By WILLIAM S. GALKIN
The author of a work (i.e., software, drawings, photographs, novels,
etc.) owns, among other exclusive rights, the right to reproduce and
market the work, as well as the right to create works derived from the
original work, like movies from novels, or translating a novel from
English to French, or software from a Macintosh to a Windows platform.
The author may transfer all or a portion of these rights.
Where the author is not marketing the work and has another person or
company doing this, royalty payments will be the usual means of
compensation to the author. A common example of royalty payments is
where a publisher of a book pays to the author a percentage of the
amount received on the sale of each copy of the book.
In the past, there was a limited universe of means of distributing
works, and a limited universe of works that could be derived from such
works. Now, with communication technology evolving daily, the universes
of distribution and derivation have greatly expanded. Furthermore, it
is now extremely difficult, or impossible, to predict where future
expansion will occur. However, the better these expansions can be
predicted, the better an author will be able to protect his or her
rights when transferred to a distributor.
Royalty arrangements can be extremely complex. This article discusses a
number of issues that it is particularly important to keep in mind.
1 - Derivative works:
The distributor may or may not have the right to create derivative
works. If the distributor does have this right, the distributor may
want to decrease the royalty rate for the revenue received from
derivative works. The rationale for this decrease is that as derivative
works are created, the original work will represent a smaller and
smaller portion of the work as a whole. This same concept will apply
where the distributor has the right to merge the original work into
other works (e.g., merging a photograph into a collage). If the author
agrees with the concept of decreasing royalty, the author should make
sure that there is a clear mechanism for determining an appropriate
decrease. For example, if the modifications to the work are primarily
cosmetic, then the decrease should be small.
2 - Sales price:
Since royalties are usually based upon the sales price of the work, it
is important to determine how this price is arrived at. For example, if
the distributor is given complete discretion over the price, it would
be possible that the distributor could decide to give the work away
free, bundled with other products that are being sold. In such a case,
the author would receive no royalties. On the other hand, if the author
has too much control over price, then this may become intrusive on the
exercise of marketing judgment of the distributor. One solution is to
require a minimum royalty on each transfer of copies of the work.
3 - Guaranteed royalties:
Amazingly, many royalty arrangements do not require the distributor to
sell even one copy. The author may be all too appreciative that the
distributor wants to distribute the work, that there is no thought that
the distributor will make less than a full effort to market the work.
However, what if the day after you grant the distributor exclusive
rights to market the work that you've spent the last two years
developing, the distributor purchases the right to distribute a
competitive work that the distributor thinks is better and leaves your
work on the shelf? Or worse, what if the distributor's goal was just to
get your work off the market so as not to compete with another product
that the distributor has? These scenarios are not far-fetched and need
to be planned for.
One solution is to require minimum royalty payments or sales, as
mentioned above. This offers some protection, but it is better to also
prohibit the distributor from marketing any competitive product. The
definition of what is competitive must be carefully worded.
4 - Sublicensing rights:
Sublicensing rights of a distributor can severely affect royalties
earned by the author. For example, assume that you have negotiated a
royalty of 15 percent of the gross revenue received by the distributor
on sales. This royalty amount recognizes that the distributor has
overhead expenses in addition to the expense of marketing. What if the
distributor decides to sublicense the work to another company to
market. They will now receive 15 percent of the sales revenue as
royalties from the new distributor, and you will only receive 15
percent of 15 percent, which is only 2.25 percent of the gross sales
price!
The solution here is to either prohibit sublicensing or agree that the
royalty will be higher (perhaps 50 percent) for revenues from
sublicensing.
5 - Marketing efforts:
It is important to require the distributor to begin marketing the work
by some specific date. The work may need further development, and
therefore a realistic date should be selected. Additionally, it is very
beneficial to require the distributor to spend a certain amount of
money on marketing within a specific time period (e.g., $100,000 in the
first year).
6 - Royalty payments:
In brief, royalty payments take the following forms: (1) Some cash up
front plus royalty payments as sales are made; (2) Some cash up front
which represents an advance against royalties earned in the future; and
(3) Only royalties as sales are made, with no cash up front.
These three forms represent a shift in risk from the distributor to the
author. Cash up front represents a risk to the distributor, whereas
royalty payments to the author only upon sales represents a higher risk
assumed by the author. The level of rights granted by the author should
take into account how much risk is assumed by either the author or the
distributor.
7 - Audit rights:
The author should have clear rights to audit the books of the
distributor to determine the accuracy of the royalty payments the
author receives. These audits will usually be at the expense of the
author, however, the agreement can provide that where the distributor
has underpaid, the cost of the audit is paid by the distributor. There
could also be a penalty for such underpayments.
8 - Reversion of rights:
There should be provisions that under certain circumstances rights
immediately and automatically revert to the author. For example, if
sales fall below a specified level, or if the distributor breaches the
agreement.
9 - Arbitration:
Lastly, it is often useful to have disputes that arise resolved by
arbitration. Arbitrators can be selected in advance, which will
facilitate a quick resolution of the issues, which otherwise could be
dragged out in litigation, beyond the valuable commercial life of the
work. However, arbitration is not a perfect solution, and the terms of
the arbitration need to be carefully worked out in advance.
c.1995 William S. Galkin
ABOUT THE AUTHOR: Bill Galkin is an attorney in private practice in
Owings Mills, Maryland. He is also an adjunct professor of Computer Law
at the University of Maryland School of Law. He advises individuals and
companies on a wide range of legal issues associated with computers and
technology.
Bill Galkin can be reached at galkin(at)aol.com.
PHONE: 410-356-8853
FAX: 410-356-8804
MAIL: 10451 Mill Run Circle
Suite 400
Owings Mills, MD 21117.
NYT-10-12-95 1711EDT
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