Published Articles

August 7th, 2004

Take Six Steps Before Licensing Animated Characters

Licensing animated characters raises a variety of complex issues. For example, what intellectual property rights does the licensor actually control? Is trademark protection available? What definitions will govern payments to the licensor? These are a few of the important questions licensees must consider before licensing an animated character. This article highlights some of the potential pitfalls for licensees of animated properties, and suggests six steps to help maximize one's investment.

Step 1: Who Controls Copyright in the Property?

Before licensing a particular animated property, conduct some simple due diligence: Has this property been registered with the U. S. Copyright Office? Whose name appears in the copyright notice? If you negotiate an exclusive license, you can register a short form license agreement with the U.S. Copyright Office confirming your status as an exclusive licensee.

Step 2: Determine Who Participated in the Creation of the Property.

To reduce the risk of an infringement claim, require that the licensor give you a comprehensive list of anyone who played a role in creating the property (and check this list against the credits on the property). Require that the licensor show you copies of executed work-for-hire agreements or certificates of engagement with each member of the team. Such agreements and certificates ensure the copyright in the work resides with the licensor after creation.

Step 3: Find Out If Trademark Protection Is Available.

While copyright is of course important in licensing deals, the development of a commercial exploitation strategy will focus on whether the animated property’s trademarks can be successfully registered. Again, due diligence is key. The first step in trademark due diligence is to ascertain whether the mark is available. A licensee can waste time and money negotiating for a trademark only to learn that the mark has already been registered or put in use by someone else, or that a confusingly similar mark has been registered or is already in use -- thereby undermining the mark’s potential value. Avoid these pitfalls by conducting a federal, state and, if applicable, international search of the mark. Search not only the name, but also the artwork and logo, and remember that trademarks are organized by classes of products or services. Because trademark searches can be expensive, prioritize the classes in which the mark is likely to be used, and search these classes first.

Step 4: Analyze Risks in First-to-File Trademark Regimes.

In the U.S. and some other jurisdictions, rights to a mark are generally obtained on a first-to-use basis – that is, at such time as a mark is used with goods in interstate commerce. In such jurisdictions, common law rights accrue upon use, and use in commerce (or intent to use followed by use) in addition to filing are required in order to secure registration. If another entity is first to file the same mark, the earlier user can object to registration upon publication of the application or subsequently may file a cancellation action against the registration issued to the later user.

But many jurisdictions do not follow a first-to-use system, and a common pitfall in clearing a trademark is navigating through opposing or confusing marks in first-to-file regimes. Most of the EU (including the U.K., Germany, France, Spain, and Italy) and Asia (including Japan, South Korea, and Taiwan) register works on a first-to-file basis, and for the most part do not require evidence of use. Under a first-to-file system, anyone can theoretically register any unregistered mark, though a licensor who finds that his mark has been fraudulently obtained may file a cancellation action. If a preliminary search determines that a mark is available, licensees must then consider whether to hire foreign specialists to conduct country-specific searches and assist with registrations in target jurisdictions.

Step 5: Determine in Which Classes to File and in Which Countries.

One of the most important things a licensee can do is decide which countries to target for registration and in which classes to file. The decision about where and how to file depends on whether there will be sufficient commercial activity to warrant the expense of registration. For instance, registration fees in the U.S. are $325 per class; in the U.K. they are roughly $500 for the first class and $125 per class thereafter; and in Japan and Brazil they are roughly $2000 per class. The EU also offers registration for its 25 member states for roughly $2100 for up to 3 classes. However, if a licensee has a substantial presence in any single member nation, it is advisable to also secure a registration through that member nation’s trademark office as well.

Part of the licensee’s marketing and distribution strategy will focus on the specific classes for which to register. The likely options are those in which the merchandizing of animated characters is most common: class 9 (videos, tapes, DVDs), class 16 (books, posters, notebooks), class 18 (backpacks, book bags), class 25 (clothing, headwear, footwear), class 28 (toys and handheld computer games), and class 41 (website services, film, and TV).

Step 6: Address Key Contractual Issues.

A license agreement can, of course, run to great lengths. Here are two key issues about which you, as licensee, will have to be clear.

Royalties. One of the most costly potential pitfalls a licensee will encounter arises from the structure of royalty payments to the licensor. There are, generally, two models for royalty payments. One is royalties based on a percentage of gross revenue. In this model, a thorough definition of “gross revenue” is essential. For instance, whose gross revenue is being used as a basis for royalty calculations? And what deductions or exclusions will apply in calculating gross revenue?

The second model is essentially a profit split in which gross revenue, less distribution fees and expenses, are divided between licensor and licensee. As with the gross revenue model, this structure calls for explicit definitions. The parties will not only have to define gross revenue, but also “allowable expenses” and "distribution fees" – particularly if your business model contemplates sublicensees.

Sublicensing. If your business plan contemplates using sublicenses, several issues need to be addressed. First, remember that a license may be “personal” to a licensee: just as a corporation that hires a specific CEO may want only that CEO to run the corporation, a licensor may be very specific about who merchandizes or distributes his animated property. Therefore, licensees who wish to sublicense a property must get the express right to do so from the licensor. Second, the right to sublicense may have a large effect on royalty calculation. For example, will the licensee’s gross revenue (in a gross revenue model) exclude amounts received from sublicensees, thus limiting the base upon which revenue to the licensor is calculated?

Of course, royalties and sublicenses are only two of many issues a licensee will want to address. Other material issues include the term of the license and sublicenses, exclusivity, brand extensions, accounting obligations, creative control, and the potential use of composite marks.

Authors: Thomas D. Selz and Baruch M. Bebchick

This article originally appeared in Total Licensing magazine