by Mark A. Pearson, Esq.
The following is the third in a series of articles that will try and explain some of the pros and cons of entering into a licensing agreement in today’s entertainment industry.
Recently, we were approached here at BEAT-LAW by a client wondering if she could terminate a licensing agreement she’d entered into without any penalty (i.e. without getting involved in litigation). My first reaction was to grab a copy of her license and look for the stated ‘term’, or duration of the license. Unfortunately, the license was silent as to the term. Why, you might ask, was there no stated duration? Well, the license was oral. It turns out the parties had been working on a hand-shake agreement for years.
I suppose I should start by letting you know that you should always strive to get your agreement in writing, and in most cases there should be a stated duration. Seems rather a basic idea, but often because of the nature of the parties involved and their relationships there is no written agreement. It happens.
Here are two examples of a situation where you might find Intellectual property, namely copyright rights, being licensed without a written agreement. Two friends, one a producer and the other a singer, get together in the studio to record a few songs. The producer brings with him a bunch of pre-recorded tracks he had put together several years earlier. The singer records some new vocals. The producer mixes the vocals with the tracks, and we have ourselves a new master recording. There was no written agreement between the parties, but rather a handshake agreement that the singer could ‘own’ the new master recording. Thus, the producer has licensed his tracks to the singer under an oral agreement. I should also mention that all of this happened in California.
The second example comes where two parties, a record label and a distributor, enter into discussions to release an album. The parties, both based in Illinois, haven’t reached a formal agreement but decide to go ahead and get the album out in time for the Christmas season. Subsequently, the parties never come to a formal agreement as there were ongoing disagreements on several terms. However, the album was released under direction of both parties, and thus an agreement was formed.
The first question is whether these agreements are, in fact, binding and legally enforceable. Under U.S. Copyright Law, "A transfer of copyright ownership, other than one by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner's duly authorized agent." 17 U.S.C. § 204(a). This is the old Statute of Frauds concept, and seems to suggest the oral agreements in the examples, above, would be unenforceable. However, almost across the board courts have ruled that oral or implied transfers of copyright ownership create a non-exclusive transfer of ownership. These non-exclusive transfers can be made without a written agreement and, most importantly, do not violate the Copyright Act. Walthal v. Rusk, 172 F.3d 481, 1999 U.S. App. LEXIS 5455 (7th Cir. 1999), I.A.E., Inc. v. Shaver, 74 F.3d 768 (7th Cir. 1996).
Therefore, in both examples, above, the oral transfer of copyright rights created an implied non-exclusive license. It’s important to note the nature of non-exclusive licenses by pointing out that the producer in the first example could go ahead and use the tracks (i.e. license them to third parties) without getting the singer’s permission. This non-exclusive license created by the oral and implied agreement opens up a huge can of worms, and is a glaring example of why you should always seek to “get it in writing”.
Remember our client wanted to know if she could terminate her oral agreement without penalty. The next question is: When can oral or implied licenses, or even ones that simply have no stated duration, be terminated?
There are several possible ways to terminate an oral or implied license. The parties can simply agree to terminate the license. This can be done by agreeing to an end date during the negotiations stage: In the second example, above, let’s say the parties had agreed that the distribution license was to last for three years, and had email messages supporting this point. It would then be arguable that the agreement duration was agreed upon as being three years. Termination can also be accomplished by agreeing to modify the oral or implied license at a later time: The parties agree that their relationship is not fruitful after six months, and agree in both words and performance to terminate the agreement.
Termination by agreement would also work where a written license states a termination date (i.e. language in the agreement stating, “This term of this agreement shall be perpetual” or “This agreement shall last for three (3) years from the date first stated above”, etc.), or the parties agree in writing at a future date to terminate earlier or later. Note that an oral agreement can amend a written agreement, thus it becomes important to always include a clause in your written agreements stating that the agreement cannot be modified except by an amendment executed by the parties.
Sometimes, termination can be implied by the conduct of the parties involved. The label never sends any materials to the distributor for use in manufacturing the album, and the distributor never raises an objection.
What happens, though, if the license is silent as to the duration? Most states have laws making any agreement that is silent as to duration terminable at-will whether written, oral or implied. This is the case here in California, where absent language or a showing of an agreed upon duration, a contract can be terminated by either party. Zimco Restaurants, Inc. v. Bartenders and Culinary Workers' Union, Local 340, 165 Cal. App. 2d 235, 331 P.2d 789, 792-92 (Cal. Ct. App. 1958). So, it appears that, in both examples, that the parties could just terminate the agreement by simply putting the other party on notice that they had elected to terminate.
Not so fast.
In 1993, the Ninth Circuit in Rano v. Sipa ruled that under § 203 of the Copyright Act, non-exclusive licensing agreements silent as to duration are not terminable at-will from the moment of creation; instead, they are terminable at the will of the author only during a five year period beginning at the end of 35 years from the date of execution of the license (unless they explicitly specify an earlier termination date). 17 U.S.C.S. § 203(a). Rano v. Sipa Press, 987 F.2d 580 (1993). For background purposes, under § 203 of the Copyright Act the copyright holder who has assigned or licensed their rights to a third party can reclaim their rights after 35 years as an operation of law. § 203 applies to exclusive and non-exclusive transfers, and the only time it does not come into play is when the subject of the copyright was made as a Work For Hire. You can learn more about Work For Hire agreements by checking out this MELON article.
The bottom line is that the Ninth Circuit’s ruling means that in California, any state law regarding at-will termination of agreements silent on duration is trumped by federal law where the subject of the license is copyright transfers. Thus the parties in the first example would not be able to terminate the license unilaterally until 35 years after the agreement was created. Let’s say the singer never really did much with the master recording, but Dr. Dre heard the track and wanted to license it from the producer. Obviously, the good Dr. would want an exclusive license on the track, which wouldn’t be available since the singer has a valid, oral, non-exclusive license that the producer couldn’t cancel. I’m guessing the singer is going to get paid to get those rights back. I’m also guessing the producer now wishes he had a written agreement.
Just so you are aware, there is plenty of debate on the Rano ruling. Several jurisdictions have criticized Rano, and the Seventh Circuit rejected Rano; ruling that Illinois state laws allowing for at-will termination of non-durational copyright licenses are valid. Walthal v. Rusk, 172 F.3d 481 (1999). In the second example, the record label, realizing their oral agreement with the distributor was not favorable and that the planned written agreement wasn’t going to happen, could simply terminate unilaterally by giving the distributor notice that the agreement was rescinded. Again, check your facts, because some jurisdictions hold that when an agreement does not contain an express statement as to duration, the court should determine the intent of the parties by examining the surrounding circumstances and by reasonably construing the agreement as a whole in determining the issue of duration. Sensormatic Sec. Corp. v. Sensormatic Elecs. Corp., 249 F. Supp. 2d 703, (D. Md. 2003). It is also the case in California that the general rule increasingly has given way to courts' willingness to "gap fill" a reasonable duration. Foley v. Interactive Data Corp., 47 Cal. 3d 654, 765 P.2d 373, 385-86, 254 Cal. Rptr. 211 (Cal. 1988). The question in our second example then becomes whether the parties have acted in a way that would lead a court to determine a reasonable duration, or have inferred duration by some other means.
A final way of allowing a party to unilaterally rescind a contract regardless of there being a stated, implied or written duration is when the other party materially breaches the contract. Under well-settled copyright law, a party would be able to claim copyright infringement if the other party exceeded the scope of the licensing agreement, see, e.g., S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081 (1989), breached a covenant or condition, see, e.g., Fantastic Fakes, Inc. v. Pickwick International, Inc., 661 F.2d 479 (1981), or breached the agreement in such a substantial and material way as to justify rescission. See e.g., Affiliated Hosp. Prod. Inc. v. Merdel Game Mfg. Co., 513 F.2d 1183, 1186 (2d Cir. 1975). Thus, if the distributor in the second example fails to pay the label, the label could terminate based on a material breach of the contract.
At the end, or termination, of the day you always want to “get it in writing”, but if you don’t and you end up wanting to rescind (or wanting to stop the other party from rescinding), you need to be aware of the laws in your particular jurisdiction. It might not be as simple to terminate a licensing agreement as your standard, blanket, terminable at-will state law might lead you to believe. Oh yeah, it goes without saying, you might also want to avoid breaching your agreements, as a rule.
Next Time: We keep the boilerplate turned on, and explore what happens to your license if there’s a bankruptcy
For questions or comments, please email Mark at: [email protected]