BY:Michael I. Rudell and Neil J. Rosini
Originally published in the Entertainment Law column in the New York Law Journal on October 24, 2018.
These times are heady for creators of books and stories that may be suitable for television production. In addition to the traditional broadcast networks (NBC, CBS, ABC and Fox), a legion of pay and basic cable exhibitors and, more recently, direct to consumer streaming outlets such as Netflix, Amazon, Apple and Hulu, are voraciously licensing product from those creators. (Although the licensee of the content may be a production company or the ultimate exhibitor, for the purposes of the article we will refer to the licensee as “the exhibitor”). Much press is given to the compensation aspects of the creators’ agreements with exhibitors, but attention also should be paid to the extent and duration of the exhibitor’s exclusivity in the property in which rights are being acquired, including holdback provisions, reversion of rights, and the right to produce derivative spinoffs, sequels and other derivative works.
Broadcast networks traditionally ordered a pilot and if it were well-received, then a limited number of episodes for the first season and the option to order more in subsequent seasons. But now, streaming services (and even some cable exhibitors and broadcast networks) have ordered one or more entire seasons of episodes at a time. This has allowed more creativity in how the adaptations are treated, and sought-after writers who at one time would only be willing to write for theatrical motion pictures are vying for prestigious television writing engagements. As a result, the quality of television programming has been enhanced.
The framework for the licensing agreements in the television industry essentially involves the grant of an option for a period during which the exhibitor can commission the creation of outlines, treatments and scripts for episodes. If the option is exercised the licensor will receive a purchase price, a royalty per episode, contingent compensation (such as a share of “modified adjusted gross receipts”), and perhaps a fee as executive producer.
The basic grant of rights includes production of a series (most often including a pilot episode) derived from the underlying work, the right to produce remakes and sequels, and the right to exploit, advertise, promote and publicize these works. The principal rights usually reserved by the licensor are literary publication rights, including text-based prequels and sequels to the underlying work. The treatment of motion picture and live stage rights is subject to negotiation. Depending on the leverage of the parties they can be reserved to the licensor with a holdback period during which they may not be exercised, or frozen, or granted to the exhibitor.
Provisions involving the nature and extent of the exhibitor’s exclusivity can be complicated. They may address in some cases, reversion of rights to the licensor, when rights reserved by the licensor but “held-back” from exploitation eventually become available, and how spinoffs and sequels of the original series are treated.
Reversion and Retention of Rights
For most deals, if the exhibitor does not exercise its option it loses any right in connection with the property. Beyond that, the terms of a reversion of rights to the licensor will depend on relative bargaining power of the parties. Deals made by proven writing talent may specify benchmarks at which the exhibitor will lose rights to produce episodes. For example, the exhibitor may be required to produce successive tranches of programming in order to maintain rights for increasingly long periods of time, failing which rights revert. If the exhibitor has obtained the right to produce sequels and spinoffs (as is usually the case), then that proven talent might negotiate the length of time the exhibitor will have to enter into an agreement relating to their production with associated provisions relating to reversions and hold backs.
Writers who have less leverage might only obtain reversion if the pilot is made but a series is not ordered; or if only a first season of episodes is ordered. They also may seek to recover rights in sequels and spinoffs if they are not exploited within a specified time period. Typically, exhibitors try to require repayment of certain expenses, such as the cost of developing and producing a pilot that doesn’t lead to a series.
If the agreement includes reversion provisions, holdback periods usually are attached to them. If, as mentioned above, a licensor has managed to retain motion picture rights, the rights almost certainly will be subject to a holdback on exercising them for a number of years during the term of the agreement and often for some time after the term has expired. The exhibitor’s theory is that audiences are likely to be diverted by the existence of a theatrical motion picture from watching the series and they are concerned about conflict at any time between the two categories. (As noted above, in any case they would prefer to obtain motion picture rights for themselves). Valuable film franchises like “Star Trek” and “Mission Impossible” have been based on popular television series as well as a long list of stand-alone theatrical films. Licensors argue that if motion pictures actually do divert audiences from a series, over time audiences are less likely to be so diverted. And licensors with less leverage are pressed to turn over motion picture rights along with television series rights assuming certain standards are met, and then satisfy themselves with negotiated fees if a motion pictures are produced.
As a fallback, some authors might still obtain a “freeze” of those forms of exploitation in a TV rights deal. Then, if either party wishes to produce a derivative work in those other categories it will either have to partner with or buy out the other.
Live stage rights, too, are generally demanded by exhibitors for the same reasons as motion picture rights and if they are granted, the licensor will be paid if a production follows. Again, top tier licensors may succeed at retaining stage rights for themselves subject to a holdback period during which the rights may not be exploited. And with stage rights as well, a “freeze” on exploitation may be the compromise. Compensation for the licensor if a stage version is produced should be specifically negotiated and, in this regard, Hollywood exhibitors are reluctant to compensate the licensor as well as a Broadway producer would for stage rights.
There are many moving parts relating to reversions, holdbacks, and derivative versions and generally they should be negotiated with as much focus as other important provisions in the agreement.