Source: https://www.wealthmanagement.com/art-auctions-antiques-report/pitfalls-concerning-copyrights
Timestamp: 2019-04-20 18:16:37+00:00

Document:
A working knowledge of (if not an expertise in) the Internal Revenue Code is a prerequisite for estate-planning professionals. For those tasked with estate planning for authors and artists, however, a working knowledge of a different federal statute—the 1976 Copyright Act, as amended, which took effect on Jan. 1, 1978 (the 1976 Act)—is also of great importance. If an estate planner isn’t familiar with the 1976 Act, the consequences to her client may be detrimental and could wreak havoc with the intended disposition of the copyrights associated with the client’s creative works.
The 1976 Act creates three potential pitfalls that must be considered when disposing of a client’s creative works and the copyrights associated therewith, both during the client’s lifetime and on her death.
First, to transfer both a creative work and the copyright, the client must specifically state that the copyright is being transferred with the creative work. A gift or bequest of a creative work, such as a painting, without a corresponding gift or bequest of the copyright, will only pass the creative work to the donee or beneficiary. For example, if a client bequeaths a painting to a friend and the residue of her estate to her children, the friend will receive the painting and the copyright will pass as part of the residue of the estate to the client’s children. If the client intends to bequeath the copyright with the painting, her will must specifically do so.
Estate-planning professionals must understand the uncertainty associated with transferring a client’s copyrights via methods other than by the client’s will. The 1976 Act provides creators with the opportunity to exploit their “original works of authorship” by prohibiting others from profiting from the work for a limited period of time without consent.1 During that time, the creator can sell, lease, license and gift the right to reproduce, distribute, perform, display and prepare derivative works as one undivided “bundle of rights” or, more commonly, as individual intangible rights. The ability to separate rights from the bundle and transfer them independently enables the creator to control the work’s exposure and profit as she may desire.
But what if, as may be the case with new talent, the highest bidders aren’t interested when the creator first seeks to benefit from her work? The 1909 Copyright Act, as amended (the 1909 Act), sought to provide authors and artists with a second opportunity to profit from an already exploited copyright through a right of renewal for that very purpose. In 1943, however, the U.S. Supreme Court upheld the validity of assignments of renewal rights prior to their vesting under the 1909 Act,2 thereby depriving creators of a second opportunity to assign their renewal rights under the terms of an initial transfer. In response to the court’s holding, the 1976 Act dispensed with the right of renewal and, for copyrights created after Jan. 1, 1978, created a statutory right of termination.
January 1, 1978, other than by will, is subject to termination.
The remainder of Section 203 dictates the specific requirements for termination. Unlike the automatic renewal right, the 1976 Act’s termination right requires affirmative action on the part of the creator and can’t be waived or contracted away.
The year 2013 marked the first opportunity for authors and artists to recapture rights they transferred or licensed away on or after Jan. 1, 1978. Assuming that the creator of the work is still alive, any transfer may be terminated during the 5-year period beginning 35 years from the date of the transfer.5 The creator must also provide notice of the termination right no more than 10 years, but not less than two years, prior to the effective date of the termination.
For example, assume your client sold an original copyright to a song to a record label in September 1978 for a small royalty. Further assume that your client subsequently found fame as a world-renowned performer. Over time, the record label realized substantial profits without paying any similar compensation to your client. Under the terms of Section 203(a)(3)-(4), during the 5-year period from September 2013 to September 2018, your client has the right to terminate the sale by serving written notice on the record label anywhere from 10 years to two years before the effective date of the termination and recording a copy of the notice with the U.S. Copyright Office.6 By following the procedures of Section 203(a)(3)-(4), the copyright will then revert back to your client under Section 203(b) on the effective date of the termination. Under Section 203(a)(2), if a creator dies before the commencement of the termination period, the termination right vests in a surviving spouse and/or descendants.7 This termination right is an automatic right of inheritance and can’t be altered by a client’s will, testamentary substitute or other agreement. In these circumstances, the creator’s spouse and/or descendants have the ability to terminate the creator’s post-1978 copyright transfers, with the caveat that any bequest of a copyright under the deceased creator’s will can’t be terminated. In situations in which more than one individual owns the termination right, only 50 percent of those individuals need to agree to terminate a creator’s lifetime transfer by complying with the same procedures outlined in Section 203(a)(3)-(4). Notwithstanding action by as few as 50 percent of the owners of the right, the terminated interest vests in all of the holders of the termination right on the effective date of the termination.
Assume that your client is survived only by children, but executes a will leaving all assets of the estate to a significant other, thereby disinheriting the children under the terms of the will. If your client dies before the termination right vests under the 1976 Act, the surviving children will have the opportunity to terminate the sale of the copyright, take possession of it and exploit it for their personal gain. The right of termination doesn’t (and can’t) pass under the client’s will to the significant other. In this case, your client’s children have the opportunity to frustrate your client’s testamentary plan and circumvent their disinheritance.
Estate planners should also consider that Section 203 not only overlooks the fact that a creator’s surviving spouse and/or descendants might be different individuals from the beneficiaries of a will, but also, Section 203’s sole carveout for transfers made pursuant to a will presents an opportunity for a creator’s surviving spouse and/or descendants to undo lifetime estate-planning transfers if they don’t inure to their benefit. Particularly in states where the probate process is lengthy and complex (for example, New York, California and Florida), estate planners often use testamentary substitutes, such as revocable trusts, in lieu of traditional wills that would trigger probate. For example, a surviving spouse and/or descendants who aren’t the beneficiaries of a creator’s revocable trust can frustrate the creator’s testamentary intent by terminating an inter vivos transfer of a copyright after the creator’s death. Plainly, this action interferes not only with the creator’s wishes regarding to whom the copyright devolves, but also with the desire to avoid probate. This gap in the statute, which allows for the unraveling of an estate plan merely because the creator elected to use a revocable trust over a will, highlights the need for revisions to Section 203 of the 1976 Act to except transfers to testamentary substitutes from the right of termination by a creator’s surviving spouse and descendants. Indeed, if a creator chooses to transfer copyrights to a limited liability company (LLC) for management purposes during the creator’s lifetime, that too can be undone by a surviving spouse and/or descendants if they don’t receive the LLC’s interests on the creator’s death. As with a transfer to a trust, Section 203 grants the family the right to terminate the copyrights owned by the LLC during the termination period.
Of the three potential pitfalls we’ve discussed, the failure to specifically gift or bequeath an underlying copyright along with the creative work is the easiest to avoid. As previously noted, to effectuate a lifetime gift or testamentary bequest of a copyright along with the creative work, the assignment or will must also include a specific reference to the copyright. The pitfalls of Section 203 are more difficult to avoid, although not impossible, if careful consideration is given to the appropriate planning.
For example, case law under Section 304 provides a limited opportunity to circumvent the revocation of common lifetime estate-planning transfers under Section 203 if the grantor is still alive when a termination right first becomes ripe for exercise. Let’s again consider your world-renowned client who penned an original song in September 1978, and assume that she didn’t sell the copyright to that original song. Let’s further assume that your client created a revocable trust for the benefit of individuals other than her spouse and/or children and that the client transferred her copyright by assignment to said trust. Section 304 case law suggests that “an author or an author’s statutory heirs are [not] entitled to more than one opportunity … to use termination rights,” and this same limitation should arguably be applicable to Section 203 termination rights.11 Therefore, as a means of protecting your client’s estate plan, one option is to counsel your client to exercise her termination rights as soon as possible, and, on reversion of the copyright, immediately reassign it to her revocable trust.12 By proactively terminating your client’s initial transfer to her revocable trust, you’ve removed the only opportunity for statutory heirs to frustrate your client’s testamentary plan under Section 203.
Another way to avoid the uncomfortable uncertainty of the application of Section 203 is to remove an author’s or artist’s copyright from its scope entirely. As previously noted, Section 203 doesn’t apply to works made for hire. The 1976 Act specifically defines a work made for hire, and courts have construed the definition narrowly, applying traditional agency law concepts.14 Because termination rights don’t exist under Section 203 for works made for hire, if an author or artist is still in the business of creating original works, an estate planner might consider creating a loan-out company in the form of an LLC, which the author or artist may wholly own. The use of the loan-out company may create an employer-employee relationship between the author or artist as employee and the company as the employer, causing future works to be treated as works made for hire, which are outside the scope of Section 203.15 It should be noted, however, that the choice to vest ownership of a copyright in a loan- out company to avoid the pitfalls of Section 203 must be weighed against the fact that termination rights don’t exist for transfers made by a loan-out company, regardless of whether those transfers prove to be unremunerative in the future.
Estate planners must have a working knowledge of the 1976 Act to inform their clients of these and other potential pitfalls that are unique to authors and artists and then advise them of the best means of disposing of their copyrights. Although Section 304 case law can and should be used in counseling clients whose estate plans might fall prey to the pitfalls of Section 203, we don’t suggest blind reliance on it. Until Section 203 cases involving common lifetime estate-planning transfers are decided, estate-planning professionals should approach planning for authors and artists with a creativity similar to that employed by their clients.
1. The 1976 Copyright Act (the 1976 Act) provides that works created on or after Jan. 1, 1978, which aren’t works made for hire, are extended copyright protection for a period of the author’s life plus 70 years. Works created prior to Jan. 1, 1978, are outside the scope of this article.
2. See Fred Fisher Music Co. v. W. Witmark & Sons, 318 U.S. 643 (1943).
3. See H.R. Rep. 1476, 94th Cong., 2d Sess. (1976).
4. Ibid., at pp. 124-125.
5. If the grant covers the right of publication of the work, the period begins 35 years from the date of publication of the work under the grant or 40 years from the date of execution of the grant, whichever term ends earlier. See 17 U.S.C. Section 203(a)(3).
6. To effectuate a termination in September 2013, the creator would have been required to have served notice in September 2011.
7. The creator’s surviving spouse will own 100 percent of the termination right unless the creator has descendants then living. If so, the spouse will own 50 percent of the termination right, and the creator’s descendants, per stirpes, will own the other 50 percent. If the creator dies without a spouse or descendants, the termination right may be exercised by the executor, administrator, personal representative or trustee of the creator’s estate.
8. We anticipate that the blanket application of the termination right to common lifetime estate-planning transfers will be challenged by litigation as more terminations are effectuated under the 1976 Act.
9. In 2012, the district court for the Southern District of California published the first case interpreting a provision of Section 203. See Scorpio S.A. v. Willis, No. 11cv1557, 2012 WL 1598043 (S.D. Cal. May 7, 2012).
10. See Mills Music, Inc. v. Snyder, 469 U.S. 153, 173 n. 39 and 174 n. 40 (1985), noting that Section 304(c) and Section 203(b) are “comparable” and “counterparts” of each other. See also Initial Brief: Appellee-Respondent at 30 n. 11, Vergara Hermosilla v. Coca-Cola Co., No. 10-12894 (11th Cir. Aug. 11, 2010), noting that the U.S. Court of Appeals for the 11th Circuit has treated cases dealing with Section 304(c) as precedential for Section 203(b) issues and vice-versa.
11. See Penguin Group (USA) Inc. v. Steinbeck, 537 F.3d 193, 204 (2d Cir. 2008).
12. Note that the use of a will naming the client’s revocable trust as the residuary beneficiary of the client’s estate will ensure that the copyright passes to the intended beneficiaries in the event your client dies in between the exercise of the termination right and the effective date of termination, although this will necessitate probate, and the estate may have to remain open until the effective date of termination.
13. See Dori Ann Hanswirth, “‘I’ll Be Back’: Termination Rights Under Section 203 of the Copyright Act,” Intellectual Property Magazine (July/August 2012), at p. 60, discussing Steinbeck, supra note 11.
14. See 17 U.S.C. Section 101. See also Community for Creative Non-Violence (CCNV) v. Reid, 490 U.S. 730 (1989).
15. Special care must be taken to create a relationship that would be classified as a work for hire arrangement under the scrutiny of traditional agency law concepts.

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