Are your design contracts helping—or hurting—you? Do clients understand your contracts? Do you? If you don’t have a solid contract, you may be unknowingly giving away your design rights or taking on liability you shouldn’t be. Even worse, if you don’t operate as an LLC or corporation, your personal assets could be at risk if you make a mistake. Learn how to prevent a contract catastrophe, get your contracts signed faster and protect your design rights—and yourself—from a legal crisis.
- Works Made for Hire – U.S. Copyright Office (PDF)
- Errors and omissions (E&O)/professional liability insurance
- Better Relationships Through Better Contracts
- Quick Question
Matt Johnston is an attorney in Frederick, Maryland, who works with creative professionals and small businesses on business formation, employment law, contracts, copyright and trademark law. Matt has been in private practice since 2007, and in solo practice since 2012. He serves on the AIGA Blue Ridge board and is a frequent speaker on a variety of topics related to small businesses. You can find him online at MattTheLawyer.com and Johnston-Legal.com.
Colleen: Welcome, Matt. Thanks for being on the podcast. Do you have to start us out with a legal disclaimer?
Matt: Probably not so much right now.
Matt: But, thanks for having me. I appreciate it.
Colleen: Sure. I notice you have a quote on your website that’s really interesting, and it says,
“Reacting to legal matters in crisis mode is far more expensive than proactive management. But there is no such thing as a legal problem today that didn’t start as a legal question sometime in the past.”
Can you explain that a bit?
Matt: Sure. One of the big problems that people have when they start thinking about, “Maybe I need a lawyer. Should I get a lawyer? Oh, my God. Lawyers are so expensive. I can’t afford a lawyer.” The real problem is, is you probably can’t afford not to have one around. Most people, when they first contact a lawyer, it’s always in reaction to something else that has happened, whether that is, “I’ve been sued,” which was common in my prior practice before I went at it solo or, “I’ve got this nasty letter from somebody that says I’m infringing on their trademark,” or, “I’m infringing on their copyright,” or all sorts of things. There’s all these sort of crises that come up and people react. That gets expensive because it takes time to sort of figure out what’s going on, who’s doing what, what was the cause.
Every single problem that I’ve ever experienced as an attorney—from every case except one in my litigation practice, in my current practice—every single one of them has been the result of not asking a question sometime in the past or assuming an answer that wasn’t necessarily true. A legal question is, “Okay, how do I protect myself against copyright infringement claims?” Rather than waiting until you get one of those nasty letters you’ve already assessed the problem going into it. That’s what I mean is most legal problems that people experience could have been addressed some time ago if they had just had somebody to ask the question of.
Colleen: Great. That’s really helpful, and I agree.
Matt: Yeah, I mean, it’s more proactive. It’s taking charge rather than waiting for somebody.
Colleen: Preventative rather than reactive.
Matt: Sure, your car is a good example. If you take your car in for regular oil changes, and tune-ups, and all this other stuff, they can spot a problem before it becomes a real problem. If you don’t do any of that and your transmission dies you’re looking at several thousands of dollars.
Colleen: That’s a great analogy. Now, a lot of attorneys don’t understand what’s unique about creative businesses. They may not realize that there is a need to address in the contract who owns design rights and the files that the designer is creating, and I see a lot of designers giving away those rights and their files free of charge. That’s their intellectual property.
Colleen: So they don’t understand that, by default, they have this inherent right about creating files and owning those rights. Do you see that a lot with designers and can you explain a bit about that?
Matt: Sure. Probably the biggest reason why, to address the first part that attorneys don’t understand what’s different about creative businesses, is largely just not spending enough time around creatives. I am not an inherently creative person. I can’t draw to save my life, but I can appreciate what designers do and I can appreciate the work that goes into it. That’s what I’ve spent my time learning, spending time learning what that’s about. While attorneys can learn about the business, sometimes it doesn’t go the other way. Most creatives, they’re running a business, they’re running a creative business. They don’t really think about the legal aspects of it.
Yeah, I see a lot. I see a lot of designers just giving away certain aspects of their work without thought or based on the assumption that, well, clients are paying for that so, therefore they should have it, without thinking about, well, there should be some restrictions on that.
Most of the work that designers do is going to be covered by the copyright doctrine called Work Made For Hire. The client is paying you to produce something, they have the right to have that last iteration of it. Whatever design you come up with and the client says, “Yes, that’s what it was. That’s what I want. That’s great.” They have the right to use that. It’s a pretty unencumbered right. But all of the iterations, all of the designs that were rejected, all of the things that didn’t suit or were not what the client wanted, that still belongs to the designer. That’s their stuff. If they use it to riff off of for another idea later on, that’s perfectly fine.
There is an awful lot of giving away of what shouldn’t be given away. The intellectual property is the one thing that designers own. It’s their stuff. Somebody who builds cabinets or something like that, you know, nobody gets … the client doesn’t get from the cabinet maker all of the jigs and templates and all of the stuff that the cabinet maker uses to create the final cabinet.
Matt: The designer shouldn’t … the graphic designer, the creatives shouldn’t be giving away all of their tools either. It’s the same sort of concept is it’s what the client is getting and what they actually own at the end of it.
Colleen: Right. I mean, I very rarely in my 21-year career have ever done work for hire. I mean, if it was a situation where I was just kind of acting as an extension of their department because they didn’t have enough in-house designers to do something and they just needed help with layout but the design was done, it was following their templates or even if they sent me the files, that was all considered work for hire. But if I’m creating the design and the whole project, then I specifically have in my contract that I own all the rights other than reproduction rights, which I give them.
Matt: Right, well there’s two ways to going about it. I’ll be honest, if I’m on the other side and I represent your client, I’m going to insist on getting it as a work made for hire because, at the end of the day, if I want to excerpt something from your work that you created for me, I don’t want to have to go back to you to get permission. But the client only gets the final product. They don’t get everything that went into it. It is something that it’s a line that has to be walked. If your clients are willing to say, “Okay, yeah. I’ll just take the production rights,” then the production rights are theirs and it becomes an agreement. That’s the other thing is that pretty much everything’s negotiable, and so negotiate it. If something is going to the client as a work made for hire, I tell designers, “Make sure you get a portfolio right that allows you to display that work in your portfolio so that people can see that work that you do.” I see that oftentimes is forgotten or it’s not addressed clearly.
Colleen: Right, well, and in my contracts, I have a clause about displaying the work but I still own the rights but I just have that in there in case it’s like a confidential project or something like that. But if they want to buy the native files, the InDesign files or layered Photoshop files, or something like that I always have that as an extra fee. Most clients don’t want that because they don’t even have the software to work with that. They don’t have the software and they don’t know how to use it if they did have it.
Matt: Right, and that’s perfectly fine. I tell people, “Yeah, charge for it. I mean, if they want those files it’s fine to charge for it. It’s perfectly fine.”
Matt: Just bear in mind that sometimes even if they don’t have the software to use it, it might come down the road somewhere else where they need to hire another designer for whatever reason and may need those files. Just sort of be prepared for both eventualities.
Colleen: Right, that’s a good point. I mean, I’ve had it come up a few times and that’s where I just … instead of just having this legalese in their addressing copyright that the client didn’t understand I added a plain English clause addressing it telling them what it means because that would always be the one question in my contracts that was questioned. It’s like, “I don’t understand this. What does this mean? Well, why don’t I get the files?” I would have to always explain it. They usually didn’t want the files anyway even after I explained it, but they … it brought up the point, which was a good thing, but now I just spell it out in plain English because that always seems like a point of contention in design contracts.
Matt: I think that it is and I think part of it is oftentimes both sides don’t fully understand how copyrights apply in the particular situation. It is very fact driven. It’s one of the things that drives my clients nuts when I’m talking to them. It’s like, “Well, yes, if that’s happening, if X case is happening then this applies, but if it’s Y case then something else applies.” People are like, “Wait a minute, it’s not the same thing?” I’m like, “It is the same thing, it’s just applied differently because the facts are different.” Which is a frustrating aspect of the law. I understand that.
Colleen: You know, copyright is not only confusing for clients, it’s confusing for designers and a lot of times designers don’t know how to explain it to the client if they’re asked, or even if it gets brought up. They also confuse copyright with a trademark. Can you go into copyrights versus trademark?
Matt: Sure. The basic description is that copyright is the intellectual protection for the expression of an idea. An idea that floats around your head, you put it into InDesign or Photoshop, or you take a picture, you write it down, you draw it, whatever. If it’s put into some sort of expression, some fixed medium of expression is the legal term. That’s what a copyright is. And with the copyright comes a whole bundle of rights, everything from production and performance rights to display rights, derivative works, a whole bunch of complicated stuff. But copyright is the intellectual property protection for the expression of an idea.
Trademark is a mental shortcut, the best way to describe it. You see a trademark, a logo, a tagline, and it becomes a mental shortcut to the goods and services that are being sold and the company who’s selling those goods and services. So, for example, the Nike swoosh. You see the Nike swoosh, you know exactly what company is putting that product out and you have a pretty good idea of the quality of the product.
So it’s a mental shortcut from the visual to the company and to the goods and services. So they are very different sort of ideas from a legal perspective. Trademark can last forever. As long as Nike keeps using that swoosh, Nike will own that trademark forever. But a copyright has a limited lifetime. Those are two of the main sort of distinctions is the duration and the ability for people to use copyrighted material versus trademark material.
Colleen: When should a designer consider, or what should a designer consider trademarking?
Matt: Some of the things that a designer could trademark would be their own business logo, if they have a tagline, if they have a particular product or niche that they occupy, they could come up with some sort of mental shortcut that would allow them to obtain registration of that trademark with the U.S. Patent and Trademark office. That’s probably the most common thing.
So you have a company name, a company logo, a tagline, those sorts of things that people can identify with your company. And then when you’re working with clients and you’re developing a logo, a brand identity, those things are inherently valuable as trademarks. Leaving aside the copyright protection for them, they’re inherently valuable as trademarks and I would urge companies to consider obtaining the registration for that trademark.
Colleen: I know from having you review my contracts recently that you take a different approach from most other lawyers about contracts in that you prefer just writing out plain English instead of a whole bunch of legalese. So why did you decide to take that approach and how does that help?
Matt: Okay. Well, wow, you’re opening up a great big bag of stuff here. The primary reason is that most people hate contracts. They look at them, “Oh man. It’s another contract. I don’t want to mess with it.” And contracts are important. They’re the grease that keeps the wheels of commerce moving, but most contracts are not written for the people who are going to use them.
So you, you are a knowledgeable designer. You know what you’re doing in your business. You have a good idea who your clients are and what they want, but you’re not a lawyer—at least I don’t think you’re a lawyer.
Colleen: I’ve worked for them though.
Matt: But most people who use contracts day in and day out are not lawyers and it seems ridiculous to have to pay a lawyer to translate a document that is ostensibly in English into something that a non-lawyer can read.
Matt: Let me tell you a little story and this is kind of what I’m sort of speaking about. I had a client who was dealing with a company in Brazil. Now in Brazil they speak Portuguese, and the Brazilian company that they were working with wanted a contract that was both in English and in Portuguese. Well, I don’t speak Portuguese so we hired, being not far from D.C., we contacted somebody at the Portuguese embassy who was willing to help us translate this.
They helped us translate it into Portuguese. We paid the translator something like $125 an hour to do this. Not that’s translating English into Portuguese and back and forth, two completely different languages. Why would anybody then spend three or four of five hundred dollars an hour to have a lawyer translate a document that is supposed to be in English into something that more resembles the English that you and I use every day?
So it just seems a little ludicrous. Part of it is that, I just don’t believe that lawyers … Lawyers should be in the business of serving their clients needs and advancing their client’s needs. If a contract is in plain English, it’s something that your customer is going to be able to understand. They are far more likely to sign that agreement and sign it faster.
Colleen: I like that!
Matt: You know, and then the client then becomes, or the customer then becomes much more enamored of the work that you’re doing because you’re upfront and honest about it. People see legalese and they get automatically distrustful about it. It’s not all the lawyer’s fault. Don’t get me wrong. Some of it has to do with the way that we are trained. Some of it has to do with the way, how we’re trained both in law school and sort of on the job training when we get to a law firm.
But some of it is also this sort of mindset of what is referred to as the “curse of knowledge.” The longer lawyers practice law and the more that they read and write that style, the more they lose the connection to the notion that other people don’t know what lawyers know. You run into with designers all the time. You may be speaking a lot of jargon, a lot of discussion about maybe psychology of colors, typography, all this other stuff and if you look at your clients, they’re kind of glazing over. The reason being is that you’re speaking a language they don’t understand. And it’s difficult for people who spend their time in a specialized field. The longer they spend that time in that field, the farther they get from that notion that not everybody knows what they know.
So it’s the curse of knowledge. And there’s been a lot of stuff written about the curse of knowledge. I recommend people go out and Google it to sort of understand what that is and apply it in their own work.
And that’s really what it boils down to: I’m working for clients who have customers who are not lawyers and may not be represented by lawyers. So I want my clients to be able to get contracts signed. It’s the only measure of success is whether or not the contract is signed.
Colleen: That’s brilliant.
Matt: I try.
Colleen: So other than the design and file rights that we talked about earlier, what are some essential elements of a contract?
Matt: You need to be very explicit about what the customer is getting. The scope creep is one of the things that gets dangerous. So, let’s say, for example, a client hires you to put together a simple rack card or brochure, a trifold brochure and—
Colleen: I’m impressed you know what a rack card is.
Matt: Hey, I’ve got my own, you know. So let’s assume that’s what you’re being hired to do and then they ask, “Oh, can you change that design to, so that it’ll work on my website?” And you’re like, “Oh, sure. That’s no big deal,” and you do it. And then you get the next request and the next request and the next request and all of a sudden, because you haven’t billed for that or you haven’t put it into the proposal you’ve spent five, six, 10 hours doing other work outside the scope of what you originally agreed to.
So I tell people to guard against scope creep you have that extra thing. It’s like, “If it’s not really related to this, I charge X number of dollars per hour to do other work.” Or, “If you want me to do that, then we’ll have another agreement to do that.” So clearly define the scope of what’s going on.
Really, have a good indemnification policy. So indemnification is about risk. To define, “indemnification” is: the other party is going to pay my fees is some sort of risk comes true that the other party controlled. So one of the questions that you had sent me and you were asking me about, “What happens if the client gives me a file, audio file, visual file, text, whatever that they don’t actually own or have the right to use?” That’s what indemnification is for.
So you have a provision that says you’re going to give me these files. I’m going to trust, I, the designer am going to trust that you have the right to use those files. If it turns out that you don’t have the right and I get sued for using them, you’re going to pay me whatever damages I suffer, including paying for my lawyer. And the reason why is because the other side, the customer, they controlled the risk.
Indemnification applies not just to that specific thing but any time that there’s some sort of risk that something could go wrong within the relationship. Indemnification guards against that. You have to sort of figure out who owns the risk, the who can control it and who might be hurt by it. And once you figure that out, then you can write an indemnification provision that says, if these bad things come true—and they may never come true—but if they come true, then the party who has the ability to control it is the one who has to pay for it.
And sometimes it goes both ways. You know, for example, the designer goes out and gets some stock photography from a stock photography site and they buy the license on behalf of the client. Well, the designer should be making sure that they understand the scope of that license.
Matt: And the designer has the ability to inform the customer: this is the scope of the license, so you can use this photo in 10,000 versions of your document. But if you want to do more, you have to pay an additional fee. The designer needs to be telling the client that and transfer that license to the client, so that the client knows it and the client owns it. So it’s those sort of risks that are involved in there.
Then, I guess the other big thing is making sure that the designer gets paid. After all, you want to get paid for your work.
Colleen: Yes, please.
Matt: I firmly believe that most customers want to pay their vendors on time, but there’s no real way to reward on-time payment so you sort of have to disincentivize late payment. And you do that by having a late fee and interest and collections fees. But having a nice clear-cut, you know—
Having a nice, clear-cut, “Here’s my invoice. You have 15 days or 30 days from this date to pay it,” and be clear about, and then be prepared to kind of be jerky about it. I know we don’t like to be, but, sometimes, you’ve got to be a little jerky about making sure you get paid.
Colleen: You do. You have to be firm.
Matt: It’s not that I don’t think designers don’t want to be paid. I’m sure they do, but it’s a confrontation that a lot of people get very uncomfortable with, and I understand that.
Colleen: Right. I just blame it on my project management system. I have this great project management system that will send out reminders for late invoices, so it’s not—
Colleen: I’m not the bad guy.
Matt: Yeah, my practice management software has the same thing, but it does say it’s coming from my office. I now have a virtual assistant, but, for the most part, it’s always been me, so, if something went out from my office, it’s because I sent it. There’s no getting around that ownership of that problem, but, yeah, just get paid, be paid, you know?
Colleen: I know some colleagues that have their own businesses, and it’s them and maybe their designer and developer, and they don’t have anybody other than themselves doing the bookkeeping, so they’ll create a separate email address, like on their domain, and just give that person a name and an e-mail address and send out invoices from that e-mail address.
Matt: I mean, I can see why they do it, but I’m kind of a big fan of, “No, wait a minute, I did the work. You owe me the money.”
Matt: Bear in mind, I would include in the contract, “You don’t have any rights to anything I delivered until you pay me,” and be very clear in the contract about that. So even if you do deliver the final design for them to go and take to the printer or go live on a website or whatever they’re going to do with it, if they haven’t paid you, they don’t own the right yet, and you can assert a copyright violation.
Now, when you do that, it automatically gets very sort of tense, but you do have that right. You haven’t been paid for the work yet. They don’t own it yet.
Matt: Going back to our car analogy, if you drove off the lot without paying for it, you just committed a theft, a grand theft auto, I might add, and they will come for the car. It’s the same sort of thing.
Colleen: If a designer is thinking about going out on their own, what types of things do they need to consider when it comes to like an LLC versus incorporation or not doing anything at all, because I know contracts provide some level of protection, but how can they get a more macro level protection with these?
Matt: The big thing about forming an LLC or a corporation—we’ll talk about the differences here in a second—is it provides what’s legally called a “liability shield,” so, if you’re doing something on your own. Let’s say you designed a logo for somebody or you put together a catalog or a rack card, or something like that, and somebody comes along and asserts a copyright violation against you. They say you used all this stuff, and it turns out that was the case. I hope it’s not, but let’s say that it is, all right? If you’re working just on your own without one of these liability shields, your personal assets are at stake—your house, your car, your bank accounts. Those things are at stake now and, if there’s a judgment, those things can be attached and collected against, which is not a very fun place to be.
Matt: That’s why I almost always recommend forming an LLC or a corporation. For most designers, almost without fail, I would say file and form an LLC. You can have a single member, a one-owner limited liability company. It costs $195 here in the state of Maryland. It takes about 24 to 48 hours to get the paperwork back, and if you follow the corporate formalities, which is having a separate bank account, operating things separately from your personal life, if there’s a problem like one of these copyright things, it begins and ends at the company. It doesn’t go any further. So that’s it and, as long as you’re not using that limited liability company to commit fraud, it’s very, very, very difficult—at least here in the state Maryland and in most states, honestly—to get behind that liability shield.
So I tell everybody it’s a good idea to form a limited liability company. Yes, you got to the pay the annual fee and all those sorts of stuff, but it just protects you and your personal assets, your family assets, from a mistake, and oftentimes it is what these things are. It’s a mistake, and you don’t want your whole life to be ruined because of a mistake.
Colleen: Right, yeah. I wouldn’t be sleeping at night.
Matt: Right, and the limited liability can grow. The limited liability company, the LLC, can grow with you, so as your business grows, you can change the tax, how it’s taxed. You can change it to a corporation later on if you need to. It has so much more flexibility, and it allows you to sort of sleep at night and not worry about that mistake and its impact on your personal assets and your business, but your personal family assets.
There may be some young designers out there who go, “Oh, well, I don’t own anything.” Okay, but judgments last for a really long time. A judgment in Maryland is open for 12 years and it can be renewed.
Matt: Yeah, you may not think, “Oh, well, I don’t have anything now,” but in 10 years you might. At any time, that person who has that judgment can come and ask for you to pay it, and you’re legally obligated to do so.
Colleen: What do you advise about insurance?
Matt: Absolutely, positively get errors and omissions insurance. It’s called E&O, or errors and omissions insurance, and, essentially, it is malpractice insurance. So, if you make a mistake that costs somebody money and it’s a good faith mistake, the insurance coverage is there to protect you. So it’s this additional level of protection. Work with a commercial insurance agent. There’s all kinds of products out there, but I’m a big, big, big, big, big fan of insurance.
Colleen: Freelancers Union offers it for like 38 bucks a month, and it’s through Hiscox, and I used to pay 10 times that directly through a Hiscox broker.
Colleen: It’s very cheap at Freelancers Union. I’ve not been able to find it cheaper anywhere else.
Matt: You probably won’t because it’s been … I mean, I don’t know what designers would pay through AIGA, but I’m sure they have an insurance option, and there’s other professional insurance options that are available out there through various organizations, whether it’s the chamber of commerce or professional organizations. But spend some time looking around for it because it can … now, hopefully, you never need it.
Matt: I’ve never needed my malpractice insurance. I really need it now because I just have a growing practice, but when I went out on my own, another lawyer said, “Malpractice insurance is very expensive,” and it is, but he said, “The best insurance policy is happy clients. Happy clients don’t sue.” So, early on in my practice, that’s what I made sure. I made sure all my clients were happy. If that meant I had to eat eight, nine, 10, a whole day’s worth of work, that’s what it meant, and, sometimes, that’s the best insurance policy. If you can get it for 40 bucks a month through Freelancers Union, yeah, it’s worth every penny just for the peace of mind.
Colleen: Absolutely. This has been really great information—and in plain English, not in legalese. So if the listeners or readers need anymore assistance, what do you offer that can help them?
Matt: You gave one website at the beginning, but there’s an easier website to remember. It’s just MattTheLawyer.com. It’ll take you to … It’s got my blog, all of the good stuff there, and you can contact me through that.
There’s also the usual sort of social media stuff up there, and I do have a book about contracts that’s available on the website, so if you just go to MattTheLawyer.com, there’s a little button there on the right-hand side that says, “Buy the book.” It’s about contracts. It’s about how you can build better contracts yourself, so if you don’t have to a lawyer involved, or at the very least it gives you the tools that you can communicate with your lawyer a little bit so that you can get a contract that reflects how you do business as a designer or as a business owner and not just how the lawyer thinks you should do business because it’s two different things.
Colleen: Right, and don’t you have something called Quick Question?
Matt: Yeah. If you’ve got one discreet sort of question, you can go to the website. Log on for the Quick Question. It’s 100 bucks for 10 minutes. We can talk about whatever you need to talk about—nice and simple and easy.
Colleen: That’s great because most lawyers don’t do that.
Matt: Probably not. I got the idea from a lawyer out on the west coast. She’s a very bright lady who kind of operates like I do. She knows… But I stole the idea from her.
Colleen: Then you have an e-mail newsletter and you have a really great blog too.
Matt: Right, so I mean the blog is there.
Colleen: I’m on your list.
Matt: Yes, the blog is there, and you can also sign up for the e-mail newsletter on the website.
Colleen: Well, thanks so much for your time, Matt. It’s really been great talking with you.
Matt: You are very welcome, and let me know if you need anything else.