BY:Neil J. Rosini, Michael I. Ruddell
(Originally published in the Entertainment Law column in the New York Law Journal on Friday, March 1, 2013)
The legendary Ray Charles is remembered for the numerous hits he recorded during his lifetime. Less well known is that he was the father of twelve children and that he left much of his estate to a foundation dedicated to assisting the hearing impaired as well as other charitable endeavors. The royalties from those musical hits and the competing interests of his children and the foundation recently gave rise to a federal district court decision about who has standing to assert a right of termination under the Copyright Act. [i]
The decision joins a procession of case law that is slowly clarifying the intricate termination provisions of the Act. In broad strokes, the Act permits an author’s statutory successors, after the author’s death, to terminate certain assignments or licenses of rights in the author’s works upon notice to the grantee (or the grantee’s successors, if applicable). The notice must be served at least two years and no more than ten years prior to the effective date of termination, which must occur within a statutory time period. Among the many details of this process, however, legal issues lie in wait.
The Ray Charles case discussed here, in which seven of his children were defendants, focuses on the validity of termination notices served by them. No grantee who received a termination notice has yet objected, but the Foundation challenged the notices as a recipient of royalty streams that depend on the viability of the grants targeted for termination. Does such a third party have standing to challenge the children’s attempt to terminate? The answer from the Central District of California is that they don’t.
Ray Charles’ Plan
Ray Charles had a plan to fund a $500,000 trust for each of his children before he died. In 2002, he entered into an agreement with each of them in which they acknowledged: “This gift is my entire inheritance from [Ray Charles] … and I understand that I will not inherit anything further under my father’s estate plan and that I am waiving any right to make a claim against his estate.” When Charles died in 2004, he left all of is rights in his musical works to the Robinson Foundation for Hearing Disorders, which was renamed the Ray Charles Foundation (the “Foundation”). Those rights included royalty streams from songs written or co-written by Charles.
During the 1950s, Charles signed several “Musicians Services Agreements” with Atlantic Records (“Atlantic”), under which he was “hired as an employee” to record songs in exchange for an advance payment and royalties on sales. Atlantic owned the recordings that were produced. As part of that same relationship, Charles also was employed to write songs by Progressive Music Publishing (“Progressive”), a company owned and controlled by Atlantic. Progressive owned the songs he wrote, which were recorded and released on various albums on the Atlantic label. Charles was entitled to receive royalties from this source as well.
In 1980, Charles allegedly re-negotiated the Progressive deal with Progressive’s successor in interest. Under the new arrangement, he received a “significant cash payment” and also continued to receive royalties.
There are two sections of the Copyright Act that pertain to termination of grants of rights by successors of authors, including children and grandchildren: Section 304 pertains to pre-1978 grants and Section 203 pertains to grants made on or after January 1, 1978. Works for hire are not subject to termination under either section.
In March, 2010, seven of Charles’s children served 39 copyright termination notices pursuant to Section 304(c) of the Copyright Act on various parties with interests in Charles’s works. Among the recipients was Warner/Chappell Music (“Warner/Chappell”) successor-in-interest to Progressive. Those notices sought to terminate transfers of rights in songs to Progressive that occurred before 1978, but because the same songs were part of the 1980 agreement with Warner/Chappell, the defendants also served termination notices relating to that grant pursuant to Section 203, which applies to agreements made in and after 1978.
The Foundation filed its suit in March, 2012 challenging the termination notices and seeking to prevent the seven children from “diverting income away from the Foundation and for violating signed agreements pertaining to trusts,” according a press release issued at the time. The Foundation described its own work as “giv[ing] away millions of dollars for educational and other charitable purposes, especially directing its efforts toward the underprivileged and disadvantaged,” and contended that terminating Warner/Chappell’s rights would “depriv[e] the Foundation of a significant portion of its income” with potentially “adverse implications as to the ability of the Foundation to carry on its charitable works.”
In its suit, the Foundation sought a declaration that the termination notices were ineffective and untimely for a number of reasons including: the compositions were works for hire and therefore exempted from the termination statutes; if they were not works for hire, then the renegotiation in 1980 extinguished the right to terminate the earlier grants; certain notices pertaining to unpublished works were invalid; and the 1980 agreement constituted a new transfer and all termination deadlines had to be calculated from that year.
Beyond invoking the Copyright Act, the Foundation also sought to establish under state law that the children had breached their contracts with Charles as well as their covenant of good faith and fair dealing by bringing claims against Ray Charles’s estate, which they had promised not to do. The defendant children moved for dismissal and to strike the state claims pursuant to California’s anti-SLAPP statute, Cal. Code. Civ. P. Section 425.16. (SLAPP stands for “strategic lawsuit against public participation,” which the anti-SLAPP legislation was intended to discourage.)
The Foundation’s claim for a declaratory judgment invalidating the termination notices was dismissed for lack of standing. The court’s path toward that conclusion is worth reviewing.
The court framed the issue of standing by reference to three criteria[ii]: Does the Foundation’s grievance fall within “the zone of interests protected or regulated by the statutory provision or constitutional guarantee invoked in the suit”? Because the Foundation’s claim is based on the Copyright Act, is the Foundation “statutorily authorized” under the Copyright Act to bring a claim? And does the Foundation’s claim for relief rest on its “own legal rights and interests” rather than “on the legal rights or interests of third parties”?
The Foundation contended that its challenge to the termination notices fit within a “zone of interest” provided by Section 501(b) of the Copyright Act, which permits “beneficial owners” of copyright interests to sue for infringement.[iii] Alternatively it argued that if the zone of interests contemplated by 501(b) did not apply to the Foundation’s challenge to the termination notices, then the Foundation fit within the “zone of interests” that the termination statutes themselves sought to protect.
The court responded by observing that sections 304(c) and 203 of the Copyright Act do not define who may challenge termination notices. Rather, the terms of these statutes “only contemplate that certain parties will be involved in the termination process.” First, if the author is dead, the statute refers to the author’s statutory successors (e.g., surviving widow, children, grandchildren, etc.) who hold a “termination interest” and give notice of termination. Second, the statute refers to the party or parties holding the grant to be terminated, who are entitled to receive the termination notice. The court refused to expand that zone to include the Foundation for two principal reasons.[iv] First, if Section 501 were interpreted to place the Foundation into the zone as a “beneficial owner” for purposes of sections 304 and 203 terminations, it would “improperly [rewrite] … that section into a catch-all standing provision that applies to the entire Copyright Act.” Second, by including no reference to beneficial owners in the termination statutes, Congress evidently intended to leave them outside the zone of interests that relate to termination notices.[v]
The Foundation further argued that its interests in continued royalties fell within the “zone of interests” protected by the termination provisions themselves (that is, without reference to the protection offered by Section 501(b) to beneficial owners). Having already noted that Congress did not mention beneficial owners in the termination provisions, the court further observed that the “zone of interests” doctrine in statutory interpretation turns on the interest sought to be protected, not the harm suffered by the plaintiff (in this case, the potential loss of royalties). The interests protected under Sections 304(c) and 203 are the rights of authors and their statutory successors “to recover ownership of previously transferred copyright interests, and, to a lesser extent, the rights of a grantee or its successors in preserving or renegotiating the transfer” (referring to the effective right of first negotiation for a renewed grant that is built into the statute for current rightsholders). The Foundation was asserting none of those rights. Said the court, “Congress did not even require the statutory heirs to provide [the Foundation] with statutory notice of the termination, let alone give it a seat at the table during the termination process.” Its claims were outside the “zone of interests” protected under the statutes.
Aside from lacking standing to assert its own interests, the Foundation could not assert Warner/Chappell’s interests in the termination notices because it lacked third-party standing. There was no showing that the Foundation had a “close relationship” with the music publisher or that the publisher could not protect its own interests. In fact, Warner/Chappell had not challenged the validity of the termination notices, suggesting that this is not a case in which the Foundation’s “interests were aligned with those of the party whose rights were at issue.” In any event, the Foundation did not show that Warner/Chappell was unable “to assert its own interests here, if it so chooses.”
The court did not reach the question of whether or not the compositions were actually works for hire; if they were, the transfers in issue would be invalid because works for hire are exempt from termination. But even in that scenario, the Foundation would lack standing to challenge the termination notices.[vi]
The State Claims
As a further blow to the Foundation, the Court granted the defendants’ motion to strike the Foundation’s state-based claims (breach of contract; breach of the covenant of fair dealing) under the California anti-SLAPP statute. Among other acts, the statute protects any oral statement or writing that is “made before … any … official proceeding authorized by law” or in connection with an issue under consideration or review by “any … official proceeding.” The defendants argued that their termination notices were attempts to “establish a property right under a comprehensive federal statutory scheme” which placed them within the protection of the anti-SLAPP statute. The Foundation asserted that its claim was based on the mere “ministerial” act of termination – service of a termination notice – which could not trigger the anti-SLAPP statute.
The court agreed with the defendants principally on the basis that the Copyright Act’s termination provisions are so “formalistic and complex” that successful termination of a grant is “against all odds.”[vii] In the court’s view, this process is not ministerial.
With that established, the court found that the Foundation had no reasonable probability of success on the merits of its claims for breach of contract and breach of the covenant of good faith and fair dealing. First, the termination notices were not claims against the Charles estate, particularly because having gone through probate, the estate was closed years earlier. The court held that the children’s agreement could not be interpreted to “impose an indefinite future obligation on Defendants not to take any action against assets that have gone through probate and have been distributed to the Foundation as a beneficiary, now that the estate is closed.”
Second, if the works were works for hire (as the Foundation argued), then they were never part of his estate in the first place. Third, if the works were not works for hire and Charles owned them when he died, then the Copyright Act prevents the court from interpreting those agreements to limit the defendants’ statutory termination rights. This is because the Copyright Act provides that “[t]ermination of the grant may be effected notwithstanding any agreement to the contrary, including an agreement to make a will or to make any future grant.” An agreement not to serve a termination notice (if that’s how the children’s agreement could be interpreted) would be an “agreement to the contrary” that is given no validity under the Copyright Act.
As for the breach of covenant claim, it was coextensive with the breach of contract claim and could not survive on its own.
The court awarded the defendants mandatory attorney fees under the anti-SLAPP statute.
As successive case decisions have underscored, the termination provisions of the Copyright Act are complex and powerful. They can undo the mutual assent of contracting parties by terminating duly executed assignments and licenses for the benefit of statutory successors. The Ray Charles Foundation decision shows that they also can undo estate planning that is intended to benefit charitable institutions or any other third party, if that planning depends on the continued vitality of a terminable assignment or license. Whether or not a statutory successor signed a promise to leave the estate plan intact is not decisive.
[i] The Ray Charles Foundation v. Raenee Robinson, et al., CV 12-2725 ABC (C.D. Cal. Jan. 25, 2013), Judge Audrey B. Collins.
[ii] The defendants did not contest, and the court accepted, that the Foundation had satisfied the test of standing presented by the United States Constitution: whether a “case or controversy” was presented.
[iii] Section 501(b) provides in relevant part: “The legal or beneficial owner of an exclusive right under a copyright is entitled … to institute an action for any infringement of that particular right committed while he or she is the owner of it.”
[iv] Here and elsewhere in the decision, the court also referred to the Foundation’s argument that if the compositions were works for hire, then they would not be subject to termination. The court, however, expressly did not decide that the songs wereworks for hire.
[v] The court allowed hypothetically that the Foundation might have fit within the zone as a plaintiff in an action for infringement of copyright, which this is not.
[vi] Would the Foundation be entitled to sue Warner/Chappell for withholding royalties if that publisher accepted as valid a notice of termination that related to grant in a work for hire, which was exempt from termination? This is not that case, either.
[vii] The court quoted Siegel v. Warner Bros. Entertainment, Inc., 542 F. Supp. 2d 1098 (C.D. Cal. 2008), rev’d on other grounds sub nom., Larson v. Warner Bros. Entertainment, Inc., No. 11-55863, 2012 WL 6822241 (9th Cir. Jan. 10, 2013) (unpublished decision).