By Scott Hervey
Recently, a client asked why we included a short form option agreement and a short form assignment agreement as an exhibit to a long form literary option agreement. I am sure that many a corporate transactional attorney has similarly wondered why a short form copyright assignment agreement is included within the package of numerous M&A transaction documents. It is true that the short form agreement is used to record the transfer of the copyright interest by filing it with the Copyright office without filing the long form agreement with all of the transaction details. But that is half the answer to half the question. The other half of the question is why this type of short form agreement is filed with the Copyright office in the first place. To answer that question, we look to the statutory language of the Copyright Act.
17 U.S.C. § 205 deals with the recording of transfers of copyright ownership. The Copyright Act does not require that transfers be recorded. In order for a transfer of an interest in a copyright to be effective, it is enough that it is in writing and signed by parties. So if the Copyright Act does not require that transfers of ownership by recorded, what is the benefit to doing it.
Similar to recording an initial copyright interest in a work, transfers are recorded in order to provide constructive notice of the transfer of ownership and to vest the new owner with the right to sue for infringement. There is one other reason to record the transfer of copyright ownership and other documents pertaining to a copyright; addressing how to deal with conflicting transfers.
Some may assume that once the seller of a copyright interest transfers ownership that seller cannot sell the same interest a second time (or if the unscrupulous seller does so, the second buyer takes nothing). That’s not always the case. 17 U.S.C. § 205(d) provides:
As between two conflicting transfers, the one executed first prevails if it is recorded, in the manner required to give constructive notice under [17 U.S.C. § 205(c)], within one month after its execution in the United States or within two months after its execution outside the United States, or at any time before recordation in such manner of the later transfer. Otherwise the later transfer prevails if recorded first in such manner, and if taken in good faith, for valuable consideration or on the basis of a binding promise to pay royalties, and without notice of the earlier transfer.
In the scenario where the first buyer (or first exclusive licensee or first optionee) fails to record its interest prior to a second transfer (or grant of exclusive license or grant of option), a second transferee who took without notice, paid valuable consideration and recorded its transaction first, would have a superior interest in the subject work. If, however, the subsequent transferee had notice (constructive, actual and possibly inquiry notice), then the subsequent transferee would not have a superior interest. Similarly, the subsequent transferee would not have a superior interest if valuable consideration was not paid, or if the prior transferee recorded its transfer within the statutory grace period of one (or two) months from execution of the prior transfer.
My client was surprised to learn that if it did not record its option (in the form of a short form option), an unscrupulous rights holder could grant the same option to the same material a second time and divest my client of its rights under the option agreement. While my client would certainly have a claim against the unscrupulous rights holder, the damages my client could potentially collect may be limited to its out of pocket costs and expenses related to the option; no recovery of any potential profits the client could have made from the exploitation of the program based on the literary material that was the subject of the option.