Stronger than Kryptonite? Inalienable Profit-Sharing Schemes in Copyright Law

Abstract

Starting in 2013, authors of copyrighted work and their successors will be able to terminate every assignment and license 35 years after execution. These termination rights are inalienable and are expected to have a substantial impact on some industries, and in particular, the music industry.

This Article provides an in-depth economic analysis of these inalienable rights. It explores the traditional justifications for the inalienability of termination rights and finds them unconvincing and lacking. Indeed, termination rights seem to be rooted in a romantic perception of a starving, unsophisticated artist, a description that is neither accurate nor justifies inalienability.

The effects of termination rights on the incentives to create are analyzed in-depth. It is shown that when competition among buyers of copyrighted work is limited, inalienable termination rights might promote economic efficiency. Those rights allow the creator to sell her work in two steps. Initially, the pre-termination rights are sold when the seller lacks market power, but later, when the value of the work is known, the author can sell her post-termination rights as a monopolist. This can increase the incentives to create. The main costs of this system include the misallocation of risk among the author and her buyers, an end-game problem — the need to control the externalities between the parties as termination approaches, and the problem in reassembling the various rights after termination. The Article makes several suggestions for improving this system including allowing the parties to contract around the rules of termination when it approaches, and forcing the author to grant the transferees compulsory licenses.

The analysis suggests that while termination rights might have been economically desirable in the past, nowadays their costs probably outweigh their benefits in major copyright industries. The Article further shows that adopting a similar mandatory resale royalties system in the fine art industry, which is common in foreign jurisdictions and is currently being considered by the U.S. Copyright Office, is undesirable.

Keywords: Copyright, termination, termination rights, economic analysis, contracts, license, authors rights, droit de suite

JEL Classification: K00, K11, K12, K33, O34, O30, L12, L11, L13, L14, L10, D40, D41, D42, D43