When performing intellectual property due diligence in connection with a corporate acquisition, a frequently overlooked question is whether any of the company’s copyrights may be subject to termination at some point in the future. UCLA School of Law Professor Doug Lichtman’s excellent Intellectual Property Colloquium podcast recently prompted me to think about copyright termination rights in the context of IP diligence.
Ordinarily, an assignment of intellectual property is just that — irrevocable unless the agreement says otherwise. However, an exception exists for copyrights that were not made as “works for hire.” Section 203 and Section 304 of the Copyright Act permit a copyright owner (or his or her heirs) to terminate all licenses and or transfers of rights after a certain time period.
Because of this, if a company acquired copyrights from founders, from consultants who did not sign work for hire clauses, or from others who were not employees at the time that the work was created, then that company may be at risk of copyright recapture at some point in the future.
56-year and 35-year triggers
For transfers and licenses made prior to 1978, the termination right exists for five years beginning on the 56th year after the copyright was originally secured. For transfers and licenses made in 1978 or later, in most cases the five-year termination right begins 35 years after the assignment or license was made. Notice of the termination may be given between two and 10 years prior to the effective termination date. For example, an assignment granted in 1980 may be terminated in 2015 if the author or his/her heirs give notice of the termination between the years of 2005 and 2013.
Termination rights are only available to certain individuals, who must follow certain termination procedures. However, when exercised, termination rights can be deadly for a company. All rights to the original work revert to the author or his/her heirs. If the company has developed derivative works from the original work, the company may continue to exploit those derivative works, but the company may not prepare additional derivative works that were based on the original.
Companies at risk?
Copyright termination rights can place a variety of companies at risk of losing intellectual property rights. For example, a writer who assigned rights in a musicial composition to a publisher during the year of 1978 may be able to recapture rights to the composition in 2013. An author of a comic strip created in 1980 may be able to recapture rights in 2015.
Works such as musical compositions and books often have value that endures 35 years or more. However, the risk is not limited to companies who acquire content such as music and books. For example, third party software developers who were involved in development of key products circa 2000 may be able to recapture rights to the software in 2035. While software rarely endures more than a few years before it is replaced by a new version, a company who acquired a copyright should consider that the recapture rights will also prevent the company from creating any additional derivative works. This may require the company to perform substantial re-coding in order to continue future enhancements.
Diligence Tips; Protective Measures
When performing IP diligence on a potential acquisition target, companies should carefully review assignment agreements governing copyrights that were made by consultants or other third parties, especially if the copyrightable work may have value that endures for 35 years or more. In the case of a non-employee creator, work for hire clauses can be critical to ensure that the creator cannot take advantage of termination rights in the future.
The Copyright Act’s transfer rights kick in even if the assignment agreement specifically says otherwise. However, the Copyright Act does not necessarily void subsequent assignments after the original. So, as a protective measure a company who received copyrighted works by assignment may consider whether an additional, later assignment from the author’s heirs may ensure that copyright termination rights will not arise in the future.
For a very informative discussion about copyright termination (and for CLE credit in several states), check out the full Intellectual Property Colloquium podcast on the topic.