PRACTICAL TIPS ON FOREIGN LICENSING AGREEMENTS
 
As an independent record company in the U.S., your ability to distribute your product overseas usually requires you to enter into a contract with a foreign distributor. These agreements are referred to as foreign licensing agreements and may be entered into on a long term basis or on a project by project basis. Although I strongly advise that you have a lawyer review any paperwork before you sign it, there are certain basic issues that arise in each situation which can be addressed here.

You must make sure that your agreement with the recording artist (or with the owner of the masters if you are purchasing a master recording) provides for a worldwide right of distribution and sale, and permits you to use licensees to exploit this right. Otherwise, the artist or the owner of the masters has the right to do the foreign licensing deals directly.

There are various types of foreign licensing deals. You might enter into a deal with a major overseas distributor for all territories outside of the U.S. (e.g., MCA, BMG, etc.). The advantage to one foreign distributor is that it simplifies matters from an accounting as well as a logistical perspective. Most such deals will give this distributor a first option on all of your product for an extended period of time (e.g., 3-5 years). In effect, you have an overseas affiliate in such a situation.

A variation of this scenario is to have a different affiliate company in each country or territory. In such a case you might have an agreement for an ongoing affiliate relationship with a different company exclusive for each territory (e.g., EMI in the ECC, Avex in Japan).

Finally, you may have no ongoing affiliates but would take each master, release it in the U.S., and then "shop" for a distributor in each different country. Many people go to MIDEM each January to try to make such deals. Although this process can be tedious, it can have be remunerative. It also gives you the ability to have more control over who releases your product in each territory.

Regardless of your distribution arrangement, there are several basic issues that should be dealt with in the agreement between you (often referred to as the "licensor") and the foreign company (the "licensee").

You should get an "advance" against your royalty on product delivered (e.g. $500 - $5,000). An advance is literally a non-refundable payment of royalties in advance of when they are actually earned. This advance is then "recouped" or paid back out of royalties if and when they are earned. Since royalties may be a long time in coming and are usually only accounted for on a semi-annual basis, the entire business is built on the advance/recoupment system.

As for your royalty rate, in foreign deals it is often a percentage of the published price to dealer or the "PPD". This is usually something between the retail price and the wholesale price depending on how PPD is defined in your agreement. You must be very careful because percentages can be deceiving. It really depends on what number your percentage is applied to - and the definition of PPD is often a heavily negotiated issue in any deal.

I always try to get the royalty percentage applied to the highest number possible. I also make the licensee state the actual dealer price or PPD dollar amount so I can do a "penny count" and know exactly how much the client receives per record sold. Also, I always make sure that the clients gets a piece of any flat fee or third-party license made by the licensee.

A very important point when it comes to payment is to make sure to specify that all payments are made by wire transfer because foreign checks usually take up to 90 days to clear into a U.S. bank account. As for accounting statements, most companies offer to pay semi-annually, but you should try to get quarterly accountings with 2-3 years to object to any statement and commence an audit. Sometimes you can even get the foreign licensee to agree to pay for the cost of the audit if it is determined that there is a discrepancy and/or a mistake was made in excess of a certain percentage (e.g., the licensee actually owes you 10% or more than the actual amount paid to you).

I always make sure that there is a release commitment provision. If the foreign licensee does not release the product in its territory (or any particular country within its territory) within a certain time after delivery (e.g., 90 days) then the rights granted in the product would revert to you. This forces the foreign company to either perform or allow you to go to another company in that territory to do the job. I try to relate all timeframes to a fixed date in the contract rather than to the delivery of product or the release of product since such dates can be disputed by the parties. Sometimes you can get a provision added that also states that you can terminate the agreement if the licensee fails to make any payment or fails to release the product delivered to them.

Even if the product is released, the license agreement will usually provide for a term limit (e.g., 3-5 years) after which you can either continue to do business together or terminate the contract and have the masters returned. Most such provisions will provide that the licensee can continue to sell residual product from its warehouse on a non-exclusive basis in the territory. Be sure to put a time limit on this sell-off period (e.g. 6 months) and be sure to specify that the licensee must limit its manufacture of product at least 3-6 months before the contract period ends.

These are some of the most important deal points in any foreign licensing deal. Even though you may be able to negotiate some or all of these deal points for yourself, be sure to have your lawyer review any written paperwork before you sign it. Otherwise, you may find that a paragraph on the last page takes back everything that a paragraph on the first page gave to you. Do not be penny-wise and dollar-foolish - consult with your lawyer on all contract matters. When it comes to your business, it is always better and lest costly to ask a dumb question that to make a dumb mistake.
 

(c) Wallace Collins
Wallace Collins is an entertainment lawyer . He was a recording artist for Epic Records before attending Fordham Law School. 

Specializing in Entertainment Law & Intellectual Property Matters


Wallace E. J. Collins III, Esq.
250 East 39th St. (Suite 9K)
New York, New York 10016
Tel: 212 661-3656

Email: Wallace Collins

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