Waite v. UMG Recordings, Inc.

450 F.Supp.3d 430

John WAITE, an individual; Joe Ely, an individual; Kasim Sulton, an individual; Susan Straw Harris p/k/a Syd Straw, an individual; Leonard Graves Phillips, an individual; Stan Sobol a/k/a Stan Lee, an individual; and Israel Caballero, an individual; and on behalf of all others similarly situated, Plaintiffs,

v.UMG RECORDINGS, INC., a Delaware corporation doing business as Universal Music Group, and Does 1 through 10, Defendants.

19-cv-1091 (LAK)

United States District Court, S.D. New York.

Signed March 31, 2020

Ryan E. Cronin, Gregory M. Bordo, David M. Perry, Blank Rome LLP, Evan S. Cohen, Maryann R. Marzano, Cohen Music Law, Attorneys for Plaintiffs.

Steven M. Bierman, Melanie Berdecia, Rollin A. Ransom, Lisa M. Gilford, Adriane Peralta, Sidley Austin LLP, Richard S. Mandel, Thomas Kjellberg, Cowan, Liebowitz & Latman, P.C., Attorneys for Defendant UMG Recordings, Inc..

MEMORANDUM OPINION

Lewis A. Kaplan, District Judge.

Aspiring singers, musicians, authors and other artists – sometimes young and inexperienced and often not well known – tend to have little bargaining power in negotiating financial arrangements with recording companies, publishers, and others who promote and commercialize the artists' work. They often grant copyright in that work as part of the bargain they strike for promotion and commercialization. Accordingly, when an artistic work turns out to be a "hit," the lion's share of the economic returns often goes to those who commercialized the works rather than to the artist who created them. Section 203 of the Copyright Act of 1976 established a limited opportunity for artists to terminate the copyright ownership that they had granted to commercializers decades earlier in order to address this issue. The idea was that termination of these rights would more fairly balance the allocation of the benefits derived from the artists' creativity.

Termination is effectuated by serving the grantee with written notice.¹ This notice lists, among other information, the effective date of termination.² Once the effective date of termination has passed, the grantee becomes the owner of the copyright and therefore holds exclusive right to reproduce and distribute the sound recordings.³

This is a purported class action by recording artists⁴ whose albums were released by predecessors in interest of defendant UMG Recordings, Inc. ("UMG") pursuant to agreements the artists signed in the 1970s and 1980s that granted copyright in their works to UMG's predecessor recording companies. These grants allowed those companies (and now UMG) to market, distribute, and sell the artists' sound recordings.

Each member of the class allegedly has terminated that grant as to the sound recordings comprising certain albums.⁵ UMG disputes the validity of those terminations.⁶

Plaintiffs argue that UMG is infringing the artists' copyrights by continuing to market and sell the recordings for which the effective date of termination has passed. With regard to recordings for which termination notices have been served but the effective dates of termination have not yet been reached, plaintiffs seek a declaratory judgment of certain legal rights and duties of the parties. Plaintiffs seek also an injunction restraining defendant from continuing to deny and disregard the termination notices. The matter is before the Court on UMG's motion to dismiss the first amended complaint ("FAC").

Discussion

I. Legal Standards

A. Motion to Dismiss

To survive a motion to dismiss for failure to state a claim, a complaint must allege facts sufficient "to state a claim to relief that is plausible on its face."⁷ This standard is met where the "pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."⁸ The Court accepts as true all well-pleaded factual allegations and "draw[s] all reasonable inferences in the plaintiffs' favor."⁹ In resolving a motion to dismiss, the Court may consider "any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit."¹⁰

B. Section 203 of the Copyright Act of 1976

Recording artists often transfer copyright ownership in their works to record labels and music publishers. Recognizing that publishers often hold more bargaining power than authors and the "impossibility of determining a work's value until it has been exploited," Congress created a termination right to provide authors with an opportunity to enjoy a greater share of their work's economic success.¹¹ Authors of works created on or after January 1, 1978 may terminate transfers of a license or copyright in those works thirty-five years from the date of the grant's execution or, if the grant covers publication rights, the earlier of thirty-five years after the work's publication or forty years after the execution of the grant.¹² The termination right for the first eligible works therefore did not vest until January 1, 2013.

Termination under Section 203 is available for all works "executed by the author," other than those "made for hire."¹³ Termination is not automatic. The earlier grant will remain in effect absent a termination notice.¹⁴ These notices must include the effective date of termination, which may fall on any date in the five-year period after the work becomes terminable, and other requirements set forth by regulation.¹⁵ The notice must be recorded with the Copyright Office and served upon the grantee prior to the effective date of termination.¹⁶ Upon the effective date of termination, the grant is terminated and the copyright reverts to the author.¹⁷

For instance, if an author executed a grant transferring the copyright in Work A in January 1980, the grant for Work A may be terminated on a date between January 2015 (thirty-five years from the date of execution) and January 2020. If the author selected January 1, 2018 as the effective date of termination, assuming the termination notice comports with all applicable requirements, the grantee can continue to distribute Work A until December 31, 2017. On January 1, 2018, copyright ownership reverts to the author. At that point, any continued exploitation of that work by the grantee is an infringement on the author's copyright.

II. Plaintiffs' Claims Cannot be Dismissed Based on Section 203's "Works Made for Hire" Exception

Under Section 101 of the Copyright Act, a work made for hire is either a work "prepared by an employee within the scope of his or her employment" or certain types of "specially ordered or commissioned" work, so long as the parties agree in writing that the work will be considered a work made for hire.¹⁸ The statute enumerates nine categories of works that can qualify as commissioned works: a contribution to a collective work, a part of a motion picture or other audio visual work, a translation, a supplementary work, a compilation, an instructional text, a test, answer material for a test, and an atlas.¹⁹

The legal author (creator of the work) and owner of a "work made for hire" is the employer or person who specially ordered it, rather than the artist.²⁰ Section 203 excludes these works from the termination right precisely for this reason: "The hired [or commissioned] party, although the ‘author’ in the colloquial sense ... never owned the copyrights to assign. It stands to reason, then, that there are no rights the assignment of which [the artist or] his or her heirs may now terminate."²¹

Though plaintiffs' agreements with UMG's predecessors contained "works made for hire" language – which stated that the recording company, rather than the artist, was the legal author and owner of the works²² – neither party argues, at this stage, that plaintiffs' works were specially commissioned. Nor do the parties contend that there was an employee-employer relationship between the artists and recording companies. As will be explained in more detail in the following section, defendant, for purposes of the motion to dismiss, argues only that the "works made for hire" language is relevant to the question of when the statute of limitations began to run on plaintiffs' claims.²³ The Court therefore need not resolve, for purposes of this motion, whether the agreements conferred "for hire" status on the works.

III. Plaintiffs' Claims: Copyright Infringement and Declaratory Relief

Plaintiffs' copyright infringement claim is brought on behalf of the artists with albums for which the respective effective dates of termination have passed. Plaintiffs with albums for which the effective dates of termination had not passed when the FAC was filed request a declaratory judgment concerning the rights and duties of the parties.

A. Plaintiffs' Infringement Claims Are Not Barred by the Statute of Limitations

1. When Did Plaintiffs' Copyright Infringement Claims Accrue?

A copyright infringement claim must be brought within three years from the time the cause of action accrues.²⁴ Accrual occurs when a plaintiff "knows or has reason to know of the injury upon which the claim is premised."²⁵ This is known as the discovery rule.²⁶

a. Case Law

The Second Circuit follows the discovery rule for all copyright claims.²⁷ However, the application of the rule may vary. "An ownership [or authorship] claim accrues only once, when ‘a reasonably diligent plaintiff would have been put on inquiry as to the existence of a right.’ "²⁸ "By contrast, an infringement action may be commenced within three years of any infringing act, regardless of any prior acts of infringement[.]"²⁹

This distinction is less clear when an infringement claim implicates questions of ownership or authorship.³⁰ To succeed on an infringement claim, a plaintiff must establish "ownership of a valid copyright" and "copying of constituent elements of the work that are original."³¹ As...