Option Agreements
1.
Exclusivity
2.
Option Periods
3.
Option Fees
4.
Producers' Rights During Option Periods
5.
Ownership Of Rights: warranties on the part of the owner of a copyright work being optioned
6.
Legal Enforceability Of Contract
Assignment Agreement
1.
Assignments By Comparison To Licences
2.
Rights To Be Acquired
Minimum Requirements
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Ancillary Rights
Rental And Lending Rights
3.
Waivers Of Moral Rights
4.
Acquisition Costs
Purchase Price
-
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Net Profits
Payments For Ancillary Rights Exploitation
5.
Credits
6.
Turnaround/Re-Assignment Of Rights
7.
Right Of Assignment Of Contract To A Third Party
8.
Legal Enforceability Of Contract
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1. Film producers must acquire sufficient rights in the copyright works which will comprise their films to enable them to exploit those films for the purposes for which they were intended, ideally worldwide in all languages, in all media for the entire copyright period and so far as legally permissible in perpetuity.
2. A producer therefore has to acquire rights in certain basic elements which make up the film.
These include underlying works, such as novels, plays or published or unpublished works over which a producer will traditionally be granted an option to acquire certain rights for a fixed period of time, during which time a producer will undertake the creation of other elements of the film and in particular the script. That said it is not unusual for a producer to take an option over an original screenplay which has already been written by a writer and for the producer to subsequently commission a second draft script from the original writer or a third party writer. Option and assignment agreements are traditionally negotiated between a producer and/or his lawyer and the underlying rights owner's agent and/or their lawyer.
3. The key legal, commercial and practical issues which arise in the negotiation of the option and assignment agreements are as follows:-
3.1 Option Agreements
3.1.1 Exclusivity: It is essential that the option granted by a rights owner is exclusive to the party being granted the option (who it is assumed for these purposes to be the producer). A producer must have the comfort of knowing that a project cannot be developed by a third party. A development (and indeed production) financier will also insist on exclusivity so as to protect its financial investment in the development and production of the film.
3.1.2 The Option : An option, in the context of film development, is in itself the right for a producer to acquire certain pre-agreed rights in an underlying copyright work such as a novel, play, unpublished work or indeed an original screenplay. Critically, an option does not grant to a producer any copyright or any other rights whatsoever in an underlying work, but merely by definition, the option to acquire those rights at a later date, subject to certain criteria being met. An option is exercised by a producer making payment to the person granting the option, prior to the expiry of an agreed option period(s), of an agreed sum of money and entering into an assignment or licence agreement effecting the grant or transfer of those certain rights. The form of the assignment or licence (and the difference between these is mentioned below) is usually agreed prior to the date of finalisation of the option in the form of a preagreed document which is attached to the option agreement but which is only then signed when the option is exercised, although it is not uncommon for an assignment or licence to be signed at the same time as the option agreement granting the option is signed. In this latter scenario, the assignment or licence is signed "in escrow" ie.,
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the assignment or licence although signed is not a legally binding agreement until such time as certain pre-conditions are met, namely the option being exercised usually by the producer giving notice to the rights owner that it intends to exercise the option and by the agreed exercise or purchase price being made to the rights owner.
3.1.3 Option Periods: An option will be granted for a fixed period of time, called "an option period". From a rights owner's point of view, given the level of the option fee payable (see below) it will not wish the rights in a particular underlying work to be optioned exclusively to one owner beyond a period of time that a producer should be able to set up a project for production. Industry practice would normally dictate that an option is granted for an initial period of 12 - 18 months (although this can vary) with the producer being given the opportunity to extend the option beyond this initial option period for a further period of time, usually an additional 12 months (although, again, this can vary). The mechanism for extending an option period is usually by the producer giving notice to a rights owner that it wishes to extend the option for the further pre-agreed period and by the producer making payment to the rights owner of a further option fee.
3.1.4 Option Fees: Historically, the mechanism of securing rights by means of an exclusive option has arisen because of economic considerations; the obvious difficulty a producer would otherwise have in raising finance to acquire rights at full market rate in an underlying work at the development stage of a film. Without any guarantee that a project will proceed to production, the risks to a financier of investing a significant sum to actually acquire rights ordinarily prohibits this practice. That said, it is not uncommon for a major studio to acquire rights in an underlying work outright without the mechanism of an option. The level of option fees can vary quite considerably, although traditionally the initial option fee is calculated as approximately 10% of the ultimate exercise fee ie., the "purchase price" of the rights. The option fees and purchase price will largely depend upon factors such as the status of an underlying work and the author, the proposed financing structure and production budget of the film intended to be made based upon the underlying work, the development finance available to a producer and indeed the reputation and status of the producer. In the sphere of independent film production in Europe, a typical production budget of US$3 - 5m, will commonly contain a purchase price for rights in an underlying work of between 2% to 2½% of the production budget (less certain deductions, namely contingency, finance fees and interest, completion guarantee fees, legal, accountancy and insurance costs, deferments and the sums payable to the rights' owner). In turn, option fees may vary from anywhere between a nominal fee up to US$10,000 or more for films with this type of budget, although it must be reiterated that a number of factors can affect the level of option fee. In any event, an option fee is normally expressed to be on account of the purchase price although customary practice usually dictates that any renewal option fee ie., for the second or further option periods will be in addition to the purchase price.
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3.1.5 Producer Rights During The Option Periods : A producer should always seek to ensure that a rights owner expressly permits the producer to undertake development activities during the period in which the option subsists. Such activities will include permitting the producer to commission or write screenplays or adaptations of the underlying work, entering into agreements with financiers or distributors in connection with the development, production or exploitation of the film and the right to show a screenplay or adaptation to a third party. In the absence of this express right, an infringement of copyright in the underlying work could theoretically arise
(creating an adaptation of an existing copyright work is, under UK law, "a restricted act") given that the option does not grant or transfer any rights in the underlying work to the producer at the outset.
3.1.6 Ownership of Rights : A producer should obtain comfort in the form of legally enforceable warranties on the part of a rights owner in the option agreement that they actually own beneficially and solely the rights being optioned by the producer and that the rights have not previously been optioned to a third party. It is sometimes the case that the owner of the rights in an underlying work is not the actual author of the work, albeit that an author will usually be the first owner of copyright in a work,
(other than where a copyright work has been created pursuant to a contract of employment). Despite the warranties on the part of the rights owner, a careful examination therefore by an experienced copyright lawyer of the agreement(s) under which the seller claims to have acquired his rights (the so called "chain of title") must be undertaken at the stage when the option is acquired. It should not be left until the option is exercised - at that stage it is too late and the only remedy left for a producer is to sue the rights owner for damages for breach of warranty (or to invoke an indemnity), for the producer's loss in commissioning screenplays and undertaking other development work. A search of the US Copyright Registry (the USA is the only major country with a registration system) may also be advisable.
Where a book or other copyright right has been published, a producer will need to be satisfied that none of the rights over which the producer has purported to acquire an option have been vested in the publisher, pursuant to its publishing agreement with the author or rights owner. Moreover, a producer should seek to obtain from the publisher of the underlying work a release and quitclaim acknowledging that the publisher has no rights in the underlying work which conflict with those acquired by the producer, although the release will normally permit the producer to issue published articles, synopses and resumes of the underlying work or the film in relation to the advertising and exploitation of the film. Without this permission, a producer could theoretically be infringing the publishing rights owned by a publisher in the underlying work.
3.1.7 Assignment Of The Benefit Of An Option Agreement : As a matter of English law, in simple terms, the benefit of an agreement, but not the burden ie., the obligations that go with an agreement, may be assigned, pledged, transferred or charged to a third party. From the point of view of a producer, it is essential in an option (and indeed assignment agreement) to obtain the express right of assignment from the owner of the underlying rights, as typically a producer will be required to
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assign or charge the benefit of an option (and assignment) agreement to a third party financier as security for being loaned development or production finance. From a rights owner's point of view, given that there will be no direct contractual relationship with any third party who acquires (through an assignment or otherwise) the benefit of an option agreement it is important to ensure that the original producer will remain expressly primarily liable to the rights owner for its obligations under the option agreement, specifically, the obligation to make payment to the rights owner of the agreed option fees and purchase price. An alternative, from a rights owner's point of view, is to make any assignment of the benefit of an option agreement conditional upon the third party entering into a direct contractual covenant with the rights owner undertaking to comply with the obligations of the producer under the original agreement. Financiers typically are loathe to do this and a producer should usually resist this. The minimum, however, a rights owner should insist upon is notice being given to them of any assignment, transfer or charge of the benefit of the option (or assignment) agreement within a prompt period of time following such assignment, transfer or charge.
3.2 Assignment
3.2.1 Assignments And Licences: Under English law, the transmission of copyright may be effected by assignment, by will or by operation of law. It is essential to bear in mind that assignments and exclusive licences of copyright must be in writing signed on behalf of the assignor (ie., the person granting the assignment). It is also possible, under English law, to assign future copyright ie., copyright which has not yet come into existence.
The most important difference between an assignment and a licence is that under an assignment, an assignee (ie. the person acquiring the assignment of rights) becomes the absolute owner of the copyright which is assigned to him. If the previous owner tries to assign the same copyright to a third party, that will be an ineffective assignment, whether or not the new assignee was aware of the earlier assignment.
However, if a licence of rights has been granted and the licensor subsequently assigns the copyright entirely to a purchaser, who pays valuable consideration for the assignment and has no notice of the licence, then this subsequent assignment will be effective. The licensee would lose his rights but could sue the original licensor for damages. For this reason therefore, a producer will (and should) usually seek to obtain an assignment of rights as opposed to an exclusive licence which may limit the period for which the rights are granted. It is also possible to take a non-exclusive licence of rights but this is rare and is not advisable.
3.2.2 Rights To Be Acquired: In the context of producing films, a producer will endeavour to secure as wide a grant of rights from a rights owner in the copyright works (including the underlying novel or play upon which the film is to be based) comprising the film for the full period of copyright in the relevant copyright work.
A producer may be prevented from doing this for a number of reasons. In the context of underlying works such as novels or plays, the principal reasons are that first, certain rights in the underlying works may have already been granted or
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licensed to a third party - for example publishing rights. Secondly, a rights owner may wish for commercial reasons to limit the grant of rights, to say the opportunity to produce and exploit one film only based upon the underlying work or may only wish for rights to be granted exclusively for a limited period of time in which case the producer will wish to ensure that after the expiry of this period of time, the rights can continue to be exploited by the producer on a non-exclusive basis so as to permit the exploitation of a film already produced for the full period of copyright and insofar as permissible in perpetuity.
Because of the significant investments in films made by financiers, they likewise usually wish to ensure that the grant of rights by a rights owner extends to the right to produce one or more films based upon the underlying work (including sequels, remakes or television series or serials - the definition of "films" under English law is now extremely wide and covers all possible technical ways of recording moving images) and to exploit these films and all allied or ancillary rights therein (see below) throughout the world in any and all languages through any medium now known or subsequently invented for the full period of copyright of the films and insofar as is permissible in perpetuity. The principal media for the exploitation of the film is still by means of theatrical exploitation, non-theatric exploitation, by means of all forms of television and by means of all forms of videogram (including so-called video on demand). This is therefore the starting point for financiers and producers, although it is common for certain types of rights (including publishing rights, which may already have been transferred) such as radio and stage dramatisation rights to be reserved to a rights owner although even where these rights are reserved it is customary for a producer to impose a restriction over the exercise of these rights for a period following the date of the sale - this is termed "a holdback". Where publishing rights and radio rights have been reserved it is important for a producer to acquire the express right to issue synopses and resumes of the work in all languages in connection with the exploitation, publicity and advertising of the film and the right to transmit extracts from the soundtrack of the film similarly for the purposes of exploitation, publicity and advertising of the film on radio.
Analysing the specific rights which should be acquired by a producer, in addition to film rights, and the rights considered above, these include:-
3.2.2.1
3.2.2.2
3.2.2.3 television and cable broadcast and cable retransmission rights which as a matter of English law do not form part of the very wide definition of "film" rights; the express right for a producer to be able to make changes to both the original underlying work and to its title (this is because of moral rights of authors which are considered below); the rental and lending rights which subsist in an author's work and again these are considered separately in the course materials;
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3.2.2.4 sequel rights: These include film, prequel and sequel (and in turn remake rights and television series and spin off rights) and author written sequel rights. A producer should always seek to protect himself against an original author exploiting a subsequent work, containing characters or sequences common to the original work, after a film of the original work has been made, by at least acquiring the right to match offers made by third parties for such author written sequels. Where sequel rights including remakes, sequels, prequels and television rights are granted by a rights owner it is customary for the producer to negotiate with the rights owner in the assignment or licence for the payment of additional sums in the event that such remakes, sequels or television series, serials or spin-offs are made.
In the case of remakes, sequels and prequels these payments are usually 50% and 331/3% if the original purchase price for the right and for television series a royalty is normally payable calculated either at a fixed price or as a percentage of the sums payable to a writer on the television series or serial;
3.2.2.5 other "allied and ancillary rights" usually acquired by a producer include so called merchandising rights, music publishing and soundtrack record rights, novelisation rights (in the case of original screenplays) and screenplay publication rights as well as all forms of so-called new media or interactive rights; and
3.2.2.6 name and biography rights; the non-exclusive right to use an author's name, likeness, photographs and biography in connection with the exploitation of the rights assigned or licensed.
A short form assignment should always be obtained when acquiring the rights in an underlying work so that this can be registered at the US Copyright Office as the assignment of copyright. This is a simple one page document dealing with the actual assignment. As documents filed at the registry are available for inspection, this one page assignment obviates the need to reveal any specific financial or other details relating to the assignment agreement.
3.2.3 Moral Rights: Copyright law in Europe has always divided authors' rights into economic rights and moral rights, the former to enable the author to earn money, the latter, in theory, to protect an author's reputation. Moral rights were only introduced into English law for the first time in the Copyright Designs and Patents Act 1988, although they have been prevalent in much of Europe for a considerably longer period.
Under English law, the principal moral rights (in the context of film production) are:-
3.2.3.1 "the paternity right" ie. the right to be identified as author or direct;
3.2.3.2 "the integrity right" ie. The right to object to derogatory treatment of work.
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Moral rights continue to subsist as long as copyright subsists in a work. Moral rights are therefore exercisable during extended and revived copyright periods. Moral rights are not assignable but do, however, pass to an author's personal representatives on his or her death and, in certain cases, the moral rights of a person following their death can be exercisable by more than one person, for example, if film rights in an underlying work are inherited by one person but the publishing rights by another.
Although moral rights can not be assigned, they may, under English law, be waived by document in writing signed by the person giving the right. This is not the case, however, across Europe where, in many countries, it is not possible for moral rights to be waived. It has, however, for a long time been the practice of film producers in the UK and the USA, in particular, to insist upon waivers of moral rights so as to prevent any possible future claim by an author and thereby threatening a financier's investment in a film. That said, it may theoretically be possible for an author to bring a subsequent claim for infringement of an author's moral right(s) in a country where a waiver is not accepted, as a matter of law, such as France. In relation to the paternity right, one comfort may be provided to a writer where there is a waiver of moral rights of the writer, if the waiver is expressed to be without prejudice to the writer's contractual right to receive a credit on the film.
3.2.4 Rental and lending rights: These are examined in detail elsewhere in the course material.
3.2.5 Purchase Price: At the cornerstone of independent feature film production, in much of Europe is the concept of the "buy out". This means that subject to certain payments ie. the purchase price for the rights acquired in an underlying work (and any other payments expressly agreed to be paid to a rights owner, such as a share of net profits or residual streams for remakes and sequels etc) the producer will not required to make any further payments to a rights owner. This notion of "buying out" rights is equally applicable to writers and other persons providing copyright services on a film and allows a producer to be certain of the costs attaching to the exploitation of a film.
As has already been stated, a purchase price for rights in an underlying work will vary depending upon a number of factors, but is often linked to a percentage of the production budget of a film with often a minimum and maximum sum expressed to be payable. A rights owner may also negotiate a share of the net profits of the film which, customarily, is linked to the producer's share of such net profits. A summary of the calculation of net profits in independent film production is considered in the notes on writers' agreements which can be found in the course materials. A rights owner would normally insist, however, that the definition of net profits given to it is no less favourable than the definition accorded to the producer.
3.2.6 Credits: An assignment agreement between the producer and rights owner should clearly state what credit, both on screen and, if applicable, in paid advertising or publicity should be accorded to the author or rights owner. Issues such as size,
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placement, style and type of such credit are usually a matter for commercial negotiation, although a producer will usually seek to limit its liability if there is a failure by a distributor or broadcaster to accord the agreed author's credit on the film.
3.2.7 Turnaround: An option is usually exercised and rights assigned to a producer, when a producer is set to commence production of a film. This is because it is usually only at this stage that the producer will have secured the production finance for the film and therefore the ability to pay the "purchase price" for the rights.
However, there may be circumstances when a producer has exercised an option, paid the purchase price and acquired rights in an underlying work without proceeding to produce a film based upon the underlying work. In these circumstances, a rights owner will require the right, after a period of time (usually between 3-7 years), to reacquire the rights which have been assigned to the producer subject to repaying the producer the sums paid to the rights' owner plus interest. The producer needs to be careful here because the producer may also have to repay all the sums the producer has expended on developing the project up to the point of turnaround, together with interest and/or a premium on such sums. If this is the case this payment obligation will have to be passed onto the rights' owner. Payment of these turnaround costs, necessary for the re-acquiring of the rights, is normally expressed to be payable on the first day of principal photography of a film subsequently produced by a third party based upon the underlying work.
The issues relating to option and assignment agreements are complex. These notes are a summary of the subject matter covered and are produced for the benefit of participants in the Arista Story
Editors Workshops. These notes do not purport to be comprehensive or give specific legal advice which should be sought if action is to be taken on any matter covered by these notes.
For further information contact: Reno Antoniades
Lee & Thompson
Green Garden House
15-22 St Christopher's Place
London W1U 1NL
© Lee & Thompson, 2010.
Tel:
Fax:
020 7935 4665
020 7563 4949
E-mail: renoantoniades@leeandthompson.com
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