Making deals with copyright owners and postponing payments
Entrepreneurs in the tech area are understandably concerned with getting their product to market but it’s often done using a business model full of potential legal problems. While the excitement of a good idea and the technological challenge of implementing it can be exhilarating, neglecting the related business aspects can be a costly and sometimes fatal mistake. This is especially true when the idea and technology are dependent upon the use of content owned by others. Such content is often music and videos, but can also be photos, words, graphics, drawings and designs, among other things. Failure to pay or otherwise acquire the rights to use of someone else’s content where such use is central to the success of the venture, can not only cost the venture substantial amounts of money in litigation, but can be destructive of the entire business. But entrepreneurs who are considering such risks may be surprised to learn how many options exist that do not require a full and immediate payment.
A case that exemplifies the risk involved is the much discussed Aereo lawsuit which recently came before the U.S. Supreme Court. In that case, a supplier of equipment and over-the-air broadcast transmissions on digital devices to subscribers was held to be an infringer of the copyrights owned by television producers, marketers, distributors and broadcasters in the programs streamed by Aereo over the Internet. That decision essentially puts Aereo out of business unless they can qualify as a “Cable System” entitled to a compulsory license under the Copyright Act. That battle is currently being fought before the 2nd Circuit in New York and before the FCC.
While dealing with legalities at a later date may be a calculated risk, in many cases it is too dangerous to justify. In the case of possible copyright infringement, the civil penalties can range from up to $30,000 for each infringement and up to $150,000 per infringement for willful infringement. In a case where the entrepreneur knows he is infringing but proceeds anyway, willful infringement may be relatively easy to prove. The plaintiff may also be entitled to recover the profits of the infringer, plus attorneys’ fees and costs along with an injunction effectively putting the start-up out of business. The cost of defending a copyright infringement lawsuit can be in the high six figures or greater, and if the infringer has to pay the attorneys’ fees of the other party plus damages as well, the overall cost could be in the millions of dollars.
If that weren’t bad enough, in addition to civil penalties, the Copyright Act provides for criminal penalties with fines and jail time.
And there is no assurance that any claim can be settled with a content owner if their overall goal is to put the venture out of business. Napster was destroyed by litigation as were a number of other tech start-ups, including possibly Aereo. And in such cases, unless investors were sufficiently experienced and were advised up-front, and in writing, the entrepreneur’s investors could also file a lawsuit.
If the venture is using content directly—say, a musician’s song is being played or a photograph is displayed— the latter situation requires a license between the entrepreneur and the content owner. In today’s climate, most content owners are happy to have their content used on a prominent website or app, provided they are compensated fairly for it. This compensation can take many forms or can even be postponed. In fact, at the start-up stage, many content creators are willing not to burden the venture with large licensing fees until the venture is successful. At that point, they would expect to be paid a fair market price going forward. They are also increasingly willing to take some equity in the project in lieu of cash.
In the early days of video gaming, I had a client who provided music for a new game with a start up gaming company. Instead of taking an advance and royalty for the use of his music, I negotiated to secure him some equity in the company. The company was delighted to give up equity rather than have to pay an advance and royalties. And while the composer ended up with music in a game that was unsuccessful, his equity in the company was worth a substantial amount of money in the long run because the company developed other games which were major successes.
Another approach can be borrowed from the film industry. When an independent filmmaker considers licensing music for synchronization in his or her film, they don’t know whether the film will be successful or will even secure distribution. Consequently, it is common practice to enter into synch licenses which involve “step deals.” The initial rights granted are for festivals, usually the first step in exploiting an indie film. The license fees are minimal for this type of usage. However, if the film received theatrical distribution, there is an additional, more substantial payment required to keep the license in effect. And if the film achieves pre-agreed gross box office receipts, then at each level an additional license fee kicks in. This type of model could be easily adapted to the roll out of an app or other digital application using content.
In addition to clearing content for infringement purposes, there are other intellectual property issues that need to be dealt with early in the process. For example, use of photographs of certain individuals might violate their rights to privacy or publicity. Statements made about people and products may constitute defamation even if they are made by third parties and then republished or broadcast by the venture.
Entrepreneurs may find they qualify for “safe harbor” exemptions provided by the Digital Millennium Copyright Act (DCMA) of the United States Code if they are relying on user generated content. These exemptions protects certain types of online businesses from lawsuits involving copyrighted content that has been posted by the business’s users, such as video, photographs, comments or blog posts.
However, in order to qualify, a developer will need to comply with the detailed takedown procedures provided by the Act. It’s advisable for entrepreneurs to seek legal advice from the outset regarding possible exemptions from copyright infringement liability, and to arrange to comply with the requirements from the very up front.
So, there are many ways to avoid running afoul of all these legal problems with proper planning. Sweeping all of these legal land mines under the carpet is usually not a smart way to start a business.