U.S. Copyright Act Termination Provisions May Have Significant Impact on Transactions Involving Intellectual Property

October 8, 2009


Recent press reports regarding copyright termination notices filed by the heirs of famed comic book illustrator Jack Kirby as well as a recent decision by a federal District Court in a long-running case regarding termination notices filed by the heirs of “Superman” co-creator Jerome Siegel both serve as timely reminders of the substantial complexity of copyright and other intellectual property issues raised by the transfer of valuable intellectual property assets and the critical importance of a thorough analysis and understanding of the potential pitfalls involved in transactions concerning such assets.

On September 20, 2009, only three weeks after the Walt Disney Company announced it was acquiring Marvel Entertainment, the New York Times reported that representatives of the heirs of Jack Kirby — the creator or co-creator with Stan Lee of many of Marvel Comic’s most iconic characters, including the Fantastic Four, the Hulk, Iron Man and the X-Men — had sent forty-five notices of copyright termination to Marvel and to Disney, as well as to other companies that have exploited rights with respect to these and other characters originally created by Mr. Kirby. If the notices are valid, Mr. Kirby’s heirs could be entitled as a matter of statute to begin to recapture certain rights to his creations as early as 2014.

In a decision handed down on August 12, 2009 (Siegel v. Warner Bros. Entm't, Inc., C.D. Cal. 2009) after years of litigation and interim decisions, the District Court in the Central District of California, in what it described as the “final installment regarding the publication history of and the rights to the iconic comic book superhero Superman,” conclusively determined and affirmed its earlier holdings that Jerome Siegel’s heirs were entitled to recapture, and become co-owners of, some of the original materials in which the character “Superman” first appeared, as a result of Mr. Siegel’s heirs effectively exercising termination rights afforded to them under the U.S. Copyright Act of 1976 (“Copyright Act”).

These two recent examples, along with other instances of well-known literary works and characters becoming entangled in litigation arising out of attempts to exercise similar statutory termination rights, demonstrate the importance of a detailed analysis of the “chain of title” documents that evidence ownership in a book, comic book, play, screenplay or other form of literary or other property, and the motion pictures, television series, video games, theme park attractions, merchandise and other creations that may be based thereon, in addition to all applicable statutes, regulations and case law, whether in the context of a potential sale or acquisition of an entire company or with respect the exploitation of a single but valuable property, such as “Superman.”

The Copyright Act affords authors and their heirs two separate rights to terminate grants of a transfer or license of copyright, depending on when the work at issue became subject to copyright. Section 203 applies with respect to transfers executed by the author on or after the effective date of the Copyright Act, i.e., January 1, 1978. In the case of any work other than a “work made for hire,” the exclusive or nonexclusive grant of a transfer or license of copyright or of any right under a copyright, executed by the author on or after such date (other than by will), can be terminated by the author or his heirs during a five-year window that commences 35 years after execution of the grant, on at least two (but no more than ten) years advance written notice to the grantee or his successor. Once effective, the termination does not affect the grantee’s right to exploit derivative works that were created prior to the termination date, but it does terminate the right to create any future derivative works based on the same underlying property. The termination right was created by Congress for public policy reasons, to allow authors who may have entered into unremunerative arrangements when initially licensing a work a “second bite at the apple” if the work proved more successful than originally envisioned. As the House Report on this section notes, a “provision of this sort is needed because of the unequal bargaining position of authors, resulting in part from the impossibility of determining a work’s value until it has been exploited.”

Section 304 affords similar rights with respect to works that were already subject to copyright as of the effective date of the Copyright Act. For such works, a grant of a transfer or license of the renewal copyright in a work can be terminated on the later of fifty-six years after the date copyright was originally secured (i.e., what would have been the end of the renewal term of copyright for the work under the 1909 Copyright Act, before the term of copyright was extended) or January 1, 1978. Additionally, upon effectiveness of the Sonny Bono Copyright Term Extension Act in 1998, which extended the term of copyright for pre-1978 works by twenty years, an additional termination window was added if the foregoing termination right had expired, which could be exercised beginning at the end of seventy-five years from the date copyright was secured.

Although these statutory requirements seem reasonably clear on their face, it is often the case that in actual application they can become quite complicated. As the judge in the Siegel case noted, “The 1976 Copyright Act contains many intricate formalities that an author (or his or her heirs) must navigate to successfully terminate” a grant. As one example, both Sections 203 and 304 provide that a grant can be terminated when the statutory right ripens “notwithstanding any agreement to the contrary,” in order to prevent an unsuspecting author, or one with little leverage, from waiving the right at the time of the grant or before its value can accurately be measured. But what if the author or his heirs have subsequently entered into an agreement with the grantee after the work has been exploited, in a manner that takes into account the demonstrated value of the work? Should those be considered “agreements to the contrary” that have no bearing on the validity of the termination right? Or should they be upheld as waiving the termination right, on the basis that they have effectively fulfilled the public policy of providing the author or his heirs the chance to re-negotiate from a position of knowledge and possibly strength? Both the 2nd Circuit and 9th Circuit have considered this issue in several different cases over the last few years, but the conclusions they have reached may not be entirely consistent, even taking into account the factual differences in each case (e.g., Marvel v. Simon (2nd Cir. 2002) regarding another famous Marvel character, “Captain America,” Classic Media, Inc. v. Mewborn (9th Cir. 2008), analyzing ownership of “Lassie,” Milne v. Slesinger (9th Cir. 2005) regarding the “Winnie the Pooh” series of books, and Penguin Group (USA) Inc. v. Steinbeck (2nd Cir. 2008), where rights to “The Grapes of Wrath,” “Of Mice and Men” and other famous works by John Steinbeck were at issue).

O’Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.