A LEGAL NIGHTMARE: The Unwritten License: Further Issues

IVAN HOFFMAN, B.A., J.D.


        In the article “A Legal Nightmare: The Unwritten License”, I discussed the nightmarish scenario in which parties to a transaction involving creative works (such as cover artists and publishers as but one example) do work, pay money and exploit the results of the work, all without a written agreement or using an agreement so poorly written that it lacks clarity and thus spawns disputes and, in the worst case scenario, civil litigation including appeals, remands and the accompanying enormous legal fees.  This unfortunately happens all too frequently and in the instance where it matters, where the creative product becomes successful (or even where it does not), the nightmare continues into the courtroom when the parties attempt to straighten out what was not straightened out in the agreement.  What could have been accomplished inexpensively with proper drafting becomes a financial nightmare as well with all the risks attendant to not knowing how a trier of fact is going to rule.  It continues to perplex me beyond comprehension the reasons parties would operate in this manner.

        In Leslie Atkins, d/b/a Leslie Atkins Communications vs. Benson J. Fischer, [url: http://laws.lp.findlaw.com/dc/027003a.html] these were the facts in summary form:  Atkins operated an advertising, marketing and pubic relations firm and was engaged by Fischer to create a brand identity and logo for Fischer’s beer called “Redneck Beer,” both as to a bottle including the label and as to a 6 pack carrier.  The parties entered into 2 agreements one of which contained the following provision:

Ownership and possession of all underlying creative work developed and supplied by Leslie Atkins Communications shall remain the exclusive property of Leslie Atkins Communications; creative work includes, but is not limited to, sketches, copy, photographs, illustrations, type, and mechanical art boards.
        The Court determined that the provision quoted above constituted a retention of the rights of copyright in and to the work by Atkins.  The Court further stated:
Atkins testified at deposition that she believed that this provision allowed her to retain her rights to her creative work and to set a price for use of that creative work. Atkins also testified that she charged Fischer less than she otherwise would have, with the understanding that she would be able to obtain royalties for the use of her work.
        [A note about negotiations of agreements, although not specifically related to this case:  it is essential in negotiating any deal to have all of the essential deal points clearly stated since parties evaluate the deal and quote fees etc. based on what they believe they will get or have to give up in the deal.  Unfortunately, what often happens is that these essential terms are not actually spelled out and the parties operate with differing understandings of the said terms, only to find themselves in dispute. Read “The Cover Artist/Illustrator Contract” ]

        Atkins subcontracted with a graphic artist to have some of the work done including revisions to the original designs.  Then Fischer elected not to continue working with Atkins saying he was not satisfied with the designs and engaged another firm to design other labels, logos and the like.

        Thereafter, Fischer came up with a deal for the production, marketing and distribution of the beer.  In that deal, Fischer had to “warrant that [Fischer Brewing, Fisher’s company] was the exclusive owner or licensee of all trademarks and copyrights which it would use and authorize Stroh to use in manufacturing and marketing the product.”

        At this time, Fischer sought to have Atkins sign a work made for hire agreement in which such exclusive rights would be transferred to Fischer, which Atkins refused to do.  [Note: Whether such an after-the-fact agreement would even have been valid is a very open question.  Read “Work Made for Hire Agreements” and “Playboy and the Work Made For Hire Agreement”  Note as well:  I have stated quite frequently that trying to “retrofit” a deal once there is money on the table is virtually impossible or at least significantly more expensive than making a deal before the project becomes successful.]

        Fischer used the designs created by the second firm. Atkins sued for copyright infringement among other claims.  The issues were the nature and scope of the rights granted or licensed to Fischer in the first instance by Atkins and further, whether the designs of the second designer were an infringement on the rights of Atkins.  As stated by the appellate Court, the trial court in issuing a summary judgment in favor of Fischer found that Fischer had “an implied nonexclusive license to use Atkins’ work in the commercial production of Redneck Beer. The [trial] court also held that the six-pack carrier design [Fischer] actually used was not substantially similar to Atkins' designs.”  This appeal followed.

The Non-Exclusive License

        As I stated in the above article:

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 issue facing the Court was the scope of the “implied non-exclusive license.”  Because, by the clause cited above, Atkins retained the rights of copyright to her designs, any rights that Fischer had to those designs were in the form of a non-exclusive license.  Because the agreements were apparently silent as to what rights in those designs Atkins was licensing to Fischer, the question was whether Fischer had a non-exclusive license to use the Atkins’ designs in the commercial manufacture of beer or whether there was a more limited non-exclusive license granted.  The Court stated:
Section 204 of the Copyright Act invalidates attempted transfers of copyright ownership made without a writing. 17 U.S.C. § 204(a) (2000). However, section 101 of the Act excludes nonexclusive licenses from the definition of "transfer of copyright ownership." 17 U.S.C. § 101. A nonexclusive license may be granted orally or arise from the conduct of the parties. Nelson-Salabes, Inc. v. Morningside Development, LLC, 284 F.3d 505, 514 (4th Cir. 2002); Johnson v. Jones, 149 F.3d 494, 500 (6th Cir. 1998); Lulirama Ltd., Inc. v. Axcess Broad. Serv., 128 F.3d 872, 879 (5th Cir. 1997); IAE, Inc. v. Shaver, 74 F.3d 768, 775 (7th Cir. 1996); Effects Assocs., Inc. v. Cohen, 908 F.2d 555, 558 (9th Cir. 1990). Such an implied license will arise where "(1) a person (the licensee) requests the creation of a work, (2) the creator (the licensor) makes the particular work and delivers it to the licensee who re- quested it, and (3) the licensor intends that the licensee- requestor copy and distribute his work." Lulirama, 128 F.3d at 879 (quoting IAE, 74 F.3d at 776). Because the existence of an implied license is an affirmative defense to infringement, the alleged infringers have the burden of establishing an implied license. IAE, 74 F.3d at 775.
        In simple words, since the scope of the rights granted Fischer was unstated, the law implies that Atkins allowed Fischer some rights but it is not clear what rights and thus the parties found themselves probably spending many, many thousands of dollars in legal fees to try to figure this out.  The claim of copyright infringement was based on the claim that the actual use made by Fischer exceeded the scope of this license.

        The Court stated:

Atkins argues that she did not intend for Fischer to use her designs as anything more than a sales tool at the convention and that, at a minimum, a genuine issue of material fact exists with regard to the intent of the parties. Appellees argue that they hold an implied license to use the artwork from the first stage of the agreement in completing the second stage because the designs from the first stage were indisputably intended to be used in the second stage. Appellees further argue that the note from Atkins to Fischer on the date of delivery of the first-stage designs supports their theory that the parties intended the first-stage designs to be used by Fischer in the commercial production of Redneck Beer.
        The Court stated:
As the district court recognized, the two-stage written agreement between the parties sheds little light on whether completion of the first stage of the agreement implied a grant of a nonexclusive license to use Atkins' copyrighted designs for commercial production or merely as a sales tool at the convention. Atkins v. Fischer, Civ. No. 98- 0800, slip op. at 22 (D.D.C. Nov. 30, 2001) (noting that the agreement between the parties "does not eliminate the possibility of an oral or implied grant of a nonexclusive license"). The existence of the second stage of the agreement suggests that the parties contemplated that the designs, created during the first stage, would be used in the second stage to create camera-ready art suitable for commercial production. Nevertheless, there is a genuine issue as to whether the agreement implies the grant of a nonexclusive license to Fischer to use the bottle and six-pack carrier designs from the first-stage for subsequent commercial production without Atkins' cooperation and further compensation.
        [Note yet again: a contract should solve more problems than it creates and should be clear and unambiguous and should not be such that it “sheds little light” or “suggests.”  A contract should be drafted so thoroughly that no one should be able to interpret the agreement other than as the drafter intended.  Spending the time to be precise, using the extra words, is almost always cost-effective. Vagaries and uncertainties are the fertile ground for legal dispute with the consequent costs and uncertainty about result discussed above.  Read “Precise Contract Language.” ]

        Because the agreement was silent about the scope of the rights and because the conduct of the parties was not unambiguous in explaining these matters, the Court held that the grant of summary judgment was improper and that the case should go to trial on the issue about the scope of the license (thereby further increasing the probably already astronomical cost to the parties).

Substantial Similarity

        The case involved other issues including whether the designs created by the second designer and used by Fischer were “substantially similar” to the designs created by Atkins and the designer she had engaged.  The Court went through an analysis of this copyright issue but for the purposes of this article, I will not discuss the details of that analysis.  Under any circumstances,  the Court said that since the facts were not clear and since issues related to “substantial similarity” are really questions of fact in most instances, the case should go to trial on that issue and could not be decided on a motion for summary judgment.

        There was also a claim under the Lanham Act which the Court did not substantively address but included that in the remand to the trial court.

Conclusion

        Although not specifically in reference to this case but overall: keep in mind that in the business of intellectual property rights, which is the business you are likely in if you are reading this article, 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 contract, 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.  Further, you may put yourself in a lose-lose situation:  if your project is a failure, you lose.  But if your project is a success, you may find that the other party, not you, ends up making all the money or you may open yourself up for more claims than you can even imagine and in which event, you lose because you pay all your profits to lawyers and/or damages to the offended parties.

        What kind of a way is that to run a business?

        I have said this many times: Help me is almost always cheaper than fix me.

        Read “The Do It Yourself Publishing Lawyer,”“What Business Are You In?,” “Set To Fail,” “Private Laws” and “The Need for Vision.”

Copyright © 2003 Ivan Hoffman.  All Rights Reserved.

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This article is not intended as legal advice and is not 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.  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 law.  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.

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

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