China record-breaking animation movie Nezha 2 is predicted to exceed the box office $10 billion. Related IP peripherals are booming, and the ability of China high-quality IP derivatives has been proven. Adaptations of novels, films, television shows, animations, games, and other creative works, commonly referred to as IP are a significant source of content for the entertainment sector. Nowadays IP has become a vital asset not only for the film and television industry but for the entire content landscape.
In this article, we will analyze and summarize the common risks and effective solutions related to the review of the copyright chain of IP.
1. Summary
To conduct a thorough copyright chain review, it is essential to systematically organize all documents provided by the licensor into a chronological table. This table should include details such as the licensed content, rights granted, authorized methods, exclusivity, license duration, territory, permitted languages, sublicensing options, and any additional restrictions. A meticulous comparison of key terms in both upstream and downstream documents is crucial to identify any legal and commercial issues that may arise.
When it comes to the inherent risks associated with the IP transfer and licensing process, it is challenging to provide a comprehensive overview, as these risks can vary significantly across different industries and projects. Based on our practical experience, we advise investors to evaluate the chain from three key perspectives:
(1) whether the licensor has the authority to grant the license,
(2) whether the rights granted adequately support the project’s commercial development needs, and
(3) whether any restrictions apply to the granted rights.
It is important to note that defects can be challenging to avoid, particularly in lengthy copyright chains. When such defects are identified, the typical approach taken by parties involved is to “patch up” the issues by negotiating directly with the original IP owner, such as the authors of literary works. However, this method can introduce logical gaps and risks, as it bypasses intermediate licensees.
2. Determining whether the licensor has authority to grant license
If the licensor’s rights to the IP in question are flawed or if there is an incomplete chain of title, the transaction could face significant risks. One common risk involves the rights of authors of Internet literature is whether they can directly license their works. Internet literature has become a key source of content in IP adaption industry.
Typically, when dealing with traditional literature, investors engage directly with the author. However, for serialized Internet literature published on major platforms, authors often enter into agreements with these platforms. These agreements may grant the platforms certain rights, including alteration, distribution, revenue sharing, and derivative development, which might limit the authors’ ability to license their works to third parties. Given this uncertainty, it is essential for investors to thoroughly examine the terms and agreements associated with the relevant Internet literature platforms. If access to these agreements is restricted, investors might consider exploring public resources, such as news articles and legal cases for additional information.
Furthermore, it is advisable for investors to request documentation from the licensor confirming that the author has the right to directly grant the license. 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 can often be co-owned by multiple rights holders, particularly in the realm of audiovisual works such as films and television series, which typically involve significant investments and complex production processes. For instance, in the case of Japanese animations, copyrights are frequently held by a committee that includes representatives from television stations, producers, and other stakeholders.
When it comes to the co-ownership of IP, the co-owners may establish agreements stipulating that any disposal of the IP requires unanimous consent or that certain rights are exclusively held by 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 of the co-owners, it is crucial to determine whether the specific co-owner has the authority to grant the relevant license on behalf of other co-owners.
4. IP As Derivative Works
When determining whether IP qualifies as a derivative work, it is essential to consider the necessity of obtaining licenses from all relevant upstream rights holders. For instance, a television drama adapted from an original novel may require rights associated with both the original literary work and the adapted series. In such scenarios, it is crucial for investors to 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 required to obtain or grant such rights. This highlights 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 lacking, 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 prevalent practice in the industry, akin to the concept of “twice-sold property.” For instance, in a dispute over a well-known song, the songwriter may have licensed the song to multiple parties, either for payment or without charge, 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 rendered invalid in areas of conflict. Additionally, the rights of the later licensee may not be exclusive in these instances. When assessing the scope of conflict in concurrent licenses, factors such as the nature, scope, and content of the licenses must be taken into account. For example, 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.
As a result, a bona fide third party may find itself unable to exercise licensed rights as per the agreement, despite having paid significant royalties, leading to substantial losses. To mitigate the risks associated with concurrent licensing, it is not enough to simply 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 advise investors to conduct thorough research, including news reports and industry surveys, to identify any potential prior licenses. For significant transactions, it may be prudent for investors to withhold a reasonable percentage of the final payment for a specified duration or to require the licensor to provide certain guarantees to further minimize the risks associated with concurrent licensing.
6. Determination on the scope of sublicensing
It is also essential to assess whether the rights granted by the licensor adequately cover all commercial development requirements for the project. China Copyright Law categorizes copyrights into 17 distinct rights, including reproduction, publication, adaptation, audiovisual production, exhibition, broadcasting, and information network dissemination. The specific rights needed will depend on the project’s commercial objectives. For instance, 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.
Beyond these primary rights, other rights may be essential for the practical development and operation of the project. For example, 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 instance, 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 right 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 note that IP often changes ownership multiple times. With each transfer, the likelihood of potential issues regarding the rights to the IP increases. To prevent any disruptions to a project or the risk of infringement disputes stemming 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, and any restrictions associated with the IP by reviewing all relevant transfer and licensing documents, including certificates, license agreements, authorization letters, and confirmation letters.
