The Why’s of Exclusive Art Licensing Arrangements

In any contract negotiation, if the goal is to reach an agreement, both parties should consider the “why” of their positions. Contracts typically address the who, what, when, and where, but they rarely address the “why” in more than a perfunctory manner with a few broad “whereas” clauses. At the same time, when parties are stuck in their negotiations (either before they enter into a contract or during the contract), if they consider the “why” behind their positions, they are more likely to reach consensus. This concept is of particular importance in art licensing deals where the parties may be of unequal bargaining power. This post will explore the exclusivity provision of an art licensing deal, possible points of tension between the artist and its licensee, and some solutions that come from asking “why.”

Exclusivity Scenario 1: A licensee wants broad exclusive rights, but it is a small deal based on a flat fee rather than royalties. The artist is concerned about giving exclusivity.

Upon investigation, Artist finds out that Licensee wants to ensure that it was the only big box store that sold this pattern on the licensed goods. The solution is to narrow the exclusivity. Rather than granting broad exclusivity regarding the licensed art, the artist granted exclusivity for the art in certain specific product categories and in delineated trade channels (e.g. paper hand towels in big box stores.)

Exclusivity Scenario 2: A licensee wants broad exclusive rights to the artwork, but the deal is a 5-year royalty worldwide deal. The artist is concerned about locking in the art for so long.

In this scenario, the licensee is going to invest a substantial amount of time and effort into marketing the licensed products. It is offering generous, or at least fair royalties, and it wants the flexibility to add future licensed products. A solution may be to shorten the term to 3 years with an automatic renewal if neither party objects. Artist may also negotiate for benchmarks for royalties with termination rights if licensee does not hit the minimums.  In this way, the artist has the opportunity to reap the benefits of licensee’s efforts but he also has strategies to exit the relationship.

Exclusivity Scenario 3: A licensee asks for exclusivity in the formal contract it sends to the artist, although the deal memo had been silent on this issue.

 It is not uncommon for licensees to use forms if they have active licensing programs. Artist may discover that the exclusivity was part of the form, and that it is really not important to the licensee. If, however, it turns out that the mention of exclusivity is important to the licensee but is a new request, the artist should use it to his advantage to attempt to negotiate more favorable financial terms.

Exclusivity Scenario 4: Artist has entered into an exclusive licensing arrangement that failed to define exclusivity by product category, instead broadly saying that licensee had exclusive rights to use the artwork during the term. In the middle of the term, artist decides it would like to make use of the art in a non-competitive manner (e.g. donating to charity or licensing on products that Licensee is not currently manufacturing).

The first lesson here is to always define the exclusivity in a deal as narrowly as possible. If a licensee asks for broad rights to use the artwork in any capacity, the artist should always ask why and see if that makes sense. After the fact, as in the stated scenario, Artist should explain his own “why” to the Licensee and see if it would be willing to amend the contract.

All of these scenarios  highlight the importance of careful drafting in the contract to not only afford the artist maximum flexibility but also protect the licensee’s financial investment. They also underscore the importance of asking “why” and considering the motives of both parties to facilitate reaching an understanding.