The Music Professionals Guide To Copyright Termination Rights

copyright termination rights

Before we jump into a complex topic like copyright termination…Quick!

Off the top of your head…name 3 songs from the early 1990s that spark a good memory for you.

(leave a comment at the bottom of this post…I’m curious to see the musical taste of people who read this article).

For me there were a ton of songs and groups in the early 1990s that were inspiring but here are the ones that immediately came to mind (I had an eclectic upbringing).

My list would be:

– Come and Talk To Me – Jodeci

– Warm it Up – Kris Kross

– La Schmoove – Fu-Schnickens

How does this tie into the Copyright Termination Rights? Well, the artists and/or writers of these songs may have the legal right to regain ownership of their copyrights if they fit certain criteria (I have not analyzed these particular situations listed above).

The topic of Copyright Termination Rights is by far the best kept secret in the entertainment industry.

About 13 years ago I wrote a few blogs, and did this video, on this topic.

Since then I have been heavily involved in this area of law. I have sent Notices of Termination to the major publishing companies on behalf of songwriters and producers, and I have helped my publishing company clients negotiate settlements when they have received Notices of Termination from their songwriters and producers.

But what is the state of this so-called “termination right” that was supposed to level the playing fields by giving artists and writers the power to take back their rights, or at least give them some leverage to re-negotiate lopsided deals that they made 35-40 years ago (or, in the case of some pre-1978 compositions, the window can be 56-61 years ago)

Well, let’s start with a recap of what I am talking about so that everyone is on the same page, and then I’ll talk about what’s been going on recently.

First let me give you a quick example of copyright termination rights with an Infographic. This will give you a quick break down of what a timeline would look like.

Below the Infographic I have a detailed article on what copyright termination rights are and how they work.

__________________________________________________________________________

Infographic: Example of Copyright Termination Rights

copyright termination rights infographic

Want to share this image on your site? Just copy and paste the embed code below:

What Is The Copyright Termination Right?

The Copyright Termination Right sounds like a bunch of legal jargon, but what if I told you that it was possible for you, songwriter or music producer, to take back ownership of your music from the publishing or other media company that “encouraged” you to take an undesirable deal years ago.

Most writers wonder how this is possible when they signed agreements that clearly transferred all of their rights in the compositions to the publisher.

The short answer is that the U.S. Copyright Act includes two statutory termination provisions known as Section 203 (post-1978) and Section 304(c) (pre-1978) “copyright termination rights,” that actually supersede any contract that was signed by an author songwriter or producer. If certain criteria are met, the author or the author’s estate can recapture ownership of his or her copyright in the songs.

What about a termination right for recording artists in sound recordings? Unfortunately, in recent years, courts have denied that such a right exists; however, the fight to reverse this precedent continues.

What Is The Basis For This Law?

Particularly, there are two main reasons why a creative person may possess this right:

First, in the early 20th Century, the U.S. Congress initially created law to protect young authors from having to settle for bad deals that were made for the life of the copyright because at the time, struggling authors had no leverage to negotiate his or her original contracts.

More recently, Congress, through the 1976 Copyright Act (which actually didn’t take effect until January 1, 1978) reiterated this concept by ensuring that an author would have a chance to re-evaluate the value of a copyright after 35 years (or after 56 years for pre-1978 works), and either re-negotiate a deal with the original contracting party, who would likely be open to more fair negotiations, or go elsewhere and make a new deal with another party for the remainder of the copyright life.

Second, federal law, such as the Copyright Act, takes precedence over any state laws, including contract law, so if a direct conflict exists between the two then the federal law governs. This means that an author’s Copyright Termination Right cannot be waived, sold in advance, or otherwise forfeited by contract.

In short, taking advantage of a songwriter or composer is not only unconscionable, but literally unconstitutional.

Even though an author signs a contract that says something like, “all rights are assigned and transferred for the life of the copyright”, which is common language in publishing deals, such a provision is void and ineffective when it comes to an author’s right to terminate the contract assignment and regain control of his or her work pursuant to the Copyright Act.

What Is The Effect of Termination?

Upon the effective date of termination, all of the author’s previously transferred or licensed copyright rights covered by the terminated grant revert to the author or proper person(s) if the author is deceased.

Exercising the termination right does not extend or otherwise modify the original copyright term.

A copyright for an individual author under the 1976 Copyright Act lasts for the life of the author plus 70 additional years. If, on the other hand, the work is a work of corporate authorship, the copyright duration is 95 years from the date of publication or 120 years from creation, whichever expires first.

A proper termination of the rights to one can be transferred again for the remainder of the life of the copyright.

When Can The Right Be Terminate?

For rights granted in works created after January 1, 1978, a songwriter/composer has the right to terminate the granted rights during a five-year period beginning 35 years after the agreement was signed. The legal term for this date is the “execution date of the grant.” This five-year period may be altered to begin on the release date of the music if the agreement also granted the publisher the right to publish music, which most agreements did. The songwriter/composer must send the publisher a proper Notice of Termination, which can be sent as early as 10 years before the 35-year period begins and as late as 2 years before the 40-year period ends.

For example, if music was released on January 15, 2000, a notice of termination can be served as early as January 15, 2025 (effective January 15, 2035), but no later than January 15, 2038 (effective January 15, 2040). You’ll probably need a calculator and a few examples to get the hang of this calculation. Luckily, the U.S. Copyright Office website has created official handy tables to help calculate the date.

For rights granted in works secured prior to January 1, 1978, the start date, time period, and calculation are different. Unfortunately, this term is not clearly defined in the Copyright Act. Many scholars have interpreted it to mean the copyright registration date.

The 5-year termination window begins 56 years following the date that copyright rights are “secured”. The window to give notice is the same.

For example, if music was released on January 15, 1970, a Notice of Termination can be served as early as January 15, 2016 (effective January 15, 2026), but no later than January 15, 2029 (effective January 15, 2031). The Copyright Office website also has a table for this calculation.

Who Can Challenge An Author’s Termination Notice?

The original author or the author’s heirs clearly have the right to termination copyrights; however, more complicated situations may not be as clear. One such case already decided on the basis of standing involved a termination claim brought by the children of Ray Charles against the Ray Charles Foundation.  Though the foundation had become the legal owner of the rights in Charles’ songs, the grant of rights was originally given to Atlantic Records, and later renegotiated to its’ successor-in-interest.

Since only the original grantee can challenge the termination claim, the court determined the foundation had no standing to challenge the claim because they were merely the “beneficial owner” of the copyright interest, rather than the party who was originally granted the transfer.

How Exactly Does This Right Work?

To qualify for the Copyright Termination Right, the transfer or license must have been executed by the author, not by a recipient of an author’s rights (i.e., heirs by will).  However, statutory heirs of the author(s) may still able to affect the termination rights if the author who executed the transfer is since deceased.

I won’t go into the details (that would turn this into a book) but if the original author transferred or licensed the rights, then the discussion of the following issues will give authors some guidance as to whether the rights in their work may be eligible for revision:

When Did The Author Transfer or License The Rights?

The first fact to determine is when the grant of rights in question was executed. A longer analysis applies to works that were created prior to January 1, 1978 because Copyright Law prior to this date was more complex.

Within this sub-topic you have to analyze whether the work is considered a pre-1978 work, a post-1978 work, or a so-called “gap” work where may have been contracted or written before 1978 but actually created or released after 1978.

Was The Copyright Created As A “Work-Made-For-Hire”?

A work-made-for-hire is a work prepared by an employee within the scope of his or her employment for the employer so copyright termination does not apply.

It is also a commissioned work, falling under one of the specially designated categories of such works, where the parties agreed in writing to treat it as a work-made-for-hire (“WFH”).

Certain works are clearly defined in the WFH definition, but there are also several types of work that are excluded entirely, particularly music.

This creates some ambiguity and when the work is not mentioned, a deeper analysis may be required, or possibly a lawsuit to clarify.

Upcoming lawsuits will feature arguments from both sides concerning whether sound recordings can qualify as a WFH.  Labels will take the position that albums fall under a qualifying category such as a “collective work” or “compilation.”

Most music agreements contain both WFH language and assignment language as an attempt to hedge bets on what a court will say one day.

Also, many agreements with WFH language also contain clear language that the artist is not an employee of the record label. By the way, did you know that California’s labor code states that any agreement with work-made-for-hire language in it automatically means that the contracting party is a statutory employee?

I’ll save that topic for another blog.

Who Can Terminate The Copyright?

Generally, if the author is still alive then this answer is easy, the author can terminate the copyright. If the author is not alive then it can get complicated, but the short answer is the author’s heirs have the right to terminate assignments, (again, provided the deceased author made the assignment).

Are There Any Exceptions?

It is worth noting that the Copyright Termination Right does not apply to derivative work prepared under authority of the grant before termination of the grant. A derivative work is a creation that is based on an original work, such as an updated version of original music.

The derivative user may continue to use that work, but no new derivative works can be created after termination.

This topic will be a hot button for many years to come. There are currently a number of active cases that will shape the future of this right so stay tuned!

And if you happen to run into Teddy Riley, Sarah McLachlan, Carole King or another prolific songwriter or producer, please share this article with them!

Until next time!

Richard Jefferson, Esq.

Updated and reposted: September 19, 2023

Copyright Fair Use – Do I Really Need To Clear That?

Video Presentation

I love it when technical law meets mainstream news because it makes an otherwise dry legal topic (like DMCA, Fair Use) much more relatable to the public.

After all who wouldn’t be more interested in hearing the legal details if the story involved Prince and dancing YouTube babies?

Let me explain further.

This perfect storm recently happened when the U.S. Court of Appeals for the Ninth Circuit ruled in a case called Lenz v. Universal Music Corp. et al. that a famous YouTube video featuring a baby bobbing his head to Prince’s “Let’s Go Crazy”, should not have been snatched down by Universal (I’m sure you’ve all seen that pathetic YouTube snowed out screen with the unhappy face that appears when a video is removed).

There is nothing more technical than the Digital Millennium Copyright Act (DMCA) and there is nothing more mainstream than cute baby videos and, of course, anything involving Prince!

This is a major case in which the court basically ruled that, before a content owner requests/demands an Online Service Provider (ISP or OSP for short) like YouTube to take down a video or other content, the content owner must have first considered whether the unauthorized use is “fair use”.

This is the first case to address the Fair Use issue and is going to have wide reaching ramifications.

Especially for those companies that assign some intern to do nothing all day long but look for infringing videos on YouTube and issue takedown notices. (No offense intended to interns…I use to be one of those grunts).

For those of you that like the legal background, let’s start there.

Note: I have an updated video presentation on Fair Use at the bottom of this post

 

What is DMCA?

In general, the DMCA protects OSPs against copyright infringement liability if they comply with certain content takedown rules. So when an OSP, like YouTube, allows users to upload content for other users to view, there is a risk that a user will upload unauthorized copyrighted materials.

If this happens, an OSP is put at risk of committing copyright infringement and has a good chance of getting sued since it is usually the deep pocket in the incident. This is what happened before the DMCA implemented safeguards for OSPs.

The DMCA created a process that allows an OSP to avoid liability if it expeditiously removes copyrighted material when notified by the copyright owner of the content. The notification is known as a “takedown notice” and instructions on how to issue one is usually located in the Terms of Use section of the OSP’s website.

In the Lenz case, Stephanie Lenz uploaded to YouTube a 29-second home video of her children dancing to the song “Let’s Go Crazy” by Prince. She titled the video “Let’s Go Crazy’ #1,” and in the video she asks her 1 year old son if he liked the song. The son cutely bobs his head up and down. Adorable, right?

Well, Universal, who was responsible for enforcing Prince’s copyrights, didn’t think it was adorable.

Universal determined that the video of the little Prince fan was an infringing use based on its standard company criteria. It sent a takedown notice to YouTube, and the video was removed from view. Lenz then sued Universal, alleging that it had misrepresented the infringement.

Lenz argued that Universal’s criteria was literally not fair, meaning it did not consider the Fair Use Doctrine. You remember the Fair Use Doctrine, right? If not, here’s a refresher so that you can really understand the importance of this case.

 

What is Fair Use?

Copyright law grants the author of a work an exclusive right of usage, which bars other persons from using the work without permission from the owner of the copyright.  Fair use is an exception to that right.

The courts previously lead the legal community to believe that fair use could only be used as a defense to a copyright infringement claim, but the Ninth Circuit flipped the script on this notion (We’ll talk about that more in a minute).

When determining whether or not a usage is fair use, courts will consider certain factors, listed below.  None of these factors are determinative on their own, and how much weight the court assigns to each will vary by their relevance in each case.

Even if one factor weighs completely in favor of one side, all four factors must balanced against each other before a decision can be reached.

The factors are:

1. PURPOSE AND CHARACTER OF USE

Often the most influential factor, this component focuses on the very heart of copyright law: As defined in Article I of the US Constitution, does the work “promote the Progress of Science and Useful Arts” through the addition of some new expression or meaning?

Put another way, is the work purely derivative, or is the use transformative?

A derivative use favors the party claiming infringement, since the right to create derivative works is held exclusively by the copyright owner.  A derivative work is a secondary work that incorporates elements of an original, previously created work, and stands alone as new and original relative to the first work.

Even if the work is deemed derivative, finding that the use is sufficiently transformative weighs in favor of the use being fair.

A transformative use favors the alleged infringer.  It is a use that adds some value to the original work, as opposed to just repackaging it.  The work can be transformed by using it for a new purpose, adding some new aesthetic or understanding, or changing the underlying meaning.

Some categories commonly favored as transformative uses are scholarship, education, research, parody, symbolism, certain non-profit or non-commercial uses, production of new technologies, criticism and commentary, and journalistic uses.  Even these “accepted” categories are rife with limitations and are subject to unpredictable outcomes.  Appropriation art, audio remixes, and audio sampling are areas that are still heavily debated.

One of the most famous examples of a derivative work is the visual piece “L.H.O.O.Q.”, in which artist Marcel Duchamp embellished a postcard reproduction of the Mona Lisa with a moustache, goatee, and a cryptic title complimenting the subject’s posterior.

Those few additions, however small, were considered highly transformative because the idea behind the artwork changed from a feat of technical skill to the ridicule of the French bourgeoisie.

Commercial use weighs against the fair use defense, but it also depends on what type of profit is being made. For instance, an artist that uses her own work in a portfolio to secure new clients is unlikely to have her commercial interests held against her, even if the owners of the works are her previous employers.

Likewise, not every non-profit use is given an automatic pass if the court determines that other factors are more controlling.

Conduct of the Defendant – Dealing in bad faith, knowingly exploiting the work, or falsely claiming authorship is relevant to the character of the defendant’s use.  However, using the work after a license has been denied does not weigh against the fair use defense.

 

2. NATURE OF THE COPYRIGHTED WORK

This factor balances the benefit from facts and information being disseminated to the public with the rights of the copyright owner to control their work.

Factual vs. Creative – Think of this as a sliding scale.  The more factual the work being copied, the more likelihood there is for finding fair use.  For example, a filmmaker would have more leeway to use historical footage of the attack on Pearl Harbor in an upcoming film than they would to use a clip from the Hollywood movie, Pearl Harbor.

Unpublished work – The copying of an unpublished work weighs heavily against a fair use finding because the author of the work has the right to control the first sale of the work.  Few exceptions exist, but one such case involved a biographer who copied small portions from the unpublished letters of a famous author who was the subject of his book.

 

3. AMOUNT AND SUBSTANTIALITY

Another sliding scale analysis, this factor balances features both a quantitative and a qualitative aspect.

Quantity & Quality – Generally, the more of a work that is copied, the less likely it is to be a fair use.  Some courts consider “thumbnail” versions of a work to be a lesser amount.

However, even a minute use may not be fair if it targets the “heart” of the work.  To illustrate, while it may be fair use to copy a 3-second clip from Gone With The Wind, it’s less likely to be so if that clip is of Clark Gable saying, “Frankly my dear, I don’t give a damn.”

Parody – Interestingly, the opposite may be true in a parody case, where a use may not be considered parody if the original material is not easily identifiable in the new material (i..e, satire may not be considered fair use parody). Parodies usually want to target the “heart,” or most memorable portions, of the original work to be clear about what they are imitating.

 

4. EFFECT UPON WORK’S VALUE

Often a more difficult factor to analyze is whether the copying negatively affects the income of the owner, or undermines a potential market for the original work.  If a work could have been purchased or licensed for use, there is less likely to be fair use for copying.

Purpose – Is the unauthorized use for commercial or non-commercial purposes?  It’s more difficult to show a negative affect when the copying is done for research or educational purposes.

Parody – Again, the analysis for parodies differs because a parody aims at ridiculing the original.  The test here is not whether the parody negatively affects the original, but whether the parody is so successful that it completely supplants the demand for the original.

 

OTHER CONSIDERATIONS

The above four factors are certainly the meat of a fair use analysis, but the court is free to consider other factors, which may include:

Public Interest – Some courts consider this to be an unofficial “fifth factor.”  When the use relates to issues of public concern, the fair use doctrine is given a wider scope.

De Minimis Use – Fair use will not cover uses that are so insubstantial that they would be considered de minimis, or so minute as to be of no consequence.

Individual Viewpoints – While judges should be neutral and objective parties, the subjective nature of a fair use analysis leaves room for the individual views of judges or juries to affect the decision.

Parody vs. Satire – Works of parody are commonly granted a fair use defense, whereas works of satire are almost always unsuccessful.  A work of parody target’s the original work as the object of the parody.  Satire uses the original work to make a general social commentary.

Acknowledgements/Disclaimers – Acknowledging the original author, or adding a disclaimer that the work is not associated with the original author, may contribute towards showing the user was acting in good faith, but it won’t protect from a copyright infringement claim.

 

Back To The Case…

I covered Fair Use to bring everyone up to speed. So the core disagreement between the parties was whether fair use is “authorized by the law” within the meaning of the Section 512(c) good faith statement.

Universal contended that fair use was not a use authorized by the law, but was rather an affirmative defense that would excuse otherwise impermissible conduct. Under that reasoning, a good faith statement could be made without considering fair use. This is what case law told us for years.

The Ninth Circuit, however, did not agree. First, the court noted that the Copyright Act itself relied on fair use to define what is, or is not, an infringement at all, thereby defining uses that are not infringing. By defining a use as a non-infringing use, it defines an authorized use.

Having determined that fair use is an expressly authorized use in the Copyright Act, the court went on to say that labeling fair use as an “affirmative defense” would be a misnomer. The court also cited several prior Ninth Circuit decisions that also found fair use to be distinct from traditional affirmative defenses.

The court compared the statutory language for compulsory licenses with the fair use language, and noted that both sections phrase their requirements as setting forth what “is not an infringement of copyright.” The court did not see a reason to treat compulsory licenses and fair uses differently in this regard.

Universal presented evidence of the criteria that it used in deciding to issue the takedown notice. The court concluded that Universal’s criteria used in deciding to send a takedown notice did not include criteria sufficient to form a good faith belief about fair use.

In other words, a copyright owner must run a potential infringement use through fair use analysis before issuing a takedown notice.

 

Your Takeaway

All of this to say that copyright owners better have some record of doing a reasonable fair use analysis before issuing a DMCA takedown notice. I interpret this as being a legal opinion from counsel.

You must have a subjective good faith belief that the alleged infringing use is not a “fair use” or you could find that cute baby back up bouncing to your music!

I hope I was able to shed some light on this topic. Feel free to leave a comment with your thoughts!

 

 

Why You Should Form an LLC (Explained in 45 Seconds)

form llcRegardless of the industry, when starting a new business, project, brand, or venture, the first step is to determine the proper legal structure. This typically becomes a choice between a corporation or a limited liability company.

The purpose of this post is to give you a broad strokes overview of a few legal structures so you can have an informed discussion with your attorney, accountant, or other professional advisor.

My goal is to explain the most important points for each in less than a three minute!

__________________________________________________________________________

Below I have 3 items for you that quickly give you a rundown on the most important points.

  1. A Infograph that shows the difference between LLC and Corporations.
  2. A video on why you should form an entity.
  3. A table breaking down the differences between LLC and Corporations.

__________________________________________________________________________

Infograph: Differences Between an LLC or a Corporation?

differences between llc and corporation

Want to share this image on your site? Just copy and paste the embed code below:

_____________________________________________

Video on Why You Should Form an LLC or Corporation

__________________________________________________________________________

Table on Differences Between LLC and Corporation

LLC Explained – Corporation Explained

Different Forms of Business Entities

Entities Characteristics Limited Liability Company (LLC) Corporation
Ownership Rules Unlimited number of members allowed Unlimited number of shareholders; no limit on stock classes
Personal Liability of the Owners Generally no personal liability of the members Generally no personal liability of the shareholders
Tax Treatment The entity is not taxed (unless chosen to be taxed); profits and losses are passed through to the members Corporation taxed on its earnings at a corporate level and shareholders are taxed on any distributed dividends
Key Documents Needed for Formation Articles of Organization / Certificate of Formation; Operating Agreement Articles of Incorporation; Bylaws; Organizational Board Resolutions; Stock Certificates; Stock Ledger
Management of the Business The Operating Agreement sets forth how the business is to be managed; a Member (owner) or Manager can be designated to manage the business Board of Directors has overall management responsibility; Officers have day-to-day responsibility
Capital Contributions The members typically contribute money or services to the LLC and receive an interest in profits and losses Shareholders typically purchase stock in the corporation, either common or preferred

Do Producers of Projects Based On Real Life Events Need To Acquire Life Story Rights?

“42” (Jackie Robinson), “Rocketman” (Elton John), “A Beautiful Day In The Neighborhood” (Fred Rogers), “Bohemian Rhapsody” (Freddie Mercury) “I Wanna Dance With Somebody” (Whitney Houston), “When They See Us” (Kevin Richardson, Antron McCray, Yusef Salaam, Korey Wise, and Raymond Santana), and so many more! These are just a few of the many documentaries and projects based on life stories that have been produced.

These motion pictures, biopics, and other real life-based projects have triggered a renewed discussion in the industry about the issue of life story rights, or “life rights” for short.

What are Life Rights?

 In a nutshell, life rights are thoughts, observations, recollections, reactions, and experiences surrounding, arising out of, and concerning events, incidents, situations, and experiences that have occurred throughout a person’s life.

In other words, it’s the non-public events that happen in someone’s life. These rights may need to be acquired from the subject person just like any other property right before being incorporated into a project. The following are examples of projects where acquiring life rights needs to be considered:

  • A motion picture studio that wants to produce a documentary on a person that includes intimate details.
  • A television network that wants to create an authorized biography movie, or biopic, that tells the story of a person from his or her perspective.
  • A reality show that features a person’s daily life experiences on camera.
  • An author who is writing a screenplay, teleplay, book, magazine article, short story, stage play, essay, or treatment about a person’s life.
  • The producer of a media project that will incorporate a person’s life story, such as a music video, commercial, mobile application, video game, online content, or virtual reality experience.

Do Life Rights Need To Be Acquired? 

There is case law that says that in certain cases life rights do not need to be acquired because of the First Amendment; however, it is best if a producer analyzes his or her specific situation and make an informed decision. For instance:

  • If a project is based on the story of a person and contains intimate details that may not be public, then a producer likely needs to acquire life rights.
  • If a project is based on a previously written story about a person, then a producer needs to obtain a license from the author of the work and may also need to acquire life rights from the person.
  • If a project is strictly based on non-fictional facts and events that a producer obtained solely through researching public materials, then he or she may not need to acquire life rights from a person.
  • If it is unclear whether life rights need to be acquired, then a producer may want to avoid the risk of being sued and acquire life rights from a person.

Keep in mind, there are clear benefits in securing life rights from a subject person regardless of the legal analysis, such as it may encourage the person to give a producer more substantive information to enhance the project and it will reduce the risk of a potential defamation or invasion of privacy claim by the person (avoiding a significant amount of time and legal fees).

Also, having an agreement in place with a person will make it easier for a production company to obtain errors and omission insurance.

How Are Life Rights Acquired?

Typically, life rights are acquired by either a Purchase Agreement or an Option to Purchase Agreement.

Purchase Agreement

Just like purchasing any other type of property, a producer can buy a person’s life rights on whatever terms and conditions are agreed to by the parties.

Purchasing the rights may be the best decision if a producer has already secured financing, attached sought after talent, or otherwise developed the project where it is ready to move forward quickly.

The following are key terms to consider include:

  • Purchase Price
  • Contingent Compensation
  • Rights Granted
  • Derivative and Alteration Rights
  • Cooperation between the writers and person
  • Portrayal Rights
  • Participation with Publicity for the Project

Option to Purchase Agreement

Just like obtaining option rights for any other type of property, a producer can secure an option to purchase the life rights for a certain period.

A producer will typically pay the person a nominal fee to have time to write the literary work (i.e., screenplay), secure financing, attach talent, and ultimately purchase the rights before the option expires.

The following are key terms to be considered:

  • Term (Length) of the Option
  • Option Fees
  • Development Rights
  • Reversion of Rights
  • Representations, Warranties, and Indemnification
  • Purchase Price

Other provisions may apply to this transaction, such as securing other rights related to name and likeness uses, screen credits, press, and promotional guidelines, holdbacks for other projects, social media campaigns, and what happens to the rights if the Company abandons the project before it is released.

In short, a producer should first determine whether it is necessary to acquire the life rights from a person early in the development of a project.

If it is in a producer’s best interest to do so, the following are some best practices to follow:

  • Acquire life rights from a person by entering into either a Purchase Agreement or Option to Purchase Agreement.
  • Obtain required written consents and releases for all people depicted in the project.
  • Ensure that the portrayals of all people in the project are true and accurate to avoid libel and defamation claims.
  • Avoid being overly intrusive into a person’s personal life even if an agreement is in place to avoid an invasion of privacy claim.

Always protect your work. We offer Affordable agreements packages.

Documentary Independent Film Makers Agreements

Reality Television Digital Production Agreements

Disclaimer: Nothing stated in this blog is intended to be, or shall be considered, legal or other professional advice. To properly analyze the issues raised in this piece, you need to engage a competent attorney to assess your specific situation. Also, note that all of the disclaimers to this site also apply.

 – Richard B. Jefferson, Esq.

4 Common Mistakes People Make When Running An LLC

reality tv pitch misakes

Every business, project, and even personal brand needs to be properly structured for legal and tax reasons. There are a few different structures that our attorney or accountant may suggest, such as a corporation, an s-corporation, or partnership, but this post focuses on my favorite small business structure, the Limited Liability Company, or LLC. It has taken about 30 years, but LLCs are starting to get the respect that they deserve.

For over 20 years, I have set up hundreds of LLCs for client ventures in real estate, music, television, film, technology, brand management, media collaborations, and as a structure to protect client’s intellectual property and other assets. I’ve always been a fan of LLCs from a legal perspective because, if formed and managed properly, this entity offers the best of both worlds…limited legal liability (which you don’t get with partnerships) and fewer formalities to deal with in comparison with running a corporation. For example, if you are a partner in a partnership and it gets sued, then your personal assets (i.e., house, cars) are vulnerable if the plaintiff wins. On the other end of the spectrum, if you are a shareholder in a small corporation and it fails to comply with certain legal and tax formalities, then your personal assets may also be at risk (i.e. the plaintiff may be able to “pierce” your corporate protection).

An LLC is an entity that falls somewhere in the middle of partnerships and corporations. Check out this short (45 second) video and the associated blog post for a quick explanation on this subject or more about LLCs.

Despite the ease of forming an LLC relative to a corporation, the members need to properly set-up the operations to avoid issues. Below are 4 Common Mistakes for you to avoid when running your LLC.

  1. LLC Members Do Not Have A “Deadlock Provision” In the Company Operating Agreement

A deadlock provision (or more formally called Impasse Resolution) is a method specified in the Operating Agreement that governs what happens when members with equal ownership disagree on a decision. A common scenario is when an LLC with only 2 equal members are at odds on a decision which results in a 50/50 deadlock (i.e., one member votes to get a bank loan; the second member votes not to get a bank loan). If the Operating Agreement states that all decisions must be made by majority vote, then what happens? Exactly! Without language in the Operating Agreement indicating how a deadlock is resolved, the company business could be adversely affected. I’ve seen unresolved deadlocks result in very bad outcomes, including members suing other members, businesses failing due to lack of management unity, and Courts ordering lucrative businesses to dissolve!

Be aware that many form Operating Agreements found on the Internet, or provided by LLC formation companies, do not include a deadlock provision. Make sure your Operating Agreement has a deadlock provision!

  1. The Company Operating Agreement Is Outdated

As you may be aware, California completely re-wrote its LLC law in 2014 and made some additional revisions in 2015. The governing law is called the California Revised Uniform Limited Liability Company Act. If your company was formed before 2015 and you have not amended or revised your operating agreement, you need to update it immediately.

In general, the previous LLC law provided members with flexibility when drafting the company’s Operating Agreement. This allowed the Operating Agreement to govern operations and the old law supplemented what may not have been covered in the agreement. The new law takes the opposite approach. It defines specific default laws that automatically apply if the company’s Operating Agreement does not address a certain issue.

For example, the new law states that an LLC is member-managed (it takes a vote of the members to approve something) unless the LLC (1) has filed articles of organization stating that the LLC is manager-managed (approval is allowed by one or more managers); and (2) has a written operating agreement expressly establishing management by a manager. Many existing manager-managed LLCs formed under the previous law may not comply with both of these provisions since it was not a requirement, so the new law may have automatically converted these LLCs to member-managed entities, which means the current manager no longer has the authority to make decisions. Imagine what would happen if a dispute occurs based on one of those unauthorized decisions! I recently saw this issue result in a company losing a lawsuit.

Make sure your company is operating under an updated Operating Agreement.

3. The Members Do Not Properly Document LLC Activity

This is a common scenario. You form an LLC through one of those cookie-cutter companies and eagerly start to hold yourself out as a formal business. A few years later, you engage an attorney for some reason (to discuss a lawsuit against the company, the company wants to apply for a bank loan, someone wants to buy the company, etc.) and you give the attorney your nice-looking LLC record book. When the attorney opens the book, the only things in it are the filed Articles of Organization and a bunch of unsigned template documents!

This scenario happens frequently so don’t feel embarrassed. Many people are in love with the concept of owning a company but ignore the work that is required to properly form it and maintain records. Don’t be that person.

There are many reasons why you need to keep your records up to date. The following are a few examples:

  • To Prevent “piercing” of your legal protection. If you are in a lawsuit, the first thing an opposing party will do is try to discredit the existence of your LLC and get to your personal assets. If your paperwork is not in order, you are helping the other side.
  • To Memorialize membership percentages. It is critical that each member’s ownership interested is documented in a signed Operating Agreement! I once had a client who believed that he was a 50% owner based on an unsigned Operating Agreement. After he was sued by the other members, the Court ruled that he only owned 1/3 of the company. He lost a lot of money because of this ruling.
  • To define the scope and limits of management. Whether your LLC is member-managed or manager-managed, everyone needs to be clear on how decisions are made. Usually, there are some decisions that can be done without everyone’s participation, but major decisions, like whether the company will be sold, should require unanimous approval. Any limits should be spelled out in the Operating Agreement.
  • To Document Member Contributions and Member Loans. Almost every company deals with funding issues at some time. Usually, members will transfer money and property to and from the LLC, which is normal, but these transfers need to be properly categorized and documented! It is different if you contribute money to the LLC in exchange for membership interest vs. you loaning the LLC money that you expect to be repaid. If you don’t document your transfers, the IRS or a Court may do so however they see fit. I don’t suggest you let this happen.
  • To Properly Purchase or Transfer Assets Into The LLC’s Name. Members who purchase assets or register IP with the intent that the LLC be the owner need to properly assign and transfer the transfer in writing. Failing to do so can result in a rude awakening during a significant Company event, such as a lawsuit, bankruptcy, or company dissolution.
  1. LLC Members Commingle Company Funds With Personal Funds

This is another very common mistake. The most important rule when operating an LLC is to not commingle funds! This includes things like a member cannot pay personal bills with LLC money and vice versa. All LLC income must go into the LLC bank account and all expenses must come out of that account. Even small things like your monthly web domain charges. If the LLC is short of cash, the members should deposit money into the LLC account, pay the expense, and properly document the transfer of funds as either a capital contribution or a loan.

If a member needs money and the LLC has excess funds, the LLC should pay the member and the LLC will reflect on its books that the payment is either a return of capital, distribution of profits, or repayment of a loan.

I see many more mistakes but these are probably some of the most costly.

Until next time!

Richard Jefferson, Esq.