Museum Licensing : How to do it right!

By Joshua Kaufman © 2005

Museums contain two sets of treasures and both are found in the same display case. One is the physical embodiment of the works in their collections, and the other is the intellectual property embedded in the objects.  Museums have been very adept at portraying the external beauty but less so in understanding and fully exploiting the economic value of the intellectual property contained in those very same objects.  Over the last few decades this has begun to change as museum after museum have been convinced, some kicking and screaming, that exploiting the intellectual property contained in their objects could help further their educational purpose as well as positively effecting their bottom line.  For many years, any commercial exploitation of works in the collection was frowned upon.  However, with the popularization of modern art, the blockbuster shows, and the accompanying demand from the public for “souvenirs” from their day at the museum, along with the decrease in public funding and the never ending increase in the expense of running a museum all have led to the phenomena of museum licensing.

What is licensing? In its simplest form it is the reproduction of objects found in a collection on various products.  The museum is the “Licensor,” and contracts with outside third parties and licensees to manufacture products embodying the art works in the collection.  The licensed products may be posters and postcards, puzzles, magnets, key chains, jewelry, clothing, computer screensavers, placemats, coasters, tablecloths, towels, umbrellas, puzzles, wine and water bottle labels, furniture, checks, plates and platters, the back of a deck of cards, and the backdrop for advertisements.  They can be licensed to appear in television shows and in motion pictures.  There are no limits to the type of products onto which art works can be licensed, except for the limits imposed by the copyright owner's sense of propriety, and the marketplace.

Before embarking on a licensing program, the museum must ascertain what rights it actually has in a work.  Simply because a work is in a museum collection it does not necessarily mean that it owns the rights to license the work.  The right to license belongs to the copyright owner, not to the owner of the physical embodiment of the work.  For works acquired after 1978 the answer as to who owns the copyright is very simple, it would be the artist or the artist’s estate unless there was a specific writing transferring the copyrights in the art work when it was gifted to or purchased by the museum.  Copyright assignments must be in writing and there can be no oral transfers of copyright or implicit understandings.  If a museum is interested in licensing art works in its collection it is incumbent upon it as a matter of policy to acquire the copyrights in the work when a gift or purchase is made or at a minimum to receive the right to license the work with or without the payment of royalties to the copyright owners.  For works acquired before 1978 the legal canvas is a bit more clouded.  There was a case which held that the copyright transferred with the purchase of a work. The resulting doctrine which was known by the case title the “Pushman Doctrine."  It was never successfully challenged because the copyright law regarding the ownership of rights was changed in 1978 on a prospective basis.  The new law made it clear that when one purchases a work they do not acquire the copyright.  The law effectively overturned the "Pushman Doctrine" for works acquired after 1978.  For works obtained before 1978 greater investigation is required to ascertain the copyright owner.

Another important date is 1923. Under United States law, works published before 1923 (offered for sale as reproductions, i.e., posters, cards, books, catalogues, limited editions, etc.) are in the public domain.  (This is not the case in other countries.)  Therefore, works protected abroad may not be similarly protected in the USA.  Also, if before March 1, 1989 American artists published their works without a copyright notice (name of artist- ©-year) the works fell into the public domain (look back at your collections and you will probably notice that few prints from that era had notices on them).

When a work is in the public domain the copyright owner loses all rights to control by whom and how it is reproduced.  Several years ago in an attempt to circumvent the fact that many of their prized works are in the public domain, a number of museums, through their licensing agent, the Bridgeman Art Library Ltd. in a law suit claimed that even though their underlying works were in the public domain the Defendants still violated their copyrights.  They claimed the Defendants copied the museum's prints, posters, and transparencies and then argued that this violated the copyrights not in the original public domain works, but in the derivative works which were not in the public domain.  A novel idea, but it did not work.  The court held that the slavish reproduction of a public domain work is not copyrightable.  The lesson is to make sure that in fact you need to be paying royalties to and getting permission from an artist or their estate or that you have the right to be claiming royalties from licensees and the warranties which you are making in regard to ownership and other rights which are standard in most licensing agreements are correct.

Even if the work is in the public domain from a copyright point of view, a museum still might have the ability to license it.  The same would apply to an artist or their estates.  The licensing would be based on trademark, not copyright.  It is not the underlying art that is providing the licensable value, but rather the name of or association with the museum or the artist and/or the artist's signature or museum logo, all of which may be trademarked.  Therefore, any entity might be able to take the images of Monet and put together a box set of greeting cards without permission from Monet's estate or the museum which actually owns the work, but they might be precluded from prominently using the Monet name, his signature or the name of the museum.  One can always describe a work in an appropriate manner such as saying that the works are by Monet and can be found in MOMA, but such uses must be purely descriptive and not done in a manner which would lead someone to assume that the cards were produced by a license from the estate or the museum or that there is any affiliation between the seller and the artist’s estate and/or the museum.  To do so, would violate the museum and artist's estates rights.

Assuming that the museum is the copyright owner and has the right to license the materials in its collection (or it is a licensee from an artist and/or their estate, and has the right to sublicense the works on goods to the manufacturers), it must be aware of some of the key elements, nuances, and negotiating points that are found in art licensing agreements.

Promotional approvals:  The museum might grant their licensee the right to use the name or trademark of the museum in a dignified manner in conjunction with the advertising or promotional materials for the licensed goods.  In those cases, there is usually some form of approval by the museum prior to the release of the materials. 

Advances:  Advances on royalties guarantee that at a museum will receive at least a minimum amount of revenue when it grants a license.  These are upfront payments that are non-refundable advances against royalties to be paid to the museum.  The museum will not receive additional funds until the advance has been recouped by the licensee.  If the product is not that successful, and the advance is never recouped, it is a loss borne by the licensee; the museum should never be required to return any of the advance.

Royalties:  Royalty payments can take the form of a flat fee or a percent of the sales price.  Percentage based royalties generally are the preferred route for both licensees and licensors.  No one has a crystal ball nor has the ability to predict the success of the licensed product, so royalty fees based on sales are the safest course for both parties.  The royalty percentage paid is based on the nature of the product and the popularity of the artist.  There is no single royalty number for all licensed artworks.  While paper based licenses such as calendars, cards, and posters generally generate a royalty of approximately 10 percent, most other licensed goods pay in the five to eight percent range.

Royalties are generally based on net sales, but what is a net sale?  Is it a sale based on the retail or the wholesale price?  Generally, museums license to a wholesaler, and the royalties will be based on the wholesale price, but what if the licensor also sells at retail through its own stores, online or mail order? In these circumstances the museum will try to have the "sale" based on both levels, not only the wholesale level.  In book publishing deals more often than not, the royalty is based on the suggested list price of the book.

Is a sale counted from the time the licensee received the funds from its customers or from when the goods are shipped?  If it is from when the goods are shipped, and the licensee's customers turn out to be a bad credit risk and do not pay the licensee, the museum is still entitled to the royalty (this is obviously the position that museums take into negotiations).  If the royalty is based on funds received and the licensee is not paid, then the museum is also not paid (this is obviously the licensee's initial negotiating position).  When a licensee provides discounts, is the museum's percentage reduced accordingly, or do they get paid the same amount regardless of the licensee's discounting policy?  What to do with returns?  Can returns or bad debt be capped for royalty purposes?  This area is one of intense negotiation in many licensing agreements.

Guarantees:  A number of licensing contracts provide for a guarantee which is different than the advance.  An advance is a payment which is recouped from sales.  A guarantee provides that the museum will receive a certain level of revenue in royalties no matter what the amount of the sales.  Therefore, if at the end of the guarantee period the guaranteed sum has not been reached in royalty payments the difference is then paid by the licensee.  Another type of guarantee is linked to option clauses.  For example, the license agreement may be a certain number of years, but if the museum has earned a designated amount of money through royalties, the licensee has the right to automatically extend the term of the license.  If they don't reach the guaranteed level, then any renewal or continuation of the agreement would be at the discretion of the museum.

If the license is exclusive and precludes the museum from licensing elsewhere, then it is well advised to seek guarantees because if the exclusive licensee falls down on the job, the museum loses this important source of revenue while the licensee can still sell other entities' products.  The more exclusive and binding a contract is on a museum, the more it should demand sizeable advances and/or guarantees.

Accounting:  Accounting rights are very important in all royalty-based transactions.  Comprehensive royalty statements should be as frequent as possible.  The museum should also obtain a right to review the licensee's books.  It should insist on late fees and interest charges on delayed payments. Additionally, if an audit of the licensee's books shows a discrepancy to the detriment of the museum, the audit cost should be borne by the licensee.

Quality approval: Another very important area for a museum is the approval of the quality of the licensed goods.  The museum in its licensing agreement will generally have the right of approval of the product.  They should also review preliminary samples or proofs as well.  There needs to be representations in the contract that the final product will conform to the approved samples.  In order for these rights to be effective, clauses need to be incorporated into the contract which provide for the appropriate remedies if the produced goods do not conform to the approved samples.

Indemnification:  Indemnification clauses run both ways and are important in ensuring that the museum will appropriately indemnify and hold harmless the licensee from any type of the copyright or trademark violations for which the licensee is found liable as a result of breach by the museum.  Conversely, the licensee should indemnify the museum for any claims made against it regarding the nature and exploitation of the licensed products produced by the licensee.

Termination:  There should be a precise list of the reasons for termination of the agreement by either party.  Are there any cure provisions?  For how long?  What is the nature of the ability to cure?  How many times?

Sell-off rights:  An important area to be considered in every contract is sell-off rights.  When a contract is durational and expires or is terminated as a result of lack of sales, generally, a licensee is granted the right to sell-off their remaining inventory. However, if a contract is terminated by the museum for breach by the licensee, sell-off rights are normally not granted to the licensee.

Sell-off rights are simply the right to sell-off remaining stock for a period of time after the contract expires and not the right to manufacture additional goods.  Sell-offs can be a very dangerous area for a museum.  The licensee, once the contract is over or about to be over, has no interest in maintaining an artist’s or museum’s market or reputation, rather it has a very strong incentive not to be stuck holding inventory it cannot sell.  The normal tendency, therefore, of a licensee is to "dump" the artist's or museum's product on the market for what ever price it can get.

Dumping can destroy the market for future licensed goods and jeopardize the museum's ability to acquire a new licensing agent.  What new licensee would want to come out with a line of products at full price when the same products bearing the same images are being dumped on the market by the previous licensee at 10 cents on the dollar?  Therefore, anti-dumping and/or buy back clauses are important for the museum to include in its contract.

Choice of Forum:  Forum clauses are often found in contracts where a specific law is determined to be the law governing interpretation of the contract as well as choosing the location in which contract disputes will be resolved.  Obviously, each party wishes to litigate any dispute on its home turf, and subject to the laws of the state most favorable to them.  This is always an area of negotiation and is usually resolved by clout or horse trading.

Arbitration vs. Litigation: Often licensing agreements provide clauses stating that disputes arising out of the contract will be handled by arbitration instead of litigation. The attraction to both parties of arbitration is that it is usually quicker and less expensive than litigation.

However, before either a museum or a licensee jumps in and automatically demands arbitration, they should be aware of the fact that arbitration provides for fewer opportunities in the area of discovery, injunctions, juries, etc.

Manufacturing Costs:  The licensees are always solely responsible on a non-reimbursable basis for all costs incurred in the manufacture, promotion, and sale of their licensed goods. 

Limitation of Rights:  There should be statements in the contract that say the rights granted to the licensee are limited to those specifically set out in the contract and no others are being granted.  The more specific one can be in regard to the scope of a license being granted, the less likely there will be problems incurred later on over which products the licensee has been granted the right to manufacture and market.

If the agreement is non-exclusive and if the rights granted are limited to a certain type of product or location, extent, nature of the media or duration, these limitations should be clearly and carefully spelled out.

Copyright:  It should be made clear in whose name the copyright will vest in regard to the licensed products, the museum or the licensee (under copyright law the licensed product is a derivative work and the copyright can be in either party's name).  There should be provisions regarding registration of copyrights and the accrual of trademark rights in the museum's name for the licensed products.

Insurance:  Depending on the nature of the product, if it is one where there is potential liability to the museum based on harm to consumers, they should be assured that the licensee has appropriate insurance and that it should covered by the museum.

A list of issues goes on and no two licensing agreements will be the same.  The museum can and should prepare a form license agreement that it uses as the starting point for its negotiations with each and every licensee.  However, many problems can and do occur when a museum simply relies on its "tried-and-true" license form without re-reading it a the judicious eye as to the circumstances of each new and different license arrangement.

Licensing can be very lucrative and is an avenue of revenue enhancement that every museum should consider, but carefully.

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Joshua Kaufman is a partner in the law firm of Venable LLP which is counsel for the AAM.  While he is based in Washington, D.C., his practice is international in scope.  He is of the country's foremost attorneys in the field of art, copyright and licensing law.  He has published over 200 articles on various topics in the field.  He is also an adjunct professor of law at American University Law School.