A LEGAL NIGHTMARE: The Unwritten "Agreement"

IVAN HOFFMAN, B.A. J. D.


     In the world of intellectual property law-the law that governs much of publishing, web design, copyright and trademark law-there is no greater legal mess than an unwritten “agreement.”  It creates a major legal nightmare and yet it appears that many publishers, authors, web designers, illustrators etc. operate without valid, written and thorough agreements.   And then when the nightmare stars they come to an attorney and ask “fix me.”  

     The classic situation that creates this nightmare is where the intellectual property has been created by one party but is being used by another party without a written agreement or without an agreement covering the essential rights ownership issues in a clear and unambiguous manner.  These situations come up in many contexts but let me use, for the sake of simplicity, 2 different settings with the same factual and legal meaning.  One setup is when a book publisher engages the services of an independent contractor artist to do the cover art or illustrations for the book.  The other setting is when a web site owner engages the services of an independent contractor designer to design and build a web site.  In both examples, there is no written agreement regarding rights for the work being done by the artist or designer or what writing does exist is incomplete.  These are classic situations because they arise countless times. 

     If you are on either side of these or any similar situations, this nightmare is yours. 

The Law End of the Nightmare 

     Under the provisions of the United States Copyright law, a transfer of exclusive rights in a copyrighted work must be in writing and signed by the owner of the rights.  [17 USC, section 201 (d) (2), 204 (a)]  In the examples, the owner of the rights in the cover art is the artist and in the work done on the web site, the designer.  [17 USC, section 201 (a)] (I am excluding employer-employee situations since those are far less frequent.)   In order for the publisher to acquire the exclusive rights to use the cover art or the owner to acquire exclusive rights to the designer’s work on the web site, the publisher or owner must have had the artist or designer sign an agreement transferring such exclusive rights to the publisher (Read “The Cover Artist/Illustrator Agreement” and “The Fundamental Principle Under the United States Copyright Act” and “The Need for a Written Web Design Agreement.”  )  However, in the classic cases, the publisher/owner fails to have the artist/designer sign such an agreement or the agreement is incomplete, vague and uncertain, either because the parties do not know they need to have such an agreement or because the publisher/owner is trying to “save” a few dollars by having no agreement or no agreement drafted by an experienced attorney, which “savings,” in these instances, may turn out to be very costly indeed, as you will see. 

     The same copyright law also provides that a copyright proprietor may transfer rights to a copyrighted work without a writing but that such a transfer operates only to transfer non-exclusive rights [17 USC sections 101, 204 (a)].  In Foad Casualty vs. Azzalino et. al., a case from the 9th Circuit, the Court explained in a footnote this as follows: 

By its terms, the Copyright Act’s writing requirement applies only to a “transfer of copyright ownership.” Id. § 204(a).  The Act defines “transfer of copyright ownership” as an “assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright or of any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but not including a nonexclusive license.” 17 USC § 101. Thus, the requirement does not apply to the transfer of nonexclusive copyright licenses.

     Non-exclusive means that the grantee, the publisher/owner in these examples, has some rights but the artist/designer also has some rights.  The nightmare is that it is not at all clear in any given instance what rights the publisher/owner has and what rights the artist/designer retains and further, what the party claiming the rights can or cannot do with whatever rights that party claims.  This is called an “implied, non-exclusive license.”  Merely explaining the problem, as you see, gives definition to the nightmare.  

     The nightmare also involves trying to remember the term “implied, non-exclusive license.” 

     Thus, without a valid, thorough, written and signed agreement, the legal status of the many rights that are the subject of a copyright is completely clouded.  Which party has the right to do something with the respective rights to the copyrightable work is left, in the worst case scenario, to a court to decide.  An agreement should solve more problems than it creates and if there is either no agreement or the agreement is vague and uncertain, then the interpretation of what the parties intended is left to a judge or jury and is, at best, a gamble as to how it is going to come out.  And during the pendency of this dispute, the work is legally pretty much unusable since neither party can use it since neither party knows what they can use.  A thorough agreement should leave no interpretation to chance and should be written in such a way so that no one can interpret it except in a manner most favorable to the client for whom the attorney drafted the contract. 

The Business End of the Nightmare 

     But who owns what and who can do what with what is not just some theoretical set of issues.  Those issues translate into real money.   At least they translate into real money if the project is successful (but even if it’s not).  If it is a failure, probably no one’s going to care about rights although in a given instance people sue about everything so it can be the subject of claims even if it is unsuccessful.  But if it is successful, you cannot count the number of parties who are going to come along to stake their respective claims.  And they bring their (very expensive) attorneys with them.  

    And that’s where the money spigot begins gush.  The very thing the publisher/owner/artist/designer sought to avoid has come back to haunt. 

    So the nightmare involves legal fees, much of which could have been avoided by preventive law instead of remedial law.  Help me is almost always cheaper than fix me.  I have been at both the litigation table and the negotiation table and the former is almost always infinitely more expensive.   (Read “Hoffman-isms” and “10 Words That Can Help You Make Money.”) 

     But the nightmare also involves loss of potential revenue.  If the copyrightable elements that are unclear become successful-if a book cover becomes more valuable than the text and someone wants to do a poster or a t-shirt using that art; if a graphic on a web site is to be used in a motion picture or a television commercial; just to name a few of the myriad examples that can arise-which party has the right to license or use those elements and is there any financial participation on the part of the other party in that deal?  Which party owns the rights?  Does the other party have rights?  Without appropriate written agreements, the situation is very unclear and any prudent licensee or other potential user of such materials is going to be very uncertain whether it wants to step into such a mess. 

     Additionally, any potential licensee or user of those elements is going to want the licensor to warrant that the licensor owns the work being licensed and can grant exclusive rights in the work.  If the rights are not clear, not only would such a warranty be legally risky from the licensor’s standpoint but the failure to make such a warranty may just end the licensee’s desire to license the work.  Moreover, not only is the ownership of the rights unclear but by definition, if there is another party with even non-exclusive rights, neither party can grant exclusive rights and most licensing deals are done on an exclusive basis.  

     Thus, not only can the lack of clarity cost money in legal fees either trying to retrofit a legal document onto an existing problem or if litigation is necessary, but that same lack of clarity can cost money in lost income because of the inability to make deals on the rights.  Once one party knows the other party needs to make a deal to clarify rights, the price of that deal almost always escalates.  An additional cost that may have been avoided with foresight. 

Conclusion 

     In the business of intellectual property rights, which is the business you are in even though you are a publisher, web site owner, artist or designer, among other businesses, legally appropriate contracts are not add-ons to your business, something you do if you have any money left over; legally appropriate contracts are your business.  Without a thorough and valid agreement, what you have is nothing but an illusion.  It only appears you are in business but in reality, you are not since given a controversy between you and the other party, you risk losing your rights and the money that goes along with those rights. 

     So without proper agreements, both parties set themselves into losing situations.  If the project is a failure, they lose because they have spent money creating and publishing a loser.  And if the project is a success, they lose because they spend all the money they make paying lawyers to figure out what should have been figured out in the beginning, at what is likely a considerably greater cost including the potential for loss of income.  

     So if they lose, they lose and if they win, they lose. 

     Is this how you want to run your business, no matter what side of the transaction you are on?    It seems inherently self-defeating. 

     Read the additional articles on my site under the title “A Legal Nightmare:…” (click on “Articles for Writers and Publishers.”  Also read “Set To Fail” and “The Need for Vision.”)

Copyright © 2001, 2018 Ivan Hoffman.  All Rights Reserved. 

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  You should not rely on this article in any manner whatsoever and you should not draw any conclusions of any sort from this article.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States laws but the laws of other countries may be different.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation. 

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