Loan-Out Corporations Ambush Copyright Grant Termination Rights

I previously discussed the copyright termination of transfer provisions in my post, Termination of Transfer Provision Applies to All Authors, Not Just Musicians17 U.S.C. §203 provides for the termination of a copyright grant 35 years after the grant was made, if the grant was made after January 1, 1978.  Section 304(c) creates a similar right of termination for copyrights that were registered before January 1, 1978.  The law on copyright termination of transfers recognizes the unequal bargaining power between publishers and authors and is an attempt to allow authors and their families the opportunity to reclaim and benefit from the authors’ commercially successful works. 

The effect of loan-out corporations on the implementation of the §203 grant termination provision adds a potentially fatal wrinkle to an author’s ability to successfully terminate a copyright grant.  A loan-out corporation is corporation that is usually wholly owned by one person and is used to “loan-out” that person’s services to employers.  Actresses, musicians and professional athletes often provide their services through loan-out corporations.  Loan-out corporations generally limit the liability of the employee and provide tax benefits.  The use of loan-out corporations dates back to the 1930’s. 

Loan-out corporations can be used by anyone who provides a service.  The person whose services are “loaned out” is an employee of the loan-out corporation and therein lies the problem:  Works created by employees are defined as works made for hire under the Copyright Act.  The copyright termination provisions do not apply to works made for hire, so that creators of works made for hire cannot terminate copyright grants.  The copyright grant termination provisions address reclaiming copyrights.  Since works made for hire never belong to the actual creator, there is nothing the creators can reclaim.

Under 17 U.S.C. §101

A “work made for hire” is—

(1) a work prepared by an employee within the scope of his or her employment; or

(2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire. For the purpose of the foregoing sentence, a “supplementary work” is a work prepared for publication as a secondary adjunct to a work by another author for the purpose of introducing, concluding, illustrating, explaining, revising, commenting upon, or assisting in the use of the other work, such as forewords, afterwords, pictorial illustrations, maps, charts, tables, editorial notes, musical arrangements, answer material for tests, bibliographies, appendixes, and indexes, and an “instructional text” is a literary, pictorial, or graphic work prepared for publication and with the purpose of use in systematic instructional activities.

Thus, a work made for hire (also called a work for hire) is a work created by an employee or a work that is specially ordered or commissioned and fits into one of nine specific categories, if there is a written agreement that it is a work made for hire.  Works that are part of a motion picture are included in the nine specific categories, but sound recordings and photographs are not.  Sound recordings and photographs can never be works made for hire unless they are made by employees.  That’s the reason the main stream media discussion of copyright grant termination focuses on recording artists.

What can an artist who provides her services through a loan-out corporation do to preserve her copyright grant termination rights?  Aaron J. Moss and Kenneth Basin address this question in Copyright Termination and Loan-Out Corporations:  Reconciling Practice and Policy.  Moss and Basin discuss the possible solutions of using an alternative organizational form, such as an LLC; writing the agreement the artist signs with her loan-out corporation to avoid application of the work made for hire statute; writing the agreement between the loan-out corporation and the purchaser of services, e.g. a production company, to reserve the termination rights to the artist; and revising the Copyright Act to exclude works made by loan-out corporation employees as works made for hire. 

Of the possible solutions suggested by Moss and Basin, I think the most workable one is writing the agreement the artist signs with her loan-out corporation to avoid application of the work made for hire statute. 

[R]ather than (as is the common current practice) explicitly providing that the author’s contributions to his or her loan-out employer are works made for hire, the author’s agreement with his loan-out could instead provide that ownership of any copyrights is expressly reserved to the artist, but such copyrights are assigned to the loan-out.

(page 97).

According to Moss and Basin, the potential pitfall with this approach is the distinction between ownership of the copyrighted work and legal authorship.

Nevertheless, such an agreement may only serve to vest the artist with ownership of the copyrighted work, and not legal authorship of such work – and, as discussed above, the availability of statutory termination rights depends on the latter rather than the former.  Specifically, if the loan-out employer is deemed the “author” of a work created in the course and scope of an artist’s employ, such work may not be terminable even if the employer and employee agree that copyright ownership will vest in the employee.

(page 98).

A court may determine that the work created by the artist is a work made for hire at its inception, so that the artist and loan-out corporation will not be able to enter into a contract that changes the work made for hire status.  The only solution may be for artists who want to preserve their copyright grant termination rights to not use loan-out corporations or similar entities to provide their services.

Anyone who is interested in exploring this topic further should read Moss and Basin’s article.  It’s an academic article, published in the Harvard Law School Journal of Sports & Entertainment Law and, accordingly, contains footnotes with references to even more resources on the topic.

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