CONCEPT OF OPTION AGREEMENT
An option agreement is basically an understanding/arrangement entered into, one step before the assignment, between the owner of a copyrighted work, particularly literary work, such as books, screenplays, stage plays, magazine articles, blogs, etc., and a potential buyer, usually a producer, who intends to adapt such literary work into a movie, TV Show, Web series, etc. or who wants to make a movie, TV Show, Web Series based on such literary work, wherein the owner of rights chooses to option the rights to this potential purchaser.
To option the rights means "to give a right to the purchaser, exclusively, to make the decision to buy or not to buy, or to take an acquisition or not take the acquisition of all the rights in such work, in return for no assurance from the producer that he would be buying the rights for sure."
The purpose of the option agreements is to give the potential purchaser (i.e., the Producer) the exclusive ability (Option) to consider, within a limited time period (known as Option Period), whether or not he/she wants to purchase the entire rights in such work from the original owner (i.e., the author) through an assignment.1 Therefore, the assignment of rights in such work becomes a discretionary option, but not an obligation on the part of the producer vide this option agreement. This is important for the purchaser because once he purchases all the rights in the copyrighted work through the assignment, he shall become the new owner of that work, and would invest in developing it further. However, if that work fails at a later date, he will have no option but to leave the project and bear the loss, which could have been otherwise avoided, had he evaluated the marketability of that work before purchasing all rights in that work. This is where 'Option Agreements' play a significant role.
However, the potential purchaser is required to pay a certain amount of fee (known as Option Fee) to the owner of such work, to park/block the rights of the owner in the work, exclusively for a fixed/limited term, until the purchaser becomes fully sure of exercising his option right.2 In case, the Option Period increases, the amount of the Option fee increases proportionately or as agreed upon between the parties.3 It is pertinent to note that the purchaser gets only an exclusive but a temporary and irrevocable right for such fixed duration, as agreed upon between the parties.
It is important to understand that the producer/purchaser does not acquire the exclusive rights to make a film/TV show/Web series based on the literary work, but only acquires the exclusive right to purchase the right to make the film/TV Show/Web series, as the case may be.
An Option Agreement typically includes a set purchase price to be paid to the owner should the purchaser exercise its option.4 In such a case, the option fee already paid may or may not get adjusted against the purchase fee/assignment fee, depending on the mutual understanding between the parties. It also sets out the kinds of rights to be transferred upon the producer exercising his option, and the commercial terms related to the potential transaction.
For instance, a Producer comes across a certain story published on the "All rights reserved blog", and wishes to-
- test the marketability of such a story before purchasing all the rights subsisting in it; and
- at the same time, does not want the author and owner of copyright in such work, to take the story to another person/producer.
In that case, the Producer has the option to propose the Author and Owner of the Story to enter into an Option Agreement. The author and owner of the Story, will get an Option fee for allowing the Producer to park his rights in the work exclusively, which may be purchased by the Producer at a later date, in the event the Producer finds a favorable market for such work. Until then, this Option Fee would prevent the author and owner from selling or assigning the rights in such work to another person/producer during the term the Producer is evaluating the marketability, by pitching the work to potential platforms. This Option Fee will also compensate for the time the author and owner will have to wait and pass on other offer(s) for the same story. This term is known as Option Period.
Fox 2000 optioned the rights subsisting in John Green's popular novel, "The Fault in our Stars" before adapting the book into a movie.5
WHY DO PARTIES ENTER INTO OPTION AGREEMENTS?
Option Agreements are convenient and beneficial for both parties to the Agreement-
A. Benefits for the Potential Purchaser/Producer of Film
The party who is considering purchasing all the rights in the literary work-
- gets enough time to test the marketability of the work by pitching it to various platforms, and accordingly, secure financing, develop the project, and get on board with the director and the probable cast for the film.
- instead of purchasing all the rights outright in the first place, by paying a fatter amount of money (Assignment Fee or Purchase Price) which is always higher than the Option Fee, the producer/potential purchaser gets to park or block the rights of the owner in such work for a small amount of fee. In case, the Option Period increases, the amount of the Option fee increases proportionately or as agreed upon between the parties.
- gets the assurance that the rights in such work are secured and not going to a third party or another producer; in other words, this agreement gives the producer an ability to prevent the author/owner of literary work to approach third-party for the same work, for a limited period, until the producer/potential purchaser exercises his option. Through Option Agreement, the producer binds or obligates the owner of the work to maintain exclusivity for a certain period, known as the Option Period,
- is not obligated to go for complete assignment, and can leave the project or the literary work, if the market doesn't seem to be favorable or profitable.
B. Benefit for the party who owns the rights and is offering the option (Author/Owner of Literary Work)
The party who owns the rights and is offering the option also benefits from such agreement, because-
- does not feel deprived of lost opportunities, because he/she gets a certain amount of fee ["Option Fee"] to prevent him from entertaining other offers, during the period the producer is considering whether or not to pursue such work. This way such a person would be compensated for losing out on all other monetary possibilities because they are receiving a certain amount of money which is the option fee.
- if the purchaser never exercises his option to purchase all the rights, no rights or ownership interest in such work is ever transferred to the potential purchaser.
- Once the option period expires, the author/owner of such work gets to retain the Option Fee, and has an opportunity to entertain other offers.
WHETHER THE CONCEPT OF OPTION AGREEMENTS IS RESTRICTED TO ANY SPECIFIC TYPE OF CONTENT?
The Concept of Option Agreement is applicable in relation to all types of copyrighted content, such as literary works- books, novels, magazine articles, blogs, screenplays, concept notes, stories, plays, etc. It is also applicable in the case of Films where the producer wants to consider making the derivative of such film, say a web series, a prequel, sequel, spin-off, remakes, etc., and wants to option the rights to pitch the project to various potential exploitation partners, which requires certain time. In the film industry, an option is a contractual agreement pertaining to film rights between a potential film producer and an owner of source material like book/ screenplay, etc.
The option agreement can be entered into for other purposes like shares, land, financial deals, etc.
It is important to understand that option agreements are not mandatory in all cases, like when the producer is sure of the work, he/she does not want to test the marketability of the work by pitching it to various platforms, and wants to instantly buy all the rights in such work to proceed further with the project (Film, TV Show. Web Series). Option Agreements are discretionary and are preferred only in relation to that content, where the producer wishes to park the rights for some time to evaluate the marketability of such content, without going for assignment, and at the same time, wants to prevent the author from approaching other producers, in relation to the same work.
DIFFERENCE BETWEEN AN OPTION AGREEMENT AND AN ASSIGNMENT AGREEMENT
An option agreement is entered between the parties prior to the assignment agreement, and is completely different from the assignment agreement.
- Through an option agreement, the potential purchaser only secures an exclusive right to purchase the right to make the Film/TV show/Web Series. Optioning of rights does not confer ownership rights in the potential purchaser, but the potential purchaser merely gets to park/block the rights of the owner for a limited time, exclusively with him. The ownership is conferred only when the potential purchaser decides to exercise his option rights. Whereas in an assignment agreement, the ownership rights are immediately transferred from the owner of the work to the Purchaser on a mutually agreed upon date and terms of the agreement.
- The amount of fee (Option Fee) paid by the producer for parking the rights in such work is small in the case of Option Agreement, while the amount of fee (Assignment Fee/Purchase Price) is always higher than the Option Fee, because the owner would part with his/her ownership rights in such work through an assignment agreement.
- After entering into an Option Agreement, if the potential buyer decides not to buy the rights in the work in question, the only loss the producer would incur is that of the Option Fee paid to the owner of such work; but in case of Assignment of such rights, the producer becomes the ultimate owner, and if the project fails, he/she would have to bear the loss from all sides, the major loss being the payment of Assignment Fee (plus Option Fee, if paid), which is very high compared to the Option Fee.
IMPORTANT CLAUSES IN AN OPTION AGREEMENT6
- Exclusivity Clause: to ensure that the author/owner of literary work does not simultaneously discuss the literary work with other producers;
- Definition of Option: It is important to clearly define the term option in the Agreement so that the Parties are on the same page. Additionally, wherever the term "Option" is defined, it must be defined as an "Exclusive and Irrevocable Option". This would help in ensuring that the same work is not optioned to another party.
- Option Fee Clause: The payment of Option Fee (a specified amount) is a consideration that is a must to allow the author/owner to grant the exclusivity to the Producer to evaluate the marketability of literary work, by way of pitching the story to various potential platforms, or exploitation partners, director, etc. It is important to draft it in a manner say, if the Producer decides to extend the Option Period that was agreed upon between the Parties earlier, the Producer shall be liable to pay an additional amount of fee as an Option Fee to the Owner for parking or blocking the rights in the literary work for such extended period.
- Option Period Clause: It is important to define the time period for which the rights of the Producer would be parked in the literary work, and the author/owner will be waiting to either get the literary work approved for optioning, and not approach or take on another project/offer for the same literary work. Usually, the agreed-upon option period is one year, during which the Producer will be obligated to exercise the Option right. However, in most instances, a producer may negotiate to extend such a period by at least 2 or 3 years, to develop the project and arrange for finance. On the contrary, the author will be reluctant to increase it beyond 2 years as that would mean agreeing to pass on better offer, if they arise.
- Grant of Rights Clause: It is important to specify the kinds of rights that are being optioned in the Agreement. Producers may always attempt to acquire all the rights in the Literary work, say, if the movie based on the optioned literary work (book) becomes successful later, the Producer would want to acquire the right to make derivative works (prequels, sequels, spin-offs, remakes) based on such literary work. It is important to specify if the Producer would have the right to create merchandise based on the Film/Web Series, if it becomes successful/popular. On what platforms the Producer would have the right to exploit the Film- theatrical, non-theatrical (satellite, digital, OTT, radio, etc.), ancillary markets (home video, new media, video games, theme parks, etc.) must also be specified.
- Representation and Warranties Clause: The producer must also ask the author/owner to confirm that such person is the true author and owner of the literary work; they have the copyright in the literary work; the owner of rights must warrant that they shall maintain exclusivity and confidentiality, as per the terms of the agreement, until the expiry of the Option Period, and shall not take the story to a third-party for optioning or assignment, as the case may be.
- Termination Clause: to ensure that if the exclusivity and confidentiality are not maintained, or are breached, the agreement shall be terminated with immediate effect.
- Right of First Refusal ["ROFR"]: In
case the author and owner desire to be associated with the
development and production of any derivatives based on the first
film/web series created and/or produced subsequently, the author
must include "Right of First Refusal" in
the Option Agreement.
The "Right of First Refusal" also known as the first right of refusal, is a contractual right to enter into a transaction with another person or entity before anyone else can. Only when the party with this right (the Author and Owner) declines to enter into the said transaction, the obligor (Producer) is free to entertain other offers.But first, the Producer is obligated to approach the author and owner whose work is used to create the main work (on which the derivative will be based) before anyone else.
Right of First Refusal is usually requested by individuals or entities who want to see how a business or opportunity will turn out. The holder of this right may prefer to get involved at a later point, rather than make the outlay and commitment right away, and a right of first refusal allows them to do so. It is important to note that the holder of this right has only the right, but not the obligation, to enter into a transaction. The 'Right of First Refusal' only gives the person with this right, the opportunity to establish a contract or an agreement in relation to a project, usually the derivative based on the Film, before others can.
Also, the main Author/Owner may include a clause stating that in case the Author refuses to work on the project due to any unfavorable terms offered to him by the Producer, say lesser service fee, and later the Producer goes to another author/owner and offers the project on terms more favorable than those offered to the Author/Owner, say the service fee which was demanded by the Author/Owner but refused by the Producer, or a higher service fee is offered to another such author/owner, then the Producer would be prevented from doing so.
- Reserved Rights: Only the rights which are
optioned by the Producer, in an option agreement, will be
considered for assignment later, if option is exercised. All the
other rights that are not defined in this Agreement will be
retained and reserved by the Author/Owner of literary work. Say,
the Author/Owner may decide to publish the literary work later, and
this clause would allow him/her to do so. Following other rights
must also be specified-
- stage rights (to perform the literary work or its derivatives on live stage, in theatres, etc.);
- radio rights (produce and broadcast audio-only versions of literary work on radio);
- holdbacks (when the author/owner will have the right to exploit the reserved rights; Usually, these rights could be exercised 5-7 years later after the release of the Film/Web series);
- Right to write sequels/prequels: The author will always want to retain the right to write any sequels, prequels based on the current work to illustrate in detail any character of the book before (prequel) or after (sequel) of any event described in current work. In case, any such work is created and the Producer desires to adapt it in Film/Web series, the clause must specify the optioning of such work as well. Additionally, if a sequel/prequel gets created, the period of holdback will get extended accordingly.
- Right of First Negotiation: in case the author wishes to exploit any of his/her reserved rights, and decides to negotiate with a third-party, this clause may create an obligation on the author to provide a written notice to the Producer as well as the right of first negotiation (similar to ROFR of the author). Only if the Producer refuses to exploit such reserved rights or no agreement is reached within the time prescribed in the agreement, the author will take the work to a third-party.
- Assignment Clause: The Parties must also incorporate an Assignment Clause, in case, the Option is exercised, and clearly specify the Assignment Fee/Purchase Fee for purchasing the optioned rights. Usually, the Purchase Fee is stated in a form of a percentage of the entire budget of a Film/Web Series.
- Author/Owner's Credit: The author/owner must negotiate for getting the rightful credit in the Film/Web Series. An opening credit (appearing in the start) is usually preferred by the authors as against the closing credit (appearing at the end, including all the names of people involved in the making of the film/web series).
- Reversion: in case, after assignment and payment of purchase fee, if the Film/web series does not get released or the production does not begin, it will bring the author or owner of such literary work in a terrible position, hence, this clause will state that in any such situation, the rights assigned will revert back to the Author/owner. However, the Producers do not generally agree to it, and prohibit the application of Section 19(4) of the Copyright Act in the Grant of Rights clause.
WAY FORWARD IF OPTION IS EXERCISED
If the Producer finalizes that he wants to make a Film/Web Series, etc., based on the literary work of an author, the Producer will have to purchase from such author, the right to adapt the literary work into a cinematograph film on various platforms, and in return, the Producer would have to pay to the author an Assignment Fee, also known as a Purchase Fee. This Assignment or Purchase Fee may or may not be inclusive of the Option Fee, and depends entirely on the mutual understanding or arrangement of the Parties. This means the Option Fee paid by the Producer for the grant of Option Rights or in case of extension of Option Period, any additional Option Fee paid to the Owner by the Producer, may get adjusted against the Purchase Fee, if the parties agree to do so, or it may exclude the Option Fee, in which case, the Producer would be liable to incur an additional cost for assignment of the exclusive right to adapt the literary work into a Cinematograph Film.
In any case, the Purchase Fee would be an additional amount of money (apart from and beyond the Option Fee, but may include the Option Fee) which the Producer is obligated to give to the Owner for purchasing the ownership of all the Rights in the literary work, except the Reserved Rights withhold by the author of such literary work, if any, such as the Publishing Rights in the Literary work. All the Rights in the literary work are purchased either vide a full-fledged separate Assignment Agreement or may be purchased in accordance with the Assignment Clause(s) set forth in the Option Agreement.
The payment of the purchase price is what converts the Producer's right from an Option to an actual conveyance/assignment of rights.
1. Movie Law, How Option Agreements Work, https://movielaw.net/tips-of-the-trade/how-option-agreements-work/.
4. LawSikho, Option Purchase Agreement, Secured Learning Management System, EC Media and Entertainment Law: Contracts, Licensing and Regulations, 4-5.
5. Rachel Deahl, Fox Options John Green's 'Fault in our Stars', Jan. 31, 2012, https://www.publishersweekly.com/pw/by-topic/childrens/childrens-industry-news/article/50442-fox-options-john-green-s-fault-in-our-stars.html.
6. LawSikho, Option Purchase Agreement, Secured Learning Management System, EC Media and Entertainment Law: Contracts, Licensing and Regulations, 8-13.
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.