Every year individuals dedicate immeasurable amounts of time, money, and energy to creative processes that result in thousands of songs, plays, books, computer programs, and television and radio programs that are made available to the public for consumption and enjoyment. Federal law states that upon creation and fixation in a tangible medium, 1 an author has a number of exclusive rights pertaining to his or her work. Some of these rights include the right to reproduce and distribute the work, prepare derivative works, and transfer ownership of the work.2 While many creative works do not become commercial successes, for those that do, the protection of an author’s rights in his or her work becomes an important issue that the authors often do not fully understand or implement. Therefore, it falls to their attorneys to educate these authors and protect their interests.
Of particular importance is the author’s right to transfer ownership of the work. Transfer of rights in a work may be done through written assignments, licenses, or other methods.3 Alternatively, if no written agreement has been executed, courts may find an implied license based on the conduct of the parties involved.4 These implied licenses can seriously diminish the author’s control over the work and the compensation from it.
The Copyright Act requires that a transfer of copyright ownership be in writing.5 In contrast, nonexclusive licenses are expressly excluded from the definition of “transfer of copyright ownership.”6 Thus, federal courts have held that nonexclusive licenses may be granted orally or by operation of law to carry out the intent of the parties as evidenced by their conduct.7 In I.A.E., Inc. v. Shaver, 74 F.3d 768, 772 (7th Cir. 1996), the Seventh Circuit adopted the three prong test originally set forth by the Ninth Circuit in Effects Associates, Inc. v. Cohen, 908 F.2d 555 (9th Cir. 1990) that an implied nonexclusive license has been granted for copying and distribution of a work when (1) the licensee requests the creation of the work, (2) the licensor makes that particular work and delivers it to the licensee that requested it, and (3) the licensor intends that the licensee copy and distribute his work.8
In Shaver, the Court found an implied license between the defendant and the plaintiff with regard to schematic drawings for an airplane hangar that were produced at the request of and delivered to the plaintiff. The validity of the copyrights was not challenged. In holding the existence of an implied license, the Court specifically noted that the plaintiff’s outward manifestations9, i.e. his correspondence, showed that he had intended that the drawings be used to build the hangar.10 As a result, the Court found that plaintiff’s distribution of the drawings to the airport without the defendant’s permission did not infringe the defendant’s copyright.
Recently, the Ninth Circuit expanded the third prong of the Effects test. In Asset Marketing Systems Inc. v. Gagnon, 542 F.3d 748 (9th Circ. 2008), the Court stated that the third prong was not limited to the intent to copy and distribute but rather to the protected right at issue, in this case, the licensee’s ability to retain, use, and modify the licensor’s programs.11 In Asset Marketing, the defendant operated as an independent contractor under a technical services agreement (TSA) to develop custom software for the plaintiff. The TSA stated nothing about a license and the parties continued the relationship after the TSA expired. Additionally, the parties exchanged a series of outside vendor agreements (OVAs) that discussed ownership of the intellectual property rights arising out of the relationship. The original OVA as offered by the defendant would have ensured the defendant retained the rights to all intellectual property, including the copyrights, while the second version as offered by AMS would have transferred all rights to the plaintiff. Neither version of the OVA was ever executed. In all, the defendant wrote six programs at the plaintiff’s request and the source code and programs were installed on several of AMS’s computers, but the issue of a license for the programs was never discussed until it became clear that the relationship was about to end. Four years into the relationship, the plaintiff terminated the relationship and the defendant sought $1.75 million for the continued use of the programs and another $2 million for the plaintiff’s exclusive use of the programs.
In applying the Effects test, the Court rejected the defendant’s argument that, since the plaintiff merely relayed its needs, the defendant had not received a request from the plaintiff, saying that the defendant’s interpretation of the rule was too literal.12 Moreover, since the defendant created the software and installed it to the plaintiff’s computers, the court held that delivery had been made.13 Thus, the central issue became whether the defendant intended that AMS would be able to retain, use, and modify the programs he installed. In its analysis, the Court stated that “[t]he relevant intent is the licensor’s objective intent at the time of the creation and delivery...as manifested by the parties’ conduct.”14 Additionally, the Court went on to list three factors used by the First and Fourth Circuits to determine intent: 1) whether the parties were engaged in a short-term discrete transaction as opposed to an ongoing relationship, 2) whether the creator used written contracts providing that copyrighted materials could only be used with the creator’s future involvement or express permission, and 3) whether the creator’s conduct during delivery or creation indicated use without the creator’s involvement or consent was permissible.15
In applying these factors, the Court noted that evidence of the relationship of the parties did not provide any information as to the defendant’s involvement.16 The Court noted, however, that the TSA and the OVA drafts could be used to determine intent despite the fact that they had never been executed.17 Specifically, the Court quoted a portion of the plaintiff’s OVA, “Contractor will allow Company non-exclusive, unlimited licensing of software developed for Company,” and stated that this language removed any doubt as to the defendant’s intent.18 Since the defendant intended for the plaintiff to use, retain, and modify the program, the Court’s holding of an implied license to that effect expanded the scope of Effects. Moreover, the Court held that the implied license was irrevocable because consideration had been paid to the plaintiff,19 effectively ending his ability to derive income from the licensee.
Individuals and small businesses with limited resources are at especially high risk to this type of situation because they often feel they cannot afford to have an attorney draft the proper documents. As an example, consider an individual operating a website development company out of his home. Because of the copious amount of web-based advertising and low start-up costs, many individuals are tempted to try their hand at running their own web-based business. Because these entrepreneurs often feel that written contracts are too expensive or will scare away business, most will forgo any contract and design a website with no thought about the ownership of the graphic design, layout, or programming involved with the project. Once these individuals or companies perform the work and deliver it to their clients, upon payment, these individuals may discover that they delivered more than they intended.
To make matters worse, since the parties’ conduct at the time of creation20 is likely to determine whether or not an implied license was intended, the entrepreneur’s willingness to please in order to generate business becomes that much more perilous to his ability to retain control of, use and modify his own work product. Similarly, individuals and their attorneys should be wary about signing pre-printed form documents such as purchase orders for delivery of items like software, since these forms may be silent about intellectual property rights in the deliverables or may contain provisions that are adverse to the creator’s interests. At the very least, these forms should be reviewed and modified as necessary.
Asset Marketing demonstrates the inherent perils of producing creative works and delivering them to a potential licensee without a written agreement that defines the ownership or the licensing of the copyrights. If the Seventh Circuit follows the Ninth Circuit’s lead as it did with Shaver, authors must become aware that the consequences of inadequately protecting their rights may become more significant, and attorneys should look to the parties’ conduct.
1 17 U.S.C. §102
2 17 U.S.C. §106
3 17 U.S.C. §101 under “transfer of copyright ownership”
4 Effects Assoc. Inc. v. Cohen, 908 F.2d 555 (1990).
5 17 U.S.C. § 204(a)
6 17 U.S.C. §101
7 I.A.E., Inc. v. Shaver, 74 F.3d 768, 772 (7th Cir. 1996).
8 Id. at 776.
9 Id. at 777. See also Real Estate Support Servs., v. Nauman, 644 N.E.2d 907, 910 (Ind.Ct.App.1994).
10 Id. at 777.
11 Asset Marketing Systems Inc. v. Gagnon, 542 F.3d 748, 755 (9th Circ. 2008)
12 Id at 755.
13 Id at 755.
14 Id at 756.
15 Id at 756.
16 Id at 756.
17 Id at 756.
18 Id at 757.
19 Id at 757. See also Shaver at 772.
20 Id at 755-756.
Stephen Behnken is an associate at Momkus McCluskey, LLC in Lisle, Illinois. He holds a Bachelor of Science in Chemical Engineering from Purdue University and is 2006 graduate of the DePaul University College of Law. Before joining Momkus McCluskey, Steve worked for Cardinal Intellectual Property, a search and examination contractor of the United States Patent and Trademark Office, where he performed prior art searches and rendered patentability opinions in a wide range of applications in areas including oil processing (both refining and drilling), biofuels, and more.