This article has been written by Riya Gupta, pursuing a Certificate Course in Media and Entertainment Law: Contracts, Licensing and Regulations from LawSikho.

Introduction

As we all know, movies are protected by Copyright law, and streaming movies online for free is illegal. As a result of the internet revolution, new forms of exploitation of films have surfaced. To fulfill the entertainment needs of consumers, a lot of streaming apps like Hotstar, Prime Video, Netflix have come up which allow you to watch movies legally, without violating the copyright. In this article, we will understand how Netflix obtains these streaming rights by analyzing what Netflix actually does to have become the largest subscription streaming service in the world and some relevant provisions of law.

What are the requirements of making a copyrightable film?

Any cinematograph film which is original in the sense that it is not a copy of substantial or essential parts of another film is granted copyright protection. There must be a minimum degree of creativity. What it means to have your film protected by copyright is to have the exclusive right to make a copy of the film, to sell or rent the film, or to make the film available for being enjoyed by the public. Now, to exploit these rights, the producer of the film enters into distribution agreements with companies.

What is the procedure to obtain distribution rights for films?

If a platform like Netflix wants to stream a movie, it will have to enter into a Digital Exploitation Agreement with the producer of the film wherein the producer will license the right to communicate the film to the public, also called a Film Distribution Agreement. There are various kinds of Film Distribution Agreements depending on the mode of exploitation such as theatrical and non-theatrical. By licensing this right and not assigning it, the producer does not transfer the title to the film but only gives permission to the distributor to stream the movie for a particular term period. The most essential clauses of such agreements are the Definitions Clause, Grant of Rights Clause, and the Consideration Clause. 

Definitions: it is essential to clearly stipulate what constitutes ‘Licensed Contents’, ‘term’, ‘territory’ and the mode and platforms that licensee is allowed to use for exploitation of rights granted.

Grant of License: this clause lays down clearly that all rights have been licensed by way of this agreement. This can also include restrictions on dubbing, subtitling, editing, altering, not using the content in any manner other than through the agreed platform. It is also important to include a residual clause within this statement that all residual rights not granted shall vest absolutely with the licensor.

Consideration: this clause stipulates the amount of the licensee fee to be paid, the mode and schedule of payment. It also mentions if this payment is inclusive or exclusive of taxes. As per The Copyright Act, 1957, underlying authors in a film are also entitled to royalties for commercial exploitation of their works so this clause should also mention the number of royalties to be paid to them.

What is the Licensing policy of Netflix?

Netflix is an Over the top (OTT) platform which means it is a streaming media service that is offered to the viewers directly through the internet. It does not need cable, satellite television, or a broadcast platform. OTT, in general, means subscription-based video-on-demand service providing access to film as well as television content. 

Netflix regularly negotiates and renegotiates agreements with various content providers to license streaming rights for multiple movies and TV shows. A license agreement is constituted under the terms of a legally binding contract between the content owners and Netflix, and each agreement varies based on the needs of the content owner and Netflix. Some licenses are limited for a time while others will last for a perpetuity. For this reason, Netflix is always updating consumers on what will soon be available, and also what will soon disappear. 

For instance, the owners of a TV show may agree to permit Netflix to stream all seasons of that show for two, five or seven years. The licensing agreement may then be renewed after the set time period ends, or if viewing figures don’t justify that, Netflix will remove the show from its archive. Some content may be non-exclusive, and therefore also available on other streaming services. Licensing agreements that are not exclusive to a single streaming platform are less costly to obtain. This is why something may be available through another streaming service, and not on Netflix. Examples of licensed content include second-run movies and shows such as Shameless from Showtime, How to Get Away with Murder from ABC, The Office from Universal, and The Godfather from Paramount.

Netflix also acquires exclusive rights to stream content as well as produces in-house. Examples of Netflix-branded originals that are nonetheless exclusively licensed content include House of Cards from MRC, Orange is the New Black from Lionsgate and The Crown from Sony. Movies and shows that Netflix produced and owns include Stranger Things, Mind Hunter and The Irishman.

In case an actor dies before releasing of the Film, Netflix scrambles to acquire prized content very quickly. This is obvious as consumers customarily flock to that content upon hearing of the demise of a famous and beloved celebrity. Even though this doesn’t help Netflix earn any additional revenue but more importantly, this increases the brand value of Netflix in the eyes of consumers.

Most likely the different content owners structure their deals differently. Variables in play might include:

• Number of views
• Geographic market
• Duration of agreement
• License to resell, or straight purchase
• Clauses for reversion
• Revenue share of commercial insertion (if any)
• Discount for demographic data sharing
• Co-branding or cross-market advertising on different platforms
• Package deal for a number of media properties

Music and certain authors’ performances that are a part of the content Netflix distributes may require it to acquire licenses for such distribution also. For this purpose, Netflix engages in negotiations with collection management organizations (“CMOs”) that hold certain rights to music and/or other interests with regard to streaming content into various territories. If they are not able to reach mutually acceptable terms with these organizations, Netflix could become involved in litigation and/or could be barred from distributing certain content. 

Additionally, pending and ongoing litigation going on as well as negotiations between certain CMOs and other third parties in different territories could adversely impact its negotiations with CMOs, or result in music publishers who are represented by certain CMOs to unilaterally withdraw rights, thereby hampering its ability to reach licensing agreements reasonably acceptable to Netflix. Failure to reach such licensing agreements could expose it to potential liability for copyright infringement or rise in costs. Additionally, as the market for the digital distribution of content grows, a broader role for CMOs in the remuneration of authors, performers and other rights holders could expose it to greater distribution expenses.

The cost of the content business of Netflix

Securing licensing agreements with filmmakers, TV networks and other content owners is undeniably Netflix’s largest expense. At the end of 2020, Netflix had $25.4 billion worth of content assets on its balance sheet, up from $24.5 billion the year before.

Of this, licensed content accounted for $13.7 billion in 2020 and $14.7 billion in 2019. The company is using more of its financial resources in developing its own TV programs and film. It had $11.6 billion in produced content in 2020, up from $9.8 billion in 2019.

Netflix uses consumer data mining to ascertain which content viewers pay to watch and relies heavily on this information to calculate the total cost of each licensing agreement. The data is compiled to find out the expected hours of viewing each TV show or movie generated over the term of a licensing agreement thus establishing a cost per hour viewed. It compares this metric to similar content arrangements, and it thereby decides final pricing based on the time frame of the contract as well as exclusivity. 

Netflix is the epitome of how to correctly use data in such creative endeavors. Before greenlighting “Orange is the New Black” for production, Netflix already knew the likelihood of success of the show based on viewership data of women-led TV shows and Jenji Johan’s hit show Weeds. Netflix knew exactly which subscribers would be interested in watching its show and thereby reducing the creative cost of the project.

Netflix And copyright infringement

If you believe your work has been reproduced or distributed in a way that constitutes copyright infringement or are aware of any infringing material available through the Netflix service, you are first supposed to notify Netflix by completing the Copyright Infringement Claims form at netflix.com/copyrights, which asks about your details and the rights that you have in the copyrighted work, details about the copyrighted work and the infringing copyrighted work followed by a verification that you are or are authorized to act on behalf of, the owner of the copyright that is allegedly infringed.

Sameer Wadekar & Anr. vs. Netflix Entertainment Services Pvt. Ltd & Ors

In this case, Plaintiff, a screenwriter sued the Defendants seeking an ad-interim injunction to restrain the release of the web series titled “BETAAL” on Netflix due to alleged copyright infringement with one of his works titled “Vetaal”. The court, while rejecting the injunction, held that no copyright can be claimed over the title as it originates from Hindu mythology. Moreover, the plaintiff was not able to establish the chain of access to his work available to Defendant especially since his work was not available in the public domain. Lastly, the plaintiff was also held to have been guilty of delay and laches as the storyline of the web series had been released in the public domain almost a year before the institution of the suit. 

Irish Rover Entertainment, LLC v. Sims, et al., slip op. 

In a lawsuit filed by Irish Rover Entertainment in California Federal Court regarding copyright infringement with regard to Netflix Original web series “STRANGER THINGS” , it was alleged that the Duffer Brothers and Netflix, copied sequence, theme, dialogues, characters, plot, setting, and mood, as well as copyrighted concept art from Totem, a screenplay written by Jeffrey Kennedy. Kennedy claimed that he got the idea of his story after the demise of his childhood friend who suffered from seizures that sent him to an alternate universe where he would fight demons. 

While Netflix claimed that their story is a result of the issues faced by teenagers while fighting with fictional monsters or military personnel or evil scientists, it asked the court for a motion to dismiss based on the Extrinsic Similarity Test wherein the Court objectively assesses the substantial similarities between two competing works. For conducting this test, the Court decided to seek additional evidence such as expert testimony and thereby rejected Netflix’s motion. It is likely that Netflix would have settled this case with Irish Rover Entertainment by now. 

While it is not uncommon for Netflix to get sued for copyright infringement, settlement is the name of the game for it. Netflix has settled cases against its 2020 movie “Enola Holmes”, “The Bicycle Thief”, “The Chilling Adventures of Sabrina”, “Wild Wild Country” and another documentary titled “Fyre Festival”. It would rather pay and settle now than lose the case as well as its reputation later. But of the cases that have been resolved by Court, Netflix more often than not prevails.

Conclusion

Netflix very well knows what it is doing. Sometimes, it may not seek a license with the expectation that the risk of settling is less expensive than routinely paying costly licensing fees. It seems Netflix sometimes engages in a “do not ask for permission, beg for forgiveness” policy when picking content. This is an effective method only so long as it works for them. But in most cases, they do end up negotiating Licensing Agreements with Producers which is in fact the best way to stream content.

References

1. https://help.netflix.com/en/node/4976
2. Netflix “2020 Annual Report https://s22.q4cdn.com/959853165/files/doc_financials/2020/ar/8f311d9b-787d-45db-a6ea-38335ede9d47.pdf” page 53, Accessed April 18, 2021.
3. https://jiplonline.com/2021/03/15/hit-netflix-content-and-the-copyright-infringement-that-follows/ Accessed April 18, 2021.
4. Pujiyono, Legal Protection for Creators of Cinematographic Works against Copyright Infringement through Streaming and Free Download Sites, 2019 Vol: 22 Issue: 3, Journal of Legal, Ethical and Regulatory Issues, https://www.abacademies.org/articles/legal-protection-for-creators-of-cinematographic-works-against-copyright-infringement-through-streaming-and-free-download-sites-8253.html
5. Sameer Wadekar & Anr. vs. Netflix Entertainment Services Pvt. Ltd & Ors, 2020 SCC Online Bom 659.
6. Irish Rover Entertainment, LLC v. Sims, et al., slip op. Case No. 2:20-cv-06293 (CBM) (C.D. Cal. Jan. 21, 2021)

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