Preempt . . . Preempt . . . Preempt

So, you bring claims for Idea Misappropriation; Unfair Competition; Breach of Oral Contract; Breach of Implied Covenant of Good Faith and Fair Dealing; Negligence; Misappropriation of Trade Secrets; Conversion of Trade Secrets; and Promissory Estoppel. All claims are based on the same set of facts. Any problems?

The Uniform Trade Secrets Act was designed, by the Commissioners, to “be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this Act among states enacting it.”  The general purpose has been stated as follows:

[T]o create a uniform business environment [with] more certain standards for protection of commercially valuable information, and to preserve a single tort action under state law for misappropriation of trade secret as defined in the statute and thus to eliminate other tort causes of action founded on allegations of misappropriation of information.

Other tort causes of action are the issue. One Federal Court judge has explained that finding something other than a trade secret and then applying other tort claims would destroy the general purpose of uniformity.

If the UTSA’s preemption provision only preempted claims of misappropriation of information that meets the statutory definition of a “trade secret,” the provisions purpose would be undermined. In every instance where a plaintiff could not meet the statutory requirements of the Uniform Act, the court would be forced to re-analyze the claim under the various common law theories. Such a result would undermine the uniformity and clarity that motivated the creation and passage of the Uniform Act.

Firetrace USA, LLC v. Jesclard, 800 F.Supp.2d 1042, 1048–49 (D.Ariz.2010). So, what does this all mean when I tell you my idea for a wrestling show, and then you do it without me?

An Indiana Appellate Court say PREEMPT. The Indiana Court followed a famous Hawaii case and found that the majority of jurisdictions applied the USTA's preemption provision as “abolish[ing] all free-standing alternative causes of action for theft or misuse of confidential, proprietary, or otherwise secret information falling short of trade secret status ( e.g. idea misappropriation, information piracy, theft or commercial information, etc.).” HDNET LLC v. North American Boxing Council  2012 WL 3250551, 4 (Ind.App.) (Ind.App.,2012); BlueEarth Biofuels, LLC v. Hawaiian Elec. Co., 123 Hawai‘i 314, 235 P.3d 310, 319 (Haw.2010);  Hauck Mfg. v. Astec Indus., 375 F.Supp.2d 649, 655 (E.D.Tenn.2004)).

The UTSA is intended to foster uniformity in the definition of state laws, and a party may not read this design out of the statutory scheme under the guise of “plain language” or any other rule of construction.

Bad Faith: Trade Secrets

The existence of a trade secret and wrongful misappropriation are two important elements of a theft of trade secrets claim. The focus here is on the latter, misappropriation.

It is tempting for attorneys to bring trade secret claims, but doing so without good evidence of the wrongful act of misappropriation can result in an ugly award of attorneys' fees if you lose. It is becoming more common to assert trade secrets, but doing so without a sound understanding of what is a trade secret and what is a violation of trade secret law can backfire, and the amount of that backfire can be tremendous. Bring a theft of trade secrets claim without proper support can result in an ugly award of attorneys' fees against you a sanction.


Misappropriation under UTSA includes acquiring trade secrets through “improper means” or using trade secrets of another that were obtained “from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use....”  "Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. Reverse engineering or independent derivation alone shall not be considered improper means. A.R.S. 44-401

In a recent California case, the plaintiff sued defendants based on the suspicion that they must have misappropriated trade secrets because the individual defendants left the employ of plaintiff to work for a competitor, who subsequently took one of plaintiff's clients. The result? Let's look at the attorney fees statute in the trade secret context:

44-404. Attorney fees
The court may award reasonable attorney fees to the prevailing party for any of the following:
1. A claim of misappropriation made in bad faith.
2. A motion to terminate an injunction made or resisted in bad faith.
3. Willful and malicious misappropriation.

What is "bad faith?" The California courts have said: “[I]n enacting section 3426.4 the Legislature was concerned with curbing ‘specious' actions for misappropriation of trade secrets, and such actions may superficially appear to have merit. We ... conclude that ‘bad faith’ for purposes of section 3426.4 requires objective speciousness of the plaintiff's claim, as opposed to frivolousness, and its subjective bad faith in bringing or maintaining the claim.” ( Gemini, at p. 1262, 116 Cal.Rptr.2d 358.)

Now, that does not help much.  But this does: simply hiring another's employee and taking a client is not enough to support bringing a claim. The California court says " There is no evidence in the record supporting the claim that defendant misappropriated SASCO's trade secrets. Defendants were not required to conclusively prove a negative (i.e., that they did not steal SASCO's trade secrets). Instead, under the “objectively specious” standard, it was enough for defendants to point to the absence of evidence of misappropriation in the record. It was perfectly legitimate for Rosendin to hire the individual defendants and for the individual defendants to leave the employ of SASCO in favor of a competitor, Rosendin. (See Reeves v. Hanlon (2004) 33 Cal.4th 1140, 1149, 17 Cal.Rptr.3d 289, 95 P.3d 513.) Speculation that the individual employees must have taken trade secrets from SASCO based on their decision to change employers does not constitute evidence of misappropriation. Nor does speculation that Rosendin's success in obtaining the Verizon Tustin contract was based on the theft of trade secrets constitute evidence of misappropriation. ( King v. Pacific Vitamin Corp. (1967) 256 Cal.App.2d 841, 850, 64 Cal.Rptr. 486 [Intent to “take away some of plaintiff's business did not prove their actions to be wrongful. There is virtue in fair competition in business even though a competitor is hurt”].)"

An Indiana case (on Illinoislaw) states this more simply: "The appropriate test “requires the party seeking relief to establish both that statements in the pleadings were untrue and that they were made without reasonable cause,” Bouhl v. Gross, 133 Ill.App.3d 6, 88 Ill.Dec. 305, 478 N.E.2d 620, 626 (Ill.App.Ct. 4th Dist.1985) (citation omitted) (construing former 735 Ill. Comp. Stat. § 5/2–611), in light of “circumstances existing at the time of the filing,” Bennett & Kahnweiler v. American Nat'l Bank & Trust Co., 256 Ill.App.3d 1002, 194 Ill.Dec. 929, 628 N.E.2d 426, 430 (Ill.App.Ct. 1st Dist.1993) (citation omitted) (construing Ill. Sup.Ct. R. 137).  Loparex, LLC v. MPI Release, LLC  2012 WL 3065428, 4 (S.D.Ind.) (S.D.Ind.,2012).

Protect Your Business Work Product: Copyright

USI MidAtlantic, Inc. suffered a $22.5 million judgment for copyright infringement from competitor. A former employee of the competitor joined MidAtlantic and supplied them with binders of information about insurance products created by his former employer. Most lawyers would look to confidentiality agreements and trade secrets, but Graham, the competitor, had done something even better: they copyrighted the material. When MidAtlantic copied language from the binders into over 800 client proposals, they were found to indirectly infringe the copyrights.Graham recovered profits attributable to USI MidAtlantic's infringement, plus prejudgment interest.

The lesson? Copyright can be used to protect business work product. The plaintiff proved lost profits: their task may have been easier if they had promptly registered their copyrights.

The big legal issue in the case how far back can copyright damages go? Three years is the statute of limitations. The issue is, though, whether the statute of limitation runs three years from discovery or from when the claim "accrued," e.g. "occurred." Under the injury rule, a claim accrues, and the statute of limitations begins to run, when the plaintiff suffers the injury. If the discovery rule applies, the claim arises when the plaintiff discovers, or with reasonable diligence should have discovered, the injury. The difference: in this case the shorter limit resulted in $2 million in damages, the longer $20 million.

The Third Circuit went with the Discovery Rule. "Although we have not previously addressed this issue, eight of our sister courts of appeals have applied the discovery rule to civil actions under the Copyright Act. See Warren Freedenfeld Assocs., Inc. v. McTigue, 531 F.3d 38, 44-46 (1st Cir.2008);  Comcast v. Multi-Vision Elecs., Inc., 491 F.3d 938, 944 (8th Cir.2007);  Roger Miller Music, Inc. v. Sony/ATV Publ'g, LLC, 477 F.3d 383, 390 (6th Cir.2007);  Polar Bear Prods., Inc. v. Timex Corp., 384 F.3d 700, 705-07 (9th Cir.2004);  Gaiman v. McFarlane, 360 F.3d 644, 653 (7th Cir.2004);  Lyons P'ship, L.P. v. Morris Costumes, Inc., 243 F.3d 789, 796 (4th Cir.2001);  Daboub v. Gibbons, 42 F.3d 285, 291 (5th Cir.1995);  Stone v. Williams, 970 F.2d 1043, 1048 (2d Cir.1992)."

Defense, it seems, often relies on some shred of hope in some case somewhere. On this issue, it is a New York District Court case that gives copyright defendants hope to limit the limitations to accrual. Auscape Int'l v. Nat'l Geographic Soc'y, 409 F.Supp.2d 235, 247 (S.D.N.Y.2004). And defendants want to broaden a Supreme Court case on FCRA statute of limitations to copyright. TRW Inc. v. Andrews, 534 U.S. 19, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001). That dog, it seems, won't hunt.

Here is the Third Circuit case: WILLIAM GRAHAM COMPANY v. HAUGHEY USI

Protect Your Business Work Product: Copyright

USI MidAtlantic, Inc. suffered a $22.5 million judgment for copyright infringement from competitor. A former employee of the competitor joined MidAtlantic and supplied them with binders of information about insurance products created by his former employer. Most lawyers would look to confidentiality agreements and trade secrets, but Graham, the competitor, had done something even better: they copyrighted the material. When MidAtlantic copied language from the binders into over 800 client proposals, they were found to indirectly infringe the copyrights.Graham recovered profits attributable to USI MidAtlantic's infringement, plus prejudgment interest.

The lesson? Copyright can be used to protect business work product. The plaintiff proved lost profits: their task may have been easier if they had promptly registered their copyrights.

The big legal issue in the case how far back can copyright damages go? Three years is the statute of limitations. The issue is, though, whether the statute of limitation runs three years from discovery or from when the claim "accrued," e.g. "occurred." Under the injury rule, a claim accrues, and the statute of limitations begins to run, when the plaintiff suffers the injury. If the discovery rule applies, the claim arises when the plaintiff discovers, or with reasonable diligence should have discovered, the injury. The difference: in this case the shorter limit resulted in $2 million in damages, the longer $20 million.

The Third Circuit went with the Discovery Rule. "Although we have not previously addressed this issue, eight of our sister courts of appeals have applied the discovery rule to civil actions under the Copyright Act. See Warren Freedenfeld Assocs., Inc. v. McTigue, 531 F.3d 38, 44-46 (1st Cir.2008);  Comcast v. Multi-Vision Elecs., Inc., 491 F.3d 938, 944 (8th Cir.2007);  Roger Miller Music, Inc. v. Sony/ATV Publ'g, LLC, 477 F.3d 383, 390 (6th Cir.2007);  Polar Bear Prods., Inc. v. Timex Corp., 384 F.3d 700, 705-07 (9th Cir.2004);  Gaiman v. McFarlane, 360 F.3d 644, 653 (7th Cir.2004);  Lyons P'ship, L.P. v. Morris Costumes, Inc., 243 F.3d 789, 796 (4th Cir.2001);  Daboub v. Gibbons, 42 F.3d 285, 291 (5th Cir.1995);  Stone v. Williams, 970 F.2d 1043, 1048 (2d Cir.1992)."

Defense, it seems, often relies on some shred of hope in some case somewhere. On this issue, it is a New York District Court case that gives copyright defendants hope to limit the limitations to accrual. Auscape Int'l v. Nat'l Geographic Soc'y, 409 F.Supp.2d 235, 247 (S.D.N.Y.2004). And defendants want to broaden a Supreme Court case on FCRA statute of limitations to copyright. TRW Inc. v. Andrews, 534 U.S. 19, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001). That dog, it seems, won't hunt.

Here is the Third Circuit case: WILLIAM GRAHAM COMPANY v. HAUGHEY USI

CD's? CD's still exist? The law tries to catch up . . .

The trouble with technology and the law is that technology moves fast; the law does not.

So, finally a ruling on whether promotional music compact discs can be resold without violating copyright. The answer? Yes, because of the first-sale doctrine. UMG Recordings, Inc. v. Augusto, Case No. 08-55998 (9th Cir., Jan. 4, 2011) (Canby, J.).

UMG Records distributed promotional CDs. They sent them to critics, radio personnel, and others for promotion. Of course, they claimed the cd was only for those to whom they sent them: acceptance of the cd is a license; not for resale; promotional use only; resale or transfer is not allowed and may be punishable under federal and state laws. Very imposing.

I had always wondered, since way back in the day, when a local general manager of a Fort Wayne tv/radio empire gave me a new Iggy Pop album sent to them for promotion, whether I had been the unwitting recipient of a copyright violation or some kind of crime. Cal wasn't worried; but, I never wanted to risk my neck for Iggy Pop.

The question is answered. Despite the warning of the Dire Wolf on the recordings sent, unsolicited and for free, we need not beg "don't murder me record company, please don't murder me," although Mr Augusto was dragged to the Ninth Circuit. His sin? Ebay.

The district court granted Augusto summary judgment finding his sale on Ebay of Big Bad Record Company's promotional cd's permissible under the first-sale doctrine. Lawfully acquiring title of a copyrighted work gives one the permission to transfer, sell, or dispose of that work without permission from the copyright owner. That's the first sale doctrine (which says the second sale is not a copyright violation).

The Supreme Court created the first sale doctrine, which is very simple. Once you buy a car, you can resell it at any price. Why should copyright differ? In Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), the Supreme Court said it should not. Describing its own case, the Supreme Court explained: "In that case, the publisher, Bobbs-Merrill, had inserted a notice in its books that any retail sale at a price under $1.00 would constitute an infringement of its copyright. The defendants, who owned Macy’s department store, disregarded the notice and sold the books at a lower price without Bobbs-Merrill’s consent. We held that the exclusive statutory right to vend applied only to the first sale of the copyrighted work..."

The Big Bad Record Company said its distribution of promotional CDs constituted a license and not a “sale,” pointing to its promotional statements on the CDs. But, the first-sale doctrine applies not only to a sale, but also to any transfer after the copyrighted work being placed in the stream of commerce. And, as any contract law 101 would teach, the free, unsolicited distribution did not create a license. And the commentators had explained that "first sale" really means "first transfer:" Although this statutory limitation is commonly referred to as the first sale doctrine, its protection does not require a "sale." The doctrine applies after the "first authorized disposition by which title passes." 2 Nimmer § 8.12[B][1][a]. This passing of title may occur through a transfer by gift. See 4 William F. Patry, Patry on Copyright § 13:15 ("Since the principle [of the first sale doctrine] applies when copies are given away or are otherwise permanently transferred without the accoutrements of a sale, 'exhaustion' is the better description."); 2 Paul Goldstein, Goldstein on Copyright § 7.6.1 n.4 (3d ed.) ("[A] gift of copies or phonorecords will qualify as a 'first sale' to the same extent as an actual sale for consideration.").

Best of all, there is a Unordered Merchandise Statute. Because the discs were unordered merchandise, the recipients were free to “retain, use, discard, or dispose” of them as they saw fit under the Unordered Merchandise Statute." That statute does, indeed, make unordered merchandise a gift. Kudos to the defense lawyers for this research.

The 9th Circuit dismissed the infringement claim. I am safe for receiving Iggy Pop. And future lawyers will try to understand what was a cd . . .

CD's? CD's still exist? The law tries to catch up . . .

The trouble with technology and the law is that technology moves fast; the law does not.

So, finally a ruling on whether promotional music compact discs can be resold without violating copyright. The answer? Yes, because of the first-sale doctrine. UMG Recordings, Inc. v. Augusto, Case No. 08-55998 (9th Cir., Jan. 4, 2011) (Canby, J.).

UMG Records distributed promotional CDs. They sent them to critics, radio personnel, and others for promotion. Of course, they claimed the cd was only for those to whom they sent them: acceptance of the cd is a license; not for resale; promotional use only; resale or transfer is not allowed and may be punishable under federal and state laws. Very imposing.

I had always wondered, since way back in the day, when a local general manager of a Fort Wayne tv/radio empire gave me a new Iggy Pop album sent to them for promotion, whether I had been the unwitting recipient of a copyright violation or some kind of crime. Cal wasn't worried; but, I never wanted to risk my neck for Iggy Pop.

The question is answered. Despite the warning of the Dire Wolf on the recordings sent, unsolicited and for free, we need not beg "don't murder me record company, please don't murder me," although Mr Augusto was dragged to the Ninth Circuit. His sin? Ebay.

The district court granted Augusto summary judgment finding his sale on Ebay of Big Bad Record Company's promotional cd's permissible under the first-sale doctrine. Lawfully acquiring title of a copyrighted work gives one the permission to transfer, sell, or dispose of that work without permission from the copyright owner. That's the first sale doctrine (which says the second sale is not a copyright violation).

The Supreme Court created the first sale doctrine, which is very simple. Once you buy a car, you can resell it at any price. Why should copyright differ? In Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), the Supreme Court said it should not. Describing its own case, the Supreme Court explained: "In that case, the publisher, Bobbs-Merrill, had inserted a notice in its books that any retail sale at a price under $1.00 would constitute an infringement of its copyright. The defendants, who owned Macy’s department store, disregarded the notice and sold the books at a lower price without Bobbs-Merrill’s consent. We held that the exclusive statutory right to vend applied only to the first sale of the copyrighted work..."

The Big Bad Record Company said its distribution of promotional CDs constituted a license and not a “sale,” pointing to its promotional statements on the CDs. But, the first-sale doctrine applies not only to a sale, but also to any transfer after the copyrighted work being placed in the stream of commerce. And, as any contract law 101 would teach, the free, unsolicited distribution did not create a license. And the commentators had explained that "first sale" really means "first transfer:" Although this statutory limitation is commonly referred to as the first sale doctrine, its protection does not require a "sale." The doctrine applies after the "first authorized disposition by which title passes." 2 Nimmer § 8.12[B][1][a]. This passing of title may occur through a transfer by gift. See 4 William F. Patry, Patry on Copyright § 13:15 ("Since the principle [of the first sale doctrine] applies when copies are given away or are otherwise permanently transferred without the accoutrements of a sale, 'exhaustion' is the better description."); 2 Paul Goldstein, Goldstein on Copyright § 7.6.1 n.4 (3d ed.) ("[A] gift of copies or phonorecords will qualify as a 'first sale' to the same extent as an actual sale for consideration.").

Best of all, there is a Unordered Merchandise Statute. Because the discs were unordered merchandise, the recipients were free to “retain, use, discard, or dispose” of them as they saw fit under the Unordered Merchandise Statute." That statute does, indeed, make unordered merchandise a gift. Kudos to the defense lawyers for this research.

The 9th Circuit dismissed the infringement claim. I am safe for receiving Iggy Pop. And future lawyers will try to understand what was a cd . . .

Fees . . fees. . . fees . .

Section 505 of the Copyright Act provides:

In any civil action under this title, the court in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof. Except as otherwise provided by this title, the court may also award a reasonable attorney's fee to the prevailing party as part of the costs.

Seems simple.

The court has two tasks in applying §505: first, deciding whether an award of attorney's fees is appropriate and, second, calculating the amount of the award.

Simple again.

When is an award appropriate? One must be a "prevailing party," meaning that ". . . one has to be awarded some relief by the court. Id. at 603, 121 S.Ct. 1835. The key inquiry is whether some court action has created a “material alteration of the legal relationship of the parties.” Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep't of Health & Human Res., 532 U.S. 598, 604, 121 S.Ct. 1835, 149 L.Ed.2d 855 (2001).

So, once one prevails, the analysis goes on because, even if a plaintiff or defendant "prevails," the Supreme Court in rejected a rule requiring attorneys' fees in copyright infringement cases as a matter of course, instead leaving the question of attorneys fees to the discretion of district courts. Fogerty v. Fantasy, Inc., 510 U.S. 517, 114 S.Ct. 1023, 127 L.Ed.2d 455 (1994). The Supremes ruled that “attorneys' fees are to be awarded to prevailing parties only as a matter of the court's discretion.”).

So, how does a Court determine its discretion? The Ninth Circuit tells the Court to look at factors. Five factors. They are:

(1) the degree of success obtained;
(2) frivolousness;
(3) motivation;
(4) objective unreasonableness (both in the factual and legal arguments in the case); and
(5) the need in particular circumstances to advance considerations of compensation and deterrence.

But, remember: the applicable standard depends on the statute, and Section 505 simply authorizes fee awards to the prevailing party.

Fees . . fees. . . fees . .

Section 505 of the Copyright Act provides:

In any civil action under this title, the court in its discretion may allow the recovery of full costs by or against any party other than the United States or an officer thereof. Except as otherwise provided by this title, the court may also award a reasonable attorney's fee to the prevailing party as part of the costs.

Seems simple.

The court has two tasks in applying §505: first, deciding whether an award of attorney's fees is appropriate and, second, calculating the amount of the award.

Simple again.

When is an award appropriate? One must be a "prevailing party," meaning that ". . . one has to be awarded some relief by the court. Id. at 603, 121 S.Ct. 1835. The key inquiry is whether some court action has created a “material alteration of the legal relationship of the parties.” Buckhannon Bd. & Care Home, Inc. v. W. Va. Dep't of Health & Human Res., 532 U.S. 598, 604, 121 S.Ct. 1835, 149 L.Ed.2d 855 (2001).

So, once one prevails, the analysis goes on because, even if a plaintiff or defendant "prevails," the Supreme Court in rejected a rule requiring attorneys' fees in copyright infringement cases as a matter of course, instead leaving the question of attorneys fees to the discretion of district courts. Fogerty v. Fantasy, Inc., 510 U.S. 517, 114 S.Ct. 1023, 127 L.Ed.2d 455 (1994). The Supremes ruled that “attorneys' fees are to be awarded to prevailing parties only as a matter of the court's discretion.”).

So, how does a Court determine its discretion? The Ninth Circuit tells the Court to look at factors. Five factors. They are:

(1) the degree of success obtained;
(2) frivolousness;
(3) motivation;
(4) objective unreasonableness (both in the factual and legal arguments in the case); and
(5) the need in particular circumstances to advance considerations of compensation and deterrence.

But, remember: the applicable standard depends on the statute, and Section 505 simply authorizes fee awards to the prevailing party.

Derivative Works Exception

Here is a corner of copyright law: the Derivative Works Exception. 17 U.S.C. §203(b)1), the Derivative Works Exception, presents a defense to a claim of infringement. It provides that a derivative work prepared under the terms of a license “may continue to be utilized under the terms of the [license] after its termination.”



The Supreme Court explained in Mills Music, Inc. v. Snyder, 469 U.S. 153 (1985), that “an entitlement to continue to distribute derivative works under the Derivative Works Exception depends on the terms of the license.” Who's Sorry Now? That is the song which is the subject of the Mills Music case. It's author sold the renewal rights in the song to Mills Music and received an advance and 50% of future revenues on reproductions and a fee on sheet music. The author died, and his estate cancelled the transfer, causing almost all the rights in the copyright to revert to the estate. The exception? Under §304(c)(6)(A), a "derivative work prepared under the authority of the grant before its termination may continue to be utilized under the terms of the grant after its termination." There were many sound recording of "Who's Sorry Now," so the dispute was about who received the continuing royalties from the recordings. The result? Since the recordings had been "prepared under authority of the grant" from the author to petitioner, the terms of the agreement that had been in effect prior to the termination governed the record companies' obligation to pay royalties, and that under those agreements petitioner and respondents were each entitled to a 50 percent share in the net royalty.

What about architectural drawings? In a new case, Architettura licensed its site plans for an apartment complex in Fort Worth to the developer. Ultimately, another architect was chosen. Architettura wanted to be paid for its work, but the developer refused. Architettura claimed infringement. It was undisputed that Architettura owned the work and could revoke any licenses, which it did; but, the Court found that if another firm had used their work while developing the site plan, the new work was a derivative work. And the Plaintiff has a "Who's Sorry Now" problem. They argued that the Derivative Works Exception did not apply to a revocable license of limited duration, as here, but should only be applied to a statutory termination, as in Mills. The Court disagreed.

The lesson? Beware of derivative works if you license a copyright.

Derivative Works Exception

Here is a corner of copyright law: the Derivative Works Exception. 17 U.S.C. §203(b)1), the Derivative Works Exception, presents a defense to a claim of infringement. It provides that a derivative work prepared under the terms of a license “may continue to be utilized under the terms of the [license] after its termination.”



The Supreme Court explained in Mills Music, Inc. v. Snyder, 469 U.S. 153 (1985), that “an entitlement to continue to distribute derivative works under the Derivative Works Exception depends on the terms of the license.” Who's Sorry Now? That is the song which is the subject of the Mills Music case. It's author sold the renewal rights in the song to Mills Music and received an advance and 50% of future revenues on reproductions and a fee on sheet music. The author died, and his estate cancelled the transfer, causing almost all the rights in the copyright to revert to the estate. The exception? Under §304(c)(6)(A), a "derivative work prepared under the authority of the grant before its termination may continue to be utilized under the terms of the grant after its termination." There were many sound recording of "Who's Sorry Now," so the dispute was about who received the continuing royalties from the recordings. The result? Since the recordings had been "prepared under authority of the grant" from the author to petitioner, the terms of the agreement that had been in effect prior to the termination governed the record companies' obligation to pay royalties, and that under those agreements petitioner and respondents were each entitled to a 50 percent share in the net royalty.

What about architectural drawings? In a new case, Architettura licensed its site plans for an apartment complex in Fort Worth to the developer. Ultimately, another architect was chosen. Architettura wanted to be paid for its work, but the developer refused. Architettura claimed infringement. It was undisputed that Architettura owned the work and could revoke any licenses, which it did; but, the Court found that if another firm had used their work while developing the site plan, the new work was a derivative work. And the Plaintiff has a "Who's Sorry Now" problem. They argued that the Derivative Works Exception did not apply to a revocable license of limited duration, as here, but should only be applied to a statutory termination, as in Mills. The Court disagreed.

The lesson? Beware of derivative works if you license a copyright.