Behind The Deal & Case Analysis

Behind The Deal: Lawyers for artists, managers and labels should be aware of state labor laws and pending legislation that may affect contracts. Case Analysis: A federal court in New York decides that

Behind The Deal: Lawyers for artists, managers and labels should be aware of state labor laws and pending legislation that may affect contracts.
Case Analysis: A federal court in New York decides that a claim for copyright infringement accrues when the infringement occurs, not when the copyright owner discovers the infringement.

Behind The Deal: Labor Laws & Personal Service Contracts

Case Analysis: Auscape International v. National Geographic Society

Behind The Deal: Labor Laws & Personal Service Contracts

Lawyers for artists, managers and labels should be aware of state labor laws and some pending legislation that may affect their contracts. California, New York and Florida have similar labor laws, and New York has pending legislation that may affect contracts.

California labor law essentially allows artists to get out of their personal management contracts if their unlicensed managers book gigs for them. Since the labor commissioner can void the contract and order the manger to return all commissions ever received under the contract, there's a hefty price to pay when setting up work for an artist.

The law prohibits anyone from engaging in the occupation of a talent agency without a license. This doesn't mean the manager must be working full-time as an agent; the California Court of Appeal has held that "occupation" includes "temporary or occasional work or service for pay."

Even lawyers aren't protected. Although attorneys are licensed by the state bar, they must obtain a separate agency license to lawfully find work for the artist.

Florida and New York have similar provisions requiring talent agents (called "theatrical agents" in New York), to obtain licenses if they want to procure work for an artist lawfully.

Why doesn't every manager simply apply for a license? Often, managers and lawyers don't know about this requirement. Other times, the representatives don't want to spend the money. All three state's laws require an application fee plus the posting of a surety bond.

In Florida and New York, the applicant must post a $5,000 bond ($10,000 for a modeling agent in New York). In California, a $10,000 bond is required. This often means the manager or lawyer must either own real estate to secure the bond or have the cash available.

If pending New York legislation becomes law, the term of recording contracts -- and possibly publishing deals -- will be limited. The law would govern contracts entered into by New York residents and those entered in New York with non-residents. Nearly all contract provisions in deals entered with major companies state that New York law governs interpretation and enforcement of the contracts.

If passed, any individual, company or contractor that enters "a contract with an artist for personal services in the sound recording industry" is an "employer" -- even if, technically, the company is an independent contractor rather than an employer under other laws.

An artist is defined as any individual, other than a minor, "who enters into a contract to render personal service as a songwriter, composer, comedian, producer, musician, vocalist, or as any other performing artist in the sound recording industry for an employer." Other laws govern minors' contracts.

The types of contracts covered are agreements "whereby an artist agrees to render personal services for consideration." It's unclear whether or not this may extend to publishing deals, since most agreements between songwriters and publishers could be interpreted as having an intent for the songs to become part of some type of sound recording.

The law would make any agreement unenforceable beyond three years from the date of execution, unless the artist is represented "in the negotiation and execution" of the contract by "qualified counsel experienced with entertainment industry law and practices." Even when represented, the contract is unenforceable beyond seven years. Any attempt to waive this requirement by either party would be unenforceable.

This law would certainly provide incentive for companies to offer advances sufficient to cover an artist's legal fees and provide more work for music attorneys. On the downside for artists, however, some lawyers who profess to be experienced in this industry are not, and many who are experienced don't have the time to take on additional clients. Some artists may prefer to enter a three-year deal to avoid hiring a lawyer and may lose valuable copyright interests if the deal isn't understood.

California Labor Code, section 1700 et seq.
Florida Regulations of Professionals and Occupations, Title XXXII, Ch. 468, Part VII, section 468.401 et seq.
New York General Business, Article 11, section 170 et seq.
The New York pending bills are S4548 sponsored by Senator Serphin Maltese and A6951 sponsored by Assemblyman Robert Green.
Excellent discussions of the California labor law can be found in Waisbren v. Peppercorn Productions Inc. (1995) 41 Cal.App.4th 246, and Wachs v. Curry (1993) 13 Cal.App.4th 616.

Case Analysis: Auscape International v. National Geographic Society

When their works are infringed, copyright owners benefit in those courts that hold that the statute of limitations begins to run (the claim accrues) when the owner "discovers" the work has been infringed. (See story, Top of the News.)

In those courts that hold that the cause of action for infringement accrues when the infringing activity occurs, owners' claims are barred if they don't discover the infringement or file suit until three or more years after the infringement.

A federal district court in New York issued an opinion on Aug. 12 that may persuade courts in the future to follow this latter rule. A summary of the court's analysis in Auscape International v. National Geographic Society follows.

Plaintiffs are freelance photographers and writers whose works were first published, with their consent, in National Geographic magazine. They assert that their copyrights were infringed by use of their works in microform and electronic editions of the magazine.

Specifically, they claim that defendants are liable for direct and contributory copyright infringement and inducement to infringe copyrights arising out of the use of plaintiffs' works in a CD-ROM archive of digitized images of the magazine, microform publications and databases.

Unlike most other courts that addressed the issue, the Auscape court thoroughly examines the statute of limitations defense as follows.

Copyright Act: The court begins its analysis with the Copyright Act, which provides that infringement claims must be commenced within three years of the date on which the cause of action accrued (17 U.S. C. section 507(b)). The court then points out that the continuing infringement doctrine is unavailable in the second circuit, citing Kregos v. Associated Press (2d Cir. 1993) 3 F.3d 656, 663.

Therefore, plaintiffs could only recover for acts of infringement that occurred within three years prior to the suit unless the action accrued later than the infringement date or the statute was tolled. Since the acts occurred more than three years prior, plaintiffs argued that their claims did not accrue until they first learned of the availability of their works in the databases, just prior to commencement of this suit.

Thus, the issue before the court was whether an infringement claim accrues at the time of the infringement (the "injury rule") or when a plaintiff "knows or has reason to know" of the injury upon which the claim is based (the "discovery rule").

Prior Decisions: Neither the U.S. Supreme Court nor the Court of Appeals for the Second Circuit, the appellate level for New York, has determined which rule governs accrual of copyright infringement claims.

The district courts within the second circuit are divided. The court cited four cases following the injury rule and seven cases following the discovery rule. Reviewing appellate decisions in other circuits for persuasive, rather than binding, authority, the court noted that courts of appeals for the fourth, sixth and ninth circuits followed the discovery rule, but they did so "without any analysis."

Courts in the second circuit often relied on the decision in Merchant v. Levy, which relied on Stone v. Williams, to conclude that the discovery rule applies to infringement claims. The Auscape court did not agree with this reasoning.

The court first noted that many federal courts "long applied a discovery rule, in absence of any authority to the contrary, in determining when claims under a plethora of federal statutes accrued." The Stone case involved the question of when a claim for co-ownership of copyright accrued. That court "simply applied this general rule without examining the text or the legislative history of the Copyright Act," relying only on civil rights and RICO cases, which all followed a decision in another circuit involving a latent medical injury case.

Merchant simply followed Stone, but at least noted that only claims for co-ownership of copyrights -- not infringement -- were involved.

The Auscape court questioned and distinguished the Merchant holding, noting the following differences from the present action:

  • The Merchant court made it clear that it was not resolving the issue of whether the discovery rule applies to a copyright infringement claim;

  • Merchant simply followed Stone, and both decisions rest entirely on then-prevalent views regarding the accrual of federal claims in general;

  • Neither court made an extended analysis of the discovery rule;

  • The Merchant jury made a factual determination as to the date of accrual; and

  • Merchant noted that Stone was a "highly idiosyncratic case" limited to a narrow proposition.

All of these prior decisions were then diminished when the Auscape court pointed out that the U.S. Supreme Court "altered this landscape" in 2001 when it reversed application of a discovery rule for a claim under the Fair Credit Reporting Act.

The Supreme Court "rejected the previously dominant view that federal courts should apply an injury rule only when Congress explicitly has adopted that rule, requiring instead that federal courts look beyond the specific language of a statute to its text and structure in determining what rule should apply when the statute is silent."

The Text and Structure Analysis: In beginning this analysis, the Auscape court noted "two clear things" in the aftermath of this Supreme Court decision: (1) whether Stone and Merchant remain good law is uncertain since both were premised upon the automatic application of the discovery rule that the Supreme Court rejected, and (2) regardless of whether the two cases continue to govern copyright co-ownership claims, the Supreme Court decision indicates that an "uncritical extension of those cases to infringement" would be "unwarranted."

The Text: The text of the Copyright Act lends no guidance to Congress' intent with regard to when an infringement claim accrues, so the court must turn to the legislative history.

Legislative History: Until 1957, there was only a statute of limitations for criminal actions under copyright law. For civil actions, federal courts looked to the limitation periods in the various states. This meant that different periods of limitation and different rules for accrual and tolling applied depending on where the claim was brought.

In 1955, Congress began examining the problem and held hearings on a bill to enact a civil statute of limitations. Therefore, there is ample legislative history to examine on this issue.

Upon examining text of the hearings, the Auscape court learned that lawyers for both users and owners of intellectual property supported a uniform period of limitations so users could know when they would be liable.

The Senate Report revealed that "due to the nature of publication of works of art," in general, "the person injured receives reasonably prompt notice or can easily ascertain any infringement of his rights."

The Auscape court stated that this history made two things clear:

  • The goal of a uniform three-year limitations period was to remove the uncertainty concerning timeliness that "plagued the copyright bar." Since the goal was a fixed statute of limitations, it seems likely that their intent for the time when an infringement claim accrues would not "depend on something as indefinite as when the copyright owner learned of the infringement."

  • An inference can be drawn from the Senate Report that the committee regarded the three-year period "'adequate opportunity' for the owner to commence his case precisely because copyright owners generally receive 'reasonably prompt notice' of infringement."

Letter statements contained in the legislative history were also helpful in discerning intent, especially one that stated "there would seem to be no reason why three years from infringement would not be a sufficient period to permit the institution of legitimate suits."

Finally, the court noted that those involved in the hearings considered including an exception to the three-year requirement for fraudulent concealment. If they thought the discovery rule would govern accrual of an infringement claim, a statutory exception for fraudulent concealment would have been superfluous. Although the Copyright Act never included this exception, the court determined that this does not reflect an intention to adopt a discovery rule; Congress declined to include this exception because "it expected that federal courts would continue to apply fraudulent concealment and other equitable case law as they had done previously."

The Auscape court concluded that the legislative history makes it "strikingly clear that Congress intended to adopt" a limitations period "running from the date of the infringement" because a discovery rule "would have defeated its overriding goal of certainty."

Other Considerations: The court also found support from the Supreme Court's statement in the 2001 case that it adopted the discovery rule "only in two contexts, latent disease and medial malpractice situations," which are quite different from copyright infringement. The "very nature of a latent medical injury is that it does not manifest itself immediately."

For copyright infringement, "the author knows of his copyright ownership from the beginning and, in most cases, the infringement occurs in public." Thus, "the passage of time must leave some wrongs without a remedy."

Plaintiffs' claims were barred.

Since there is much disparity among the district courts, and this opinion is contrary to decisions in other federal circuits, it seems time for a higher court to make a consistent rule. If this well-reasoned decision is followed by other courts, however, plaintiffs may not wish to risk this rule becoming binding legal precedent and may choose to forego an appeal.

For those wishing to track this case, notice of appeal must be filed within 30 days after judgment was entered, which was on or shortly after Aug. 12, 2004.

Case: Auscape International v. National Geographic Society, 02 Civ. 6441 (LAK), decided Aug. 12, 2004
Court: United States District Court for the Southern District of New York, Lewis A. Kaplan, District Judge
Counsel for Plaintiffs: The Soni Law Firm, by Surjit P. Soni
Counsel for Defendants: Weil, Gotshal & Manges LLP, by Robert G. Sugarman, Pierre M. Davis and Denise Alvarez; National Geographic Society by Terrence B. Adamson; Latham & Watkins LLP by Juli Wilson Marshall, Daniel Scott Schecter and Elizabeth Heering Hickey


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