Copyright Reversions And Loan-Out Corporations

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A few weeks back, I had the opportunity to speak at an Ontario Bar Association Entertainment, Media & Communications Law Section session on the topic of copyright reversionary interests. A .pdf version of my slides from the session can be downloaded by clicking on this link. During the Q&A portion of the session, an audience member posed a question about how "loan-out corporations" (sometimes called "personal service corporations") might impact on the analysis - I thought I would take some time to delve into the answer to that question, since it can have significant impact for rights-holders in the entertainment industries, particularly those, such as film and TV production, where the use of loan-outs is relatively common.

Scenario: A film producer engages a composer to create a score for a film - but the Producer "engages" the Composer through the Composer's loan-out corporation.

Issue: Pursuant to Section 14(1) of the Copyright Act (Canada), grants of rights and licenses in copyrighted works which are contained in agreements entered into by an author are deemed void starting twenty-five years after the death of the author - put another way, 25 years after the author of a work dies, the rights in the work "revert" to the author's estate and any agreement entered into by the author which transfers or licenses rights in the work ceases being operative for the last 25 years of copyright protection for the work. That reversion could pose problems for the producer (and the producers' licensees, such as distributors of the film) because without the right to use the music in the film, the film is going to be... well, at the very least it'll be quieter and less interesting, and it could render the film entirely unexploitable.

Question: What impact, if any, does the loan-out corporation have on the question of the reversion of copyright in the score?

What is a "loan-out corporation"? A loan-out corporation is a corporation which is (usually) wholly-owned by an individual (often an individual who renders creative services in one of the entertainment industries) and which enters into contracts with third parties to "provide" the services of the individual. An individual artist would create a loan-out corporation for two primary reasons: to enjoy the benefits of the limited liability the corporate structure provides and for tax-planning purposes. In a situation involving a loan-out, there will be two contracts entered into: (1) a contract between the individual and their loan-out, pursuant to which the individual agrees to provide services to the loan-out, and (2) a contract between the loan-out and a third party, pursuant to which the loan-out agrees to provide the services of the individual to the third-party.

Basics of the Reversionary Right: Under Section 14(1),

  • if the author is the first owner of the copyright in a work, then
  • any assignment of copyright (i.e., transfer or sale of the copyright) or grant of an interest in the work (i.e., a license to use the work) made by the author will be void as to such assignment or grant with effect 25 years after the author's death

The "reversionary right" does not apply to:

  • works "made in the course of employment" as contemplated by Section 13(3) of the Copyright Act
  • assignments of copyright in a collective work or licenses to use a work in a collective work
  • works which are subject to Crown copyright (because the author was not the first owner)
  • assignments/grants made by will or made by the beneficiaries of the author
  • things which are not "works" for purposes of Canadian copyright law, such as sound recordings

Of the foregoing exceptions, the relevant one for purposes of this discussion is the first, namely that a work "made in the course of employment" is not subject to the reversionary interest which would otherwise be enjoyed by the author's estate.

Analysis: Does the presence of a loan-out corporation affect the reversionary right? There are two aspects to the relationships contained in the example which need to be considered: (1) the relationship between the Composer and the Composer's loan-out corporation; and (2) the contractual relationship between the Composer's loan-out corporation and the Producer.

(1) The Relationship Between the Composer and His Loan-Out. If the score created by our Composer is a "work made in the course of employment" (what I'll refer to herein, inelegantly, as a WMICE), then it is not subject to the reversionary right. From the point-of-view of the Composer (more particularly, his or her heirs), that would be an undesirable result; but from the Producer's POV, that would be an excellent result - their security of tenure, so to speak, in the rights in the Score is then more robust. But is the Score a WMICE for the loan-out? That can be surprisingly difficult question to answer.

First, we'd need to determine whether the Composer is an "employee" of the loan-out under a contract of service or apprenticeship - that will be determined on a case-by-case basis with reference to the specific facts of the case and the traditional indicia of employment (see, e.g., 2001 SCC 59). If the Composer is an employee of the loan-out corporation, then the Score is a WMICE and is not subject to reversion. If the Composer is not an employee, we can't yet conclude that the Score is not a WMICE - we would need to look at whether there is a contract in place between the Composer and the loan-out. If there is a contract, we need to determine whether it is "contract of service" (which would make the Score a WMICE), rather than a "contract for services" (which would mean the Score is not a WMICE). But there's yet a further wrinkle to the analysis: what if the contract expressly addresses the treatment of copyright in works created by the Composer? It could do so in a number of ways: first, the contract could state that works created by the Composer are deemed to be WMICE - but we don't know what the effect of such deeming language is - perhaps a court would be inclined to give effect to such language. On the other hand, the contract may specifically state that works created by the Composer are not WMICE and instead the rights therein are merely transferred to the loan-out - which would be beneficial for the Composer, since that would mean that the Score is not WMICE and is therefore subject to the reversionary interest.

So, if the Composer is not an employee of the loan-out and there is no contract in place between the Composer and the loan-out, or there is a contract which expressly states that the Score is not a WMICE, then the Score is not a WMICE and it is subject to the reversionary interest. Meaning that the rights in the Score will revert to the Composer's estate/heirs twenty-five years after the Composer dies.

If the Composer is an employee of the loan-out (which would make the Score a WMICE), or there is a contract between the Composer and the loan-out which has the effect of making the Score a WMICE, then the Score is not subject to the reversionary interest, and the producer's ownership/control of the Score is not affected by the statutory reversion.

(2) The Relationship between the Composer's Loan-out Corporation and the Producer. If the Score is not subject to the reversionary interest, then we don't need to concern ourselves with this branch of the analysis - the Producer will enjoy whatever rights they enjoy under their contract with the loan-out corporation. But if the Score is deemed to be subject to the reversionary interest, and the rights therefore do revert back to the Composer, the question remains: what happens to the grant of rights made by the loan-out corporation to the Producer? Canadian law isn't clear on this point. Section 14(1) of the Copyright Act states that it applies to grants/licenses made by the author - on the face of it, the reversion does not apply to grants/licenses made by the grantee/licensee; but since a grantee/licensee can only pass along what they have received from the author, presumably any grant/license they pass along to a subsequent party would be affected by the reversionary interest in some fashion. The issue doesn't appear to have been the subject of a reported Canadian decision, so for now we're left to speculate as to the precise effects of the reversionary interest on subsequent grants/licenses.

What This Isn't Covering: This discussion ignores the question of whether a motion picture is a "collective work" (if a movie is indeed a collective work, then the reversionary right does not apply to the score in our example, since any license to use a work in a collective work is not subject to reversion, as set out in Section 14(2) of the Copyright Act). It also fails to provide an answer to the question of what the "knock on" effect of a reversion is - which is to say, even if the copyright in the score has reverted to the composer as between the composer and the producer, it's not clear what effect that has on the grants of rights made by the producer of the film (to the distributors, for example).

For those interested in how loan-out corporations interface with the US copyright termination provisions, see Aaron J. Moss and Kenneth Basin, "Copyright Termination and Loan-Out Corporations: Reconciling Practice and Policy".