Opinion ID: 1383209
Heading Depth: 2
Heading Rank: 2

Heading: Retroactive Licenses and Transfers Are Invalid

Text: In this case, we deal with the question of whether a copyright co-owner  who, according to the legislative history of the Copyright Act, we are to treat as a tenant in common, see ante page 98  can convey his copyright interest to a third party retroactively, thereby defeating a claim of infringement asserted against that third party by another co-owner. In Eden Toys, we held that a later writing could memorialize or confirm an earlier oral agreement. Eden Toys, 697 F.2d at 36. The District Court in the instant case concluded that a reasonable jury could find an oral agreement never existed between Chambliss and Miller. Davis, 419 F.Supp.2d at 498. Still, the District Court agreed with defendants that the written agreements would nonetheless be valid to defeat Davis' claims. Id. at 499. Relying on several district court decisions holding that retroactive licenses are permissible and enforceable, see ante pages 97-98, it concluded that the written agreements between Chambliss and Miller were sufficient to defeat Davis's claims. We conclude that the district court decisions relied upon by the District Court are distinguishable from the instant case insofar as they involved retroactive licenses granted pursuant to negotiated settlements of accrued infringement claims. See, e.g., Country Road Music, 279 F.Supp.2d at 328 (agreeing with defendant that a settlement agreement between [defendant and co-owner] granted defendant retroactive reproduction rights that bar any infringement claim by plaintiffs [co-owners]); SBK Catalogue P'ship v. Orion Pictures Corp., 723 F.Supp. 1053, 1059 (D.N.J.1989) (The [settlement] agreement contemplated a retroactive written license for the use of the musical composition. . . .); Lone Wolf McQuade, 961 F.Supp. at 590 (In a settlement agreement dated December 9, 1996, [co-owner] granted [defendant] a retroactive license from January 1, 1990.). Indeed, to the extent that the district courts deciding these cases state the rationale of their legal conclusions, they uphold the agreements as private contracts between two parties without examining the implications for other holders of the copyright, other than to say in a conclusory fashion that these agreements will have the effect of barring infringement claims by third-parties, including co-owners. See, e.g., Country Road Music, 279 F.Supp.2d at 329 ([A] license from a co-holder of a copyright immunizes the licencee from liability to the other co-holder for copyright infringement.) (quoting McKay, 324 F.2d at 763). We believe that reliance on cases involving settlements is misplaced. Licenses and assignments function differently from settlements and releases, and the use of the term retroactive license for settlement or release by the parties causes unnecessary confusion and potentially creates legal mischief. Settlements are generally retrospective and exclusively between the parties to the settlement  the unauthorized user and the owner; and, absent clear language to the contrary, they are not licenses for future use. The Seventh Circuit has aptly observed that [a] settlement agreement [is] nothing more than a promise by [one party] to pay liquidated damages for past infringements in return for a dismissal of the infringement suit. [The party] erroneously equates a settlement for past infringement with a license for prospective use. . . . Ransburg Electro-Coating Corp. v. Spiller & Spiller, Inc., 489 F.2d 974, 977 (7th Cir.1973); see also Birdsell v. Shaliol, 112 U.S. 485, 487, 5 S.Ct. 244, 28 L.Ed. 768 (1884) ([A]n infringer does not, by paying damages for making and using a machine in infringement of a patent, acquire any right himself to the future use of the machine. On the contrary, he may, in addition to the payment of damages for past infringement, be restrained . . . from further use. . . .); United States v. Youngstown Sheet & Tube Co., 171 F.2d 103, 111 (6th Cir.1948) (A release for wrongs done in the past is not the equivalent of a license to do rightfully the same thing in the future.) (quoting Raytheon Mfg. Co. v. Radio Corp. of America, 286 Mass. 84, 190 N.E. 1, 5 (1934)). A settlement agreement between an injured owner and an injuring non-owner recognizes the unauthorized use while providing a remedy to the injured owner that is acceptable to all parties to the agreement. A settlement agreement can only waive or extinguish claims held by a settling owner; it can have no effect on co-owners who are not parties to the settlement agreement. It is a venerable principle of New York co-tenancy law, for example, that [o]ne tenant in common can settle for or release his interest in . . . personal property, but he cannot settle for or release the interest of his co-tenants. If one tenant in common should settle for his portion of the damages before action, the other may sue without joining him. Jackson v. Moore, 94 A.D. 504, 87 N.Y.S. 1101, 1103 (1904); see also Wagman v. Carmel, 601 F.Supp. 1012, 1015 (E.D.Pa.1985) (Ordinarily, although a tenant in common may freely sell or otherwise dispose of his own interest in jointly held property, he may not act so as to prejudice the rights of his co-tenants. For example, a tenant in common may not unilaterally bind his co-tenants to an agreement concerning the use, control, or title to the joint property.). [S]ettlement agreements are `not to be used as a device by which A and B, the parties to the decree, can (just because a judge is willing to give the parties' deal a judicial imprimatur) take away the legal rights of C, a nonparty.' Bacon v. City of Richmond, 475 F.3d 633, 643 (4th Cir.2007) (quoting United States v. Bd. of Educ. of Chicago, 11 F.3d 668, 673 (7th Cir.1993)). Licenses and assignments, however, are prospective; they permit use by a non-owner who would not otherwise have a right to use the property. In its simplest form, a license means only leave to do a thing which the licensor would otherwise have a right to prevent. Western Elec. Co. v. Pacent Reproducer Corp., 42 F.2d 116, 118 (2d Cir.1930). A retroactive license or assignment purports to authorize a past use that was originally unauthorized. Unlike a settlement, which recognizes an unauthorized use but waives a settling owner's accrued claims of liability, a retroactive license or assignment would  if given legal effect-erase -the unauthorized use from history with the result that the nonparty co-owner's right to sue for infringement, which accrues when the infringement first occurs, is extinguished. This is the effect of the District Court's decision in this case. The co-owner's right that would be extinguished by a rule permitting retroactive licenses or assignments  the right to sue for infringement  is a valuable one; indeed, it is one of the most valuable sticks of the bundle of rights of copyright. See Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 890 n. 1 (9th Cir.2005) ([T]o receive maximum value for the impaired copyright, one must also convey the right to recover the value of the impairment by instituting a copyright action.). Accordingly, we must examine carefully whether retroactive licenses and assignments that extinguish a co-owner's accrued right to sue are consistent with the general principles of tort [11] and contract law that underlie the accrual and settlement of infringement claims. As we have observed, [u]nder general principles of [tort] law, a cause of action accrues when conduct that invades the rights of another has caused injury. When the injury occurs, the injured party has the right to bring suit for all of the damages, past, present and future, caused by the defendant's acts. Leonhard v. United States, 633 F.2d 599, 613 (2d Cir. 1980) (citing Restatement (Second) of Torts §§ 899, 910 (1977)). A retroactive assignment or license that extinguishes the accrued infringement claims of a non-consenting co-owner by traveling back in time to undo an unlawful infringement destroys the co-owner's valuable and vested right to enforce her claim. A retroactive license or assignment that purports to eliminate the accrued causes of action for infringement held by a co-owner who is not party to the license or agreement also violates the fundamental principle of contract law prohibiting the parties to a contract from binding nonparties. See, e.g., EEOC v. Waffle House, Inc., 534 U.S. 279, 294, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002) (It goes without saying that a contract cannot bind a nonparty.). Moreover, a co-owner who purports to convey not only his right to prosecute past infringements but also his co-owners' right to prosecute past infringements violates the basic rule that an owner cannot convey more than he owns. See Roy Export Co. Establishment v. Columbia Broad. Sys., Inc., 503 F.Supp. 1137, 1153 (S.D.N.Y.1980) ([I]t is axiomatic that no one can convey more than his own interest in a work.). We have no doubt that Chambliss can release his own accrued claims of copyright infringement against Miller and his fellow defendants, either orally or in writing. But we know of no authority to sanction his attempt to release any rights Davis has against Miller, for they are not Chambliss's to release. None of what we say above should be read as preventing an owner and an infringer from settling infringement claims among themselves. See ABKCO Music, Inc. v. Harrisongs Music, Ltd., 722 F.2d 988, 997 (2d Cir.1983) (noting in a copyright infringement case, that courts favor the policy of encouraging voluntary settlement of disputes); see also In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 203 (2d Cir.2006) (The general policy of the law is to favor the settlement of litigation, and the policy extends to the settlement of patent infringement suits. (quoting Asahi Glass Co. v. Pentech Pharms., Inc., 289 F.Supp.2d 986, 991 (N.D.Ill.2003) (Posner, J., sitting by designation))). An owner who wishes to release unilaterally his own accrued claims may do so using whatever language he chooses  including by calling the negotiated settlement the proverbial banana  but such an agreement cannot have the effect of eviscerating a co-owner's claims based on past copyright infringement, nor can it settle accrued claims held by co-owners who are not themselves parties to the agreement. Accordingly, we hold that a license or assignment in copyright can only act prospectively. We find support for this holding in the law of patents. Although patent and copyright law function somewhat differently, courts considering one have historically looked to the other for guidance where precedent is lacking. See Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 439, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984) (referring to the historic kinship between patent law and copyright law when looking at patent law to understand vicarious liability in copyright). Our holding in this case is consistent with the law of patents. See Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341, 345 (Fed.Cir.1997) ([T]he grant of a license by one co-owner cannot deprive the other co-owner of the right to sue for accrued damages for past infringement. That would require a release, not a license, and the rights of a patent co-owner, absent agreement to the contrary, do not extend to granting a release that would defeat an action by other co-owners to recover damages for past infringement.). The prospective nature of licenses has long been recognized in the law of patents. See, e.g., Waterloo Furniture Components, Ltd. v. Haworth, Inc., 467 F.3d 641, 647 (7th Cir. 2006) (Courts have recognized the prospective quality of a patent license, which allows another party to use the patentee's property in the future without fear of suit.); see also Wang Labs., Inc. v. Oki Elec. Indus. Co., 15 F.Supp.2d 166, 172 (D.Mass.1998) (noting that there is authority to the effect that the concepts of both royalty and license are necessarily prospective, rendering a `retroactive royalty agreement' a legal nullity). Licenses in patent and copyright function similarly, see Harris v. Emus Records Corp., 734 F.2d 1329, 1333 (9th Cir.1984), and thus it is appropriate to consider copyright licensing, like patent licensing, prospective in nature. We see no reason why this principle should not also apply to the assignments of the type at issue here. There is little from a policy perspective to recommend a rule that allows retroactive licenses or assignments, and there are two strong reasons disfavoring them  (1) the need for predictability and certainty and (2) discouragement of infringement. A rule permitting retroactive assignments and transfers would inject uncertainty and unpredictability into copyright ownership, contrary to the intent of Congress in enacting the Copyright Act of 1976. See, e.g., Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 749, 109 S.Ct. 2166, 104 L.Ed.2d 811 (1989) (declaring that Congress' paramount goal in revising the 1976 Act [was] enhancing predictability and certainty of copyright ownership); In re Cybernetic Servs. Inc., 252 F.3d 1039, 1056 (9th Cir.2001) ([F]ederal copyright laws ensure predictability and certainty of copyright ownership. . . .) (quoting In re Peregrine Entm't, Ltd., 116 B.R. 194, 199 (C.D.Cal.1990)). It would also damage, if not extinguish, the principal purpose of the Copyright Act, which is to encourage the origination of creative works by attaching enforceable property rights to them. Diamond v. Am-Law Publ'g Corp., 745 F.2d 142, 147 (2d Cir.1984); see also Veeck v. S. Bldg. Code Congress Int'l Inc., 241 F.3d 398, 402 (5th Cir.2001) (The core purpose of copyright law is `to secure a fair return for an author's creative labor' and thereby `to stimulate artistic creativity for the general public good.') (quoting Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156, 95 S.Ct. 2040, 45 L.Ed.2d 84 (1975)). If retroactive transfers and licenses were permissible, one could never reliably and definitively determine if and when an infringement occurred, because an infringement could be undone by the very sort of maneuver attempted by defendants in this case. See Venegas-Hernandez v. Asociación De Compositores y Editores de Música Latinoamericana, 424 F.3d 50, 60 (1 st Cir. 2005) (Fitting agency concepts like `retroactive authorization' into copyright law provides plenty of room for debate; obviously a license in 1998 did not `cause' a 1993 infringement.). [12] Similarly, one could never know who the pool of authorized users or licensors of a copyright would be at any given time, because a retroactive transfer could always turn an infringer into a potential user or licensor, who would then have the ability to grant his own retroactive licenses or retransfer his new (retroactive) interest retroactively. This case demonstrates why permitting such an indeterminate legal regime could create substantial mischief. Construing the facts in a light most favorable to Davis, as we are required to do in the case of a summary judgment, Miller had no right to use or license the disputed compositions at the time they were used on the Album or at the time he licensed them to the third-party defendants. The third-party defendants are, in turn, potentially liable for infringement to Davis because they never obtained a legitimate right to use the disputed compositions. [13] If Chambliss were permitted to assign his interest in the disputed compositions retroactively, Davis's infringement claims would fail not only against Miller (because Miller would be retroactively authorized to use the compositions as a co-owner), but also against the third-party defendants, whose illegitimate licenses would retroactively become legitimate because Miller (by operation of the legal fiction of retroactivity) would now have been authorized as a co-owner to grant third parties the right to use the disputed compositions. Thus, Chambliss's alleged retroactive assignment to Miller of the disputed compositions, for consideration of one dollar each, would have the effect of unraveling valuable accrued infringement claims against not only the retroactive assignee (Miller) but also his licensees. [14] The second policy reason disfavoring retroactive copyright transfers and licenses that extinguish the right of other co-owners is that such retroactive activity lowers the cost of infringement to infringers, thus making infringement more attractive. An infringer could buy his way out of an infringement suit, in which an injured owner may seek enhanced statutory damages and costs, see 17 U.S.C. § 504, by paying a single co-owner for a license or assigned copyright interest. A retroactive license or assignment that can be obtained from a co-owner not bringing suit, or one willing to settle for a lower price than the co-owner bringing the action, is likely to cost much less than the value of the copyright interest including the cost of litigation. The result is that infringement is encouraged and rewarded. This economic incentive to infringe runs directly counter to the intent of Congress in passing 17 U.S.C. § 504  namely to compensate the copyright owner for losses from the infringement, and . . . to prevent the infringer from unfairly benefitting from a wrongful act. Abeshouse v. Ultragraphics, Inc., 754 F.2d 467, 470 (2d Cir.1985) (quoting H.R.Rep. No. 94-1476, at 161). [15] For the reasons stated above, we conclude that the written transfer agreements, through which Chambliss allegedly transferred his interests in the disputed compositions to Miller, cannot extinguish Davis's accrued infringement claims against any of the defendants. On remand, the District Court shall adjudicate Davis's infringement claims without giving effect to the purported retroactive assignment of Chambliss's interest in the disputed compositions. [16] We now turn to address defendants' alternative argument regarding ratification. Miller argued before the District Court that Chambliss transferred his interests in the disputed compositions (and potentially other compositions) to Miller in 1998 or early 1999, in an alleged oral agreement, before the alleged infringement occurred. Miller and his co-defendants acknowledged that the Copyright Act requires all transfer agreements  including assignments  to be in writing, see 17 U.S.C. § 204(a), but argued that the transfer agreements ratified the earlier oral agreement. See Davis, 419 F.Supp.2d at 497-98. Because the District Court found that a genuine issue exists as to whether Chambliss ever orally transferred his rights in the [disputed c]ompositions to Miller, the District Court did not consider whether the [transfer a]greements [were] sufficient to satisfy the writing requirement [of the Copyright Act] as a written ratification of a prior oral transfer. Id. at 498. We conclude that, even if an oral agreement assigning Chambliss's copyright in the disputed compositions to Miller was reached in 1998 or 1999, the oral agreement cannot be ratified retroactively by the 2004 transfer agreements to defeat Davis's accrued infringement claims. This is so for the same reasons we cannot give the transfer agreements themselves retroactive effect. If there was no written agreement between Miller and Chambliss documenting the alleged assignment at the time the disputed compositions were used by defendants, defendants had no legal right to use the disputed compositions, [17] and Davis's right to sue for infringement accrued. Chambliss and Miller could not extinguish Davis's accrued infringement claims by ratifying an earlier oral agreement that had no legal effect at the time it was made, because doing so would require us to employ a legal fiction  treating the transfer agreements as if they were written in 1998 or 1999, rather than 2004  to obtain a counterintuitive and inequitable result. Our opinion in Eden Toys is readily distinguishable from the facts of the instant case. In Eden Toys, we held that a third-party infringer could not assert the invalidity of an alleged 1975 oral agreement for an exclusive license, which was allegedly memorialized in a 1980 writing, to defeat an infringement claim brought by the exclusive licensee. See Eden Toys, 697 F.2d at 36-37. We first noted that the alleged oral agreement was valid at the time it was made, see id. at 36 (noting that [u]nder the pre-1978 copyright law, exclusive licenses could be granted orally or by conduct). We then held that, because the purpose of the writing requirement in the Copyright Act of 1976 was to protect copyright holders from persons mistakenly or fraudulently claiming oral licenses . . . [where] the copyright holder appears to have no dispute with its licensee on this matter, it would be anomalous to permit a third party infringer to invoke this provision against the licensee. Id. In this case, however, the third party is a copyright holder who does have a dispute with the alleged licensee or transferee and who would stand to lose her accrued rights to sue for infringement if an allegedly fraudulent oral agreement were given legal effect. Thus it would be anomalous not to let Davis invoke § 204(a) in support of her infringement claims. Even if a third-party infringer cannot, under Eden Toys, contest the validity of an oral transfer agreement under pre-1978 copyright law that is later confirmed in writing, see Magnuson v. Video Yesteryear, 85 F.3d 1424, 1429 (9th Cir.1996) (stating that [t]he logic of Eden Toys is particularly compelling in this case and holding that a third-party infringer could not assert as a defense to an infringement claim the alleged invalidity of an oral transfer agreement that was later confirmed in writing); Billy-Bob Teeth, Inc. v. Novelty, Inc., 329 F.3d 586, 592 (7th Cir.2003) (holding that a third-party infringer lacked standing to contest the validity of an oral assignment that was later confirmed in writing), we do not read Eden Toys to foreclose a presumed copyright holder (Davis) from using the invalidity of an alleged oral transfer agreement to defeat an infringer 's effort to avoid liability for accrued infringement claims. [18]