Trademark Terminations: A Lesson From the Music Industry?

 

By Peter Karol, a member of our Trademark Practice Group

 

T

he nervous energy accumulating in anticipation of January 1, 2013—the start date for terminations under Section 203 of the 1976 Copyright Act—has been centered around the music industry.

Justifiably so. As others have explored at length, the music industry is particularly vulnerable to arguments that its valuable copyright assets, especially sound recordings from the late 1970s and early 1980s, are not works made for hire and therefore not exempt from the termination provision in Section 203. See, e.g., Mark H. Jaffe, Defusing the Time Bomb Once Again—Determining Authorship in a Sound Recording, 53 J. Copr. Soc'y 139 (2006).

Add to this already volatile mix that many sound recordings are subject to multiple claims of authorship, that many of these authors feel undercompensated for their contributions, and that many of the copyrights at issue have increased in value over time, and one is left with a real powder keg.

While the music industry might be receiving the most attention, it is not the only one facing the risk of post-1978 terminations. The structure which put the music industry in jeopardy—its use of large numbers of non-employee contractors to create copyrighted works that increased in value over time—is not unique.

Converted into a query, we might ask for any given industry: (1) Did it outsource its creative tasks to freelancers in the late 1970s and thereafter; and (2) Did those freelancers create works of ever-increasing value to the deep-pocketed companies which now own them? With a few exceptions mentioned below—such as the movie and television industries—a strong yes to both should put one on guard.

Viewed through the lens of the above query, certain industries come into focus that might not have been immediately visible—particularly to a trademark attorney.

Reclaiming Rights to Logos?

For decades, the advertising industry has been hiring talented freelance graphic designers to create the branded logos we see around us. These artful logos, design marks in trademark parlance, have been steadily increasing in value over time.
They started as mere pictures but, in the language of the law, grew into symbols impregnated with the psychological power to draw in repeat purchasers. Mishawaka Rubber & Woolen Manufacturing Co. v. S.S. Kresge Co., 62 S. Ct. 1022, 1024 (1942). In other words, they became invested with goodwill. For any successful product or service, the value of this goodwill, and therefore the logo, could have ballooned to an enormous size.

Imagine a young company that paid a freelance graphic designer some lump sum in, say, January 1980, to design a logo for its designer clothing line, super premium liquor, coffee, or budding sports franchise. Trying to do the right thing from an intellectual property perspective, the young company asked the graphic designer to irrevocably assign to it all the copyrights in the work, and also for good measure to agree that the work was created as a work made for hire.

Thirty-five years go by. The brand, anchored by that nifty and original logo, is fabulously successful. In addition to large sales of the flagship clothing, liquor, or coffee, or television rights for the sports franchise, the logo itself gains popularity. Merchandising has taken off—millions of dollars are coming in from shirts, mugs, hats, shower curtains, infant onesies, license plate holders, etc.

The company, perhaps, has kept its look sleek and contemporary by modernizing its logo over time, but the core concept remains in place. In its success, it has undertaken an aggressive policing campaign, involving every manner of demand letter even in borderline cases of trademark and copyright infringement.
Then, in January 2013, the company receives a notice of termination effective January 2015. That graphic designer from the 1980s—now retired and painting seascapes in Wellfleet— has two children well aware of the value of that logo he came up with.

Works Made for Hire?

The company consults its attorney, hopeful of finding a clean way out of the situation. Can't the copyright be characterized as a work made for hire, as spelled out in the agreement? Unfortunately for the company, the answer is likely “no.” The  freelance designer was clearly not an employee of the company under the first prong of the “work made for hire” definition in the Copyright Act, 17 U.S.C. §101.

As to the second alternative prong, the work was “specially ordered or commissioned,” and the agreement was memorialized in writing, which is consistent with a work made for hire. However, it still must fall within one of the nine enumerated categories in the definition (namely, a collective work, part of a motion picture or other audiovisual work, translation, supplementary work, compilation, instructional text, test, answer material for a test, or atlas) regardless of how the parties characterized the project. Lulirama Ltd. Inc. v. Axcess Broadcast Services Inc., 128 F.3d 872, 877 (5th Cir. 1997).

The best argument for the brand owner, in this regard, would likely be that the logo was ordered “as part of … [an] audiovisual work.” Perhaps, as part of the full line of uses of the logo, a television commercial was envisioned in which the new logo was to be showcased.

This position, however, requires the facts to line up just so, and has been rejected on summary judgment where there was no evidence that the specific work in issue was created for use in a work with both an audio and a visual component. Id. at 878-879, n.6 (reversing summary judgment for commissioning party where the evidence did not indicate that advertising jingles were commissioned “at least in part” for use on television as opposed to merely radio).

Challenging Copyrightability

Maybe the attorney, worried as she begins to grasp the scale of the problem, counsels the company to take a scorched-earth approach and argue that the logo was not copyrightable in the first place. Maybe it was too lacking in originality  to warrant copyright protection. In such a case, the author would have nothing protectable to terminate.

This defense faces numerous problems. Some cases have indeed denied copyright protection to word marks standing alone, see, e.g., Bird v. Parsons, 289 F.3d 865, 882 (6th Cir. 2002), and Copyright Office regulations prevent registration of labels “consisting solely of trademark subject matter and lacking copyrightable matter.” 37 C.F.R. §202.10(b).

Nevertheless, we are assuming that the logo has some graphic design element. While one can envision a graphic design so simple that it does not warrant copyright protection—maybe a black and white Helvetica-font term placed in a box—it is equally easy to provide examples of logo designs sufficiently original to warrant copyright protection.

The first Baltimore Ravens logo, shown below next to the logo design it was accused of infringing, comes to mind:

Bouchat v. Baltimore Ravens, 241 F.3d 350, 355-356 (4th Cir. 2001) (drawing of logo for new football team entitled to copyright protection). Add to this the difficult fact that the company—like most proud and successful brand owners—has been asserting copyright in its logo for years in order to threaten or actually sue others, and the argument is starting to look fairly frivolous.

Joint Authorship Argument

Perhaps the company's attorney can argue that, in any event, the logo was jointly authored by the graphic designer and a company representative. Every joint owner, akin to a tenant in common, has the right to exploit the work and as such joint ownership is a defense to a claim of copyright infringement. Warren Freedenfeld Associates Inc. v. McTigue, 531 F.3d 38, 47-48 (1st Cir. 2008). Thus, even a successfully terminating joint author cannot stop use of the logo by the other joint author. Id.

Joint authorship can be tough to show, due to the independent elements of “intention” and “contribution” required to qualify a “joint work” under Section 101. See, e.g., Childress v. Taylor, 945 F.2d 500, 505-509 (2d Cir. 1991). However, for the sake of this hypothetical we might assume that the company representative provided some original element incorporated into the design and everyone intended for him to be a joint author.

The negative here, even if the facts supported finding a joint work, is that all joint authors must account to the others for a share of the profits from exploitation of the work. Warren Freedenfeld, 531 F.3d at 48, n. 5; Weissmann v. Freeman, 868 F.2d 1313, 1318 (2d Cir. 1989). The terminating graphic designer would be sending the company a massive bill in such a case.

Apportioning Copyright, Trademark Value

The company would counter that the trademark goodwill value must somehow be apportioned out from the copyright value as part of the accounting. Trademark rights, arising from federal law other than the Copyright Act and state law, are outside the scope of any statutory termination. 17 U.S.C. §203(b)(5).
One can only image the fights and headaches that would ensue, with no certain outcome.

Indeed, the fact-intensive and difficult question of how to apportion “mixed” trademark/copyright profits was twice sidestepped by a federal court in its otherwise exhaustive treatment of Section 304(c) termination questions in the well-known Superman dispute. See Siegel v. Warner Bros. Entertainment Inc., 542 F. Supp. 2d. 1098, 1142 (C.D. Cal. 2008); 658 F. Supp. 2d. 1037, 1095 n. 27 (C.D. Cal. 2009).

The previously mentioned Bouchat litigation is one extreme example of an apportionment where the copyright owner fared very badly. Bouchat v. Baltimore Ravens, 346 F.3d 514, 519, 527 (4th Cir. 2003). There, the court upheld a jury verdict of no monetary damages from the infringing use of a copyrighted logo because revenues were deemed attributable entirely to factors other than the infringement. Id.

That case, however, involved infringement from the outset—not holdover use after a termination— and was shaped largely by key evidentiary rulings, such as the exclusion of a range of merchandising revenue streams from the potential damages base. Id. at 518. This harsh result notwithstanding, it seems fair to believe that most graphic designers would be quite content as a joint owner of the copyright in a successful luxury brand or sports franchise logo, entitled to some share of the profits from its use for decades to come.

Tough Choices

If it doesn't feel confident in these first-line defenses concocted by its attorney—and why should it?—the company, it seems, will be faced with some tough choices. It can either (1) renegotiate the deal and reacquire the rights from the designer for another 35 years; (2) drop the logo and do a complete redesign for 2015; (3) limit its use after 2015 to only “derivative” works that meet the statutory safe harbor discussed below; or (4) do what it wants with the logo and face the consequences.

As to renegotiating the deal, the obvious problem is the value of the brand. Everyone, including the graphic designer, knows just how deeply this company values its house mark, including the flagship logo or design.

Now that the freelance designer—after 35 years of feeling exploited—is in a position of tremendous bargaining strength, he can be expected to seek a very high percentage of the value of the brand for himself. This, in fact, touches on a problem unique to the above-described arena of what we might call trademark terminations.

The terminating logo designer is in the rare position of being able to leverage a copyright asset to attain some percentage of the value of a trademark. The trademark's value, however, is theoretically the value not of the artistic expression of the design of the logo, but of the goodwill in that brand, captured over the past 35 years.

That, and not the ornamental beauty of the logo, is why trademarks can receive immense valuations when luxury brands are acquired. Thus, if it proceeds down the renegotiation route, the company buying back the rights to its own logo will surely pay a stiff premium due to its mixed trademark/copyright nature.

As to the second option, a complete redesign of the logo will solve the legal problem. But that is itself an immensely expensive strategy, can have disastrous consequences if consumers reject the new image, and might be simply impossible for a company—like, perhaps, Starbucks or Nike—which considers its flagship logo to be the sine qua non of its image.

While option three, the derivative works exception, might provide some relief, that exception only applies to derivative works prepared before the grant was terminated, and not “the preparation after the termination of other derivative works.” 17 U.S.C. §203(b)(1). While it could be argued that the hypothetical current, modernized logo is “derivative” of the original from 35 years ago (not necessarily a slam dunk) it is difficult to imagine a top-flight brand owner that is willing to live with a logo that it is legally unable to alter further over the next seventy-plus years in any meaningful way. It might simply prefer to phase in an entirely new logo at that point.

Moreover, there is an argument that certain further merchandising efforts— use of the logo as one aspect of an elaborate design on a new beach towel, let's say—would be unauthorized “other derivative works.” At a minimum, this would require repeated subjective evaluations by counsel of every new item of merchandise created going forward. See, e.g., Dam Things From Denmark a/k/a Troll Company ApS v. Russ Berrie & Co., 290 F.3d 548, 563-566 (3d Cir. 2002) (emphasizing, in analogous context of Section 104A derivative works exception, that an “exacting comparison needs to be made” in each derivative works exception case).

In such a case, the company/brand-owner would be restricted in its ability to use the logo on new products as fashions change. To make matters worse, the company will want to take a generally broad view of the meaning of “derivative works” (thereby assuring its right to continue selling all of its preexisting product line under the exception).

Given that, it will be hard-pressed at the same time to take a narrow view of the scope of “derivative works” if later it wishes, for example, to argue that a minor change to its logo, or use of the logo on a new good, is not an impermissible, new “other derivative work” prepared after termination.

There remains option four—fight the termination and otherwise continue to use the logo as though nothing had happened. This strategy is obviously risky from a damages and willfulness perspective.

Worth the Risk?

However, given the other choices, this may be a risk that the company is willing to take. The gravest threat is of course an injunction against future use of its flagship logo. That threat, however, appears significantly muted by the recent appellate decisions eliminating any presumptive right to a preliminary or permanent injunction in copyright cases. See, e.g., Salinger v. Colting, 607 F.3d 68, 82 (2d Cir. 2010)  (irreparable harm may not be presumed in context of preliminary injunction inquiry); Flexible Lifeline Systems Inc. v. Precision Lift Inc., —- F.3d —-, 2011 WL 3659315, at *9 (9th Cir. 2011) (same); Christopher Phelps & Associates LLC v. Galloway, 492 F.3d 532, 543 (4th Cir. 2007) (copyright owner not necessary entitled to permanent injunction even after finding of infringement), citing eBay Inc. v. MercExchange LLC, 126 S.Ct. 1837, 1839 (2006).

It is difficult to evaluate the likelihood that a court would grant a permanent or preliminary injunction in circumstances such as those supposed here, where a retired graphic designer has terminated his assignment of a logo design that he has no serious competitive interest in using. Would a court consider denying an injunction in favor of an ongoing royalty in a non-competitive case, where the copyright owner was in a position not unlike a non-practicing entity in the patent context? Possibly. See, e.g., Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1314, 85 USPQ2d 1001 (Fed. Cir. 2007) (noting, in patent context, “Under some circumstances, awarding an ongoing royalty for patent infringement in lieu of an injunction may be appropriate.”).

Weighing Likelihood of Litigation

At this point, it might be natural to ask, why haven't we seen this issue arise with any frequency before? After all, termination for works created and granted prior to 1978 has been around for more than three decades under the provisions of 17 U.S.C. §§304(c) and (d).

Why, for example, haven't we seen litigation arising from older freelance graphic designers, or their heirs, trying to terminate all those valuable logos created during the middle of the last century?

There have been, to be sure, some termination cases with an incidental trademark component. The previously mentioned Superman case is an example. Siegel, 542 F. Supp. 2d. at 1142. As with the Superman case, however, those cases have been isolated, fairly unique in their fact patterns, and not on point as to the trademark termination issue.

One explanation is that work-for-hire rules before the 1976 Act were generally more likely to place ownership of the work in the hands of the company ordering it, such as a brand owner commissioning a logo. They even created a presumption of ownership in favor of a party retaining an independent contractor “to produce work of an artistic nature.” May v. Morganelli-Heumann & Associates, 618 F.2d 1363, 1368 (9th Cir. 1980). Under the 1976 Act, that is no longer good law. M.G.B. Homes Inc. v. Ameron Homes Inc., 903 F.2d 1486, 1490-91 (11th Cir. 1990).

As shown above, outside of the movie or television industries, it is much harder for a party to claim that a commissioned work created after January 1, 1978, is a work made for hire.

Another explanation may be that before 1978 copyright attached upon publication with the necessary formalities, not upon fixation. Many brand owners, even for brands of clear value, just didn't bother to take the necessary steps to protect their logos as copyrighted works before the 1970s. See, e.g., Boston Professional Hockey Association Inc. v. Dallas Cap & Emblem Manufacturing Inc., 510 F.2d 1004, 1008 (5th Cir. 1975) (relying on trademark law analysis to prevent sale of “artistic” NHL team logo patches where “[n]one of the symbols of the various teams ha[d] been copyrighted.”).

Thus, a large number of logos from the middle of the last century are in the public domain from a copyright perspective (although trademark law continues to prevent their use in certain ways likely to cause confusion or dilution). Id. Because Section 304(c) and (d) terminations only apply to pre-1978 works, Jan. 1, 2013 will mark the first time that authors will be able to terminate a copyright in post-1978 works that originally accrued upon fixation alone (under Section 203). This should open the door to a much wider assertion of termination rights.

What might save brand owners from this fate? To begin with, freelance graphic artists and their families may simply not be aware of the issue, or the potential value of their rights. While musician groups have been openly discussing and promoting termination of sound recordings for some time, similar discussions by freelance graphic designers in the advertising industry appear to have generated little publicity.

Of course, it might also be that most of the famous logos created after 1978 were in fact designed by employees of either the company itself or an advertising agency, and are therefore works made for hire and not subject to termination. It is outside the scope of this article to determine what percentage of post-1978 logos were created by freelance graphic designers commissioned to do so.

If it turns out that most of these logos are works for hire in some form, this would be welcome news to brand owners. Yet anecdotally, the practice of outsourcing freelanced graphic design services seems to have been rather common over the last four decades. Nike, for one, was reported to have purchased is swoosh from a graphic design student for $35 in 1971. Nike gives board seniors the boot, BBC News, Aug. 2, 2004, available at:http://news.bbc.co.uk/2/hi/business/3527512.stm.

A Fair Outcome?

If “trademark terminations” do become prevalent, it may seem unfair that brand owners who happened to outsource the design of their logos to freelancers would be far worse off than those that opted arbitrarily for advertising firms or in-house employees.

This is arguably, however, the very result intended by the drafters of the 1976 Copyright Act. See Community for Creative Non-Violence v. Reid, 109 S.Ct. 2166, 2176 (1989) (noting that authors groups agreed to support the inclusion of commissioned—as opposed to employee—works for hire in the 1976 Act only in exchange for concessions regarding termination rights, and then only as to four discrete categories of commissioned works); and see H.R. Rep. No. 94-1476 (1976) as reprinted in 1976 U.S.C.C.A.N. 5659, 5740 (characterizing Section 203 as “a provision safeguarding authors against unremunerative transfers … needed because of the unequal bargaining position of authors, resulting in part from the impossibility of determining a work's value until it has been exploited.”).

This structure, in the end, is not without some logic. Independent graphic designers—unlike their employed colleagues—can toil away for years without job security, benefits, or bargaining strength. Every now and again lightning strikes, and their works become immensely valuable to the companies that bought them for a fraction of their current worth.

In many ways, then, these freelance designers are prime examples of the “authors” that the act meant to reward 35 years later for their initially unremunerative efforts.

Reproduced with permission from BNA’s Patent, Trademark & Copyright Journal, 82 PTCJ 666 (09/16/2011). Copyright (c) 2011 by The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com