The obscure “termination of transfer” provision of the 1976 Copyright Act popped up twice in the news recently.  The provision allows a copyright owner who assigned his copyright interest to another to undo the transfer after a number of years and recover ownership of the copyright.   How the termination right operates depends on when the copyright interest arose, but the language governing copyrighted works created after January 1, 1978 is as follows:

Conditions for Termination. — 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 January 1, 1978, otherwise than by will, is subject to termination under the following conditions:

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(3) Termination of the grant may be effected at any time during a period of five years beginning at the end of thirty-five years from the date of execution of the grant; or, if the grant covers the right of publication of the work, the period begins at the end of thirty-five years from the date of publication of the work under the grant or at the end of forty years from the date of execution of the grant, whichever term ends earlier.

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(5) Termination of the grant may be effected notwithstanding any agreement to the contrary, including an agreement to make a will or to make any future grant.

17 U.S.C. § 203(a).  Statutory procedures must be followed carefully to invoke the termination right.  Yet, if they are, any author who has assigned or exclusively licensed his work can recover it after 35 years, and there is no way to contract around it.  Think of it as a “starving artist” provision designed to ensure an economic return to authors who create works for others, transfer them for a pittance, and find themselves losing out as their works become enormously popular and highly valuable.

The only types of works not subject to the termination right are “works made for hire”, a category of works defined by Section 101 of the Copyright Act as either (1) works created by an employee within the scope of his employment; or (2) a specially commissioned work of certain defined types (the work must fall within one of 9 specific categories) “if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.”  17 U.S.C. § 101.  Because many if not most copyrighted works do not fall within the 9 categories, they cannot qualify as specially commissioned works made for hire, not even if contracts call them works for hire.

Thus, assignments of most works created by independent contractors rather than employees can be terminated after 35 years.   There is one wrinkle to this that can be helpful: a work created by an independent contractor’s employee and then assigned to the contractor’s client still qualifies as a “work made for hire” (initially owned by the contractor), and so neither the author nor the contractor can terminate the transfer to the client.  Because of this quirk, it is fairly common in independent contractor agreements to require that creative deliverables of the contractor were created by their employees within the scope of their employment.

The two recent news items both involve works in the entertainment industry.  Most termination disputes involve these types of works, as they sometimes gain enormous value and have very long commercial lives.

Most recently, The New York Times reported that Victor Willis, the original lead singer of the group The Village People, sent a notice to terminate his transfer of rights in the song “Y.M.C.A.”   The article did not disclose what costume he wore at the time, but his assignee filed suit to prevent the transfer, arguing that the group members were really employees and as a result the song was a Type 1 work made for hire not subject to termination Larry Rother, A Village Person Tests the Copyright Law, New York Times, August 16, 2011.   Evidently disco still will not die.

In late July, the U.S. District Court for the Southern District of New York ruled that the heirs of Jack Kirby, a famous artist who had a long association with Marvel Comics, was not entitled to terminate transfers of his copyright interests in 45 works or series of works, all comics involving well-know characters such as Spider-Man, The Fantastic Four, and the Incredible Hulk.  Again, the issue was whether the comics were works made for hire, and the court ruled they were.  These works were created before 1978 and so were subject to the Copyright Act of 1909, under which works by contractors (Kirby was a free-lance artist) could much more easily qualify as works for hire.  See Marvel Worldwide, Inc. v. Kirby, 2011 U.S. Dist. LEXIS 82868 (S.D.N.Y., July 28, 2011).

Most copyrighted works do not have commercial lives over 35 years, and certainly few are as valuable as the Spider-Man character.  Yet, one never knows:  the parties to these two recent disputes probably did not anticipate longstanding success.  The possibility of termination therefore is something worth thinking about when there exists a reasonable chance of longstanding use and success.

One area where the termination issue is potentially very important is artistic works used as logo trademarks.  Stylized trademarks very often do have long life spans and great value.  Designs used as marks frequently are sufficiently creative to qualify as copyrightable works.  Both trademark and copyright interests exists in such works, and the two protect different things.  A company that uses and federally registers its logo as a trademark still could face the possibility of termination of the copyright interest in the logo by a contractor who created the work.  The consequences could be disastrous: the author could prevent ongoing trademark use by exercising his right as a copyright owner to prevent copying, modification, distribution and public display.  Indeed, the risk can arise before 35 years:  a company that hired an independent contractor to create a logo and did not obtain a written, signed assignment of copyright interests (logo marks seldom would qualify as Type 2 works for hire), and relies instead on an express or implied license, runs the risk of the contractor terminating the license or claiming the scope of the license is more narrow than the company’s use.  Thus, if logo marks are not developed by employees, it is essential to obtain an express, written copyright assignment; to avoid termination of transfer, the work should be created by an employee of the hired independent contractor.

Christopher J. Mugel practices intellectual property law from Kaufman & Canoles’ Richmond, Virginia office.  He spoke on intellectual property transactional matters at the Annual Meeting of the American Intellectual Property Law Association in Washington, D.C., October 20-22, 2011. 
–Christopher J. Mugel

The U.S. Supreme Court has agreed to hear five and a half hours of oral arguments in the Florida v. Department of Health and Human Services case challenging the constitutionality of the controversial Patient Protection and Affordable Care Act (“PPACA”). The case arises out of an appeal by 26 states of a decision by The United States Court of Appeals for the Eleventh Circuit. The scope of what the Court has agreed to consider is limited to the issues of whether (1) it is within Congress’ power to require states to choose between complying with the provision of the PPACA or losing federal Medicaid funding, and (2) whether the “individual mandate” provision of the PPACA is constitutional and, if not, the extent to which it may be severed from the remainder of the Act. Arguments will be heard in March of 2012 and a decision is expected before the Court recesses in late June. A copy of the petition for certiorari submitted by Florida et al. is available here.  –Meagan J. Thomasson

The General Availability period in which to register remaining .xxx domain names commences on December 6, 2011 at 11:00 am EST.  There are no qualifications, such as a registered trademark or pre-existing domain name, required in order to register during this period.  Anyone can attempt to register an available .xxx domain name through one of the designated registrars.  Available .xxx domain names will be issued on a first come, first served basis, and some registrars are currently accepting pre-registrations.  If you obtain the requested domain name, the registration will be effective for one year, with the ability to renew. –Nicole J. Harrell

Perhaps the most significant reform effected by the America Invents Act (“AIA”) is its provisions that will transition the United States patent system to one in which the first inventor to file a patent application will generally be the one entitled to a patent on the invention in question.  Under the current system this entitlement goes to the first to invent, regardless of whether he or she wins the race to the Patent Office.  The change from a first-to-invent to a first-to-file system under AIA will go into effect on March 16, 2013, so everyone has a bit of time to adjust to this change, which is meant to bring the U.S. patent system more in line with the first-to-file systems that exist in most other countries.

As with any complicated legislation, there are subtleties to the AIA first-to-file rules that may lead to changes in the way U.S. inventors, companies and institutions plan and manage their approaches to patent protection.  For example, publication of invention details might be useable in some cases to, in effect, preempt the priority of a later first-to-file application by a competing inventor.  And strategies may evolve for use of continuation-in-part applications to bring claims under applications filed prior to the effective date of the first-to-file rules within those rules. 

However, such changes in practice will likely be the exception rather than the rule.  Inventors, companies and institutions seeking patent protection in the U.S. have always been well advised to file their applications as soon as possible, and the provisional application process makes this relatively easy to do.  So, while the change from a first-to-invent to a first-to-file system is a major one – and all who utilize the U.S. patent system should fully understand the new rules – its impact at the practical, working level should not be severe. –Robert E. Smartschan

The sale of real estate under Virginia law in connection with a decedent’s estate can involve a number of legal and practical considerations that can be affected by whether a decedent dies with or without a will.

The Intestate Estate

If the decedent dies intestate (without a will), title to his or her real property passes immediately upon death directly to his heirs at law. In such cases, the real property is not an asset of the estate. The filing of a list of heirs will establish chain of title to the heirs as co-owners (tenants in common) based on their respective interests determined under the course of descent provided in Va. Code § 64.1-1.

Although an administrator of an intestate’s estate has the power under the law to sell and distribute the decedent’s tangible and intangible personal property, they do not have authority to sell the decedent’s real estate, even if the personal property is insufficient to pay estate debts and estate administration expenses. Although the heirs at law do not become personally liable on a mortgage secured by the property, as a practical matter they will need to make arrangements for such payments or risk foreclosure; and prompt arrangements should be made for payment of real estate taxes, insurance and utility payments for the property.

To sell the real property, the heirs at law as co-owners must all agree upon all the typical questions in the sale of property: whether to sell the property, the timing and manner of sale (by realtor or by owners), the purchase price and other terms of sale; and they must all sign the deed conveying the property to the purchaser. This can present problems if the co-owners cannot agree on these matters and can present practical issues if some of the owners live in other states or other countries. The sale can be further complicated if any of the heirs at law are minors or incapacitated.

The Testate Estate

Decedents who die testate (with a will) may provide direction in their will regarding the sale or disposition of their real property. Most well drafted wills contain provisions granting power of sale of real property to the executor named in the will. This authority is commonly incorporated by specific reference in the will to the statutory powers contained in Va. Code § 64.1-157. This express power of sale allows the executor to sell the real estate if the personal property is insufficient to pay the estate debts and estate administration expenses or because of other estate or beneficiary circumstances.

There may be some question as to whether an executor should or can sell real estate of the estate if it is not necessary based on the circumstances of the estate, particularly if the beneficiaries of the real estate under the will prefer to receive the real estate in kind. If a person (testator) preparing a will believes that it would be best for the executor to sell real estate, he can provide in his will that the executor is directed to sell the real property, or even more effectively provide that the real estate is devised to the executor to be sold, with the proceeds to be received as an estate asset for distribution to the beneficiaries.

In the event of sale of the real property by the executor under the terms of a will, the executor typically has authority to determine the arrangements and terms for sale of the property. The net proceeds from the sale of the real property will be disbursed by the executor in accordance with the terms of the will. Pending the sale of the real property, the executor normally pays any mortgage payments, insurance and real estate taxes from the estate assets, unless that is not possible based on the circumstances of the estate.

Under Virginia law, even when a decedent leaves a will with power of sale over real estate, title to the real estate nevertheless passes upon the decedent’s death to the beneficiaries of the real estate under the will. Probate of the will establishes the beneficiaries’ chain of title to the property. These rights will be divested if the executor sells the real estate in accordance with the terms of the will.

It is possible that a will does not contain authority for the executor to sell real estate due to oversight or perhaps the testator did not intend to grant power of sale to the executor and intended that title to the real estate pass directly to the beneficiaries under the will. In such cases the beneficiaries will encounter many of the same issues mentioned above for heirs at law of intestate estates.

Some Practical Considerations

In cases where there is no power of sale available to an administrator or executor and if sale of the decedent’s real estate is necessary or advantageous based on the circumstances of the estate or the beneficiaries, the administrator or executor can, pursuant to Va. Code § 64.1-57.1, petition the Circuit Court for an order granting power of sale to the executor or administrator.

Also, where an administrator or executor does not have power of sale, and if all of the heirs at law or beneficiaries of the real estate are competent adults and can agree, they can appoint an agent by special powers of attorney with authority to market and sell the real property upon agreeable terms. The appointed agent could be the administrator, executor or other person(s). This approach would avoid the expense of a court petition.

When preparing estate planning documents, a testator who clearly wants his executor to sell the real estate, can provide in his will that the real estate is devised to the executor to be sold, with the net proceeds of such sale to be disposed as directed in the will.

A decedent’s real property is by law subject to the payment of creditor claims against the decedent. Personal property is the primary fund for the payment of creditor claims unless otherwise stated in a testator’s will. If the personal property is not sufficient to pay such claims, an executor with power of sale under a will can and should sell the real property and use the net proceeds to first pay such claims. If title to the real property passes to the heirs at law or beneficiaries under a will (with no power of sale), the creditors may, under Virginia law, file a creditor’s suit to subject the real estate to the payment of such claims, if such claims are not resolved between the heirs or beneficiaries.

Real estate sold within one year after a decedent owner’s death is not a valid conveyance against creditors of the decedent. Therefore, the purchaser or the purchaser’s title company will typically insist that the net proceeds of sale be held pursuant to an indemnity and escrow agreement for one year after the decedent’s death, or that the sellers purchase a decedent’s debt bond to protect against such creditor claims.

The Last Resort – Partition Suit

If title to real estate passes directly to a decedent’s heirs at law or beneficiaries under a will without a sale by the administrator or executor and the co-owners cannot agree regarding a sale of the real estate, what happens then? This situation can often be further complicated if one of the heirs or beneficiaries is living at the property, is not paying rent, is not maintaining the property and refuses to leave the property.

In such cases, any of the co-owners may file a partition suit in the Circuit Court for the jurisdiction where the property is located requesting an order for sale of the property and also file an action for eviction of the heir or beneficiary living at the property. In the partition suit, one or more co-owners may request approval for purchasing the interests of the other parties. If no such purchase is requested or approved, and if the property cannot be physically partitioned between the parties, the court will enter an order providing for the sale of the property by a special commissioner appointed by the court, with the net proceeds of sale to be distributed to the co-owners according to their respective interests in the property. –Ed Stolle