Australia: Territory-based licensing and distribution agreements – lessons from Netflix

If your business is reliant on territory based licensing and distribution agreements then it's important to consider how your agreement covers your rights and obligations in respect of the defined territory. Here are some guidelines so you can save yourself from Netflix' current content licensing headache.

For those in the know, Netflix has been around for quite some time, with Australians using proxies and unblocking services to access the service long before it was locally available. Its popularity has surged in recent months, as more and more households sign up to the streaming service now available in Australia.

However, as Netflix' content varies from country to country, many users continue to use 'geo-dodging' technology to enable them to access the content libraries in other countries, where Netflix has licensing rights for TV shows and movies that aren't available yet in Australia, or are only available on other subscription services.

This appears to be creating quite the headache for Netflix whose content licensing deals are territory based, and Netflix has recently announced that it will be cracking down on geo-dodging users.

However, the problem of extra-territorial transactions is not unique to Netflix and could occur in almost any licensing and/or distribution agreement, where rights are granted to a Licensee in respect of a certain "territory."

It is therefore important for any business entering into these types of agreements to consider the rights and obligations in respect of distribution within a defined territory, in order for both parties to make sure their commercial interests are protected.

Definition of "Territory"

The actual geographic parameters of the territory are perhaps the most important step in making sure there is sufficient clarity between the parties prior to commencing a licensing arrangement. Ensuring that this is appropriately captured and defined in the agreement itself is also necessary to minimise potential disputes later on regarding what is or is not included in the Licensee's territory.

A Licensor protecting its commercial interest will want to ensure that territory is clearly defined, to allow it to grant rights for any areas outside that particular territory.

A Licensee will also want clarity in order to ensure the territorial boundaries provide a sufficient area for profitable distribution, as well as to ensure its territory is clearly designated so that other persons do not encroach during the term of the agreement.

There are a number of ways that the territory can be clearly defined - using postcodes for certain areas within metropolitan areas, setting a radius from a certain reference point, incorporating a detailed map or listing the countries that the rights granted relate to.

This should be considered against individual arrangements so that the method used is appropriate and the definition is unambiguous.

Consider as an example, defining territory as "Sydney." This potentially could mean:

  • Just Sydney CBD
  • Sydney CBD and immediately surrounding suburbs (to what extent it is unclear)
  • All of greater Sydney, within the boundaries of Campbelltown, Camden, Penrith and the Hawkesbury River.

Obligations of the parties regarding the "Territory"

It is a fairly standard obligation under licensing and distribution agreements that the Licensee is not to distribute to customers outside the territory.

With the rise of online accessibility where, such as in the case of Netflix, customers may seek to mask their geographical location to obtain better prices or varied service offerings, it may also be prudent to include an express obligation on the Licensee not to supply where they know, or should reasonably have known or suspected, that the customer is outside their designated territory, or where the customer intends to on-supply outside the territory.

It may even be appropriate to include an obligation for the Licensee to put in place appropriate measures or procedures to verify the location of a customer before fulfilling an order or providing the services.

What happens when a breach of the "Territory" occurs?

The agreement should also address the ramifications in the event that the Licensee breaches the rights granted and distributes outside of the territory.

Generally speaking, this could be viewed by the Licensor as a 'material breach' providing grounds for termination of the agreement. Additionally, the Licensor may seek to include an indemnity for any loss or damage caused to it, or any of its other Licensees, as a result of such breach by the Licensee.

However, as appears to be occurring with Netflix, it may be of greater commercial interest to allow the Licensee to attempt to rectify the breach, rather than terminating the agreement completely and disrupting the distribution of the Licensor's product within the territory.

Is there a need for "Territory" anymore?

Netflix has strongly indicated that it will be pushing in the future to eliminate territorial restrictions in its content deals so people across the globe can access the same content at the same time.

While this may be possible for Netflix, other businesses will still find benefit in territory based licensing and distribution agreements and as such, should ensure that they do not underestimate the importance of ensuring appropriate "territory" based provisions are incorporated into their agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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