Introduction

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Licensing is the practice of selling less than all of an intellectual property right to a third party. This chapter will discuss two kinds of licensing: content licensing , where a trademark and/or copyrights are exploited in other media (example: Batman comics becoming Batman the movie and toys); and technology licensing , where a third party acquires the rights to use a technology or incorporate that technology into its product (example: the 3-D engine used in the Quake games is licensed for use by other game developers in making their own games ).

The structure of this chapter is a bit different from its predecessors. The contract terms and logic of the licensing world will be introduced and then illustrated through examples of four different contracts, an engine license, a film option, a children's television series license, and a license for a developer to purchase a little-known property from a third party.

NOTE

Some definitions:The party who owns the rights is known as the licensor , while the recipient of those rights is the licensee. A property , for purposes of this chapter (and as generally used in the industry), is a set of trademarks and copyrights that identify products and entertainment as coming from a single source (though not necessarily a single author).

Licensing versus Owning

The idea of licensing property can seem counter-intuitive: either you own something, or you don't. Law professors like to explain the subtleties of property use and ownership with the "bundle of sticks" metaphor. A property that you own is comprised of many different sticks, each representing a separate right that can be taken out of the bundle and sold. With a house, for instance, you can sell the stick corresponding to the right to live in the house ( renting ), but keep the stick representing the right to sublet the house; you can sell the stick representing the right to walk across your lawn to get to the beach (called an easement ), but keep the stick that represents the right to walk across your lawn to get to the bar on the other side.

The author would like to thank Fred Fierst of Fierst, Pucci & Kinder LLP for his help in preparing this chapter and for his generosity in being an outstanding boss and mentor.

A property has an almost infinite number of sticks in its bundle: instead of giving a license to the book rights to your game, you can license just the Latin American trade paperback rights for stories about just one character in your game. The goal of a licensing program is to give a licensee only those rights that it will actually use. Wouldn't it be terrible if you sold the worldwide exclusive book publishing license to a publisher who ended up releasing just a single book in Spanish in Venezuala? This pain would double if Random House then approached you two months later to do a series of books in 12 languages around the world.

The art of licensing a property is like building a fire with your bundle of sticks. You only have enough gas to build a fire with some of your sticks, leaving you the option of having a small fire all to yourself, or building a bigger fire to share by selling the other rights to licensees with enough gas to light their own sticks and throw them onto your fire.

Technology licensing is usually quite a bit simpler than character licensing. Technology is generally created for a narrow purpose and has only so many possible uses. In other words, the bundle doesn't have that many sticks in it. Therefore, the bulk of this chapter will address the subtleties of content licensing, though it will review the highlights of a contract licensing a third-party engine.

Risks and Benefits of Licensing

Benefits to the licensor:

New sources of revenue with minimal investment.
Licensed products provide free advertising and marketing ("brand extension").
Expansion of the property and its creative assets.
Trademark becomes stronger through use in more classes (see Chapter 5, "Trademarks").
Having several licenses in production can minimize cash flow volatility (rather than being dependent on revenue from only one product).

Risks to the licensor:

Overexposure of property.
Inferior licensed goods can erode the value of the property.
International enforcement against piracy and gray marketing is difficult and costly.
Inadequate control over use of trademarks can lead to loss of trademark status.

Benefits to the licensee:

Brand recognition.
Pre-built audience.
Synergy with advertising/marketing budget of all other uses of the property.

Risks to the licensee:

Usually must pay a minimum guaranteed royalty (the "guarantee") no matter how much money licensee earns.
Licensee assumes production and distribution/marketing risk for the product.
Licensee suffers from piracy and gray marketing issues as much as licensor.

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