Royalties and Copyright Standing

Employers benefit from the labor of their employees in many ways beyond the day to day tasks assigned that employee. Copyrightable work produced within the scope of employment belongs to the employer as work for hire. Any other intellectual property created by an employee can be transferred to an employer through an assignment. When a contractor, in contrast with an employee, produces a copyrightable work, the rights remain with the contractor unless a signed document transfers some or all of those rights. An author has the right to transfer some or all of her copyright, usually in exchange for payment or royalties.

According to copyright law, a person must own a registered copyright to sue for infringement. Under most circumstances, if an author transfers her interest in a work to another person, for example an employer or publisher, the author no longer has the ability to sue for infringement, called standing; however, if the author receives royalties in exchange for the copyright, then she retains the right to sue for infringement. The courts recognize royalties as an expression of continued interest in a particular work and reward that interest by allowing authors to protect their creations.

Mr. Smith was a composer who transferred his copyright in several existing compositions, as well as future compositions, to Sunshine Sound Entertainment Inc. and its affiliates in exchange for royalties. Smith wrote a composition outside the scope of the agreement. Even though the copyright was not assigned, it was registered with Smith as composer by one of Sunshine Sound’s affiliates, Harrick Music. Mr. Smith acquiesced to the registration. In time, Smith’s relationship to Sunshine Sound deteriorated and they signed a termination agreement, granting Smith continued royalties but saying nothing about ownership of the copyrights. Mr. Smith died having received no royalties post termination from Sunshine Sound and no royalties at all from the Harrick Music. Smith’s estate filed an order of termination with the copyright office and sued the assignees for infringement.

While the trial court found no standing to claim infringement, since Mr. Smith had filed no copyright registrations, the Federal Court of Appeals for the Eleventh Circuit disagreed. In Smith v. Casey et al, the court found, in line with other circuit decisions (see Batiste v. Island Records Inc., 179 F.3d 217, 219-21 & n.2 (5th Cir. 1999); Cortner v. Israel, 732 F.2d 267, 271 (2d Cir. 1984); Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1144 (9th Cir. 2003); Moran v. London Records, Ltd., 827 F.2d 180, 183 (7th Cir. 1987); 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 12.02[D]), that a copyright filed on behalf of an author gives that author standing to file in court; but, only if the author is, or should be, receiving royalties on the work. Royalties indicate an author’s continuing interest in his or her rights in the work, an interest which the courts respect by granting standing in infringement cases.

This decision is a none too delicate reminder of the difference between a contractor, assignor, and employee. When distinguishing an employee from other relationships, the courts take into account employment status, scope of work, and contractual obligations. Many contracts for any working relationship now transfer or assign rights to all IP created within the scope of the work being done. According to the Restatement of Agency (2nd), an employee’s conduct is within the scope of employment only if “(a) it is of the kind he is employed to perform; (b) it occurs substantially within the authorized time and space limits; [and] (c) it is actuated, at least in part, by a purpose to serve the [employer].”

This decision also emphasizes the importance of the type of payment made in exchange for copyright rights. The court highlighted the receipt of royalties as signaling an ongoing interest in the copyrighted work. Had the copyright been assigned in exchange for a lump sum payment, the author would not have had a right to claim infringement. While royalties may see less initially expensive or more fair, they have far reaching influence over future interests in the copyright.

The video game industry relies heavily on contractors and assignments. Due to funding limitations, most game companies cannot hire employees in every area of game development. This case reminds developers and those that represent them that when forming contracts, they ought to be careful how the transfer or assignment of rights is handled. Royalties will be less expensive initially but give the author increased control over the work. A lump sum payment ensures the complete transfer of all the right associated with a copyright. Developers ought to be aware of the author’s continuing right to sue for infringement and plan accordingly.

About Suzanne Jackiw

Suzanne Jackiw is an official contributor to Law of the Game. She’s a student at Chicago-Kent College of Law, focused on Business and Intellectual Property issues related to video game law; and, she works as a business intern with several small indie game companies and as a law clerk for The Game Attorney. She has attended many video game development conferences, including Steam Dev Days and the Game::Business::Law Summit. The opinions expressed in her columns are her own. Reach her at Suzanne[dawt]Jackiw[aat]Gmail[dawt]com.

Leave a Reply