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While the Internet glitters with the promise of immediate, worldwide distribution of all types of content, contentious battles over music rights, such as the Napster and MP3.com cases [FOOTNOTE 1], have thrown sand into the gears of this vast machinery, threatening to halt — or dramatically slow — the advance of on-line technology. Disputes over intellectual property rights bring into question the survival of nascent technologies, as piracy beggars media giants and lawsuits hobble Web entrepreneurs. The need to resolve the rights issue has never been more urgent, as the mass on-line distribution of film, TV signals and video finally starts to become a reality. Indeed, the approaching Internet movie wars, accompanied by a thicket of copyright and licensing complexities, will make businesses yearn for the simplicity of the Napster dust-up and may alter the copyright landscape far beyond the reach of the Napster and MP3.com cases. In a now-familiar paradigm, the pace of technological change, this time fueled by the steady growth of broadband, will force a shift in traditional content-distribution models. Broadband access is coming even faster than anyone thought. While only two million households [FOOTNOTE 2]currently have high-speed Internet connections, new media analysts from Morgan Stanley Dean Witter predict that by 2005 that number will climb to 47 million and to some 107 million households — the equivalent of 90 percent of all Internet users — by 2009. [FOOTNOTE 3]The insurgence of broadband, coupled with new compression and distribution technologies such as Microsoft’s new near-VCR delivery specifications or the “DivX ;-)” compression code, has hoisted Internet video into position as the next big thing in the on-line world. Come the broadband revolution, static text and graphics will no longer be the predominant theme. Video will be ubiquitous. Because video is such a compelling means of communication, multiple uses for video on Web sites will rival pure Web entertainment programming. Television and film are already starting to make their way onto the Internet, and film “shorts” and video clips are finding their first meaningful audience. But the future of the Internet portends an even greater reach for wired film and video. Banner ads will be replaced with “rich media” streaming video better suited to grabbing consumer attention; companies will use videos to make sales pitches or provide information; shopping sites will let visitors examine their wares from every angle; and how-to videos for just about everything will abound. Before Web sites rush pell-mell to put up on-line video, however, they would be prudent to sort through the tangle of associated rights clearance issues. [FOOTNOTE 4]Because the costs of obtaining the rights after the fact (including the costs of potential infringement litigation and the resulting damages or injunctions) can far exceed the costs of proper initial licensing of a work, Web-site operators should identify and obtain the necessary rights up front. PRE-EXISTING CONTENT The first step in clearing rights to a pre-existing film or video is to determine who the current rights holder is for the desired uses. This may not be as self-evident as it seems. Producers and other owners of film and video programming will usually divvy up distribution rights on a medium-by-medium, territory-by-territory basis, usually for limited periods of time. Because the Internet is, at least for the time being, by definition a global distribution platform, streaming video from a Web site requires worldwide Internet rights. [FOOTNOTE 5]One cannot assume, however, that the copyright owner of the film itself — or even any one distributor — possesses the worldwide Internet rights. Instead, some or all of the Internet rights may have been granted to film or television distributors in various territories, or the copyright owner may have retained the rights subject to certain restrictions. This is particularly true for low-budget or older films. Indeed, until recently, most distribution contracts were silent on the issue of Internet rights — meaning that, as a general rule, rights would not be deemed granted to the distributor — unless the agreement included a future-looking, catch-all grant provision, such as “for all media now known or hereafter invented.” Once the Internet rights holders of a particular film or video are identified, the Web site must ensure that the underlying rights were obtained in the first instance for the contemplated Internet use. Any film or video is a compilation of a number of different intellectual property rights, which must be acquired from any number of different individuals and stitched together. Indeed, there are typically a large number of different intellectual property rights contributors for even the shortest piece (as the credits to even a four-minute film will attest). The rights to any pre-existing works, such as the underlying story or screenplay, any still photography, animation, simulation or special effects, third-party artwork and any individual pieces of music used must be acquired by license or assignment. The creative contributions of the director, cameramen and other crew must be secured as works made for hire pursuant to written agreements. [FOOTNOTE 6]On-screen performers may have rights of publicity requiring a release and/or license for the use of their name or likeness. In addition, many members of the cast and crew members may have rights under guild agreements. While the producer will normally have acquired all of these rights in the first instance for traditional means of film distribution, it may have obtained the rights subject to certain restrictions or only for specified media, particularly in the case of low-budget films or videos. As such, one should confirm that all of the rights grants to underlying works encompassed in the film or video contemplated the envisioned Internet use. MUSIC RIGHTS ARE KEY Particular attention should be paid to music rights. Unless a piece of music is written expressly for a film or video as a work made for hire, the rights to use the music will often be narrowly circumscribed. The music rights that have to be cleared for the Internet are: (a) performance rights in the underlying work (the song); (b) a “mechanical” license to reproduce the song in tangible form (e.g., in a digital file); (c) a synchronization license to perform the music in combination with visual images; and (d) in some cases, a digital performance, or Web casting, license to make digital transmissions of a particular sound recording. [FOOTNOTE 7] The music performance rights for the underlying composition are almost always the responsibility of the distributor, and can ordinarily be obtained as part of a blanket license through the American Society of Composers, Authors and Publishers (ASCAP) or Broadcast Music, Inc. (BMI) in the United States (or through SESAC, Inc. for certain works). Mechanical and synchronization rights for the composition are generally obtained from the Harry Fox Agency, the licensing arm of the National Music Publishers Association, and synchronization and re-use rights for the recording (including amounts to cover any guild reuse fees) from the record company. Without going into more detail here, suffice it to say that clearing music rights for the Internet can be a particularly time-consuming, confusing, frustrating — but necessary — task. The Web-site owner may of course request to see the documentation for the underlying rights, which is especially recommended when dealing with an unsophisticated licensing party, who may not realize what rights it does or does not have. Indeed, a great deal of interesting old footage is available, such as the only existing copy of a video of a certain Elvis concert or a Martin Luther King speech, in the hands of private individuals or collectors, who may unwittingly attempt to sell more rights than they possess — not out of any bad faith, but simply due to a lack of understanding of copyright laws. Whether or not any due diligence is done, the Web-site owner should make sure the license agreement includes detailed representations and warranties from the licensor that it has sufficient rights or licenses to permit the Web-site owner’s contemplated use of the film and all of its components (with express carve-outs for any rights the Web-site owner will have to clear on its own). Detailed representations are generally preferable to a broad representation (such as “licensor possesses all of the rights necessary for licensee to exercise the rights granted hereunder”), especially where there is any reason for concern about specific rights. For example, if the licensee suspects that the licensor/owner might not possess the Internet rights with respect to the film’s music, a representation that expressly states that the licensor has these rights will focus the licensor’s attention on those particular rights, prompting further investigation if necessary. At the very least, such specificity will eliminate any future ambiguity as to whether those rights were covered by the representation. The representations and warranties should be supported by adequate indemnities, requiring the content owner to reimburse the Web-site owner for any losses, damages and costs that arise from a breach of the licensor’s representations and, most importantly, from any third-party claim of infringement due to the Web-site owner’s use of the film or video in a manner authorized by the agreement. The indemnity should be drafted broadly enough to cover any losses associated with an injunction, as well as damages from a lawsuit. The importance of obtaining adequate assurances or protection as to the underlying rights cannot be understated. If the rights to merely one song in the soundtrack have not been cleared for the Web, the Web-site owner distributing the film or video can be sued and enjoined from further distribution of the entire film or video. [FOOTNOTE 8] NEGOTIATING A LICENSE Once the Web-site owner has identified the rights owners and assured itself that they can grant it the necessary rights, it should attempt to negotiate as broad a license as it will need, taking costs into consideration without being shortsighted. Ideally, the grant should cover new technological developments related to the Internet, such as extranets, intranets and wireless technologies. In addition, the Web-site owner should consider what other media its business is likely to move into down the road. For instance, will the television rights become important as certain types of television programming start to converge with the Internet? Could merchandising become an important source of revenue down the road? In addition, the site owner should consider how important exclusivity is in light of its business model. As an alternative to purchasing ancillary rights up front that the Web site may or may not want in the future, a right of first refusal or option to purchase those rights at some future date could be negotiated. In any event, regardless of the deal struck by the parties, the importance of defining the relationship early and memorializing that relationship in writing cannot be overstated. NEW CONTENT Obtaining the necessary Internet rights to new works involves many of the same issues, but the Web-site owner (or the producer it hires) is now responsible for putting together the bundle of rights. The site owner will want to make sure that all the necessary “work made for hire” agreements, licenses, assignments and releases described above are entered into and that, if contributions are not secured by “work made for hire” or assignment agreements, sufficiently broad rights are licensed from each person or entity contributing any creative material. At the same time, it is important to bear in mind that Internet-specific productions are necessarily low-budget because, at least for the present, it is harder to make back production costs on the Internet. As a result, Internet producers and distributors of video content looking to acquire a lot of content quickly and cheaply are far more apt to settle for only partial rights to the underlying works (or, in the case of commissioned works, even to the entire video or film) than producers of traditional film and television programming. GUILD PAYMENTS, RESIDUALS Regardless of whether a Web site licenses pre-existing content or creates or commissions new content, an emerging issue for consideration in obtaining Internet rights is whether the payment of any guild residuals is due to creative talent for Internet use or reuse of their performances in a film or video clip. Depending on the usage, such residuals may be payable through such trade unions as the Screen Actors Guild (SAG), the American Federation of Television and Radio Artists (AFTRA), the Directors Guild of America (DGA), the Writers Guild of America (WGA) and various other technical and creative guilds. Each of the four major U.S. guilds — SAG, AFTRA, WGA, and DGA — has recently issued an interim agreement regarding certain Internet uses of members’ performances and contributions (the SAG and AFTRA agreements concentrate on use in commercials, due to the ongoing strike against advertising producers). In addition, each of the guilds has in place provisions governing “interactive use,” which were developed to specify contractual terms relating to performances on interactive CD-ROMs. While approaches vary, each of the guilds asserts, in effect, that Internet uses of members’ creative contributions are covered through existing agreements, whether through the interactive agreement provisions or through the guilds’ various interpretations of the contractual definition of a “motion picture” to include Internet use. Not surprisingly, disagreement has arisen with the guilds’ position, as evidenced by the guilds’ own creation of the independent interim Internet agreements and provisions. Suffice it to say that, for the time being, this is and will remain unsettled territory — at least until new, updated guild agreements are negotiated and adopted. REVENUE, PAYMENT MODELS A variety of creative approaches are available for structuring licensing fees and payments for Web video use, for both pre-existing and original content. In this “new frontier,” there are no entrenched payment models, and Web sites seeking to license content have a great deal of flexibility with regard to the financial aspects of a deal. Many forms of consideration involve no or only partial money payments. The following are some of the more common economic models currently being used, alone or in combination: � Per Use.The Web site can pay a set fee or royalty for each “use” of the video content or component on its site. This model works best for downloadable content, where the number of downloads can be easily tracked. Streaming media is more difficult to track on a per-use basis, although some Web sites do employ this model for streamed content. � Per Page View.A royalty can be paid for each time a user accesses the Web page from which the video is delivered. This model can work for streams as well as downloads, but the Web site should carefully identify what proportion of a Web page’s traffic is driven by the video, and set fees accordingly. If possible, the Web page that counts for page view purposes should be a stand-alone Web page with minimal content other than the access link to the video. � Flat Fee.In addition to works for hire, other categories of works may be licensable for a flat fee, or for some combination of flat fee and other revenue-sharing or royalty models. It is usually in the Web site’s interest to limit payouts to a defined fee (whether paid all at once or in several stages). Such flat-fee arrangements often work well for talent and performance licenses (such as actors, voiceovers and composers). On the other hand, the Web site may be able to lower its upfront costs by paying a lower or no upfront fee and sharing revenue across the life of the license on a percentage or other basis. � Revenue Share.The revenue share model — where a Web site agrees to share advertising or subscription revenue with the licensor at a percentage of net revenues — is very popular on the Web, and allows Web sites and creators to share the risk of success or failure. The parties can negotiate a constant percentage, or may build in increases or decreases to the revenue share contingent on specific events (e.g., if page views reach one million the share may bump up, but for any period in which page views drop below 500,000, the revenue share drops down). � Cross-Promotional Uses.In some cases, the parties to a licensing deal will arrange for payment to be comprised partially or entirely of cross-promotional and advertising opportunities. For example, a film producer may agree to license a film clip to the Web site in exchange for a defined number of banner ads promoting her new movie and a link to the new movie’s promotional Web site. Such cross-promotions can often be tossed into the financial pot as means of reducing actual cash payouts. � Equity.Increasingly, anyone doing business with a successful or promising dot-com is likely to seek a piece of the dot-com’s equity in actual share grants, stock options, and so forth. An equity stake may be tied to meeting performance milestones or used to reduce or eliminate the Web site’s need to make cash payments for desired content. Web sites, of course, should be wary of giving away too much of the company if other arrangements are available. � Barter.In some cases, the Web-site owner might also be a producer of content (for example, the site might create animated short films) or provide other services that the film footage licensor might wish to acquire. In such a scenario, part or all of the consideration for a deal might be a mutual content/services swap. WEB VIDEO LICENSING The Internet promises to revolutionize the distribution paradigm for film and video, from the practical product to the pop culture icon. With steady improvement in the quality of streaming video, and the imminent arrival of the long-promised Internet/television convergence, the necessary technology is nearly in place. Despite current confusion over the obvious economic models (advertising, pay-per-view, or subscription), technological innovation will grow the Internet field of dreams — if they build it, paying audiences will come. But licensing models lag far behind the technologies that integrate words, images and sound on-line. The incredible tangle of rights incumbent in Web video licensing threatens to impede the march of progress, much as the legitimate distribution of music on the Internet has been delayed. The breathtaking sweep and complexity of clearing rights, especially for film and video on the Internet, cries out to the various stakeholders to step back, put aside their differences and find a simple, expeditious and affordable template for licensing rights that is fair to entrepreneurs and media giants alike. Instead, the entertainment and Internet industries have thus far confronted this fundamental paradigm shift on an ad hoc basis, mainly through litigation. Several recent cases illuminate the ways in which Internet film distribution is chipping away at the traditional entertainment industry models. In Twentieth Century Fox Film Corp. v. iCraveTV, 53 U.S.P.Q.2D (BNA) 1831 (W.D. Pa. 2000), the court granted plaintiff broadcasters’ motion for a permanent injunction against iCraveTV, holding that iCrave’s Internet retransmission of broadcast television signals at the iCraveTV.com Web site (retransmissions presumably directed to Canadian viewers, but accessible in the United States) constituted direct copyright infringement in the U.S., regardless of its permissibility under Canadian copyright law. A recent decision of critical importance to the Hollywood community, Universal City Studios Inc. v. Reimerdes, No. 00 Civ. 277 (LAK), 2000 U.S. Dist. LEXIS 11696 (S.D.N.Y. Aug. 17, 2000), permanently enjoined the defendants from publishing on-line the programming code popularly known as DeCSS, or any external hyperlink to the code, that descrambles the encryption protection embedded in DVD movies, even for the defendants’ claimed purposes of interoperability, comment, or protest. The case is sure to be appealed and pits free speech against property and statutory rights pursuant to the Digital Millennium Copyright Act (DMCA). The currently pending Twentieth Century Fox Film Corp. v. Scour Inc., No. 00 Civ 5335 (S.D.N.Y., filed July 20, 2000), involves the “Napster-plus” Scour Exchange application, which allows users to share files on an anonymous basis. And in MGM Studios Inc. v. RecordTV.com, No. 00-06443 (MMM) (C.D. Cal., filed June 15, 2000), a group of motion picture industry plaintiffs has brought suit for contributory and direct copyright infringement against a Web site that allows users to access a “virtual VCR” by which the user can instruct the Web site to record television programs for the user’s later replay on-line. The future of video on the Web may not be truly discernable until the entertainment industry begins to concentrate more of its firepower on finding ways to harness the new Internet technologies rather than railing against them — to find methods by which the Internet will capitalize, rather than cannibalize, content — perhaps shifting the entire framework of film and video licensing along with it. One such method might be to devise a collective mass use licensing system, akin to the structure put in place by ASCAP, BMI, SESAC and the Harry Fox Agency for music licensing. Another possible framework is a compulsory licensing system similar to current provisions permitting the satellite and cable retransmission of broadcast signals. While business and economic models may shift and evolve over time, the fundamental rights at issue in film and video licensing will nevertheless remain the same. The Web-site owner who takes the time to learn the fundamentals now will not only be armed to handle current licensing needs, but will also be equipped to understand and negotiate the potentially treacherous waters that lie ahead. Mary Rasenberger is of counsel, and M. Lorrane Ford is an associate, in the New York office of Morrison & Foerster LLP; their practice focuses on the intersection of Internet and entertainment law and is part of the firm’s larger technology transactions group. Trey Hatch, a summer associate with the firm, assisted in the preparation of this article. FOOTNOTES: FN1 A&M Records, Inc. v. Napster, Inc., No. C 99-5183 (MHP), 2000 U.S. Dist. LEXIS 11862 (N.D. Cal. Aug. 10, 2000); UMG Recordings, Inc. v. MP3.Com, Inc., 92 F. Supp. 2d 349 (S.D.N.Y. 2000). FN2Alexei Oreskovic, “Broadband or Bust,” The Industry Standard, June 12, 2000. FN3Morgan Stanley Dean Witter, “The Broadband Report: Reaping What You Sow: ROI in the Broadband Market” at 7, 8 (Summary Report, May 1, 2000). FN4This article is intended to provide a road map to help spot the major issues when using film or video on the Internet and identify the relevant rights that will need to be cleared, but is not meant to serve as a replacement for more thorough research or consultation with an experienced intellectual property attorney. While some uses of video content may constitute fair use and some content may be public domain (for which permissions need not be obtained in either case), we assume for the purposes of this article that the work in question is owned by a rights holder from whom permission is required for use. FN5Following a highly publicized dispute over its Internet retransmission of broadcast TV signals, startup iCraveTV.com claims to have developed technology that can reliably limit Web access to targeted geographical areas. However, the technology has, as yet, been neither publicly unveiled nor proven. FN6A work made for hire is a creative, copyrightable work made by employees in the course of their employment or one of several categories of specially commissioned works, including audiovisual works, whereby the rights vest initially with the commissioner of the work and not the individual creator. 17 U.S.C. �201. Where the creative contributor is not an employee of the commissioning party, the contribution will only be deemed a work made for hire pursuant to a written agreement. 17 U.S.C. �101. It is unclear for now whether the new digital signature law (Electronic Signatures in Global and National Commerce Act, Pub. L. No. 106-229 (June 30, 2000)) pertains to such copyright transfers; for the time being, it is best to ensure that a signed hard copy of any work for hire agreement is obtained. FN7Such “Web-casting” rights may be licensed directly from the owner of the sound recording (typically a record label) or pursuant to the compulsory license provisions of the Digital Millennium Copyright Act. See17 U.S.C. ��114 , 115. The compulsory license applies only to primarily audio entertainment Web sites (rather than use of the recording in conjunction with other media). If the Web site is primarily engaged in the distribution of music videos, though, the compulsory license is available. FN8With each advance in technology in the distribution of film, disputes have arisen as to whether existing licenses for underlying rights in films covered the distribution of a copyrighted work via the new technology. See, e.g., Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79 (1933), (holding that contract granting approval rights to plaintiff over any exploitation “affecting the title to the dramatic rights” in a Broadway play prohibited defendant from exploiting rights for “talkie” motion picture, because “talkies” did not exist at the time the contract was formed); Cohen v. Paramount Pictures Corp., 845 F.2d 851 (9th Cir. 1988) (holding that Paramount’s license to use musical score in television production did not extend to use of score in video cassette release); Boosey & Hawkes Music Publrs., Ltd. v. Walt Disney Co., 145 F.3d 481 (2d Cir. 1998) (holder of composer Igor Stravinsky’s copyright for the music used in the soundtrack for the Disney classic “Fantasia” animation (“Le Sacre du Printemps”) claimed that the home video version of the film was not covered by the 1939 agreement, which broadly granted the rights to use the compositions in “any manner, medium, or form” in connection with the film). The 2nd Circuit, ultimately held in Booseythat, under the specific facts, the 1939 license grant was sufficient, but only after years of litigation.

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