APU Legal Studies Original

Bankruptcy Is Not Grounds to Circumvent Copyright Benefits

The bankruptcy case of In re Waterson, Berlin, & Snyder Co. was an important 1931 case involving composers’ copyrights, according to Justia. It clarified the rights of composers and the obligations of a bankrupt company.

This case was originally tried in federal district court. The decision of the trial court was appealed, and the Second Circuit Court of Appeals granted certiorari.

Because this case was a bankruptcy proceeding, its name does not use the typical “Plaintiff vs. Defendant” syntax. “In re” here simply means “in regards to” and refers to the party filing for bankruptcy.

The History of the In re Waterson, Berlin and Snyder Co. Bankruptcy Case

Last year, I discussed how authors of creative works may transfer their copyrights to third parties through copyright transfer agreements if they wish to do so. Commonly, authors in the world of entertainment transfer their copyrights to publishers in exchange for compensation. Those transfers are often subject to royalty agreements through which payments are owed to the original authors, based on the proceeds or profits from the sale or distribution of the creative works by the publishers.

But what happens if publishers later want to transfer the copyrights they hold to other parties? This passing of copyrights can create a number of complications for the original agreements with authors, which happened with In re Waterson, Berlin & Snyder Co.

Waterson, Berlin, & Snyder Co. was a music publishing company. During its time of operation, Waterson made agreements with 22 different musical composers for the purchase of copyrights to musical selections produced by those composers.

In exchange for the copyrights, Waterson agreed to pay compensation to the composers for their work. The terms of remuneration included an upfront payment of $1 for each work to be sold to Waterson.

Waterson’s agreements also called for royalties based upon both pianoforte copies and mechanical reproductions. Pianoforte copies were essentially sheet music printings that allowed pianists to play the tunes at home or in their places of business. And Waterson agreed to pay the composers one cent for every pianoforte copy of their works sold.

In terms of mechanical reproductions, technology at the time was very limited. In 1931 (the same year as this case was litigated), RCA produced the first vinyl records for phonographs, according to South Florida Reporter.

Prior to RCA, however, there were the Little Wonder Records, which were 5 ½-inch gramophone records. Incidentally, the Little Wonder Records were originally brought to market by Henry Waterson himself in 1910s and 1920s.

So in the agreements, Waterson agreed to pay the composers 33⅓% of all revenue for such reproductions.

Finally, Waterson agreed to pay each composer a $500 advance on royalties for the work each produced. Out of that advance, the initial royalties owed to the composers – to be paid on a semi-annual basis – were to be deducted before any future payments would be made.

Eventually, Waterson went bankrupt. In bankruptcy proceedings, the assets of a company are usually assigned to a trustee. Part of that trustee’s responsibilities – depending on the type of bankruptcy – may be to liquidate assets to pay the company’s creditors and satisfy outstanding debts.

Such was the case with Waterson. Their copyright transfer agreements with the composers implicitly allowed Waterson to sell or “assign” them to other parties. So the trustee naturally looked at selling those copyrights to pay for some of Waterson’s outstanding financial obligations.

However, the trustee knew that selling the composers’ copyrights subject to the royalty agreements would make them less valuable and more difficult to move. As a result, the trustee contemplated transferring those copyrights free and clear of the royalty obligations.

The composers naturally challenged the legality of this action. They argued that their agreements with Waterson were subject to the royalty conditions. Also, they argued that if Waterson would not or could not honor those agreements any longer, then the composers had the right to rescind the agreements and claw back the copyrights to their works.

The district court agreed with the composers. The district court judge argued that, because Waterson could no longer make productive (profitable) use of the copyrighted material, the composers had the right to undo the agreements and recover their intellectual properties. However, the court also noted that the composers were required to repay any advances on unearned royalties (through revenues reported by Waterson) at the time of the bankruptcy.

Waterson Appealed the District Court’s Original Decision

Naturally, Waterson appealed to the Second Circuit. There, the judges took a different approach. They argued that the opinion of the trial court (ordering the rescission of the copyright agreements) gave no consideration to the work that Waterson had put into producing, marketing and selling the music.

Although Waterson found itself in bankruptcy, the court did not construe this circumstance as a deliberate choice on Waterson’s part or even a reflection of incompetent management. Instead, it was likely due to complicated market forces that were both unforeseeable and unavoidable.

The Great Depression was one of the worst economic periods in American history, affecting many people and companies, especially on Wall Street.

It’s important to remember that the Waterson bankruptcy happened at the height of the Great Depression – one of the worst economic periods in American history, according to Federal Reserve History. The fact that Waterson could no longer make productive use of the copyrighted material was viewed not so much a product of Waterson’s failings as it was the supervening macro-economic forces of the era.

The Second Circuit Court argued that Waterson had made good-faith efforts to produce and sell the composers’ music for as long as it was financially able. So rescission of the copyright agreements by the composers would allow no consideration for those efforts.

Yes, the trial court ordered that any unearned advance royalties be repaid by the composers. But the fact of the matter is that, for many of the composers, there were no such unearned advances to be repaid when Waterson filed for bankruptcy.

So the Second Circuit Court opined that allowing the composers to pull back their copyrights after earning the royalties would lead to unjust enrichment for the authors and unjust deprivation of rights for the publisher. The court noted that their opinion might be different if Waterson had simply declined or neglected to make productive use of the copyrighted works.

But that was not the case here. Waterson made good-faith efforts toward producing and selling the composers’ music for as long as it could. Consequently, the Second Circuit Court did not feel that the company should be deprived of the fair value of its bargain with the composers simply because an economic crisis befell the U.S.

Instead, the Second Circuit Court argued that Waterson should be permitted to sell or assign the copyright agreements, pursuant to their rights in the original agreement terms. However, the Second Circuit Court noted that such sales must maintain the obligations of the royalty agreements owed to the original authors.

In rendering their opinion this way, the Second Circuit Court judges effectively decreed that upholding the integrity of copyright transfer agreements swings both ways. Bankruptcy of a publisher is not legitimate grounds for composers to rescind their contracts. But neither is it legitimate grounds for a publisher to avoid its commitments on the royalties owed to composers.

Contracts Must Be Clear to Avoid Confusion during Unexpected Events Such as Bankruptcy

Ultimately, the ownership and obligations of copyrights can be complicated – not just by contracts and terms, but also by macro-level external forces such as the ebb and flow of economic prosperity. However, the lesson learned from Waterson is that parties to such legal agreements would do well to clearly articulate their rights and obligations in the contracts to avoid confusion and conflicts if and when unanticipated events like bankruptcy arise.

Gary Deel

Dr. Gary Deel is a faculty member with the Dr. Wallace E. Boston School of Business. He holds an M.S. in Space Studies, an M.A. in Psychology, an M.Ed. in Higher Education Leadership, an M.A. in Criminal Justice, a J.D. in Law, and a Ph.D. in Hospitality/Business Management. Gary teaches classes in various subjects for the University, the University of Central Florida, the University of Florida, Colorado State University, and others.

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