by : Music Law, July 2009

Avoiding the Copyright War of 2013

Avoiding the Copyright War of 2013

For all the cultural cache and tabloid-mystique of the record industry, the business boils down to one task: management of assets. Sound recording masters are key, and yet the ownership of this vital asset will soon be challenged. Beginning in 2013, the Copyright Act will allow authors to regain ownership of copyrights transferred to others 35 years after those transfers took place. This means that regardless of what agreement a recording artist originally struck with his record label, after 35 years he could potentially regain ownership of his sound recordings – creating a windfall for artists and depriving record labels of the important revenue that catalogue recordings generate.

However, it is unclear whether this reclamation of ownership, known as the termination of transfer right, applies to sound recordings. Further complicating the matter is the issue over who may exercise that right. As a result, the industry could be expected to become proactive in finding a middle ground between labels and artists before litigation makes reasonable dispute resolution impossible.

Section 203 of the Copyright Act allows an author to terminate an exclusive or nonexclusive transfer of a copyright executed on or after January 1, 1978; however, this termination right does not apply to works made for hire. Therefore, transfers of sound recordings by artists to their record labels are subject to the termination right only if those recordings were not made for hire. Thus, the debate over the ability of artists to exercise their termination of transfer right centers on whether sound recordings are eligible for made-for-hire status.

The Copyright Act provides two categories of works made for hire: works created by an employee under the scope of employment, and specially commissioned works. Though the Copyright Act provides no definition of “employee,” courts have routinely held that a lack of employee benefits combined with the failure to withhold income taxes are highly indicative of a lack of an employment relationship. Because recording artists lack employee benefits and do not have taxes withheld by their record labels, it is unlikely that artists have an employment relationship with labels. Therefore, sound recordings are only eligible for made-for-hire status if they fit into the second category of works made for hire.

The second category of works made for hire contains two requirements: (1) the parties must expressly agree in writing that the work is made for hire, and (2) the work must be prepared for use in one of nine specially designated classes of works. Sound recordings easily meet the first requirement; standard recording agreements used by major record labels uniformly state that all masters delivered under the agreement are works made for hire. Under the second requirement, only two classes of works, compilations and contributions to a collective work, could possibly describe sound recordings.[3]

It is unclear whether courts will label sound recordings as works made for hire by virtue of being specially commissioned compilations or contributions to collective works. However, most agree that neither classification is a perfect fit, and there may not necessarily be a one-size fits all determination that applies to every recording. Because the financial stakes are so high for both labels and artists, there is already vigorous debate over whether sound recordings are eligible for made-for-hire status and thus whether artists may exercise their termination of transfer rights. The debate remains academic until 2013, when litigation over this issue will likely begin. That litigation could take several shapes; however, it will most likely take place as a series of copyright infringement lawsuits.

A termination takes place through a simple notification process in which an author sends a notice to the transferee stating the date that the termination will take place. That notice must be sent to the transferee at least two and no more than ten years before the termination is set to take place. In addition, a copy of the notice must be recorded with the United States Copyright Office. There is no hearing process or formal “changing of the guards” to ensure that a proper termination has taken place.

Once the date set for termination has passed, artists (assuming that sound recording are not works made for hire and are thus subject to the termination right) may sue their record label for copyright infringement should the label continue to distribute the sound recordings in question. Conversely, labels (assuming that sound recordings are works made for hire and are thus not subject to the termination right) may file cross-claims against artists alleging that any distribution by the artist or their assigns constitutes an infringement.

However, if cooler heads prevail, all sides may benefit from finding an alternative to litigation. While the idea of exercising the termination right may appear attractive to artists who wish to control their own sound recordings, terminations may create unintended consequences. For joint works (including most sound recordings), the termination right may be exercised by a majority of joint authors; but who are the joint authors of a sound recording? Certainly, the artist or band members who appear on the sound recording are joint authors. In addition, contributors like the producer, engineer, studio musicians, and graphic designers contributing to the album art could potentially claim joint authorship rights and a vote in whether a termination may take place. This could cause recording artists to wind up with less control over their recordings after a termination has taken place.[6]

In addition, labels may find it in their best interest to avoid litigation over the termination of transfer right. For those artists whose recordings have maintained commercial value, the period between sending a notice of termination and the actual date that the termination will potentially become effective resembles an extended period of renegotiation. By providing either additional advance money or a higher royalty rate, labels may prevent artists from exercising their termination rights and thus maintain valuable and reliable distribution rights or those recordings.

It remains to be seen how labels will treat terminations for sound recordings of lesser commercial value. In the case of recordings with little commercial value, labels may decide to return ownership to the artist without acknowledging an effective termination. This would benefit both the artist, who would once again be able to exploit his work, and the label, which would be losing little from its bottom line and reaping the benefits of not having to acknowledge that a successful termination has taken place.

Inevitably, some litigation will occur; however, according to Daryl P. Friedman, Vice President of Advocacy and Government Relations at the National Academy of Recording Arts and Sciences, “it will be in the interest of all sides to begin developing an industry-wide solution of the work-for-hire issue now to avoid contentious litigation or legislation as we approach 2013.” If both labels and artists rely solely on litigation to determine the issue, the business of bringing music to the listening public will likely suffer regardless of whether courts decide in favor of artists or labels. Therefore, it is in the interest of labels, artists, and all others associated with the production and distribution of sound recordings to seek compromise in determining how the ownership of sound recording masters is to be defined in the coming decades.

by Caz McChrystal

References

[1]Aymes v. Bonelli, 980 F.2d 857, 862 (2d Cir. 1992). In fact, the court in Aymes found these factors so probative as to “constitute virtual admissions” of the hired party’s status as an independent contractor. Id. For further discussion of agency law and copyright see, Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989). [2]The enumerated classes of works are contributions to a collective work, motion pictures or other audiovisual works, translations, supplements, compilations, instructional texts, tests, answer materials for tests, and atlases. 17 U.S.C. § 101. The Copyright Act was amended in 1999 to include sound recordings as a class of works eligible for made-hire-status as specially commissioned works; however, that change was repealed less than one year later after withering criticism from artists’ rights groups.
[3] Efforts to describe albums as audiovisual works by virtue of their artwork and liner notes have uniformly failed. See, e.g., Lulirama Ltd. v. Axcess Broadcast Services, 128 F.3d 872 (5th Cir. 1997). [4]January 1, 2013 is the first date on which transfers made on or after January 1, 1978 may be terminated.
[5]See, e.g., Aalmuhammed v. Lee, 202 F.3d 1227 (9th Cir. 2000).
[6]Absent an agreement to the contrary each joint author in a work may license the work nonexclusively to others without the permission of the other joint authors.

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