By: Maks Ewendt
There’s simply too much streaming content across too many platforms for me to keep up with what movies and shows come out when, much less which are supposed to be good. To exacerbate the situation, there’s too much sponsored content about streaming content for me to trust that online reviews aren’t all sponsored. That being the case, I’ve resulted to choosing my next viewing treat by looking for combinations of actors and production companies that I tend to find interesting. That method recently led me to a Taron Egerton + AppleTV collaboration called Tetris. Unsurprisingly, it’s a film about the genesis (no Sega pun intended) of the namesake game.
Extremely surprising was my realization around the 20-minute mark that the movie was a homage to the practice of product licensing. One of my favorite parts about my job is translating legalese to our business clients to explain the impact and the importance of legal terms buried in the seemingly endless waves of contract clauses. The movie Tetris does an amazing job of bringing to life many of the key hurdles and pitfalls that can accompany product licensing. Whether you’ve seen the movie or not (and if you’ve read this far about licensing, you probably should), it’s an interesting backdrop to discuss some of the key factors that come up during licensing negotiation.
Who Has the Right to Grant a License?
One of the first questions to answer when licensing a product is does the grantor have the right to grant such a license. There are two ways in which a grantor can have such a right. The grantor can either: (i) be the original product inventor/owner that holds all of the rights to make the original grant; or (ii) hold a valid license from another grantor which they intend to sublicense. Tetris touches on both of these issues.
The original inventor of the game invented it while on the job, complicated by the fact that his job was in communist Russia. As soon as someone expressed interest in obtaining a license to the game, his first question to his boss was appropriately “Can I license the game?” Putting a pin in the characteristics of a communist regime for the purposes of this blog, it’s important to note that some employers have clauses regarding intellectual property rights in their employment agreements. These clauses can stipulate that any IP created during company time, or using company resources, is owned by the company. In such an instance, the individual may have no personal rights to the invention to grant a license.
Once it was determined that the inventor could license the game, the plot continues to thicken as the license ends up taking different forms as it crosses territories, manufacturers, distributors, and delivery methods. Tracking the types of licenses and their restrictions is a key component to making sure each grantee is operating within their legal rights, and not infringing upon a third-party’s intellectual property rights which could lead to exorbitant damages. All of these grants and restrictions should be captured in many words within a contract, which leads us to the importance of defined terms.
How Important are Defined Terms?
In short? Very. Capitalized terms in contracts are defined terms, and you won’t find their definition in the Webster’s. The parties to a contract can agree to define a term as anything they mutually agree to and the definition needs to be included in the contract itself (or in an incorporated document referenced by the contract). One of the most important defined terms when it comes to licensing will always be “Territory.” How Territory is defined will inform the grantee where it has the licensing rights granted by the agreement. Without a defined Territory, it can be argued that the license grant was intended to be worldwide, so it’s imperative for the grantor to be specific as to where they intend the particular license to be applicable. Tetris was being licensed per country and by device type, but a Territory can be a state, region, market type, or even a market size. An important follow up to the defined Territory is whether the license is exclusive in that Territory or not. As you can imagine, an exclusive license in Territory is more valuable than a non-exclusive license.
Tetris also does a great job highlighting the importance of defining terms that may be thought of as common knowledge, in particular when working with emerging technologies. While it may be difficult to think about the technology in the 80s as emerging, it was an important time for personal computing. The licenses being granted were limited to being described as video game consoles, computers, and arcade cabinets. That seems straightforward enough until you dive into the physical components of each, as the movie does, and you realize that a video console is nothing more than a computer without a keyboard. There’s a great “a-ha moment,” and a contract amendment moment, that by defining what a video game console is, the parties could change the rights that were being granted.
Specifically defining terms in a contract also helps account for things that may not even exist yet. In Tetris, Nintendo had developed a handheld game machine (the Gameboy). If the rights to Tetris were licensed for video game consoles, computers, and arcade cabinets, had a license for handheld game machines already been granted as part of one of those other licenses? If “Video Game Console” was defined as “Any device that displays the game on an electronic screen and has controls that are manipulated by the player’s hands,” then it’s arguable that the license for handheld game machines is already spoken for. If “Video Game Console” was defined as “A computer monitor that is not controlled by a joystick rather than a keyboard,” then it’d be a stretch to say that includes a Gameboy.
If a license type doesn’t seem to be included in a previous grant, who owns such a license?
Why Reserve “All Other Rights”?
Typically, somewhere toward the end of the licensing terms, and sometimes in the disrespectfully titled “Miscellaneous Terms,” there is a relatively short clause that simply reserves all rights not expressly granted by the grantor in the agreement. It seems pretty innocuous, but it will bring tremendous relief to a grantor when the question is asked whether or not a specific license type was granted that may not have been originally contemplated. Tetris shows a great example of how much money can ride on the seemingly simple question of whether a license for video game consoles includes use on a Gameboy. As a nice catchall and CYA, it’s a best practice for a grantor to include a reservation of all other rights not expressly granted in the agreement to safeguard against situations and technology that may not have been thought of. Such a clause would allow the grantor to retain the rights to handheld game machines, and subsequently grant a new license to the highest bidder.
Consideration Options for Licenses
While not specific to license agreements, how much is being paid, and when, in exchange for the license is always important to keep in mind. As the anticipated value of the game being deployed on handheld game machines increases, Tetris captures several different bid types as consideration for the license. As tends to be the case in a David vs. Goliath story, one party has more cash on hand than the other. That opens the door for the cash-strapped company to offer future royalties on game sales rather than a one-time upfront payment which the larger company is more comfortable with. The value of a bird in the hand versus two in the bush will always be up to the seller, but the movie included a nice representation of creative solutions for consideration that should not be overlooked when negotiating licensing agreements as they tend to include the opportunity for future sales.
I have no idea if non-attorneys, or even attorneys that don’t practice in licensing, would find Tetris even half as enjoyable as I did, but if you’ve ever stared at licensing terms and wondered “what’s the point?” it may be worth giving it a watch and putting some thought into your licensing terms.
Picture on the top is by Alexandre Boucey and is in the public domain.
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