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. In an earlier blog post, we provided an overview of the statutory termination right, discussing the scope of this right as well as the complicated termination process. This post elaborates on a few of the previously discussed limitations on statutory termination. It is crucial that creators, particularly those at the start of their careers, are aware of these caveats before transferring their copyrights to publishers, filmmakers, or other third parties so they do not unknowingly jeopardize their right to terminate.
Brief Recap of the Termination Right
To exercise the termination right, creators must comply with complex timing and filing formalities. Generally, most creators have 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. Assuming all statutory requirements are met, on the effective date of termination the U.S. copyrights previously transferred revert back to the creator. A more in-depth discussion of this process can be found in our previous blog post, which is hyperlinked above.
The termination right is a powerful, but limited tool. Certain types of works, specifically works made for hire and derivative works, are not subject to 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. Creators should familiarize themselves with these limitations, which are discussed in further detail below, as third parties will typically seek to reduce the risk of future termination by structuring agreements so they fall within these exclusions.
The Work Made For Hire Exception
The first noteworthy exception to the termination right concerns works made for hire. The Copyright Act 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 for one of the two types of works made for hire.
To qualify as the first type of work made for hire, the creation must be prepared by an employee within the scope of his or her employment. If the creator is deemed an independent contractor, statutory termination is available only if the work falls under the second type of work made for hire discussed below. While some creators are undoubtedly employees, in other cases a hired party’s status is ambiguous. For such cases, there is no clear standard for determining whether a hired party is an employee or independent contractor. Instead, the Supreme Court in Community for Creative Non-Violence v. Reid (“CCNV”), 490 U.S. 730 (1989), provided factors to aid courts in this determination. These factors focus on details concerning the creation of the work (e.g., the hiring party’s control over the work and the source of the equipment or tools used by the creator) and the relationship between the two parties (e.g., the duration of the relationship, whether the hiring party paid employment benefits, and the tax treatment of the creator). A 2018 federal court decision pertaining to the original “Friday the 13th” film provides an informative example of how courts approach this analysis.
In Horror Inc. v. Miller, 335 F. Supp. 3d 273 (D. Conn. 2018), the question before the district court was whether the screenwriter Victor Miller prepared the “Friday the 13th” screenplay as a for-hire employee. Manny Company, which hired Miller to create the screenplay, and Horror Inc., which subsequently acquired the rights to the “Friday the 13th” franchise, argued yes in an effort to block Miller from exercising his copyright termination right. Ultimately, the court held that Miller was an independent contractor. It based its decision on the various CCNV factors, including that he was not treated as an employee for tax purposes, he received payment in the form of a lump sum, he worked for Manny Company for a short period of time and he used his own equipment to prepare the script. The case was argued before the Second Circuit in February 2020 and is awaiting decision.
The second type of work made for hire encompasses works specially commissioned or ordered from an independent contractor. There are two statutory requirements for a creation to qualify as a specially commissioned work. 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, and an atlas. Each of these categories are defined in the Copyright Act. Interestingly, an issue unique to the music industry that is currently being litigated is whether sound recordings fall within one of those enumerated types of specially commissioned works.
Creators should note that parties may not simply agree that a work will be deemed a work made for hire—the statutory requirements outlined above must be satisfied. When faced with this issue, courts will generally look beyond the contract terms and examine the relationship between the parties as well as the nature of the work at issue. Importantly, creators should not be misled into believing that termination is futile simply because of contractual language labeling the creation as a work made for hire.
The Derivative Works Exception
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, the Spider-Man film is a derivative work of the Marvel comic books, and the various movie sequels to the Jurassic Park film are also derivative. When a creator permits a third party to prepare derivative works, the creation of such works vests new copyrights in that party. Although the preexisting material incorporated in the derivative work is part of the copyrighted derivative work, the third party does not obtain exclusive copyright rights in the underlying work.
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 third 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. This means that, for example, if an author granted a company the right to produce a movie based on the author’s novel for a lump sum, the author would not receive any additional payment from the company’s continued exploitation of the film post-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, however, a very limited solution as most creators have little bargaining power when entering into these agreements and thus would be unable to persuade the other party to agree to such a term. Alternatively, creators could use the threat of termination as to the creation of new works to renegotiate the original contract terms governing revenue-sharing from the existing derivative works.
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 third 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 into new contracts with other transferees.
This post touches upon a few of the intricate limitations on the copyright termination right, although there are others not mentioned here. While it is important that creators educate themselves about these exclusions, it is also critical that creators seek legal advice before transferring their copyrights to ensure that their termination right is protected. The attorneys at Lutzker & Lutzker are happy to assist creators—both at the beginning of their careers or later down the line—by reviewing proposed contract terms to understand the implications of the copyright grant and/or by guiding creators through the termination process.