Animation adaptation and licence contracts

By He Jing and Dong Xue, AnJie Law Firm

China’s animation industry is experiencing an unprecedented IP upsurge, with capital flooding into the market. The rights holder has to adapt to China’s legal environment and approach the terms in the licence contracts intelligently.

何菁 HE JING 安杰律师事务所合伙人 Partner AnJie Law Firm
AnJie Law Firm

Q: How are animation commercialization rights granted in China? A: Certain courts have recognized the right of commercialization as a right of a copyright holder or trademark holder, but China is not a case-law country and these judgments themselves have been criticized as “judges making the law”. At the legislative level, “the right of commercialization” has yet to be expressly enumerated as a right of copyright holders and/or trademark holders, and in practice and theoretical circles, a consensus as to the concept of the “right of commercialization” has yet to form.

When carrying out commercialization licensing, best efforts should be made to specify in detail the contours of the right that is being licensed, e.g. the name, image, lines, etc. of the animated character; and to describe the type of product licensed, e.g. toys, stationery, bags, glasses, etc., including their dimensions, material, colour and quality. It should also be particularly stated whether internet-related products are included within the scope of the grant of rights, e.g. emoji in apps.

A rights holder should, as soon as possible, apply for trademarks for its animation titles and animation images, and make up for the lack of legal provisions in this area. Of course, not all animation titles and images satisfy the requirements for trademark application, and there is the possibility of encountering the prior bad faith applications. Nevertheless, if the trademark issue is not resolved, it will become a time bomb, throwing up the risk at any time that a trademark pirate will claim trademark infringement.

Q: What are the methods for limiting the form of licence? A: Precise Chinese legal language needs to be used to describe the form of the licence. In actual licensing transactions, a description along the lines of “dujia game adaptation rights” has frequently appeared which, literally, would seem to mean “exclusive to the licensee”. (“Dujia” is usually translated as “exclusive”, but in Chinese it’s different from “duzhan”, which is also often translated as “exclusive”.) However, this method of description does not expressly stipulate the form of the grant of rights, giving rise to legal risks. The term dujia is not a proper legal term. There are three forms of intellectual property (IP) licences: duzhan xuke (exclusive licence); paita xuke (sole licence); and putong xuke (non-exclusive licence).

The term “exclusive licence” means that, other than the licensee, no one, including the rights holder, may exercise the licensed rights. The term “sole licence” means that the licensee solely enjoys the licensed rights, and while the rights holder may not further license the licensed rights to any third party, the rights holder may still himself exercise the licensed rights. A “non-exclusive licence” neither excludes the rights holder nor third parties from exercising the licensed rights within the same scope.

董雪 DONG XUE 安杰律师事务所律师助理 Associate AnJie Law Firm
AnJie Law Firm

Both an “exclusive licence” and “sole licence” need to be expressly specified to take effect. In the absence of any other specific explanation, a licence will normally be interpreted as a “non-exclusive licence”. Accordingly, in licensing transaction negotiations, it is necessary to expressly state whether an exclusive licence or sole licence is being granted. Even if in commercial practice the use of the term “dujia” is favoured, the meaning of “dujia” should be explained in the contract, clarifying whether it is “exclusive”, “sole” or “non-exclusive”, to avoid ambiguity.

Q: How does the original right holder avoid damages arising due to adapted work infringement or product quality problems? A: Notwithstanding that the licensee may be required in the contract to undertake not to use elements in adapted works that infringe the lawful rights and interests of others, or that requirements for product quality are expressly set out, it is nonetheless difficult to avoid causing damage to consumers or third parties in actual practice due to adapted work infringement or product quality.

When safeguarding his or her rights, the injured party will usually also name the rights holder as a defendant out of considerations of compensation. Accordingly, even if the rights holder is ultimately not required to bear liability for infringement, he or she will nevertheless incur some expenses in the course of responding to the claims, which may even include damage to his or her goodwill. Therefore, it is necessary to set out such liability clauses as the assurances and damages from the licensee in the event that the rights holder is the subject of an infringement or product quality accusation. Additionally, third party service charges such as attorney fees, notary fees and investigation expenses should be expressly incorporated into the scope of damages.

Q: How are adapted works and products to be handled after the expiration of the licence term? A: That the licensee still has stock at the expiration of the licence term is nearly unavoidable, but entirely restricting him or her to sell the products upon expiration would also harm his or her interests. Accordingly, the rights holder could redeem the products at the specified price, or grant the licensee a specified period of time to liquidate his or her stock, while simultaneously limiting the quantity of products so as to guard against the licensee ramping up production immediately prior to the expiration of the agreement. For example, a ceiling on the stock could be set, with the loss incurred from the failure to sell the products exceeding the ceiling being borne by the licensee.

Q: How is the responsibility for cracking down on infringement and unfair competition to be shared? A: Infringement and unfair competition are issues that are almost unavoidable in China. The rights holder will normally want to keep the initiative in cracking down on infringement within his own control, but his or her familiarity with the market will not compare with that of the licensee, particularly in the case of a foreign rights holder. Furthermore, in an infringement and/or unfair competition legal action, if the licensee can also take part as a plaintiff, each party can corroborate the other – an excellent litigation strategy.

Accordingly, the licensee could be required in the contract to monitor acts of infringement and unfair competition, and promptly report to the rights holder, but be required to seek the approval of the rights holder before taking any administrative or judicial action. The rights holder could also require the licensee to be under obligation to co-operate with the rights holder and jointly participate in any infringement or unfair competition legal action.

He Jing is a partner and Dong Xue is an associate at AnJie Law Firm

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