This article is provided for educational purposes only. Nothing on this website is intended as legal advice, and no attorney-client relationship is created by your access to this article. Please do not rely on the information presented in this article without consulting a lawyer for application to your specific facts and circumstances.
Copyright law prevents you from making a new work that is based upon someone else’s copyrighted work. (In legal terms, the new work would be called a “derivative work.”) For example, you cannot turn a copyrighted book into a movie without first obtaining the necessary rights from the copyright holder of the book. This concept applies broadly to any copyrighted work and the new work that you may wish to create. The “underlying property” is the copyrighted work that you want to adapt.
The underlying property can be any type of copyrighted work: book, article, play, film, etc. The “underlying rights” are the rights that you need to acquire to make your new work. What underlying rights do you need? That depends on the type of new work you are creating: for film and TV works you would want audio-visual rights, for a book you would want literary rights, for a live stage play you would want stage rights, and so on. To acquire the underlying rights to an underlying property, you will likely want to first option the underlying rights.
Here are the key elements to Options and Acquisition Agreements:
Options: An option is the exclusive right to purchase the underlying property or specific underlying rights within a certain period of time for a set fee. You first pay a small option fee, and then you have the time to work on your project and assess the risks before you have to pay the full cost of the underlying property or underlying rights. An option is not necessary, but it lets you invest only a fraction of the price so that you can determine the viability of the project without the fear that someone else will beat you to it.
Option Fee: This is what you will pay the copyright holder in exchange for the option. The option fee is normally a percentage of the purchase price, such as 10%. The option fee is non-refundable. Sometimes, the option fee is applicable to the purchase price should you decide to exercise the option. For example, if the option fee is $50 and the purchase price is $500, your remaining balance will be $450.
Option Term: This is the amount of time in which you have to exercise the option to purchase the underlying rights. The term is exclusive, which means that the copyright holder cannot sell the underlying rights that you have optioned to anyone else during the term. The term gives you the time to secure elements like talent, financing, and distribution without worrying about someone else jumping in. If the term expires before you have exercised the option, then the copyright holder is permitted to sell the underlying rights to someone else.
Extensions: Sometimes the initial term turns out to not be enough time. An option may allow for extensions, but this is a negotiable point that will vary. The option might permit an extension in exchange for more money. Note that the extension fee might not be applicable to the purchase price. Using the option fee example from earlier, if the extension fee is $100, you would still owe $450 because the $100 would not further reduce the balance to $350. The option might also require that certain conditions be met before an extension is granted, such as a director has been brought on or a certain amount of financing has been secured.
Exercising the Option: If you determine that you want to acquire the underlying rights that you have optioned, then you must follow the directions provided in the option. This could be as simple as sending a check for the purchase price to the copyright holder.
Acquisition Agreement: The acquisition agreement should be negotiated at the same time as the option. Once the option is exercised, the terms of the acquisition agreement become effective. If those terms are not in place, then essentially you have only optioned the right to negotiate those terms. The potential danger here is that you will have paid the option fee and done a lot of work on your project only to find that the copyright holder is demanding an unreasonable amount money or conditioning the sale with burdensome provisions.
Purchase Price: This is how much the underlying rights that you want will cost. As discussed above, the option fee may be applicable.
Grant of Rights: A copyright holder holds many various, divisible rights to his or her work, such as audio-visual, stage, and literary, as well as the rights to make sequels and prequels. When selling rights, the copyright holder can decide which rights to sell and which to keep. Be sure of which underlying rights you need before entering into an option or acquisition agreement. A general rule of thumb is that the more underlying rights you wish to acquire, the more you will have to pay.
Reserved Rights: These are the rights the copyright holder reserves for his or herself and are not being granted to you.
Rights of First Negotiation and Last Refusal: You may want to later acquire the reserved rights, and the rights of first negotiation and last refusal will give you an advantage. A right of first negotiation requires the copyright holder to negotiate with you first when he or she is ready to sell. A right of last refusal requires the copyright holder to approach you about an offer that he or she is willing to take before accepting it, which allows you to match the offer. Note that these rights are not standard terms and will have to be negotiated for.
Representations and Warranties: This section of the acquisition agreement often contains complicated legal concepts. The most important thing you should know about representations and warranties is that this is where the copyright holder of the underlying property assures you in writing that he or she owns the underlying rights and has the ability to sell them to you. Without this language, you could be in a sticky situation if the copyright holder does not actually own the underlying property or the underlying rights.
Indemnity: This section gives teeth to the representations and warranties section. It requires the copyright holder to pay for your damages should he or she break any of the assurances given to you.
Credits: This section will not make or break an acquisition agreement, but it should be considered up front. The author of the underlying property will want some sort of credit in your new work.
No Obligation to Produce: Circumstances change and producing your new work may no longer be feasible. You are unlikely to get your money back, but a no obligation to produce clause means that you are not required to produce your new work. This will prevent you from spending time and resources on a project that will be dead on arrival.
Reversion: Copyright holders might not appreciate it if you purchased the underlying rights but do not do anything with them. The acquisition agreement might include a mechanism whereby the underlying rights revert back to the copyright holder after an extended amount of time if you have not acted on them.
First, you do not have to acquire rights to a work in the public domain. A work in the public domain is one that is not subject to copyright laws, usually because the copyright term has expired. Do not assume: Consult an attorney to determine whether a work is in the public domain.
Second, if you are drawing inspiration from a copyrighted work, then you do not need to acquire the underlying rights. Drawing inspiration from a copyrighted work for your new work is not copyright infringement because copyright law protects expressions of ideas, not the ideas themselves. For example, you read an article about illegal street racing and want to make a movie on the subject. The idea of illegal street racing is not copyrightable, meaning you do not have to acquire the underlying rights to the article to make a new work on the subject. However, you cannot lift the specific elements of that article to use in your new work. The line between inspiration and copyright infringement is a thin one, and you should consult an attorney.