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Monica Pa Archives

November 3, 2009

CMJ MUSIC AND FILM FESTIVAL

Monica Pa is an associate with Davis Wright Tremaine LLP who attended the CMJ seminar. Here is a summary of her general report of the panel's discussion, but questions concerning the information provided at the seminar or the accuracy of advice given should be referred to the panel members.

The welcoming remarks were delivered by Ken Swezey, Esq., who is the Chair, of the Entertainment, Arts & Sports Law Section, New York State Bar Association, and a partner at Cowan, DeBaets, Abrahams & Sheppard LLP, New York City.

The program was introduced by Joanne Abbot Green and Rebecca A. Frank, Esq.
“Recession Deal Making”

The moderator was Susan Butler, Esq., Executive Editor of Music Confidential, Butler Business & Media LLC.

The panelists were: Helen Murphy President, International Media Services, Inc.; Jonas Kant, Esq. Senior Vice President, Business and Legal Affairs, Sony/ATV Music Publishing; Michael Poster, Esq., partner at Sonnenschein Nath & Rosenthal

General Discussion Regarding the Publishing Industry During A Recession

Helen spoke about trends in the film and television industry in LA. She observed that publishers are still deriving income from synch licenses in advertising and TV, but generally, the industry is under tremendous pressure. Studios are cutting back on both internal spending and outside talent. For example, terms that were once standard are not being given out anymore. T&E for talent is being cut, which was historically sacrosanct. And these cuts have had a ripple effect throughout the industry.

The panelist observed that publishing is actually doing OK, while the rest of the music industry is suffering. Joel observed that “this is a changed environment, even from last year.” He noted that there has been some increase in performance-side royalties (because of streaming services like Rhapsody and Pandora), and this may increase if, for example, iTunes starts a streaming service. But this increase isn’t sufficient to offset the tremendous loss in CD sales.

Sale of Catalogues

The panel spent a good deal of time discussing this issue. The Rogers and Hammerstein catalogue was sold this year, but this catalogue and its sale was unusual for a variety of reasons. In this economy, many catalogues are not up for sale. There are few buyers, and many sellers are not compelled to sell, so there aren’t many “fire sales” happening. The owner of the catalogue is going to wait for the economy to rebound before going into the market.
Joel Schoenfeld pointed out that, while many catalogues are not formally up for sale, some sellers may be informally testing the waters (e.g., “I’m not for sale, but I’m willing to talk”). So whether a catalogue is up for sale depends on knowing who to ask and what to say.
It’s also unclear how catalogues are being priced. A deal can include bells and whistles that exaggerate the catalogue’s sale price, such as “kickers” or “earn outs”. With respect to “earn outs”, in a perfect world, if certain targets are hit, only then would the total price of the deal be achieved. Michael Poster pointed out that “earn out” provisions are incredibly risky. The buyer has to jump through hoops and meet the seller’s (perhaps inflated) expectations, may also incur high deal costs, and such provisions may likely end up in litigation. With an “earn out”, the seller has some control over the buyer’s future conduct and has a right to audit.

Michael pointed out that a notable exception to the lack of “fire sales” is the case of private equity funds that purchased publishing catalogues during boom times and now have to unload this asset. Accordingly, private equity firms are selling their catalogues for cheap. Jonas pointed out that Sony is happy to see these catalogues go up for sale by these private equity firms, and has been able to buy these catalogues at a discount.

Alterative Income Stream and Advertising

With declining music income, people are looking creatively at ways to attach other non-traditional income streams. Helen pointed out that the agent’s business model has changed. Agents and labels have been aggressively attaching a percent of the talent’s various income streams (e.g., the emergence of 360 deals). In light of all these hands in the artist’s pockets, artists are now trying to do something different, which is facilitated by the fact that digital distribution is possible, and the rights business is becoming more transparent.

On the other hand, while there has been an obvious decline in CD sales, music can be monetized is creative and unpredictable ways. No one expected cell phone ring tones to take off, and now music video games generate a substantial and unexpected source of revenue. There is also the Beatles Cirque de Soleil show, and there will soon be one for Elvis. The biggest growing source of music revenue is digital content. Publishers and traditional music industry have been slow to incorporate these developments. Digital content is now 40% of the market. Maybe the industry will finally be forced to shift when digital content is 70% of the market.

The panel discussed whether, at this point, substantial income can be derived from advertising. This was one question that seemed to really boggle the panel. One panel member noted that it can be done. For example, Google derives almost 90% of its income from advertising. There may be more targeted advertising. For example, Google is best at linking ads with digital content (using an algorithm), but perhaps there will be other ways of linking content with advertisers, or more integration of advertisement with content.

Jonas Kant, speaking from his perspective as the music publisher, noted that publishing is generally an ad based income, and there are fewer ads now. When an advertiser, filmmaker, or television program selects a song to synch, they want to go with “a sure thing”, meaning a song that resonates with the audience. Therefore, well-known songs are more often being selected because this may resonate more with the audience, and accordingly, advertisers are unwilling to go with lesser-known artists.

* * *
“Starting From Zeroes: Start-Ups & Digital Distribution”

The Moderator was Lisa Weiss, Esq., Partner, Sonnenschein Nath & Rosenthal LLP.
Panelists: Aileen Atkins, General Counsel, Napster, Inc.; Mark Eisenberg, Esq. Executive Vice President, Global Digital Business Group, Sony Music Entertainment, Inc.; Drew Lipsher, Esq. Partner, Greycroft LLC.

Discussion

Lisa gave a background on copyright law and the DMCA. She summarized recent safe harbor decisions, including the summary judgment decision in favor of Vios. In one decision, the court held that failure to use filtering technology (which is widely available) does not undermine the applicability of the DMCA Safe Harbor provision.

Drew, as venture capitalist, discussed what VCs consider when deciding whether to invest in a digital content service. He was asked how important was it that a business have a license before launching. The issue is whether a service should build a business first and then get a license, or get the licenses first and then build business. “Ask forgiveness, not permission?” As an investor, his preference is for the companies to get permission first because the risk of litigation– from a financial return strategy – is unpredictable. But he may be more liberal depending on the service’s proposed business model (i.e., whose behind the service, whether the service has good terms and conditions, whether the company is more established, etc.) A separate business question is whether there is any value in a user generated model, whether advertisers are going to pay the service, and whether the service has any hope of generating a profit.

When asked how a new business can balance the cost of a license versus the cost of an eventual settlement/litigation, Drew characterized this situation as: “death by firing squad or death by hanging.” The service knows that it is going to have to pay; it’s just a matter of ascertaining what will be their greater cost. He observed that this is a return on investment issue, which is largely driven by time. Moreover, services face the problem that the process of obtaining licenses is fraught with defragmented rights in a work, and the lack of transparency.
Aileen observed that, for many start-up services, they will not be able to get a license unless they can convince the content owners they have a viable business model, and then the question becomes the terms and conditions of the license. So for many start-ups, the content companies are actually the ones determining the business model for them.

Marc, who represents Sony, gave the label’s perspective. The general assumption is that everyone wants to make money. What labels look at is the service’s business model and its path to profitability. “We know that music is popular and consumption of music is high – but this isn’t a business model.” While labels do not need the services to prove profitability on day one, there needs to be some way to pay for the license, which is why it’s necessary to look at the overall credibility of the service. “Just because you have an idea doesn’t mean that you can be licensed.”

All business must pay their suppliers. A business rarely asks the landlord to give them space for free. For a restaurant, there can be a great chef, great cuisine, excellent space, but people are at the restaurant for the food. If food is what customers are going to eat, then the restaurant should pay for the food. In this case, the sine qua non of the start-up service is the musical content, so why is there a debate about whether the labels should be getting paid for this.

Aileen pointed out that services want to pay for the music they use, it’s just impossible to wrangle all the different interests (publishers, labels, etc.) prior to launching the service. There is no consistency in the process or terms. This difficulty is exacerbated by the fact that labels are trying to hold onto a business that is in decline, and are unable to shift their business approach to accommodate digital content.

Drew pointed out that the problem with the “restaurant” analogy is that a restaurant only has to negotiate with a single landlord, and there is a standard in pricing, a known market. The difference is that, in the licensing process for music, the terms are constantly shifting. A landlord doesn’t ask to see a business model when renting out space. A music service wants to be legitimate, but the terms and rates are constantly shifting. As such, there are tremendous inefficiencies in music licensing.

Marc responded that there is a difference between frustrations with market inefficiencies and throwing up your hands and acting in blatant disregard of copyright law. When asked whether the terms of a license depend on whether the service comes to Sony before launching, versus launching first and then seeking a license, Marc said that rates depend on how the service operates. An infringer isn’t necessarily going to do better in terms of rates. If someone comes to Sony having launched first, there may be a premium that Sony exacts. On the other hand, if the business is successful, it may have more negotiating leverage.

Aileen was asked whether, if she were now mentoring a young service, what her advice would be. She said that Napster launched in 2001 with only a handful of licenses. At that time, no one knew what they were doing. The environment now is completely different than in 2001. The financial cost for litigation is substantial, which includes both time as well as attorneys fees. On the other hand, the costs associated with obtaining a license from content companies are also high.

Moreover, services may develop and change as it grows. For example, Facebook did not have an obvious path to profitability but it had millions of users and a huge platform. When Facebook launched, it didn’t necessarily realize that there was going to be a huge business for games (which could now generate billions of dollars in revenue). It’s unclear how Twitter is going to make money, but lots of people are using it, so we’ll just have to see.

In terms of music publishing, Drew observed that rights disaggregation is the biggest problem. A licensee can go to a publisher, get rights and rerecord the work. Rights have to come back together because digital content is increasingly sophisticated. For example, all services now include video, so this implicates a host of issues, including synch and publishing rights. With traditional distribution of music, the labels use to take care of publishing. How many different ways are there to divide a pie? There cannot be meaningful negotiations with this many competing interests. If the labels do not want a compulsory licensing system, and do not want arbitrators saying what the rates are, then they need to come up with a way to make licensing more regular, standard and systematic.

* * *
“Footprints In Cyberspace: Following Consumers Online”

Moderator, Marc S. Reisler, Esq., Partner at Holland & Knight.

Panelist: Flora Garcia Privacy Director, Time, Inc.; Laura Stack, Esq. Division of Privacy and Identity Protection, Federal Trade Commission; Shane M. McGee, Esq. CISSP, Partner, Sonnenschein Nath & Rosenthal LLP.

The panel addressed privacy issues by using a hypothetical multimedia entertainment company to discuss various digital projects that this company wanted to launch.

The first hypothetical involves the company’s music division which wanted to launch a website to promote the latest release from their 12 year old pre-teen pop sensation named Rhoda. Rhoda’s website featured a section on “Rhoda Memories” where visitors could share online (including videos or picture format) their memories or personal encounters with Rhoda. The website could also include a section called “Rhoda dress-up” where visitors could post pictures of themselves dressed as Rhoda.

Flora said that, from an in-house perspective, the first question is whether users are going to have to register online, and if so, would they be asking only for their email address and user name, or would they be asked for additional information. Another issue is that, since this website concerns and likely targets younger consumers, the Children’s Online Privacy Act (“COPA”) is implicated. This law prohibits companies from marketing to children 13 or under without parental consent.

If the website is going to market to children under 13, then it needs to obtain verifiable parental consent. Even if the website only collects an email address, the company still needs to send an email to the parent to confirm that their child has permission to register with the site. The email to the parents should also notify them of what type of information was collected, whether information will be shared with third parties, whether there is a way to opt-out of the sharing of information or receipt of emails, and how the company is going to protect and use collected information.

COPA provides a sliding scale of necessary parental verification depending on the type of information collected and how the information is being used. If the website wants to collect additional information from the child, like what school they go to or their favorite mall, and perhaps share this information with third parties, then the company needs to provide additional information when obtaining parental consent. The website may need the parent to sign a form, provide credit card information to confirm their identity and consent, etc.

Laura represented the view of the FTC. She noted that deceptive practices are pretty straightforward: do not create a material deception that will mislead a reasonable consumer. If the website is aimed at children, then the standard is the reasonable child.

COPA generally requires a privacy policy, notice of certain rights (what are you collecting, why are you collecting it, etc.), what do you do to safeguard information, and it provides requirements for verifiable parental consent.

This hypothetical website also involves children disclosing more than just an email address because it permits users to share Rhoda photographs and stories. As such, even though the initial registration does not ask for any information other than an email address, because of this feature, COPA may treat this website as collecting personal information from children, which triggers heightened requirements of verifiable parental consent. Moreover, even if the website does not specifically target children, if the service has reason to know that children are accessing their site, then it needs to comply with COPA. The website should use some filtering technology, and/or hire moderators for the website (which can be outsourced). There is software available to websites to strip personal information from users (with mixed success).
The FTC applies the standard of “what would a kid normally do, what should you be doing to keep kids safe.” In seeking parental consent, there needs to be transparency. Parents need to understand what they are saying yes to. This is especially the case where the website includes posts of children’s photographs given that there is such a problem with child pornography. A practical advice for websites for children is to stay away from all photographs unless the service uses a good moderator.

Aside from COPA, the FTC looks at whether the website has provided full and accurate disclosures. For example, was there a full disclosure that the child’s information would be shared to marketers? Do the parents realize that their child is going to be on marketing list? Where the company’s subsidiaries, divisions or affiliates are marketing to the user, its unclear whether this counts as a “third-party marketer.”

Motion Picture Division

The second hypothetical involves the motion picture division wanting to launch a new website to promote its new PG13 film. The website includes the ability to purchase movie related gear and merchandise, and visitors will be able to register to receive texts from their favorite characters from the film.

Because this film is PG 13, we can assume that its a general purpose site targeting audiences over 13 years old. The website does not necessarily need to comply with COPA, but when users register for the website, the company should utilize an age-screening process that is age neutral (e.g., the website can’t just ask whether the user is “over 13.” The website also needs cookies to prevent “back buttoning” (if the user realizes that he or she will be prohibited from accessing the website because he or she initially truthfully said that they were twelve, this prevents the child from hitting the “back” button and changing their initial selection).
Data security is about avoiding unintentional disclosures of information. Financial information and SS# are the big concerns. So websites that collect financial information need to utilize reasonable security measures. Even if it is not engaged in any financial transaction, if the website requests credit card information (even if only to confirm parental information), it still needs to comply with “PCI standards”, which are industry standards that credit card companies have developed for security on the Internet.

Video Game Division

The third hypothetical involves a video-game division that wants to launch a website where it can have attorneys who represent clients in parking court to sign up. [This hypo didn’t make a lot of sense to me.] The video game division intends to sign up this website as a member of a behavioral advertising network that uses a click-track company (meaning, the browsing behavior of website will be tracked and it will share the data with targeted advertising).

The concern is that this website should not sell information that will permit marketers to identify any user; instead, they should just receive information about anonymous IP addresses that the marketer could pop ads to. Generally, where a third-party advertising network wants to collect information about a user’s web behavior, the privacy policy should disclose the fact that the website is selling information to third parties, and must make clear that there is an opt-out option (although to be safe, the website should use an opt-in option instead).

The FTC has published guidelines on behavior advertising based on browsing behavior, and guidelines have also been promulgated by trade groups. The FTC is in a “wait and see” mode; they are going to give self-regulation a final chance.

* * *

The Luncheon Keynote Address was given by John Scher, co-CEO of Metropolitan Talent Ons
John started his address with the general bleak observations that the concert business is in chaos and record labels are failing. His view is that the labels were counting the merchandiser’s money, counting the promoter’s money, and counting the artist’s money, with their hands out to take a piece of these income stream, but they weren’t trying to make their own money. He talked about how labels historically paid as little as possible (there was a time when labels paid only 2 4% of royalties to artists, or paid with Cadillacs). Artists had to fight to get a decent royalty, and once they get a royalty, they had to force the labels to pay them the full amount due.

The concert promotion business is also struggling, especially since the business of concert promotion has shifted over the past few decades (especially, consolidation of the concert business). Currently, Live Nation is the largest and only public corporation in the concert business, but it has never made a profit. When Clear Channel spun off its concert division into Live Nation, John claims there was about 3 billion debt written off by Clear Channel. “Live Nation was a disaster for Clear Channel; there was no synergy.” The lack of profit by Live Nation seems inconsistent with its monopoly status. It controls the shows, ticketing, the “essence of the business”. The reason why it is not profitable is because Live Nation is a monolithic company, which is only going to get bigger if its attempt to merge with the largest ticketing company (Ticketmaster) is successful.

John spoke about the history of the concert business. He said that in the 60’s the only acts that toured were successful artists pushed by the labels. As the music concert business matured, promoters realized that they needed to get involved in youth culture to know what hot acts were emerging. So concert promoters began working with young artists to develop them.
Historically, the promoters’ deal with the artist was that there would be a guarantee. Once gross ticket sale came in, the promoter would pay its bills, pay the guarantee, the next 15% went to the promoter, and anything left was split between the artist (60%) and the promoter (40%).

As the industry evolved, artists were not making a fair share on the recording side so they needed to make more from concerts. The deals began to change. First, artists received a reasonable guarantee, but started demanding that the split of net profits be increased from 60% to 85%. Then, guarantees started increasing.

John observed that “All graduates from Wharton should go to hell.” Since the artist’s business managers took in 5%, they needed to justify their existence by pressuring promoters because they couldn’t pressure labels (which were large companies with sophisticated lawyers). The guarantees increased substantially, which meant that promoters took on greater risk and “the deals got tighter.”

The concert promotion business was stable those day because of Premiere Talent and its owner, Frank Barcelona. Premiere was the largest talent agency in the music industry. Frank understood that promoters needed to make a fair living so he instituted the idea of paying the artist 85% of the net profits (not gross) but no guarantees (so the promoter would never lose). This idea didn’t last because the business managers insisted on a guarantee.

As a result, John contends that deals in the concert business are extremely one-sided: enormous guarantees (regularly $500K-1 million) plus 90- 95% net. The venue receives income from ancillary sales (concessions and service or ticketing charges). Profit margins are incredibly thin, and there can be no real competition with Live Nation. Its now extremely difficult for any party to make money in the concert business. Superstar acts do well because they receive huge guarantees, but concert promoters are unable to afford any artist development. “The Deal has strangled the industry.”

John then discussed how 360 deals with artists put additional pressure on the concert business. Labels wanted a percentage of the artist’s merchandise and/or touring, but they do not provide any additional service in exchange for this new income stream. John warns that, if this continues, there will not be a live music industry that anyone wants to participate in. Attorneys need to make deals that are fair and reasonable for all parties. Do not try to take advantage; instead, the best deal is one where neither side in 100% satisfied. Record companies need to stop holding their hand out, and the industry needs to be better at protecting intellectual property. The industry needs to realize that, without artists creating content and performing, then there will not be a music industry.

* * *

“Ethical Negotiation Practices”

Panelists: Howard Siegel, Esq., Partner, Pryor Cashman LLP, and Professor John P. Sahl Faculty Director, Miller-Becker Institute for Professional Responsibility, The University of Akron School of Law.

Howard and John opened the discussion by observing that there is a general preconception that entertainment lawyers are unethical. Namely, that the artist’s criminal problems can be attributed to the their lawyers. But this is because the media is focused on celebrities, and entertainment attorneys are in their orbit. There are few news stories about non-celebrities (or their lawyers).

Practical Tips

• Do not “shoot from the hip” when giving advice to individuals about potential legal problems because the standard for finding a lawyer/client relationship is a low one. By giving quick advice, you run the risk of exposing yourself to potential malpractice liability.
• Always Have a Retention Letter. Contingency fee arrangements must be in writing. In New York, an attorney must have a written retention letter even if he or she has a non-contingency relationship if the fees will be in excess of $3000. The letter should also make clear the scope of representation. In taking on new business, keep in mind what is your level of competency and expertise.
• Communicate. The key source of trouble is lawyers who fail to maintain adequate contact with their client.
• If you receive a letter of inquiry from a disciplinary committee, participate fully and promptly. The key is to short circuit a full disciplinary inquiry. Even if you believe the disciplinary complaint is baseless, cooperate with the investigation because you can be reprimanded just for failing to respond.
• Analyze your errors and omissions policy, and be sure you know what is covered. Statistically, law graduates will have 3 to 5 malpractice actions initiated against them, which does not include disciplinary proceedings. Have an office policy about client files, client confidences, how the phone is answered, how you advertise for services, etc.
• Fee Disputes. because a client may elect mandatory fee arbitration (in New York), your retainer agreement should not be inconsistent with this. If there is a fee dispute, don’t take the disputed amount out of the client’s trust account.
• Ethics of Negotiation. You can refer to the law and other considerations in negotiating with third parties. When negotiating contracts, your client needs to agree to the terms of the agreement. If you are given oral authority for a range in negotiations, its best to put this authority in writing.
• Have a Scrubbing System. All drafts of agreements are discoverable in any subsequent litigation and can be used against you. So consider whether you should use oral communications instead of email.
• Be careful about threatening criminal action in communications with opposing counsel. This is not prohibited, but you should have some basis for threatening it rather than using it as negotiating leverage. By contrast, an attorney may not threaten to bring a disciplinary action. Although you can remind opposing counsel that they are crossing the line, you cannot blackmail or threaten a disciplinary action because you are obligated to report all disciplinary violations.

Representing Multiple Parties

In representing multiple parties (e.g., musical group), or in motion picture deal where you represent both the producer and director, bear in mind that groups always get along great in the beginning; “every divorce started out in a mad love affair.”

When representing multiple individuals, there may be differing goals and expectations. Rule 1.7 provides that a group’s lawyer may represent an individual member of the group provided the representation is not inconsistent with the group’s interest. This rule also provides a list of possible conflicts of interest, but try to “listen to your gut.”

You may continue to represent the group and/or stay involved in representing client where there is a potential conflict of interest if you obtain informed consent (and the conflict does not arise in litigation). Informed consent includes a full disclosure of the benefits and risks of continued representation, and a discussion of alternatives.

A multiple representation may require the lawyer to provide the client with a new or revised disclosure statement, retainer agreement and at least a written waiver. Courts are more likely to uphold waivers signed by clients when it provides specific and complete information about all possible conflicts.

Truthfulness with Persons Other than Clients

Aside from the obvious duty of be truthful to your client, you also have an obligation not to make false representations of material fact to third parties on your client’s behalf. And you also may have an affirmative duty to disclose material facts when necessary to avoid assisting clients in a fraudulent action. A “material” fact is broadly defined as any fact that will change a person’s course of conduct. Finally, a misrepresentation can occur if you incorporate or affirm another person’s false statements.

This begs the question of the difference between commercial puffery versus false representation. Statement that may be the “strict truth” may be technically true, but if you suggest a falsity, this may also subject you to a disciplinary violation. In attempting to create a bidding situation, take the high road. Permissible commercial pufferies are statements of opinion. You cannot misrepresent a fact.

* * *

“From Treatments To Royalties: The Basic Lifespan Of An Indie Film”
Moderator: Susan Bodine, Esq., Cowan, DeBaets, Abrahams & Sheppard LLP.
Panelists: Madhu Goel, Esq. Director, Legal & Business Affairs, A&E Television Networks LLC, Dan O’Meara Green Film Company; Marc Simon, Esq. Partner, Cowan, DeBaets, Abrahams & Sheppard LLP.

1) PURCHASING RIGHTS: Madhu Goel

Madhu first set forth the basic development deals that studios have with a producer. This can range from (a) an exclusive deal (where the producer is tied to the studio, which may be costly but then this gives the studio a lot of freedom) (b) a first-look deal (the studio has right of first refusal on a project); or (c) a housekeeping deal (where the studio provides some support, like an office space and a secretary), which is usually offered to a younger producer.

If there is no overall deal with a studio, an independent producer can pitch an idea, treatment, or screenplay to a studio through a pitch meeting. In order for the producer to protect his or her idea, he or she should try to get the studio to sign an NDA/confidentiality agreement prior to disclosure of the idea, which ensures the confidentiality of the pitched idea. But, if the director/producer is just starting out and doesn’t have any leverage, it may not only be difficult to have studio sign the NDA, the studio may have the director/producer sign a submission release, which is an acknowledgment that the pitch may not be unique, that the studio receives millions of pitches all the time, and even if the studio decides not to do business with that person, there is a chance that it will develop a property that is similar to the one that was pitched, and the producer promises not to sue the studio. Bear in mind that ideas are not protectible under copyright law, only the expression of ideas are protected. So if the expression of the producer or director’s idea is expressed in a “treatment”, then the treatment is protected by copyright law, and any derivate work created based on the treatment may also be barred. The director or producer, however, may have other state law claims, like breach of implied contract, but this may require a showing of novelty, depending on whether you are in New York or in California.

Option Purchase Agreement: Deal Points

Generally, the buyer of option rights wants the longest period of time to exercise the option. The standard option period is 12-18 months, but this can be much shorter. The price for the first option may be a percentage of the purchase price of the property, based on a higher back-end price or a percentage of a the film’s budget. Note that you may want flexibility in determining the option price. If the film development is only at the beginning stages, the parties don’t know the type of studio or the financiers who will support the project, so someone selling the rights does not know whether they are going to be involved in a $20 million or $80 million budget movie.


2) FILM FINANCING: Dan O’Meara

Two key concepts to keep in mind: (1) the waterfall; and (2) control by investor. All the other deal terms tend to be pretty boilerplate, but these are two issues can be deal-breakers.
“The Waterfall” is shorthand for a provision in a financing agreement that describes how the film’s profit will be allocated. The money is paid out in tiers. Most investors are concerned with where they are located “in the waterfall”, meaning their priority in being repaid their investment. Typically, two interests will be paid first: (1) the film’s sales fees (must hire an attorney and sales agent) and (2) the costs associated with a full theatrical delivery. After all the investors recoup their investment and premium, then the remaining money is divided between the producers, partners, investors, and other interests.

The second issue is the extent of control that an investor can have over what the producer does. The investor may have some general rights. For example, whatever was represented to them about the film’s budget and financing cannot change materially without the investor’s approval. (There may be a “most favored nation’s” clause providing that the producer cannot make any other finance deals on terms that are better than the terms that the producer has with that investor.) An investor may want to have some meaningful approval or consultation concerning the sale or distribution of a film, or some right to have control over key creative decisions. All of these deal terms will depend on how much leverage the respective parties have.

3) FILM PRODUCTION: Marc Simon
Creation, development, and production are the mechanics of film. The goal is to have the production team moving forward. A producer will want to create an entity (typically an LLC) to own the film, which facilitates accounting, clarity of ownership, and limits liability.
Some production considerations include:

• Location. Many states offer substantial tax credits, and some are transferable credits that can be sold. In New York, film tax credits can be turned into actual cash down the road, a money back credit, which can be substantial. Another issue is that film financing may be a tax deduction, which can be a selling point when trying to raise funds from wealthy individuals. An equity investor may be able to “write off” 100% of his or her capital contribution in the current year of production.

• Chain of Title Issues. Who owns the underlying property rights in the film. All the ownership agreements between producers and investors should explicitly address who owns the film, and there should be no conflicts among the various agreements so the LLC can sell the film without any issues.

• Clearly Defining the Term “Budget”. Many financing terms are based on the budget, such as bonuses.

• “Back End”/Contingent Compensation or Profit Participation (also known as the “producer’s share”). In an actor’s agreement, there may be a provision that the actor may recover 5% of the “producer’s share” as part of the actor’s contingent compensation.

• Writer’s Agreement. One issue may be the writer’s credits, including whether the writer receives shared or sole writing credit. The writer’s compensation and/or bonus may be based on his or her respective credit. There are certain industry standards for agreements with writers.

4) DISTRIBUTION: Susan Bodine

The process for obtaining film distribution is currently going through substantial changes. Its becoming increasingly rare for an independent film to be purchased wholesale by one distribution company who will pay a large advance and distribute the film worldwide on all different platforms. The film industry is reconsidering how films get seen and monetized. Right now, its hard to say “this is how it works” because this is a time of great experimentation. Traditionally, the goal for independent filmmakers was to have the film financed with private equity, then the film debuts at Sundance. The producers hire a great indie sales agent and the day after the film’s debut, it is sold to a distributor and then wins a bunch of Oscars.
Newer and smaller distribution companies have emerged, and they do not necessarily purchase worldwide rights. There are also newer models of distribution (Internet, VOD, TV) or distributors who start investing during the film’s production. Indiewire is a good website which discusses what’s going on in the industry, and covers DIY film distribution and marketing.

* * *

“Destination Unknown: What’s Next For The Industry In 2010”

Moderator: Vejay G. Lalla, Esq., Moderator Associate, Davis & Gilbert LLP
Panelist: Stanley Pierre-Louis, Esq. Vice President, Associate General Counsel, Intellectual Property & Content Protection, Viacom, Inc.; Drew Stein President & COO, IMO; Lance Podell, Esq., CEO, Next New Networks; Peter Drakoulias President, GAF Holdings

The panel addressed a range of issues. Here are just a few of the topics that they touched on.

(1) DRM Free Websites. Consumers apparently prefer MP3s without DRM (“digital rights management”) protection. Is DRM dead or are there different models to choose from? Content creators, however, want DRM and are still testing other ways to protect digital content. Consumers may want to be able to burn CDs, so are there other ways to have the content locked up, and under what terms. There can also be rental models or different uses. ITunes, which represents 80% of the market, does not use DRM.

Stanley talked about Viacom’s approach to DRM protection for audio-visual works. Consumers can view its shows in different ways (either pay by downloading on iTunes or free on Hulu). Mobile is still a growing area, especially since bandwidth constraints are improving. The key is to have the flexibility to test various ways of getting content to consumers by using different models.

Piracy is obviously a big concern (e.g., the Viacom-YouTube litigation). There are ways to create a filter to track unauthorized uploading on peer to peer networks. The content owner can use “watermarking” on blue ray disc. Another way to stem the tide of piracy is to give notice to persons engaged in illegal peer-to-peer downloading without suing them (a three-strike rule for infringement).

(2) How to Make Money from Content. Newer trends include TV on the Internet. There are two types of content. Content that was originally shown on TV and then repurposed for the Internet, and content created FOR the Internet. Content for the Internet is less expensive to create, there is less production and a quicker turnaround time. TV for the Internet is an exploding market. One way to keep cost down is to steer clear of copyrighted music by creating their own music for these programs.

(3) Another Emerging Trend is Branded Entertainment. Content created for the Internet is better able to utilize branded entertainment because of its ability to turn around content so quickly.

Branded entertainment includes more than just product placement. For example, the Gates Foundation has sponsored TV shows where the “product” that was being “placed” was a concept (e.g., encouraging kids to finish high school). The foundation paid the TV program to convey that message, which weaved the “staying in school” theme into that TV program.

(4) Is Music Superstardom Still Possible? What is role of marketing for superstardom? In marketing new content, what is role of the record label? Historically, the label’s main job was to put their muscle behind an emerging and promising musical act. They would distribute the artist’s music, promote the artist, give tour support, give an advance, and then these costs would be recouped through the sales of the musician’s recordings. Now, with mp3 files, the label’s control over the channels of distribution are less relevant, and MySpace and Facebook has usurped a part of the label’s promotion functions.

The question was posed on whether record labels missed the boat on digital content. Labels were slow to come to the party, and now they are trying to innovate. For example, Warner just inked a deal with YouTube where Warner may be involved with the sale of music video on YouTube.

The key to innovation is finding out ways to get consumers to engage with the content on the website, and for that, there needs to be compelling content. For example, games on websites are now huge. Both labels and other content generators need to use new technology to reach people and get them to come to their website. Larger, monolithic companies are not able to innovate the same way that smaller companies can. So now large companies are working with young entrepreneurs companies.

Lightening round predications for 2 years from now: what will be super hot/cold

Stan: As TV become more adapted to the computer, there will be a switch to Internet TV, and more people will be listening and watching content on their mobile devices. Screens hooked up to televisions will be better quality, and there will be more VOD and Netflix instant-movie streaming models.

Liam: prices will start rising for content. On the web, there was initially a culture of “I shouldn’t have to pay for content”. It will become more accepted over time that content/information is no longer free on the Internet (e.g., newspapers charging for membership).

Peter: larger industries are going to be more nimble, and will start looking at smaller channels, which will create new opportunities.

Drakoulias: Consumers are demanding everything on their time and on their channels. In two years, while traditional advertising will still be around (e.g., sponsorship), the general trend will be towards more accountability of advertising dollars. Also, more directed advertising to consumers, so it’ll be a tension between algorithms (e.g., Google and Pandora) and instinct.

February 1, 2010

Christoph Büchel's VARA Victory

By Monica Pa

On January 27, 2010, the First Circuit Court of Appeals issued an important decision protecting the scope of artists’ rights under the Visual Artists Rights Act (“VARA”), 17 U.S.C. § 106A. In this much-publicized lawsuit, the Swiss artist Christoph Büchel was commissioned by the Massachusetts Museum of Contemporary Art Foundation, Inc. (“Mass MOCA”) to construct a mammoth art installation, roughly the size of a football field, entitled “Training Ground for Democracy” (“Training Ground”). The work included several major components, such as a vintage movie theater interior, a house, a variety of vehicles, a burned out 737 aircraft fuselage, and a bomb carousel. Mass MOCA was solely responsible for the cost of acquiring these items for the installation, which ultimately amounted to an upwards of $300,000 (nearly twice its initial budget) for materials and labor. Remarkably, the parties never memorialized the terms of their relationship or their understanding as to the intellectual property rights at issue. Communications between the artist and the museum became so strained that the artist refused to continue working on the unfinished installation. The museum, nevertheless, continued putting together the work in accordance with Büchel’s latest instructions. Unable to convince Büchel to return to the project, on May 21, 2007, Mass MOCA filed a complaint in federal court seeking a declaration that it was entitled to exhibit this unfinished work and a retraining order preventing Büchel from interfering. Büchel responded with a five-count counterclaim, asserting, among other things, that showing his unfinished work would violate his rights under VARA.

In July 2008, Judge Michael A. Ponsor in the District Court of Massachusetts ruled in favor of Mass MOCA, 565 F. Supp. 2d 245 (D. Mass. 2008), holding that VARA did not protect unfinished works of art. As such, the museum was entitled to show the Training Ground work so long as it included an accurate disclaimer. In any event, Büchel’s rights of attribution and integrity under VARA were not implicated by the museum’s conduct. The district court then dismissed Büchel’s copyright claims, finding that the display of “covered components of an unfinished installation” was neither an infringement of Büchel’s exclusive right to publicly display his work or to create derivative copies. Accordingly, the district court entered judgment in favor of the museum and dismissed all five of Büchel’s counterclaims.

In a substantial victory for artist rights advocates, the First Circuit reversed. Most important, Judge Lipez, writing for the unanimous panel, held that the “statute’s plain language extends its coverage to unfinished works”, as well as the statute’s history and purpose. The court concluded that Büchel’s rights in his Training Ground work “were protected under VARA, notwithstanding its unfinished state.” VARA protects an artists “right of integrity” which allows the artists to prevent distortions, mutilations or modifications of their works that are prejudicial to their reputation or honor. The record contained “sufficient evidence to allow a jury to find that Mass MOCA’s actions [namely modifying the “Training Ground” work over his objections] caused prejudice to Büchel’s honor or reputation.” The court, however, dismissed Büchel’s right of attribution claim. Since VARA’s protection for a right of attribution is only enforceable through injunctive relief, this claim was moot because the Training Ground work no longer existed after the museum dismantled it.

This decision is also notable for its copyright holding. Acknowledging the intersect between VARA and the Copyright Act, the First Circuit held that the record revealed a factual dispute as to whether Mass MOCA violated Büchel’s exclusive right to publicly display his work when it repeatedly and deliberately showed Büchel’s unfinished works on numerous occasions to various individuals without his permission. The court, however, held that because Büchel’s counsel did not adequately develop the claim that the museum’s modification of the Training Ground work constituted the creation of an unauthorized derivative work, this copyright right was waived on appeal. This case was remanded for further proceedings on Büchel’s reinstated VARA and copyright claims. In a recent statement to the press, Büchel’s counsel has indicated that Büchel, now represented by the Volunteer Lawyers for the Arts, Wachtell, Lipton, Rosen & Katz in New York City, and K&L Gates LLP in Boston, intends to litigate this case “to the fullest extent possible.”

This litigious debacle has, interestingly, reemerged in Büchel's other works. At the latest Art Basel Miami Beach show in December 2007, he presented a smaller version of the Training Ground work, which featured litigation papers and correspondence about the failed show. Reportedly, this work was purchased by a collector for $250,000, and donated to the Hamburger Bahnhof museum in Berlin.

July 21, 2010

New Music Seminar Report

By Monica Pa, with Eva Dickerman's assistance

The first New Music Seminar occurred in New York in 1984. The director of the conference, Tom Silverman, of Tommy Boy Entertainment opened the current conference at Webster Hall with an interesting point: The music industry still faces many of the same concerns today that it did in 1984, namely the challenges of new technology and the evolving habits of the consuming public.

This conference was intended to be an informative and affordable program devoted to the future of music. It sought to give labels, website operators, artists and their representatives information about the music business, a forum to discuss changes in music and technology, and an opportunity to network with others in the industry. The conference organizers scheduled panel discussions, short talks and performances. There were also informal areas for exhibitors and networking. My sense was that the conference was geared towards artists rather than seasoned industry professionals. This was not necessarily a bad approach. For example, the NMS Guidebook contained an extremely helpful “do’s and don’ts” section, and included tips from industry experts about artist management, digital distribution, touring, marketing and merchandising, web strategy and music licensing.

There were three closed-door industry summits: The NMS Brand Summit, The NMS Tech Summit and The NMS Business Summit. These were unfortunately closed to press and reporting. I understand that the purpose of each summit was to provide a forum for dialogue about the music industry, and the panelists discussed legal issues, such as the new music deal and economic models. The legal panel (of which EASL was a sponsor) included Tom Silverman, Adam Ritholz, Jim Cooperman and venture capitalist David Pakman.

I was able to report on the marketing and branding panel in the morning, which focused on “how to cultivate fans and how to harvest them.” This discussion on marketing strategy and band branding offered information that is relevant to any entertainment lawyer.

The panel included Ariel Hyatt from Ariel Publicity and Cyber PR; Jay Frank from CMT; Gwen Lipsky from Sound Thinking; Eric Garland from Big Champagne; and Mike Doernberg from Reverb Nation.

The panelists began by pointing out that there exists a fundamental tension inherent in marketing music. On the one hand, music should be spontaneous and creative; on the other hand, marketing should be systematic and scientific. Musicians need to understand that their music is a product, and that they are not just creating music, but also creating a brand. Artists are often skilled at communicating their art but deficient at communicating from a business perspective.

The panelists emphasized the financial importance of a fan base. Historically, although fan relationships were important, these relationships were disconnected from the core music business, which was the creation and distribution of music by labels. Today, as the music industry has become more decentralized, fan relationships are increasingly important. To illustrate this point, the panelists discussed the “Theory of a Thousand True Fans.” The theory is that if an artist can have 1000 fans, and each fan contributes $100 a year, the artist could earn $100,000 a year, which should be a sustainable living. Not all fans, however, are created alike. The deeper the fan relationship, the more value that relationship contributes to the band as a brand. The more you understand about your fans and the more direct contact that exists between artist and fan, the more value that fan relationship has. Every artist, at least in his or her early stage, needs to develop and nurture a fan base to support the music and brand.

The classic marketing rule is that fans will result in a 20/80 profit split: 20% of the fans will account for 80% of the artist’s revenue. In terms of music, the split is even more pronounced (perhaps more like 10/90). So if there are 1,000 fans, the artist needs to focus on gaining the attention of the 1 in 10 fans that will be dedicated enough to purchase music, tickets, shirts, merchandise, etc.

Typically, musicians market online by having MySpace and Facebook pages, and perhaps by sending out sporadic communications through a general newsletter. They then tour and ask fans for money (e.g., purchasing tickets to a show) but this occurs before they have built any value as a commercial product. Artists need to be precise and goal-oriented in their communications with fans. Expert marketers focus on controlling the message that gets out. Smart marketers don’t just rely upon general social media platforms, but rather use analytics to understand the relevant fan base, in order to better create a compelling product and brand.

The panel discussed three stages for a band:

(1) Create: Bands are usually well-equipped at how to approach this initial stage. The band should make a compelling product, but also develop itself as a brand. In this early stage, the band members should create social media profiles, digitally distribute music, and give away free music in exchange for fans signing up to an email mailing list.

(2) Grow: Once the artist has established his or her product and brand, then it’s about maintaining and growing the fan base. Artists need to be able to understand the existing fan base (e.g., perfect their music and performance quality, play lots of gigs and get feedback, nurture fan relationships).

(3) Develop the Band’s Fan Base (see above): Artists should revise their marketing strategy on a daily basis and continually shift their engagement (in other words, keep assessing what the fans want and accommodate these demands). Musicians should pay attention to their audience and constantly refine the marketing strategy. Social media takes a while to get traction, so do not quickly abandon these platforms – it takes patience to develop successful strategies.

What constitutes a real fan (e.g., a “valuable” fan)? An audience member is someone who has listened to your music; a fan is someone who has a sustained relationship with you. You should have a two way relationship with your fans, and that relationship should be growing and exponential.

One panelist noted an interesting tidbit: an email “friend” is 8 times more valuable than a “friend” on a social networking website (e.g., a Facebook friend). Mailing lists are therefore more valuable then merely having passive Facebook friends. The ideal trajectory for fan development is to convert a social network friend to an email friend to a devoted fan.

There are two models for monetizing a fan base: breadth and depth. “Breadth” refers to the general awareness of the artist. For example, Lady Gaga is incredibly well-known, so there is a lot of fan awareness of her product. Depth refers to the engagement of fans. An artist with a million views on YouTube has wide awareness, but to transform this awareness into “engagement,” viewers need to purchase the music after viewing the video. An artist can survive with a low awareness base if there is substantial fan engagement. If each fan will buy the t-shirt, go to the concert, tell his or her friends, and create long‑term sustained interest, then the artist will have a continuous stream of revenue. An artist with high awareness but low engagement will not survive as a business. It's crucial to use marketing data to figure out ways to move fans along the continuum of involvement, from awareness to engagement.

When an artist engages a listener, the artist wants to do it quickly and then effectively capitalize on it. When a person hears a song and decides to buy it; that is a rare and valuable opportunity. To create the most opportunities for engagement, the song needs to be widely available and distributed everywhere. One panel member discussed how he had become interested in a song that had already been released for three weeks. He couldn’t purchase the song though because the record label had not made it available for digital sales. This squandered a valuable opportunity. Moreover, since that song was not available, the website suggested that he listen to a similar artist name Boy Wonderbread. The panelist liked Wonderbread’s music and ended up purchasing a few songs. As a result, the label lost the $1 that the listener was going to spend on the original artist, and he ended up spending $10 on Boy Wonderbread.

Ariel Hyatt made an interesting point that few people purchase their own music on iTunes and Amazon. But, she said, this is like making dinner for 10,000 people without tasting the food before it leaves the kitchen. It is also key to make sure that listeners can easily purchase the artist’s music. Hyatt provided an interesting “Clicks to Content” slide, which showed how many “clicks” it takes to purchase a song on a website. For example, if a listener goes on iTunes to purchase a song she just heard, it takes up to 14 clicks to actually purchase it if she does not have an account. Google Onebox stream takes 3 clicks to get to the music. It takes one click to hear the song on a promoted stream on a music blog, on a YouTube video, on a video or audio stream from Facebook, on an artist’s MySpace page, etc. Anything above 2 clicks and the consumer will likely lose interest. Bear in mind that, for the average consumer, when faced with too many choices, the consumer will end up choosing nothing. The decrease of music sales may be related to there being TOO much available music.

Jay Frank said that, regardless of all this marketing information, the music should be great, identifiable and have an immediate impact, which means artists need to impress listeners fast. The top 25 selling downloads in 2010 had an average intro length of 6.6 seconds, and 2/3 of the top selling downloads have an intro of 7 seconds (“don’t bore us, get to the chorus!”). People are giving music about 6 seconds before deciding whether the song is worth purchasing.


August 15, 2010

Report on the ABA Forum on the Entertainment and Sports Industries –Part II: “Clash of the Titans: Viacom v. YouTube – Will Copyright Law Undo Goggle’s Internet Juggernaut?”

By Monica Pa

This panel was held on Friday, August 6, 2010 at the InterContinental Hotel in San Francisco.
The panel included Jennifer Golinveaux, Marc Greenberg, and Jennifer Seibly and was moderated by David Given.

This panel raised some unique points about this heavily discussed litigation, including several interesting background facts surrounding this case. Even before the litigation was filed, there was a fair amount of trash talk by Viacom. When YouTube debuted, Viacom issued negative press about YouTube’s business model. Viacom has a lock on the “youth-market” as far as cable TV content (it owns MTV, VH1, Comedy Central, and Nickelodeon). Billions of dollars every year are earned in licensing fees and advertising revenue from programs on these channels. Viacom was appropriately concerned about YouTube, given that a significant percent of the youth market was trending towards turning to the Internet for media consumption. Google purchased YouTube in 2006, one year after YouTube’s public launch, for 1.65 billion dollars (a tremendous price for a company that has never made a profit), and Viacom filed suit shortly thereafter in March 2007.

Viacom’s lawsuit claimed that YouTube and Google were guilty of massive copyright infringement. The initial reaction was that, given the results in Napster and Grokster, this should be a slam dunk case for copyright infringement. Viacom’s complaint anticipated many of the defenses that YouTube would raise under the DMCA, accused YouTube of willful copyright infringement (which allows for enhanced statutory damages), and sought preliminary and permanent injunctive relief.

At the close of discovery and summary judgment briefing, there were supposedly “smoking gun” documents leaked to the media. Notably, the first source of that leak was a former subsidiary of Viacom (CBS.com), which suggested that there was evidence adduced at discovery extremely detrimental to YouTube’s defenses, including documents showing the state of YouTube’s knowledge and encouragement of infringing activities.

Turning to the merits of the decision, Professor Marc Greenberg from Golden Gate University Law School pointed out that this case turned on the straight forward issue of how to interpret the safe harbor provision of the DMCA, which provides that the content owner must give notice to the ISP identifying where on the website the infringing materials is located, and then the ISP must investigate this claim and perhaps take it down. The district court’s decision carefully parsed the DMCA provisions and legislative history, focusing on the question of whether it was sufficient for the content creator to provide only general notice to the ISP of a problem.

The court held that general notice is not sufficient; instead, the DMCA requires the content owner to provide specific information about infringements of particular individual items. This is a burden shifting issue - who should, in the first instance, be required to identify infringing works and police infringement. The court makes clear that the DMCA places the burden on the copyright holder to identify the infringing activity.

The panel discussed the fact that the more significant issue, and what the appeal may hang on, is the availability of the statutory exception for a “representative list,” which provides that, if copyright owner can identify a representative class of infringing items, then the burden shifts to the ISP to take down similar instances of infringement. Specifically, the statute provides that “works” may be described representatively, so long as the content owner provides
“information reasonably sufficient to permit the service provider to locate the material.” The very purpose of this exception is to relieve copyright owners of the need to specifically identify each and every infringement. The court found that merely giving a representative sampling of infringing content undermines the DMCA’s general requirement for content owners to identify the location of the infringing material. But, this undermines the fact that the apparent purpose of the statutory exception is to shift the burden to the ISP. As such, the district court’s construction and application of the “representative list” exception may be Viacom’s strongest argument on appeal.

The panel also discussed the decision in UMG Recordings, Inc. v. Veoh Networks, Inc., 665 F. Supp.2d 1099 (C.D.Cal. 2009), with counsel for Veoh speaking on the panel. Veoh’s counsel pointed out that it is not easy for an ISP to identify what constitutes infringing content. For example, when a content owner says to take down unlawful copies of a music video, a broad sweep for videos containing a particular song may capture home videos with someone playing that song on the piano or kids dancing to that song. She argued that content owners are the ones in the best position to identify infringing content. You do not want ISPs guessing at what is infringing; this is not the case of “know it when you see it.”

She pointed out that in both UMG and Viacom, neither ISPs were ignoring infringement notices. As soon as they received a DMCA notice, they immediately took the infringing materials down. For example, when Viacom sent more than a hundred thousand DMCA infringement notices to YouTube on the eve of litigation, by the next business day, the majority of those allegedly infringing files had been taken down. She argued that this shows that the “take down” method actually works.

The panel also discussed the potential for a technological fix for these legal problems. Viacom argued that YouTube could have used filtering technology early on. Notably, Viacom’s infringement claim is predicated only on infringement occurring before YouTube enacted filtering technology. It’s unclear why Viacom would choose to limit liability for pre-filtering activity because the use of such technology is not relevant under the DMCA, which does not predicate the availability of safe harbor immunity on the use of filtering technology.

Early on, there was hash filtering software, which is a more precise but limited filtering system. It identifies any identical files on the system and disables them. But, all a user has to do to avoid this filter is to crop off one or two seconds at the end of the film clip. Veoh and YouTube employed more advanced and less precise “Audible Magic” fingerprinting filtering technology, which matches the “fingerprints” within a file with other files on the system. Thus, the file need not be identical to be captured by the filter. This is one of the most effective filtering software available right now.

These filtering fixes, however, are not without their issues. The EFF is vocal about over-filtering, especially since much non-infringing original content is being taken down without the ISP serving a DMCA counter-notice to the poster. Robust and broad filter technology takes away the opportunity to challenge a take down of allegedly infringing files, and also undermines the chance to consider fair use and other defenses.

As a final point, it bears observing that, when the DMCA was enacted in the late 90’s, there were no social networking sites (which is essentially how YouTube operates). It is extremely burdensome for content owners like Viacom, which generates thousands of hours of programming that results in thousands of infringing uploads on YouTube on a daily basis. The problem may be that legislation has not caught up with technological advances. The DMCA is just a poor fit to address user generated content on social networking sites. The 2d Circuit Court of Appeals may uphold this decision, or perhaps overturn the “representative sampling” holding, but the panel expects some language in the decision asking Congress to revisit the “take down” structure in the DMCA.

Report on the ABA Forum on the Entertainment and Sports Industries –Part I: “From Music, Film and Art to Motorcycles and Other Sports: Hot Issues and Disputes in Entertainment, Art and Sports Licensing Deals”

By Monica Pa

This panel was held on Friday, August 6, 2010 at the InterContinental Hotel in San Francisco.

The panel included Richard J. Idell, Idell & Seitel; Jessica Darraby, the Art Law Firm; Samuel Lew, Feldman Gale PA; Jann Moorhead; and Rob Rieders, Pixar Animations Studios. This blog entry only discusses Rob’s presentation, which I thought raised excellent points about entertainment licensing by a content creator.

Pixar has been involved in numerous award-winning animated movies, including Toy Story, Up, Cars, etc. Rob’s presentation provided practice tips for how to negotiate and work with content owners, licensors, creative executives and the marketing team in setting forth the parameters of the licensing agreements and the scope of permissible use for creative works.

He used the movie Toy Story as an example of various entertainment licensing issues that come up in a movie. Toy Story licensed a tremendous number of characters (e.g., Ken and Barbie, Mr. Potato Head, Slinky the dog, lots of Fisher Price toys, etc.). When you are licensing a character, you want to consider all the artistic interpretations of the licensed elements and potential changes to the brand identity from these interpretations. For example, if you are licensing Mr. Potato Head, you want to think about what happens when a toy becomes a “living character,” animated with a voice, personality and 3D design. Similarly, if you are licensing a historic character like Kasper the Ghost, and the licensee intends to update this character, are these updates going to be appropriate for the character? Will it be positive for the brand and/or the overall line of business?

For example the movie Cars animated several iconic cars and gave them distinct personalities. Pixar depicted the 1960 VW Bus as an old hippie van narrated by George Carlin. The 1959 Chevrolet Impala was updated as a snazzy slick Hispanic car narrated by Cheech Marin. In Toy Story, Barbie and Ken were primary characters. Pixar was unsure whether Mattel would be comfortable with the depiction of Ken as a fashionista metrosexual. Barbie, on the other hand, was depicted as very intelligent, which Mattel liked. Similarly, Mr. Potato Head is an important brand for Hasbro (it's the company's Mickey Mouse), so it is protective of this character. In Toy Story, Mr. Potato Head was depicted as a folksy character narrated by Don Rickles. Pixar queried whether Hasbro would be comfortable with the fact that Mrs. Potato Head was depicted walking around for half the film without an eye. Notably, Mr. Potato Head was depicted with a bowler hat and mustache, which was not original to the toy. By doing this, Pixar added to the Mr. Potato Head character, thereby creating new intellectual property that Pixar now has some ownership interest.

In entertainment licensing, you want to continually consult with the licensor along the way. Even if you have a broad license, you do not want to have the licensor unhappy with the resulting product or be surprised about how its character was depicted. Once a film is made (which can take up to five years), it is extremely difficult and expensive to extract elements from the animated work if a dispute arises.

In licensing a character or toy, you’ll also want to consider unexpected uses of the licensed element. For example, Pixar created a Mr. Tortilla Head (which took Mr. Potato Head’s features and put it on a tortilla because at one point the toys needed to slide under a closed door.) Make sure the license provides for whether the elements of the intellectual property can be disembodied and whether it governs the “whole” work. Remember, people love mash ups.
In seeking to obtain a license for a character, as a preliminary consideration, analyze whether a license is even obtainable given the intended use. For example, in the current Toy Story, the nemesis was an evil teddy bear. There is no famous teddy bear brand (such as Paddington Bear) that would be willing to license their character for this use because this would be so detrimental to the brand. Accordingly, Pixar created its own teddy bear character that is pink, bitter and walks with a cane. Indeed, it’s sometimes better to create your own content rather than operate under a restrictive license where the licensor is uncomfortable with the intended use.

However, if you are going to license a character as a nemesis, e.g., a “Bad Guy”, make sure you fully and accurately disclose your intended use because, again, you do not want the licensor to be unhappy later. Put a full disclosure in writing setting forth the intended use (e.g., this character is going to be depicted as a homicidal maniac). Regardless of how the character is going to be used, the licensee should never agree to a “positive light” provision, which provides that the character will be portrayed positively; at most, agree to a “neutral light” provision. Also pay attention to the precatory language in the agreement, and be careful about boiler-plate provisions, including provisions for injunctive relief, venue, choice of law, and publicity rights the content creator should control the publicity of the film and not the licensor).
A content creator also wants to avoid giving the licensor script approval or final product approval. This, however, depends on the bargaining power of the respective parties, and on the reputation of the content creator. Pixar does not give story approvals, but they have good relationships with their licensors. They work closely with those companies to keep people on board all along the way. With smaller content creators, a licensor may want to be more careful and protective of their brand. In these instances, the licensor may want to push for some level of script approval.

Rob pointed out the challenges that arise when the creative team insists that an element is a “must have.” This results in the loss of negotiation leverage (e.g., the licensor know that you need them more than they need you). If the content creator has an unequal bargaining position (desperation can be obvious), the resulting license will not only be more expensive, it can be limited in the scope of granted rights, and other provisions (e.g., the representations and warranties, indemnification) may be compromised. The in-house lawyer should be willing to push back on the creative team. Try exploring available alternatives with them, such as creating a new character instead.

Another practice point is to make sure that the in-house lawyer is consistent with licensing methods and practices. If the company has a best practices policy, these should be consistently followed. For example, if Pixar is licensing several characters from various toy companies, all of the companies should be treated fairly and subject to similar deal terms. For example, do not give one company script approval when no other company go this and/or there is a company practice against this. Try not to make exceptions, even if the licensed elements is a “must have.” Bear in mind that the licensing community is tight knit and people talk.
In drafting, make sure the license contains contingent obligations. Obligations for payment and screen credit should be contingent on actual use. Without this provision, if the product or character does not actually appear in the film, there is a chance that the content creator will still need to pay the licensor.

License agreements should also contain certain non-contingent obligations, such as a strict confidentiality clause. If the creator discloses preliminary drafts of its film and marketing campaign with its licensing partners, this needs to remain confidential. Another non-contingent obligation should be that the creator reserves the right to use or not use any licensed element. The content creator wants to make sure that no one is shoving their product into a film or marketing campaign.

Finally, Rob pointed out that, in entering into a license, the content creator should assume success; meaning, the film is going to have sequels, toys, books, games, theme parks, etc. For example, there is a “Cars Land” theme park now based on the Cars movie. Try not to give away toy merchandising rights, book rights, and other derivative rights. The creative team may not think this far ahead and, if this is a “must have,” may be willing to forgo these rights in order to get the deal done.

March 22, 2011

Fair Use Decision

By Monica Pa

On March 18, 2011, the Southern District of New York (Batts, J.), 08 Civ. 11327, issued a decision in the closely-watched copyright infringement case involving the well-known "appropriation" artist Richard Prince. In a surprising decision, the court held that images created by Price infringed the plaintiff Patrick Cariou's copyright in photographs of Rastafarians in a series of collages and paintings created by Prince and sold by his art dealer, co-defendant the Gagosian Gallery.

In 2000, Patrick Cariou published Yes, Rasta, a book of photographs that was released by PowerHouse Books. The book featured photographs of portraits of Rastafarian individuals in and landscapes of Jamaica.

Richard Prince is a well known artist who has shown at numerous museums and other institutions, including a solo show at the Guggenheim Museum in New York City. He is represented by the Gagosian Gallery, Inc., which is owned by Lawrence Gagosian. Prince admits that he used 41 images from the plaintiff's book as artistic elements in a series of paintings titled "Canal Zone", which was first exhibited in St. Barts and then in a 2008 exhibition at the Gagosian Gallery in New York City. The work included images taken from Yes, Rasta, some in their entirety, some where only portions were used, some were collaged, enlarged, cropped, and/or painted-over. The "Canal Zone" included photos and works from other sources as well.

The defendants argued that Prince's use of the plaintiff's photographs was a permissible fair use, which allowed him to use copyrighted materials for purposes like commentary, criticism, news reporting, and scholarship, as set forth in Section 107 of the Copyright Act.

The court, however, held that Prince's use of plaintiff's photographs in these collage works was not fair use. It reasoned that there is no "per se" exemption for appropriation art; instead, for the "fair use" defense to be available, there must be "a focus on the original works or their historical context[.]" Order at 16. Yet the court did not cite to any case law support for this proposition; instead, this rule appears to impose a wholly new element for a fair use defense. The court argued that, based on its reading of prior precedent, those cases all "impose[] a requirement that the new work in some way comment on, relate to the historical context of, or critically refer back to the original works." Id. It concluded that "Prince's paintings are transformative only to the extent that they comment on the Photos; to the extent they merely recast, transform, or adapt the Photos, Prince's Paintings are instead infringing derivative works." Id. at 18.

The decision appears to contravene the Second Circuit decision in Blanch v. Koons, 467 F.3d 244 (2d Cir. 2006), which held that the fair use defense was available to the "appropriation" artist Jeff Koons who had used the plaintiff's photograph in his collage painting. In Blanch, the court held that "[w]hen, as here, the copyrighted work is used as 'raw material,' in the furtherance of distinct creative or communicative objectives, the use is transformative." Id. at 254. Judge Batts, however, distinguished Richard Prince's collage paintings from Jeff Koon's paintings by holding that Koon's work was transformative; specifically, the purpose of Koons' paintings, unlike Prince's paintings, was "to comment on the role such advertisements [like the plaintiff's photographs] play in our culture and on the attitudes the original and other advertisements like it promote." Order at 17.

The district court's recent decision in Prince should certainly concern artists and galleries who had previously relied on Koons in the creation, distribution, and sale of "appropriation" art. The decision appears to add a new and poorly-defined element to the "fair use" defense (e.g., the necessity that works actually "at their core focus on the original works or their historical context"). Finally, in reading this decision, it is unclear whether and to what extent the attorneys for Prince relied on Blanch, which should have served as a playbook for their litigation defense. Certainly, it would not have been difficult to argue that, like Koons, Prince was also commenting on plaintiff's allegedly appropriated image. Indeed, it is surprising that Prince's attorneys thought to argue initially that there was no copyright in the plaintiff's photographs whatsoever, a position that is against well-settled law that has, for decades, held that photographs are worthy of copyright protection. Order at 10.

The decision is available at: http://www.scribd.com/doc/51219154/Cariou-v-Prince-S-D-N-Y-Mar-18-2011.

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