Exclusive Licenses and Your Business

Have you ever granted exclusive rights to your work? If so, I sure hope you got paid enough for it because you may not be able to sue for infringement of that work. Maybe. It depends. Language matters and this is (likely, surprisingly) technical stuff.

A new case doesn’t help; actually, it kind of muddies the water and I’m sure it will be debated by lawyers in filings and cases to come. In Fathers & Daughters Nevada, LLC v. Lingfu Zhang, Case No. 3:16-cv-1443-SI (D. Or January 17, 2018) (“Zhang“) the court split a fine hair about standing and exclusive licensing and it has some copyright owners and licensors[1] worried.

Get popcorn, this is going to take some explaining.

Courts require something called standing in order to sue (for any suit). Standing roughly means that the plaintiff is the person who was harmed/affected by the defendant’s illegal actions. If you get punched by a jerk in a bar, you have standing to sue the jerk for assault and battery because you were put in fear and physically harmed. Your friend who, from across the room, saw the jerk hit you? She does not have standing to sue the jerk for assault and battery for that punch, because she wasn’t actually harmed by it[2]. Got it? Good.

Now, a bit about copyright… it is often described as a bundle of sticks where each stick represents an exclusive right. That bundle actually consists of six big sticks: one for each of the rights listed in the statute[3]: to reproduce the work, to prepare derivative works based upon the work, to distribute copies of the work, to perform the work publicly, to display the work publicly, and to record and perform the work by means of an audio transmission. Each of those big sticks is made up of its own sub-sticks, and they can be very specific sub-sticks. For example, the right to reproduce can be made up of the sub-sticks “the right to reproduce the work in print,” or “the right to reproduce the work in the USA,” or “the right to reproduce the work for 6 months,” or those sub-sticks can be combined into the stick “the right to reproduce the work in print in the USA for 6 months.”

It’s an imperfect metaphor, but it’s about as good as we can get and it’ll be helpful here.

Anyway, an original owner of a copyright owns all these sticks[4] and can share any of them by non-exclusive licensing. After granting a non-exclusive license, the copyright owner still holds the stick. The licensee doesn’t get the stick but the license means s/he/it can’t be hit with that stick now, so to speak[5].

However, (and here’s the thing I bet you didn’t know) when an owner grants an exclusive license for any of these rights, these (sub-)sticks, s/he is handing that stick over to the licensee–and (often) letting go of it. The statutes and case law say that an exclusive license is tantamount to ownership of the right conveyed in the license[6]. For example, if you grant the exclusive reproduction right in print in the USA for 6 months, you no longer own any right to reproduce the work in print in the USA for that 6 months.

Now to bring the pieces together… to bring a suit for copyright infringement, to have standing to sue, a plaintiff has to be the person who owned the rights actually infringed at the time of the infringement. In other words, the plaintiff had to have that particular stick when the infringement happened. Let’s look at some examples to make that clearer.

Example 1
Betty makes an illustration and grants a non-exclusive license to Forbes for display use on its website for 6 months only. Sometime during those 6 months, BloggerBob copies the article and the illustration and displays them on his own website. Forbes cannot sue for infringement of the illustration[7] because it only has a non-exclusive license and Betty still owns the exclusive right. Betty still has the stick for website display during that time and so she has standing and can sue BloggerBob for the infringement.

Example 2
Betty makes an illustration and grants an exclusive license to Forbes for display use on its website for 6 months only. Sometime during those 6 months, BloggerBob copies the article and the illustration and displays them on his own website. Forbes can sue for infringement of the illustration because it has an exclusive license for website display for those 6 months! Here, Betty does not own the exclusive right any more–she has handed that stick to Forbes for the 6 months–and so Betty cannot sue BloggerBob for that infringement.

Example 2a
Now, just because Betty has handed a stick to Forbes doesn’t mean she didn’t keep all the other sticks. During this same 6 month Forbes license window, Tony Tshirt illicitly prints Betty’s illustration on clothing and sells the items. Betty (not Forbes) has standing to sue Tony for that infringement because he infringed on a different exclusive right that she still owns.

 

Okay, now here is where it gets uncomfortable and confusing. In a previous case[8] in the 9th Circuit (Minden, as well as other cases and in other places), the court said that a copyright owner can grant an exclusive license to a licensee and (wait for it) still keep that same stick–essentially saying both the licensor and the licensee have the stick, while excluding all others from having it. The terms of the exclusive licenses in Minden and these other cases included the owner retaining some the right explicitly or the licensor had something called “beneficial ownership” of the right (for example, was paid royalties based on the exploitation of the right granted[9]).

However, in the Zhang case I mentioned at the start of this post, the court said the copyright owner, when it granted an exclusive license for the right later infringed, gave that stick to someone else entirely and so didn’t have standing to sue. That is, they didn’t keep any of the stick for themselves (nor get any beneficial ownership), and since it was that stick’s rights that were infringed, the copyright owner could not sue. Ouch.

Yeah, I know, it sounds a lot like the same as Minden, but with a different outcome, but it isn’t, quite. The difference is very much in the wording of the licenses– technical stuff. Honestly, these issues are sometimes difficult even for attorneys to understand, and we are highly trained to understand them! Don’t feel bad if you don’t totally grok this stuff.

So why am I bothering to tell you about this? What does this mean for you as someone who licenses your work to others? Basically, you need to be very careful of your license language and, if you are going to grant an exclusive license especially, make sure you do it in a way that works for you AND that you get paid enough for it.

Too many artists just throw around words like “exclusive” without understanding that they could seriously impact rights and the artist’s livelihood. Don’t be one of them. Also, don’t sign contracts unless you fully understand all the terms and their effects.

Best practices would be to hire an attorney to draft your licenses and to read contracts offered to you by your clients. Yes, this will cost you some money but (a) you can write it off and (b) it may save you much more in the long run. Ignorance is no excuse, especially in court. Worse yet, when you throw around legal-sounding words without understanding their effects, you are still bound by their effects.

Remember: you are an artist who is running an arts-based business–you need to run it like the real business it is.

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[1] A licensor is someone who grants licenses to another party (that party is the licensee).

[2] I know someone reading this is going to say she could sue for something else, and maybe she could, but I’m not going there. Just roll with the example being limited to civil assault and battery.

[3] 17 USC §106

[4] A later owner, someone to whom the copyright was assigned (transferred) may very well own all of these rights, but it’s possible s/he/it may not. To use the favorite phrase of attorneys everywhere: it depends. It can get very complicated and I don’t want to go into all that here.

[5] I mean, a licensor can’t sue the licensee for a use covered by the license granted to the licensee.

[6] 17 U.S.C. § 501(b); Minden Pictures, Inc. v. John Wiley & Sons, Inc., 795 F. 3d 997 (9th Cir. 2015); Silvers v. Sony Pictures Entm’t, Inc., 402 F.3d 881, 890 (9th Cir. 2005); etc.

[7] Forbes’ rights in the article may be an entirely different story–I’m only discussing the illustration here.

[8] Minden, 795 F. 3d.

[9] Broad. Music, Inc. v. Hirsch, 104 F.3d 1163, 1166 (9th Cir. 1997).