Subsidiary Rights - Acquisition and Licensing

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Subsidiary Rights - Acquisition & Licensing
© Copyright 1998 Lloyd L. Rich

Introduction

The grant of rights clause in a publishing contract is one of the most important clauses because it enumerates the specific rights granted to the publisher by the author. Negotiation of this clause has become even more important in today's world where increasingly more uses are being developed for literary content.

The scope of the clause may vary widely, it could be all inclusive -- granting all the exclusive rights and interests in the author's work, or the grant could be very narrow -- only including a single specific use of the author's work, or it could be somewhere between these extremes. The critical point is that the publisher only has the right to exploit those rights that are specifically granted to the publisher and any exploitation of rights exceeding the author's grant could be deemed a copyright infringement of the author's work.

Copyright ownership of a literary work consists of a bundle of rights which an author, at least theoretically, may assign to the publisher in any manner they choose. Thus, an author may assign all or only a part of his/her rights to one or more publishers while retaining particular rights for himself/herself.

The Copyright Act confers five separate exclusive rights to copyright owners of a literary work. Subject to certain limitations, the copyright owner has the exclusive right to: (1) reproduce the copyrighted work, (2) prepare derivative works based on the copyrighted work, (3) distribute copies of the copyrighted work to the public, (4) perform the copyrighted work publicly, and (5) display the copyrighted work publicly. Any or all of these rights may be subdivided in an almost infinite number of ways by format, language, territory, or term.

When negotiating the grant of rights clause the publisher and author should be very specific in discussing the rights that will be to the publisher. The clause should not use vague terms that could be open to more than one interpretation; for example, what does the term "electronic rights" mean? Before beginning the negotiation process it is advisable that the publisher prioritize the rights into the categories of "must have", "like to have", and "do not really need". Following this the publisher should evaluate how much any particular right will be worth to acquire. The more evaluation done before negotiating the agreement the more likely the publisher will succeed in obtaining its objectives.

Primary and Subsidiary Rights

Primary rights and secondary or subsidiary rights are the two main categories of rights in a book publishing contract. Although these terms are used frequently they do not have precise definitions; however, traditionally primary rights include only those rights the publisher specifically intends to use. For the print publisher these rights normally have included the book publication right for the original hard or soft cover edition and paperback reprint rights, and possibly foreign translation rights, serialization rights, book club rights, and the rights for special editions. On the other hand, subsidiary rights are those rights that are, as the name suggests, subsidiary to the right of publishing the literary work in book form. These rights include electronic rights, motion picture and television rights, audio book rights, audiovisual rights, merchandizing rights and dramatic or performance rights. Motion picture, television, audio and merchandising rights are good examples of how valuable subsidiary rights can be today, while electronic rights could be tomorrow's best example.

Who Controls Subsidiary Rights

Many publishers take the position that they will only enter into a publishing agreement with an author under the condition that they obtain all rights in the work, however this eventuality may not always be possible for a particular literary work. Prioritizing particular rights becomes important in those instances where an author is unwilling to assign all rights or when an author attempts to place specific restrictions on a particular right(s), such as a clause stating "the publisher must exploit electronic rights in the literary work within three years of the publication date of the hard cover edition of the book or such electronic rights revert to the author".

Since author and publisher are usually both remunerated from the licensing or sale of subsidiary rights to third parties there are many ways in which each party can achieve their common objectives. There may be instances where an author has better contacts than the publisher for exploiting a particular right. In such event that particular right could be reserved for the author and the author would then be responsible for compensating the publisher from the successful exploitation of that right. Alternatively, both parties could pursue the licensing of a particular right with the proceeds being divided between the parties.

The grant of rights clause should be specifically crafted to accomplish the publishing company's objectives. Flexibility and compromise should be the modus operandi for both parties when negotiating the grant of rights clause, rather than a posture implying "take it or leave it".

Who Should Sell or License the Subsidiary Rights

Subsidiary rights are normally sold or licensed to third parties by the publisher and under certain circumstances by the author. Another possibility, especially when the publishing company has limited personnel resources is for the publisher to hire an agent(s) to handle to the sale or licensing of subsidiary rights. The agent, if successful in exploiting a particular subsidiary right(s) for the publisher, will be compensated by a commission that reduces the compensation to be divided between author and publisher, however, an experienced agent who can initiate and conclude a subsidiary rights deal will bring additional income to the author and publisher that they by themselves could not have achieved.

Negotiating Subsidiary Rights Deals

The following discussion focuses attention on certain key issues that may be in encountered in negotiating subsidiary rights deals for mass market paperback, book club, foreign and translation, electronic and dramatic rights.

Mass Market Paperback Rights
Whether the work has been successful in its original edition or there is "hot interest" in obtaining mass market paperback rights prior to publication of the original edition, then it goes without saying that the publisher of the original edition should attempt to obtain as large an advance as possible. Some publishers of the original edition will not begin to license mass market paperback rights until sales of the original edition begin to slow down, as they do not want the mass market paperback competing with sales of the original edition. However, a better way of achieving this objective is to make certain that the agreement with the mass market paperback publisher specifically states the publication date and the date on which the mass market paperback publisher may begin shipping the paperback. Another key point that needs to be negotiated is the time period for the mass market paperback rights and whether or not that term is automatically extended if the advance for these rights has not been recouped.
Book Club Rights
Book club royalty advances have decreased as membership in the book clubs has fallen-off. Higher advances are normally forthcoming if the literary work has been chosen as the featured selection for the month. An additional benefit of a book club rights deal occurs when the book club edition manufacturing order is included as part of the original edition print run resulting in a reduced unit manufacturing cost of the original edition. The publisher should attempt to negotiate a non-exclusive book club rights deal because it is possible these rights could be licensed to both general as well as specialty book clubs.
Foreign and Translation Rights
Foreign translation rights or foreign (non-U.S.) English language editions could also be very important to the publisher if a particular title has the potential outside the United States. Historically, the strongest markets have been in the countries that comprised the British Commonwealth, Germany, France, Italy, Spain, Spanish speaking America, and Japan. These rights are frequently sold at international book fairs and expositions and U.S. based scouts for foreign publishers are playing an increasing role in offering deals even prior to U.S. publication.

Some of the major deal points in negotiating these rights are the following: (1) estimated first printing, (2) royalty advances that cover at least 50% to possibly almost 100% of the estimated first printing on smaller deals, (3) payments to the U.S. publisher should be in U.S. dollars, (4) selling price of the book in the foreign country and the royalty schedule, (5) minimum annual royalty payments, (6) approval of translation, (7) ownership of the copyright in the translation and the U.S. publisher's right to use that translation -- this could be important regarding other media formats based on that translation, (8) control of subsidiary rights, (9) the term, usually five to twelve years is normal, or curtailment to a shorter period if annual royalty payments fall below a certain level, (10) the specific territory - this is very significant when dealing with Spanish language rights, and (11) foreign tax obligations and responsibility for such payments.
Electronic Rights
Many of the same key issues that are involved in the negotiation of electronic rights with the author are present when a publisher attempts to license electronic rights to a third party. The growing importance of electronic rights and electronic publishing makes the negotiation of electronic rights agreements particularly important.

A basic issue involving the licensing of electronic rights to a third party is how that third party intends to adapt or manipulate the original work and in what specific electronic formats the literary work will be used. The publisher of the original edition of the literary work should not, unless the financial reward is so great, grant a license to a third party that is an exclusive license that encompasses all electronic rights. Instead the license should be for specific formats, platforms and types of products, and should have a reversion clause if the specific rights granted to the licensee are not commercialized within a specific time period. The publisher should try to ensure that the electronic rights that are being licensed are defined with specificity in order that the publisher may carve out multiple electronic niches for which the content may be licensed.

Since technology is changing so rapidly it is not possible to provide a precise definition of electronic rights. As a result of this indefiniteness the publishing contract frequently contains a future technology clause that grants the right to exploit a work in "all media now known or hereafter created." The purpose of the future technology clause is to try to ensure that electronic rights include the right to create a derivative work in a technology that may not have been developed or even contemplated at the time the parties signed the contract. Conceivably there may be no limit to the scope of the specific rights known as electronic rights. Thus, a key issue when negotiating the licensing of electronic rights to a third party is whether or not a future technology clause has been included in the publishing agreement and whether it should be included in the licensing agreement.

Another basic issue that must concern the publisher of the original edition of the literary work is when that literary work contains copyrighted materials of third parties for which the author obtained permission to use in the original edition. The crucial inquiry is whether that permission extends to the use or licensing of these third party materials in an electronic publishing project. The answer to this question is important because the publisher can only use or license copyrighted materials that they own or have obtained permission to use, otherwise there exists the potential risk of copyright infringement.
Dramatic Rights
It is rare when dramatic rights - motion picture, television, theatrical - are purchased outright by a production company before negotiating an option agreement for the potential future purchase of such rights. Option agreements normally are for twelve to eighteen months, but frequently have extension clauses for additional time periods. During the option period the producer will attempt to develop a screenplay or other format and locate and obtain financing for the actual production of the dramatic work. Proceeds received by the publisher from an option agreement are usually directly correlated to the success or prospects of the literary work; the option could be as low as $1,000 or more than $50,000. The normal practice is for the option price to be considered as an offset against the purchase price. Purchase prices for dramatic works vary widely and frequently are a percentage of the actual production budget along with additional contingency profit participation compensation.

It is estimated that less than 1% of optioned dramatic works actually are purchased and therefore one difficulty encountered by the publisher of the optioned property is the legal expense involved in negotiating and formalizing an option agreement. The expense is incurred because a dramatic rights license usually involves a short form option agreement that is accompanied by a complex, extensively negotiated purchase agreement, containing the details of the dramatic rights license and ancillary rights involving merchandising, novelization, syndication, international distribution, sequels, and use of characters, that automatically becomes effective at the time the option is exercised.

Conclusion

The use, sale or licensing of subsidiary rights frequently makes a significant difference in the financial success of a particular literary work or publishing company. Obtaining these rights from the author is extremely important, but once these rights are obtained they must be exploited if both publisher and author are to reap additional financial benefits. Therefore, it is imperative for the publisher to obtain the primary and specific subsidiary rights that they have the capability to exploit, thus ensuring the maximum revenue from each published work.

This article is not legal advice. You should consult an attorney if you have legal questions that relate to your specific publishing issues and projects.

Lloyd L. Rich is an attorney practicing publishing and intellectual property law. He can be reached at 1163 Vine Street, Denver, CO 80206. Phone: (303) 388-0291; FAX: (303) 388-0477; E-Mail: rich@publishingattorney.com; Web Site: http://www.publishingattorney.com.

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