Opinion ID: 757727
Heading Depth: 2
Heading Rank: 2

Heading: Derivative Works Exception

Text: 18 As noted above, the Copyright Act of 1976 had a major effect on the rights of the parties to this dispute. Section 304(b) automatically extended the copyright renewal term for 19 years. Section 304(c) gave Dixon's heirs (to whose interests Ahlert has succeeded) the right to exploit this extended renewal term by allowing them to terminate Dixon's grant to Remick (Warner's predecessor in interest). Upon termination, all rights possessed by Remick and Warner reverted to Dixon's heirs, including the right to license uses of the Song and receive any consequent royalties. But there is one notable caveat--the Derivative Works Exception: 19 A derivative work prepared under authority of the grant before its termination may continue to be utilized under the terms of the grant after its termination, but this privilege does not extend to the preparation after the termination of other derivative works based upon the copyrighted work covered by the terminated grant. 20 17 U.S.C. § 304(c)(6)(A). 21 The Derivative Works Exception reflects Congress's judgment that the owner of a derivative work should be allowed to continue to use the derivative work after termination, both to encourage investment by derivative work proprietors and to assure that the public retain[s] access to the derivative work. Note, The Errant Evolution of Termination of Transfer Rights and the Derivative Works Exception, 48 Ohio St. L.J. 897, 912 (1987). Without the Exception, the creator of a derivative work (and, indeed, the public at large) could be held hostage to the potentially exorbitant demands of the owner of the copyright in the underlying work. 22 The parties to the present case do not dispute that the Cocker derivative is a derivative work prepared under authority of the grant before its termination. Rather, they dispute whether the inclusion of the Cocker derivative on the soundtrack and soundtrack album constitutes utiliz[ation] under the terms of the grant. 7 The district court found that it was not, and therefore concluded that Ahlert was entitled to receive the contested royalties. Warner appeals from this determination. In order to resolve this question, we must determine what is meant by the phrase the terms of the grant. 23 The Supreme Court interpreted the meaning of the terms of the grant in Mills Music, Inc. v. Snyder, 469 U.S. 153, 105 S.Ct. 638, 83 L.Ed.2d 556 (1985). That case involved a controversy between a music publisher and the heirs of Ted Snyder, a co-author of the copyrighted musical composition Who's Sorry Now. The original copyright was registered in 1923 by a publishing company partially owned by Snyder. When that company went bankrupt, the bankruptcy trustee assigned the copyright to music publisher Mills Music. In 1940, Mills Music and Snyder entered into an agreement whereby Snyder assigned his interest in all renewals of the copyright to Mills Music. In exchange, Mills Music agreed to pay certain royalties to Snyder, including 50 percent of all net royalties received for mechanical reproductions of Who's Sorry Now. 24 In 1951, Mills Music registered the renewed copyright. It then issued over 400 licenses to record companies authorizing various recordings of Who's Sorry Now. These record companies paid royalties to Mills Music, which in turn remitted 50 percent of those royalties to Snyder. On January 3, 1978, Snyder's heirs served notice of termination on Mills Music effective January 3, 1980, pursuant to the 1976 Act's termination provision. Mills Music claimed that after termination, Snyder's heirs were entitled to only 50 percent of the royalties from pre-termination derivative recordings of Who's Sorry Now, as was agreed to in the original 1940 grant from Snyder to Mills Music. The heirs claimed that they were entitled to the full 100 percent of these royalties. 25 Resolution of the dispute turned on whether the terms of the grant preserved by the Exception included only the approximately 400 licenses from Mills Music to the record companies, or whether it also included the terms of the original 1940 grant from Snyder to Mills Music entitling the latter to 50% of the mechanical royalties. The Supreme Court first examined the text of the Derivative Works Exception. For convenience, we set forth this text a second time. 26 A derivative work prepared under authority of the grant before its termination may continue to be utilized under the terms of the grant after its termination, but this privilege does not extend to the preparation after the termination of other derivative works based upon the copyrighted work covered by the terminated grant. 27 17 U.S.C. § 304(c)(6)(A) (emphasis added). Because the word grant appears three times in the Exception, the Court assumed that Congress intended to give the word the same meaning throughout. Mills Music, 469 U.S. at 164-65, 105 S.Ct. 638. Logically, the third reference to the terminated grant had to refer to Snyder's 1940 grant to Mills Music. See id. at 164, 105 S.Ct. 638. The Court next considered the first reference to the word grant, in the phrase derivative work[s] prepared under authority of the grant. Because [t]he 1940 grant ... expressly gave Mills the authority to license others to make derivative works, and because each of the 400-odd sound recordings at issue was authorized by Mills Music while it was owner of the copyright, the Court concluded that whether the phrase ... is read to encompass both the original grant to Mills and the subsequent licenses that Mills issued, or only the original grant, ... the word 'grant' must refer to the 1940 grant from Snyder to Mills. Id. at 165, 105 S.Ct. 638. 28 Finally, the Court interpreted the phrase under the terms of the grant. In order to give the word grant a consistent meaning throughout § 304(c)(6)(A), the Court reasoned that this language necessarily encompassed the original 1940 grant from Snyder to Mills Music. However, the terms of the grant for a particular derivative work also had to include the subsequent license between Mills Music and the record company that prepared the derivative work. See id. at 165-66, 105 S.Ct. 638. Thus, the Court concluded that the phrase 'under the terms of the grant' as applied to any particular licensee would necessarily encompass both the 1940 grant and the individual license executed pursuant thereto. Id. at 166-67, 105 S.Ct. 638 (quoting § 304(c)(6)(A)). In other words, the terms of the grant include the entire set of documents that created and defined each licensee's right to prepare and distribute [the] derivative work[ ], id. at 167, 105 S.Ct. 638, both the individual license requiring the licensee to pay royalties to Mills Music, and the 1940 grant from Snyder to Mills Music entitling the latter to keep 50 percent of those royalties and requiring it to remit the remaining 50 percent to Snyder's heirs. 8 Indeed, unless the preserved terms of the grant included the original grant from Snyder to Mills Music, the Court noted that there would be neither a contractual nor a statutory basis for paying any part of the derivative-works royalties to the Snyders. Id. Therefore, the Court ruled that Mills Music was entitled to keep 50 percent of the disputed royalties. See also Woods v. Bourne Co., 60 F.3d 978, 987 (2d Cir.1995) (interpreting Mills Music to preserve during the post-termination period the panoply of contractual obligations that governed pre-termination uses of derivative works by derivative work owners or their licensees). 29 The Supreme Court in Mills Music did not specifically address the question before us: whether the author or the publisher has the authority to license new uses of a pre-termination derivative work after termination. When the Mills Music case was in the district court, Judge Weinfeld determined that after termination, the publisher retained the authority to license new [uses] of old derivative works that it first licensed prior to termination of the [1940 grant] with royalties to be shared as [they were] before termination (assuming of course that those new uses were not themselves new derivative works). Harry Fox Agency, Inc. v. Mills Music, Inc., 543 F.Supp. 844, 868 (S.D.N.Y.1982), rev'd, 720 F.2d 733 (2d Cir.1983), rev'd, Mills Music v. Snyder, 469 U.S. 153, 105 S.Ct. 638, 83 L.Ed.2d 556 (1985). The district court reasoned that it would be illogical to impose a limitation on Mills Music's rights on the basis of licenses which Mills Music itself had issued and which were never a part of the original grant from Snyder to Mills Music. Id. Neither the Second Circuit Court of Appeals, which reversed the district court's judgment, nor the Supreme Court, which in turn reversed the Second Circuit, touched on the question of post-termination licensing of pre-termination derivative works. 30 We are not persuaded by the district court's reasoning in Harry Fox Agency. In effect, Judge Weinfeld's holding would enforce the terms of the original grant from the author to the music publisher but ignore the terms of the subsequent grant from the music publisher to the record company, at least when it came to authorizing post-termination uses of pre-termination derivative works. But, as the Supreme Court in Mills Music makes clear, the entire set of documents that created and defined each licensee's right to prepare and distribute [the] derivative work[ ] must be enforced. 469 U.S. at 167, 105 S.Ct. 638 (emphasis added). As one commentator has noted, if the entire pre-termination transaction is what is being preserved, then the limitations on the record companies are preserved as well, and any attempt to change them after termination is ... outside of 'the terms of the grant.'  Howard B. Abrams, Who's Sorry Now? Termination Rights and the Derivative Works Exception, 62 U. Det. L.Rev. 182, 235 (1985) (quoting 17 U.S.C. § 304(c)(6)(A)); see also Howard B. Abrams, The Law of Copyright § 12.05[F][d][iv], at 12-50 (1998) (district court decision in Harry Fox Agency seems to be in fundamental conflict with the Supreme Court's Mills Music decision); id. at 12-58 ([I]f a particular post-termination exploitation of the derivative work cannot be undertaken within the terms of the pre-termination grant, then it is the post-termination copyright owner who must authorize and be entitled to compensation for the particular post-termination exploitation of the copyright.). But see 3 Melville B. & David Nimmer, Nimmer on Copyright § 11.02[B], at 11-18.10 (1997) (concluding that new uses of a pre-termination derivative work would not be the subject of termination because the post-termination licenses would simply constitute the further utilization of the previously prepared derivative work). 31 To determine, then, whether inclusion of the Cocker derivative on the Sleepless in Seattle soundtrack and soundtrack album is under the terms of the grant, we must examine the scope of both the original grant from Dixon to Warner's predecessor in interest, and the subsequent grant from Warner to A & M authorizing production of the Cocker derivative. Although the original grant would presumably authorize this new use, plainly Warner's license to A & M does not. As the district court found, that license is a narrow one granting A & M the right to use Bye Bye Blackbird for the limited purpose of recording the Cocker derivative and releasing it as Record No. SP 4182. This grant does not authorize any additional releases of the Cocker derivative, much less its inclusion on a movie soundtrack. Just as Warner continues to benefit from the terms of the second grant, pursuant to which it receives royalties from sales of the Cocker derivative on A & M Record No. SP 4182, it is bound by those terms of the second grant which limit its exploitation of the Song to sales of that phonorecord. Cf. Mills Music, 469 U.S. at 167 n. 35, 105 S.Ct. 638 (criticizing dissent for read[ing] the 'terms of the grant' to include only those terms defining the amount of the royalty payments.... The statute itself ... refers to 'the terms of the grant'--not to some of the terms of the grant.). 32 This result is consistent with the purposes of the Derivative Works Exception, which seeks to protect the rights of persons who have invested in creating the derivative work as well as to protect public access to derivative works. See Woods, 60 F.3d at 986; Hughes, Jurisprudential Vertigo, 60 Miss. L.J. at 251-52; Note, Errant Evolution, 48 Ohio St. L.J. at 912. Neither interest would be furthered if Warner, rather than Ahlert, had the power to authorize new uses of the Cocker derivative. First, Warner's investment in the Cocker derivative is already protected because it may continue to receive its share of royalties from the sale of the A & M phonorecord. Second, ruling for Warner would not increase public access to the Cocker derivative. Any new use of the Cocker derivative would have to be specifically licensed, and there is no reason to believe Warner would authorize new uses more frequently than would Ahlert. Cf. Woods, 60 F.3d at 986 (The goal of keeping derivative works in public circulation does not require that publishers rather than authors receive royalties for their use.). And of course, a ruling for Ahlert is more consistent with the general thrust of § 304, which is designed to protect the interests of authors and their heirs and to maximize their ability to exploit the value of their Songs during the extended renewal term. See Note, Errant Evolution, 48 Ohio St. L.J. at 912. 33 In sum, when Dixon's heirs terminated Warner's domestic copyright interest in the Song pursuant to 17 U.S.C. § 304(c), the right to authorize new uses of the Song as embodied by the Cocker derivative reverted to the heirs, because that right is not within the terms of the grant preserved by the Derivative Works Exception. The district court properly entered judgment in favor of Ahlert.