Wolff and Samson

In the modern entertainment industry, a recurring disputed issue has been the effect of technological innovations on contracts allocating the rights to intellectual property created by authors and filmmakers.

In the last century, innovations in entertainment technology have moved the industry from traditional live stage performances, to silent movies, to talk ing movies - and most recently - to compact discs, cable, home video and satellite transmissions. These innovations have generated vast profits and defined the economic center of the dispute, which is whether the creator or the producer or distributor of the work can reap the economic rewards of the new technology.

At the legal center of this dispute is the licensing agreement between the author or filmmaker who created the work and the producer or distributor. After a work is created, an author or filmmaker typically licenses rights in the work to someone who will exploit the work in exchange for a fee. This is a mutually beneficial agreement because without the exploitation, the work will languish, unknown to the general public.

Difficult and legally perplexing disputes arise, however, when a new and profitable method of exploitation is discovered after the completion of the original license. At issue is whether the original licensing agreement's language should be construed to include the new method.

Manners v. Morosco
One of the early and historically interesting cases concerning the issue of new technology is Manners v. Morosco, 252 U.S. 317 (1920). In Manners, the author of the play Peg 0' My Heart tried to restrain the licensee Morosco from exploiting the work as a "moving picture," as the U.S. Supreme Court described it. The author granted to Morosco the sole and exclusive license to produce, perform and represent the play within certain limits.

Justice Oliver Wendell Holmes, writing for the Court, reasoned that the license might carry the right to exploit the play in moving pictures if the terms of the agreement pointed that way. Not surprisingly, the tenus of the agreement didn't point that way because the parties had not anticipated the development of moving pictures. Presumably, Holmes searched the license for an intent by the author to divest himself of all rights in the play and, if such terms were found, then the result may have been different.

Holmes argued that the mode of representation was in fact known - in other words, that the author knew of the existence of moving pictures. He also argued that it was to be expected that the license would have expressed a grant of such rights to moving pictures if that is what the author intended. In Holmes' view, the license only granted rights to the spoken drama. The final result prohibited the producer from exploiting the play in moving pictures.

In a more recent decision, somewhat similar issues were raised by the august Philadelphia Orchestra when it sued the Walt Disney Co. over the right to receive royalties from the release of "Fantasia" in the new home video formats of videocassettes and laser discs. The Philadelphia Orchestra Ass'n v. The Walt Disney Co., 821 F. Supp. 341 (E.D. Pa. 1993). Most of the musical score in "Fantasia" was performed by the orchestra under the direction of Leopold Stokowski. There was an executed agreement by which the orchestra granted to Disney the right to record the orchestra's music fbr "a feature picture now in preparation."

Later, Disney sought and received a separate license to sell phonograph records. The home video consisted of the feature film originally produced by Disney. Unlike the issuance of the phonograph record license, Disney didn't seek permission from the orchestra to use its performance or name and likeness in the home video or video disc formats. Disney never paid royalties to the orchestra for sales of the home video or video disc. Disney asserted that home video and laser disc exploitation were included in its right to exploit the "feature film."

The U.S. District Court of Pennsylvania examined the underlying license agreement and found that the orchestra permitted Disney to use recordings "in connection with this feature picture." The orchestra pressed the argument that the license permitted use of the orchestra's performance and related rights only in the theatrical release of the film. It urged that feature picture meant a feature-length theatrical motion picture intended to be exhibited in theaters outside the home.

The plaintiff argued that Disney's license didn't include rigbts in bome video formats since that technology didn't exist wben tbe license was executed. Tbis is a traditional argument made by licensors that goes back to Manners v. Morosco. The District Court compared Manners to a Third U.S. Circuit Court of Appeals opinion where the court considered whether a man should be deemed to have granted a use not in existence and not contemplated by eitber party at the time the contract was made.

The District Court described an example of a man who sold a farm that later became valuable due to urban expansion. Because tbe farm was sold outright, tbe court noted that the seller would not be entitled to any additional compensation for tbe new use. Such an argument seems to beg the entire question of whether or not a license is granted for a new use or a use not specifically considered at the time of contracting.

In any event, in the "Fantasia" case, tbe court simply decided against granting summary judgment finding tbat there was a genuine issue of material fact concerning the meaning of the term "feature film" in tbe original agreement.

It's a simple matter to predict the arguments at trial. The orchestra will argue that it could hardly have granted a license in a medium that was not yet commercially viable. Disney will argue that it has the rights to tbe feature film and it does not make a difference whether the format will be shown in tbe home or in a theater.

Disney was again the defendant in a case involving videocassettes. In Bourne v. The Walt Disney Co., the Second Circuit was asked to resolve disputes concerning "Snow White and the Seven Dwarfs" and "Pinocchio." 68 FJd 621 (2d Cir. 1995). The plaintiff, a successor to Irving Berlin Inc., conceded that the applicable contract instrument conveyed rights to Disney to use Berlin's music "in synchronism with any and all of the motion pictures which may be made by [Disney]." Disney assigned the rights in the musical compositions to Berlin in exchange for a share of the revenues. Berlin granted back to Disney rights in the music for its motion pictures.

In the Snow White case, a jury decided the issues in favor of Disney and found that the company did not have to pay Berlin for the use of the music in videocassette format. Berlin appealed and argued, quite predictably, that the videocassette rights fell outside the specific language of the license because the technology was unknown at the time of the agreements and such rights could not have. been within the contemplation of the parties.

The issue this presented to the court was: Did the term "motion picture" rights (which presumably had been granted to Disney) unambiguously exclude home videocassette rights? The Second Circuit declined to find tbat tbe term "motion picture" has a definite and precise meaning permitting a contract interpretation as a matter of law. It held that tbe parties could submit evidence on what the term "motion picture" meant, thereby affirming the jury verdict.

Reflecting Justice Holmes' analysis in Manners, the court specifically disagreed with the contention that videocassettes could not have been within the contemplation of the parties in the 1930s. Disney had introduced evidence that bome viewing of motion pictures was contemplated by some members of the entertainment industry.

In determining whether or not a new medium such as videocassettes belong to the licensor or to the licensee, these two courts have found the issue to be whether the new technology fits into the description of the rights granted in tbe original license. Ambiguity in the license required resolution by a jury, rather than by summary judgment as a matter of law that a term like "feature film" or "motion picture" had a fixed definition. Proof of what was intended apparently includes reference to what someone in the industry may have known about the potential new usage, even if the new usage was in fact unknown to the contracting party.

The Videotape War
Litigation over videocassette rights seems almost minor compared to the war over the videotape recorder (VTR), which ultimately lead to the Supreme Court's decision in Sony v. Universal Studios, 464 U.S. 417 (1983). In a 5-4 ruling, the Court held that the manufacturers of videotape recorders were not liable as contributory infringers to the copyright holders of movies and programs broadcast on television.

The VTRs were used to record copyrighted works and, at least to the plaintiffs, threatened the entire structure of American copyright law. The Court acknowledged that the VTRs were used to copy programming but held that such copying was a fair use and, more persuasively, that the VTR had uses other than illegally copying protected works. This acknowledgment prevented the manufacturers, as a matter of proof, from being found to be contributing to the copying by any specific individual who purchased a VTR manufactured by one of the defendants, such as Sony.

The Court mentioned that innovations in technology have historically caused changes in the copyright law. The justices noted that the development and marketing of player pianos and perforated rolls of music preceded the Copyright Act of 1909, and that innovations in copying gave rise to the statutory exemption for library copying in 1976.

The Court also noted that retransmission technology prompted changes in the law regarding television in 1982. The justices further quoted the underlying District Court opinion, which described other innovations that. could result in copyright violations - a typewriter, a recorder, a camera and a photocopying machine - yet which were not outlawed as an article of commerce.

The Sony Court focused on the purpose, in this country, of the limited scope of the copyright holder's statutory monopoly. It approved the concept that copyright protection is not based upon any natural right that the author has in his writings but rather upon the ground that "the welfare of the public will be served and progress of science and useful arts will be promoted by securing to the authors for limited periods the exclusive rights to their writings." The Court stated that a balance should be struck between the stimulation of the creator to enlarge the arena for ideas and thereby benefit the public and how much the monopoly granted to the creator would be detrimental to the public.

In Sony,the Court analyzed the effect that new technology was having on existing television viewing habits to determine if the videotaping of programs was having a market effect. The Court reviewed evidence from several sources, including sports, religious, educational and other programmers (there was a favorable reference to the testimony of Fred Rogers, of "Mr. Roger's Neighborhood") to establish their consent to home videotaping of their works.

The Court determined that the new technology permitted time shifting of broadcasted shows, and that time shifting, whether authorized or unauthorized, would not result in liability to the manufacturers of the VTRs. The Court found that the manufacturers' sale of VTRs to the general public did not constitute contributory infringement of copyrights. It added, significantly, that it "may well be that Congress will take a fresh look at this new technology... but it is not our job to apply laws that have not yet been written."

Interestingly, European countries have not been blocked by the perceived anti-creator bias arguably found in the U.S. intellectual property tradition. Most European nations have a greater tendency to permit copyright holders to protect their works, following the tradition of the moral right of authors. In so doing, the European countries have imposed a governmental tax, or levy, on the manufacturers of VTRs and blank videotapes.

These laws - generally referred to as the "blank tape levies" - compensate the owners of the copyright for unauthorized copying of their copyrighted works when the works are broadcast on television. Presumably reviewing the same type of factual evidence as the Supreme Court did in Sony, the governing agencies of the European countries came to the opposite conclusion. They require the VTR and tape manufacturers to pay a levy on every such item sold in the applicable country. Generally, most agencies collect money from the manufacturer and pay an amount to the copyright owner based on a formula which adjusts for the number of times a work is shown, the time of day shown and other factors related to the size of the audience.

The blank tape levies present an anomaly in practice. A film can be videotaped by a person on his own home VTR in the United States and the copyright owner will receive nothing. The same film, broadcast on television in France for example, will result in payment to the copyright owner because of presumed copying on home VTRs. The payment will be made by the government agency based on the levy from the sale of the offending VTR and blank videotape. The blank tape levies also avoid the relatively tortured contract analysis which United States courts have traditionally applied in trying to determine whether a licensor or licensee owns rights in new technology.

This article is reprinted with permission from the August 9, 1999 issue of the New Jersey Law Journal. @1999 ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.

Howard J. Schwartz hschwartz@wolffsamson.com is a partner in and co-chair of the Intellectual Property Group at Wolff & Samson PC. and practices in all aspects of intellectual property law, including patents, trademarks, copyrights and trade secrets.

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