Judge Allows Musicians to Move Forward in Suit Aimed at Reclaiming Rights

Universal Music can't end a putative class action, but the judge does make a big caveat that could influence future dealmaking in the entertainment industry.
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On Tuesday, a New York federal judge authored an opinion that was decades in the making. It's a ruling that will undoubtedly shape how rights are conveyed in the entertainment industry. At issue is the aspect of copyright law that allows authors to terminate copyright grants to publishers. The putative class action was brought by John Waite and Joe Ely, musicians who alleged that Universal Music Group routinely and systematically refuses to honor termination notices. The judge is allowing a group of plaintiffs to move forward, but not without a pretty huge caveat.

Under Section 203 of the Copyright Act of 1976, authors can reclaim rights to works after 35 years. Congress enacted the law when it extended the copyright term. The idea was to give artists who bargained away rights during the early part of their careers a second bite at the apple. Because of the decades-long wait time, the impact of termination has only recently become explosive. Many prominent musicians including Tom Petty, Bob Dylan and Prince have used their prospective termination power to renegotiate more favorable royalty rates. Meanwhile, the termination provision has begun to threaten film studios' hold on major movie franchises, too. But there's still many legal issues quite unsettled. And that's why Tuesday's opinion figures to make an impact.

The UMG musicians brought their claims in February 2019. In reaction, the record label made several arguments why dismissal of the lawsuit was warranted.  

One of the big controversies pertains to "works made for hire." Under copyright law, a work prepared by an employee within the scope of his or her employment or commissioned as a "work for hire" via an agreement may not always be eligible for termination. In such instances, it's the publisher who can be deemed the statutory author. In many instances, record labels have prepared for this day of reckoning by inserting “work made for hire” language into recording contracts or by noting that certain recordings are "works for hire" in registrations with the U.S. Copyright Office.

Maybe these recordings are not really "works made for hire." The truth isn't as necessarily important as the clock. Typically, those contesting someone else's copyright ownership has just three years to sue. So UMG made the argument that given old copyright registrations and ancient contracts, these musicians should have gone to court years ago and that their new legal claims were outside the statute of limitations.

On Tuesday, U.S. District Court Judge Lewis Kaplan ruled the suit isn't time-barred after acknowledging that the issue is a close one. He comes to the conclusion that the musicians can indeed sue now after deciding that they're really making an infringement claim. The U.S. Supreme Court has made it clear that copyright plaintiffs may sue anytime within three years of an infringement. 

"Indeed, it is impossible for there to be a legally cognizable infringement claim until a termination right vests, a valid and timely termination notice is sent, is ignored, and the copyright’s grantee continues to distribute the work," writes Kaplan, later adding, "That the statute of limitations would begin to run against an artist the day the contract is signed would be incongruent with a termination right that does not vest for at least thirty-five years from that date. ... To restrict the termination right based on the artist’s failure to bring a claim within three years of signing a recording agreement — a time during which the artist and recording company may still have disparate levels of bargaining power — would thwart Congress’s intent and eviscerate the right itself."

That's a pretty big victory for present and future authors on the copyright termination front. It's one that figures to receive appellate review eventually, but in the meantime, it'll embolden many terminators. 

The judge also gives plaintiffs another victory over UMG's contention that omissions and errors in the terminations notices render them invalid.

"These defects are harmless," responds Kaplan. "Despite the incorrect dates and omissions, defendant has sufficient notice as to which grants and works plaintiffs seek to terminate. While perhaps in other circumstances an omitted execution date could be fatal to the validity of a termination notice, defendant possesses the relevant agreements and can discern the relevant dates."

Kaplan won't stop the lawsuit on these grounds, but he does make a ruling that may — or should — cause transactional lawyers in the entertainment business to think hard about the structure of contracts. The judge concludes that Waite and Ely may not be eligible to terminate copyright grants wherever they used loan-out companies to grant rights.

The two musicians argued "that the loan-out company is only a tax-planning device," states the opinion. "Even so, people cannot use a corporate structure for some purposes — e.g., taking advantage of tax benefits — and then disavow it for others. While Waite and his loan-out companies, like Heavy Waite, Inc., perhaps are distinct entities only in a formal legal sense, the statutory text is clear: termination rights exist only if the author executed the grant."

Given the widespread use of loan-out vehicles in entertainment, many artists may soon confront a choice between immediate tax advantages or down-the-road copyright benefits. That's a discussion for another day. Here, the judge rules that Waite and Ely may not terminate copyrights granted by third parties, dealing both of them a major setback.

Here's the rest of the opinion, which also gets into the issue of the so-called gap grant, meaning situations where the contracts predate 1978 but cover later sound recordings. Elsewhere in this decision, the judge strikes a request for declaratory relief, noting that such a judgment couldn't really guarantee that UMG would accept termination notices on an ongoing basis. Other plaintiffs may now carry the lawsuit forward. The issue of class certification is for another day.

UPDATE: In a separate case exploring similar issues, another judge has allowed musicians suing Sony over termination to move forward as well. U.S. District Court Judge Edgardo Ramos rejected Sony's contention that termination notices were invalid as untimely and insufficiently identifying the potentially recaptured work. The decision states that harmless errors may be excused. Here's the full ruling rejecting a motion to dismiss.