Protecting Residual Payments

January 22, 1999


Michael I. Rudell

Protecting Residual Payments to Talent Covered by Guilds Statute Obligates Transferees of Rights In Motion Pictures Produced Under Collective Bargaining Agreements To Pay Residuals

(Originally published in the Entertainment Law column in the New York Law Journal, January 22, 1999.)

The Digital Millennium Copyright Act (the “DMCA”),1 signed into law by President Clinton on October 28, 1998, states that it is enacted “to amend title 17 United States Code, to implement the World Intellectual Property Organization Copyright Treaty and Performances and Phonograms Treaty, and for other purposes.” One of the “other purposes,” found in Section 406 of the “Miscellaneous Provisions” portion of the DMCA, gives talent Guilds a powerful mechanism to protect the residual payments to which their members are entitled.

Under Guild agreements, members are entitled to receive residual payments for certain exploitations of the work in which their services are used (e.g., the sale of videocassette versions or the transmission on cable systems of a motion picture initially produced for theatrical release). A producer which is signatory to a Guild agreement is obligated to pay these residuals and to cause any entity to which it sells, transfers or assigns rights to exploit the work to assume and be bound by the producer’s obligation to make residual payments and to sign an assumption agreement committing it to do so. Ordinarily, the assumption agreement is expressly for the benefit of the applicable Guild as representative of the talent whose services are included in the production. At times a production company without assets or soon to discontinue business would transfer one or more rights under copyright to a non-union entity, which would not sign the assumption agreement.

Section 406, entitled “Assumption of contractual obligations related to transfer of rights in motion pictures” is intended to address this situation. It provides that in the case of a transfer of copyright ownership in a motion picture that is produced subject to one or more collective bargaining agreements, the transfer document is deemed to incorporate the applicable assumption agreement and the transferee is subject to the obligation under each such assumption agreement to make residual payments accruing after the effective date of the transfer. The term “transfer of copyright ownership” is defined as that term is defined in the Copyright Act: “an assignment, mortgage, exclusive license or other conveyance, alienation or hypothecation of a copyright or of any of the exclusive rights comprised in a copyright… but not including a nonexclusive license.” The term “motion picture” includes television programs and other audiovisual works.

The obligation under Section 406 exists if (a) the transferee knows or has reason to know at the time of the transfer that a collective bargaining agreement was or will be applicable to the motion picture; or (b) if there is a court order confirming an arbitration award against the transferor under the collective bargaining agreement and the transferor does not have the financial ability to satisfy the award within 90 days after the order is issued.

Section 406 specifies ways in additional to actual knowledge in which a transferee would have reason to know of the applicability of a collective bargaining agreement. The transferee will be deemed to have such knowledge if a document pertaining to copyright in a motion picture is recorded in the Copyright Office or if there is publication at an on-line site available to the public operated by the Guild of information that identifies the motion picture as subject to a collective bargaining agreement if the site permits commercially reasonable verification of the date on which the information was available for access.

Further, a transferee knows or has reason to know of the obligation if it is aware of other facts or circumstances pertaining to a particular transfer from which it is apparent that the collective bargaining agreement was or will be applicable to the motion picture. The Joint Explanatory Statement of the Committee of Conference (“the “Conference Report”) indicates that these might include, for example, budget, location of principal photography, the identity of the talent associated with the project or the existence of a personal service contract that references terms or conditions of the collective bargaining agreement.

There are two exclusions to the coverage of Section 406. One is when the transfer of copyright ownership in a motion picture is limited to public performance rights. Thus, when a motion picture theater, television station, cable system or programmer obtains only public performance rights, it will not be obligated to pay residuals. However, when such a theater, station, cable system, programmer or other transferee also is functioning as a distributor or as a producer of the motion picture, the public performance exclusion does not affect any obligations imposed on the transferee to the extent that it is engaging in such functions. The Report notes that the public performance exclusion (i) would not be rendered inoperable simply because a transfer of public performance rights is accompanied by a transfer of limited, incidental other rights necessary to implement or facilitate the exercise of performance rights and (ii) is not intended to expand or restrict in any way what constitutes a public performance for any other purpose.

Congress also was concerned that banks and others providing financing for motion pictures should not be made subject to the assumption obligations required by Section 406 merely because they obtain a security interest in a motion picture. Because Section 101 of the Copyright Act defines “transfer of copyright ownership” to include a mortgage or hypothecation of any exclusive copyright right, this could be an unintended result of the provision. Accordingly, Section 406 provides that the obligation to pay residuals also is not imposed on copyright transfers that consist solely of a mortgage, hypothecation or other security interest by or under the authority of the secured party. Further, it does not apply to subsequent transferees to which the copyright may be sold by a secured party.

Section 406 is not part of the Copyright Act. Rather, it amends Part VI of title 28 of the United States Code (which deals with the judiciary and judicial procedure). Apparently, this is because it provides that any disputes concerning its application are to be determined by an action in United States District Court. The Court in its discretion may allow the recovery of full costs by or against any party and also may award a reasonable attorney’s fee to the prevailing party as part of the costs.

The act contains a provision indicating that the Comptroller General in consultation with the Register of Copyrights is to conduct a study of the conditions in the motion picture industry that gave rise to this section and the impact that it will have on the motion picture industry. The Comptroller General is to report the findings of this study to Congress within two years after the effective date of the act.


1 Public Pub. L. No. 105-304, 112 Stat. 2860 (Oct. 28, 1998).