U.S. Copyright Office Publishes Final Rule On Termination Rights, Royalty Underpayments and Derivative Rights Disputes

On July 9, 2024, the U.S. Copyright Office published its final rule confirming that the derivative works exception to termination rights do not apply to the statutory blanket mechanical licenses established under the Music Modernization Act.  What’s the importance of the final rule, and who will benefit from it?

Here’s the legal context! Sections 203 and 304 of the Copyright Act permits authors, such as songwriters and recording artists, and their heirs to terminate copyright grants, including transfers or licenses within certain windows of time after 35 years or 56 years. But, an exception within Sec. 203 and 304 of the Copyright Act provides that termination is subject to an exception that allows derivative works created before termination to continue to be utilized under the terms of the grant after termination (the “Exception”). The Exception was intended to balance the rights of creators of derivative works with the termination rights of the original creators and their heirs, but led to a very unintended result of royalty overpayments to publishers and underpayments to the copyright grantors who had successfully terminated their copyright grants.

Now here’s the context for the creators and heirs who have terminated grants or licenses of copyrighted works. Suppose you’re a songwriter who terminated a grant to a publishing company 56 years ago, but before or after the termination date that publishing company licensed the song to a record company to release a new sound recording of the song.  Well, relying on the derivative works exception, the music publisher and the record company continued to collect their share of the royalties from the release of the sound recording after termination, but the songwriter did not.

The Copyright Office’s final rule confirms the proposal it made nearly four years ago, overriding the objections of the National Publishers Association and the Motion Pictures Association, and others.  The rule confirms that the derivative works exception to termination does not apply in the context of the blanket license established by the Music Modernization Act (“MMA”), and directs the Mechanical License Collective (“MLC”) established to administer the MMA’s blanket licenses, to correct royalty overpayments to publishers, copyright grantees and assignees, made based on an incorrect interpretation of the Exception.

The rule directs the MLC to notify all relevant pre and post termination copyright owners of any overpayments to engage in a voluntary self-administered royalty overpayment adjustment no later than September 9, 2024, and to re-distribute those royalties in a manner consistent with the Final Rule.  The MLC will administer a mandatory corrective adjustment if the relevant parties do not agree to a self-administered one or fail to notify the MLC of any such agreement by October 9, 2024.

This summary is provided for informational purposes only and is not intended to constitute legal advice nor does it create an attorney-client relationship with Rimon, P.C. or its affiliates.

Celeste Moy is a Partner in Rimon’s Entertainment Sports & Media practice group.  Ms. Moy has extensive music and entertainment law experience primarily representing songwriters, and their successors-in-interest, in disputes over royalty payments and royalty monetization transactions, copyright assignment terminations and recaptures, as well as negotiating and drafting various types of entertainment contracts for recording and performing artists and music producers.  She also helps her clients to obtain trademark registrations and trademark license agreements for use of their logos, and creative works in connection with advertising, marketing materials and merchandise. Read more here.