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Tuesday, February 14, 2012

The Worst Part of Copyright: Termination of Transfers

There were some great responses to my survey about the worst provision in the Copyright Act. Bruce Boyden nailed it when he guessed I was thinking about termination of transfers. This rule lets authors revoke any licensing contract between 35 and 40 years after they enter into it. (There was a similar but different system for renewals under the 1909 Act, which also survives in modified form in the 1976 Act, just to add to the confusion.)

This is an inalienability rule. But it's not an inalienability rule that rests on a deep and shared moral intuition, like the rule prohibiting people from selling their organs as meat for the super-rich. Termination of transfers rests instead on a view that authors are "congenitally irresponsible" to the point that they can't be trusted to make licensing decisions for themselves. They need to be given a second bite at the apple because they're not smart enough to negotiate fair deals the first time around. As for the theory that it's hard to value creative works up front, apparently percentage royalties and reversion clauses are too complex for authors to understand or insist on.

Trying to impose an inalienability rule on authors and publishers who don't want it at the time they strike their original licensing deals leads to no end of practical trouble. Making the rule stick means overriding any number of contracts, including contracts specifically drafted to get around it. Litigation over decades-old agreements, frequently with intervening modifications and regrants, is virtually guaranteed to be a morass--and so it has been, with well-publicized disputes like the fight over the termination rights in Action Comics #1 dragging on for years at ridiculous expense. The courts have been fighting against this system for much of the century, but all they've really accomplished is to increase its complexity. And Congress has done its part to make the statute incomprehensible: I dare you to read Section 203(b) and explain what it's supposed to mean.

But the demented logic of inalienability doesn't stop there: it continues beyond the grave. The termination rights of a deceased author vest in the widow or widower, then the children, and then the grandchildren, on a per stirpes basis. That's right: the Copyright Act displaces state probate law by creating future estates. And it does so in the form of byzantine set of fractional shares subject to an idiosyncratic voting rule requiring a majority of majorities to exercise the termination right. (Need I add that the drafters of the Uniform Probate Code concluded that a vast majority of Americans wouldn't want per stirpes distribution if they understood how it worked? No. That would be overkill.)

The underlying assumptions behind this postmortem provision are creepy, too. The romantic author, it would appear, is both the family breadwinner and a bad provider. His family, having sacrificed for decades to support his creative efforts, will receive their reward after his passing, when his genius is belatedly recognized. Copyright law has a theory of the family: it's nuclear and dominated by a single individual on whom the rest depend. The statutory text is gender-neutral, but its assumptions aren't.

As an incentive for authorship, this a terrible one. If authors make bad up-front deals because they're unmindful of future revenues, it follows that those same future revenues won't operate as an ex ante incentive for creativity. As a welfare system to support deserving authors in their old age, it's also terrible, since it bestows large windfalls on a very small number of them, at immense administrative cost. If this is a welfare system to support the families of authors, it's beyond terrible, since it bestows windfalls on a small number of people with the good fortune to be related to a commercially successful author, while doing nothing for the families of those who toiled their whole lives in some other, equally worthy calling.

There is, I recognize, essentially zero chance that this system will be modified for the better any time soon. But that doesn't mean we have to like it.

Tomorrow: comments on readers' choices of their own least-favorite copyright rules. There's still time to add your suggestion to the list!

Posted by James Grimmelmann on February 14, 2012 at 05:03 PM in Intellectual Property | Permalink

Comments

The different levels of intent you perceive behind the termination provisions sounds interesting--do you have any sources that show Congress did indeed think artists are unintelligent? The other explanations I had read were: Congress was concerned with artists' lack of bargaining power as against large intermediaries like publishers or record labels; and Congress decided that it is difficult for *anyone* to accurately gauge the value of the individual work shortly after its creation and before it has been presented in the marketplace. If Congress instead was taking a shockingly paternalistic view of artists' intelligence that would seem like a much less valid reason to enact the statute.

Posted by: Anon | Feb 14, 2012 5:24:43 PM

Aren't these provisions a middle ground approach to recognizing moral rights, and if so, is that a bad thing?

Posted by: Droit Moraux | Feb 14, 2012 6:39:55 PM

Anon, the bargaining power theory is the one most commonly given in the legislative, judicial, and scholarly analyses, with the difficulty-of-valuation and family-subsidence arguments also appearing regularly. I borrowed the Supreme Court's dismissive phrasing because I think that the feeling of contempt for authors' business savvy runs through and helps explain all the other arguments -- none of which is convincing when looked at in the cold light of economic reason they appeal to.

If authors collectively lack "bargaining power" to demand better future terms, that's an indication either that maybe their works aren't actually worth it (especially given competition from other authors), or that authors quite reasonably are obtaining better terms elsewhere in their contracts which are more valuable to them than decades-hence reversions. The uncertain valuation problem can be addressed with better contract drafting. To the extent that these contracts allocate all of the risk in the work's fate in the marketplace to the publisher, there's a strong argument that this is the market working as designed by establishing entities (called "publishers") who are more capable of bearing the risk by diversifying across a portfolio of many authors. And as for the policy of supporting families, Mark Twain skewered that one in his testimony on behalf of a copyright term that extended after the author's death:

. . .that benefits my two daughters, who are not as competent to earn a living as I am, because I have carefully raised them as young ladies, who don't know anything and can't do anything. So I hope Congress will extend to them that charity which they failed to get from me.


In any event, whatever the purported justification, termination of transfers isn't a good fit. That goes for Droit Moraux's question, too. If termination of transfers is an implementation of droit de suite, it's a particularly inept one.

Posted by: James Grimmelmann | Feb 14, 2012 9:16:05 PM

I must differ with Professor Grimmelmann's economic argument, because it is founded on the availability of equal information... and publishing operates in a culture of secrecy.

It also fails to account for new methods of exploitation and technology that can be engaged in at little or no risk to the publisher. For example, consider e-books for a 1970s contract that proposed a 20% author share on later-developed technologies. (This is not a hypothetical; it is sanitized to protect the guilty.) Leaving aside the more-disturbing question -- 20% of what? -- the current publisher-imposed-as-oligopsonists rate is 25% for the specific later-developed technology of e-books... which is still substantially below the 50% default rate for what are called "subsidiary rights." Thus, the better justification for having some kind of termination right is that it is impossible to value future technological and/or market developments -- the sheer diversity of economic opinions should demonstrate that more than adequately...

This was my second-place candidate for worst-written section of the Act.

Posted by: C.E. Petit | Feb 15, 2012 1:22:30 AM

The legislative history of the termination provisions shows that authors *asked* for it. This isn't a case of Congress's holding a view that authors were too dumb to make good contracts. Rather, authors' representatives argued that the original reversionary purpose of the renewal term had been frustrated by court decisions upholding the validity of renewal term assignments; authors wanted an inalienable reversion. Publishers and other intermediaries wanted no reversion at all. They compromised by making the period before reversion longer (from 28 to 35 years), making it subject to a derivative works exception, and requiring the author to jump through a bunch of complicated hoops to reclaim her copyright. In return, authors got inalienability.

Posted by: Jessica Litman | Feb 15, 2012 11:00:04 AM

Two comments: 1) Ha! I guessed right. 2) I have to disagree with your assessment James. There's plenty of room to argue that termination is confusing (as my students will be complaining on Thursday) and overprotects some people. I wouldn't nominate it for *best* provision in the Copyright Act. But the idea that it protects an interest that in every contract is only unprotected by choice or by negligence is I think incorrect, although it depends on who you have in mind. For non-established artists (authors and bands come to mind) there is, as C.E. Petit was saying, an information asymmetry. The buyer (the publisher) knows a lot more than the seller (the author) about how well the work will do in the long term. Second, the author understandably has a pretty high discount rate early in their careers. They cannot afford to turn down offers to shop around based on an uncertain guess about possible future revenues. The problem is that even a successful artist or band only has a certain number of hits in them -- maybe even just one. I'll admit, there is often another player involved here that complicates this story, the author or band's agent, who is a repeat player less likely to be susceptible to information asymmetries or abnormally high discount rates -- I don't know enough about the agency business to say with confidence what their incentives are with respect to long-term versus short-term payments. But since the agents, like the publishers, depend on a steady flow of business, most of which will have short life-spans, I would expect that their incentive to sacrifice short-term for long-term revenue from any one deal is low. Whatever the mechanism, there are numerous examples of authors whose works hit it big getting paid a pittance. Siegel is a good example; and I was reading recently that Philip K. Dick sold a number of his stories for a low flat fee. Meanwhile, the long-term *risk* to the publisher from a bad bet is minimal. Once it goes out of print, you just don't print any more (or, if we're talking electronic media, you cease promoting it). The risks are almost entirely short-term.

Posted by: Bruce Boyden | Feb 15, 2012 11:47:31 AM

Jessica's point is important. The dysfunctional complexity of the provision is a result of it being a compromise of the worst sort, one that leaves both sides with a system that works poorly for them. As for uncertainty arguments, I doubt that publishers have a much better idea about commercial potential than authors do at the time of initial contracting. Instead, the more powerful arguments are that no one at all knows which works are going to hit big until some of them do. But this argument is unavailing in defending termination rights unless there is also some reason why authors won't, at the time of the initial license, be able to take uncertainty into account. So, take for example the "oligopsonists" explanation C.E. Petit gives: if that's the problem, termination rights are a distinctly Nth-best solution, compared with a little trust-busting in the publishing industry.

Posted by: James Grimmelmann | Feb 15, 2012 1:32:34 PM

James, you're right that publishers are not able to pick out the mega-hits with any certainty. But they have a pretty good idea which ones they'll promote heavily and print a big run for. And I'm not sure why it has to be true that authors are unable to take uncertainty into account in some way. Suppose they take uncertainty into account, but with long-term consequences that predictably redound to their detriment. Why isn't that a legitimate basis for the termination provision?

Posted by: Bruce Boyden | Feb 15, 2012 2:41:13 PM

Classroom material for next Monday's class. Thanks.

Posted by: Jeffrey Harrison | Feb 15, 2012 5:14:49 PM

I am not too keen on 110(5), especially (B). At least with termination rights there is a "short version." Not sure what the short version of 110(5)(B) would be.

Posted by: Jeffrey Harrison | Feb 15, 2012 5:23:16 PM

James --

I agree with you so often, but your antagonism for termination rights is something I really don't get. Yes, the statute is very tricky to understand -- suspiciously tricky. Yes, these provisions do breed litigation battles -- but when you consider the high stakes attached to some of those battles, you can understand why they are so hard fought. And yes, many courts seem keen on finding new ways to make these provisions more complicated in order to avoid negating contracts.

But I have absolutely no problem at all with the underlying motive here. Like Jessica said, authors have these rights because they wanted them. They wanted them because the average contract between author and publisher is skewed heavily against the author. There's a huge imbalance in bargaining power.

If you recall that copyright is, in theory, designed to create an economic incentive promoting *authorship* (not *publishing*), we ought to care about situations (which are fairly common) where the original creator of a valuable work ends up with next to nothing and the work has continuing social value. If we are going to have a copyright duration that extends so far beyond any period that anyone genuinely needs to commercialize a work, then I'm perfectly fine with giving authors who make the right moves, the ability to fight to reclaim their megahits.

The termination of transfers provisions are an island of genuinely pro-author sentiment in an act that has been drafted and redrafted primarily to benefit non-author intermediaries. Please don't call them the worst part of copyright.

Posted by: greglas | Feb 15, 2012 6:59:09 PM

To say that authors "wanted" these provisions doesn't actually tell us that they're good for authors as a class. (Indeed, given the bizarre representational politics of copyright lawmaking, we should be very careful to specify who we're talking about when we say that "authors" wanted them.) To say that they express a "pro-author sentiment," similarly, doesn't tell us that the sentiment is translated into effective action. I would rather have a statute that does good things for authors than one that gives them a sentimental pat on the head. Even if we want to give authors pats on the head, there are better and more effective ways of doing it.

The argument that termination of transfers promotes copyright's incentive function is self-defeating. If authors really were incentivized to greater creativity by the prospect of termination rights after four decades, publishers would voluntarily offer authors those reversions in order to induce that creativity even if termination of transfers weren't in the statute. Conversely, if the dangling prospect of termination rights induces greater creativity under the current system, the same argument that says authors are forced into bad up-front bargains says that publishers will simply capture much of the added value.

That makes termination of transfers into a purely distributional play. But it's hard to stick up for termination of transfers on distributional justice grounds, given how capriciously it showers its favors on such a small group of beneficiaries.

I'm not going to defend our hypertrophic copyright terms. But if we're going to have them, then a simple system with clear lines of ownership would be enormously preferable. (I'm also one of those cranks who thinks that Tasini should have gone the other way on policy grounds.) The consequences of the termination of transfers regime radiate all throughout the Act. Why, for example, is work-made-for-hire litigation such a high-stakes hot-button issue? After all, a work-made-for-hire agreement and a post-creation transfer of ownership ought to be perfect functional substitutes. But the former isn't subject to the termination of transfers rule, and the latter is. Complexity breeds complexity.

I accept that I'm largely alone in my opinions here. And I accept that termination of transfers is broadly popular because of its pro-author purpose. But that purpose, I think, is largely a matter of symbolic politics, whereas the actual result is a thoroughgoing botch.

Posted by: James Grimmelmann | Feb 15, 2012 11:27:27 PM

James -- it *is* a thoroughgoing botch, but I would conjecture that it is that way largely because forces antagonistic to author's rights want it to be that way.

You're right that it is a double mess when compiled with work-for-hire, to which I would respond that the problem there is work-for-hire. Indeed, work for hire is high on my own list of the worst provisions in U.S. copyright law -- it exemplifies the U.S. bias against authorial rights in favor of publisher interests.

But I would be careful about telling authors (or anyone, for that matter) that they don't know how best to protect their own interests or that the ToT provisions are merely sentimental. They do have teeth, which is why they lead to such vigorous fights. If your claim is that a revised version of ToT could better protect those interests, I would agree 100%, but really, if the choice for authors is a choice between 1 arrow in the quiver and none, I think authors would prefer to have 1 arrow. When you start down the "you are, ab initio, actually better off without ToT" path and your reasoning is based on assumptions that the absence of ToTs will promote more efficient contracting that makes all boats rise, you start sounding (oddly) like Posner and Easterbrook.

Yes, we are talking about a small subset of creators here who make incredibly rare megahits that have enduring value. They are, as you say, capriciously showered author beneficiaries. But if that caprice doesn't land on the author, then the publisher gets to enjoy an equally capricious windfall for the full extent of the hypertrophic copyright term. It seems clear to me that, barring some strong policy argument, the windfall from a megahit should be a windfall that should come back to the author. (Or, at the very least, in the shadow of a fight over who wins, there should be a settlement that divides the windfall.)

In Tasini, I may join you in your crankery. There was a good policy argument for granting the windfall to the publisher/distributor. Tasini involved a potential tragedy of the low-value work anticommons. In the case of orphan works, there's a similar problem. But in the megahit cases, I don't have that concern.

Anyway, sorry to go on about this -- as you know, I'm a huge fan of your prolific scholarship across the board. I just have radically different instincts about ToT. And similar to you, I may also be largely alone in my strong bias in favor of them.

Posted by: Greg Lastowka | Feb 16, 2012 9:39:53 AM

Greg, you're right that I'm channeling Easterbrook here. (It's harder to channel Posner because his economic analyses are always so disquietingly ad hoc, as though he might well reach a different result if he redid the calculations from scratch.) I find it's a useful thought exercise: if I want to argue with the my imagined Easterbrook's bottom line, it forces me to articulate a good reason why his assumptions are wrong. In this case, I tried, and I couldn't find a rationale that actually convinced me.

I think you're more in the mainstream on this one than I am. I canvassed the scholarship on termination rights before writing this post, and it's striking how much of it takes the underlying policy rationales for granted. That stands in sharp contrast to copyright scholarship on almost any other question, which typically subjects any and all policy claims about copyright to withering criticism from every conceivable direction. So this post is partly an attempt to provide the missing critique, and, maybe, just a little bit of a troll to ask why termination rights get a free pass when almost nothing else in the Copyright Act does.

Posted by: James Grimmelmann | Feb 16, 2012 9:58:34 AM

If termination rights worked well, or if they were reformed to work well, they might solve a bunch of current problems -- the one that strikes me as most useful is that termination could encourage/allow authors to seek to exploit their work in new media and new markets when the owners of the copyrights in their work have little incentive to do so. If termination were truly easy to accomplish and transparent, it might significantly improve the orphan works situation. My bottom line is that I agree that the current system is more illusory than useful, but I think that replacing it with a better termination system would have a bunch of public policy benefits.

Posted by: Jessica Litman | Feb 16, 2012 10:41:55 AM

Part of the reason it may get a free pass is that it seems like an internecine fight to those who are primarily concerned about the public domain. If you want the public to have access to these works, or be able to make fair use of them, who really cares who controls the rights? (Though Tasini is a good example of why that actually might matter and why publishers might be the favored controller, since voiding contracts is a roadbump in the process of public distribution -- I presume you might see things that way and that case can be made.)

The other reasons might be:

* a combination of the sympathy we have for the Romantic starving artist in a garret who is the genius behind a megahit but still ends up starving in the garret (and whatever one says about the cult of Romantic authorship, those folks do still exist and, imho, some sympathy is deserved)

* a respectful nod to droit morale (it deserve at least a nod!)

* some of the same Lockean (reap where you sow) instinct that sits behind claims of unjust enrichment, misappropriation, trademark dilution, etc.

* the unequal bargaining story is real. Countless artists get the raw end of the contractual deal, just like countless consumers get the raw end of the TOS/EULA.

Personally, the last one speaks to me most, but I think the reply to Easterbrook and the law & econ folks is that for both parties, the prospect of a megahit is discounted to zero at the time of contracting. This is essentially the economist brief in Eldred -- nobody cares what is going to happen with a work past the reasonable exploitation window. It doesn't factor into any calculations. So a megahit is a force majeure. In that situation, I say force the publisher to strike a new deal with the author.

If you want to play Easterbook w/r/t the windfall, you could say: "Well, the work has been produced now, so we have the social value already and the publisher is the party better posed to exploit it. Allowing a legal fight just increases transaction costs."

To which I would say, but copyright is a statute designed to reward authors, not a statute designed to make access and distribution more efficient. Indeed, it is a law the has the effect of making access and distribution incredibly inefficient.

OK -- off to teach Property, where I will actually be introducing and critiquing the strange law & economics of defeasible fees.

Posted by: Greg Lastowka | Feb 16, 2012 10:43:51 AM

I have two responses to this line of reasoning:

(1) Footnote 6 of Tasini, particularly the closing statement. Where I think Justice Ginsburg goes slightly off the rails is that she does not distinguish among author rights under the 1909 Act, author rights under the 1976 Act, and non-US work rights. It's perfectly understandable that she didn't do so in Tasini, as those issues were not before the Court... but it's frustrating to see apparently general statements of policy made with such glaringly obvious exceptions.

(2) With all due respect to the Easterbrookian economic analysis, it's invalid here for two reasons.

* One cannot discount to any value, let alone to zero, unforeseeable fundamental changes in the nature of the marketplace. Discounting of future value occurs (mathematically or otherwise) only within the confines of the present marketplace. It does not matter whether this is a technological change (the rise of e-books and audiobooks just echoes the early 20th century rise of motion pictures and the mid 20th century rise of television... but those changes were still unpredictable) or a legal change (the 1976 Act, accession to the Berne Convention, etc.), or even mere evolution of the marketplace (Amazon, chain bookstores). What matters is that when the marketplace itself changes unpredictably, prechange discounts to present value are the equivalent of divide-by-zero errors.

* More crucially -- and I see this as the fundamental problem with this entire inquiry -- there is no uniform publishing industry to evaluate, legally or economically. Thus, making uniform statements about how all copyrighted works should be valued/treated at time t 35 years is essentially proposing a universal kludge for the three-body problem in Newtonian physics: You can approximate, much of the time, but it's far too easy to create initial conditions that reflect the real world that blow up the kludge.

In short, the Easterbrookian approach essentially assumes the ether... and there's plenty of evidence that there is no ether in publishing, in creation of individual works that potentially advance the progress of the useful arts, or indeed anything else related to this morass. This isn't just about "megahits", either; it's also about publisher neglect (specific examples: William Gaddis and Anthony Burgess, to name two y'all might have heard of whose contractual circumstances would not be credible for a law school exam hypothetical).

Posted by: C.E. Petit | Feb 16, 2012 12:38:10 PM

Agreed!

Posted by: Greg Lastowka | Feb 16, 2012 1:11:47 PM

One point that needs to be explicit: The purpose of §304 terminations (applying to pre-1978 transfers) is to give original authors the benefit of ex-post copyright term extensions, rather than giving the benefit of the increased terms to the assignees.

That being the case, I just can't except that §304 terminations are any worse than extensions of the terms of existing copyrights. Term extensions are so economically silly, it seems to me to be absurd to try to seriously consider the economic wisdom of a provision governing who can benefit from an extension.

Can recapture rights affect author incentives? That question is nonsensical if you believe, as I think most do, that extended terms won't affect author incentives in the first place.

Now, maybe some of this argument can be somewhat worthwhile when it comes to §203 terminations (which apply to post-1977 transfers). But even there, we are talking about termination windows that open up at the 35th year, which is far enough from creation that the incentive argument begins to get really weak. In fact, I would tend to think that the main reason the big media industry would agree to §203 terminations in negotiations over the statute is that they were far out enough in time that they were not economically crucial to their present-day business concerns. And if that's the case, it suggests that an economic argument over §203 terminations is correspondingly fanciful.

BTW, this is a great discussion thread. And I, like others, find myself surprised to be disagreeing so vehemently with James when I agree with nearly everything I've read by him.

Posted by: Eric E. Johnson | Feb 17, 2012 7:25:44 AM

First, termination is a good thing. The reality is that many authors are in poor bargaining positions when it comes to the initial license of their work. Or, more exactly, many authors of valuable works are in poor bargaining positions when it comes to their initial licenses. Reading model recording contracts or book contracts can give you a good idea of why.

Second, purchasers of a licenses are not in unreasonable positions when it comes to termination rights as long as those termination rights are clearly defined. The purchaser of the license in these situations should calculate the effect of this termination right into the bargain. (And they do—or people are beginning to.)

Third, just because the courts have mangled an area of law does not mean the underlying premise and function is bad. There is as more justification for allowing termination rights than in the term extensions that have occurred.

Rather, if the courts have mangled the law, it is important for lawyers, law professors, and eventually (but don't hold your breath) to chart a more clear, closer-to-bright-line path for the law.

Ultimately, clear rules that allow parties in a license to understand the long-term effects should be sought. And this can be done. After all, copyright isn't anything more than a legislated monopoly—it is constructive property that only possesses meaning in the law.

Posted by: John W. Nelson | Feb 17, 2012 2:58:44 PM

It seems to me that very few megahits occur without an expensive PR media blitz complete with pay to play, payola, paid advertising. I thought the notion of calling the phenomenon of a hit a "force majeur" was clever and true. But, God, it seems, prefers to act only after the publishers paid for the promotion. Remember, most works never 'hit' even with a properly funded media parade.

That said, I am interested in constructing revenue streams for authors to earn a nice living without a megahit. As for the termination of transfer, I look forward to reading more YMCA-like decisions.

Posted by: Cort | May 10, 2012 9:40:07 AM

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