One of the many exclusive rights accorded a copyright owner under United States copyright law is the right to make “derivative works”  based on the copyrighted work. (17 USC 106 (2)).  Often, however, the copyright proprietor itself does not create these derivative works and allows other parties to use copyrighted materials to create such works and the issue becomes who is the owner of the rights in and to the derivative works.

        Such was the issue in a Seventh Circuit Court of Appeals case Xu Liu vs. Price Waterhouse LLP et. al.  These were the facts, simplified as much as possible: Price Waterhouse had developed certain tax preparation software which had been, prior to the within case, been revised by another party.  Price Waterhouse owned the copyright rights in and to both the underlying and revised software.  An employee of Price Waterhouse, Xiaomei Yang, acting with the permission of Price Waterhouse, engaged the services of a programming company in China, Sichuan Sky Company Limited, to do further revisions to the software to increase its speed.  Price Waterhouse and Yang entered into a letter agreement whereby Yang was guaranteed a certain amount of money for a certain amount of increase in the speed of the program.  Among other provisions, the letter stated:

It is clearly understood that the source code is the sole property of Price Waterhouse and Price Waterhouse gives no authority, implied or otherwise, to distribute or copy this source code in any way.  Upon completion of the project, ALL source code will be given back to Price Waterhouse. [emphasis supplied]
        After the software was revised, the Chinese programming company asserted copyright rights to their revisions and assigned those claimed rights to Liu, who was Yang’s daughter, who then registered the claim to copyright in her name.

        Price Waterhouse later sold the software business and the new owner sought to do further revisions to the software, whereupon Liu filed suit for copyright infringement because, Liu claimed, the revisions infringed upon her copyrights as claimed above.  Price Waterhouse filed various counterclaims including, that by filing the copyright registration, Liu infringed upon their copyright.  There were many other claims raised in the litigation but for the purposes of this article, I will omit them as not directly relevant to the issues I want to discuss.

The Copyright Law

        Under the law, a derivative work is defined as:

[A] “derivative work” is a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, elaborations, or other modifications, which, as a whole, represent an original work of authorship, is a “derivative work”.
        The law further provides:
 (a) The subject matter of copyright as specified by section 102 includes compilations and derivative works, but protection for a work employing preexisting material in which copyright subsists does not extend to any part of the work in which such material has been used unlawfully.

(b) The copyright in a compilation or derivative work extends only to the material contributed by the author of such work, as distinguished from the preexisting material employed in the work, and does not imply any exclusive right in the preexisting material. The copyright in such work is independent of, and does not affect or enlarge the scope, duration, ownership, or subsistence of, any copyright protection in the preexisting material.

        There was no question that the software as revised by the Chinese programming company was a derivative work based on the underlying software and that Price Waterhouse was the copyright proprietor of the underlying software.  Thus the issue was joined as to which party was the copyright proprietor of the derivative work.

        As indicated above, the copyright law provides that the creator of a derivative work that is not an infringement of the underlying work is the owner of rights of copyright in that derivative work, but does not acquire any rights to the underlying work.  However, the creator of that derivative work must have created the derivative work with the authority of the copyright proprietor since the copyright proprietor of the underlying work has the exclusive right to make derivative works, as discussed above.  That means that the Chinese programming company had to have authorization from Price Waterhouse to create and prepare the revisions that became the derivative work.

        Without any such authorization, the creator of the derivative work cannot use any part of the underlying work without the permission of the copyright proprietor in that underlying work nor can the copyright proprietor of the underlying work use any part of the derivative work.  A stalemate results.

        You should read “Derivative Rights and Web Sites.”

        Therefore, parties contemplating having third parties create derivative works based on underlying copyrighted works should always have a written, thorough license covering the many issues involved in such a transaction including but not limited to the issues relating to the ownership of the rights in the derivative work.

The Letter Agreement

        The Court noted that while the law provides that the creator of the non-infringing derivative work may have the right to claim the copyright in the derivative work, the parties to the authorization transaction may alter their rights to that derivative work by contract.  The Court reviewed the above letter agreement and the evidence in regard to the intention of the parties in regard to the same.  The Court concluded that the said agreement provided the requisite authorization for the Chinese company to prepare a derivative work and that, even though the said agreement was ambiguous in regard to the rights of ownership in and to that derivative work, it also concluded that the evidence supported the conclusion that it was the intent of Price Waterhouse that it would own the rights of copyright in and to the derivative work.

        It cited Nimmer on Copyright, a well-respective treatise, which states:

[T]he right to claim copyright in a noninfringing derivative work arises by operation of law, not through authority from the copyright owner of the underlying work.  Nonetheless, if the pertinent agreement between the parties affirmative bars the licensee from obtaining copyright protection even in a licensed derivative work, that contractual provision would appear to govern. [emphasis supplied by the Court].

        Parties to most transactions are allowed to alter their respective rights and obligations by agreement.  Read “Private Laws."

        If the agreement is clearly written, then the parties can each read it and recognize the strengths or weaknesses in their respective legal positions and that can go a long way toward eliminating the need to resort to the civil litigation process, which can be expensive, time consuming and which ultimate outcome is often uncertain.

        A thorough agreement is thus in the best interests of all parties.

© 2002 Ivan Hoffman.  All Rights Reserved.


This article is not intended as legal advice.  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.


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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