Wednesday, December 27, 2006

No Pound of Copyright

A number of previous posts have dealt with statute of limitations issues. The thorniest problems arise when ownership claims are at issue, rather than infringement. Although things started out on the right foot with the Second Circuit’s opinion in Stone v. Williams, 970 F.2d 1043 (2d Cir. 1976), which correctly regarded the limitations provisions in Section 507 as being remedial rather than substantive, things went downhill thereafter, with courts barring ownership claims (rather than claims for relief outside the limitations period) permanently if not brought within the three year period specified in that section.

Over time, exceptions were created, none of which make particular sense logically, but which instead represent a tendency of courts to attempt ad hoc justice on the facts. In Pritchett L.P v. Pound, (5th Cir. Dec. 18, 2006), the Fifth Circuit followed the Second Circuit in one of these exceptions, and on facts which clearly pointed to one result only.

Nancy Pound was the wife and heir of an employee of Pritchett L.P., , a business consulting firm. The employment contract governing Pound's employment provided that he was responsible for, inter alia, “completing regular written assignments and the development of new products and procedures.” In addition, the contract stated that should Pound produce any written materials in the course of his work with Pritchett, “then such shall be done for and on behalf of the Employer and all work produced shall be the exclusive property of the Employer.” Pound was paid a salary plus a discretionary bonus, which reached $1 million in 1995, the last year he worked for Pritchett (he died in the first quarter of the year, but Pritchett generously paid the entire bonus amount).

As noted by the court of appeals:

In 2002, Nancy Pound sued Pritchett in state court, alleging co-ownership in the books' copyrights and seeking an accounting and royalties from the books' sales. Pritchett removed the case to the Northern District of Texas, but it was remanded, apparently based on Pound's representation that there was no ownership dispute and therefore no federal question. Pritchett then filed suit in the Eastern District of Texas, seeking declaratory judgment that it was the sole owner of the copyrights in the two books. Pound counterclaimed in the Eastern District for an accounting and payment of royalties. On Pritchett's motion, the district court granted summary judgment and awarded Pritchett attorney fees.

The court of appeals upheld the district court’s correct finding that Pritchett was the sole owner of the copyrights and that “the ownership of the copyrights by Pritchett defeats Pound's claim for royalties and moots the limitations bar to Pound's claim.” Recall though that it was Pritchett who was the plaintiff in the declaratory action for sole ownership. Pound filed a counterclaim based on state law. How then could the limitations issue be mooted when one issue was whether the declaratory judgment action was timely filed?

Here is the court’s discussion of the limitations question:

The declaratory judgment action initiated by Pritchett is not barred by limitations. Under appropriate circumstances, a party may seek a judicial declaration regarding the ownership of a copyright. As a practical matter, declaratory judgments typically are sought by potential defendants…. We agree with our sister circuit that a defendant who is not seeking any affirmative relief and who asserts a defense only to defeat plaintiff's claim is not barred by the Act's statute of limitations. See Estate of Burne Hogarth v. Edgar Rice Burroughs, Inc., 342 F.3d 149, 163-64 (2d Cir.2003). A potential defendant is not required to seek at the earliest opportunity a declaration that a defense to a claim not yet brought is valid. Id. (holding that a commissioning party's claim that books were works for hire accrued, for limitations purposes, when commissioned party's heirs first claimed copyright interest in books).

Pritchett's work-for-hire contention was a defense to Pound's initial claim for accounting in state court. Pritchett's declaratory judgment rights accrued when it knew or had reason to know of the injury upon which the claim is based. Id. at 165. Pritchett's work-for-hire “claim” did not accrue until it suffered some injury. Since the evidence establishes that Pound never asserted a claim of ownership or demanded royalties during his lifetime, Pritchett was not aware of and the claim did not accrue until the Pound estate first asserted accounting claims in 2002. Pritchett's work-for-hire “claim” was asserted in 2003, thus within the statute of limitations.

I have no quibble with the court’s selection of the accrual date (other than the erroneous reference to suffering injury as the accrual trigger) nor with its conclusion that the declaratory judgment action was timely therefore (the state suit was brought in 2002 and the DJ in 2003). The part of the opinion that baffles me is the reference to Pritchett not seeking affirmative relief: the declaratory judgment action did seek affirmative relief, a declaration that Pritchett was the sole owner; it was not a defense to Pound’s counterclaim based on state law, which only came later. Indeed, federal jurisdiction cannot be based on a defense and since Pound’s claims were state law only, absent a affirmative claim by Pritchett, the district court lacked subject matter jurisdiction.

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