Walthal v. Rusk, 98-1659

• Decision Date: 26 March 1999
• Docket Number: No. 98-1659,98-1659
• Parties: 254 Copr.L.Dec. P 27,890, 50 U.S.P.Q.2d 1311 Paul L. WALTHAL, Gibson J. Haynes, and Jeffrey S. Coffey, Plaintiffs-Appellees, v. Corey RUSK d/b/a Touch and Go Records, Touch and Go Records, Inc., and Touch and Go Distributions, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 481

172 F.3d 481

254 Copr.L.Dec. P 27,890, 50 U.S.P.Q.2d 1311

Paul L. WALTHAL, Gibson J. Haynes, and Jeffrey S. Coffey, Plaintiffs-Appellees, v. Corey RUSK d/b/a Touch and Go Records, Touch and Go Records,

Inc., and Touch and Go Distributions, Inc.,

Defendants-Appellants.

No. 98-1659.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 7, 1998.

Decided March 26, 1999.

Elliot B. Pollock, Chicago, IL; Sawnie R. Aldredge (argued), Zumwalt, Almon & Hayes, Nashville, TN, for Plaintiffs-Appellees.

Arthur U. Ellis, Chicago, IL; Santiago A. Durango (argued), Sandy, UT, for Defendants-Appellants.

Before COFFEY, FLAUM, and EVANS, Circuit Judges.

TERENCE T. EVANS, Circuit Judge.

Paul L. Walthal, Gibson J. Haynes, and Jeffrey S. Coffey are the Butthole Surfers. For the unenlightened, that's a musical group. ¹ In 1984 they entered into an agreement with Corey Rusk, who had formed a company which eventually became Touch and Go Distributions, Inc. and Touch and Go Records, Inc., both Illinois corporations. Under the agreement, Touch and Go was granted the nonexclusive right to manufacture and sell copies of the Butthole Surfers' musical performances in return for a 50 percent share of the net profits.

One would ordinarily think that an agreement of the type we just described would be in writing, for as Yogi Berra observed, "A oral contract isn't worth the paper it's written on." But, alas, the Butthole Surfers and Touch and Go never got around to writing up their deal. So what we have here is simply an oral licensing agreement between the parties that had no specified duration; it did not set out any circumstances giving rise to a right of termination. Under the agreement, until the dispute before us raised its head, the Butthole Surfers provided Touch and Go with six recorded performances and one video performance to manufacture and sell.

On December 4, 1995, the Butthole Surfers demanded that the agreed 50/50 split be changed to a more favorable (for them) 80/20 split and that the agreement terminate in 3 years. Touch and Go responded, in writing, that it considered the parties bound by the original agreement. On December 8 the Butthole Surfers sent a letter terminating the agreement effective immediately and demanding a return of inventory. Touch and Go, however, continued to copy and sell the performances--an action that fueled this suit claiming copyright infringement along with several pendent state-law claims.

The district court granted a summary judgment motion filed by the Butthole Surfers on the pivotal issue in the case--whether 17 U.S.C. § 203 prohibits the termination of the agreement. The court determined that the Butthole Surfers' termination of the licensing agreement was effective and, accordingly, infringement by the defendants was found. The decision prompted a stipulation disposing of the remainder of the case, and this appeal followed.

Touch and Go presents two primary issues. The first is that the licensing agreement is irrevocable because consideration--the 50 percent share of the profits--was paid. This contention is without merit. The other issue, which is seriously pursued, is that termination of the agreement was prohibited by § 203 of the Copyright Act. The argument here is that the statute prohibits the termination of a copyright license--including one of unspecified duration arising out of an oral agreement--prior to 35 years from the date the license was granted. It is to this issue we now turn.

Section 203 provides that "the exclusive or nonexclusive grant of a transfer or license of copyright or of any right under a copyright ... is subject to termination" under certain conditions. As relevant here, subsection (3) provides:

Termination of the grant may be effected at any time during a period of five years beginning at the end of thirty-five years from the date of execution of the grant[.]

The disagreement before us is simply whether the statute establishes 35 years as a minimum or maximum term of a grant. That is, is the statute an attempt to ensure that regardless of the terms of the agreement--say an agreement for the life of the copyright--between the copyright owner and the licensee, the agreement can, nevertheless, be terminated after 35 years, or whether no agreement can be terminated until 35 years have passed, or something in between those extremes.

Despite the fact that § 203 was enacted over 20 years ago as part of the Copyright Act of 1976, there is very limited case law on its interpretation. The only case from a court of appeals is from the Ninth Circuit, Rano v. Sipa Press, 987 F.2d 580 (1993). ² Kip Rano was a professional photographer who granted a nonexclusive license of unspecified duration to Sipa to reproduce, distribute, and sell his photographs. The relationship continued for about 8 years; Rano then attempted to revoke the agreement and, when Sipa continued to sell the photographs, sued for copyright infringement. The court of appeals recognized that California law, which was the relevant jurisdiction, allowed for termination at will of agreements of nonspecified duration and that under appropriate circumstances the copyright law allows the use of pertinent state law. However, the court said that the "application of this principle of California contract law here would directly conflict with federal copyright law" so the state law, the court concluded, was preempted. The court then interpreted § 203 to mean that unless a license explicitly specifies an earlier termination date, it cannot be terminated prior to 35 years.

To put it mildly, this result is deplored by commentators. If the Rano decision were a Broadway show, bad reviews would have forced it to close after opening night. Nimmer, for instance, finds Rano a "remarkable result," a "wayward result," "stunning, both for its utter absence of support in law and for the breadth of its error." Nimmer says that the 35-year period in § 203 is a maximum period that a contract can be enforced, not a minimum as Rano holds. See 3 Melville B. Nimmer & David Nimmer, Nimmer on Copyrights § 11.01 (1998). William T. Rintala says that the Rano court's ruling turns protection for authors into a "windfall for those acquiring rights for an indefinite term." William T. Rintala, Copyright Update--Substantive Law, 379 PLI/Pat at 271, 325-26 (Practicing Law Institute, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series, 1994). Yet another commentator calls Rano a "ridiculously incorrect interpretation of the statute. It takes a provision meant to protect the author and turns it into a straitjacket." Mark F. Radcliffe, Copyright Ownership Issues, 411 PLI/Pat at 243, 300 (Practicing Law Institute, Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series, 1995).

We think it's time to take a fresh look at § 203, putting the statute in context, and because its plain meaning is not perfectly clear, we will cast a glance at its legislative history for whatever guidance it might disclose. The term of a copyright is the life of the author plus 50 years. 17 U.S.C. § 302(a). The ownership of a copyright vests in the author, who, of course, may transfer his rights as he sees fit. 17 U.S.C. § 201(a). A "transfer of copyright ownership" is an "assignment, mortgage, exclusive license, or any other conveyance, alienation, or hypothecation of a copyright or of any of the exclusive rights comprised in a copyright, whether or not it is limited in time or place of effect, but not including a nonexclusive license." 17 U.S.C. § 101. Transfers of ownership must be in writing. 17 U.S.C. § 204(a). Nonexclusive licenses are excluded from the definition of "transfer of copyright ownership." Therefore, nonexclusive licenses such as the one we are considering here may be granted orally, but they do not transfer ownership of the copyright. I.A.E., Inc. v. Shaver, 74 F.3d 768 (7th Cir.1996).

The purpose of § 203 is to give authors and their heirs a second chance to market works even after a transfer of rights has been made. Often, it is not clear, soon after the creation of a work, how valuable it will prove to be. ³ Congress intended to safeguard "authors against unremunerative transfers." The provision was needed "because of the unequal bargaining position of authors, resulting in part from the impossibility of determining a work's value until it has been exploited." H.R.Rep. No. 94-1476, at 124 (1976); S.Rep. No. 94-473, at 108 (1975), U.S.Code Cong. & Admin.News 1976, 5659, 5740. Therefore, if an author had granted a license for the life...