Be Wary of Confidentiality Clause in Art Deal Agreements

A recent case, Hoffman v. L&M Arts, et al., No. 15-10046 (5th Cir. Sept. 28, 2016), provides key lessons for drafting and construction of confidentiality provisions for the sale of artwork.

The case involved a claim for breach of confidentiality provision in the Agreement between Marguerite Hoffman and L&M Arts. Hoffman was a wealthy art collector seeking to sell her “Untitled” 1961 Mark Rothko oil painting after her husband’s death. L&M Arts was a broker acting as an intermediary between Hoffman and the buyers, Studio Capital, Inc. and David Martinez. In order to sell the work, Hoffman had to remove the painting from Dallas Museum of Art where it was on display. To safeguard her from a public sale of the painting, Hoffman decided to make a private sale of the painting, which took place in 2007.

The confidentiality language in the Agreement was as follows: “All parties agree to make maximum efforts to keep all aspects of this transaction confidential indefinitely.” Furthermore pursuant to the Agreement the buyers were prohibited to display or hang the painting for six months after the sale.

In 2010, the buyers auctioned the painting, which sold for more than $31 million. This appeared on the cover of the Sotheby’s catalog. Consequently, Hoffman sued L&M Arts, and the buyers for breach of the confidentiality provision of the Agreement.

On appeal, the Fifth Circuit Court of Appeals, among other things, found that the Letter Agreement was not breached and ruled in favor of L&M and the buyers.

The following factors were discussed and are lessons to be learned for drafting confidentiality provisions in art deals:

First, although confidentiality provision may be used to keep the sale of artwork secret, it has to be limited in scope so as to not be an unreasonable restraint on the sale of property. A significant factor regarding enforceability of such provisions is the length of the restriction.
Second, confidentiality provisions should clearly define the period of time and, in some cases, the geographic restrictions imposed as a result of the confidentiality provisions and what each party to the transaction can and cannot do.
Third, the parties to a transaction should always ensure that every party is bound by the confidentiality provisions, or, at the very least, include an indemnity provision for the breach of a third-party buyer when an intermediary is used.
Finally, in case of breach of the confidentiality provisions, parties should clearly draft the remedies and damages that may follow.

 

By Dorisa S. Hanrahan, Esq.

The Importance of Delivery Specifications in Art Deals

A recent case illustrates the importance of negotiating and drafting clear delivery terms in art transactions, and the need to put the parties’ agreement in writing as opposed to relying on oral communication, especially in an art market in which works may undergo material price fluctuations.

Filing a complaint on July 20, 2016 in New York state court (Docket No. 653810/2016), Blue Art Limited, a UK company owned by Old Master art dealer Fabrizio Moretti (“Blue Art”), sued art dealer David Zwirner and his gallery, a contemporary art gallery in New York and London. The complaint was for breach of contract and fraudulent concealment and inducement, regarding an unnamed piece by an undisclosed artist.

In its complaint, Blue Art alleges a claim for breach of contract for failure to deliver the work and subsequent refusal to refund the purchase price. Blue Art also pleads fraudulent concealment and inducement, arguing that defendants made reckless oral representations regarding the time of the delivery of the work, “as they had no reasonable basis to believe that the Work would be completed in a reasonable amount of time.”

Blue Art alleges that in June 2014, it agreed to buy a work from Zwirner for $2 million, and that at the time of the deal, Zwirner told Moretti that the work was in the process of being manufactured by the artist’s studio. The purchase agreement did not specify any date for completion or delivery of the artwork, which allegedly is one of a series by a world-renowned American artist.

Blue Art alleges that although it paid the full price, Zimmer failed to deliver the work. Blue Art also alleges that the value of the purchased work “has fallen dramatically in the past year”, due to Zwirner’s “mishandling of other sales of works in the same edition” by the artist, “as well as a downturn in the market.” Blue Art indicates that the work is intentionally not described to mitigate any possible further damage to the work’s value.

In an email between Blue Art and Zwirner last July, Moretti told Zwirner that he was no longer interested in the piece and wanted to cancel the deal, asking Zimmer to wire him the money back. Zwirner refused.

Zwirner filed a motion to dismiss in response to Blue Art’s complaint, claiming that this is a case of buyer’s remorse and that Moretti has lost interest in the deal. Zwirner alleges that, shortly after the purported cancellation of the deal, the artwork in fact was complete and that, on August 4, 2016, Zwirner’s gallery informed Blue Art that the artwork was ready to be delivered, but that Blue Art failed to arrange for delivery, “standing by its bogus claim that it has validly canceled the contract.”

Zwirner further argues that, because the purchase agreement between Plainitff and Zwirner’s gallery did not specify any delivery date, delivery was required only by “a reasonable time,” and Blue Art did not have the right to unilaterally treat the contract as breached for late delivery without giving the gallery advance notice and a chance to perform by a specific, reasonable date certain.

By Dorisa S. Hanrahan, Esq.

Should you claim color in your trademark application?

When filing a trademark application, clients often wonder if they should claim color.  The answer depends on the so called “likelihood of confusion.”  If you are a relatively new company and color is not really a distinctive element of your trademark, it is probably best not to claim color.  A trademark presented in black and white without claiming color is presumed to cover the mark when presented in any color.
If on the other hand, color in your mark is an essential part of your mark, to the extent you want to prevent others from using your color scheme with different words/characters, it is advised to make a claim for color in your trademark.  Take “Mobile” for example, where the “o” is red and the “M-bil” is blue. They registered both as a word mark and in color, to preclude others from using “Mebil” (word mark) and also “Force” with the “o” in red and the “F-rce” in blue.
Similarly, Federal Express has various registrations on the mark FedEx with “Fed” claimed in purple and the “Ex” claimed in orange. Therefore, it is be possible for FedEx to claim that the use of “MadFx” infringes its trademark, if MadFx was in the same color scheme where “Mad” was in purple and “Fx” was in orange. This claim is not guaranteed, but FedEx would have a better chance if they have a registration claiming color, than if they did not.
However, note that when filed in early 80’s, “FedEx” did not make any claim for color. Its registration initially made a standard character claim to “FedEx,” alone without any claims to style or color.  This is because standard character marks cover the words/characters in any font stylistic arrangement or color.  Standard character marks are broader than special form marks claiming style elements, logos, or color.  In fact, many other famous companies such as Starbucks, Google, and Apple did not initially claim color.
In conclusion, for your first federal trademark application it is best practice not to make a claim for color, unless color is very important.   If color happens to be very important, you may want to file two applications, one as standard character and one claiming color.
By Dorisa S. Hanrahan, Esq.

You formed an LLC, Should You Have an Operating Agreement?

All LLC’s with two or more members should have an operating agreement. Although this document is not required for a single member LLC, it’s a good idea in any case.

An operating agreement sets forth the rights and duties of the members of the LLC and provides guidelines for its operation.  It deals with capital contributions, allocations and distributions, management, membership notice, and voting rights, transfer of membership interests, dissolution and winding up and other important matters. LLC can be either managed by the member owners, much like a general partnership, or it can be structured to be managed by a manager, subject only to the general review and confirmation of the members.

It is recommended to have an operating agreement for the following reasons. First, the operating agreement describes the operation of the LLC clarifying how funds are contributed or distributed to the owner; hence it is a good way to assure appropriate records are kept. Second, having an operating agreement and keeping records of operations helps establish the separateness of the business from the owner for liability and tax purposes. If you don’t have an operating agreement, you will find it more difficult to show that your business is separate from you. This is crucial, particularly if there is a liability issue. Third, an operating agreement also clarifies what happens if the owner dies or is unable to run the business.; that is, it creates a succession plan. Your operating agreement should include a clause stipulating who will manage the LLC if you are unable to do so. Without this specific provision, it may be difficult for your family to continue the business or dispose of it without a lengthy legal battle. Finally, an operating agreement helps avoid default rules of the California Codes of Corporation, which would govern if you don’t have set forth the conditions. In other words, without the operating agreement you run the risk of having the state tell you how to dispose of your business assets or otherwise run it which may not be what you want.

By Dorisa S. Hanrahan, Esq.

Fox News didn’t escape a lawsuit on “fair use” grounds for its use of 9/11 photos

This week, Fox News lost a bid to end a lawsuit over its use of one 9/11 photo.

Plaintiff, publisher of The Record and the Herald News alleged that Fox News’ television program Justice with Judge Jeanine posted on its Facebook page a now iconic photograph by Thomas Franklin.  The photo depicted three firefighters raising the American flag at the ruins of the World Trade Center site. This photo was juxtaposed with the classic World War II photograph of four U.S. Marines raising the American flag on Iwo Jima.  Plaintiff alleged that a production assistant Googled “9/11” and used on social media with the hashtag “#neverforget.”

Fox News raised the flag of “fair use.” Consequently,  New York federal judge Edgardo Ramos  examined the four factors that constitute a fair use of copyright and denied defendant Fox News’ summary judgment defense of fair use based on the last two factors.

Factor One: The nature of the underlying work -The judge found to favor a finding of fair use because the work “is factual and has been published.”

Factor Two: The amount and substantiality of the portion used– The judge further found another factor -the amount and substantiality of the portion used – to be neutral because it wasn’t clear “that Fox News’ use of any less of the Work would have ensured its audience’s recognition of the iconic photograph.”

Factor Three: Purpose and character of use– However, Fox News can’t prevail on summary judgment because the judge looked at the purpose and character of the work and found it not to be transformative.  The judge reasoned that the news organization was hardly the first to have ever thought of combining two photographs, that #neverforget was a “ubiquitous presence on social media that day.”Furthermore, the judge said that it was a question of material fact whether Fox News used the photo for the commercial purpose of promoting Pirro’s show as opposed to commemorating 9/11.

Factor Four: The effect of use upon the potential market– Regarding the last factor – the effect of the use upon the potential market of the photo -the judge stated plaintiff has raised more than $1 million in licensing revenue from the photo based on its existing licensing programs in place.   The judge said what Fox News did “poses a very real danger that other such media organizations will forego paying licensing fees for the Work and instead opt to use the Combined Image at no cost.”

So Now What?  

This ruling is significant in today’s social media driven culture. Here, the defendants used the image in a social media context and even used a hashtag.  This type of ruling is the reason why bloggers and websites are advised to never just search for an image and use it in a post or article or Twitter.  This can also apply in case of those using footage without permission for documentary productions hoping that they can get away on basis of fair use without proper clearances.

Article by Dorisa Shahmirzai, Esq.

Founding Attorney at IP Law Click

 

 

Batmobile Protectable as Character Under Copyright Law?

 

 

 

In a recent case, Warner Bros. sued Mark Towle for violating its intellectual property. Mark Towle has been operating a car customizing shop called Gotham Garage, which makes replicas of cars from TVs and movies.  A U.S. District Court Judge Ronald Lew has ruled that the Batmobile is subject to copyright because the car is itself a fictional character in the Batman franchise. This decision, which indicates Batmobile vehicle is a protectable character much like its fictional owner, has significant repercussions for copyright law as well as for business sectors within the entertainment, digital media and manufacturing industries.

Although Lew found that, the Batmobile would be copyrightable as a “pictorial, graphic, and sculptural work,” it’s the discussion of the Batmobile as character that’s the most interesting.  Lew ruled that Towle violated DC’s copyright on the character of the Batmobile.

Lew cited an earlier case, Halicki Films LLC, v. Sanderson Sales and Mktg. et al.   That case brought to issue the question of whether or not the “Eleanor” car in the 1974 film Gone in 60 Seconds was a copyrightable character. The Ninth Circuit did not decide whether Eleanor was herself copyrightable.  However, the case indicates that a non-sentient vehicle can be protected as copyrighted as long as it fulfills the other requirements of a character under copyright law. Copyright law protects content creators in literary characters if the character constitutes “the story being told.”  As such, in this case, Lew held that Batmobile does fulfill that requirement to be protected under copyright law.

Given the current climate in graphic media, objects that we don’t traditionally consider characters would be integral to the storytelling. You could have a perfectly engaging story that centers on the Batmobile, after all. If other courts uphold this case or cite it as persuasive law, it creates some questions about what constitutes a character in storytelling, and what constitutes a mere storytelling accessory.

 

Article by Dorisa Shahmirzai, Esq.

Founding Attorney at IP Law Click

Negotiating Agreements in Reality Television

Reality television is a new growing area in the entertainment industry.  Although the area is flexible due to lack of sufficient history, three types of reality television agreements exist: 1) writer agreements, 2) performer agreements and 3) content creator/producer agreements.

Each of the above-named agreements have their own deal points that must be carefully negotiated to avoid pitfalls and confusion in the future.   For example, although it would appear that writer agreements are non-scripted, writers are engaged to create dialogue, scenarios, sketches, plot outlines, synopses, routines, and other narratives for the shows.  Agreement depends on  type of services required, whether or not the contract is subject to Guild regulations, and other factors such as writer’s quote and budget of the program.

Article by Dorisa Shahmirzai, Esq.

Founding Entertainment Attorney at IP Law Click

Advantages and Pitfalls on Most Favored Nations Clause in Profit Participation Agreements

One of the key points that comes up from time to time, is in profit participation or back end compensation, whether one should negotiate for what is known as most favored nations clause.

It is tempting to seek a provision requiring the participant to be treated on the same basis as some other participant, especially the producer, thereby assuring a particular level of treatment for the participant while avoiding lengthy negotiations.  However, there are pitfalls to this approach.  Certain participants, particularly producers, may have cross-collateralization provisions, abandonment provisions, and over budget penalty provisions.

In each instance, by relying upon the definition of another participant, the party may be subjected to undesirable reductions in his profit participation.

As such, it is recommended to carefully assess all dynamics before deciding to negotiate most favored nations clause in profit participation agreements.

Article by Dorisa Shahmirzai, Esq.

Founding Entertainment Attorney at IP Law Click