Artists beware: Royalty arrangements likely not terminable under Copyright Act

Imagine you recorded your first album forty years ago. Under the terms of your original deal with your record label, you aren’t seeing much in the way of income from the sales or exploitation of that album. That’s because, at the time you made your deal, there was no guarantee that your first album would be a hit. So, the deal terms weren’t especially favorable to you. But the album was, in fact, a hit. The record label sold millions of copies, and the recordings on that album have become iconic. Decades later, they continue to generate vast sums of money—very little of which ends up in your pocket.

You might be in luck. The Copyright Act permits authors (or, if deceased, their heirs) to terminate “grant[s] of a transfer or license of copyright or of any right under a copyright” after a certain number of years. 17 U.S.C. §§ 203 and 304. According to the Copyright Office, the termination right is “intended to protect authors and their heirs against unremunerative agreements by giving them an opportunity to share in the later economic success of their works by allowing authors or their heirs, during particular periods of time long after the original grant, to regain the previously granted copyright or copyright rights.” See Brumley v. Brumley & Sons, 822 F.3d 926, 928 (6th Cir. 2016).

In other words, the Copyright Act gives qualifying authors and their heirs a “second bite at the apple” to recapture previously transferred copyrights once they’ve proven valuable; by effectuating termination under the Act, authors and their heirs can “recapture” all domestic income from the exploitation of certain works. See Brumley v. Brumley & Sons, 822 F.3d 926, 928 (6th Cir. 2016). That is, upon termination of the grant of a transfer or license of copyright, only the author or her heirs can exploit the work—e.g., by publishing it, performing it publicly, making phonorecords, etc.—and therefore any domestic income that might derive from further exploitation of the work would return exclusively to the author or her heirs. Under the “principle of territoriality,” the U.S. Copyright Act doesn’t apply outside the U.S.; thus, only the U.S. copyright and its attendant income can be recaptured.

In practical terms, and in our firm’s considerable experience in this area, effectuating termination brings the grantee or transferee (in the music business, often the record label or a music publisher) back to the negotiating table, where it will have to pay more to the authors or their heirs to continue exploiting their works. Exercise of that right must be carefully considered. See David M. Given, “U.S. Copyright Termination: Re-monetization’s Final Frontier,” Journal of Intellectual Property Law & Practice, 2016, Vol. 11, No. 11, p. 826. But the swing in proceeds to authors and their heirs via an effective termination can be considerable—and life changing.

But termination rights under the Copyright Act are, relatively speaking, quite new. That is because those rights may only be exercised (in the case of works prior to Jan. 1, 1978) fifty-six years from the date copyright was originally secured and (generally, in the case of works on or after Jan. 1, 1978) thirty-five years from the date of execution of the grant. 17 U.S.C. §§ 203(a)(3) and 304(c)(3). Works created in the 1960s, 1970s, and 1980s have therefore only become subject to the termination right in the last few years. The decisional law in this area is thus still in its infancy.

The predominant type of income derived from the exploitation of a copyright, of course, is royalties. And in addition to granting rights to exploit their copyrights, authors often grant rights to their royalties—the income derived from the exploitation of their copyrights. For example, it is not unusual for an author to assign her copyright to a record label and, in a side or related deal, grant a royalty right in the income derived from the copyright to another entity or individual, such as a bandmate, manager, charitable foundation, or ex-spouse.

Accordingly, artists/authors, their heirs, and the federal courts are only just beginning to contend with a key question: Does a valid termination of a grant “of copyright or of any right under a copyright” under the Copyright Act have the same effect on an author’s grant of a royalty right? In other words, is a contract granting royalties a “grant of copyright or of any right under a copyright” and therefore also terminable under the Copyright Act?

In the last few years and months, a handful of federal courts have grappled with that question. An early consensus appears to be emerging. Those courts weighing in appear to have coalesced around the conclusion that an interest in royalties is distinguishable from an interest in the underlying copyright itself and is thus not terminable under the Copyright Act.

Everly Brothers: In Everly v. Everly, No. 3:17-CV-01440, 2020 WL 5642359 (M.D. Tenn. Sept. 22, 2020), aff’d sub nom. Garza v. Everly, 59 F.4th 876 (6th Cir. 2023)—a dispute between one Everly Brother and the heirs of the other Everly Brother—the plaintiff sought summary judgment in the form of a determination that a contract assigning royalty interests is not subject to termination under the Copyright Act. The district court agreed. Citing Broadcast Music v. Hirsch, 104 F.3d 1163, 1166-67 (9th Cir. 1997), among other cases, it concluded that the “law is clear” that “royalty and credit rights [] are not copyright rights under 17 U.S.C. § 106,” which lists the exclusive rights in copyright, and therefore a contract assigning those rights does not “fall within the scope of, and is not subject to termination pursuant to, § 203.” Everly v. Everly, No. 3:17-CV-01440, 2020 WL 5642359, at *7 (M.D. Tenn. Sept. 22, 2020), aff’d sub nom. Garza v. Everly, 59 F.4th 876 (6th Cir. 2023).

Funny Girl: In Merrill v. Hyman, No. 3:21-CV-551-JAM, 2022 WL 11727631 (D. Conn. Oct. 20, 2022)—a case involving rights in the iconic musical Funny Girl—the district court granted the defendant/cross-complainant’s motion for summary judgment as to claims for declaratory relief, breach of contract, and permanent injunctive relief. Again, citing Hirsch and others, the court concluded that “when [the plaintiff author] sold some of his future royalties to [the defendant producer], he ‘did not transfer any interest in a copyright or in any of the exclusive rights comprised in a copyright.’” Merrill v. Hyman, No. 3:21-CV-551-JAM, 2022 WL 11727631, at *2 (D. Conn. Oct. 20, 2022). On appeal to the Second Circuit, the author’s heir did not assert that she could terminate a grant of royalties per se, but instead contended that the agreement there “actually transferred rights under [the author’s] copyright.” See Merrill v. Hyman, No. 22-2971-CV, 2024 WL 191807, at *1 (2d Cir. Jan. 18, 2024). The Second Circuit disagreed with the author’s heir and affirmed, noting that “[u]nder the Copyright Act” the “termination notice would entitle [the heir] to terminate only the copyright right, leaving intact the [producer’s heirs] right to receive royalties.” Id. at *3, fn.1.

Scholarship in the field also supports the results in these two cases. As Dean Adams, the Director of Business & Legal Affairs for Publishing at Concord Music Group, argues: “[R]oyalty rights are neither defined in the [] Act nor included in its list of § 106 rights. [] The strongest position from a legal, policy, and practice perspective,” he writes, “is that royalty grants are not terminable under the 1976 Act because a grant of the contractual right to receive revenue is not an ‘exclusive or nonexclusive grant of a transfer or license of copyright or of any right under a copyright.’” See, e.g., Dean Adams, “A Third Bite at the Apple?: Statutory Termination Rights and Royalty Grants,” Journal of the Copyright Society of the USA (June 1, 2019), at pp. 527, 530-31 (available at https://ssrn.com/abstract=3750416)

Sonny & Cher: One notable outlier appears to be Cher v. Mary Bono, 21-CV-08157-JAK, ECF No. 43 (C.D. Cal. March 14, 2023). There, the district court considered Mary Bono’s motion to dismiss Cher’s complaint alleging that Cher was owed 50% of both Sonny Bono’s record royalties and composition royalties pursuant to their marriage settlement agreement, notwithstanding

Mary Bono’s Copyright Act termination notice to the sources of those royalties. For purposes of the motion, the court assumed without deciding that a right to receive royalties is one that arises under a copyright and is thus terminable under the Copyright Act. Cher v. Mary Bono, 21-cv-08157-JAK, ECF No. 43 at p. 8 (C.D. Cal. March 14, 2023). But in doing so, the court distinguished between the grant of a royalty interest that specifies the source of the income on which the royalty right depends (there, the record royalties) and the grant of a royalty interest which does not (there, the composition royalties). That is, the court proposed a rule that, assuming the termination right reaches an income interest at all, to the extent royalty rights are “based on” or derive from and depend on a specific source contract, and a copyright termination notice validly terminates the source contract, the dependent royalty right is also terminated. Id. at 7. (After issuing its order on the motion to dismiss, the parties filed motions for summary judgment. As of Feb. 26, 2024, the district court has taken the parties’ respective motions for summary judgment under submission.)

While a consensus appears to be emerging, an astute reader might note that none of these cases is binding on any court. (None of the cases discussed above is published in the Federal Supplement or Reporter.) Thus, there remains considerable uncertainty regarding the scope of the termination right and its effect, if any, on any related royalty rights. Until the question is settled—either by the U.S. Supreme Court or in a published opinion in the Circuit Courts of Appeals, artists, their heirs, and their business and legal affairs managers should approach the termination procedure with caution—particularly if their goal is to undo longstanding royalty agreements via copyright termination.

In many cases, that goal is quite understandable. After all, as critics of the trend discussed above argue, the imperviousness of royalty grants to termination under the Copyright Act may undermine the overall purpose of the termination right—i.e., without being able to terminate a royalty grant, the “opportunity to share in the later economic success of their works” may be diminished.