Artists Beware of these Red Flags in Licensing Contracts
Photo Credit: Noah Kalina
“A verbal contract isn’t worth the paper it’s written on” Samuel Goldwyn
A friend of mine is quite famous in Europe. He signed an Exclusive contract for with a large company that licensed his art for clothing. It was a hit in Europe, and fat royalty checks were rolling in.
He made so much money that he got himself a new wife and a nice little mansion on the beach. For a few good years he lived the high life.
That is until early 2008. One day, the checks just stopped coming.
His European licensee went bankrupt. The money never returned. He lost his home. He was devastated financially. He had to start over again.
Why didn’t he just sign up with another licensee, you might wonder? He was very popular – it would have been so easy for him to sign up with a new company and do the same thing.
He legally could NOT do any more work in Europe because of two reasons: 1.) He inadvertently SOLD his name, trademarks and copyrights to the company that went bankrupt; and 2.) He can’t cancel the contract because it doesn’t have a “get out” clause.
Basically, he signed a bad contract, and it’s cost him everything. (He admitted to me later that he never bothered to have an attorney look over the lengthy contract the company had him sign.)
Something like this is extremely rare, however, I never want to see this happen to you! So I’ve put together a partial list of Red Flags to look out for in a contract.
DISCLAIMER: I am not an attorney. But I do know a lot about art licensing deals. When I consult artists on deal-making, I share my many years of experience but always advise them to talk to an Art Licensing Attorney for answers on contract law. This information I share comes from years of negotiating deals with Licensees and clients and working with attorneys.
I’ve put together more deals and contracts in the last ten years than most people ever do in a lifetime. My experience, mistakes and triumphs with deal-making has enabled me to help others with their contract-anxiety.
Sometimes the hardest part about being a creative entrepreneur is putting together the deals. There really is no one road-map to follow. Each contract is different from the other.
But there are a few contract terms and concepts that are the same from deal to deal.
There are certain red flags to look out for in any contract. There are also necessary terms/clauses that should be in every agreement you sign.
Many companies are using outdated, antiquated language that no longer is used in the real world. Most of the time they don’t even know WHY something is worded the way it is.
So don’t be shy to tell them that you will sign the contract once they make the changes you require. Literally EVERYTHING is negotiable, especially contract language.
In the end, most of your clients are going to want you to be happy, too.
The contract phase is the most important start to a relationship – it’s where you both draw the line at what you’ll give and what you ask for.
Once you get all of that down on paper, you hopefully never have to look at the contract again! (And if you do, it usually means trouble.)
Here’s my personal list of RED FLAGS that give me goose bumps:
TRANSFER OF RIGHTS: Unless your business plan includes selling the rights to your art outright (some illustrators do this), NEVER transfer your copyright ownership. Retain ownership to all your copyrights. Once you transfer your rights to any image, you can’t get it back. Not even for that coffee-table book you plan to publish about your work when you’re old. (Read my post on the Bikini Model who sold all rights to her image and lived to regret it)
REMEDY: Ask the client to replace the “TRANSFER OF RIGHTS” language to a statement that says “GRANT OF RIGHTS”, where it’s clear that the Artist is granting rights, but retains all ownership to copyrights.
LONG TERMS: I’ve seen contracts that have as much as a ten year term! That’s just too long. A typical licensing contract is one or two years. (If you like each other, you can always renew)
REMEDY: Ask the client to lower the contract to two years. That is a very reasonable amount of time.
AUTOMATIC RENEW: Some contracts are for a certain period of time, say 2 years, and the term listed in the contract states that it automatically renews for another 2 years unless either party gives 60 day written notice. (Or something along those lines.)
Who in the world is going to remember to cancel a contract, almost two years into the future? Sure, you can put it on your Google calendar, but what if something goes wrong with that? Then you’re stuck for another two years without a chance to cancel.
REMEDY: Ask the client to limit it to a specific time period (ex: June 1, 2011 to May 31, 2012). And tell your client “If, at that time, we both want to renew, we can do so with an amendment to the contract.”
WORLDWIDE: Some companies will want their license to be granted to sell worldwide. It’s extremely rare that a company sells their product in EVERY COUNTRY IN THE WORLD! No contract should have the territory of WORLDWIDE unless they’re Coca Cola.
REMEDY: Ask the client to give you a list of countries where they are already selling the product, and then replace the word “WORLDWIDE” with their list (Example: “Territory: North America, Canada and the Virgin Islands.”) This leaves you free to doing a similar deal with a company in other territories.
EXCLUSIVE: BE AWARE OF THE EXCLUSIVE!
One of my consulting clients showed me a license agreement he was about to sign with a publishing company. It had a sentence that said that the agreement was Exclusive, World Wide, for all products!
Now, it’s literally impossible for a company to make EVERY SINGLE PRODUCT available, and in EVERY COUNTRY IN THE WORLD! Turns out, this particular company only sells in the U.S., and not in large quantities.
REMEDY: Ask the client to change the wording to Non-exclusive, and have them specify the actual products that they are making (i.e. canvas art prints or bobble heads or mohair sweaters, etc.).
If my artist had signed this agreement the way they had it worded, it would mean that if a large Australian print company approached him to sell his prints in the South Pacific, he would have to turn them down, and that severely limits his ability to earn more money from his art.
ALWAYS THINK TWICE BEFORE SIGNING AN EXCLUSIVE. It can be extremely limiting. Often, companies asking for an exclusive don’t even know why they want it. But it can seriously hurt you and future sales of your art.
*Caveat: I have this discussion with seasoned artists and some do sign exclusive agreements, for very narrow definitions of product lines. There are exceptions to every rule, and you should just be aware of what you are getting yourself into before signing.
Reasons NOT to sign an Exclusive Agreement:
LOSS OF INCOME TO THE ARTIST: There’s no guarantee that they’ll do a good job of selling your products and you may not make much from the deal. In the meantime, you’re not able to go into a deal with anyone else that could be paying you.
Most large companies, experienced in licensing art, understand this concept. When we went into a deal with the huge company Converse, they didn’t even ask for an exclusive. I find it’s usually the smaller companies that try for the exclusive, not understanding why it’s a bad deal for you.
BANKRUPCY: Bankrupcy law in the U.S. requires an exclusive agreement to be considered an “asset” of the company who goes bankrupt. This means that if your Licensee goes bankrupt and stops paying you, you are still held hostage to the exclusive agreement – you aren’t able to cancel the contract and work with any other company. (We once signed on with the 3rd largest toy company in the U.S. – they went bankrupt 1 month later. Luckily, we didn’t give in when they insisted on an exclusive.)
In some cases, I’ve had a Licensee STRONGLY insist on an exclusive. Usually it’s because they don’t want you going to their competitor with the same designs or art.
When a client vehemently opposes a non-exclusive, I ask them a lot of questions to fully understand what their issues are, and then try to find a way to give them what they want while protecting my needs.
In other words, I get creative and find a way to give them what they need to feel secure, while not giving up my ability to earn money elsewhere.
Once we did a deal with a rather large boot company. They were putting a lot of money into Drew’s program, and wanted assurance that we wouldn’t take the designs to a competitor. That was a reasonable concern, so to ease their minds, we signed an agreement that specifically stated: “Non-exclusive. Artist agrees not to license the designs named in this contract to competing sheep-skin shoe companies for a period of one year.” We were very specific, which made us happy, and we gave them what they wanted, which made them feel good. Everyone wins!
TWO GOOD REASONS I WOULD SAY IT’S OKAY TO SIGN AN EXCLUSIVE:
1.) IF THEY ARE PAYING A HANDSOME GUARANTEE: In the licensing world, a guarantee means that you will be paid a specific minimum dollar amount in royalties, regardless of how many units actually sold. A guarantee is usually included in a contract that’s exclusive.
Example of a Guarantee: Minimum of $15,000 per quarter is payable to Licensor (the artist). This Guarantee means that we get paid a minimum of $15,000 (or insert any number you wish) no matter how many products are sold (even if none are sold).
Asking for a guarantee usually inspires the client to change “exclusive” to “non-exclusive” in a hurry. After all, they don’t want to be on the hook for that much money should the product not sell in the marketplace.
And on our end, we don’t want to be tied to an exclusive contract should the Licensee not sell large quantities.
2.) IF THERE ARE SPECIFIC LIMITS IN THE CONTRACT:
If you agree to an exclusive, you should very narrowly limit the following:
- The term should be as short as possible (i.e. one year)
- The Product should be as specific as possible (i.e. Long sleeve sweaters made of mohair)
- The Territory should be very specific (i.e. East Coast of North America – or wherever they are actually selling)
WHY? Because the more specific you are, the freer you are to go into other deals. After all, you’re in this to make money, right? You don’t want to tie up your possible income streams by giving an exclusive for items or a territory that a company isn’t even engaged in.
NECESSITIES IN A CONTRACT:
If there’s one important thing in a contract for you to know about, it’s this:
Always have a “GET OUT” Clause. Now, “get out” clause is not the proper legal name, but it’s what I call a way out of a contract!
The “get out” clause should allow you to cancel the contract with a thirty day notice for the following reasons:
- The product is not sold in commercially sufficient amounts (thus you aren’t making enough money)
- The Licensee sells their company (you don’t know the new owners – you can always sign on with them later)
- The Licensee has not paid you on time or at all
- The Licensee has been seen in poor light in the publics eye (i.e. Toyota with their failed brakes)
- The Licensee breaches the contract in any way (i.e. they don’t pay you on time)
The most important one, though, is the first one. If they aren’t paying you enough, it’s a good reason to cancel the contract.
APPROVAL OF PRODUCT: The artist should always require that they give approval of the samples of the product before it’s made available to public.
SAMPLES: Artist gets samples (you choose how many) of each product produced. They should be shipped directly to the artist – shipping paid for by licensee.
SIGNATURE: Artists’ signature and/or logo should legibly appear on each product and packaging, in a manner required by the artist. (Spell out how you want it to look)
There is so much more, but these are the first things I think about when looking over a contract or license agreement.
I hope this is helpful, and please print this out and save it for the future, should you find yourself in the position of having to navigate a licensing contract.
My number one advice, though, is this: Hire an attorney that specializes in Art Licensing (do NOT hire Uncle Bob who does business contracts) – and have an art licensing template made up for yourself. It will cost you about $500 – $1,000 initially, but once you have it, you can use that template again and again for all of your licensing deals. In the long run, it will save you time and money. You MUST invest in yourself if you are going to find success!
OR, buy the Artist’s Short Licensing Agreement Template PACKAGE, which gives you a template to work with and is a great start for an artist just getting into licensing, who isn’t ready to spend the money on having an attorney draw up one for them.
If you have ANY deal-making or contract questions AT ALL, ask me in the comments please. I’ll do my best to answer.
Here’s to our success!
PS: I provide consulting for artists and I specialize in deal-making and navigating art licensing. For more information, click on my consulting page.
My goal is to help each of my artist clients to learn to feel confident with deal-making and going into contracts.
NEW: Would you like your own licensing agreement template that you can use again and again? My LICENSING AGREEMENT/CONTRACT TEMPLATE PACKAGE is now available. This package makes it easy for you! Complete with a template that you can change as needed, and instructions, this is the perfect short, simple agreement for artists not yet ready to hire an attorney. More details here: Artists Short Licensing Agreement Template
To gain a strong understanding of Art Licensing Contracts, what to charge, how to protect yourself in a deal, and so much more: Check out my e-Book, co-written with artist Tara Reed, called How to Understand Art Licensing Contracts.
This eBook will save you years of experience, time & money. It will prevent you from getting into bad deals and show you what’s reasonable to ask for. You’ll feel more confident going into each deal with this reference by your side. It’s truly a must-have reference for all artists who are licensing their art!
- Should you Sign an Exclusive Agreement – What to Consider
- What to Charge for Art Licensing – Royalties Advances and Flat Fees
- Three Reasons Artists Would Need to use A Contract