This is the property of the Daily Journal Corporation and fully protected by copyright. It is made available only to Daily Journal subscribers for personal or collaborative purposes and may not be distributed, reproduced, modified, stored or transferred without written permission. Please click "Reprint" to order presentation-ready copies to distribute to clients or use in commercial marketing materials or for permission to post on a website. and copyright (showing year of publication) at the bottom.

self-study / Intellectual Property

3 more music litigation developments in 2020-2021

Neville L. Johnson

Partner, Johnson & Johnson LLP

439 N Canon Dr
Beverly Hills , CA 90210

Email: njohnson@jjllplaw.com

Douglas L. Johnson

Partner, Johnson & Johnson LLP

439 N Canon Dr
Beverly Hills , CA 90210

Daniel Lifschitz

Associate, Johnson & Johnson LLP

Email: dlifschitz@jjllplaw.com

Anti-Bootlegging Law Developments

The anti-booglegging provisions of the Copyright Act are perhaps the most overlooked substantive right contained in Title 17 of the United States Code. Added as a standalone chapter of the act to comply with treaty obligations, 17 U.S.C. Section 1101 broadly prohibits the unauthorized trafficking of live musical performances recorded without the performers' consent. Much of the original litigation surrounding Section 1101 concerned its constitutional validity under the intellectual property clause of the U.S. Constitution (as it regulates uncopyrightable works), with the courts instead holding that the law was supported by the commerce clause. However, judges have recently begun digging into the meat of the statute, with two district court decisions published last year establishing how the right works in both an individual action as well as in a class action context.

In the first case, Comerica Bank & Tr., N.A. v. Habib, 433 F. Supp. 3d 79 (D. Mass. 2020), the defendant was sued for posting five videos to YouTube consisting of live footage of Prince performing in concert in 2013 and 2015. The court noted several distinctive features of a Section 1101 claim. First, unlike a copyright claim, it does not require lawful fixation of the work being sued over, since the very nature of a bootleg is that the author did not consent to the fixation.

Second, the only sections of the Copyright Act relevant to a Section 1101 claim are the ones it incorporates by reference, which only concern judicial remedies (and therefore eschew the act's registration requirement as a prerequisite to filing suit).

Third -- and this is where the court arguably broke new ground -- a bootlegger cannot rely on generalized statements by an artist expressing acquiescence to fan recordings as granting the bootlegger an implied license to record and exploit a performance. Rather, an implied license requires consideration of various factors only relevant to arms-length transactions -- such as the duration of the parties' working relationship, the types of contracts they employ, and conduct indicating the author intended for the work's recipient to use it without their involvement. As Prince's estate argued, "Prince's broad, alleged statement made to the general public" that "fans sharing music with each other" was "cool" "does not set out any license terms, does not demonstrate an intent to contract with Habib, and indeed plainly has no relation to Habib."

In the second case, Kihn v. Bill Graham Archives, LLC, 445 F. Supp. 3d 234 (N.D. Cal. 2020), the court explored whose burden it is as an initial matter to establish whether the performers featured in a particular recording had consented to being recorded. The defendants, who had purchased the assets of the late concert promoter Bill Graham (including thousands of concert recordings of unknown provenance taken from the famous venues Graham had managed), argued that proving a lack of consent was an element of a plaintiff's affirmative claim under Section 1101, and that this made an anti-bootlegging class action against them unmanageable. The district court disagreed, finding that consent has historically been an affirmative defense under the Copyright Act, meaning it is a defendant's burden to establish -- holding otherwise would force plaintiffs to prove a negative. The court noted that ownership is presumed to vest in the authors of a work, meaning those who control the creative expression being documented -- here, the performers -- and that alienation of an author's ownership interest must be established by the purported transferee through evidence. Thus, it only made sense that the defense must substantiate how it purportedly acquired ownership. This decision is currently on appeal to the 9th U.S. Circuit Court of Appeals, fully briefed and awaiting oral argument.

Protecting Termination Rights Under Section 203

Another copyright doctrine being examined in a class context is the termination right under 17 U.S.C. Section 203, which provides that the authors of a work created on or after January 1, 1978 can reclaim their ownership interests decades after transferring them away by sending a timely notice of termination to the relevant transferees. The statute also says that the termination right cannot be contractually alienated ahead of its vesting, although the 9th Circuit has fudged that edict if the threat of looming termination is used as leverage for a contractual renegotiation.

The biggest carveout to the termination right's application is that it does not exist for works made "for hire" under the Copyright Act. This can happen in one of only two ways: Either the work is created by an employee within the scope of their employment (in which case authorship vests in the employer), or the work is commissioned from an independent contractor pursuant to a written agreement designating it as "for hire." For works taking the second route, they cannot yet be extant at time of contract (as one cannot designate a work "for hire" retroactively) and, pursuant to 17 U.S.C. Section 101, must be created "as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas[.]"

Of note is the fact that "sound recordings" are not one of the nine types of work capable of being made for hire by contract alone (although surprisingly lurid tales exist of past industry efforts to render them as such), and attempts to shunt them under other classifications (such as deeming albums "collective works" or "compilations") have been met with deep skepticism by courts.

Waite v. UMG Recordings, 450 F. Supp. 3d 430 (S.D.N.Y. 2020), saw the record labels float a new trial balloon on challenging termination claims, which is to use initial ownership as a collateral attack on their availability. Whether sound recordings are capable of being contractually rendered works for hire or not, recording contracts almost ubiquitously include work for hire language as a prophylactic measure in the event it ends up being found enforceable somewhere down the line.

Does such language trigger the three-year statute of limitations on contesting a disputed ownership claim, such that if an artist fails to sue over the contract within three years of execution, they lose not only the chance to establish their ownership rights, but any chance to exercise termination rights in the future?

The Waite court responded in the negative, noting that the termination right exists specifically because artists were found to lack the negotiating strength to extract the full value of their services early in their careers, which is why they deserve the opportunity to eventually renegotiate the terms of (or otherwise end) a transferee's ownership of their work. This lack of leverage similarly leaves them without meaningful recourse to excise overbearing (and most likely legally inert) work for hire language in their recording agreements. Therefore, "[t]o 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." Thus, a transferee cannot deprive a transferor of their termination rights through work for hire designations where the designations are found to be legally unsupported.

Although largely favorable to artists, Waite does contain at least one finding sure to roil the transactional legal community, and that finding concerns the impact of artists using "loan out" companies to contract with third parties for intellectual property. Loan outs are a commonly used artifice in the entertainment world, wherein a business entity is established to serve as a liability buffer between an artist and those they contract with, as well as a vehicle for more effective tax planning. The loan out company employs the artist, then contracts with third parties to "loan out" the artist's services. Where the record label obtains an artist's recordings from their loan out company, how the loan out company acquired those rights is significant. If the artist creates the recordings within the scope of their employment by their own loan out company, the recordings are necessarily works for hire, and once they are transferred by the loan out company to the record label, there is no statutory mechanism available to later reclaim them.

The Waite court confirmed this grim reality for artists, holding that where chain of title documents indicated recordings were granted through loan out companies, the employee-artists had no right to terminate the grants under Section 203 of the Copyright Act. Although the artists attempted to argue that their loan outs acquired the recordings through transfers from the artists as owner-authors (placing the loan outs in the same grantee shoes as UMG), the court held that their complaint did not support the allegation, and attempts to further amend their complaint to salvage the theory with more evidence were rejected as futile. Although the court recognized that loan out companies were primarily used as tax planning devices, "people cannot use a corporate structure for some purposes -- e.g., taking advantage of tax benefits -- and then disavow it for others" -- such as the requirement that a terminable grant be executed by the author of the work. Thus, artists who have used loan outs to transfer works without a clear chain of title showing that the works were first transferred from the artist to the loan outs risk never regaining their copyrights. Waite v. UMG Recordings, Inc., 477 F. Supp. 3d 265 (S.D.N.Y. 2020).

Fighting for Legacy Artists' Streaming Rights

The advent of digital streaming has complicated the administration of contractual royalties for "legacy" artists who transferred their recordings to record labels decades ago under the assumption that the sale of records was, and would always be, the primary method by which those recordings are consumed. Fast forward to present day, and only 9% of industry revenue still comes from record sales, as opposed to the 85% now coming from digital streaming. If legacy artists had no contractual entitlement to share in these streaming royalties, the core consideration underpinning their record deals would fail and their fundamental purpose would be frustrated, giving rise to colorable rescission claims. To forestall this outcome, each of the major record labels -- Sony, Warner and Universal -- began paying digital streaming royalties to the artists on their rosters irrespective of whether their written agreements covered the matter.

To the artists on the receiving end of this new royalty stream, the labels' decision was certainly a welcome development. However, these artists were not privy to the full story. While the periodic royalty statements they received reflected a 50% royalty was being paid on digital streaming, those statements failed to disclose the methodology by which the labels were calculating that royalty, which turned out to be particularly significant with respect to monies collected outside the United States. Those monies first pass through the labels' foreign subpublishers, which typically assess a collection fee on the royalties before remitting the balance to the labels stateside, at which point the artists' royalties are calculated. Where these subpublishers are either owned or controlled by the record labels, such fees are essentially the left hand paying the right hand, creating a perverse incentive to maximize those fees in an effort to minimize the money ultimately payable to the artists. In some cases, audits revealed these "intercompany charges" were deducting more than two-thirds of all foreign monies collected.

Since the discovery of these practices by auditors, class actions have been filed against all three major record labels engaged in the practice, with only one to date (Sony) electing to do right by artists by entering into a class settlement, one that has returned more than $12 million to affected artists while also uplifting their royalty rates by 36%. The Rick Nelson Company, LLC v. Sony Music Entertainment, 1:18-cv-08791-LLS (S.D.N.Y., filed Sept. 25, 2018).

Comparatively, Warner was able to forestall class certification here in the Central District of California after losing a motion to dismiss the case by convincing the district court that an unrecouped class representative whose contract is silent on digital streaming cannot adequately represent recouped artists or those with express licensing or streaming language in their recording agreements. That decision was then affirmed by the 9th Circuit on abuse-of-discretion grounds. As a result, a renewed request to brief certification for a narrowed class is currently pending in the district court, with the case having been reassigned to a different judge while on interlocutory appeal. Leonard Williams v. Warner Music Group Corp., 2:18-cv-09691-JWH-PJW (C.D. Cal., file Nov. 16, 2018).

Universal, utilizing the same counsel as Warner, is currently fighting their case under both Rules 9 and 12. David Marks v. UMG Recordings, Inc., 2:21-cv-04043-MCS-JPR (C.D. Cal., filed May 13, 2021).

That is perhaps the most curious aspect of this litigation: While all three major labels have realized, to one degree or another, that they are the indisputable villains of the story being told, each has reacted to being cast for the role in very different ways. While Sony was quick to recognize the propriety of settlement, Warner took the most strident possible position in moving to dismiss the litigation against it, embracing the controversial notion that any streaming royalties paid to legacy artists are pure charity on the part of the label. Universal, perhaps in response to the shellacking Warner took in the trades for its harsh stance, seems to be trying to straddle a middle ground, focusing on the artists' supposed lack of rights to circumscribe the intercompany charge rather than on a predicate lack of entitlement to streaming royalties at all. As the Universal litigation is currently in its infancy, the efficaciousness of this strategy remains to be seen.

#1033

Submit your own column for publication to Ben Armistead


Related Tests for Intellectual property

self-study/Intellectual Property

3 music litigation developments in 2020-2021

By Neville L. Johnson, Douglas L. Johnson, Daniel Lifschitz

self-study/Intellectual Property

Privilege waiver and good faith reliance on non-privileged information

By Yuqing Cui, Richard S.J. Hung

self-study/Intellectual Property

Can businesses use third-party trademarks on their websites?

By Joshua H. Eichenstein

self-study/Intellectual Property

Recent developments in copyright law

By Neville L. Johnson, Douglas L. Johnson

self-study/Intellectual Property

Trade secret litigation on the rise in California: How ADR can help

By Elizabeth D. Laporte

self-study/Intellectual Property

Do you have to disclose trade secrets to protect them?

By Samuel Yu

self-study/Intellectual Property

Takedown notices and developments in fair use

By Neville L. Johnson, Douglas L. Johnson