Making Merchandise from Video Game Characters

Dear Rich: For a while I have been making digital merchandise based off of famous movie and video game characters. At first I wasn't really making any money off of them. I know now that not making a profit doesn't change anything as far as trademark violations, but I thought it did before, so I stopped selling the merchandise a while ago because I had started making real money and didn't want to make money off of other people's creations without their permission. But now, after so many months, I find myself still wanting to make and sell that merchandise, and other people are asking me to as well. Its a bit frustrating, because I see other people creating things based off of trademarked characters, both in my market and in other markets on the internet. Like all of the Star Trek merchandise you see on Etsy. What's the likelihood of a small one-person business like me getting permission to create merchandise like this? If it's possible, how do I do it?  The likelihood of getting permission is very slim. Owners of video game characters usually only deal with established merchandisers (with serious sales voodoo). Also, they often enter into exclusive licenses. That means they can't grant permission to you without violating their license with someone else. It's possible that if you were offering a new product category, you might have a chance. But that's tough to pull off. (PS. Here's the lowdown on trademark licensing.)
How do other people get away with it? It's a matter of odds. The owners of valuable character properties usually put their resources into pursuing the bigger fish, and for the most part, that often bypasses individual sales at Etsy or eBay. So, unless the trademark owner is intending to make an example of a small fry infringer, a cease and desist letter may be sent, and that's sometimes the end of it.
What should you do? We wish it wasn't frustrating to get permission. Like, wouldn't it be great if you could pay "per impression" for reproductions of licensed characters.  Of course, that may blow any standards of quality ... but hey, merchandise happens. Anyway, infringement is always a gamble and we'll leave the risk assessment to you.

At What Point Does Copyright Protect a Plot and Its Characters?

Tell It To The Hand! Some facts you probably didn't know about Judge Learned Hand:

• his first name was Billings (ideal for a lawyer), 
• he was friends with the artist Maxwell Parrish (and his wife posed for one of Parrish's paintings), 
• he considered himself a melancholic (and "hopelessly hypochondriac"), and
• he was the godfather of J.D. Salinger's daughter, Peggy.

The Salinger Connection. Salinger and Hand, neighbors in Cornish, New Hampshire, were close friends. Salinger considered Hand a "yogi" and according to J. D. Salinger: A Life by Kenneth Slawenski, Hand's relationship with Salinger was perhaps the "fullest he had enjoyed." The men shared an intense interest in spiritual topics, and Salinger confided in Hand about his wife Claire's loneliness. Slawenski writes:

"Sadly, both men were enmeshed in troubled marriages, a fact both painstakingly concealed from others. Perhaps most important, both Salinger and Learned Hand suffered from periods of deep depression, a penchant towards melancholy that fused them together in a way unique to such sufferers."

Salinger wrote to Hand regularly and those letters were among the many paraphrased in a biography of Salinger by Ian Hamilton in the 1980s.  Salinger sued over Hamilton's paraphrasing of his letters and an appeals court ruled against Hamilton, relying on a Learned Hand case, Nichols v. Universal Pictures, as precedent.
Nichols v. Universal Pictures (1930).  Abie's Irish Rose, a corny tale of interfaith marriage, had been one of the longest-running shows on Broadway (inspiring playwright Lorenz Hart to pen the couplet: "Our future babies we'll take to Abie's Irish Rose -- I hope they'll live to see it close.") Despite a critical drubbing  (Robert Benchley said, "People laugh at this every night, which explains why democracy can never be a success.") the play was a huge hit and and like all hits, inspired imitators including the motion picture, The Cohens and the Kellys. The owners of Abie's sued for copyright infringement.
Abie's and The Cohens shared similarities: both plots involved children of Irish and Jewish families who marry secretly because their parents are prejudiced. At the end of each work there is a reconciliation of the families, based upon the presence of a grandchild. Beyond that, the works had little in common except for some ethnic cliches. The challenge in assessing this type of infringement is how to measure nonliteral similarities -- that is differences other than verbatim copying.  Learned Hand's visionary analysis demonstrated a deep understanding of the creative process:

"Upon any work, and especially upon a play, a great number of patterns of increasing generality will fit equally well, as more and more of the incident is left out. The last may perhaps be no more than the most general statement of what the play is about, and at times might consist only of its title; but there is a point in this series of abstractions where they are no longer protected, since otherwise the playwright could prevent the use of his "ideas," to which, apart from their expression, his property is never extended."

In other words, the premise of a film -- say Boy-Meets-Girl-Boy-Loses-Girl-Boy-Gets-Girl -- is never protected but the fully expressed plot -- say, When Harry Met Sally, can be protected. And the same is true for the characters within a play. Hand wrote -- in what was to become one of the most quoted statements in copyright law:

"If Twelfth Night were copyrighted, it is quite possible that a second comer might so closely imitate Sir Toby Belch or Malvolio as to infringe, but it would not be enough that for one of his characters he cast a riotous knight who kept wassail to the discomfort of the household, or a vain and foppish steward who became amorous of his mistress. These would be no more than Shakespeare's "ideas" in the play, as little capable of monopoly as Einstein's Doctrine of Relativity, or Darwin's theory of the Origin of Species. It follows that the less developed the characters, the less they can be copyrighted; that is the penalty an author must bear for marking them too indistinctly."

We don't want to belabor the point  -- though we are lawyers -- but Nichols was the breakthrough that enabled judges to assess and compare narrative works built around similar underlying ideas. Although it is true that wherever Hand's line of abstractions is drawn, it may seem arbitrary, "that," as the judge stated in Nichols, "is no excuse for not drawing it." Nichols has been cited in over 1,900 cases and its precepts have been borrowed for legal theories affecting software and websites. Thanks Judge.

P.S. Bridget Loves Bernie Dept. The unprotectible plot premise discussed in Nichols was resurrected in the 1972 TV show Bridget Loves Bernie. Oddly, an Irishman named David Birney played the Jew, Bernie, who married his co-star in real life. Sadly, the network dumped the show after one season  - even though it was in the top five for ratings -- reportedly because the networks had so many complaints about interfaith marriage. Go figure.

Royalty or Equity for Copyrighted Character

Dear Rich: I am being asked to work as creative director for a new entertainment company that is just starting. The plan is that this company will have one principal entertainment property that hinges on a main character (a cartoon), with the goal of creating a desirable licensable image and personality (via online episodes and games, and eventually consumer goods). That will hopefully lead to startup funding. I am currently collaborating directly (without compensation) with the founder of the company to co-create this character by providing art and writing. I will eventually be the principal individual in charge of directing her image, voice, and evolution and once the company is funded, I will be offered to join as an employee with full-time salary as part of the employment package. I am also being offered a percentage of equity in the company. The founder's goal is to sell the company (in the internet/Silicon Valley tradition) once the revenue from licenses, etc. is established. The founder and I have discussed the possibility of future royalties as an incentive but we don't have a good idea as to a standard for this. A big concern for the founder (and shareholders) is burdening the sale of the company with an ongoing commitment by the acquiring party to pay an individual (or individuals, in the event the founder also has an interest in a royalty stake) in perpetuity. This sounds non-standard for what we know of the internet industry. But perhaps it is not that unusual and we are just unfamiliar? Sometimes the Dear Rich staff imagines what life would have been like if we (not Peyo) had created the Smurfs -- the licensing possibilities, the interaction with our adorable blue friends, and most important, knowing that we're leaving behind a lovable legacy. We're not saying we'd be happier or more fulfilled -- there's a limit to the satisfaction provided by licensed characters, and we imagine there's also considerable stress -- but things would definitely be different if we surrounded ourselves with Smurfdom.
Right, you had a question. You're kind of in the position of a pre-Smurf Peyo. We admire your business planning and strategizing (as General Eisenhower said, "plans are useless; planning is indispensable") but what you should keep in mind is that while you proceed, legal decisions are being made without you knowing about it. For example, if you and someone else are creating a copyrightable character, then you're both co-authors of that character (once created) under copyright law. No paperwork is required for that to occur. As co-authors, either one of you can license the character provided the other co-author is reimbursed. If you've already created the character, you'll need to deal with (and acknowledge) that fact. Sometimes, this is accomplished by assigning your rights to the venture and once you assign your rights, that's it. You won't be able to get those rights back for 35 years. Alternatively, if you're hired as an employee, and you create the work after becoming an employee, the company will own whatever you create. So, if you haven't created the character then you should probably work out the paperwork before beginning ... so you're not playing catch-up later. At the same, if you and the founder are currently contributing to the business and planning to share in the revenues and you haven't 'created' a company, then you're operating as a partnership, with all of the legal obligations that entails.
What paperwork do you need? It's all about how you will be compensated. Maybe equity -- stock ownership of the business -- will be sufficient. If you acquire stock and the company is sold, you'll probably receive a payment for your shares and that will be likely be that. You're unlikely to receive income from any post-sale revenues (unless that's a condition of the sale of the business). If you're receiving a royalty for your copyright interest, that would continue after a sale because the new owners would have to assume the royalty obligations.
Do acquiring businesses want to assume royalty obligations? As a general rule most companies like to pay once for a business and not to have continuing payment obligations. On the other hand, many acquiring businesses -- music, movie, toy, publishing, and photograph companies --- assume royalty obligations as standard operating procedure. It's no big deal. We believe that if your property is a serious revenue-generator, royalty obligations won't stand in the way of a sale. And we wouldn't worry about a new owner having to pay in perpetuity. When it comes to acquisitions, anything can be worked out if the parties are willing.
Next steps. Document everything. If someone makes you an offer, save the document or email. If you agree to something, put that in writing. If you're in the midst of creating the character or storylines, keep track of who contributed what. Situations like yours are often sorted out after the fact and documentation is essential. If possible, avoid creating your work until the paperwork is in order. That's because if the character is created and becomes a hit, the company will be in a better financial position to challenge your legal rights. That's why the time to get everything right is before creation of the character.