A client recently asked me to prepare a cease and desist letter to be sent to his former band members. He was less concerned about the physical assets of the band but more about the intangible assets – the intellectual property – of the band. He was so much into the creative process when the band was formed and never paid attention to the business and legal sides of things. The band only had a two-page partnership agreement with little or nothing protecting him but now he has to go through the painful process of breaking off with his former band members while scrambling to retain control of rights in his contributions to the band’s intellectual property.

The provisions contained in a recording contract with a solo artist will very much apply to the band but instead of having just one artist, there are multiple artists in such contract. Ordinarily, the relationship of the band and the recording label for the exploitation of the band’s mechanical right, or the publishing company for the exploitation of the publishing right, will be governed by the recording agreement and publishing agreement, respectively. Such agreements, depending on how sophisticated the record label or publishing company is, will most likely make provisions applying to the band break up. For example, the agreement may provide for the “key member” concept whereby the withdrawal from the band by the lead artist may lead to the band’s breakup and the end of the recording contract. This may not apply if the drummer or the pianist leaves the group. However, the internal structure of the band as to who gets what share of the royalties or what happens when the band actually breaks up, among others, are often left to the band to determine.

The most important thing to note is that even though the band might have gotten together solely for creative purposes, it is still a business in the eyes of the law. That’s why it’s a “show business”. If there is no proper structure as to the kind of entity formed, the law will infer a partnership even if that is not the intent of the band members. Section 202 (a) of the Revised Uniform Partnership Act (See Section 16101 (9) of the California Corporations Code) defines partnership as “an association of two or more persons to carry on as co-owners a business for profit…” But partnership may sometimes not be the appropriate entity for band members given the partners’ unlimited liability, whereby third parties can attach not just the partnership’s assets but the partners’ assets. Things are a bit different for “limited partnership” where there is one general partner and other limited partners. In this situation, the general partner has unlimited liability and oftentimes it is a corporation which provides limited liability to its shareholders, while the other partner’s liabilities are limited to the amount of their contributions. Since members of a band are natural persons, they will very likely be treated as a “general partnership”.

A better way of ensuring that members are protected against liability and ensuring that their assets are properly held in an entity is to form a corporation or limited liability company (“LLC”). A corporation and a LLC are formed upon filing the necessary document, usually an article of incorporation or organization with the secretary of state. The benefit of forming a corporation or LLC is the limited liability protection it affords its members as their liability is limited to the amount of their contributions to the entity. The other benefit that LLC has over a corporation applies to taxation. As a corporation, its income is taxed at the source and if it makes distribution or pays dividend to its shareholders, the latter also gets taxed thus creating a double taxation scenario. For LLC, there is a pass-through taxation whereby the members of the LLC are taxed on their income drawn from the LLC.

Why create an entity and structure the relationship of band members before a break up happens? Each of the entities discussed above has an agreement which guides the operation of the entity and the relationship of its members. For a partnership, there is a Partnership Agreement. For the corporation, there is a Bylaw and for the LLC, there is an Operating Agreement. Through this agreement, the members are able to determine how their assets and liabilities, operation of the band, its intellectual property rights covering the mechanical, publishing, synchronization, public performance, merchandising, the name, trade name and trademark and right of publicity of each band member will be exploited and how much percentage or interest in the company each member has. The agreement will also provide for the control of the band. Will it be a “majority control” or control by whoever started the band? Will the entity (i.e. the band) continue to exist after a member withdraws from it? Will this lead to dissolution? Can the remaining band members continue the business? How does the band buy out the withdrawing member? Will the buyout apply only to tangible assets? How does the band value those assets? What about the intangible assets like intellectual property? What will happen to the band’s name (which may be its most valuable asset)? Does the withdrawing band member continue to get royalties on licenses of the band’s assets before his/her withdrawal? Does s/he continue to get royalties on merchandising using the band’s name?

These and many issues are what the band members should consider before setting up the band. The band will need an entertainment attorney who understands the issues in the music business in setting up the entity and provides ways of handling them in the organization document. It is advisable that the band consult an attorney not because members anticipate a break up but to cater for it in case it happens.

Recently, some Nigerian film makers made headlines, not because of how well their movies are doing at the box office, but about the widespread piracy of their films. They alleged that some film marketers in Alaba market in Lagos, Nigeria are saboteurs of their works. Interestingly, there are businesses in Alaba and Onitsha markets which officially distribute and market entertainment content, mostly on DVDs. Nigerian music superstars have in fact made deals with these distributors by licensing the distribution right in their music.

Film is a copyright work protected under the Nigerian Copyright Act. Nigerian films will not only enjoy the protection of the Act but will do so abroad under the international copyright treaties. One of the rights protected under the copyright law is the right of the copyright owner to control, exclusively, the distribution of their work. The exploitation of this right and the transactions involved seem to be a missing link between film producers and the distributors.

The Nigerian film industry is no different from the independent film industry in United States and across the world with many producers belonging to an organization called the International Film and Television Alliance (IFTA – www.ifta-online.org). The independent film business is however a lot different from the studio film business, which process is built in-house. An independent film will always start with an idea from the producer. The producer will then set up an entity, usually a corporation or limited liability company, which will operate as the vehicle for the production and other business and legal affairs of the film. The process often starts with obtaining an option or outright acquisition of a literary right upon which the screenplay to the film will be based. This could be a movie right to a book, a news article, a movie (in terms of production of a prequel, sequel or spin-off), screenplay or even a television show, etc. The process then leads to financing which could be through equity investment or debt financing. Thereafter, it leads to production legal works including negotiating and drafting all necessary talent agreements, location agreements, music and other rights clearances, music composer agreement (if applicable), etc. If the movie gets through all these processes, then the independent producer will start looking for distribution.

The way distribution works for independent films could happen at either of these two stages: (i) financing or (ii) distribution. One of the ways for obtaining financing for independent film is through foreign pre-sales. This happens when the producer contacts sale agents and distributors in foreign territories to license the right to distribute the movie in those territories. The distribution right could be an “all-rights” deal or be limited to any of the following windows: theatrical, home video, hotels and in-flight, per-per-view, video on demand (VOD), electronic sell through (EST), etc. The producer will then obtain a minimum guarantee (that is, the license fee which will be an advance against gross receipts to be shared at negotiated percentages, e.g. 60/40) from the distributor for the distribution rights. The producer thereafter puts the pre-sale agreements with those minimum guarantees together and approaches a bank by tendering them as collateral for the production loan. The industry term for this is called “lending against the presale”. The bank will often lend about 30% of the production budget or 50% of the pre-sale guarantees.

The other instance of distribution will arise either during production or after production of the film. If a movie is already in place, you will likely find independent producers at international film markets like Sundance, Toronto or Cannes Film Festivals (or other film festivals in Europe, Asia and Africa) seeking distribution deals. Oftentimes subsidiaries or independent film divisions of major movie studios will be on hand seeking to acquire distribution rights to these movies. This could be an outright sale without any right to share in proceeds or a license with all the terms including profit sharing properly negotiated by the producer and the distributor. Instead of making rounds at film festival, the producer may approach a major studio or distribution company for a distribution deal. Why the studio? The major studios, which are based in United States, have proven to have the financial strength and requisite resources for the nationwide or worldwide marketing and distribution of movies. More so, the budget for distribution expenses covering print and advertising alone could run into $45 million. That doesn’t mean there are no distribution companies other than the studios in the distribution business.

Now let’s talk about how distribution deals could work in Nigeria towards reducing piracy.

In getting the distribution deal done, the producer will license the right to distribute the movie to the distributor. This right, like in a pre-sale deal, could also be an “all-rights” “throughout the universe” “in perpetuity” deal or it could be structured in a way to explore different rights in the movie. Oftentimes, independent producers will prefer to control different rights and explore those rights by licensing them to different distributors, in different territories and across different platforms. For example, the producer may license the theatrical right to the distributor for the sole purpose of distributing the movie across the theaters. The right could also be limited to different territories; for example, “the right to distribute the movie theatrically in the “Territory”. “Territory” shall mean the English speaking countries of West Africa, including but not limited to Nigeria, Ghana, English-speaking Cameroon, Liberia…””

Keep in mind that the licensed right will determine the value of the licensed fee. The licensed fee could be a fixed and final amount to be paid for the right to distribute or could be a minimum guarantee. A minimum guarantee is the minimum amount which the distributor pays to the producer for the distribution right as an advance against the producer’s share of net proceeds. This means that where the distributor pays the producer $200,000 for the distribution right of its movie in Africa as a minimum guarantee, the producer will get a base amount of $200,000 from the distributor whether or not the distributor distributes the movie within the Term. If the distributor distributes the movie, the distributor will be entitled to recoup the license fee, distribution fees (which is often about 25% of the gross proceeds), distribution costs and other expenses, which may include conversion/transmission costs, collection costs, guild payments of residuals and re-use fees, foreign version costs, reediting costs, physical material costs, royalties (for copyright works used in the movie), insurance costs, copyright registration costs, copyright infringement costs, claims and litigation costs, third party participation (where producer has negotiated assignment of this obligation to the distributor) and of course, print and advertising. The producer will then start to share with the distributor, at a negotiated percentage, in the net proceeds from the film distribution.

Although there are marketers, distributors and sales agents in Nigeria, it is however not clear if their business executives and attorneys understand the intricacies of the above business and legal affairs issues in structuring those distribution deals and how it can help to stem the tide of piracy in Nigeria. I believe that the Copyright Act, as it is, is a good regulatory framework which could cater to the piracy problem; however not from enforcement by the Nigerian Police Force or other government agencies. I believe business people and stakeholders in the media and entertainment industry could actually control how their works get out through distribution deals. Piracy thrives because demand of entertainment content far outweighs the supply. A way of fixing this is through distribution.

Film production is not cheap. Even the low budget movies are produced with the aim of making money through distribution. Since many of Nigerian distributors are based in Alaba and Onitsha markets, these distributors could either individually or through joint ventures (and I envisage that in order to do more, these companies may need to consider merger or acquisition of smaller distribution companies) license the distribution rights to these independent films. Since these Alaba and Onitsha market distributors will now have stake in these films, they will do their best to police the channels of distribution. They have the incentive to do this since they will be able to recoup copyright infringement costs and the producer’s attorneys can always negotiate a cap on those costs and the right to audit the books of the distribution company. With time, some of these distribution companies will either rise to the occasion to become major studios with all the financial and logistic resources. Just maybe sooner than we think, they will be able to release a blockbuster with lots of box office receipts.