Music On Hold—-Capitol Records, Inc. v. Naxos of America, Inc.

In a decision sure to be appealed but hailed as groundbreaking, the New York Court of Appeals, on April 5, 2005, held that rights to performances recorded before 1972 are protected under state common law, even after they have been put on the market. The ruling extends, until 2067, common law copyright protection for recorded music to companies that own rights to pre-1972 recorded performances. They can now prevent others from releasing their own versions. Since Congress did not extend statutory protection to recordings created before February 15, 1972, the court held there is common-law copyright protection in New York for sound recordings made prior to that date (i.e., since sound recordings made before 1972 are not covered by the federal copyright act, common law protection remains in place). In this case, Capitol’s claim against Naxos (who had remastered the recordings and began selling CDs) for infringement of common-law copyright in the original recordings was upheld. Common-law copyright traditionally has protected only unpublished works, but the New York holding concludes that the musical performances were unpublished, even though commercially sold to the public for decades. Go figure.

Film, Tax and Videotape

In an attempt to lure film and television production back to New York from cheaper or more tax-advantaged locations such as Canada and Europe where they have been headed in recent years, New York has passed a bill offering tax cuts to benefit films and television shows produced in New York, although the bill does not extend to commercial productions. The Empire State Film Production Credit Program, signed into law on September 28, provides a tax credit for 10 percent of the production costs of feature films and episodic television programs produced by companies that spend 75 percent or more of their facility-related production costs at a qualifying production facility within New York. The law also allows New York City to offer additional incentives, including a 5 percent tax credit on projects, credits for outdoor media marketing, and assistance with story development, scouting, vendor discounts and consulting.

In a related development, the UK has enacted new permanent and more generous tax relief for small British films to replace the old Section 48 relief, which is scheduled to expire in July 2005. The new tax relief applies to 100 percent of a film’s UK production and raises the “small” film budget for qualifying purposes from £15m to £20m. Qualifying films will be entitled to government subsidies worth up to £4m per film under the new law, and film productions with budgets of up to £20m will receive a tax waiver on their production costs, including overseas costs—subject to the condition that the film actually makes a profit. The government subsidies, worth up to 20 percent of the film’s budget, will be paid directly to the producers on completion of the film. Under current Section 48 regulations, subsidies went to third parties who funded the films. Now they will be paid directly to the film makers.

The British tax relief announcement comes on the heels of a recent (February 10, 2004) clamp-down on some of the UK’s largest tax equity film funds. Set up as sale-and-leaseback deals, these funds allowed British investors to acquire marketing rights to studio films in Britain, the United States and Canada, and enabled investors to write off the cost as an upfront tax loss and lease the films back to the studios for periodic payments over 15 or 20 years. The deals often provided an option for a studio buy-out after a shorter period of time, but those exit strategies were banned by the UK’s Inland Revenue in what has come to be referred to in the film industry as “Black Tuesday.” On that day, the Inland Revenue issued a tax rule change closing a loophole that allowed these funds to operate outside the existing Section 48 film tax break and permitted claiming production costs as tax losses. As if intent on delivering a one-two punch, in March the UK followed this with a prohibition against print and advertising funds that were bankrolling distribution of features from some of the major motion picture studios.

Critics point out that the consequences of these bans could be a dramatic decrease in films produced and shot in the UK, already reeling from a strong pound sterling and increased competition for film financing. We can only assume the newly announced Section 48 incentives, with its direct production credits and other attributes, scheduled to take effect in July 2005 when the current scheme expires, are intended to attempt to repair some of the tax damage done. Combining our poor sense of humor, film and legal expertise, we can only say, “The jury is still out; stay tuned: film at 11:00”!

Internet Streaming Media—-The FCC Just Says Yes

Last month we reported the Ninth Circuit Court of Appeals found that Grokster and Streamcast Networks were not violating copyright laws by making software that allows people to swap digital content. Just a few days ago, over the objections from the motion picture, broadcast and professional sports industries, the FCC approved technology allowing digital recording services like TiVo to transmit television programming to subscribers over the Internet, allowing programming, for example, to be viewed anywhere an Internet connection was available. Digital recording services and streaming programs remotely threatens local advertising relevance and revenue, while still allowing viewers to edit out commercials. Advertisers are you paying attention??

Can You Grok This? Fans of Robert Heinlein Smile

In what may be a momentous ruling and certainly a setback to the music, film and entertainment industry’s effort to fight illegal on-line downloading and file swapping, on August 19, the three judges of the Ninth Circuit Court of Appeals upheld a lower court ruling that found that Grokster and Streamcast Networks were not violating the copyright laws merely because they made software available that allows people to trade digital content (e.g., movies, music). To be clear, the decision in no way condones copyright infringement, nor changes the law relating to the illegal use or theft of copyrighted materials, nor authorizes anyone to ignore the intellectual property rights of others. But harkening back to cases which look and feel (pun intended) much like the Sony Betamax cases years ago, the court ruled that this particular type of software—referred to as “file sharing” software—was designed in such a way that it could not be held illegal.

It is noteworthy that this is the same court that essentially brought Napster to its knees a few years ago with an exactly opposite conclusion. While critics will argue that the ruling is a descriptive guide to designing software that can avoid being caught in the web (another pun) of the Copyright Act, many others welcomed the ruling for bringing clarity to a murky area of the law and focusing on the distinctions which make some software and systems infringing, while others are not. For you technical gurus in the audience, the court found it significant that neither Grokster nor Streamcast used centralized databases or computer systems with programming file directories pointing to files on individual users’ computers—in other words, these systems didn’t direct other people (and couldn’t even intercept or prevent people) to actual or potentially pirated music, film or any other content. As with the Betamax cases, the court also found that although there were plenty of arguments (and evidence) provided in entertainment industry briefs noting that the vast majority of content exchanged by these programs was illicitly copied, the software Grokster and Morpheus (the software licensed by Streamcast), had other substantial non-infringing uses and thus could not be held illegal as a matter of law.