Negotiating & Contracting
the Acquisition of Privately Held Intellectual Properties

Part Three
By Harlington L. Hanna Jr.

Beware of Groups

It is particularly important for the entertainment entrepreneur to minimize the risks and potential problems. While collaboration is an important skill to learn and use in the business, too much collaboration or the wrong kind of collaboration could actually increase these risks and problems. In the music industry for example working with a musical group presents additional legal and business problems which is better avoided if possible. While it is important not to exclude the opportunities many excellent groups may provide, dealing with the contractual and legal problems presented can turn probable success into certain failure.

Publishers, Producers, Managers, Record Companies and other acquirers who are involved with musical groups, theatrical groups and plays, etc., should make every effort to gain legal control or at the least secure protection of the Group name. This is essential to ensure the continued ability to function should there be a split among members of the group as often happens.

Dealing with groups introduces all of the potentially troublesome aspects of human nature and behavior. All of the potential for problems are magnified and multiplied. The egos and family involvement of the group members always seem to become more intense.

A most important element of the potential for interference from family members of the group members becomes important. While members of the group may individually get along, they may be under constant pressure from family members who urge them to protect themselves from being **ripped of** by other members. In addition, long after the group relationships have expired there exists the probability that family members and or heirs of the group members may seek relief for what they perceive to be their interests in the particular project or group fortunes. These kinds of problems just tend to be magnified the larger the group membership becomes. The very nature of who owned elements of the group holdings can come into question years later.

For these reasons wise entertainment entrepreneurs should stay away from group deals as much as possible. When it is inevitable that group involvement becomes necessary as usually occurs, the entrepreneur must take the extra steps necessary to ensure the significantly increased risks are avoided through adequate legal contracting and business practices. These special measures must be undertaken to protect their interest, that of the individual members, and the group itself.

Each member of the group should be specifically protected by contract. These contracts should be carefully constructed to foresee and deal effectively with issues of the estates of each member. The wise entrepreneur should ensure that such agreements and contracts in and between the members are in place before there is any investment in time and resources. It is not unusual for members of the group to believe that because they are close friends and work together well that they or their families and heirs will have no problems. They may even have written agreements between themselves which they feel is appropriate and may not like the entrepreneur meddling in their personal relationships. The entrepreneur must however insist on the careful, detailed analysis and protection of the legal relationships of the members. In the long run it is in the best interests of all involved. The following questions and more must be answered in this regard:

1. Who actually owns the group name
2. How was the name developed
3. How has the name been protected
4. What written agreements exists between the group members
5. Who actually owns the rights in the songs written and /or produced by the group 6. What is the basis of the ownership in the name and the songs
7. What is the business structure of the group (corporation, partnership, Sole proprietor, independent contractors etc.)
8. Are there any written operational policies for group operations and decision making
9. How are financial matters and accounting handled within the group
10. What kind of formal estate plans are in place within and for the group

Obviously some of this information is important even when considering a deal with individual artists. Determining whether you deal with groups will be a function of what they bring to the table, and how these questions are answered. In the long run most small entrepreneurs with limited resources may be better off by passing most groups and emphasizing their acquisitions and deal making with individual artists who may produce similar profit margins. In a buyers market the entrepreneur usually has other alternatives on which to spend his resources.

Beware of production

The acquirer of entertainment intellectual properties must face the important determination of whether he or she will get involved with production of the physical applications of the intellectual property. The production aspect of the business is absolutely the most rewarding for many entertainment oriented types. This is so because it sits at the heart of entertainment. The record, Movie or book that every one is attracted to and the thing that every thing seems to evolve around is indeed absolutely essential to eventually success, but again if your ultimate goal is to make money you don't have to be involved with the actual production of it, if you can acquire the rights in it in some other way. The acquirer should resist the temptation of getting involved with production at all costs unless he is prepared to undertake some extremely important risks. It is much safer to acquire already completely marketable properties assuming the posture of an investor and/or marketer than to add the problems of production to your plate. Production involves lots of time, money, frustration and pitfalls along the way. The wise entertainment entrepreneur will attempt to acquire the intellectual property rights in entertainment properties by purchasing them, leasing them or otherwise negotiating collaborations which provide for ownership or control of them. If your goal is primarily a money making one then producing additional products in an already crowded marketplace is generally not a smart idea no matter what business you are in. Acquirers must be careful not to contract themselves into a position where they must finish a product or reproduce a product. If possible the I.P. and its associated physical application should be in completely finished and marketable form as much as possible. To contract for, and acquire a non finished product can be a major problem even though the future prospects and potential may be tremendous.

Understanding and undertaking some production however may become a necessity for the entertainment entrepreneur. When undertaken by the small entrepreneur production generally occurs in a very informal way which may lead to a wonderful artistic production but one flawed with so many legal and business deficiencies that it makes the product effectively unsaleable. The production process must be undertaken with great care. Every element of production should be carefully planned, legally sanitized, timed, and budgeted. If the project is to be ultimately saleable it must be produced with careful attention to the ownership and control rights involved. Typically the music business has been the area of entertainment where most of the problems of this type has occurred in the production process. Musical productions many times are the result of collaboration among several musicians, lyricist and arrangers who operate in a love triangle with the music making process. Often little attention is paid to formalities of production and ownership and it is assumed that ownership is a clear-cut item or its details can be dealt with later. This is a dangerous way to produce a song or album in that the major element of ownership lies in the composition and sound recording copyrights which attach themselves respectively at the time of creation and not at the time of registration with the copyright office. This may mean that all collaborators involved at the time of production may have some ownership in the copyrights to the composition and the recording. Unfortunately these possibilities do not become recognized until there is significant money being made and then potential owners and their families, friends and cohorts arise from the woodwork looking to collect on their interest.

It is important for the production efforts to be limited to the smallest group of individuals possible. Fortunately today with the use of computerized equipment much of the pre-production and production in a song can be effectively done with very few musicians, sometimes with only one good electronic keyboard player.

Even more important to the legal sanitization of the production is the practice of making everyone involved sign an agreement as to his scope of involvement and the legal consideration offered for his involvement. Most of the time this agreement will entail a "work for hire" agreement, which must be in writing and which establishes that the involvement is one done as an employee on the project where no rights of ownership in the copyright attaches. Work for hire agreements can take many forms and provide several different types of legal consideration for the work involved, however the most import element is that it is executed before any aspects of production is started. A good rule of thumb is that such agreements should be executed outside of the studio environment at some point in time prior to the studio work beginning.

Some problems exist with the production of live and extemporaneous recordings. However if there exists any possibility that a live or extemporaneous recording will occur prophylactic type agreements should be executed. In some cases properly drafted releases and post production documents may be executed to protect the ownership rights in the project, but these should only be used where there is no other alternative, and as a last resort.

The work for hire agreement is extremely important because it establishes that the ownership rights which may otherwise rest in all of the collaborators, will always rest with the employer from the moment of creation. This is significantly unlike an assigned right where the collaborator had ownership rights actually vested in him which he later assigned away. The holder of assigned ownership can have contingencies implied to his ownership and can also have his rights revert back to the original creator after a period of thirty-five years under the current U.S. copyright law. In addition international rights in the production may also be affected based on the customs and laws of the country or jurisdiction involved.

 

  Part Two ----- Part Four


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