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Video games are big business. According to The New York Times, Americans spent $24 billion last year on games and consoles like Microsoft Xbox, Nintendo GameCube and Sony PlayStation — easily rivaling Hollywood box office receipts. These games are the most common example of a multimedia product that combines a variety of media — images and sounds — into a single entity allowing for an interactive nonlinear experience. Negotiating licensing rights to such a product is not simple. Much of the glue that holds a multimedia deal together is a set of potentially conflicting licensing rights and obligations. Here is a guide to some of the issues that lawyers and clients should be aware of when entering into a multimedia deal. Lawyers should understand both the technology and the creative rights underlying the deal. A multimedia lawyer must comprehend the business and legal issues around music, graphics, artwork, film, sound recordings, literary works, digital technology, and the Internet. Multimedia transactions generally involve four types of parties, each with an agenda: the producer, who is responsible for the creative and technical production of the multimedia project; the publisher, who takes charge of overall production and distribution and usually owns the rights to the final product; the distributor, who distributes the product under license from the publisher; and the owner of the copyright work or trademark that will be licensed, commissioned by, or assigned to the publisher for use in the multimedia work. At the beginning of a multimedia project, the producer must decide whether to license preexisting intellectual property, or to create it in-house. It is often less expensive to do the former. On the other hand, licensing the rights to a well-known property, though more costly, may make the final product easier and cheaper to market. Although creating a work from scratch might offer producers the broadest rights, the potential for error is high. Copyright in works produced by employees within the scope of their employment is automatically owned by the employer as a work made for hire. However, the copyright in works produced by independent contractors qualifies only if the work falls within nine enumerated categories under the Copyright Act, and the parties agree beforehand in writing. Any other proprietary rights in such works, whether created by employees or independent contractors, will be owned by the work’s creator. With this in mind, producers should have employees and independent contractors sign invention assignment and nondisclosure agreements, preferably at the start of their employment, that assign all rights in all IP to the producer, whether or not the work is completed. Finally, employees and independent contractors should be required to identify the third-party materials that they plan to use. The producer is ultimately responsible for obtaining all rights from third parties to enable an employee to create her work. If an independent contractor is producing the work, the producer can require him or her to obtain the necessary rights. Licensing outside works also generates substantial legal issues. A licensee must determine the party or parties from whom the license may be needed and whether such parties own the rights the licensee wishes to obtain. Before assuming that the licensor has the right to license a property for use with new technology, the potential licensee must analyze the original grant of rights to the licensor. Certain courts have interpreted broad grants of rights to include all existing technologies as well as speculative or future ones. [ See Landon v. 20th Century Fox Film Corp., 384 F. Supp. 450 (S.D.N.Y. 1974).] Other courts have been less generous in their interpretation where there is some ambiguity as to the formats or media covered by the grant. [ See Rey v. Lafferty, 990 F.2d 1379 (1st Circ. 1993).] A publisher’s best-case scenario would include the following rights: to use the content for any and all purposes, in all embodiments and formats, and on all platforms; to incorporate the content in all technologies now known or hereafter developed; to reproduce, modify, adapt, later enhance, translate, or otherwise exploit the content, including by creating derivative works; and to publicly perform and display, exhibit, transfer, transmit, broadcast, or otherwise distribute the content by any means in any embodiment or format now known or hereafter developed. Music rights often present the most complicated issues. A musical work consists of two distinct copyright works — the composition and the sound recording, each of which is most often owned by separate parties. Use of each must be licensed separately. With the passage of the Digital Performance Rights in Sound Recordings Act of 1995, multimedia distributors must consider the payment of performance rights royalties to owners of the copyright in digital sound recordings of music. In the video game context, the Sound Recording Act may affect plans for playing games over the Internet, because this may be regarded as a form of public performance. While the multimedia developer wants to license as many rights as possible, the licensor will want to limit the licensee’s scope of rights. These are a few ways in which the licensor can do this. Rights may be limited by: • Platform Multimedia. Works such as interactive digital games are often created for specific digital platforms (such as GameCube, Playstation and Xbox). • Type of technology and format. A licensor, for example, might prohibit using the licensed content on spin-off merchandise. • Territory or channels of trade. A licensor could authorize the licensee to sell the product only within certain geographical locations or require the licensee to sell products only to certain types of establishments such as high-end retail and brick-and-mortar stores. It could also forbid mail order and Internet sales or bundling with other products. • Restricting the licensee from licensing similar content that may cause confusion, dilution, or unwanted competition. This is particularly important to trademark owners, who would suffer if the publisher used a confusingly similar or competing trademark alongside the licensed trademark. There are no hard and fast rules for structuring payment in multimedia deals. Compensation for licensing content for multimedia works may consist of a lump sum payment or royalty coupled with an advance or minimum guarantee or both. A developer without the resources to take the product to market may grant a distribution license to a publisher. The publisher would pay the developer an advance to finish developing the product. The advance is almost always recoupable from royalties, but may also be nonrefundable so that even if the royalties eventually earned are less than the advance, the advance need not be paid back. The publisher may stipulate that if the developer fails to finish the product, the developer will repay the advance. As an alternative to a higher royalty rate, the licensor may get the publisher to agree to a sliding scale, with the percentage increasing along with total sales. The key issue with royalties is how they are calculated. Some developers are in a strong enough position to have royalties based on gross revenue (free of deductions). Others must settle for smaller royalties based on net revenues. In the case of interactive electronic games, the publisher may deduct royalties payable to the owners of the digital platform on which the game operates. If a publisher intends to distribute the product worldwide through sublicensees, it should not be entitled to deduct the same expenses from its foreign earnings, because for the most part, the earnings will be pure profit, with the sublicensee absorbing shipping and other costs. Sometimes publishers distribute products by bundling them with other products. This makes it more difficult to calculate royalties, as the revenue received from the bundle must be apportioned. For content owners and developers, the multimedia industry is a great opportunity to make money. For producers and developers with a vision for a final product, the wealth of creative expertise and properties out there provide potentially lucrative streams of revenue. Protecting the rights of parties on either side of the fence is a tricky business, and there are many traps for the unwary and inexperienced. Carolyn Edgar is a partner in the IP group at the New York office of Chicago’s Kirkland & Ellis ( www.kirkland.com). Bradley Silver is an associate in the same group.

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