A more technical version of this Insight, geared to practitioners, was published by Law360.
On Friday, September 24, 2021, the comic book publisher Marvel initiated five lawsuits in federal courts, attempting to invalidate copyright termination notices sent by a former writer and the estates of several former artists. The copyrights in question included some of the most recognizable Marvel characters from the “Avengers” series, such as Iron Man, Black Widow, Thor, and even Spider-Man. In each complaint, Marvel alleges that all artists were paid a “per-page rate” for their work and that Marvel had the right to exercise creative control, therefore rendering the artists’ contributions works made for hire. This is familiar territory for Marvel—they filed a similar suit in 2010 that they ultimately settled for what has been estimated to be tens of millions of dollars soon before the U.S. Supreme Court was scheduled to address it. Marvel Characters, Inc. v. Kirby, 726 F.3d 119 (2d Cir. 2013). Needless to say, this is a contentious issue, and all of the involved works were created before the Supreme Court enumerated certain factors for determining works made for hire in Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989) (“CCNV”).
Under the Copyright Act, creators of copyrighted works may terminate prior transfers of their copyrights to third parties regardless of any conflicting contract terms. Recognizing the limited bargaining power creators hold when originally agreeing to these transfers, especially when dealing with large corporate rightsholders, Congress created this right in an effort to level the playing field. It gave content creators a one-time opportunity to enjoy a greater share of their works’ economic successes by canceling existing agreements and entering into more favorable arrangements. One noteworthy exception to statutory termination — works made for hire — is markedly fact-specific; determinations often turn largely on contract language. Prior to the Supreme Court decision in CCNV, the parties did not have guidelines to determine whether these were employer-employee or independent contractor relationships when they negotiated the assignment of rights, yet these contracts are scrutinized using those factors. Many works are also created in collaborative environments, particularly in the case of juggernaut companies like Marvel, and ownership of copyright becomes unclear from the time of creation.
Furthermore, unlike the Copyright Act of 1976, the Copyright Act of 1909 did not include any express language regarding works made for hire and there has been substantially less litigation surrounding works created under the 1909 Act to provide guidance. While these current Marvel cases could foreseeably settle, clarification from the Supreme Court regarding the work for hire doctrine would provide guidance for other creators approaching the termination window as well as those entering new relationships. In 2014, however, the Court declined to hear a case regarding ownership rights in Superman, Peary v. DC Comics, 574 U.S. 923 (2014), but it remains to be seen whether this recent bevy of litigation will influence the Court’s approach.
Given the widely publicized Marvel litigation, other lawsuits are sure to follow. Therefore, it is important for creators to understand the legal landscape of termination rights, the work made for hire exclusion, and other background information that will be relevant going forward.
Brief Recap of the Termination Right
To exercise the termination right, creators must comply with complex timing and filing formalities. Generally, there is a five-year window to terminate that starts as early as 35 years after the original copyright grant. Creators must provide advance notice to the party whose rights are being terminated within a certain timeframe before the effective termination date, which is chosen by the creator and must fall within that five-year window. Additionally, a copy of the notice must be submitted to the Copyright Office for recordation. On the effective date of termination, the U.S. copyrights previously transferred revert to the creator, assuming all statutory requirements are met.
While the termination right is a powerful tool, it has limitations. Certain types of works, specifically works made for hire and derivative works, are excluded from statutory termination. Additionally, the termination right affects only those copyright grants spanning more than 35 years and is limited to transfers of U.S. copyrights. Creative artists should be familiar with these limitations, as hiring parties will typically seek to reduce the risk of future termination by structuring agreements to fall within these exclusions.
The Work Made for Hire Exception
The first significant exception concerns “works made for hire.” The Copyright Act of 1976 identifies two types of works made for hire—those created by an employee within the scope of employment and those specially commissioned from an independent contractor. For both types, an agreement transferring rights in these works cannot be terminated. This is because the hiring party, not the creator, is deemed the original copyright owner of the creation. However, this exception only applies if the work satisfies the statutory definition of a work made for hire.
As a preliminary matter, creators should note that parties cannot simply agree that a work will be deemed a work made for hire—the statutory requirements must be satisfied. When faced with this issue, courts generally look beyond contract terms and examine the relationship between the parties, as well as the nature of the work at issue. It is important that creators are not misled into believing that termination is futile simply because of contractual language labeling the creation as a work made for hire.
If a work is created by an employee “within the scope of their employment,” the employer owns the copyright. However, other creators may be considered “independent contractors.” With no clear standard for distinguishing whether the hired party is an employee or independent contractor, the Supreme Court in CCNV provided factors to aid courts in this determination: the skill required, source of the instrumentalities and tools, location of the work, duration of the relationship between the parties, whether the hiring party has the right to assign additional projects to the hired party, the extent of the hired party's discretion over when and how long to work, method of payment, hired party's role in hiring and paying assistants, whether the work is part of the regular business of the hiring party, whether the hiring party is in business, the provision of employee benefits and tax treatment of the hired party.
Another more stringently defined category of works made for hire encompasses works “specially commissioned” or ordered from an independent contractor. There are two statutory requirements for a work to qualify as specially commissioned. First, the parties must expressly agree in a signed writing that the work will be a work made for hire. Second, the work must come within one of the nine statutorily defined categories of works: a contribution to a collective work, a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional text, a test, test answer materials, or an atlas. It is worth noting that this is intended to be an exhaustive list, but, even so, it does not appear to contemplate certain works created in more contemporary fields. In sum, an express agreement regarding a work made for hire indubitably establishes more clarity around ownership.
Derivative Works
Derivative works are also excluded from the scope of the termination right. These are works adapted from or based on a preexisting copyrighted work. For example, a film adaptation of a novel can be a derivative work. If the author permits a filmmaker to create derivative works based on the novel, the filmmaker will own copyright in the derivative works. Although the derivative film may consist of preexisting material, the new copyright does not include exclusive rights in the original novel.
Creators should be aware that derivative works, if authorized by the original agreement and created prior to termination, are not affected by statutory termination. Instead, the new party may continue exploiting and receiving income from the derivative work under the terms of the terminated grant. But that party is barred from creating any new derivative works based on the original creation after termination.
The derivative works exception can have particularly harsh consequences for creators. A potential work-around to this exception that may allow creators to maintain some control over previously created derivative works is to expressly provide in the original contract that termination ends the third party’s right to continue using those works. This is a limited solution, as most creators have little bargaining power when entering into these agreements and thus may be unable to persuade more imposing parties to agree to such a term. Given the success of the Marvel Cinematic Universe, there is almost certain to be a seemingly endless number of movies featuring characters involved in the ongoing disputes. In fact, several movies are already in production, and some are on their way to theaters in 2022. None will be impacted by the termination provision.
The U.S.-Only Limitation & 35-Year Requirement
There are two final, important limitations to note. First, statutory termination is only applicable to copyright grants that last for more than 35 years. Agreements granting rights for a lesser period of time are governed by the terms of the contract. Creators should be cognizant of third parties seeking short-term grants, as this may be an attempt to defeat their statutory right to terminate. Second, the termination right is limited to rights arising under U.S. copyright law; it has no effect on grants of foreign rights. For example, a creator who terminated a prior grant of “worldwide rights” will regain control of the work only as it is used within the United States; the third party may still exploit the work in foreign countries and retain those profits according to the provisions of the now-terminated grant. Often the marketplace for a copyrighted work — whether it is literature, films, or music — is international, so hiring parties will seek expansive copyright grants. For creators considering such global transfers, this limitation may diminish the attractiveness of their recaptured U.S. rights when attempting to enter new contracts with other transferees.
Supreme Court Guidance Would Be Helpful
While this article touches upon a few of the intricate limitations on the copyright termination right, this is a complex area of law and fact to be handled on a case-by-case basis. Current creators, as well as those approaching the termination window, should educate themselves and seek legal advice in advance to ensure that their termination right is protected. This almost begs the Supreme Court to grant certiorari in similar future cases to modify this currently fact-dependent test.
While the Marvel litigation has a high profile, the outcome and the Supreme Court’s potential treatment of these cases could have far-reaching consequences. Given the somewhat recent passage of Title II of the Music Modernization Act (CLASSICS Act), these copyright termination issues implicate the rights of musicians who created works under the 1909 Copyright Act, or before February 1972 (or “legacy artists”). More importantly, the copyright termination exclusions could significantly impact independent contractors in various creative fields, working largely in what has become a gig economy.