The Pitfalls Concerning Copyrights that Every Estate Planning Professional Needs to Know When Representing Authors and Artists

September 2014Art & Advocacy, Volume 18

A prerequisite for the estate planning professional is a working knowledge of (if not an expertise in) the Internal Revenue Code of 1986, as amended. For those professionals tasked with estate planning for authors and artists, however, a working knowledge of a different federal statute – the 1976 Copyright Act, as amended, which became effective on January 1, 1978 (the "1976 Act") – is also of great importance. If an estate planning professional does not have a working knowledge of the 1976 Act, the consequences to his or her client may be detrimental and could wreak havoc with the intended disposition of the copyrights associated with the client's creative works.

The 1976 Act creates three potential pitfalls that an estate planning professional must consider when disposing of a client's creative works and the copyrights associated therewith, both during the client's lifetime and upon his or her death.

A Gift or Bequest of a Creative Work Does Not Transfer the Copyright

First, in order to transfer the creative work and the copyright during the client's lifetime or upon death, the client must specifically state that the copyright is being transferred with the creative work. A gift or bequest of a creative work, such as a painting, without a corresponding gift or bequest of the copyright will only pass the creative work to the donee or beneficiary. For example, if the client bequeaths a painting to a friend and bequeaths the residue of his or her estate to his children, the friend will receive the painting and the copyright will pass as part of the residue of the estate to the client's children. If the client intends to bequeath the copyright with the painting, the will must specifically bequeath the copyright to the friend.

Copyright Termination Rights Devolve Under Forced Heirship

Second, the estate planning professional must understand the uncertainty associated with transferring the client's copyrights during the client's lifetime or upon the client's death, other than by the client's will. The 1976 Act provides creators with the opportunity to exploit their "original works of authorship" by prohibiting others from profiting from the work for a limited period of time without consent.1 During that limited period of time, the creator can sell, lease, license, and gift the right to reproduce, distribute, perform, display, and prepare derivative works as one undivided "bundle of rights," or more commonly as individual intangible rights. The ability to separate rights from the bundle and transfer them independently enables the creator to control the work's exposure and profit as he or she may desire.

But what if, as may be the case with new talent, the highest bidders are not interested when the creator first seeks to benefit from his or her work? The 1909 Copyright Act, as amended (the "1909" Act), sought to provide authors and artists with a second opportunity to profit from an already exploited copyright through a right of renewal for that very purpose. In 1943, however, the United States Supreme Court upheld the validity of assignments of renewal rights prior to their vesting under the 1909 Act,2 thereby depriving creators of a second opportunity where they had assigned their renewal rights under the terms of an initial transfer. In response to the Court's holding, the 1976 Act dispensed with the right of renewal, and for copyrights created after January 1, 1978, created a statutory right of termination.

As explained in the legislative history of the 1976 Act, Congress believed that the renewal right should be substituted with a different provision to protect creators who entered into "unremunerative transfers."3 Citing the unequal bargaining positions of creators that result from their inability to predict the value of a copyrighted work before it has been exploited, Congress proposed Section 203 of the 1976 Act, which provides for a termination right over any transfer of a copyright as defined in Section 101 of the Act or any nonexclusive license (hereinafter collectively referred to as a "transfer"), other than a transfer by the creator's will.4 Section 203, as it appears in the 1976 Act, provides that in the case of "any work other than a work made for hire, the exclusive or nonexclusive transfer or license of a copyright or of any right under a copyright, executed by the author on or after January 1, 1978, other than by will, is subject to termination." The remainder of Section 203 dictates the specific requirements for termination. Unlike the automatic renewal right, the 1976 Act's termination right requires affirmative action on the part of the creator and cannot be waived or contracted away.

The year 2013 marked the first opportunity for authors and artists to recapture rights they transferred or licensed away on or after January 1, 1978. Assuming that the creator of the work is still alive, any exclusive or nonexclusive transfer may be terminated during the five-year period beginning 35 years from the date of the transfer.5 Notice of the termination right must be provided no more than 10 years, but not less than two years, prior to the effective date of the termination.

By way of illustration, assume your client sold a copyright to a song to a record label in September of 1978 for a small royalty. Further assume that your client subsequently found fame as a world-renowned performer. Over time, the record label realized substantial profits without any similar compensation being paid to your client. Under the terms of Section 203(a)(3)-(4), during the five-year period from September 2013 to September 2018, your client has the right to terminate the sale by serving written notice on the record label anywhere from 10 to two years before the effective date of the termination and recording a copy of the notice with the United States Copyright Office.6 By following the procedures of Section 203(a)(3)-(4), the copyright will then revert back to your client under Section 203(b) upon the effective date of the termination. Under Section 203(a)(2), if a creator dies before the commencement of the termination period, the termination right vests in a surviving spouse and/or children and grandchildren.7 This termination right is an automatic right of inheritance and cannot be altered by the client's will, testamentary substitute, or other agreement. In these circumstances, the creator's spouse and/or children and grandchildren have the ability to terminate the creator's post-1978 transfers, with the caveat that any bequest under the deceased creator's will cannot be terminated. In situations where more than one person owns the termination right, only 50 percent of those persons need to agree in order to terminate a creator's lifetime transfer by complying with the same procedures outlined in Section 203(a)(3)-(4). Notwithstanding action by as few as 50 percent of the owners of the right, the terminated interest vests in all of the holders of the termination right upon the effective date of the termination.

In light of the federal copyright law's preference for promoting the wishes of the author or artist, from an estate planning perspective it is particularly frustrating that the 1976 Act creates an automatic right of inheritance in the creator's surviving spouse and/or children and grandchildren, who may not even be the intended beneficiaries of the creator's estate. This frustration becomes more pronounced once one realizes that the termination right appears to apply to any transfer made during the creator's lifetime, including transfers to management companies, lifetime gifts, and charitable donations.8

Consider the possibility that the creator's surviving spouse and/or children and grandchildren (the holders of the termination right) are not the named beneficiaries of the creator's assets under his or her will. Assume that your client is survived only by children, but executes a will leaving all assets of the estate to a significant other, thereby disinheriting the children under the terms of the will. If your client dies before the termination right vests under the 1976 Act, the surviving children will have the opportunity to terminate the sale of the copyright, take possession of it, and exploit it for their personal gain. The right of termination does not (and cannot) pass under the client's will to the significant other. In this case, the client's children have the opportunity to frustrate your client's testamentary plan and circumvent their disinheritance.

Transfers of Copyrights Other Than Those Made by Will May Be Revoked

The third consideration for estate planning professionals is that Section 203 not only overlooks the fact that a creator's surviving spouse and/or children and grandchildren might be different persons than the beneficiaries of a will, but its sole carve out for transfers made pursuant to a will presents an opportunity for a creator's surviving spouse and/or children and grandchildren to undo lifetime estate planning transfers if they do not inure to their benefit. Particularly in states where the probate process is lengthy and complex (e.g., New York, California, and Florida), estate planners often utilize testamentary substitutes, such as revocable trusts, in lieu of traditional wills that would trigger probate. For example, the surviving spouse and/or children and grandchildren who are not the beneficiaries of the creator's revocable trust can frustrate the creator's testamentary intent by terminating an inter vivos transfer of a copyright after the creator's death. Plainly, this interferes not only with the creator's wishes regarding to whom the copyright devolves, but also with the desire to avoid probate. This gap in the statute, which allows for the unraveling of an estate plan merely because the creator elected to utilize a revocable trust over a will, highlights the need for revisions to Section 203 of the 1976 Act to except transfers to testamentary substitutes from the right of termination by a creator's surviving spouse, children, and grandchildren. Indeed, if a creator chooses to transfer copyrights to a limited liability company for management purposes during the creator's lifetime, that too can be undone by a surviving spouse and/or children and grandchildren if they do not receive the limited liability company interests upon the creator's death. As with a transfer to a trust, Section 203 grants the family the right to terminate the copyrights owned by the limited liability company during the termination period.

As you can see, estate planning professionals must have a working knowledge of the 1976 Act in order to inform their clients of these and other potential pitfalls that are unique to authors and artists and then advise them of the best means of disposing of their copyrights.

1 The 1976 Act provides that works created on or after January 1, 1978, which are not works made for hire, are extended copyright protection for a period of the author's life plus 70 years. Works created prior to January 1, 1978, are outside the scope of this article.

2 See Fred Fisher Music Co. v. W. Witmark & Sons, 318 U.S. 643 (1943).

3 See H.R. Rep. 1476, 94th Cong., 2d Sess. (1976).

4 Id. at pages 124-125.

5 If the grant covers the right of publication of the work, the period begins at the end of 35 years from the date of publication of the work under the grant or at the end of 40 years from the date of execution of the grant, whichever term ends earlier. See 17 U.S.C. §203(a)(3).

6 In order to effectuate a termination in September 2013, notice would have been required to have been served in September 2011.

7 The creator's surviving spouse will own 100 percent of the termination right unless the creator has descendants then living. In such case, the spouse will own 50 percent of the termination right and the creator's descendants, per stirpes, will own the other 50 percent. If the creator dies without a spouse or descendants, the termination right may be exercised by the executor, administrator, personal representative, or trustee of the creator's estate.

8 We anticipate that the blanket application of the termination right to common lifetime estate planning transfers will be challenged by litigation as more terminations are effectuated under the 1976 Act.