BY:Neil J. Rosini, Michael I. Rudell
(Originally published in the Entertainment Law column of the New York Law Journal, Friday, February 26, 2010)
For virtually every kind of entertainment project that involves a license of intellectual property, the duration of the license is of great significance. Yet license agreements occasionally fail to state when or how the license comes to an end, perhaps due to negligence, the parties’ relationship, or the grantee’s unspoken hope that a license without a fixed term would be deemed perpetual. No matter the cause, a license of rights without a term can end badly for the licensee.
In two decisions, one from last month and one from last year, courts have interpreted New York law to permit termination “on reasonable notice” of licenses without fixed terms. One case involved a written copyright license in which the termination was conveyed orally and the other involved an oral license of a name and logo in which the termination was delivered in writing. In both decisions, the parties seeking to enforce termination prevailed despite some inventive legal theories advanced by the licensees to avoid it.
The Copyright Case
In the First Circuit’s recent decision in Latin American Music Company v. American Society of Composers Authors and Publishers1, the licensee of an exclusive grant without a fixed term turned to novel interpretations of copyright law and New York contract law in an attempt to fend off an oral termination.
The dispute concerned a song entitled “Caballo Viejo,” or “Old Horse,” described by the Court as a popular folk song in Venezuela. The plaintiff-appellants in the case were a music publisher, Latin American Music Company (“LAMCO”) based in New York, and its affiliate, a performing rights society based in Puerto Rico, the Asociacion de Compositores y Editores de Musica Latino Americana (“ACEMLA”). The defendant-appellee was an American performing rights society, the American Society of Composers, Authors and Publishers (“ASCAP”). The question presented was whether the plaintiffs’ exclusive license of rights in the song had been terminated effectively by ASCAP’s predecessor in interest, West Side Music Publishing, Inc. (“West Side”), making ASCAP the current rights owner. A jury in the District of Puerto Rico found in favor of ASCAP and the plaintiffs appealed.
There was no question that West Side entered into an agreement in 1982 granting ACEMLA the exclusive right to license public performance rights in the United States, Puerto Rico and the Dominican Republic — 11 years before ASCAP acquired public performance rights in “Caballo Viejo.”2 But the 1982 license was “silent with respect to termination.” It contained neither a termination date nor any conditions under which termination could be effected, nor a procedure for termination. LAMCO filed an action in federal court in which it sought confirmation of its rights over ASCAP’s. ASCAP responded that the president of West Side had verbally terminated the 1982 agreement during a conversation with the president of ACEMLA, leaving the plaintiffs without rights.
The First Circuit’s decision first addressed whether or not the jury had been instructed properly about the manner in which the grant could be terminated. The district court told the jury that “a licensing agreement without a specific term may be ended by one party after a reasonable duration and after reasonable notice is given to the other party” under the law of New York where the contract was formed. This principle had been invoked previously in cases involving distributorships3 largely to distinguish terminations of licenses without fixed terms from those in “at will” relationships; the latter could be effected immediately on notice, reasonably or not. In the ASCAP case, the plaintiffs’ argument went beyond the timing of the effective day; they argued to the district court and then on appeal that the U.S. Copyright Act required that a notice of termination be in writing, thereby preempting state law entirely.
The plaintiffs based that argument on several provisions of the Copyright Act, starting with Section 204,4 which requires a signed writing for a valid exclusive license or assignment. Logically, according to the plaintiffs, the rule that any transfer of copyright ownership had to be in writing would necessitate a written transfer from the exclusive licensee back to the licensor. The First Circuit disagreed: “Section 204, which requires a writing signed by the transferor…applies to the transfer or grant…notto the termination of such a transfer or grant.” Apart from the plaintiffs’ failure to cite any precedent in support, the Court held that “extending” Section 204 to terminations would be untenable because the transferee could simply “veto a lawful termination” by refusing to reconvey rights in writing.
The plaintiffs’ next argument relied on Section 203 of the Copyright Act,5 which deals with termination of exclusive or nonexclusive grants of a transfer or license of copyright, or of any right under copyright, by authors and their statutory successors during a five year window that — for most agreements6 — opens 35 years after the date of the grant. The plaintiffs argued that because notices of termination under Section 203 must be in writing, so must the notice of termination concerning “Caballo Viejo.” The Court disagreed for two reasons. First, Section 203 only applies where an author or statutory successor is terminating the grant, according to its “plain language.” Second, the terminating entity – a music publisher – was neither an author nor a statutory successor.
Having found no conflict between federal copyright law and state law, and therefore no basis for the former to preempt the latter, the Court turned to the contract law of New York. The plaintiffs argued that even if New York law applied, then only written notice could be deemed “reasonable” in light of the writing requirement of Section 203 of the U.S. Copyright Act. The Court refused to “linger” over that argument in the absence of any support for it. ASCAP’s opposing argument was that under New York law, a contract of an unspecified duration, which had remained in force for a reasonable time, could be terminated upon reasonable notice, and that the jury had found the standards of reasonability to be satisfied. The Court agreed, and after disposing of some residual issues of relatively small caliber, it affirmed the judgment in favor of ASCAP.
The Trademark Case
In a case cited in the ASCAP decision, the acrimonious termination of an unwritten license offers another cautionary tale for any grantee that fails to attend to the closing date of a license term. Instead of a copyright license, however, Laugh Factory, Inc. v. Basciano, 608 F. Supp. 2d 549 (S.D.N.Y. 2009), concerned an oral agreement for use of the name and logo of “Laugh Factory” for a comedy club.
The plaintiffs were Jamie Masada and two companies of which he was the principal officer. The defendants were Richard Basciano, whose principal business was managing and investing in New York real estate, and several entities he “actually or allegedly” controlled. Since 1979, Masada had operated a comedy club in Los Angles called the Laugh Factory. In 2003, he and Basciano began making plans to open a Laugh Factory comedy club in the Times Square area in a pair of interconnected buildings controlled by Basciano. They formed a jointly-held LLC with two members– a corporation of which Basciano was sole shareholder and a corporation controlled by Masada—and Basciano and Masada each contributed $500,000 to the LLC. Neither a written operating agreement nor a lease for use of the buildings controlled by Basciano was ever entered into, nor was there any written agreement governing the club’s use of the Laugh Factory name and logo, which were controlled by the plaintiffs.
The New York Laugh Factory opened in March 2004. Both Basciano and Masada were involved in its operation for almost three years, during which the club failed to turn a profit. In late 2006 or 2007, Masada began to have health problems and Masada and Basciano came to an agreement that Masada would give up his stake in the LLC they had created and become a paid consultant for the club for at least two years. This agreement – memorialized in a written “Summary of Agreement between Basciano and Masada” (“SOA”) — was executed in February, 2007. It did not address the defendants’ right to continue to use the Laugh Factory name and logo.
For several months, Masada received the payments he was due under the SOA but relations soured and in a letter dated September 14, 2007, Masada asked Basciano to stop using the Laugh Factory name and logo. Basciano expressed confusion, citing his investment of more than $4 million in the club and stating his understanding that the SOA – under which Masada was to continue to furnish consultancy services — permitted Basciano’s continued use of the Laugh Factory name. Nevertheless, Basciano began making plans to switch to an alternate name and by March 27, 2008 he stopped using Laugh Factory completely.
In February 2008, the plaintiffs filed suit with 18 separate claims, including one for trademark infringement covering the period from September, 2007 when Masada sent his letter of termination, to March 2008 when Basciano stopped using the Laugh Factory name and logo. The defendants brought eight counterclaims and asserted nine affirmative defenses. Some of these claims and defenses were withdrawn, but most became the subject matter of cross-motions for summary judgment, including the defendants’ defense that the oral license to use the Laugh Factory trademarks shielded them from liability for infringement.
The plaintiffs successfully argued that the SOA of February, 2007 — which by its terms “supersed[ed] and void[ed] all previous agreements” — extinguished any previous trademark license. The Court then considered whether a license could be inferred from Masada’s continuing involvement in the “Laugh Factory” enterprise after the SOA was signed, and acknowledged that a “revocable oral license” could arise as a result of that involvement. But, as in the ASCAP case, the Court cited the “general rule, under New York contract law, that a contract that does not contain a termination provision is terminable only upon reasonable notice …”. Accordingly, the defendants’ license could not have extended beyond receipt of Masada’s termination letter in September, “or as soon thereafter as would be reasonable.”
The defendants also argued that the plaintiffs breached the SOA by purporting to terminate the defendants’ right to use the Laugh Factory name and logo, even though the SOA didn’t mention such a right. They urged that implicit in the SOA – with its two-year consulting period for Masada in connection with the comedy club and its references to “the club” and the “World Famous Laugh Factory” — was an agreement that Basciano could continue to run the club under its original name. But the Court found that on its face the SOA did not suggest that plaintiffs were required to let Basciano continue to use the name and logo during Masada’s consulting period or at any other time.
Because the SOA was not an integrated document, the Court acknowledged that parol evidence might be considered. But the defendants offered no testimony or other evidence to support that Masada promised defendants the right to use the name, so there was no parol evidence to consider. The Court also refused to read an implied covenant into the contract because the defendants had not met the “heavy burden” of proving “that the particular unexpressed promise sought to be enforced is in fact implicit in the agreement viewed as a whole”7 — not merely that it would have been “more sensible” to include such a covenant. As the Court observed, “Basciano would have been wise to obtain rights to the Laugh Factory name and logo, [but] defendants have not shown that such a promise is necessarily implied in the agreement by which he bought out his business partner.”8 The defendants’ affirmative defense and related counterclaims were dismissed.
According to a press release from three months after the decision, the parties exchanged apologies and settled.
1 ____F.3d ____, 2010 WL 324526, 93 U.S.P.Q. 1599 (1st Cir. 2010).
2 Some of the facts presented here are drawn from an earlier related decision: Latin American Music Co., Inc. v. The Archdiocese of San Juan, 499 F.3d 32 (1st Cir. 2007), cert. denied, 128 S.Ct. 1232 (2008).
3 See, Italian & French Wine Company of Buffalo, Inc. v. Negociants U.S.A., Inc., 842 F. Supp. 693 (W.D.N.Y. 1993) cited in theASCAP case, and the cases it cites in turn.
4 17 U.S.C. §204(a).
5 17 U.S.C §203.
6 In the case of grants covering the right of publication, the five-year window opens at the end of 35 years from the date of publication of the work or at the end of 40 years from the date of execution of the grant, whichever is earlier.
7 The Court quoted DBT GmbH v. J.L. Min. Co., 544 F. Supp. 2d, 364, 384 (S.D.N.Y. 2008).
8 The Court’s disposition of summary judgment motions relating to other claims and defenses will not be recounted here.