Is 17 USC 205(e) a Trap for the Unwary? Advice to Puiblishers and Administrators

Not long ago I was involved in what should have been a routine lawsuit over a collection of past-due royalties.  At some point during the litigation the other side brought up 17 USC 205(e) as a possible defense.

            For the unaware this little-discussed section of the Copyright Act states:

A non-exclusive license, whether recorded or not, prevails over a conflicting transfer of copyright ownership if the license is evidenced by a written instrument signed by the owner of the rights licensed…and if

(1)        the license was taken before execution of the transfer; or

(2)        the license was taken in good faith before the recordation of the transfer and without notice of it.

            Section (1) is a no-brainer but Section (2) is a potential landmine as it gives a possible defense of innocent infringement in a case where a licensee claims to have acquired rights without notice of the prior assignment (for example from an artist or a songwriter).

            I researched the statute pretty carefully and could find no reported cases dealing with it specifically although there are plenty of cases that explore similar territory and those cases generally come down on the side of the copyright owner (see for example Douglas v. Hustler Magazine, Inc., 769 F.2d 1128 and Symnatec Corp v. CD Micro, LLC, 286 F. Supp. 2d 1265) which states plainly “failure to record an assignment of copyright is not available as a defense to infringement”.

            Nonetheless despite the comfort these cases offer this odd statute does seem to present some kind of defense in those rare cases where a licensee could actually prove that it  had no knowledge of a prior transfer of copyright ownership.  The lesson here for all publishers and administrators should be to always record copyright assignments and related documents as soon as possible after execution.

The James Taylor lawsuit

Digital Music News recently reported on the lawsuit filed by James Taylor against Warner Bros Records, arising out of a 2007 audit.  When it comes to a dispute between artists and labels, I am not shocked by much.  But being a child of the 70’s, a period when Warner Bros represented the gold standard of artist-friendly record companies, I am still a little saddened to see that an artist like James Taylor could be treated this way.

                The audit in question covered the period between 2004 and 2007 and included sales of such records as “Sweet Baby James,” “Mud Slide Slim and the Blue Horizon,” “Walking Man” and several greatest hits compilations.  The amount of underpayment alleged by Taylor is $1,692,726.  The  number of damage claims in the lawsuit total 52 in all and they comprise such elements as:

                1.             Over calculating the amount of “non‑royalty bearing units”

                2.             Underreported sales

                3.             Excess free goods

                4.             Improperly applying a mid‑line reduction

                5.             Violating the contractual restrictions on compilations

                6.             Charging manufacturing costs as “recording costs”

                7.             The current hot button issue of treating downloads as sales rather than licenses

                8.             Not paying for record club sales

                9.             Not paying for master use licenses

                10.          Missed interest payments

                11.          Misapplying royalty rates

                What surprises me further is that though these claims total over $1,000,000.00 they are in fact comprised of some relatively small dollar amounts (e.g. misallocated returns: $800.00 charging manufacturing costs as recording costs $3,700.00) as well as the big ticket digital claims.

                All in all this is a reminder that underneath the mystique of classic records, this is a still a penny business and one that is becoming more difficult to navigate  as the pennies get smaller.  .  I hope this is not a sign of things to come.

The Daughtry Lawsuit

It’s a cliché because it's true. Behind every successful album or artist there is a lawsuit. The latest lucky winner is former American Idol winner Chris Daughtry who is being sued by three former band mates (from his pre- Idol days) for "constructive fraud," "breach of fiduciary duty," "unfair trade practices," and other deceptive and wrongful conduct.

I have not had a chance to review the complaint but other than the allegation of breach of fiduciary duty, the other claims seem a little strong for a case of this nature They appear to stem from the fact that the plaintiffs are claiming to have co-written two songs with Daughtry who allegedly then combined the songs on his first solo album and gave himself sole authorship credit. There is apparently also a claim to income from other songs including the hit "Home" based on an alleged agreement to share all revenues equally. The reports I read did not indicate if this agreement was oral or written, but to my mind that’s going to be a key factor.

As in all these cases, there is probably some truth to both sides and both parties are going to have some interesting evidentiary problems. I don't know the situation with Chris Daughtry and his former band mates but I do know that most of this could have been avoided by having a written partnership agreement in place. I try to make this point to new bands whenever I can and I usually get ignored – mainly because no one wants to spend the money to prepare a partnership agreement or other governing document – but I can tell you from experience that such an agreement, which defines band members splits and sources of income (i.e. is publishing included or not?) will always go a long way in protecting artists from lawsuits like this, or conversely can protect your right to income if your former partner gets rich and suddenly forgets what he or she once signed.

Incorporating Touring Activities

I have just been reading articles about the horrible tragedy at the Indiana State Fair, where five people died when an outdoor stage collapsed. One article pointed out that this was at least the third such incident this summer.

I am often asked why I advise artists to incorporate their touring businesses. This is the main reason: liability. Undoubtedly, there will be lawsuits arising from the Indiana State Fair and undoubtedly the artists involved will likely be sued – even if they had absolutely nothing to do with the accident. Even if the artists ultimately prevail in court they still have to go through the necessity of dealing with the potential liability. The purpose of incorporating is to create a shield between this potential liability and your personal assets.

This is a real threat. Several years ago one of my clients managed a hugely successful country artist whose touring corporation was routinely sued for every person who slipped and fell or got hit with a random bottle of Wild Turkey at their concerts. On another occasion I represented a band that chose to tour without any type of liability protection. When a belligerent drunk got himself beaten up at an outdoor festival that they appeared at, they had to endure more than a year of costly litigation before the case was dismissed. They had to live with the uncertainty that their personal assets (houses, etc.) were at risk.

The liability protection afforded by proper corporate protection is a good first step in managing the risk inherent in touring and performing. The cost is negligible compared to the benefits and peace of mind such protection can provide

Behind Every Succesful Album There is a Lawsuit

A model named Kirsten Kennis has sued the band Vampire Weekend, its label XL Recordings and others for $2 million claiming that she did not authorize the use of her photograph on the cover of the band’s successful album “Contra”. Apparently Ms. Kennis alleges that her signature on the photographer’s release form was forged. The photo was apparently taken in 1983. Making sure that one has secured a release from any person appearing on album artwork is a standard practice and it seems strange that that practice might not have been followed in this case. Indeed, a spokesperson for the label was quoted as saying “As is standard practice, Vampire Weekend and XL Recordings licensed the rights to use the photo on the cover of Contra pursuant to a license agreement that contains representations and warranties authorizing this use of the photo.” (that actually sounds more like a lawyer than a spokesperson). This case could conceivably have implications for photographers, art directors etc. The case will probably settle but it would be interesting to know what the actual value of the model’s image is worth.