District Court Mostly Refuses To Terminate The Litigation Testing The Copyright Termination Provision

Copyright

from the artists'-rights dept

The decision this post discusses, Waite v. Universal Music Group, came out at the end of March, but, as one of the leading cases litigating the termination provision of the copyright statute, it’s still worth the attention. Maybe even especially now, as the Copyright Office overtly goes to bat for rightsholders. Because the termination provision speaks to who the rightsholders actually are. Without it, it’s likely to not actually be the artists behind the creation of the works.

The decision does a good job at least partially explaining why the termination provision is important:

Aspiring singers, musicians, authors and other artists ? sometimes young and inexperienced and often not well known ? tend to have little bargaining power in negotiating financial arrangements with recording companies, publishers, and others who promote and commercialize the artists? work. They often grant copyright in that work as part of the bargain they strike for promotion and commercialization. Accordingly, when an artistic work turns out to be a ?hit,? the lion?s share of the economic returns often goes to those who commercialized the works rather than to the artist who created them. Section 203 of the Copyright Act of 1976 established a limited opportunity for artists to terminate the copyright ownership that they had granted to commercializers decades earlier in order to address this issue. The idea was that termination of these rights would more fairly balance the allocation of the benefits derived from the artists? creativity. [p. 2]

In other words, since no one had a crystal ball, the law purposefully allows for a sort of “undo” button 35 years later to make sure that artists would not have to be forever locked out of the ability to control their own work. People sometimes refer to it as “recovering their masters,” although it isn’t really about recovering the physical media ? termination is just about canceling the copyright assignment artists may have made in their future work when they first signed their record contracts so they can choose what to do with this work from here on out. But it is only in recent years that enough time had passed for artists to try to assert this provision in the copyright statute. And, particularly for musical artists, it has often been difficult to win back their copyrights from record labels reluctant to part with them, which has led to litigation ? such as this case.

In this case several musicians, acting as a class, sued UMG. Their claims varied somewhat because the plaintiffs were not all in quite the same position, but they basically were all designed to get judicial acknowledgement that the artists either already had, or soon would, recover the copyrights they had long ago assigned to the record label. UMG filed a motion to dismiss all the claims, and this decision was a ruling on that motion. By and large the decision was a good one for artists desiring to recover their copyrights, but it wasn’t an unequivocal win. While some of the artists’ claims survived, some of the others’ were dismissed, and sometimes for reasons that may fairly cause concern.

But first, the good news.

When an artist wants to terminate a copyright assignment, there are a bunch of procedural hoops to jump through, with specific time windows and other required formalities. But if the artist manages to check off all the boxes correctly, the copyright will then automatically revert back to them. Which means that if the record company continues to use the work without their permission, those uses are copyright infringement. And that’s what Waite and many of the other artists in this case sued UMG for.

In its attempt to dismiss the lawsuit, UMG argued that the statute of limitations barred these infringement claims. The general rule for any sort of lawsuit is that there’s a ticking clock on how long you have to sue, and that the clock starts when “a plaintiff ‘knows or has reason to know of the injury upon which the claim is premised.'” [p. 8-9]. To sue for an infringement injury you need to show two things: that you have the ownership of a copyright in a work, and that someone did one of the things that only the copyright owner is allowed to do (such as copy the work) without permission. Most infringement lawsuits focus on the latter part, and the statute of limitations will start once the plaintiff has discovered the infringing activity. But in this case, where ownership of the copyright was the bigger issue, UMG argued that the statute of limitations had started to run when the plaintiff discovered that the question of ownership was in contention. The question for the court, then, was when that moment had occurred. [p. 9-10].

UMG tried to argue that this moment happened in the 1970s or 80s when the original contracts were signed because that was the moment when the ability to terminate the assignment in the future became a question. Why was that? Because many of these contracts stylized the resulting music as “works for hire,” and, per the statute, works for hire are not eligible for termination. As the court explained:

The legal author (creator of the work) and owner of a ?work made for hire? is the employer or person who specially ordered it, rather than the artist. Section 203 excludes these works from the termination right precisely for this reason: ?The hired [or commissioned] party, although the ?author? in the colloquial sense . . . never owned the copyrights to assign. It stands to reason, then, that there are no rights the assignment of which [the artist or] his or her heirs may now terminate.? [p. 7]

It is important to note that the court did not actually decide here whether the works at issue in this case were works-for-hire or not. It saved that question for another day but did acknowledge that there was at least some reason to believe they were not works for hire, in which case the attempts to terminate the copyright assignments could still be successful. But the court rejected UMG’s contention that the question of ownership should have been “discovered” almost as soon as the contracts were signed. Instead, it found that the question about ownership was only raised once the termination was attempted and the record labels continued to make what were now potentially infringing uses of the works.

In this way the court differentiated the case from an earlier one involving Meatloaf, who had tried to sue thirty years after signing his contract for a declaratory judgment that his music had never been a work-for-hire and thus was subject to the termination provision. In that case the court there had rejected his case for being filed too late. Since his case only involved the question of whether he owned his original copyright, and that question had been raised upon signing his contract back in 1977, the court in his case decided that he’d only had until 1980 to be able to sue to get clarification. [p. 11]. But in this case the lawsuit was seeking to pursue an infringement claim, and the infringement did not become an issue until after the moment termination had theoretically occurred and the record company continued to make copies of the work. Per the court in this case, that was the moment when the clock on the statute of limitations started running, and this lawsuit was filed in time.

And so this case continues for at least for some of the musicians in the plaintiffs’ class. But not for all of them. Three sorts of claims were dismissed. One sort involved the musicians who had begun the termination process but for whom the process had not yet completed. The process requires giving notice in advance of the date when termination is to occur, and then waiting for that date to pass. For these artists that date was still in the future, which meant that the record label’s continued use was not actually infringing, since the copyright assignment they had enjoyed thus far would still be valid. These plaintiff artists had sued for declaratory judgment, which basically amounted to asking the court to declare now that their copyright assignments would indeed be terminated once the relevant dates had passed. But the court declined to do what they asked, largely on the grounds that it wouldn’t really lend them the clarity they sought. A declaratory judgment now would address the reasons UMG has so far protested that the termination provision wouldn’t apply, but it wouldn’t actually cause them to be terminated on the spot. The plaintiffs would still have to wait for the process to complete, at which point an infringement lawsuit would be appropriate if UMG came up with some other reason for why it did not think the termination was valid.

It is not clear how either objective would be achieved by the declaratory relief sought. The uncertainty here is whether UMG will continue to distribute plaintiffs? sound recordings after the effective date of termination claimed by a plaintiff has passed. This uncertainty is eliminated if prior to the effective date of termination, the termination notices were declared valid and there were no grounds on which defendant could argue that the grants are not otherwise terminable. Plaintiffs suggest that the declaratory relief they seek, if granted, would achieve this outcome because it would address the various grounds defendant has cited when rejecting the termination notices. This would be so, however, only insofar as defendant never proffers new arguments as to why the termination notices are invalid or why the grants could not be terminated. The declaratory judgment plaintiffs seek now therefore could not guarantee that UMG would accept the termination notices and cease exploitation of the sound recordings after the effective date of termination. In other words, the cloud of uncertainty would not necessarily be lifted fully. [p. 16]

So these artists’ claims were dismissed, although once the termination dates have passed there does not seem to be any legal reason why they could not sue again if they needed, since their claims would now be like the claims in this case that were permitted to go forward. (There may, of course, be practical reasons why it would be hard to sue again though ? it’s a huge, time consuming, expensive ordeal that people are rarely eager to go through.)

Another type of claim that the court dismissed involved the plaintiff Joe Ely. In most instances the court found that the termination notices submitted by the artists had generally met the formality standards the statute required. In fact, the court tended to have a generous read of the notices, generally finding that what errors there were had been made in good faith and did not prejudice the record label, and thus were still valid.

Despite the incorrect dates and omissions, defendant has sufficient notice as to which grants and works plaintiffs seek to terminate. While perhaps in other circumstances an omitted execution date could be fatal to the validity of a termination notice, defendant possesses the relevant agreements and can discern the relevant dates. Defendant cannot use the parties? agreements to claim that the statue of limitation bars plaintiffs claims and then feign ignorance of which grants plaintiffs purport to terminate. […] Nor is there any sufficient basis for claiming that the errors were not made in good faith. […] Indeed, as the Copyright Office noted when promulgating 37 C.F.R. ? 201.10, ?we . . . must recognize that entirely legitimate reasons may exist for gaps in [grantor?s] knowledge and certainty? of required termination notice contents. Because the notices? defects were harmless and not made with an intent to deceive, mislead, or conceal information, defendant?s motion is denied as to its claim that plaintiffs? termination notices are facially invalid. [p. 18-20]

But with Ely it was more complicated. When we switched our copyright law from the 1909 Copyright Act to the 1976 Copyright Act, which then didn’t go into effect until 1978, there were certain issues with that statutory handshake. Ely produced music that fell in that gap. Arguably his copyright assignments were still terminable, under a different provision of the copyright statute, but with the governing regulations more complicated, the court found that the need for getting the formalities right was heightened and that the deficiencies in his termination notices had rendered them invalid.

Instead of the grant date?s execution, under the 2011 Copyright Office regulation, Section 203 termination notices for gap grants must contain ?the date on which the work was created.? ?Sound recordings are created for purposes of the Copyright Act on the date they are ?fixed,? or recorded.? Ely?s termination notice includes only the publication date and the FAC alleges the release? date. ?Publication? refers to the distribution or transfer of ownership, not to the creation of a work. Nor does ?release? indicate when the work was ?created.? Ely?s termination notice is thus insufficient. [p. 23]

The court otherwise had no further comment on where that left him in his ability to recover his copyrights.

Meanwhile, although much of this decision portends good news for artists who wish to recover their copyrights, the third sort of dismissed claim is alarming, and out-of-step with the rest of the decision. The issue relates to “loan out” artists. Per the court, these artists cannot recover their copyrights:

Only grants ?executed by the author? (or the statutorily designated successor) maybe terminated. Therefore, third parties to a contract and loan-out companies, which ?loan? out an artist?s services to employers and enter into contracts on behalf of the artist, do not have a termination right under the statute. It is undisputed that loan-out companies executed the Waite grants and that a third party company, South Coast, executed the grant for Ely?s recordings made under his 1979 agreement. In these instancesg [sic], neither Waite nor Ely was the grantor. The plain language of the statue [sic] precludes either of these plaintiffs from effectuating termination.” [p. 20]

This portion of the decision reads uncharacteristically hostile to the interests of artists, which the court otherwise had been favorable to. Earlier in the decision the court had commented on why it was so important to have the termination provision on the books in the first place:

Defendant?s argument is weakened further by the music industry?s practice of frequently inserting ?work made for hire? language into recording contracts. Its position requires that many artists, often early in their careers, would confront a choice when presented with a ?works made for hire? provision. They could refuse to sign the contract and jeopardize their chance for the record company to record or distribute the artist?s music. Or the artist could sign the contract and then bring a claim within three years to dispute the effect of the ?work made for hire? provision in order to protect the copyright. Either outcome would be inconsistent with Section 203. The first would exemplify the unequal bargaining power Section203 sought to correct. The second would render Section 203 meaningless, as its very purpose is to provide a mechanism by which artists can reclaim their copyright after the work has had time to become more valuable. Defendant?s argument simply does withstand scrutiny in light of the unequivocal purpose of the termination provision. [p. 14]

But in that rushed passage on page 20, the court took a suddenly hostile, shallowly-analyzed view towards the artists’ position. And that hostility continued:

Plaintiffs argue also that the loan-out company is only a tax-planning device. Even so, people cannot use a corporate structure for some purposes ? e.g. taking advantage of tax benefits? and then disavow it for others. While Waite and his loan-out companies, like Heavy Waite, Inc., perhaps are distinct entities only in a formal legal sense, the statutory text is clear: termination rights exist only if the author executed the grant. The Supreme Court recently reaffirmed that courts must adhere to the text the Copyright Act, even if the Act ?has not worked as Congress likely envisioned.? The unambiguous text precludes Waite and Ely from terminating the copyrights granted by third parties. [p. 20-21]

This portion of the decision seems unduly harsh and unthoughtful. It presumes facts and betrays the purpose of the termination provision. It also more heavily favors the position of the record labels than the statute itself supports. A “you should have known what you were doing” attitude fails because no one could have known what they were doing at the time these agreements were made (not even the record labels).

At the time these agreements were made, there was no Internet and no digital rights to exploit. At the time these agreements were made, copyright terms lasted for many fewer years. At the time these agreements were made, the US wasn’t even a party to the Berne Convention, and TRIPS and its progeny were just a glimmer in the WTO’s eye. There is no way that artists could have foreseen the full dimensions of the deal they were striking and how it would affect their rights decades into the future. Had they known, they might have struck a different deal.

The termination provision exists because no one can see the future. But if certain artists can be automatically penalized for their choice of corporate form (and a worry is that many of these artists might be bands, for whom choosing a corporate form is more than just a “tax strategy” but a potentially existential decision necessary to successfully wrangle a diverse group of talented individuals into a coherent creative entity), and with so little effort to fully parse what the statute meant by authorship, it turns the provision into a nullity and awards the record labels a windfall Congress never intended to grant them.

The court did, however, suggest that loan-out artists such as Waite might be able to plead their authorship more successfully, and, if they do, then their terminations may valid. Given the number of artists who would otherwise arbitrarily be denied the benefit of this important balancing provision in copyright law, hopefully doing so will turn out to be a needle that this and other courts will allow them to thread.

Filed Under: contracts, copyright, termination, work for hire
Companies: umg, universal music group