Lost in Translation Rights: Anime Merchandise Licensing across Borders

Licensing Basics

While the benefits of intellectual property (IP) licensing are evident to licensors, merchandise companies also gain from working with licensors. By utilizing the popularity of certain IP, licensees gain the ability to reinforce their brand in current markets, enter new markets and territories, and obtain new distribution channels. Further, with the use of the IP, merchandise companies are able to distinguish their products from other goods in the same category.

The Hidden Arms Race

There are a few legal and business factors to consider with anime licensing in particular. Because animation and production studios are selective in who they work with, the number of merchandise companies creating licensed anime merchandise is not yet oversaturated. To a merchandise company that bases its business model on licensing IP, this comes as a double-edged sword. On the one hand, receiving an initial licensing agreement is a difficult task because studios are protective of first-mover licensees in a product category. On the other hand, once a licensee receives the rights to produce a certain category of goods, the studio will then protect that licensee from other companies interested in creating anime-based goods of the same category (with narrow, carve-out exceptions such as apparel, a uniquely distinguished good in the same product category, or an offer of an exceedingly high minimum guarantee). Studios and sublicensors tend to limit the number of licensees creating the same or similar products to prevent companies from undercutting the price and compromising quality as the result of an overly competitive market.

Due to the selective nature of the anime merchandise industry in the U.S., merchandise licensing resembles an arms race. To illustrate, a merchandise company greatly benefits from being the first to acquire a license to a certain product category because it provides an advantage by creating a barrier to entry against competitors looking to get licensed for a similar product. Additionally, licenses also protect the merchandise company from stores creating counterfeit products. Essentially, the more rights a merchandise company can pick up for various goods, the more a company can monopolize the product and expand its demographic.

The grant of rights usually lasts anywhere from two to three years, and can last even longer with renewals as long as the product continues to recoup or exceed minimum guarantees. This means other competitors can be kept out for as long as the merchandise company is able to maintain rights to the product category.

Pre-Licensing Process with Japanese Companies

Most Japanese animation and production studios either work with licensing agents to facilitate deals and product approvals or distribute their exclusive rights in copyrighted works to sublicensors. As a licensing agent, the third-party company does not receive any rights, but as a sublicensor, the company receives exclusive rights to sublicense the IP to other companies, often limited to territories in North America, with a few exceptions. These exclusive rights usually also preclude the Japanese master licensor from licensing out that IP to other licensees directly as well. Certain production studios may prefer to work with Japanese merchandise companies over U.S. companies because they often have to communicate with a U.S. merchandise company through a sublicensor, which may slow down the process. However, sublicensors simplify the approvals process for licensors by managing art assets; coordinating, organizing, and presenting product submissions; and performing any other tasks that reduce the master licensor’s workload in regard to licensing.

Alternatively, some studios have their own U.S. subsidiaries that will act as the licensing agent or sublicensor. Regardless of the licensing structure, before proceeding with granting any rights, all merchandise companies must first be reviewed internally by the master licensors. For example, a studio may decide to check the merchandise company for a history of copyright infringement, any experience working with licensors and creating licensed products, sales volume, and other undeterminable factors. Because violating IP laws is not just a civil law violation but a criminal offense, Japanese companies are not likely to provide a licensing agreement if the merchandise company has a history of creating unlicensed goods. Once approved, the merchandise company will then submit a proposal.

Differences between U.S. and Japanese Copyright Law

Since most Japanese companies work with sublicensors or their own U.S. subsidiaries to draft licensing agreements, the differences between U.S. and Japanese copyright law do not usually affect the contracts in vital ways. Even in licensing agreements with Japanese companies, the agreement is often similar to a U.S. one. However, understanding Japanese copyright law may help U.S. merchandise companies understand how copyright law in Japan influences the licensing process.

Under both the U.S. Copyright Act (USCA) and the Copyright Act of Japan (JCA), copyright law includes various rights for exploiting a work. An author may transfer all or part of the rights. The JCA protects the following author’s rights: right of reproduction, right to performance, right to screen presentation, right to public transmission, right to recitation, right to exhibit, right to distribute, right of ownership transfer, right to rent out the work, right to create derivative work, and right to exploit derivative work. However, a work does not need to be registered in order for the author to pursue a lawsuit under copyright infringement, unless the copyright owner is looking to pursue countermeasures against a third party for the transfer of copyright. In the U.S., the work must be registered or receive a refusal on the copyright registration in order for the author to sue.

Even if a Japanese author originally created a work in Japan, they are still protected in the U.S. under the Berne Convention without registration in the U.S. Berne’s prohibition on registration formalities requires that copyright remedies, “such as injunctive relief and actual damages, remain available to foreign authors who have not locally registered their works or undertaken other locally-imposed declaratory measures.” Although the Berne Convention only mentions border seizures of infringing copies as a remedy, Berne also provides that all member states must supply a “means of redress.” In other words, because an animation or a production studio’s works are protected even without registration in Japan, the studio may take legal action against infringement in the U.S. without copyright registration in the U.S. under the Berne Convention.

Most anime is created from manga (a graphic novel the anime is based on). Thus, the manga is the original work, and the anime is a derivative work. Because anime merchandise is also considered a derivative work (rather, a derivative of a derivative work), Japan’s copyright law treats this type of work differently.

In the U.S., a derivative work is “a work based upon one or more preexisting works,” and an author of the preexisting work retains a copyright in that derivative work with respect to all of the elements from the preexisting work that were used in the derivative work. While the author is able to preclude others from creating derivative works based on their preexisting work, the rights extend only to the preexisting work within the derivative work. In contrast, Japan’s copyright law allows an author to retain all moral rights to both the original work and the derivative work. While the copyright law in both countries requires permission from the author of the preexisting work to create the derivative work, Japanese copyright law instructs creators of derivative works to obtain permission from the original author to exploit or modify the derivative work in accordance with the author’s intent and attribute the author of the original work. The JCA further clarifies that “authors of the original works continue to have all rights” and that the author of the original work holds the “exclusive rights in the same categories as the rights prescribed . . . that the author of the derivative work holds in connection with the exploitation of that derivative work.” Thus, creators who wish to exploit a derivative work must obtain authorization from both the author of the original work and the author of the derivative work.

Impact on Licensing by Japan’s Copyright Law

As a result, simply including a clause to transfer all rights for exploiting the work is insufficient because the right to create derivative works and the right to exploit them cannot be transferred (unless the purpose of transfer of these rights is specifically described in the agreement, pursuant to the provision set forth in Article 61(2) of the JCA).

While creators who utilize a derivative work must receive permission from both the derivative author and the original author, manga authors (mangakas) typically are not involved in overseeing merchandise creation. However, the animation or production studio usually ensures that any works created by the licensee strictly adhere to the key art created by the studio and approved by the mangaka, with little to no deviation.

To illustrate the protective nature of animation studios over the mangaka’s original work, in agreements made directly with the studio, when defining the “works” being licensed, the studio may occasionally phrase the protection of the author’s moral rights as follows: “Notwithstanding the above, Licensee agrees and acknowledges that the right to utilize the original illustrations created by each original author is specifically excluded from the scope of this Merchandise Licensing Agreement.”

Aside from derivative works, moral rights are also nontransferable. In order to avoid a dispute over these rights, the agreement should exclude the use of the author’s moral rights to reduce the risk of infringement.

For any additional rights potentially gained from exploiting the IP, the studio may grant rights to a sublicensor to register such rights on behalf of the studio or to enforce such rights. Prior to studios such as Khara Inc. that brought lawsuits against multiple unlicensed merchandise sellers in 2022 on its own behalf, sublicensors such as Funimation submitted DMCA takedowns and cease and desist letters and filed lawsuits on behalf of the studios.

Cultural Impact on Licensing

While approval from a mangaka is not usually required, approval is required by multiple hierarchical committees and executives of both animation and production studios, occasionally including the sublicensor or licensing agent, coordinated by the sublicensor or licensing agent. Due to the many levels of approval required, a response may take up to 21 business days to receive, depending on the merchandising committee and sublicensor or licensing agent managing the approval process.

The process of IP licensing may also be significantly impacted by cultural differences between the U.S. and Japan, including varying approaches to hierarchy and decision-making, contrasting expectations, and different communication styles. At all stages of approval, submissions are screened by the sublicensor and may be submitted back to the merchandise company before reaching the master licensor over specific issues. However, once the master licensor receives the submission, the product is heavily scrutinized for deviations from the artwork and from the original author’s intent. To avoid these issues, Japanese companies generally prefer working with other Japanese licensees or developing the products themselves.

Clauses to Review in Licensing Agreements

While the differences in Japanese and U.S. copyright law do not largely affect merchandise licensing agreements, Japanese license agreements have a few quirks that may affect a merchandise company’s business. Like U.S. licensing agreements, the essential elements of the contract to review are the minimum guarantee, IP subject matter, rights provided, and territories.

A minimum guarantee is an advance a company pays to the licensor that royalties recoup against over the term and may be negotiable depending on the anime title. The more popular the anime, the less likely the licensor or licensing agent will be willing to negotiate, and the higher the minimum guarantee will be. Conversely, even if the show is highly anticipated to be popular, if the anime has not yet aired, the minimum guarantee may be relatively low.

Licensors will usually only grant the licensee territories that are culturally similar to or correspond with where the licensee is located, and the license is usually not exclusive. For example, a U.S. licensee may only receive rights to North America, Australia, and New Zealand, whereas a South American licensee may only receive rights to South American countries, and European licensees likely work with a different licensing agent than the U.S. and South American licensees. Receiving global rights, particularly rights to sell in Japan, is incredibly rare because certain rights still belong to the master licensor or a different sublicensor altogether. However, global rights may not critically affect sales. Another element that may not critically affect sales is exclusivity. Because licensors are unlikely to layer in more than a few competing companies of its licensees, a nonexclusive right is innocuous.

Aside from the aforementioned clauses, there are other elements in the contract that may directly impact a merchandise company. For example, the approval schedule dictates what items require approval, how many stages of approval the product must go through, the criteria for approval, how long approval takes, and what happens if a product is not approved within a certain time or is rejected at a specific stage. Not all products are subject to every stage of approval, so negotiating for fewer stages, a shorter response time from the licensor, and the consequences of a product not being approved by a certain time may provide a clearer timeline for the merchandise company to plan and release products, as well as coordinate with its buyers and marketing team regarding the new launch.

Notably, another important clause to review is the withdrawal of rights clause. Although rare, the licensor may change its mind after signing the contract, even after the licensee pays the minimum guarantee. While this constitutes a breach, the consequences of pursuing that breach may discourage other licensors in the industry from working with the licensee. Thus, the merchandise company should request that if such a withdrawal is required, the master licensor (or sublicensor) must provide the licensee with a replacement that is comparable to the withdrawn IP. If an adequate replacement cannot be found, then the licensee should request for the licensor to return a portion of the unrecouped minimum guarantee based on the percentage of the licensed products unavailable and the percentage of the license period remaining.

Finally, if negotiation falls flat and the merchandise company is unable to receive a licensing agreement, it may also offer to function as a supplier for the licensor. By operating as a manufacturer for the licensor, the licensee is able to create products in a limited capacity without the licensor giving up any rights to the merchandise company, but the merchandise company is still able to generate revenue and build a reputation of working with licensors.

Conclusion

As anime becomes more popular, the number of merchandise companies looking to work with studios of popular shows will only continue to increase. With the current landscape of anime merchandise licensing, the barriers to entry are created not only by the competing merchandise companies but also by the legal and cultural differences in the licensing process between the U.S. and Japan. However, by implementing strategic legal and business tactics, merchandise companies are able to dodge the pitfalls of licensing, leading to the creation of innovative and high-quality merchandise for fans to enjoy.