This is a guest post by Hana Khan-Tareen, who is a Legal Research Fellow at Georgetown University Law Center. We appreciate her insight on how authors can best protect their rights.
Introduction
In order for an author to distribute their work to the public, they often enter into copyright licensing agreements, also known as publication contracts. While some of these agreements can feel quite cookie-cutter, others come about only after fierce negotiations between publishers and authors. While entering into the license can feel like triumph, what happens when some time has passed, and the relationship between a publisher and an author turns sour?
We have published many resources on how authors can terminate grants of copyright under § 203 and § 304 of the Copyright Act, as well as how to request rights reversion. However, if an author wants to terminate a grant of copyright sooner than what’s allowed under § 203 and § 304, or if the publisher has refused to revert copyright back to the author, then what can the author do to legally terminate their relationship with the publisher and regain their copyright?
One important way an author can end their relationship with a publisher is by proving a “material breach” of the publishing agreement. A material breach of a publishing agreement occurs when the core purpose of the agreement has been violated by the publisher. This must be distinguished from a minor or immaterial breach, where although the effect may be annoying or even painful to an author, it is not seen by the court as significant enough to justify terminating the entire contract (even if there’s separately a breach of contract claim to recover damages incurred by the breach). As you will see later in this post, what an author considers “material” may not be viewed the same way by a court. We’ve also included some practical tips at the end to help protect you from these kinds of situations.
Given contract law is state-specific, what constitutes a material breach varies across states and is also highly fact dependent. This blog will discuss New York state contract law because most publishing houses are located in New York and tend to have New York law as the governing law of the publishing contracts. While we seek to provide useful information for you to understand your rights, it should be noted that you should seek counsel to advise on the specific facts of your case if you believe there has been a material breach by your publisher.
Material Breaches in New York
| “Under New York law, rescission is permitted if the breach is ‘material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract.” Septembertide Publ’g B.V. v. Stein and Day, Inc., 2d Cir., 1989. |
A material breach is a violation of a contract that goes to the essential core of the agreement where it defeats the purpose of the parties in making the contract (De Mille Co. v. Casey, 1923). Whether a material breach has occurred depends on the court’s analysis of the contract’s language and whether the alleged action goes to the core purpose of the agreement (Al Hirschfeld Foundation v. Margo Feiden Galleries Ltd., 2017). In analyzing several cases that dealt with termination based on an allegation of material breach, we see a somewhat clear pattern that emerges as to what constitutes a material breach.
- Acting in a way that is explicitly unauthorized in an agreement may constitute a material breach.
In Legends Artists Management, Inc. v. Blackmore (2000), Legends Artists Management, Inc. (licensee) and Blackmore (licensors) entered into a licensing agreement. The agreement provided that the licensee would receive 15% of the licensors’ gross earnings limited to those earnings made during and, in some cases, after the agreement. When the licensee deducted commission from licensor’s commissions earned prior to the agreement, the court found this was explicitly unauthorized per the language of the agreement and constituted a material breach. Thus, the court found that the licensor was entitled to terminate the contract.
- Failure to act in a way that is explicitly required by an agreement may constitute a material breach.
In ARP Films, Inc. v. Marvel Entertainment Group, Inc. (1991), Marvel Entertainment Group, Inc. (licensor) entered into a licensing agreement with ARP Films, Inc. (licensee) to distribute cartoon films owned by Marvel. As part of a particularly complex agreement, the licensee was explicitly required to “substantially abide by the terms and conditions of the license for distribution of the Series and rights related thereto, which terms and conditions include prompt accounting for such distribution…,” which the licensee never did. The court found that this failure to perform amounted to a material breach of the agreement.
- Failure to make payments or pay royalties is generally considered a material breach—with some caveats.
The court has found that an essential objective of entering into a licensing agreement is the payment of royalties—meaning that payment of royalties is often a determinative factor for whether a material breach has occurred or not (Nolan v. Sam Fox Publishing Company, Inc., 1974).
In De Mille Co. v. Casey (1923), the parties entered into a licensing agreement, where Casey (licensee) was to make motion pictures derived from De Mille Co.’s (licensor’s) plays and pay De Mille Co. royalties weekly based on the profits generated from the films. When the licensee failed to issue any royalty payments, the court found that this failure to pay any of the due royalty payments was a material breach of the licensing agreement.
However, whether a material breach has occurred depends on the amount of royalties that have been paid. In Nolan v. Sam Fox Publishing, Inc. (1974), Nolan (licensor) entered into a licensing agreement with Sam Fox Publishing, Inc. (licensee) to publish his song “Tumbling Tumbleweeds.” The court found the licensee paying only 26% of royalties in the prior six years to not constitute a material breach. In other words, the fact that the licensee had not been paid 74% of his royalties was not enough to prove that the licensee materially breached the agreement.
As a sidenote, even though not receiving sufficient royalty payment may not be reason enough to terminate an entire publishing agreement, when an author is not receiving sufficient royalty payment, the author can always sue for a breach of contract, as is the case in Flynn v. McGraw Hill which we have blogged about previously.
Recommendations for Authors
- When drafting licensing agreements, make sure to include your expectations as explicit requirements binding the publisher.
As mentioned before, the courts in Legends Artists Management, Inc. v. Blackmore and ARP Films, Inc. v. Marvel Entertainment Group, Inc. based their decisions as to whether a material breach occurred on the language of the agreements that listed obligations of the licensees. A key component of contract law, regardless of jurisdiction, is to give meaning to the intent of the parties to the contract. As such, it is highly recommended for authors to be explicit in listing what they want the licensees to be obliged to do. Such explicit terms can make it clear to court what the parties considered to be material at the time they signed the publishing contract. If the author can show that an explicit requirement has not been met, the court can more easily find this to be essential to the core of the agreement and potentially enforce the action or lack of action as a material breach of the agreement.
- Throughout your negotiations of the agreement, be sure to include a written termination clause in the agreement that outlines the process for terminating the contract.
In line with the above recommendation, being explicit about what is required for terminating the contract, including what triggers termination and what notice is needed to be given by the non-breaching party, makes termination more easily enforced by the court. In Al Hirschfeld Foundation v. Margo Feiden Galleries Ltd. (2017), the Al Hirschfeld Foundation (licensor) authorized the Margo Feiden Galleries (licensee) to be the exclusive representative for the sale of 250 Al Hirschfeld original works in a licensing agreement. Along with the rights exchanged between the parties, their agreement included a termination clause. The termination clause stated that the license would terminate in 90 days given the licensor provided written notice to the licensee, the termination was “for cause,” and the licensee had a 30 day period to cure the breach. If the breach was not cured within 30 days, the license would be terminated. The agreement also specified that “for cause” was defined as due to a material breach. In this case, the breaches were clearly material based on the evidence presented at trial, and the court agreed as such. Arguably the court would have allowed for termination even without a termination clause. However, the existence of a termination clause expedited this process greatly.
Under New York contract law, once a material breach has happened, a contract does not automatically terminate. Discussed more thoroughly below, the non-breaching party must take “affirmative steps” to “manifest their intention” to terminate the contract “within a reasonable time” (Graham v. James, 1998). Having a clause that outlines the termination process would make the licensor’s “manifestation” clear to the courts and show that the parties mutually agreed to this process being the indication of their shared intent to terminate.
- Do not make your licensing agreement explicitly “irrevocable.”
In State Street Global Advisors v. Visbal (2020), Visbal created the “Fearless Girl” statue displayed in New York. Visbal (licensor) entered into a copyright licensing agreement with State Street Global Advisors Trust Company (licensee) that gave them an “irrevocable” exclusive license to use the Fearless Girl image for various listed purposes. When the licensor decided to sell replicas of the statue to other buyers, the licensee brought suit for breach of contract among other claims. The court found that although there was a material breach, the fact that the licensing agreement was explicitly “irrevocable” meant that the court could not allow for termination of the contract. In order to “give a reasonable and effective meaning to all the terms” of the agreement (there’s that giving meaning to the intent of the parties principle again!), as required by New York contract law, the court refused to allow the contract to be terminated despite the existence of a material breach.
At the same time, unlike with “irrevocable,” courts in and outside of New York consistently hold “perpetual” to be an unenforceable term for a license. When a copyright license is said to be perpetual, courts assume the grant can be terminated at any time. Some legal fiction is clearly at play here, which is why you should always seek legal counsel (or at least show your contract to someone more experienced) before signing an agreement.
- If there are two parties involved as licensors, be cognizant of the consent requirement.
If there are two licensors involved in the licensing agreement, where multiple authors are taking part in licensing a given work or works, then there is a special consent requirement before termination of the contract. In Denker v. Twentieth Century Fox-Film Corp. (1961), Denker (licensor A) and the Ousler estate (licensor B) entered into a licensing agreement with Twentieth Century Fox-Film Corporation (licensee) for the production of a motion picture based on their copyrights in several radio and television scripts, stage plays, and more. When licensor A claimed that the licensee materially breached the contract, licensor A sought to terminate the contract, but licensor B refused to join as plaintiff in the suit. As a result, licensor A pursued the lawsuit but brought the suit against licensee and licensor B together as defendants. The court found that unless licensor A could show that the other co-party (licensor B) exhibited bad faith or fraud, then licensor A was required to get licensor B’s consent before being able to terminate the contract.
What Happens After Material Breach?
As mentioned before, once the material breach has happened, the contract does not automatically terminate. Should the non-breaching party seek to terminate the contract, the non-breaching party must take affirmative steps to notify the breaching party that they are terminating the agreement. Abandonment of the contract alone, without the mutual assent of both parties to terminate, is not enough to terminate the contract (Graham v. James, 1998). In the context of publishing, this means that to simply stop performing your end of the bargain is not sufficient to end the agreement. You must take some action to indicate that you are now terminating the agreement, such as providing notice and waiting for the cure period to end without any cure from the licensee, or acting based on whatever was agreed upon in the termination provision within your agreement.
That’s fine, but how do you show “mutual assent?”
According to Graham v. James (1998), mutual assent is “demonstrated by positive and unequivocal conduct inconsistent with an intent to be bound” (citing Armour & Co. v. Celic, 2d Cir., 1961). In other words, the non-breaching party needs to clearly show that the conduct of the parties to the agreement does not indicate wanting to be bound by the agreement. One simple way to do this, as stated before, is to include the termination process in the contract! The best practice is to be explicit in the agreement what will be done to indicate that the contract has been terminated and to include how notice will be given to the non-breaching party and what the cure period will be to avoid ambiguity.
Damages
Once it has been established that a material breach has occurred and the license has been terminated, the court will then discuss what damages are to be recovered by the non-breaching party. For example, if the material breach is due to the licensee’s failure to make royalty payments, the court may decide to award damages in the amount owed in royalties.
Note: the court may limit damages to the statute of limitations for breach of contract! In Nolan v. Sam Fox Publishing Company, Inc., the court highlighted that the statute of limitations for a breach of contract claim in New York is six years. Despite the fact that the licensor was owed payment for the licensee’s failure to pay royalties for the past 17 years, the court found that the licensor could only recover for the royalties accrued during the past six years. Statute of limitations is a defense the breaching party can raise. If the breaching party waives this defense, then the breaching party could owe damages for the entire time period that the breaching party failed to make royalty payments.
Discover more from Authors Alliance
Subscribe to get the latest posts sent to your email.