BY:Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, March 23, 2001.)
In a case of first impression, a federal court has held that the 1976 Copyright Act precludes the licensee of exclusive rights under copyright from transferring its rights without obtaining the consent of the licensor.1 Because the assignment was invalid, the plaintiff who sought a declaratory judgment did not have standing to bring the action.
In 1992, Nike licensed to Sony Music Entertainment, Inc. certain rights in and to the cartoon character “MC Teach.” The license was exclusive and included the right to use the character, and any modification or alterations, in perpetuity throughout the world on and in the packaging of phonograph records, in publicity, advertising and allied exploitation of the records, in television programs or motion pictures embodying the musical compositions embodied on the records, on educational material and on clothing, subject to certain provisos.
Thereafter, Sony transferred all of its rights in the exclusive license to Michael Gardner who, through its licensing agent, Bien Licensing Agency, Inc., started making use of the character on various products.
After Gardner and Bien had used the character on educational materials and Nike threatened legal action against them and their proposed licensees, they brought an action against Nike and Sony seeking declaratory relief. The parties stipulated that Sony was intended to be an involuntary plaintiff (and not a defendant) and was not required to participate actively in the litigation. Sony agreed to abide by the ultimate judgment of the Court.
Nike filed a motion for summary judgment, claiming that plaintiffs did not have standing to sue because Sony’s assignment of rights under the Nike exclusive license was invalid. Plaintiffs responded with its own motion for summary judgment, arguing that under the 1976 Copyright Act (the “1976 Act”) an exclusive licensee can freely assign its rights in the license to a third party.
The Court notes that the Federal Rules of Civil Procedure provide that a motion for summary judgment shall be granted if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. A dispute as to a material fact is genuine if there is sufficient evidence for a reasonable jury to return a verdict for the non-moving party.
There is no dispute as to the essential facts. Sony transferred its rights under the license to Gardner; Nike never gave explicit consent to the transfer of rights. Nike claims that the transfer is invalid and, this being the case, plaintiffs have no ownership interest in the copyright and do not have standing to bring the suit. Plaintiffs argue that under the 1976 Act, Sony may transfer its rights to the copyright without Nike’s consent because the exclusive license made Sony an “owner” under the 1976 Act. As such, it thus was able to transfer whatever rights it had under section 201(d.)
The sole disagreement is the interpretation of section 201(d) of the 1976 Act which provides:
(1) The ownership of copyright may be transferred in whole or in part by any means of conveyance or by operation of law, and may be bequeathed by will or passed as personal property by the applicable laws of intestate succession.
(2) Any of the exclusive rights comprised in a copyright, including any subdivision of any of the rights specified by section 106, may be transferred as provided by clause (1) and owned separately. The owner of any particular exclusive right is entitled, to the extent of that right, to all of the protection and remedies accorded to the copyright owner by this title.”
The Court notes that if this case were governed by the 1909 Copyright Act (the “1909 Act”) the issue would have been resolved easily because, under that act a licensee (whether exclusive or not) had no right to re-sell or sub-license the rights acquired unless he had expressly been authorized to do so. The reasoning behind such rationale was that under the 1909 Act, a copyright owner could not assign anything less than the totality of rights commanded by copyright. Thus, a transfer of anything less than such totality was considered a license.
According to Nimmer, the purpose of such indivisibility was to protect alleged infringers from the harassment of successive lawsuits. This result was achieved because only the copyright proprietor (which would include an assignee but not a licensee) had standing to bring an infringement action.
The 1976 Act did away with the rule of indivisibility with respect to exclusive licenses. This abolition is demonstrated in two of the sections of that Act. Section 101 provides that a “transfer of copyright ownership” is an assignment, mortgage, exclusive license or any other conveyance, alienation or hypothecation of a copyright or any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but not including a non-exclusive license.” Under that definition, an exclusive license is equated with an assignment.
Second, section 201 provides that “any of the exclusive rights comprised in a copyright, including any sub-division of any of the rights specified by section 106, may be transferred… and owned separately.”
The decision states that the abolition of indivisibility resolves several of the problems that existed under the 1909 Act. An exclusive licensee may now sue in his own name for an infringement of the assigned right. Because the act of publication no longer is the sole indicia of ownership (rather it is the creation of the work and its affixation in any tangible medium), an incorrect name in the copyright notice is irrelevant. Under the 1976 Act, all licenses are recordable, thereby giving all interested parties constructive notice of the facts stated in such recorded document. Because exclusive licenses now are treated like assignments, the rules relating to formalities and consideration equally apply.
The Court notes that Nimmer states that the limitation on a licensee’s right to re-sell or sub-license under the 1909 Act appears to continue under the current act with respect to nonexclusive licenses, but not as to exclusive licenses. The latter, having acquired “title” or ownership of the rights conveyed, may re-convey them absent contractual restrictions. It is this interpretation that Nike challenges.
Nike claims that if Congress had intended that an exclusive licensee have the right to license its rights in the license to a third party, Congress would have said so explicitly. Congress instead chose to grant exclusive licenses only the “protections and remedies” afforded by the 1976 Act. Thus, because the right to license is not a “protection or remedy,” the rule against assignability of licenses under the 1909 Act still should control.
Plaintiffs respond by asserting that the first paragraph of section 201(d) clearly allows for a transfer of ownership and, accordingly, one of the protections and remedies to such “new” owner includes the right to transfer the rights under the license.
The Court takes issue with plaintiffs’ argument, stating that the first paragraph of section 201(d) does not apply here. That paragraph refers to a copyright owner’s right to transfer its ownership interest in that right in whole or in part. It notes that in this paragraph, Congress addressed the divisibility of the copyright owner’s interest in the totality of the copyright – the ownership rights. “What that means is that if party A owns all the rights in a particular copyright, A can sell an undivided half interest in that right to party B. Party B would then be considered a part owner of that right, and as such entitled to all the rights, benefits, protections and remedies under the Act. Essentially, party B would acquire the status of a joint owner. This is a contrast to the second paragraph of section 201.”
The second paragraph addresses the transfer of “exclusive rights” rather than the transfer of ownership. The Court indicates that this distinction is essential. A licensee under section 201(d)(ii) is not a “joint owner” of the copyright but, rather, “the owner of a particular exclusive right.” Accordingly, the original owner of a copyright could transfer its rights to reproduce to one entity, to prepare derivative works to another and to distribute copies to a third. The owner of that specific right would then be entitled to the extent of that right, to all of the protections and remedies accorded to the copyright owner. The Court states that “as demonstrated by the language, and contrary to Nimmer’s interpretation, Congress chose to grant owners of specific rights only the protection and remedies of the Copyright Act accorded to the copyright owner.”
Further, there is no indication, either in the statutory text or in the Notes of Committee on the Judiciary, that Congress intended to bestow upon exclusive licensees the right to sub-license the subject matter of their license. Having been aware that prior to the 1976 Act, licensees could not sublicense their right in an exclusive license, Congress nevertheless chose to limit the benefits of exclusive licensees under the 1976 Act to “protection and remedies.” The right to freely assign the licensed rights cannot, by any fair interpretation, be characterized as either.
Accordingly, the assignment by Sony of its rights to Gardner under the exclusive license is invalid. As such, plaintiffs Gardner and Bien do not have standing to bring the action and, for that reason, the Court grants defendants’ motion for summary judgment. It denies plaintiffs’ motion for summary adjudication and dismisses its complaint for a declaratory judgment.
1 Gardner v. Nike, Inc. et al., 110 F. Supp. 2d 1282 (July 31, 2000).