A Primer on Termination Rights

Originally published in the Apr-11 issue of The Music Business Journal – Berklee College of Music

By default a person that makes an original work and fixes it in a tangible form owns its copyright and consequently the exclusive right that will permit the extraction of commercial benefits from the creation. The economic exploitation of copyrights is commonly made through the granting of transfers and licenses to other parties in exchange for compensation.

Generally speaking, songwriters assign rights of a musical composition to publishers, while artists transfer their rights over their sound recordings to the record labels. Many of these licenses and transfers are usually granted before the publication of the work, when it is not possible to predict its success. For this reason, authors are usually in a worse bargaining position than the transferees or licensees–and end up collecting less than they could.

The Issue

In order to protect authors, the 1976 Copyright Act established termination or “recapture” rights that give authors a second chance depending on when the grant was executed. The statutory termination of transfers and licenses allows the renegotiation of these grants, either by renewing the contract with the original grantee or by recapturing that right in order to enter into a new agreement with a third party.

Termination is considered for any works other than works made for hire, and only for U.S rights that are copyright related. It excludes the possibility of recapturing foreign rights, trademarks, or any other federal or state rights. The terminated grantee has the right to exploit derivative works that were prepared under their grant, but not others.

The Letter of the Law

The provisions of the termination rights can be found in the 1976 Copyright Act in two different contexts, depending on when the grant was executed. The first, under Section 203, provides that grant of transfer or licenses that were executed by the author in or after 1978 may be terminated. Generally, the author, as well as his heirs or a duly authorized agent, has a period of five years, beginning after thirty-five years of the mentioned grant, to effect the termination. Works that were created prior to that date, but for which the grants were executed on or after January 1st, 1978, are also included.

For works created prior to 1978 and for which the grant was also executed before that date, the provisions of Section 304 (c) and (d) are applied. The general rule is that the termination may be effective during a five year period starting fifty-six years after the copyright was first secured, regardless of the date of the grant. In these cases, for the grant to be subject to termination, it is not required that it be executed only by the author, as in Section 203, but also by his heirs or executors.

Inventorying the Transfers

However, the transfer of rights back to authors is not automatic. In order for the termination to become effective under both Sections, the majority of the authors, heirs or duly authorized representatives must serve a notice upon the grantees, expressing the effective date of termination. In order to be valid, a copy of this notice must be registered in the Copyright Office prior to the effective date of the termination. The service of the notice should occur no later than two years and no earlier than ten years of the desired date of termination.

In the absence of action, the termination right disappears after the closing of the five-year window, leaving rights in the work permanently in the hands of the grantee until statutory expiration of the copyright term. For instance, for a grant executed on January 1st, 1978 the termination window will begin thirty-five years after the grant – from 2013 to 2018. If the author decided that they would want to terminate the transfers at the earliest possible date a notice should have been sent at any time between 2003 and January 1st, 2011.

With regards to the application of the Section 304, a point to be highlighted is that as sound recordings were not contemplated by the Copyright Law until 1972, the first terminations of transfers for sound recordings made before 1978 will only be effective in 2028, fifty-six years after 1972. The first notices for such terminations will start to be served in 2018.

There are certain works for which grants were signed prospectively by authors before 1978, but the works only came into existence after January 1st, 1978. These so called “gap grants” were the subject of recent analysis by the Copyright Office. At issue was whether or not the “gap grants” could be terminated, as the provisions of Section 203 are applicable only for grants executed after 1978 (Section 304 is not applicable because it requires a subsisting copyright in 1978 to become valid). After receiving comments from different stakeholders, the study clarifies that the Copyright Office will accept notices of termination for these works (it considers that the execution of the grants only becomes effective on the date when works come into existence). However, whether such notices of termination fall within the scope of section 203 will ultimately be a matter to be resolved by the courts.

Rewriting Existing Contracts

Many agreements between writers and publishers anticipate that any termination right should be renounced, with the publisher owning the copyright for its entire term. However, the Law states that the “termination of the grant may be effected notwithstanding any agreement to the contrary.” The intention of the legislation was to secure for the author the rights of termination independently of any language that might be set out in an agreement, i.e. forcing them to give up their future rights without renegotiation.

“Agreements of the contrary” were the subject of recent court decisions addressing the Section 304 termination provision. In the cases of Milne v. Stephen Slesinger, Inc. (9th Cir. 2005, Winnie the Pooh Character) and Penguin Group (USA) Inc. v. Steinbeck (2nd Cir. 2008, works of John Steinbeck), the courts decided that the renegotiation of the agreement during the termination window revoked the original grants and were not deemed to be “agreements to the contrary”. They denied, therefore, the possibility of termination. However, in the Classic Media, Inc. v. Mewborn, (9th Cir. 2008, Lassie Works) the court preserved the termination rights considering a post-1978 assignment as an “agreement to the contrary” and therefore “attending the congressional intent to give the benefit of the additional renewal term to the author and his heirs”. There is yet no case law related to Section 203, as its provisions will only become effective on 2013.

Works for Hire

Works made for hire are the significant exception for termination provisions and will provide a fertile ground for litigation in the following years. The exemption exists because in such cases there is no transfer of copyright and the employer or commissioner shall be considered the author of the work from the moment of its creation.

Record labels would like to consider sound recordings as works made for hire. Artists, however, argue that this cannot be applied to sound recordings, as they do not fall in one of the nine types of works listed on the definition of a work for hire (Section 101 of the Copyright Law). As sound recordings are typically a joint work of different artists, producers and engineers, the discussion of who can be considered the author will increase. In effect, the period between the service of a notice and the effective date of the termination resembles a period of renegotiation for record labels and artists–at least for those who have maintained commercial value throughout the years.

At Stake

As we approach 2013, discussions about the termination provisions are becoming more relevant. The Future of Music Coalition recently affirmed “as more copyrights become eligible to revert back to creators, we may find that the artists themselves exploit their works in novel ways that could be beneficial to the overall health of the music marketplace.” At the very least, the upcoming termination of transfer provisions will provide a valuable window for authors to exploit.

By Luiz Augusto Buff

Advertisements

The Music Industry in 2011

Originally published in the Feb-11 issue of The Music Business Journal – Berklee College of Music

More than ten years have passed since the debut of Napster shook the record industry. The file-sharing software gave music listeners access to an immense diversity of music for free, causing a shift in industry power from record labels to consumers. The popularity of MP3 files increased even more with the success of the iPod. Even before Napster, recorded music sales were dropping year after year, due to discounts that labels were given to wholesale prices globally. Those numbers dropped even further when the demand shifted to the free content available on the Net. After the panic, artists and the music industry started to understand the opportunities that the Internet was offering, and started to migrate to new models of marketing and distribution through the online world. Still, adaptations are a necessity in the legal system to guarantee the functioning of the creative process. The fight against piracy continues but hopefully a new business model that takes advantage of the “feels like free” system will drive people to a legal form of consumption that not only will attend the demand for lower prices, but will help elevate the value of music back to a sustainable level.

Apple
In 2003, with the intention to provide legal content for their successful iPod, Apple developed the iTunes Store. The iPod had become the worldwide standard media player but the lack of legal content was the main issue that the company had to face. After forming agreements with all the major record labels, the digital retailer store was a booming success and is now responsible for more than 70% of the digital sales and the biggest retailer store in the overall music market, accounting for 25% of the market share, accordingly to IFPI (International Federation of the Phonographic Industry).

Before the online-based sales of music products, in order to get access to one specific song the listener had to buy an entire album. That meant that to buy one song, one had to pay for the ten (or more) other songs that came with it. One of the major changes that happened with the iTunes Store was the commercialization of single tracks- making it cheaper for listeners to buy their favorite songs. The number of units sold increased significantly but the sales performance of the recorded music products dropped radically.

When the iTunes Store first opened, prices were fixed at $0.99 for a single-track and $9.99 for an album. Being the most prominent store in the online environment, major record labels started pressuring them to reconsider this pricing structure; maybe not every song was worth the same to costumers. The concept behind the argument is the price elasticity of demand. To maximize revenues the labels defended that hit songs could be sold at higher prices without loosing significant demand and deep catalog songs had to be sold at lower prices, driving interest for more people to buy them. In 2009 Apple accepted the claim and introduced a three-tier system, with variable prices of songs at $0.69, $0.99 and $1.29. The labels could raise revenues, and the system could help redirect interest to album sales, as they became cheaper. Higher quality files, bundled with bonus features such as animated lyrics, artist photos and liner notes were part of other new ideas to help boost album sales. The iTunes LP was a line of albums that offered these premium contents to fewer people at higher prices, in effect aggregating the old visual experience of the physical album into a download.

Apple’s agreement with major labels stated that 33% of the income is kept by the iTunes Store, similar to traditional values of physical distribution. The remaining 67% goes to the labels that split it with artists as traditional CD sales. When all is said and done, the artist usually ends up with around 10% of the price of a download. Labels get away with this by wording contract agreements to consider such downloads as sales of song copies and applied traditional accounting schemes. Now there is a current of thought that argues that iTunes Store downloads are licenses and not distribution of products. In fact, recent court decisions are adopting the argument of licenses, applying a 50/50 split between labels and artists, which is devastating for the former but great for the latter.

Free Music and the Record Labels
Even with digital channels being responsible for more than one quarter of the overall music sales in the world, the fight against piracy and illegal file sharing is still running. Accordingly to BMR – the UK’s umbrella organization representing the industry of the British music industry, just 37% of listeners download music legally. The majority is still taking advantage of illegal file sharing, and the difference for the digital market of less developed countries could be even bigger. As expected, in their study, BMR also identified that the main reason for downloading music illegally is that it is free and it saves money.

Digital retail stores are competing with free content spread on the web. To prevail in this new scenario, legal business models have to take advantages of gratis opportunities and not just look at its downside. For some futurists, it is important to give away control of their works in exchange for attention, thus affording them an expanded consumer audience. Just like word-of-mouth, file sharing could be viewed as a marketing tool for people to discover new music; if they like what they hear, they will seek more and different product by that artist.

With very few marginal costs in online distribution, it is easy to give away songs for free in an effort to reach a small segment that is willing to pay for premium content. This is the idea that inspired business models like Topspin. The company provides a structure with powerful marketing and selling tools with which the artists can develop a profitable relationship directly with the fans after giving away a couple of songs for free.

With the decreasing power of record labels, artists will start to organize themselves as small businesses, benefitting from the social media networking tools that allow a direct and two-way relationship between artists and fans. Inspired by that direct relationship, companies like Artist Share are now offering artists the opportunity to raise money for projects through fan funding. The idea is to build a sustainable environment that remunerates artists in their creative process. With this model, fans can contribute with all sorts of monetary values in exchange for access to the artist’s creative process—at audio sessions for album credits, in the production of videos, sheet music, and other. It is a sustainable system that affirms that the true value of music lies on the artist’s creativity.

In past years, artists got similar type of investment through record label advances. The old model was based in a recoupment system that often made it very difficult for artists to start generating revenues from the sale of their products. In the fan-funding model, 85% of all generated income goes directly to the artist. Maria Schneider – one of the most important contemporary jazz composers – won a Grammy for best large jazz ensemble album with a fan funding based project via the Artist Share website.

Monetizing the Cloud
Probably the most important growth trend of the music industry is streaming. The model is based on acquiring access to a large database of songs that can be played directly into users devices without file transferring. Free subscriptions are sustained by advertisements, while paid subscriptions allow users access to improved content such as higher quality audio files, expanded database, mobile capacity and offline usage, all commercial free.
Non-interactive streaming offers pre-made playlists that are configured to try match listener’s interests and tastes. It is a passive service that is authorized by blanket licenses for the use of the compositions from performance rights organizations (ASCAP, BMI, etc.) and a compulsory license for the use of sound recording issued by Sound Exchange. To keep the service legal, there are certain restrictions that companies like Pandora have to follow in order to avoid interactive streaming.

Allowing users to manage the database, choose songs and create playlists to share with friends requires a totally different form of licensing. In addition to the blanket licenses issued by PRO’s for the use of compositions, interactive streaming requires mechanical licenses and a license for the digital performance of the sound recording negotiated with each appropriate rights owner. These requirements make interactive streaming much more expensive to the service providers and it can be impractical to license all the content. In Europe, the Spotify model has been experiencing high levels of success. The company made an agreement with a Swedish Internet Service Provider that allowed the user to pay the premium subscription on their broadband bill. Recently they declared that two thirds of their income was used to pay licensing agreements and other rights to keep the service legal. Currently, Spotify is trying to arrange license agreements in order to make the service available in the US. With the company planning global expansion, they are aiming to turn illegal file-shares into users of their services.

Phones, Concerts, and Rights’ Collections
Expanding the opportunities for the music industry even further, mobile phones are becoming the easiest interface between users and the online world. These small portable devices are consistently getting cheaper and reaching all different social classes. Ringtones and ringbacks are helping artists to develop their marketing strategies as well as making revenue. A recent study made by Myxer -a broadband service provider- pointed out that almost three quarters of mobile phone users listen to music on their phone, via MP3, streaming or through the use of apps.

Despite this, Nokia recently shut down its unlimited download service, Ovi Music Unlimited (formerly “Comes With Music”) in more than thirty countries, leaving it available only in China, India, Brazil and South Africa. However, they are still exploring the Ovi brand, with applications and music stores as well as other services. Nokia also just announced a strategic alliance with Microsoft, in order to develop a new mobile ecosystem. Vodafone, the largest mobile phone telecommunications company of the world also has a music service called 360 Music, offering unlimited downloads for subscribers.

There’s no denying that the changes brought with the digital era have had a negative effect on record sales, but fortunately, the live music sector is still in constant growth. Concert ticket sales almost tripled in value in the last ten years and that only accounts for the public sector. Private sector events like weddings and corporate banquets make up a much more substantial industry and have been experiencing similar rates of growth. Consolidating both of these values would make the real figure for live music much bigger than it is being reported. Live music in the past was used as a marketing tool to sell recorded music, now it is becoming a vital source of income for artists. The live experience is enhanced with sophisticated venues and breath-taking productions that are driving price increases of tickets and also encouraging people spend more money in merchandising.

Digital advances are providing a better structure for the publishing sector of the music business as well. Sophisticated mechanisms of tracking song performances bring more evenly distributed royalties as well as increased revenue from collection. Issuing mechanical licenses is getting easier with new services RightsFlow, which handles all procedures involved with license acquisition online. Before the development of these tools, the process to obtain a license was very difficult and many times, independent artists didn’t get licenses because they didn’t know how.

Moving Forward

It is evident that the digital era has brought new forms of business to the music industry. New models will most likely survive best on the mantra that music is everywhere and that it should be free (or at least feel like it). The industry may be in somewhat of a slump, but value at the consumer level is increasing quicker than ever- in essence rebuilding a foundation for the business for the sake of sustainability and longevity. Never before have people had the unlimited access to music that they do now. Direct relationships with artists and fans will create a more democratic environment, as more artists will have opportunity to reach their listeners.

By Luiz Augusto Buff

Sources
Alhadeff, Peter. “US Music Industry Statistics: A Reappraisal.” MEIEA Journal, 2008.
Alhadeff, Peter. “The Value of Music and the Trappings of the Market place, 1990-2005.” MEIEA Journal, 2006.
Bargfrede, Allen/Mak, Cecily. “Music Law in the Digital Age”. Berklee Press, 2009.
Beall, Eric. “Making Music Make Money”. Berklee Press, 2004.
Hosein, Trish. “Mechanical Dues and Rightsflow”. The Music Business Journal, 2010.
Kusek, David/Leonhard, Gerd. “The Future of Music – Manifesto for the Digital Music Revolution”. Berklee Press, 2004.
Leonard, Gerd. “Music 2.0”. Gerd Leonhard, 2008.
Madden, Mary. “The State of Music Online: Ten Years After Napster”. Pew Internet, 2009.
Owsinski, Bob. “Music 3.0 – A Survival Guide for Making Music in the Internet Age”. Hal Leonard Books, 2009.
Music and Copyright, Issue 415. Informa UK Ltd.
IFPI Digital Music Report 2010.
“What’s Working in Music – Having a Ball”. The Economist, 2010

Mash-Ups & Fair Use: Girl Talk

Originally published in dez-10 – The Music Business Journal – Berklee College of Music

With the development of digital music in the mid-1990s, the act of sampling became very popular and is now a fundamental element for musical styles like Rap and Hip-hop. The use of samples to construct new songs is considered a derivative work and usually a license is required. Copyright owners have already successfully sued Hip-hop artists that tried to use samples without these licenses.

Another sample-based derivative work is the Mash-Up; a type of composition that blends two or more pre-recorded sounds creating an entirely new musical composition. While Mash-Ups are also considered a derivative work, artists like Gregg Gillis – known as DJ Girl Talk – are trying to push the boundaries of the strictures of the law by trying to include these musical collages under the fair use concept.

Girl Talk’s latest album, All Day, was released as a free download on November 15th and has more than 350 samples of different sound recordings in approximately seventy minutes of runtime. Obtaining all of the necessary licenses for each sound recording used would have been very costly and extremely time consuming.  Gillis, having planned to release the album for free, decided to move forward without licensing a single track – not even the three-minute use of Black Sabbath’s War Pigs– claiming that his creations fit the guidelines of fair use.  However, to determine congruency with the fair use doctrine, it is necessary to understand the origins and basis of the fair use concept.

Fair Use Revisited

Following a tendency that had been developed through case law, the 1976 Copyright Act recognized the fair use doctrine as a defense against copyright infringement. The goal of that concept was to permit certain uses of copyrighted works that encouraged the advancement of learning and knowledge and to provide wide access to creative works for the public. It is important to understand that fair use is not an affirmative right, but merely a defense against a copyright infringement. There is a false common belief that it is considered “fair use” to use an unlicensed, copyrighted work as long as one gives credit to the author or copyright owner (the assumption that a use is fair can be risky, and technically speaking, it is considered fair only when a court decides so).
The Copyright act listed certain types of use that are likely to be considered as fair, such as criticism, comment, news reporting, teaching, scholarship and research. This list is just illustrative and there are other types of uses that can be considered fair as well. Also, Section 107 of the Copyright Act lists four main factors to be considered by a court to determine whether or not a particular use is fair:

  1. The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes;
  2. The nature of the copyrighted work;
  3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole;
  4. The effect of the use upon the potential market for, or value of, the copyrighted work.”

Girl Talk

The first factor focuses on the observation of how the work is being used. If the use is related to information and/or education, it is more likely to be considered as fair since there are public benefits in these purposes. In general, the nonprofit character will weigh towards fair use, but the commercial use by itself does not discard the fairness of the use, since most uses are commercial to some extent. The court’s main concern is finding out if the user stands to profit from exploitation of the copyrighted material without paying the customary price for the licenses–and Girl Talk’s does profit from the act.
The transformative quality of the use is also analyzed here as a means to distinguish infringement and fair use. A use that is transformative, rather than imitative, has more of a chance to be qualified as fair, for it inserts the piece in a different context and purpose.  Girl Talk’s sample works are transformative, in that he transforms different pieces of existing sounds recordings into a new work of his own.  However, his purposes are strictly commercial and do not involve educational value or critical commentary.  In addition, the good faith of the defendant is extremely relevant in court analysis of the first factor. As the album was distributed on a website called Illegalart.net, the presumption of good faith can be quite a stretch.

When analyzing the nature of the copyrighted work, the court must determine if the work was published or unpublished, or if it is a factual or creative work. As musical works are creative in essence, this factor usually weighs against fair use- even more so when it is an unpublished work, in which case, the original author has the right of first use before a derivative creator. Gregg Gillis’ samples come from published original works- a fact that does not harm the first use principle.  The third factor refers to the portion of the copyrighted material used. There is no absolute rule to determine how much of a work can be used to be considered fair. Not only is the size and proportion of the work relevant, but also the qualitative dimension of the portion used. The greater the amount used, the less likely a use will be considered fair.  Yet in some cases, the use of even a very small part- if considered signature to a song- may characterize the use as an infringement.

Probably the most important of the four factors is the final, stating that it is important to analyze the value and the potential market of a copyrighted work. Any use of a copyrighted work –fair or unfair- it will automatically affect the copyright owner to some extent, as since they are not receiving any licensing incomes. This is tolerated due to the public benefits afforded from the fair use of the work. However, if the new work competes with, or reduces the potential commercial market for the original copyrighted material, then the use will most likely be deemed unfair. Again, a commercial use has a presumed adverse impact on the market for the original copyrighted work and reduces the credibility of fairness. Girl Talk’s main argument relies on the last two factors:  He alleges that his work is based on various small portions of original works, and the substantiality of it will not substitute or harm the copyright holder’s original or potential markets.

Conclusion

Girl Talk is aware of the risks that he is taking by not licensing the samples that he uses. There is no way to prevent a lawsuit of copyright infringement by claiming fair use and only a court has the power to determine his particular uses as fair or infringed. The expenses needed to prove fair use in court can be very high, sometimes surpassing the amount needed to obtain the legitimate licenses in the first place. Although Girl Talk has not yet faced a lawsuit for copyright infringement, the major distributors of digital music decided to not offer his albums on their websites. Major labels and publishers are most likely holding their moves against the artist because they are afraid of the negative attention and the potential setting of precedent in favor of the fair use.

By Luiz Augusto Buff