The Chinese animated film "Nezha 2" is expected to break box office records, surpassing $10 billion. This surge in related intellectual property (IP) merchandise highlights the strength of high-quality IP derivatives in China. Adaptations of various creative works—such as novels, films, TV shows, animations, and games—are crucial for the entertainment industry. Today, IP is an essential asset not just for film and television but for the entire content ecosystem.
This article will explore the common risks and effective solutions associated with reviewing the copyright chain of IP.
1. Overview
To perform a comprehensive review of the copyright chain, it is vital to systematically arrange all documents from the licensor in a chronological format. This should include details like the licensed content, rights granted, authorized methods, exclusivity, license duration, territory, permitted languages, sublicensing options, and any additional restrictions. A careful comparison of key terms in both upstream and downstream documents is necessary to identify potential legal and commercial issues.
The risks inherent in the IP transfer and licensing process can vary widely across different industries and projects. Based on our experience, we recommend that investors assess the chain from three main angles:
(1) whether the licensor has the authority to grant the license,
(2) whether the rights granted sufficiently support the project's commercial development needs, and
(3) whether any restrictions apply to the granted rights.
It is important to recognize that defects can be difficult to avoid, especially in lengthy copyright chains. When defects are discovered, parties typically attempt to resolve the issues by negotiating directly with the original IP owner, such as the authors of literary works. However, this approach can create logical gaps and risks, as it overlooks intermediate licensees.
2. Assessing Licensor Authority
If the licensor's rights to the IP are flawed or if there is an incomplete chain of title, the transaction may face significant risks. A common concern is whether authors of Internet literature can directly license their works, as this genre has become a key source for IP adaptations.
In traditional literature, investors usually engage directly with the author. However, for serialized Internet literature published on major platforms, authors often sign agreements with these platforms that may grant them certain rights, including alteration, distribution, revenue sharing, and derivative development, potentially limiting their ability to license their works to third parties. Therefore, it is crucial for investors to carefully review the terms and agreements associated with relevant Internet literature platforms. If access to these agreements is restricted, investors should consider public resources, such as news articles and legal cases, for additional insights.
Moreover, investors should request documentation from the licensor confirming that the author has the right to grant the license directly. This could include a confirmation letter from the Internet literature platform or the agreement between the licensor and the platform.
3. IP Co-Ownership
IP is often co-owned by multiple rights holders, especially in audiovisual works like films and TV series, which involve significant investments and complex production processes. For example, in Japanese animations, copyrights are frequently held by a committee that includes representatives from television stations, producers, and other stakeholders.
In co-ownership situations, co-owners may establish agreements that require unanimous consent for any disposal of the IP or designate certain rights as exclusive to specific members. When dealing with co-owned IP, it is insufficient to merely assess whether the upstream rights holder appears to have the authority to grant a license based on the attribution of the work. Investors should conduct a thorough review of the original agreements or relevant authorization letters among the upstream rights holders and their co-owners. If an investor engages with only one co-owner, it is crucial to determine whether that co-owner has the authority to grant the relevant license on behalf of the other co-owners.
4. IP as Derivative Works
When determining if IP qualifies as a derivative work, it is essential to consider the need to obtain licenses from all relevant upstream rights holders. For instance, a television drama adapted from an original novel may require rights from both the original literary work and the adapted series. In such cases, investors must secure licenses from all relevant rights holders, particularly the copyright holder of the original work. Judicial precedents indicate that if a license does not explicitly include rights from the original work, the licensor is typically not obligated to obtain or grant such rights. This underscores the importance for investors to verify that all necessary licenses have been obtained from upstream rights holders when dealing with derivative works. If such licenses are missing, it is advisable to clearly outline in the agreement which party is responsible for securing the relevant rights.
5. Conflicting Prior Licenses or Concurrent Licensing
Concurrent licensing is a common practice in the industry, similar to the concept of "twice-sold property." For example, in a dispute over a popular song, the songwriter may have licensed the song to multiple parties, leading to confusion regarding ownership rights.
In cases of concurrent licensing, Chinese judicial practices typically prioritize the rights of earlier licensees over those of later bona fide third parties. This means that if a copyright is licensed to an earlier party before being granted to a subsequent one, the rights of the later licensee may be invalidated in areas of conflict. Additionally, the rights of the later licensee may not be exclusive in these situations. When assessing the scope of conflict in concurrent licenses, factors such as the nature, scope, and content of the licenses must be considered. For instance, if a licensor has granted exclusive rights for information network dissemination of a particular intellectual property to a third party before licensing the same rights to an investor, the investor will not be able to claim those rights, even if the licensing agreement appears to grant a comprehensive bundle of rights.
Consequently, a bona fide third party may find itself unable to exercise licensed rights as per the agreement, despite having paid significant royalties, resulting in substantial losses. To mitigate the risks associated with concurrent licensing, it is not sufficient to merely obtain representations and warranties. Investors should proactively confirm with the licensor whether any prior licenses exist and request full disclosure of all downstream licenses. We also recommend that investors conduct thorough research, including news reports and industry surveys, to identify any potential prior licenses. For significant transactions, it may be wise for investors to withhold a reasonable percentage of the final payment for a specified duration or require the licensor to provide certain guarantees to further minimize the risks associated with concurrent licensing.
6. Determining the Scope of Sublicensing
It is also crucial to evaluate whether the rights granted by the licensor adequately cover all commercial development needs for the project. Chinese Copyright Law categorizes copyrights into 17 distinct rights, including reproduction, publication, adaptation, audiovisual production, exhibition, broadcasting, and information network dissemination. The specific rights required will depend on the project's commercial objectives. For example, key rights for TV drama development include adaptation and audiovisual production rights, while game development primarily requires adaptation rights, and audiobook development necessitates reproduction, adaptation, and performance rights.
In addition to these primary rights, other rights may be essential for the practical development and operation of the project. For instance, after creating a TV drama based on the target IP, the next step involves distribution, which may require rights related to information network dissemination, broadcasting, and exhibition. If the licensing agreements do not explicitly outline the necessary rights under Copyright Law (for example, stating "the right to transmit online" instead of "the right of information network dissemination"), investors may find it challenging to confirm whether they have secured all rights needed for the project's commercial development.
In judicial practice, if a specific right category is not clearly defined in the license agreement, investors can assess whether such rights have been licensed by examining the description of the authorized means. During the chain of title review, it is advisable for investors to thoroughly analyze the rights explicitly granted in the upstream documents and the descriptions of authorized means, particularly noting any restrictions on the scope of licensed rights to specific market segments. By interpreting the contract's intent, investors can determine if the rights granted by the licensor meet the project's commercial development needs. If there remains uncertainty regarding the adequacy of the acquired rights, we recommend that investors request supplementary documentation from the upstream rights holder to clarify the scope of the license or to obtain any additional rights not explicitly granted in the chain.
7. Conclusion
It is important to recognize that IP often changes ownership multiple times. With each transfer, the likelihood of potential issues regarding the rights to the IP increases. To prevent disruptions to a project or the risk of infringement disputes arising from these issues, it is advisable for investors to request a comprehensive chain from the original rights holder to the current party before committing to an IP project. Investors should thoroughly examine the titles and rights, along with any restrictions associated with the IP, by reviewing all relevant transfer and licensing documents, including certificates, license agreements, authorization letters, and confirmation letters.
Should you have any inquiries or require any support in this matter, please contact liangwen@zhonglun.com, and we would be happy to assist.
