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Licensing Artwork: Key Issues

The royalties artists receive for licensing their work is often the lifeblood of their income.

The familiar, yet vague, refrain about musicians, actors, writers, and other artists—that they live off of royalties from their old work—is often true. The royalties derived from licensing artwork can be substantial, especially over a long period of time, assuming the product has a steady demand and the artist negotiated a good royalty rate. But what is a good royalty rate and how can it best be negotiated with manufacturers, publishers, and producers?

There's no great mystery to royalties—you've created a piece art (writing, painting, music, etc.) that someone else wants to sell, so you should naturally get a share of the profits. But if you're not careful or you don't do your homework, the rate you receive could be less than favorable or you could be giving up more rights than you think.

The Bare Minimum

Most artists aren't fluent in the legal aspects of licensing artwork. That's to be expected. But you should have a solid grasp of the basics, so that you don't give up too many rights and get fleeced in a licensing deal. For those just getting started, here's a crash course in basic do's and don'ts:

  • Don't license your work unless you trust the licensing company (know as the "licensee"). Research their reputation, get information about their other clients (and contact those people directly), and find out how their operation works. There's no point in getting a great royalty rate from a company that is dishonest about numbers or has no experience marketing products.
  • Never give up your copyright. A licensing deal is an arrangement where you keep the copyright and simply give another company a license to use or sell your art. If a license has language that states you're giving up your copyright, you should object strongly and seriously consider licensing with another company.
  • Include a specific end date of the licensing contract.
  • Be as specific as possible in terms of what products your art will appear on.
  • Include the right to approve of any company that the licensee wants to sublicense your work to.
  • Include an indemnity clause. This way, you can protect yourself from any lawsuits that may arise from the licensee's use of your art on a product. For example, if a pen with your art design explodes and injures someone, you won't be held liable in any way.

Unfamiliar Terms

When negotiating a licensing deal, or when simply reading a contract offer, you may see terms with which you aren't familiar. For example, you may see a term called an "advance against royalties" and be confused about its meaning. An advance against royalties has a two-step meaning. First, you get an advance from the licensee based on the contract (this advance is non-refundable). Second, that advance will count against any future royalties the company owes you until the advanced amount is reached. After that, you'll receive royalties on a regular basis, according to the contract.

For example, if the advance against royalties is $5,000, then you'll: 1) receive $5,000 up-front; and 2) the company won't pay you again until your royalties reach $5,000, at which point you receive your royalties according to the percentage you negotiated.

If you see terms that are unfamiliar to you, don't worry too much. They're likely terms of art specific to your licensing field, and can be figured out on your own by consulting a legal dictionary, or if you're still uncomfortable, you can consult a licensing attorney.

How Royalties are Calculated

Royalties are calculated differently according to the industry (i.e., music, manufacturing, publishing), but they all must honor the royalty rate that you negotiate. Negotiating a good royalty rate is obviously the key to the entire process.

For example, if you have negotiated a rate of 5% and the sales equal $10,000, then you will receive $500 in royalties. Sounds simple, but is the 5% based on gross sales or net sales? And if there are expenses in marketing or selling the products, do they get subtracted from the sale amount?

The devil is in the details, and a huge part of the negotiations will revolve around these questions.

Negotiating a Good Deal

Gross vs. net sales will likely be a source of contention between you and the licensee. Gross sales is the total dollar amount of customer purchases. Net sales is that total amount minus certain deductions such as taxes and shipping costs.

The licensee will want the royalty rate to be based on the net sales while it's most beneficial to you to base the royalties on the gross amount. Your relative bargaining strength (perhaps your art has a huge demand) will determine how hard you can push for your terms.

Assuming that you've agreed to base your royalty rate on net sales, you should try to limit the deductions that the licensee can take when calculating the net sales amount. It's customary to deduct sales tax, discounts, and even shipping costs from the gross amount, but don't let the licensee deduct things that are out of your control and have nothing to do with your art. For example, a licensee may want to deduct costs they incur for marketing a T-shirt with your art on it, but that's a part of their business and doesn't involve you or your art. Other examples of deductions you should avoid include sales commissions, instances where a third party orders but then fails to pay (again, that's their business, not yours), and any "fees" the licensee may try to tack on.

When negotiating your royalty rate, you'll want to know about the general demand for your work, as well as the going rate for the industry. To do so, you'll need to do your homework and consult with others in that industry, talk to people familiar with licensing, and check out a library or bookstore to find resources on licensing rates.

Also, consider not only the royalty rate, but the volume of products which you expect to be sold. You may negotiate a great rate, but if the sales are low, your high rate is meaningless. For example, if you're dealing with a well known brand, they may be willing to pay a smaller rate, but because they sell so much volume, you'll probably end up with a greater royalty in your wallet.

Auditing

In the event that you believe there's a discrepancy between your royalty checks and what you believe you're actually due, your contract should include an auditing clause. An audit is simply an outside party inspecting the books to determine whether you're receiving your full due. Since audits aren't cheap, the best case scenario for artists is to include language that states the licensee will pay for audits. A frequent compromise is that the artist pays initially pays for an audit, but if the discrepancy is found to be over 10%, the licensee must pay for the audit.

Next Steps
Contact a qualified business attorney to help you identify
how to best protect your business' intellectual property.
(e.g., Chicago, IL or 60611)

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