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]
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