as corporations, limited liability companies or partnerships, either general or limited, which need to be explored. The decision on entities format can make a significant difference from a tax point of view and in determining control of the entity. If one is going to seek outside investment, the nature and structure of the entity is very important as well. There are also times when issues of liability come into play which can be impact on the type of business structure chosen.
In drafting license agreements, your licensing lawyer should have either expertise or access to expertise in bankruptcy law. Today, with so many companies going bankrupt, it is vital that when drafting a licensing agreement that certain provisions that are beneficial to a licensor are inserted into the license agreement. Without them, if a licensee goes bankrupt, it can be disastrous for the licensor. The commonly found contract clause stating you can terminate if a licensee declares bankruptcy is not enforceable. On the other hand a bankruptcy of a licensee who wants to continue the licensing relationship can be a boon for the licensor if handled correctly.
Employment issues arise on several levels. When one hires employees there are various general, as well as, state and local requirements that one needs to be cognizant of. Even for a small office, one should have, if not a formal employment policy or contract, a written agreement when hiring any employee. An employment lawyer is needed to make sure that the licensor has the ability to fire or change job descriptions as they deem necessary. An employment lawyer is necessary when questions come up with the Americans with Disabilities Act, maternity leave issues and the like, so that they do not violate discrimination laws. Additionally, it is crucial that in any employment agreement with either an employee or outside contractors that the copyright lawyer has input to insure that the work undertaken by the employees and/or outside consultants is owned by the licensor or their corporate entity. Further, in this area of employment agreements you need to ensure that you have proper language regarding confidentiality, trade secrets, and non-competes. The last thing a licensor wants is for their employees, vice-presidents, treasurers, assistants, agents, to be able to leave, work for the competition and use the knowledge and information they acquire while working with the licensor for the benefit of the competitor. Also, if the licensor is subject to confidentiality agreements, the employees need to be bound by those agreements as well. Otherwise, when they spill the beans it will be the licensor who will be liable for their disclosures.
The tax advisor, be it a lawyer or a sophisticated accountant or both need to be consulted on a regular, if not frequent, basis in order to make sure that the income being earned is subject to the lowest tax rate; that all the various deductions that might be available are utilized; that proper sales and use taxes, inventory and property taxes are paid. This area can be incredibly complicated and is not in any way intuitive or something that the average person would begin to contemplate or even think about. Unfortunately, the penalties for failure to pay proper taxes can be devastating.
Of course, once you earn money, you want to be able to keep it and you need to have a financial advisor who can look after, not only your long-term investment plans, but one who is cognizant of your business, understands the cash-flow needs of a licensing business so it can make sure that your investment portfolio is balanced to provide both long-term growth and the necessary liquidity one needs during slow periods, off seasons, etc.
Just as the above-mentioned taxes are inevitable, so is death. Copyrights and contract rights do survive after death, therefore it is important that estate planning be part and parcel of your business. If you want certain people to inherit, not others, that needs to be spelled out. If you want the people who understand your business to control the business while having other people share in revenue proceeds, that is a goal which can be accomplished; however, it takes planning. No matter which structure you end up forming be it the sole proprietor to the corporation, planning is essential to ensure that the business can remain viable after your death, that it is controlled by the people whom you want it to be controlled by and that the revenues flow in a manner that satisfies your wishes.
Finally, artist/designers often need infusions of cash and either borrow money from friends or family or take in investors. These types of transactions often occur between friends and family. If anything, that would call for proper agreements to be drawn up to ensure that everyone understands the nature of the transactions. There are many laws that cover investments. It is an area where misunderstandings abound and action need to be done in the proper, meticulous manner in order to avoid breaking laws, ruining friendships, causing family riffs or loss of ownership or control of one’s own entity.
Granted following through on everything in this article might seem a bit overwhelming, the various components set out do need to be made part of a plan if you are going to have a holistically healthy long-term licensing business.