Legendary Artists Are Winning Decades-Long Arguments Against Labels Over Termination Rights. But What About the Others?
A pair of favorable decisions for recording artists in class action suits against Universal Music and Sony Music, respectively, are the latest installments in a legal battle more than 35 years in the making. In Waite v. UMG Recordings, decided on March 31, the U.S. District Court for the Southern District of New York rejected UMG’s argument that the musicians’ claims were time-barred based on the Copyright Act statute of limitations. Moreover, the federal court was dubious of UMG’s long standing reliance upon its insertion of “work made for hire” language in musicians’ recording contracts.
Similarly, in Johansen v. Sony Music Entertainment, which was decided the following day, the court rejected Sony’s argument that the musicians’ claims were defective. In siding with the recording artists, the court explained the Copyright Office provides general rules that relieve terminating parties from “harmless errors in a [termination] notice that do not materially affect the adequacy of the information[.]” Furthermore, the Copyright Office has unambiguously stated the purpose behind Section 203 of the Copyright Act is to protect authors of creative works by counterbalancing “the unequal bargaining position of artists, resulting in part from the [impossibility] of determining a work’s value until it has been [exploited].”
BACKGROUND
Let’s back up. On February 5, 2019, UMG and Sony were sued for violating the “second chance” provision under Section 203 of the Copyright Act — and thus violating Section 106 for infringement — by refusing to honor termination notices stating the intention of many artists to reassert their copyrights over certain works. The well-known second chance provision allows authors to reclaim copyrights from unwise grants made to labels after 35 years. Notably, an artist must file their notice at least two years before the date they wish to recoup their work — making the 33-Year mark pivotal — and once a song or recording qualifies for termination, its authors have five years in which to file a claim.
But the most important exception to the second chance provision is “works made for hire.” Under the definition in Section 101, a “work made for hire” is “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.”
To be clear, a written termination notice under Section 203 could merely be an invitation to renegotiate between the artists and label for more favorable royalty arrangements. But here, according to the musicians’ complaints, UMG and Sony “routinely and systematically refuse[d] to honor” their invitation to renegotiate. Rather, the labels insisted that the sound recordings at issue were “works made for hire,” citing explicit contractual language in the recording agreements. Accordingly, UMG and Sony refused to acknowledge that any recording artist has the right to take over control of the sound recordings, or enter into an agreement with a different label for the exploitation of the recordings, after the effective date of termination.
Alternatively, the musicians alleged that sound recordings cannot be considered works made for hire because they are not included in the definition. Therefore, continued exploitation of the sound recordings after the effective termination date is willful copyright infringement, destroying the post-termination rights in the recordings that the Copyright Act expressly guarantees.
Legal precedent is split on this matter, perhaps paving the way for an eventual landmark Supreme Court ruling. In 2003, the United States Court of Appeals for the Ninth Circuit held that musical compositions created by the artist at the request of a corporation were works made for hire within the meaning of Section 101. Contrastingly, the District Court for the Central District of California ruled in 1990 that songwriters who transferred rights by assignment, and who were listed on original copyright registration as authors, did not compose songs created on a work-for-hire basis. One of the key issues to be determined by the federal courts is the significance of what some analysts call a “soft paternalism” in the legislative intent which favors artists because of their diminished bargaining position in dealings with labels early in their careers (more on this below).
In siding with the recording artists and denying UMG’s motion to dismiss on April 2, the court explained:
“Defendant’s argument is weakened further by the music industry’s practice of frequently inserting ‘work made for hire’ language into recording contracts. Its position requires that many artists, often early in their careers, would confront a choice when presented with a ‘works made for hire’ provision. They could refuse to sign the contract and jeopardize their chance for the record company to record or distribute the artist’s music. Or the artist could sign the contract and then bring a claim within three years to dispute the effect of the ‘work made for hire’ provision in order to protect the copyright. . . . Either outcome would be inconsistent with Section 203 of the Copyright Act. . . . The first would exemplify the unequal bargaining power Section 203 sought to correct. The second would render Section 203 meaningless, as its very purpose is to provide a mechanism by which artists can reclaim their copyright after the work has had time to become more valuable. Defendant’s argument simply does [not] withstand scrutiny in light of the unequivocal purpose of the termination provision.”
The court’s respective rulings clear the way for the case to go to trial — UMG’s trial date is, for example, currently scheduled for November 9, 2020 — or alternatively for large settlements which benefit the artists and mitigate potential damages for the labels. For the record, according to Warner Music’s S-1 filings, “virtually all of our agreements with recording artists provide that such recording artists render services under a work-made-for-hire relationship."
SCOPE OF LEGAL CONTROVERSY
In 2011, Larry Rohter wrote an eye-opening piece for the New York Times entitled “Record Industry Braces for Artists’ Battles Over Song Rights.” The well-sourced article warned of lawsuits to come as 2011 marked 33 years since any recordings made in 1978 fell under the purview of the Copyright Act’s “termination rights” language. According to records on file at the United States Copyright Office, Bob Dylan, Tom Petty, Bryan Adams, and Tom Waits — major recording artists with multi-million dollar catalogs — were among the earliest artists to file claims.
At the time, the four major labels — Universal, Sony BMG, EMI and Warner — stated they would “not relinquish recordings they consider their property without a fight,” as the labels were already reeling financially from the impact of music piracy on the Internet. From a legal perspective, the major labels were clinging to a ruling made by the Southern District of New York in 2010 which found that the sound recordings were the “absolute property” of the record company, and not Bob Marley or his estate. That decision, however, applied only to Marley’s pre-1978 recordings, which are governed by an earlier law allowing for termination rights only in some cases after 56 years. In other words, the Marley decision is not binding precedent in cases pertaining to post-1978 recordings.
At the time, independent copyright experts were skeptical of the argument advanced by the labels because “[n]ot only have recording artists traditionally paid for the making of their records themselves, with advances from the record companies that are then charged against royalties, [but] they are also exempted from both the obligations and benefits an employee typically expects.”
One prominent entertainment lawyer even offered this premonition:
“My gut feeling is that the issue could even make it to the Supreme Court. . . . Some lawyers and managers see this as an opportunity to go in and renegotiate a new and better deal. But I think there are going to be some artists who feel so strongly about this that they are not going to want to settle, and will insist on getting all their rights back.”
Moreover, one recording industry executive told Rohter that significant differences of opinion existed “not only between the majors and smaller independent companies, but also among the big four,” stymying the possibility for a unified position. Some of the major labels, the executive said, “favored a court battle, no matter how long or costly it might be, while others worry that taking an unyielding position could backfire if the case is lost.”
If the labels opted for a fight, it could be deeply alienating for their respective musicians and songwriters, squashing all respectability between the parties and the likelihood of future peaceful dealings. In other words, as the executive predicted, the artists would begin “insist[ing] on total control of all their recordings.”
Without a unified position from the labels, artists began taking their individual battles to court. For example, in June of 2017, Paul McCartney reached a confidential settlement of his lawsuit against Sony in which he sought to reclaim copyrights to songs by the Beatles. McCartney sued in January for a declaration that he could reclaim more than 260 copyrights, including for songs credited to him and John Lennon such as “I Want to Hold Your Hand,” “Yesterday” and “Hey Jude.” Interestingly, McCartney pursued his case despite a British court ruling against pop group Duran Duran in its similar case against Sony in 2010. The British court refused to grant rights on the grounds that US law did not apply in Britain. One of the legal issues listed in the complaints of the class action suits discussed above is whether a foreign choice of law provision in a recording agreement has any effect upon the application of U.S. copyright law to issues relating to the application of Section 203 of the Copyright Act — or whether such a clause is a “breach of contract” in favor of the major labels.
This intellectual property issue transcends squabbles between the major labels and legendary recording artists. The film industry will continue to see high profile copyright termination suits brought by original authors. For example, the legendary composer Ennio Morricone sued to reclaim rights to six scores after sending termination notices to defendant Bixio Music Group, as the organization paid Morricone upfront in the 1970s and 1980s for his scores in exchange for limited royalties. Morricone lost at the district court level in October 2017. Nearly two years later, the U.S. Court of Appeals for the Second Circuit reversed that decision, finding that the scores were not “works for hire” under U.S. or Italian law. Notably, the parties stipulated that Italian law governed their dispute, and therefore the court “did not consider or pass on any underlying choice-of-law-issues.” In Italy, a composer is considered a joint-author of the film in which his or her work is used and is the sole author of the score itself.
Screenwriters, too, have begun filing termination notices under Section 203. In 2018, U.S. District Court Judge Stefan Underhill granted summary judgment in favor of Friday the 13th screenwriter Victor Miller and against the producers, holding that Miller did not prepare the screenplay as a work for hire, and that Miller’s second termination notice validly terminated the rights to the copyright. Specifically, the court determined that the screenplay (a) was not a work for hire, (b) was not prepared within the scope of employment, (c) that labor law does not require holding that the screenwriter was an employee, and (d) alternatively, Miller was an independent contractor. That positive ruling for screenwriters grew awareness of the issue, leading to subsequent copyright termination notices filed against Warner Bros., Disney, and Skydance over existing IP.
ARGUMENTS AGAINST INALIENABLE TERMINATION RIGHTS
Should the class action suits against UMG and Sony continue through the federal courts, there are many critical legal issues that could be resolved, as well as the potential for replacing a misguided system for a more efficient one. For example, can a record company argue that a record is a collective work or a compilation, and does a “greatest hits” record fit this definition? If the answer is yes, according to Guy A. Rub, the transfer of rights in these works cannot be terminated.
In his 2013 article “Stronger Than Kryptonite? Inalienable Profit-sharing Schemes In Copyright Law,” Rub cites “the main historical justification for inalienable profit-sharing arrangements is heavily rooted in a romantic notion of the starving artist” doomed by poor bargaining position against publishers at the outset of their careers. This echoes arguments made above that the unequal bargaining position of artists demands intervention by copyright law.
However, Rub argues that termination of transfer rights “destroys the main tools … that allow the industry to concentrate the rights needed for commercial exploitation within one entity — the intermediary publisher or record company — and thus overcome the tragedy of the anticommons.” The transaction costs of negotiating deals among parties with veto power is always expensive, encapsulating why, under a law and economics framework, this particular copyright issue could be better solved with a liability rule (e.g., compulsory licenses with statutory fees) over a property rule (e.g., veto power and automatic copyright ownership).
On the one hand, it is admittedly wasteful to allow high market concentration in the music industry because some profitable albums go unproduced because of deals that never get signed. On the other hand, even under oligopoly conditions, the Internet has significantly lowered fixed costs of production and distribution in the music industry for authors, thus raising the average bargaining position of all authors.
More importantly, Rub points out the irony that only the most successful authors of song recordings benefit from a system where their termination-of-transfer rights vest after 35 years. The vast majority of records stop making money long before this vesting period. Meanwhile, the label has already made the lion’s share of the money from the megahit over the previous 35 years, leaving too small a revenue stream to the terminating authors. In other words, even with termination rights, the original authors will never make that money back on the market.
Furthermore, as Rub wrote, “[m]egahit records are typically not an isolated source of income for a recording artist,” allowing these special artists “to extract considerable income throughout their career from other sources including other records, touring, and advertising campaigns.” Indeed, a system that denies income to the younger, poorer version of Bruce Springsteen, but rewards an older, multimillionaire Springsteen with whatever market remains for the recording after 35 years is “exceptionally perverse.”
Mostly in agreement with Rub, Kevin J. Hickey’s 2017 article “Copyright Paternalism” investigates the degree of paternalism in copyright law. Hickey argues that because “current half-hearted paternalism” is ineffective at securing its distributive and author-protective goals, there should instead be “mandatory protections” or “hard paternalism” for authors. Critical of the legal fiction that all artists are bad at business, Hickey argues that termination rights as structured by the Copyright Act fail to improve the bargaining position of most authors. Instead, vesting termination rights actually weakens the initial bargaining position for the majority of authors to the benefit of the tiny minority who create works that are still valuable after 35 years.
Hickey’s ideological bent takes him down a pedantic road where “incentives” are a special, precise method of measurement that should dictate copyright law. For example, Hickey seems troubled by hypotheticals where shortsighted authors are “irrational actors” — claiming that amassing future revenue was their “extrinsic motivation” all along despite 35 years beforehand prioritizing an advance over royalties. Hickey finds this behavior puzzling enough to belittling point out that “a contract negotiation occurs in an economic context that specifically calls for weighing of costs and benefits.” Hickey offers that “a purely rational actor, even if economically weak, would not want these [soft] interventions [because] they only serve to reduce his bargaining power by limiting what he can sell.”
One could push back against this framing, of course, by arguing that authors of sound recordings are often unable to effectively value their own works precisely because of the music industry’s distortion in the allocation of risk. In other words, when an up-and-coming producer accepts concessions — either on the frontend (i.e., small advance) or backend (i.e., less points on the Master, less publishing, etc.) — to secure placement on a star artist’s major label album, the producer is arguably acting rationally in the context of dealing with a highly competitive oligopoly (or, to borrow Hickey’s words, perhaps this author is, indeed, “economically helpless when negotiating with intermediaries.”).
Nonetheless, Hickey is correct to point out that termination rights as presently structured do not actually improve the bargaining position of most authors — only the lucky ones that find their way back to the negotiating table with leverage after 35 years. Moreover, Hickey is correct to ask why this must be the case because “if equalizing bargaining power was truly the aim, it would be more straightforward for the law to intervene in the actual negotiation, as opposed to merely providing some easily satisfied formal requirements and a distant termination right.”
If freelance authors lack the bargaining power to reject contractual designations of their work as made for hire, which Hickey reminds is “the stated premise of the regulation,” then these authors likely also lack bargaining power to resist assignments of their copyrights. When analyzed from this angle, therefore, it seems that work-made-for-hire restrictions operate merely to preserve termination rights — a property interest that fails to produce any value for the vast majority of authors.
As suggestions for new regimes in this area, Hickey too recommends compulsory licenses for original authors — and not automatic copyright ownership — thus lowering transaction costs by replacing a property rule “with something closer to a liability rule.” In general, instead of nudging authors into better decisions through “soft paternalism,” it may be more effective “to mandate the distributive results sought, such as guaranteeing authors a minimum royalty or equitable compensation.”
The possibility also exists to borrow from other countries, such as German copyright law, which contains an inalienable right where authors receive “equitable remuneration” for their work. This feature could neatly encompass most examples where recording agreements transform into multi-million dollar windfalls lopsided toward the record labels.
Finally, Hickey stresses that termination rights create inefficiencies in the exploitation of the work itself. A publisher anticipating the end of the maximum initial assignment period, for example, may underinvest in the exploitation of the work since they stand to lose their future property interest. Presently, because copyright does not guarantee authors any economic reward — instead indirectly offering an uncertain possibility of a future reward — Hickey believes “the key is eliminating the default rule of automatic copyright.”
CONCLUSION
The class action lawsuits referenced above are the latest in a line of major litigations that promise to jam up courtrooms in the Southern District of New York for the foreseeable future. The reason why is greed and not justice. On its face, it is probably for the best that Paul McCartney owns his world-renowned songs; Ennio Morricone owns his incomparable film scores; and Victor Miller owns his groundbreaking screenplay. But if the question is how to build the most equitable copyright law regime possible, the U.S. has not yet arrived at an answer.
In the future, many lawyers, federal judges, and probably Supreme Court justices will weigh in on how to amend or change the system currently in place. As it stands, and as these class action suits prove, there remains substantial debate over what the laws as currently written mean in respect to authorship, creative expression, and working relations between corporate conglomerates and the artists that make them money.
For now, the favorable rulings in Waite v. UMG Recordings and Johansen v. Sony Music Entertainment suggest that courts remain largely sympathetic to artists because of the proven realities of the massive, global corporations they are dealing with. With the momentum now on the artists’ side in respect to recent court decisions and settlements, it is interesting to think back to a decade ago when the then-four major labels were at their most desperate. Long before streaming revenue and social media flooded the music industry with billions of dollars, the major labels opted for years of costly litigation over creating a more equitable regime designed to balance its bargaining power — and, thus, its earning potential — with that of artists at-large. In that context, it is difficult to feel bad for any label losing tens of millions of dollars now to original authors. But in the grand scheme of things, the music industry should consider lobbying for a more equitable copyright law regime that considers all of the players in complicated industries such as music and film.
