In the area of trademark protection, one of the parties from whom the artist should be protected is, ironically, his or her own merchandiser. It is wise to put into the merchandise contract a provision that ensures that the trademarks, trade names, copyrights, and other intellectual property rights of the artist will not be disputed or attacked at any time by the merchandiser and that by being authorized to use and to license the use of these rights, the merchandiser is affirming that the rights are indeed vested in the artist and that the merchandiser is not acquiring any of those rights.
The merchandiser should also be familiar with the rules governing the requirement that manufacturers identify the source of the product (that is, who manufactured it and where), and there is still some vestigial belief that proper copyright notices and trademark notices must be affixed to products to protect the intellectual property rights in the logos, trade names, etc., although such formalities are, in fact, no longer necessary. As noted earlier, many artists have a problem with corporate names being used to identify the owner of a trademark or copyright. “Neil Young, Inc.” is not something that an artist who has evidenced an antiestablishment bias in his career would like to see plastered over all of his program books or T-shirts. In this scenario, the merchandiser thinks (mistakenly) that “Neil Young, Inc.” or whatever the artist’s name is, must appear somewhere on the T-shirt, and so it includes those words on the T-shirt, together with a copyright symbol © and the year of copyright. But the artist might well be—rightfully—annoyed because of his lifelong opposition to the “establishment.” In fact, the merchandiser could simply have used the initials NY, or whatever his initials are, which would satisfy both Neil artist and the law—or used no copyright noticess at all as that formality is no longer necessary under the US Copyright Law or those of the signatories to its various international copyright conventions. The lawyer in charge of your merchandise licenses must be familiar with the laws of copyright to determine if the merchandise can be distributed without this designation, or, if the merchandise company or the artist’s lawyer prefers, they can try to reach agreement as to what designation satisfies them from a legal point of view and their artist from a public relations point of view.
The Role of the Tour Merchandiser
One of the first issues to be dealt with is whether the tour merchandiser will act as a manufacturer and distributor or as an agent, licensing to third parties the manufacture and distribution of merchandise. The latter involves considerable risk to trademarks and quality control.
Net: Gross Less Sales Tax?
Interestingly, in deals in which royalties are calculated as a percentage of net receipts, “net” is often defined as gross less all applicable taxes. Let’s see what this means. A product is sold for $10.00. Sales tax on this is an additional $0.8375 in New York City. Thus the consumer pays $10.84. If the royalty is to be paid on “gross less applicable taxes,” $0.84 is deducted from the $10.00, leaving $9.16 as the net. Here is an example where imprecise language affects the artist’s pocketbook. Obviously, the intention (probably of both parties) is that the royalty will be paid on $10.00, not $9.16, but when push comes to shove, it is surprising what disagreements may ensue (and then maybe be settled in return for some compromise elsewhere). Therefore, the definition of net receipts should be “gross net of sales tax,” not “gross less sales tax.”
Of course, depending on the nature of the merchandise and the location of the sale, there may be other taxes other than sales taxes, such as import duties, value-added taxes, etc.—that may be added to the suggested sale price of a particular product, and these should be dealt with specifically in each case. The same issue applies to shipping and handling charges, which can be significant in Internet sales. (Note that Internet sales are soon going to be subject to sales taxes also.)
Boilerplate: Don’t Overlook the Obvious
Many of the boilerplate provisions found in tour merchandising agreements—such as insurance and territory issues—are also applicable in the retail area. Just because these are routine provisions does not mean that they do not have weight and should not be fought over vigorously. For example, in the insurance area, among the warranties an artist should require is that all of the goods and materials that are used in the merchandise are safe and fit for the purpose and use intended. One of the mechanisms utilized by artists who are subjecting themselves to potential liability by depending on the quality of products produced by third parties is to require that the third parties themselves be sufficiently insured against eventual claims by people claiming injury from the products. One way to guarantee that this is the case is to require that the third party (in this case the merchandiser) provide a certificate of insurance proving the existence of whatever amount of insurance the artist’s representatives feel is sufficient to indemnify the artist in the event of adverse claims. In addition, the artist will usually want to be named as an “Additional Insured” on the merchandiser’s own insurance policy. This is customarily provided when requested (if, of course, the company is in fact insured in the required amount). One thing to watch out for is the possibility that the insured amount may be used up by claims against the merchandiser from completely unrelated parties.
Therefore, the contractual clause requiring a certificate of insurance naming the artist and the artist’s touring company as “Additional Insured” should also provide that the amount of insurance that is sought to be provided is isolated from claims from any other parties against the merchandiser.
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Many other merchandising issues are applicable both to tour merchandising and retail merchandising. A primary consideration in both areas, of course, is to maintain what I refer to as “institutional memory.” As time passes, and particularly when an artist has switched representation, the artist and the artist’s team must be very careful to be sure that there are no previous agreements or provisions of agreements that have carried over into the present (or the future).
Often merchandising companies request that the artist sign irrevocable letters of direction to the artist’s record company, music publishing company, even performing rights society, requiring them to pay to the merchandising company, in the event the merchandising deal does not play out as expected, earnings generated by the artist and otherwise payable directly to the artist. This is a disaster for a variety of reasons—not the least of which is that, although the amount of money cited in a letter of direction is by necessity a fixed number, the actual sum of money due the merchandiser at any given time is, more often than not, a matter open to considerable dispute. The “deficit” number is always changing and, in changing, becoming less and less; yet it is unlikely that the merchandiser will send follow-up letters to the artist’s record company, publishing company, etc., changing the original number.
Among the other areas of general concern are confidentiality, compliance with local laws, sell-off and inventory, the disposition of artwork and photographs, audits, and life and disability insurance. In addition, remember that the merchandise licensing agreement is usually entered into by the artist’s touring corporation, not by the artist. The artist’s personal guarantee to provide rights to the merchandise company in the event that the touring corporation defaults flies in the face of the artist’s claim that the touring corporation is a legitimate entity worthy of beneficial tax treatment. If the corporation is in actuality a gimmick, then the chances that a third party will be able to breach its limited liability protection is increased.
CONFIDENTIALITY
For some reason, people are very nosy about the relationship between artists and their merchandisers. Perhaps it is because the deals are so straightforward (advances, royalty rates, heads attending concerts, etc.) that it is easier to comprehend the value of these deals than to get into comparison shopping with information about record royalties where a royalty “point” can mean anything you want it to mean. There is no reason to educate other competitors for artist’s rights or merchandiser’s mone
y as to what deals can be squeezed out of the merchandisers. After all, the artist and the merchandiser pay substantial fees to professionals to work their way through the complexities of these deals and both the information about them and the process that accomplishes consensus are, in a way, proprietary. Accordingly, there should be included in these agreements a clause, with teeth, protecting that confidentiality.
COMPLIANCE WITH LOCAL LAWS
Nothing pleases a small-minded prosecutor more than a little publicity that can be garnered from attacking a high-profile artist for “participation” in breaking a local law. The contract with merchandisers must address the fact that the tour, and retail licensing deals as well, will involve many different states with many different laws, rules, and regulations. The merchandiser must be responsible for compliance with these laws and regulations, and most merchandising agreements so provide. But the ultimate impact of any such provision will be found in the indemnity provision, which should be carefully considered when the initial contract is negotiated.
There are innumerable laws with which most of us in the music business have no contact whatsoever at any time in our professional careers, yet these laws can cross our paths in the merchandise area suddenly and with devastating result. For example, many types of products must bear posted warnings if the merchandiser and the artist are to be insulated from liability in every state. If merchandise products with small parts are designed so they might appeal to children, specific child safety warnings often must be posted. Sleepwear for children must usually be fire-retardant. Claims arising out of the failure to abide by these laws may result in a court award of damages in an amount so high that no amount of insurance typically maintained by the merchandiser will be enough to offset the possible liability to the artist. There may be criminal liability as well. The artist’s representatives must use all due diligence to satisfy themselves that the merchandising company knows exactly what it is doing in the area of compliance with local and federal laws—yet another reason to use a company with a proven track record.
END-OF-TERM INVENTORY AND SELL-OFF
Any contract that involves inventory has to come to terms with what happens when the term of the agreement is over. In the area of tour and retail merchandising, the artist and the artist’s representatives have to ensure that the merchandiser does not manufacture or authorize the manufacture of goods—at any time, let alone toward the end of the contract term—in excess of approximate market demand. It is customary to seek a written inventory (allowing an auditor of the artist’s choice to actually physically assist in counting the inventory) both at the end of the license term and after the sell-off period (usually six months to a year after the term expires). Believe it or not, it has happened more than once that more inventory was on hand after the sell-off period than at the end of the official license term.
Once the rights to sell have officially ended, the artist should have the option of either purchasing the remaining inventory in stock at cost (plus maybe 10% handling) or demanding that the remaining inventory be destroyed. In the latter event, the artist should have the right to send in an auditor to observe the destruction, and the merchandiser should have the obligation to provide an “affidavit of destruction” to put the final nail in the coffin on that deal.
In the retail arena, a problem sometimes arises when inventory somewhere out there in the marketplace is returned to the merchandiser by sublicensees long after the events described above have taken place. Under these circumstances, the merchandiser will itself have inventory on hand after its rights have expired. The provision stating that the artist has the right to purchase (or destroy) remaining inventory doesn’t help in this situation. This kind of anomaly can be avoided if the artist has been apprised of the identity of all the merchandiser’s sublicensees and their addresses. Of course, if the artist maintains control over the choice of sublicensees as part of his or her trademark-monitoring responsibilities, the artist will likely know their identities anyway. Artists who are hands-on in this regard are more, rather than less, likely to be able to protect themselves if merchandisers glut the market with products. And those who are not hands-on? Well, you know the answer.
ARTWORK AND PHOTOGRAPHS
The artwork used for tour merchandise may duplicate the artwork on the record album (which the record company owns), or it may be created by a designer or photographer hired specifically for the tour merchandise. In either case, the artist’s rights to exploit this artwork beyond the tour itself may be severely restricted. Even if separate permissions for retail licenses are acquired from the record company or the designer (or photographer), the artist’s attorney must make it clear whose responsibility it will be to clear these rights, and at whose cost, as well as whether the rights clearance will include providing camera-ready artwork. The costs include the costs of obtaining the rights themselves, as well as the cost of attorneys’ fees for clearing the rights and negotiating and processing the contract establishing the terms of the rights clearance.
Both the artist and the merchandiser must insist that all persons who create art or text for the merchandise (for example, in program books) sign, wherever possible, work-for-hire agreements establishing the artist or the artist’s service corporation as the owner of the result created. In this regard, the representatives of the artist must be careful, in acquiring rights to artwork, designs, and photographs, to make sure that the artist’s team has the right to crop, reshape, edit, or even adapt the artwork. Note, however, that in many countries of the world, even if there is a total buyout of rights, the “moral” rights of the artist or photographer may be violated by such actions, and there is no concept of a work for hire outside of the United States. Using a French photographer for an album cover, and then fiddling with it in a way that transforms it into something that the photographer feels damages his or her art, and therefore his or her reputation, may be problematic. The unacceptable change can be as simple as cropping a painting or photograph to fit a CD jewel box and then cropping it again to fit a DVD and then cropping it yet again to fit a cassette J card. I have actually had to deal with a situation in which artwork for a tour was purchased and for which agreements were signed, where the artwork had to be reinstated in its original form for use outside of the United States under the threat of litigation for violating the artist’s moral rights. I am not suggesting that one never use foreign nationals to create or license artwork for a United States–based group, but I do want to alert those artists and their managers and other representatives whose artistic reach extends beyond our borders that they may be acquiring fewer rights than they think they are acquiring.
COUPLING
Just as the artist may be dismayed (at the least) to discover commercial advertising attached to the souvenir program for the tour (or, heaven forbid, the T-shirts), he or she may be very confused (at the least) to discover that some of the merchandising products feature not only the artist but another artist as well. This possibility is yet another reason to be careful to approve everything that is manufactured. Nevertheless, some things slip through the approval cracks and it is important for the contract itself to forbid the coupling of other artists’ names and likeness or other logos, trademarks, etc., on the subject artist’s merchandise—or even on advertisements for the merchandise.
LIFE AND DISABILITY INSURANCE
Companies that are investing substantial monies in pursuit of the purchasing capabilities of fans of a particular artist are naturally concerned lest the artist die or become disabled through illness, and seeking life and disability insurance against such contingencies is neither unusual nor unreasonable. There is, however, a practical problem: The artist usually has to undergo a physical examination—one that is conducted by a doctor other than the artist’s own, and not necessarily one that is conducted by someone who is bound by any privacy or confidentiality concerns beyond those of the medical profession. Add to this an artist who is prone to taking drugs of any sort—or even one who sm
okes marijuana occasionally—and you are inviting a lifetime problem. (For example, suppose the examining doctor denies the artist insurance, and, years later, the artist has to complete an insurance form that asks the question, Have you ever been denied insurance?) And then there is the problem of a female artist, especially a “star” who is required to submit to an examination by a male doctor (or doctors) who has not been scrutinized by her own doctors. (I have had many situations in which my female clients—and not just the supermodels—have been made to feel very uncomfortable during physical examinations by doctors who come to their homes and either behave like star-struck fans or, worse, act in ways that are, to put it euphemistically, less than “professional.”) The solution, of course, is to have one’s own doctor do the examining, and this is something that is often permitted by the insurance company. The contract itself can prescribe this option.
What They'll Never Tell You About the Music Business Page 38