The Second Circuit Goes to the Dark Side

I try not to be discriminatory among the circuits, either in my praise or criticism. As things fall out, for me and for others, the Ninth Circuit tends to fall more than others into the criticism category for reasons that many have pondered and which may remain insoluble. The Second Circuit’s forays to the dark side are less often, for reasons that may also remain insoluble, but a decision on October 5th, in Davis v Blige, 2007 WL 2893003 (2d Cir. Oct. 5, 2007), is about dark as indeed. The decision opens up to challenge untold numbers of settlement agreements, and even more broadly eliminates one of the central tenets of the 1976 Act: the alienability of one co-owner’s rights without the permission of the other co-author(s). In this latter respect, the Second Circuit has unwittingly joined the Ninth Circuit’s widely lambasted opinion in Gardner v. Nike, Inc., 279 F.3d 774 (9th Cir. 2002). The Davis v. Blige opinion is by an excellent judge, Jose Cabranes, reversing that of another excellent judge, District Judge Charles (Terry) Haight. What is more inexplicable is that the circuit once vacated part of an earlier opinion that had incorrectly came to a similar conclusion, Morris v. Business Concepts, Inc., 283 F.3d 502 (2d Cir. 2002).

The case involved an infringement claim brought by Sharice Davis against a number of individuals and companies over two songs on defendant Mary Blige’s album “No More Drama.” After suit was filed, two of the co-authors, Bruce Chambliss (whose testimony on key issues was admittedly less than a model of clarity), executed a transfer to another of the co-authors, Bruce Miller. The transfer was retroactively effective to the date of the works’ creation (an unspecified date). Miller in turn had licensed the other defendants. Defendants’ claim, which was correct, is that Miller’s license as a co-author eliminated an infringement claim by plaintiff. Plaintiff was not left out in the cold, however, because she still had a right to an accounting of the profits from the licenses Miller entered into. Judge Haight agreed that such a retroactive license barred plaintiff’s infringement claim, citing prior case law in the SDNY. The court of appeals vacated and remanded. A full discussion of the opinions shortcomings is well beyond even a long blog like this, so I will focus on the essentials.

First, the court held, “we conclude that … retroactive transfers violate basic principles of tort and contract law, and undermine the policies embodied by the Copyright Act.” Call me old fashioned, but if there are explicit provisions in the Copyright Act that address the question at hand, that is where one finds the relevant answers and policies, and I don’t give a hoot whether basic principles of tort and contract law are in conflict. The relevant provisions are Section 201(d) (cited by the court only in passing) and the definitions provision of Section 101. Congress explicitly permitted an exclusive licensee's right to transfer rights without the author's permission in these sections.

Section 101 defines a “copyright owner as the owner of any particular exclusive right.” No distinction is made among the author, a licensor of the author, or a subsequent licensee. The statute further defines a transfer of copyright ownership as an assignment or exclusive license, excluding only nonexclusive licenses. Section 201(d)(1) ties these two definitions together by expressly indicating that a transfer of copyright ownership may be made “by any means of conveyance.” Under these provisions, every holder of an exclusive right is regarded as a “copyright owner” to the extent of the right possessed. There may be, and typically are, multiple copyright owners of a single work, e.g., a novelist sells to a book publisher the right to publish a sequel, but retains the right to authorize the making a movie of based on the book, but there can be as in Davis v. Blige, co-authors of one work.

Important economic consequences flow from a joint authorship relationship: Each joint author is a co-owner of the work and, as a tenant in common, possesses an equal, undivided interest in the whole, absent a contractual agreement to the contrary, and regardless of the relative extent or quality of their contributions. Thus, two joint authors each own a 50% interest in the whole, even if one author contributed only 10% of the work. As a co-owner in the whole, each joint author may utilize the work him- or herself without the other's permission and indeed over the other author's objection. A co-owner may also sue for infringement by third parties without joining the other co-owner in litigation.

A license from one co-owner is a defense to a claim of infringement brought by the other, nonlicensing joint owner. This is a significant point: a co-owner may unilaterally grant nonexclusive licenses; a joint author (or co-owner by assignment) is immune from an infringement claim by the other author or co-owner; and, a joint author has an independent right to use or license others to use the work.

The only obligation of a co-owner is to account for any profits earned from the exploitation. One joint author may also transfer all of his or her own exclusive interest in the work without the other joint author's consent. A joint author (or co-owner) may not, however, transfer all interest in the work without the other co-owner's express (and written) authorization, since that would result in an involuntary transfer of the other joint owner's undivided interest in the whole. But the statute explicitly covers the ability of one co-author to transfer his or her proportional share in the work, and regardless of whether such a transfer is called a transfer or an exclusive license: the two terms are synonyms.

The Second Circuit, contrary to Section 201(d), held that one co-author cannot transfer his or her exclusive rights in the work without all other co-authors’ permission: “a co-owner cannot unilaterally grant an exclusive license”: to do so, the court held would conflict with “the venerable law of property that, while an owner may convey any of his rights to others permanently or temporarily, he may nor convey more than he owns.” This misses entirely the point that a co-author is only conveying his or proportional share as a tenant in common and that Section 201(d) was written precisely to permit such transfers. Such a co-owner is not, as the court of appeals incorrectly stated, trying to “convey the interests of his fellow co-owners without their express written consent… .” Under the court of appeals’ approach, there can be no copyright divorce without consent: a co-owner is the equivalent of an agunah in Jewish religious law, even though the Copyright Act lets spouses go at will.

Here is the simple analysis the court of appeals missed. Section 101 states: ”’Copyright owner’”, with respect to any one of the exclusive rights comprised in a copyright, refers to the owner of that particular right. A copyright owner is therefore merely someone who owns an exclusive right. Co-authors own proportional share of the exclusive rights. The question is then, can they transfer their exclusive right? Is there anything in the statute that bans such transfers? No there isn’t. Is there anything that permits such transfers? Yes there is. Section 201(d)(1) reads: “The ownership of a 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 pass as personal property by the applicable laws of intestate succession.” Is there anything that permits partial transfer of interests? Yes there is. Section 201(d)(2) reads: “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 section expressly contemplates that there will be multiple owners of exclusive rights, and is not limited to copyright in works authored by a single author. A co-author who transfers his or her proportional interest is merely transferring his or right “to the extent of that right.” It is telling indeed that the court of appeals failed entirely to quote or apply Section 201(d)(2), referencing it only as a cite and referencing Nimmer for the absurd and irrelevant proposition that one may not license more than one owns.

The court’s failure is to understand the statute is profound and will have profoundly negative consequences: no business can now purchase rights to a work unless it gets an assignment from all authors: imagine trying to buy rights to collective works that contains the works of thousands of authors, many of whom are co-authors. This is a disaster of major proportions, all the more so in the face of a clear statute to the contrary.

The second part of the court’s opinion painfully reveals its result-driven, legal realist nature. The issue was the validity of retroactive licenses and transfers. This section was unnecessary analytically because of the first part, but was necessitated by the court’s unwillingness to overrule its contrary opinion in Eden Toys, Inc. v. Florelee Undergarment Co., Inc., 697 F.2d 27 (2d Cir. 1982). Eden Toys held, in part, that a later writing could confirm an earlier oral agreement. Chambliss claimed there had been such an agreement, but the evidence on this point was confusing at best. But in the end, who cares? Unless a co-author can never assign rights, he or she can assign them at any time and make them retroactive to cover things like pre-existing causes of action. It is here that other courts have permitted, rightly, transfers from one-co-owner as a part of a settlement agreement that then ends the suit. The co-author(s) who didn’t transfer or settle are not out of luck, because they still have a right to an accounting from exploitation of the work, past or future. Yet, mistakenly believing non-transferring or settling co-authors would be harmed, the court of appeals held that such settlement transfers “can only waive or extinguish claims held by a settling owners; it can have no effect on co-owners who are not parties to the settlement.” Why not? Because of “a venerable principle of New York co-tenancy law … .” This is copyright law, not state law. The court also pulled out of thin air the assertion that “Licenses and assignment … are prospective… .” That will be news to millions of licenses and assignees. The court apparently thought it terrible that “A retroactive license or assignment purports to authorize a past use that was originally unauthorized.” And so what? That happens all the time.

Davis’ holding on retroactive active licenses is as disastrous as its holding on the nonassignability of proportional exclusive licenses, and moreover reflects a stunning deafness to the commercial realities of life: one would expected much much more from a court that sits in the commercial hub of the country.

One can only hope that a petition for rehearing is granted, the original opinion is vacated, and a proper one substituted.