January 2015

Contracting with Digital Media Companies: Copyright Termination Right Poses Risks to Creators Using Loan Out Companies

4 min

In the era of digital media, there are an increasing number of authors, artists, and other creators transferring or licensing their copyright content over to digital media companies. In these instances, the U.S. Copyright Act of 1976 provides for a copyright termination right 35 years after the assignment or license is granted, so that content creators may recapture their rights at a later point when their works may have significantly increased in value.

However, the story becomes much more complicated when content creators use their own loan out companies to do business on their behalf with these digital media companies. It is true that loan out companies provide content creators with a layer of protection to shield them from legal and financial liability, as well as provide certain tax advantages. Unfortunately, what many content creators do not realize is that the loan out company structure may create a situation where the creator can essentially forgo his or her copyright termination right. A creator would not have any copyright termination rights if: (1) he or she is an employee of the loan out company; and (2) the created work is deemed to be a "work made for hire" (a work created "during the course and within the scope" of his or her employment). Section 203 of the Copyright Act of 1976 expressly excludes a "work made for hire" from the termination right.

On the other hand, a content creator may be the rightful, initial owner of a copyrightable work but cause additional problems if he or she has assigned or licensed a work over to a loan out company to provide further licenses to various digital media companies. (In this case, the creator is the author of the work. In a "work made for hire" context, the employer is technically the author.) If the loan out company subsequently assigns or grants a license to the creator's work to a digital media company, the loan out company may be on the hook for breaching contractual obligations if the creator terminates his or her initial grant to the loan out company some 35 years later. The digital media company may be entitled to sue the loan out company for breach of contract, unless the contract properly represented the limited set of rights that the loan out held in the creation.

Solutions and Recommendations

If the content creator is an employee of the loan out company and the work would be deemed a "work made for hire," one solution is to draft copyright termination provisions within the employment agreement for any "work made for hire" – termination provisions which allow for the creator to terminate the copyright 35 years later. See Nimmer on Copyright § 11.02[A][2]. In that way, the creator can retain termination rights by contractual consent of the parties (rather than by operation of the U.S. copyright laws).

Alternatively, in the event that the creator is the rightful, initial owner of the copyright, and there is an assignment or license from the creator to his or her loan out company, it is important to properly describe and set forth the rights that the loan out company has in such copyrights. In other words, when the loan out company subsequently assigns or licenses the copyrights to digital media companies, each agreement should detail that the assignment or license is subject to the creator's copyright termination rights and should detail the timeframe in which the creator will be able to exercise those rights. At the very least, the loan out company should avoid representing and warranting that it has full title and right to the copyright free and clear of any third-party claims.

Other important copyright issues that may significantly change an individual's business structure and the related agreements include, among other things:

  • Whether the copyright is in the musical composition or a sound recording;
  • Whether there are joint authors and what that means for copyright termination rights; and
  • Whether the author passes away before or after the statutory period to exercise the termination right, and whether the author has served notice of termination before his or her death.

When considering copyright law and the corporate and tax structure that will govern an individual's intellectual property assets and business dealings, it is crucial to take copyright laws and the copyright termination right into consideration.