M.E.L.O.N.

Agreeing to License - Part 2: Turning On The Boilerplate – Indemnification Clauses

by Mark A. Pearson, Esq.

The following is the second in a series of articles that will try and explain some of the pros and cons of entering into a licensing agreement in today’s entertainment industry. 

   There are any number of different types of licensing agreements that come across my desk in a typical work week.  Some are short-form agreements, and others spell out every detail of the parties’ intentions over 50 pages or more.  One thing they all have in common; boilerplate provisions.  You know; the stuff that gets jammed into the last few pages of the license under the heading Miscellaneous.  Well, I’m here to remind you that while they may not be the sexiest part of a license, boilerplate provisions can solidify a good license or create possible pitfalls in a bad one.

   This week we focus on an important boilerplate provision known as the Indemnity Clause. An Indemnity or indemnification Clause is a provision in which one or both parties to the license agree to hold harmless the indemnified party from liability to a third party for loss or damage resulting from such liability.

   As we discussed in Part 1, there is a trend in the entertainment industry toward licensing intellectual property rights.  Music and motion pictures licensed for distribution would be an example.  Inherent in the licensing of intellectual property is a fear on the part of the licensee that a third party’s rights may be violated by the licensor’s work.  For example: Two musicians write a composition together and record a master of the song.  Musician A, a rather shady character, licenses the exclusive right to distribute the master to Distributor.  Distributor distributes the master and pays royalties and advances to Musician A.  Meanwhile, Musician B, who owns all rights to the master, knows nothing about the agreement between Musician A and Distributor.  When Musician B finds out about the agreement she sues both the Distributor and Musician A jointly and severally for copyright infringement and to recover monies earned under the license.

   In the example, a solid indemnity clause in the agreement with Musician A would protect the Distributor from liability stemming from Musician B’s rights in the master.  Without an indemnification Clause, or with a poorly worded and thus unenforceable Clause, Distributor might be liable to Musician B for big bucks!

   A good Indemnification Clause starts with setting forth a clear intention to indemnify. You should start the clause by stating the intention of the parties to provide indemnity.  Next, set forth the indemnitor and indemnitee.  The indemnification may or may not be unilateral. If there is a third party involved in the indemnification (an insurance provider for instance), make sure they are included. The clause must state that the indemnitee need notify the indemnitor of a claim or lawsuit in a timely manner, and how long the indemnification will last.  Will indemnity survive the termination of the license and for how long?  Finally, always include a clear statement on the losses, damages and liabilities covered, including whether or not future losses are covered. 

   You cannot draft an Indemnification Clause without understanding what can and cannot be indemnified.   First and foremost, the indemnification must be as against liability to a third party.  Public policy dictates that an Indemnification Clause is not enforceable if it seeks to indemnify against illegal activity, wrongful acts or a breach of a fiduciary duty.  In the example listed above, you might make an argument that the Distributor was negligent in not discovering Musician B.  In some jurisdictions negligence might void the Indemnification Clause.  Other jurisdictions make a distinction between active and passive negligence, allowing for indemnification if the negligence was passive. Arguably, the Distributor not discovering Musician B is passive negligence, if negligence at all. The important thing to remember is; if the Indemnification Clause is clear and knowingly bargained for, it is more likely to be enforceable even if it covers negligent acts.  A simple way of making it apparent that the Indemnification Clause was knowingly bargained for is to put it under its own heading.  Get it out of the Miscellaneous bin.

   Once you’ve established a clear definition of whom and what is being indemnified, here are some other things to think about when drafting your clause.  It’s implied that the indemnification covers legal costs and attorney’s fees, but it never hurts to make sure you expressly set forth langue covering those costs and fees.

   A big issue revolves around the issue of consent to settle.  If you are an indemnitor you want to make sure you have approval over any settlement that the indemnitee enters into.  Going back to our example, imagine if Musician A had the legal right to enter into the agreement with the Distributor, but Musician B filed the lawsuit anyhow.  Distributor could simply settle with Musician B to avoid the hassle, and send the bill to Musician A.   Now, imagine if Musicians C, D, E & F also came forward and filed claims against the Distributor, who in turn settles with all of them.  Ouch!  On this same note, Indemnitors may also want to participate in the indemnitee’s defense, including selection or approval of the attorney.

   Finally, you’re going to want to think about how the Indemnitee is going to be paid in the event of a lawsuit or settlement.  Will the Indemnitee be able to withhold payment under the license in order to pay for the cost of defending? Back to the example; under their license, Distributor is paying a royalty to Musician A on the master Distributor is exploiting.  Musician B sues, and Distributor notifies Musician A that it is seeking indemnity under the agreement, and will be withholding payment of royalties to pay for its legal defense. Here at BEAT-LAW, we’ve seen instances where the indemnification clause called for a bond to be established upon commencement of a lawsuit, or where the indemnitee is able to call for advance payment from the indemnitor to cover all legal fees.  If you are the indemnitor, you’d prefer that no payment be made until after final adjudication of any claim or lawsuit. Whatever the parties agree upon, make sure your Indemnification Clause clearly covers this issue. Do not remain silent!

   Next Month: We keep the boilerplate turned on, and explore what happens to your license if there’s a bankruptcy

For questions or comments, please email Mark at: [email protected]

10 Years After Napster: Welcome to 1998

by Tony Berman

Imagine a music service that allowed you to search for and download nearly any song for free with no monthly limits or caps. You could burn the downloaded music to a CD, either creating mixes or burning complete albums. This service exists, but it isn’t called Napster, and this isn’t 1998. All-you-can-eat music download services are being utilized by various universities who pay a site license on behalf of their students. While the downloads aren’t exactly free if the students are paying for it in the form of tuition or a technology fee, most college students don’t feel like they’ve paid for anything when it’s wrapped up in their regular tuition bill. Why does this feel an awful lot like what Napster was proposing to the record labels 10 years ago? Because that’s exactly what it is.

Agreeing to License Part One: Free to Roll With The Changes

by Mark A. Pearson, Esq.

The following is the first in a series of articles that will try and explain some of the pros and cons of entering into a licensing agreement in today’s entertainment industry.

As the various business models of the entertainment industry continue to reinvent themselves almost on a daily basis, one prevailing trend is the growing use of licensing.  More entertainment product is now self-produced by artists than ever before.  The “Studio System” and “Major Label” business models are quickly becoming obsolete.  It’s beyond the scope of this article to make any grand sweeping speculation as to why the industry models are changing.  Are these changes the result of the economy, backlash against the ‘old systems’, or technology changes?  The answer probably lies somewhere in the murky gray area known as “a combination of all of the above”.  The point is that change is here, and change means an influx in the use of licensing throughout the entrainment industry as the shift continues toward independent production.

Take the music industry, for example.  Under the old model, record labels hired talent evaluators to find artists, signed those artists to a recording contract, paid for the artist to record an album, created and distributed the album, and then profited off the sale of the album.  The label owned the copyright to master recordings that made up the album, and shared in the copyright of the song publishing with the songwriter.  The artist made money off of royalties paid by the label (including their advance) based on sales of the album, and on royalties paid to the songwriter by a performing rights organization (ASCAP/BMI) for use of the song.

Sampling Q&A

What is Sampling?  Sampling has several definitions, but the one used most commonly in music today is the practice of taking a section of recorded music, such as a guitar riff or a horn flourish, and inserting it into a new recording, often with some modification and in a loop. The use of samples in music can vary. Some samples are a straightforward reproduction of a familiar section of a popular song set to a new style of music. Examples of this approach are MC Hammer’s “U Can’t Touch This,” Vanilla Ice’s “Ice Ice Baby,” and Kid Rock’s “American Badass,” which sample Rick James’ “Superfreak,” Queen’s “Under Pressure,” and Metallica’s “Sad But True” respectively.

Circle C, Circle P: The Two Copyrights in Music

 

We get asked all the time about the copyright notices on CDs. There seems to be a lot of confusion about what is required and what exactly is meant by the “c in the circle” and the “p in the circle”. So let’s lift the veil on this issue.

 

There are two copyrights in music: the sound recording (which in general is owned by the record label) and the musical composition, including the lyrics (owned by the publishers). 

 

But there is also a separate copyright for the CD packaging and artwork.

 

The circle C refers to the packaging and artwork.  This notice should contain all of the following elements:

• The symbol ©, or the word “Copyright,” or “Copr.”
• The year of first publication
• The name of the owner of the copyright in the work

Example: © 1983 ABC Record Co.

 

(The owner of the packaging would normally be the record company that specially-commissioned or otherwise acquired the work through an assignment of rights.)

 

The circle P refers to the sound recording (i.e. phonorecord).  The notice for a sound recording should contain all of the following:

• The symbol (p)
• The year of first publication of the sound recording
• The name of the owner of the copyright in the sound recording

Example: (p) 1983 ABC Record Co.

 

(Again, the owner of the packaging would normally be the record company that specially-commissioned or otherwise acquired the work through an assignment of rights.)

 

What about the copyright in the underlying musical compositions?

 

There is no need to have a copyright notice for the compositions on the CD unless the lyrics are reprinted in the packaging. In that case, you would usually have a notice such as “Lyrics printed by permission © 2009 XYZ Publishing Co.”

 

Where should the copyright notices be positioned?

 

The notices should be affixed to copies of the CDs in a way that gives “reasonable notice of the claim of copyright.”  The three elements of the notices should appear together, as in the examples above, on the CDs or on the CD labels and inserts.

 

Are the notices really necessary?

 

The omission of notice does not affect copyright protection, and no corrective steps are required if the work was published on or after March 1, 1989.  For works published between January 1, 1978, but before March 1, 1989, no corrective steps are required if:

• The notice is omitted from no more than a relatively small number of copies or CDs distributed to the public OR
• The omission violated an express written requirement that the published copies or CDs bear the notice. 

This refers to the old copyright law requirement that a published copy bear the notice of copyright.  If it did not, the applicant had five years to cure the omission or error in notice before the work went into the public domain.  So, for works that are published between January 1, 1978 and March 1, 1989, no corrective steps are required if the omission violated an express written requirement that the published copies bear the notice (i.e., the old copyright law) because the work has already gone into the public domain.

 

In all other cases, for works published before March 1, 1989, to preserve copyright:

• The work must have been registered before it was published or before the omission occurred, or it must have been registered within five years after the date of publication without notice AND
• The copyright owner must have made a reasonable effort to add the notice to all copies or CDs that were distributed to the public in the United States after the omission was discovered.

If these steps were not taken, the work went into the public domain in the US five years after publication.  At that time all US copyright protection was lost and could not be restored.

 

Since prior law required the use of copyright notice, such use is still relevant to the copyright status of older works.  While the use of a copyright notice is no longer required under US law thanks to the Berne Convention, it is often beneficial.  Notice informs the public that the work is protected by copyright, identifies the copyright owner, and gives the year of first publication.  Further, if there is proper notice of copyright on the work, and the work is in fact infringed, it mitigates defendant’s claim of an innocent infringement defense.

Update - Events: Digital Music Distribution Panel

The Grammy Foundation® and The Entertainment Law Initiative® present Digital Music Distribution - The Paradigm Shift on Wednesday, June 10, 2009, from 7PM to 9PM.

BEAT-Law's Tony Berman will be a featured panelist, along with Jonathan Earp, VP of Legal Affairs, IODA; Sean Leonard, Digital Strategist; and David Hirshland, President, Bug Music.  Tony will be speaking about the subscription services business model as well as the issues of “disintermediation,” as that term is commonly understood by the digital music industry.

The purpose of this legal seminar is to educate and update the emerging trends of music industry distribution through "brick and mortar" stores to online digital music distribution with digital downloading technology such as Emusic.com, Napster, iTunes, and IODA.

Topics will include use of widgets, iTunes, blogging, Facebook, MySpace, YouTube, and more.

Gary Culpepper, Esq., co-founder and former Executive Vice President, Business and Legal Affairs Emusic, will moderate the seminar, with opening remarks by Scott Goldman, Vice President, The GRAMMY Foundation. It will be held at The NEW offices of The Recording Academy, 3030 Olympic Blvd., Santa Monica, CA.

 

 

UPDATE - Events: Music Business Seminar

California Lawyers for the Arts is holding its annual Music Business Seminar on Saturday, November 15, 2008, from 9am - 5:30pm.

-- UPDATE --

BEAT-Law's Tony Berman will be the co-keynote speaker, along with lawyer and agent Elliot Cahn, former guitarist from Sha-Na-Na. Tony will be speaking about new opportunities for making money in the changing music industry.

BEAT-Law's Mark Pearson will be participating in the panel discussion, "The Online Connection," where he will talk about social networking, viral marketing, and internet resources. This will include the topics of licensing issues, iTunes, blogging, Facebook, MySpace, YouTube, and more.

Other panels will held on "The New Recording Industry," "It's All About the Money," and "The Producer Panel."

The seminar is designed for musicians, songwriters, producers, dj's, attorneys and related professionals.  It will be held at the  Ex'pression College for Digital Arts, located at 6601 Shellmound Street in Emeryville, CA.

For information on registration, check their website.

Hope to see you there!

Tech News: The More Things Change, Royalties Still Remain the Same

by Shana Dines

The debate over royalty rates for online music continues, but digital music is safe … for now.

Last week, the Copyright Royalty Board (CRB) established, for the first time, an industry-wide royalty rate for digital downloads of songs. 

They made the decision by not doing anything. 

The rate Apple had established, 9.1 cents per song, which is typically sold for 99 cents, is now frozen for the next 5 years. 

This royalty decision is considered to be a victory for Apple, who threatened the CRB to shut down iTunes Music Store if the rate increased, according to Fortune Magazine.  This was not meant as a negotiating ploy, but a fact of the matter that Apple, already operating on a minimal profit margin, simply could not afford a steep hike in royalty rates.

Podcast: Why Should a Band Become a Business?

Today's podcast answers a question from Adam in Berkeley.  Adam asked, Why should a band incorporate and become a business?  Which type of business entity is best for a band?  Is it easy to manage one's own band? 

If you have a question you'd like Tony to answer on the M.E.L.O.N. podcast, please send it to [email protected]

Introdcuing: The M.E.L.O.N. Podcast!

In the interest of better serving our loyal readers, the M.E.L.O.N. Blog Team is excited to introduce the New M.E.L.O.N. Podcast!

Tony Berman, Esq. is here to answer all of your questions about multimedia and entertainment law.

Today's podcast answers a question from Will in Los Angeles.  Will asked why he should bother copyrighting his original songs and artwork.  Tony will also explain what someone should do if they find out their copyright is being infringed, how to go about registering a copyright, and what damages one can expect to recover if his copyright is infringed.

If you have a question you'd like Tony to answer on the M.E.L.O.N. podcast, please send it to [email protected]