BY:Neil J. Rosini, Michael I. Rudell
(Originally published in the Entertainment Law column of the New York Law Journal, October 26, 2007)
A recent decision concerning the legendary Citizen Kane illustrates why parties negotiating rights acquisition agreements should assume always that old and new technology will give way to unforeseen newer technology. For one reason, there is little risk in doing so and for another, much can be lost by doing anything else.
This lesson has been taught repeatedly in a series of decisions from the Second and Ninth Circuits that span decades and show no sign of abating. In each of these cases, contracts that fail to specify whether the grantor or grantee gets the benefit of a new technology require interpretation. In the most recent example, Welles v. Turner Entertainment Co. , the Ninth Circuit applied New York law to a Hollywood dispute that concerned an ambiguous contract, the writer-producer-actor-director Orson Welles, and his classic film.
The decision is notable both for the Court’s analysis of the contractual language as well as its professed principle of “neutral” contractual interpretation. This principle – like the one espoused by the Second Circuit in a case cited in Welles – gives neither party the presumption of being correct in a dispute over new-technology rights. What “neutrality” means in practice, however, is best examined in the details of each case. And for practical purposes in current rights-acquisition transactions, the question is best avoided.
The Welles Case
A key question raised in Welles was whether a decades-old agreement that made no reference to rights in future media supported the claim of the plaintiff or the defendants to home video rights in Citizen Kane. After analyzing the language of the agreement, the court determined there were triable issues of fact, vacated the district court’s grant of summary judgment for the defendants, and remanded.
The plaintiff-appellant was Orson Welles’s daughter, Beatrice Welles, successor in interest to both her father and his production company, Mercury Productions, Inc. (“Mercury”). In 1939, the defendants’ predecessor in interest, RKO Productions, Inc. (“RKO”) entered into a production agreement with Mercury in which the latter agreed to make two motion pictures, one of which turned out to be Citizen Kane. Section 13 of the agreement addressed RKO’s ownership and exploitation rights: “[RKO] shall own … all rights of every kind and nature in and to each Picture … including … the exclusive rights of distribution, exploitation, manufacture, recordation, broadcasting, televising … and reproduction by any art or method, and the literary, dramatic, musical and other works included in such Picture…” The section also provided, however, that “[i]n case of any original story written by [Mercury] … used as the basis of either Picture” — like the story for Citizen Kane — “[RKO] shall acquire the motion picture and television rights in such story for such Picture only … [and Mercury] shall own the publication, radio, dramatic and other rights in any such story” (emphasis added). On this basis, among her other claims, the plaintiff sought declaratory relief that the defendants lacked home video rights.
The court began its analysis of the contract with the premise that “it is unlikely that, in 1939, Mercury or RKO gave any thought to who would own the home video rights.” For this reason, the court was directed under New York law (following a New York choice of law provision) to “look for the meaning that reasonable persons in the positions of the parties would have attached [to the language of the contract] had they thought about the matter.”
The court first observed that the defendants needed both the right to display the motion picture and the right to exploit the underlying screenplay in order to display publicly or distribute Citizen Kane. The right to display the motion picture was covered, according to the court, by the grant to RKO of “all rights of every kind and nature… including, but not being limited to, the exclusive rights of distribution, exploitation, manufacture, recordation … and reproduction by any art or method.” The defendants’ right to exploit the screenplay, however, was less certain because Mercury reserved rights in it apart from “the motion picture and television rights in such story for such Picture only” that were granted to RKO. Although “a reasonable argument [could] be made that distributing a motion picture on home video is simply an exploitation of the defendants’ ‘motion picture’ rights in the Citizen Kane screenplay,” the Court said that “such a broad interpretation” would render superfluous the reference to “television rights.” (If “motion picture” rights embraced home video, it would also embrace television.)
There were other problems, too. The court noted that the right to distribute the film on home video is “quite different” from the right to display the film on television, in accord with Ninth Circuit precedent. Further, the production agreement failed to say who owned the right to exploit original story screenplays in media that had not been invented in 1939. And “[p]erhaps most importantly,” the rights RKO acquired in the screenplay by license “were quite narrow, encompassing only motion picture and television rights” with Mercury retaining “broad rights in the screenplay.” Had the reverse occurred – with Mercury taking the slice, leaving RKO the rest of the pie — the court said it might have been able to distinguish Ninth Circuit precedent and give RKO the benefit of the doubt. On the facts presented, it was ambiguous whether the parties would have intended RKO’s motion picture and television rights in the screenplay to include home video rights had they “contemplated the issue.”
Because of this ambiguity, extrinsic evidence was allowed to aid interpretation. In an expert declaration, the plaintiff said that in 1939 the phrase “motion picture and television rights” was a term of art embracing “exhibition of a motion picture in theatres and contemplated broadcast by television,” but not the right to make home video copies and sell them to the public. The court, however, found that this evidence required an assessment of credibility by the finder of fact that precluded summary judgment.
The Neutrality Principle
In finding this ambiguity in the contractual language, the court disclaimed in a footnote any “presumption against applying a grant of rights … [that uses the phrase] ‘motion pictures’ to new technologies,” which is to say that Welles should not be interpreted to favor the original rights owner’s claim to reap the benefit of technologies that were neither mentioned nor contemplated at the time of the grant. Instead, the court said that it “simply interpret[ed] the written contract of the parties in this case as our precedent instructs,” citing Cohen v. Paramount Pictures Corp., 845 F2d 851, 854 (9th Cir. 1998), Maljack Prods., Inc. v. Good-Times Home Video Corp., 81 F.3d 881, 885 (9th Cir. 1996), and Boosey & Hawkes Music Publishers v. Walt Disney Co., 145 F.3d 481, 487 (2d Cir. 1998).
In Maljack, the license contained no future technologies clause but conveyed “any and all worldwide rights under copyright and otherwise.” Relying on this language, the Ninth Circuit affirmed that the licensee obtained the right to exploit certain music embodied in a motion picture in the new medium of videocassettes. Previously, however, the Ninth Circuit’s rationale supported a preference for the grantor, as in the 1998 Cohen case cited in Welles.
In Cohen, the principal issue was whether the “right to exhibit a film ‘by means of television’ included the right to distribute videocassettes of the film” and the court’s answer was in the negative. The court distinguished the right of distribution from the right of reproduction upon which videocassette manufacture depends, and noted that videocassette technology had little in common with television technology other than the monitor. The court further explained that videocassette copies fell outside the “general tenor” of the clause, which contemplated “some sort of broadcasting or centralized distribution” as opposed to sale or rental of copies for home use.
The court went on to discuss the grantor’s preferred position. The court reasoned that the words “exhibition by means of television” could not include distribution of cassettes for home viewing because “videocassette technology was not invented or known in 1969 when the license was executed” (compare Boosey discussed below) and the grantor reserved all rights not granted. Given that the parties did not foresee the future technology, the court did not consider it fair to let the licensee “‘reap the entire windfall’ associated with the new medium.” The court also declared that the purpose of federal copyright law — the encouragement and protection of authors — would be frustrated by construing this license, with its “limiting language,” to grant rights in a medium that had not been introduced to the domestic market when the agreement was made.
This predisposition toward grantors was not shared on the opposite coast by the Second Circuit. In Bartsch v. Metro-Goldwyn-Mayer, Inc., 391 F.2d 150 (2d Cir. 1968), the court affirmed dismissal of a copyright owner’s complaint and cleared the way for MGM to exploit a motion picture in a relatively new medium, television. In that case, the authors of a musical play had assigned motion picture rights in 1930 to one Hans Bartsch, whose rights were subsequently assigned to MGM. In 1935, MGM distributed a movie based on the musical play and decades later, began licensing the film for television exhibition. By that time, the co-authors of the play had assigned Bartsch their copyright interests (including the renewal term), and in the case before the Second Circuit, Bartsch’s widow claimed that she rather than MGM held television rights in the underlying musical.
The court’s task was to construe the assignment to MGM. It conveyed motion picture rights in the play throughout the world, explicitly including the right to “project, transmit and otherwise reproduce” the musical play and any adaptation or version of it and to “vend, license and exhibit such motion picture[s].” Bartsch had reserved for his own benefit “[a]ll other rights now in existence or which may hereafter come into existence” without mentioning television, even though that technology’s “future possibilities” were found to be known within the entertainment industry at the time.
Noting that “any effort to reconstruct what the [deceased] parties actually intended … [was] doomed to failure,” the Second Circuit decided to place the burden on grantors to reserve rights (at least in a known medium) through the use of explicit — not general– language. Interpreting the grant, the court decided that words such as “license” and “exhibit” were “well designed to give the assignee the broadest rights” with respect to the motion pictures it produced and that television rights reasonably fell within the “penumbra” of those words. As a practical matter, the court also noted that the breadth of the grant precluded the plaintiff from making a new film based on the underlying play, and that if MGM were precluded from exploiting television rights in its existing film, the nation’s viewers would be left with no televised version of the play whatever.
In 1998, however, the Boosey & Hawkes decision cited in Welles disclaimed any default rule in favor of the grantee. In Boosey, home video rights were in issue, the underlying work was a piece of music, and a 1939 license that permitted its use in a motion picture included the right to record the composition “in any manner, medium or form.” Once again, the grantor “reserv[ed] to himself all rights and uses … not herein specifically granted” without specifically reserving “home viewing,” for which, the unrefuted evidence showed a “nascent market” existed. The court declared that inquiring into the intent of the parties or admitting other extrinsic evidence was not likely to guide interpretation, and once again held for the licensee. But this time, the Second Circuit made clear its view that the language of the contract should determine the outcome without favor to either grantor or grantee: “If the contract is more reasonably read to convey one meaning, the party benefitted by that reading should be able to rely on it; the party seeking exception or deviation from the meaning reasonably conveyed by the words of the contract should bear the burden of negotiating for language that would express the limitation or deviation.” Here, the court held that the reference in the grant to “any manner, medium or form” of recording the musical composition was “broad enough” to encompass video distribution.
Although both Courts of Appeal now profess a neutral approach, Welles, like Cohen before it, still might seem to lean in the grantor’s direction, just as Boosey, like Bartsch before it, might appear to tip the opposite way. The well-schooled practical approach in negotiation is to avoid the problem by focusing – as the courts do on both coasts— on the breadth and scope of contractual language. Grantees like television companies and movie studios, with an ever-increasing appetite for new technology platforms, now negotiate for “all rights in all media now known or hereafter invented or discovered throughout the universe in perpetuity.” This language unambiguously embraces technologies yet to come and leaves no doubt about intentions. Conversely, a grantor who wants a reservation of rights in current or future media is well-advised to put it in the grant agreement as explicitly as words allow.
1 D.C. No. CV-04-03077-JFW; Order and Amended Opinion dated September 11, 2007.