Superman’s Kryptonite: The Termination Right Loophole

Superman. He’s faster than a speeding bullet, more powerful than a locomotive, and able to leap tall buildings in a single bound. But, recently, he was bested by DC Comics with something more potent than kryptonite – the termination right loophole. In a series of decisions, the Ninth Circuit has created a loophole that allows an author’s successor (when different from the author’s statutory heirs) to deprive the author’s statutory heirs of the inalienable termination rights conferred by the Copyright Act. And, unfortunately, when the Supreme Court was presented an opportunity to correct this manufactured loophole in Peary v. DC Comics, the Court declined to do so by denying certiorari.

On October 6, 2014, the Supreme Court announced it would not be granting review in Peary v. DC Comics. The case, on appeal from the Ninth Circuit, concerned the copyright to DC Comics’ most iconic character, Superman. The issue was whether the estate of Joseph Shuster, co-creator of Superman, could exercise termination rights provided by the Copyright Act to reclaim its portion of the character.

Joseph Shuster and Jerry Siegel created Superman in 1934. In 1938, they transferred their copyright in the character to DC Comics’ predecessor for a one-time payment of $130 (the “1938 grant”). In 1975, Warner Communications, DC Comics’ parent company, executed an agreement with Shuster and Siegel to provide them each a life pension and Shuster’s brother, Frank, was provided a survivor benefit. In return, Shuster and Siegel re-acknowledged that DC Comics owned all rights to Superman.

In 1992, Shuster passed away and was survived by his siblings, Frank and Jean Peavy. Shuster’s siblings asked DC Comics to increase Frank’s survivor pension and DC Comics agreed to do so. To effectuate that arrangement, the parties executed a pension agreement (the “1992 agreement”), which included a provision that stated the agreement “fully settles all claims” regarding “any copyrights, trademarks, or other property right[s] in any and all work created in whole or in part by . . . Joseph Shuster” and further “now grant[s] to [DC] any such rights.” In 2003, Mark Peary, acting as executor of the Shuster estate, filed a termination notice pursuant to Section 304(d) of the Copyright Act to reclaim the copyright in Superman that Shuster had assigned in the 1938 grant. DC Comics resisted and litigation ensued.

Under Section 304 of the Copyright Act of 1976, an author (or, if deceased, his statutory heirs: widow, children, and grandchildren) may terminate a grant made by the author or his beneficiaries prior to January 1, 1978 “notwithstanding any agreement to the contrary.” The termination right may be exercised “fifty-six years from the date the copyright was originally secured.” Section 304(c)(3). (Later, the Sonny Bono Copyright Term Extension Act extended the termination provision to the author’s estate if there is no living widow, children or grandchildren of the author. Additionally, it expanded the time frame to exercise the termination right an additional twenty years, as long as the right had not previously been exercised.)

In an unpublished opinion, the district court for the Central District of California ruled that the Shuster estate could not exercise the Section 304 termination. According to the district court, the 1992 agreement superseded the 1938 grant as an implicit revocation and re-grant of the copyright to DC Comics. As such, there was no pre-1978 copyright grant subject to termination under Section 304.

On appeal, the Ninth Circuit affirmed the lower court’s holding. Relying upon its prior decision in Milne ex rel. Coyne v. Stephen Slesinger, Inc., 430 F.3d 1036 (9th Cir. 2005), the Court rejected the Shuster estate’s argument argued that the 1992 agreement constituted an invalid “agreement to the contrary.” The Court reiterated that

Congress specifically stated that it did not intend for the [copyright] termination statute to “prevent the parties to a transfer or license from voluntarily agreeing at any time to terminate an existing grant and negotiating a new one[.]” H.R. Rep. No. 94-1476, at 127 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5743. Congress further stated that “nothing in this section or legislation is intended to change the existing state of the law of contracts concerning the circumstances in which an author may terminate a license, transfer or assignment.” H.R. Rep. No. 94-1476, at 142, 1976 U.S.C.C.A.N. at 5758. Congress therefore anticipated that parties may contract, as an alternative to statutory termination, to revoke a prior grant by replacing it with a new one. Indeed, Congress explicitly endorse the continued right of “parties to a transfer or license” to “voluntarily agree[] at any time to terminate an existing grant and negotiat[e] a new one.” H.R. Rep. No. 94-1476, at 127, 1976 U.S.C.C.A.N. at 5743.

DC Comics v. Peary, No. 12-57245, at 6 (9th Cir. 2013) (not for publication), quoting Milne, 430 F.3d at 1045-46.

While the Shuster estate appealed the Ninth Circuit’s decision, the Supreme Court did not grant further review. Despite the Court’s denial of certiorari, there are several reasons why Peary v. DC Comics and the Ninth Circuit’s termination right decisions continue to warrant reversal.

First, the legislative history of the termination right evidences Congress’ intent to make the right inalienable. Prior to the Copyright Act of 1976, there was no termination right. Instead, there was a reversionary renewal right whereby an author and his family possessed the exclusive right to renew a copyright. Pub. L. No. 349, Sections 23-24 (1909). However, in Fred Fisher Music Co. v. M. Witmark & Sons, 318 U.S. 643 (1943) the Supreme Court held an author could assign away his right to renew the copyright. As a result, the reversionary right was not truly “exclusive” and publishers began requiring authors to assign them the right to renew as a condition of publishing their work. Peter S. Menell and David Nimmer, Pooh-Poohing Copyright Law’s Inalienable Termination Rights, 57 J. Copyright Soc’y U.S.A. 799, 804-805 (2009), Available at: http://scholarship.law.berkeley.edu/facpubs/1229.

In response, Congress eliminated the reversionary provisions and replaced it with an inalienable termination right in the Copyright Act of 1976 – Sections 203 and 304. H.R. Rep. No. 94-1476, at 124 (1976). Unlike the renewal right, Congress provided that the termination right may be exercised “notwithstanding any agreement to the contrary.” Specifically, Congress wanted to end the use of “contingent future interests as a form of speculation.” Id. at 128. Thus, the only permissible further grants would be ones “made after the effective date of the termination” or a right of “first refusal.” Id. at 127.

Congress believed an inalienable termination right was “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.” Id. Permitting recapture of the copyright would “relieve authors of the consequences of ill-advised and unremunerative grants. . .” Mills Music Inc. v. Snyder, 469 U.S. 153, 172-73 (1985).

But what about the Subcommittee Report excerpt in Milne? While it appeared to support the Ninth Circuit’s position that a revocation and re-grant is always permissible, when viewed in its entirety, it in fact does the opposite. The Report actually states, “Section 203 would not prevent the parties to a transfer or license from voluntarily agreeing at any time to terminate an existing grant and negotiating a new one, thereby causing another 35-year period to start running.” H.R. Rep. No. 94-1476, at 127-128.

Congress was specifically referring to the Section 203 termination right – not the Section 304 termination right. While structurally similar, the termination provisions differ as to which copyright grants are terminable. As noted earlier, Section 304 allows an author (or, if deceased, his statutory heirs) to terminate a grant made by the author or his beneficiaries prior to January 1, 1978. Section 203 allows an author (or, if deceased, his statutory heirs) to terminate a grant made on or after January 1, 1978 by the author, but not grants made by the author’s beneficiaries, “at the end of thirty-five years from the date of execution of the grant.

Why is that distinction important? Because the 1992 agreement executed by the Shuster siblings, if valid, would extinguish any statutory heirs’ potential termination right as (1) there would no longer be a pre-January 1, 1978 grant subject to Section 304 and (2) the existing copyright grant would be a post-January 1, 1978 grant by someone other than the author not subject to termination under Section 203. While the Subcommittee Report indicated that Section 203 should not be read to “prevent the parties . . . from voluntarily agreeing at any time to terminate an existing grant and negotiating a new one,” it limited the foregoing to situations where it would trigger “another 35-year period to start running.” Id. at 127. (Emphasis added.) Since only a post-January 1, 1978 revocation and re-grant by the work’s author would trigger another 35-year period, Congress only intended to permit an author to effectuate such a transaction.

Despite Congress’ clear intent, the Ninth Circuit in Milne, supra, created a loophole that would allow the termination right to be extinguished. In Milne, the Court upheld a transaction that invalidated a termination right, holding that because the right was used “as an advantageous bargaining chip,” Congress’ goal was achieved. 430 F.3d at 1046. The Court conveniently ignored how a testamentary trust, not the author’s statutory heirs (his son and granddaughter), made the revocation and re-grant. Pooh-Poohing Copyright Law’s Inalienable Termination Rights, supra, at 820-21. But even if the author’s statutory heirs had been the contracting party, the agreement still impermissibly relied on speculative future interests. The termination right at issue did not mature until 1986, but the revocation and re-grant occurred in 1983. Thus, the consideration in the agreement was the contingent interest of the author’s living statutory heirs in 1983, which could have been different from the author’s statutory heirs at the time the right matured three years later.

In DC Comics v. Peary, the Ninth Circuit pushed the envelope even further. Unlike Milne, where the re-grant explicitly revoked the prior copyright assignment, the Court found the 1992 agreement, which made no reference the 1938 grant, implicitly waived that grant. DC Comics v. Peary, No. 12-57245, at 10-11 (9th Cir. 2013) (Thomas, J., dissenting) (not for publication). Moreover, that agreement was executed by the Shuster siblings despite the fact that: (1) the termination right for that copyright grant had not yet matured and, (2) at in 1992, the Shuster siblings were not even potential statutory heirs capable of possessing a termination right, mature or not. Id. at 9-10. In fact, it was not until 1998, when the Sonny Bono Copyright Term Extension Act extended the termination right to an author’s estate (in the event the author’s widow, children and grandchildren were not living) that the Shuster siblings could have an interest in the termination rights. So the only way that the 1992 agreement could have used the termination right as “an advantageous bargaining chip” was as speculation that the termination right may one day extend to the Shuster estate.

Although the DC Comics v. Peary decision is unpublished, possessing limited precedential effect, the fate of many statutory heirs’ termination rights is murky at best. Any number of “agreements” could potentially extinguish a statutory heir’s termination right. A revocation and re-grant need not be made explicit. Nor is there a requirement that the termination right need first mature to be considered a bargaining chip. The right may be waived by someone that would not actually possess the termination right once mature. And, more alarming, it appears the Ninth Circuit will uphold a waiver executed by someone (or some entity) who is not even a potential statutory heir. What could be worse? The Ninth Circuit’s flawed interpretation has been adopted by the Second Circuit. See e.g., Penguin Group (USA), Inc. v. Steinbeck, 537 F.3d 193, 197 (2d Cir. 2008), cert denied, 129 S. Ct. 2383 (2009).

The impact of the Ninth Circuit’s gaffe is serious. “One particularly pernicious consequence of the Ninth and Second Circuits’ rules arises when the author’s successor is not the same person as the statutory holder of termination rights. In that circumstance, the Ninth and Second Circuits give the former a unilateral power to sacrifice the rights of the latter.” Peary v. DC Comics, No. 13-1523, Petitioner’s Writ for Certiorari at p. 27-28. The loophole actually encourages an author’s successor to negotiate a sweetheart deal for itself and preempt the exercise of termination rights by an author’s statutory heirs. Steinbeck, 537 F.3d at 197 (upholding a post-January 1, 1978 grant that increased royalties for the author’s widow but excluded the author’s children from a previous marriage by relying on the Ninth Circuit’s decision in Milne).

So what proved to be the Shuster estate’s kryptonite? Selective reading by the Ninth Circuit. While it may be too late to save Superman, hopefully someone else can fly to the defense of the termination right soon.

Follow me on Twitter: @copyistculture

Advertisements

One thought on “Superman’s Kryptonite: The Termination Right Loophole

  1. Pingback: Superman’s Kryptonite: The Termination Right Loophole | MyBioMedArt

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s