September 01, 2014

There has been a great deal of press over the past few years regarding the right of authors (or their heirs) to terminate their prior sales, licenses, and other grants of rights under copyright. Some articles have described this as a rapture-like scenario where hugely valuable rights will magically disappear from major media companies and return to their creators. Needless to say, while that description may draw attention, it is not necessarily the most realistic. In this article, we will give you a summary of these termination rights and their effect on valuation and other commercial matters.

The right for authors (or their heirs) to terminate their prior grants under copyright (we refer to these rights as “termination rights”) is embedded in the Copyright Act of 1976. Authors (or their heirs) have the unilateral right to terminate any prior grant under copyright during certain windows of opportunity, regardless of any contract the author previously signed, and without any compensation to the current grantee. We use the term “grant under copyright” to mean any sale, conveyance, or transfer of rights that exist under the Copyright Act, including liens and security interests. The impact of termination can be very substantial — depending on the nature and revenue generated by the copyrighted work, termination can cause a major reduction in asset values, disrupt collateral pools, create commercial uncertainty among licensees, and give an author a very valuable asset, which they can either re-sell to a third party or manage themselves.

Legal Background

The statute that preceded the Copyright Act of 1976 was the Copyright Act of 1909 (referred to as the 1909 Act). Under the 1909 Act, authors of copyrightable works had an initial term of copyright protection of 28 years and a separate renewal term for an additional 28 years. While the 1909 Act originally included the filing of a renewal registration in order to take advantage of the renewal term (otherwise the work would fall into the public domain), the statute was later amended to eliminate this requirement due to the number of works that were inadvertently losing copyright protection. The statute was also amended on several occasions to now extend the duration of protection (including the renewal term) for 95 years.

The renewal term was intended as a separate right for authors — it was envisioned as a way for authors to enter into a new grant after the original term of copyright expired. If the author was alive on the expiration date, the right vested with the author; if the author was deceased, it vested with his or her heirs. However, courts ruled that an author could grant rights to the renewal term at the time of the original grant, but the grant of the renewal term was only enforceable if the author was still alive on the expiration date. As a result, most grants of copyright with authors (such as songwriter agreements or publishing agreements) were then drafted to include the renewal term so that grantees could avoid the uncertainty of possibly losing their rights after the expiration of the original 28 year term of copyright.

When the Copyright Act of 1976 (referred to as the 1976 Act) was being drafted (and heavily negotiated), authors sought to regain this concept of a “second bite at the apple,” which was lost when the courts eviscerated much of the value behind granting rights to the renewal term. Thus, termination rights were codified in the 1976 Act, which created a nearly unprecedented means for authors to use federal law to invalidate a legal and binding contract. While the intention behind termination rights was to restore a sense of fairness in favor of authors (and their estates), the rights themselves — and the method of exercising them — was heavily negotiated by content owners, resulting in confusing legislative language and a complex and burdensome procedure for exercising these rights.

To further confuse matters, the 1976 Act was not actually effective until January 1, 1978. As a result, the treatment of grants prior to January 1, 1978 (referred to as pre-1978 grants), and after January 1, 1978 (referred to as post-1978 grants), varies in a number of material ways, as you will see below.

Who Can Exercise Termination Rights?

Termination rights can be exercised by the author of a work, or his/her legal heirs. Note that the 1976 Act provides for a system for determining the heirs of an author, which is distinct from what may be in an author’s will. An author’s grantee may not exercise termination rights against a subsequent grantee. For example, if an author granted rights to a publisher, and that publisher then granted some or all of these rights to a distributor, only the author may exercise termination rights; the publisher would not be eligible to exercise termination rights regarding its grant to the distributor. If there are multiple joint authors for a work, the issue of who can terminate gets more complicated. For terminations of post-1978 grants (described below), a majority of the authors who originally granted the rights to the grantee must agree to terminate; for terminations of pre-1978 grants (also described below), each of the joint authors may terminate as to their own respective interests in the work.

To add another layer of complexity to this question, the exercise of termination rights is also dependent on who made the original grant of rights (e.g., in our example above, who executed the grant to the publisher). For terminations of post-1978 grants, only grants by the author can be terminated; for terminations of pre-1978 grants, grants by the author or his/her heirs may be terminated.

Where Is Termination Effective?

Termination rights only apply to rights in the United States. To the extent that grants relate to rights outside the United States, termination rights do not apply. For example, if an author entered into a worldwide publishing agreement with a publisher, the author can only terminate the grant as it related to the rights in the United States, and the publisher will retain all ex-United States rights regardless of the termination.

What Can Be Terminated?

Termination rights apply to any grant of copyright, including sales, security interests, licenses, gifts, and other conveyances. These rights apply notwithstanding any agreement that the author (or his/her heirs) may have entered into, unless the author (or his/her heirs) renegotiate a prior grant under the threat of termination (for example, if an author threatens to terminate a prior agreement unless his/her publisher agrees to advance funds and improve the terms of the author’s contract, and the publisher and author then renegotiate the contract, the author cannot then terminate the re-negotiated grant to the publisher). In other words, these rights supersede any existing, valid contract.

There are three primary exceptions to termination rights: grants by will, pre-termination derivative works, and works made for hire. Grants by will are self-explanatory. Pre-termination derivative works are works that were created based on a valid license from a grantee and that are based on the underlying work. For example, if an author granted all rights regarding a book to a publisher, and the publisher then licensed a film producer to create a film script based on the book, then if the author later terminates the grant to the publisher, it will not cause the producer to lose the right to use the script in films, etc. (a similar fact pattern actually occurred in connection with the Alfred Hitchcock film “Rear Window,” and Congress sought to ensure that the same situation would not re-occur as a result of the exercise of termination rights). The last category, works made for hire, is the category that is likely to be the basis for most challenges to termination rights, and merits some background and explanation.

The idea of a “work made for hire” is often misunderstood as a catch-all intended to include any work product that any person makes for any other person. As you might expect, it is not quite that simple. When something is a “work made for hire,” it means that the author (for copyright purposes) is the party who hired or commissioned another person to create the work (for example, if an animator is employed by Disney to create drawings for a feature film, Disney would be deemed the author of the work, not the animator). To understand whether a work qualifies as a “work made for hire,” we have to break down how this term is used under the 1909 Act and the 1976 Act.

Under the 1909 Act, the term “work made for hire” is used in the statute, but is not defined. As a result, it was left to the courts to interpret the term and provide the standards for what qualifies as a work made for hire. Under the 1909 Act, the prevailing test for what qualifies as a work made for hire is the “instance and expense” test, which basically means that if a copyrightable work was made at the request or direction of a third party, and the third party paid for the creation of the work, then the works is deemed a work made for hire for the third party.

Under the 1976 Act, the standard is friendlier to individual authors. In order for a work to qualify as a work made for hire, the work must be:

  • A work prepared by an employee within the scope of his or her employment, or
  • A work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire

There have been a number of court decisions interpreting these terms (for example, what it means to be an “employee,” and whether the enumerated categories are meant to be illustrative or exclusive), and that will likely increase as content owners point to this term as a defense against the exercise of termination rights.

When Can Termination Rights Be Exercised?

There are two sets of timelines that are relevant to the exercise of termination rights: The effective date of termination and the date when notice of termination can be sent.

The effective date of termination changes, depending on when the original grant was made. For most pre-1978 grants, the window of time in which termination can be effective is between 56 and 61 years after the date of the copyright, except that for works with a copyright date between January 1, 1923, and October 26, 1939, the window for effectiveness is between 75 and 80 years after the date of copyright. For most post-1978 grants, the window of time in which termination can be effective is generally between 35 and 40 years after the date of the grant. Note that the effective date of termination can be any date within these window periods selected by the terminating party, as long as timely notice has been sent.

In order for termination to be effective, the author (or his/her heirs) must send notice between two and 10 years prior to the effective date. This applies to grants involving pre-1978 or post-1978 works.

Following are two examples of how these timetables work:

Example 1: Termination of a pre-1978 grant

  • Date of copyright: March 1, 1957
  • Five year termination window opens (56 years after date of copyright): March 1, 2013
  • Five year termination window closes (61 years after date of copyright): March 1, 2018
  • Effective date within window (example): April 1, 2016
  • Time in which notice must be served: April 1, 2006 – April 1, 2014

Example 2: Termination of a post-1978 grant

  • Date of grant: March 1, 1979
  • Five year termination window opens (35 years after date of grant): March 1, 2014
  • Five year termination window closes (40 years after date of grant): March 1, 2019
  • Effective date within window (example): April 1, 2016
  • Time in which notice must be served: April 1, 2006 – April 1, 2014

How Are Termination Rights Exercised?

Termination rights are exercised by written notice from the author (or his/her heirs). However, the notice requirements are quite technical and rather cumbersome, which may dissuade some rights holders from going through the termination process. Written notice must be sent to the original grantee and his/her current successor in title (e.g., an assignee or exclusive licensee) after “reasonable investigation.” Errors in notices can result in the failure to terminate the grant, unless the errors can be treated as “harmless errors that do not materially affect the adequacy of the information” in the notice. Courts have historically interpreted the notice requirements strictly.

Why Terminate?

The rationale for exercising termination rights is clear: authors (or their heirs) can reclaim — and retrade — rights that they conveyed many years earlier, and may do so without compensation or regard to their prior contracts. Authors of works that have experienced longevity in the marketplace have the opportunity to reap great financial benefits, and may be in a position to exercise much greater control over the use of their works.

Termination rights can also be a very effective leverage tool for authors who wish to renegotiate with their current grantees, without having to go through the time and expense of actually sending termination notices. One interesting nuance regarding termination rights is that once a termination notice has been sent to the grantee, until the effective date of termination, the author (or his/her heirs) cannot enter into a binding contract regarding the future use of the work with any party except the current grantee. In other words, once the termination notice is sent (which must be a minimum of two years prior to the effective date), there can be no enforceable agreement between the author and any publisher, licensee, etc., until the effective date of termination with the exception that the author can enter into a binding agreement with the current grantee. This effectively gives the current grantee the opportunity to negotiate with the author during this period of time in order to retain the rights. Many industry observers believe that a majority of authors (or their heirs) will choose to renegotiate with their current grantees instead of going through the full termination process since this is the “path of least resistance.”

Significance of Termination

Termination rights can have very significant effects on grantees as well as on their financing sources and others in the marketplace. One immediate impact is on the valuation of large copyright libraries and the companies that own or license them. This valuation concern applies in any number of circumstances, including acquisitions, financing transactions, collateral coverage/borrowing base/OLV calculations, and the preparation of financial statements. In addition, grantees may need to contemplate the practical issue of losing potential revenue flows from copyrights for which rights have been (or may be) terminated, or for the outlay of substantial amounts of capital to renegotiate with authors (or their heirs) exercising these rights. Banks and other financial institutions need to consider that a termination of a grant may lead to a loss of collateral that secures a loan or other
financial obligation.

There will also likely be a significant commercial impact from terminations. Authors (or their heirs) will regain valuable rights and be able to engage in financial planning in a completely new way. Buyers of these types of copyrights will also likely see an influx of available assets into the marketplace. Lastly, potential licensees are likely to require additional due diligence and even indemnification from grantees because of the increased uncertainty of long-term licenses.

Conclusion

Termination rights — and their attendant risks — are a fact of life that were created by statute and have been tested in the courts. Rights holders and their financing sources need to be aware of these rights and how they can affect valuation and financial performance. However, due to the complexities of these rights, any analysis should involve experienced copyright counsel with expertise in this area.

Guest Author:

Michael S. Poster