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

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