Tuesday, 1 March 2011

Automatic reversion clauses in copyright assignments: do they work?

Author: Mark Anderson (Solicitor, Certified Licensing Professional, Anderson & Company)

Crosstown Music Company 1, LLC v Rive Droite Music Limited, Mark Taylor and Paul Barry [2010] EWCA Civ 1222, 2 November 2010

Journal of Intellectual Property Law & Practice (2011), doi: 10.1093/jiplp/jpq207, first published online: February 24, 2011

The Court of Appeal for England and Wales has confirmed the legal effectiveness of a clause in a copyright assignment that provided for an automatic reversion of the copyright to the assignors in the event of breach of contract by the assignee.

Legal context

Counsel argued in this case that English common law does not allow a transfer of personal property to be subject to an automatic reversion of the property to the transferor in the event of an uncertain future event, eg a breach of contract by the transferee (‘automatic reverter’). Copyright is a species of personal property (according to section 90(1) of the Copyright, Designs and Patents Act 1988) and the transfer of copyright is subject to section 90. This provision does not specifically state whether an assignment can be subject to an automatic reverter. However, section 90(2) allows an assignment of copyright to be ‘partial, that is limited so as to apply … (b) to part, but not the whole, of the period for which the copyright is to subsist.’

Facts

The second and third defendants (the ‘writers’), who were songwriters, assigned copyright in their songs to the first defendant (‘Rive Droite’) under song-writing agreements. Clause 18(a) of the agreements provided that, in the event of unremedied material breach by Rive Droite, ‘all rights assigned to [Rive Droite] hereunder shall forthwith revert to the Writer’. Clause 18(b) provided that, if Rive Droite went into liquidation, ‘all rights assigned to [Rive Droite] hereunder shall … revert to the Writer on the day immediately preceding such event’.

In 2006 Rive Droite sold the copyrights and the rights under the song-writing agreements to the claimant for approximately US$10m. In April 2007 the writers served notice of breach on Rive Droite, alleging accounting deficiencies and other matters, and stating that they would contend an automatic reverter if the breaches were not remedied. In October 2007 Rive Droite was put into administration, owing large sums to the writers.

The claimant contended that it was the owner of the copyrights by virtue of the assignment from Rive Droite and that the reverter was invalid. At first instance, Mann J found that Rive Droite had been in material breach of the song-writing agreements, the breaches had not been remedied in response to the notice of breach, and that the copyrights had automatically reverted to the writers under clause 18(a). The claimant appealed. The Court of Appeal unanimously dismissed the appeal. Various other issues were considered in the action, which are not further mentioned in this note, including the rights of the English courts to decide matters of foreign copyright.

Analysis

Mummery LJ gave the lead judgment. His findings on the reverter point can be summarised as follows:
1. Clause 18(a) was not an agreement to re-assign; rather, it was an automatic reverter, so that re-vesting took place automatically and without the need for further documentation when the reverter event occurred.

2. Section 90 permits partial assignments for a period of less than the full term of the copyright. The key issue was whether section 90 permitted the specific type of partial assignment in this case, ie one where an automatic reverter followed an unremedied breach of contract. Common law rules on personal property were not relevant to this question.

3. Although section 90 did not specifically refer to automatic reverter provisions, the ‘ordinary meaning’ of the words of the section, where they referred to a period of less than the full period of the copyright, did allow such provisions to be legally effective.
Practical significance

In his judgment, Mummery LJ referred to a comment by counsel for the claimant that this outcome of the case was an ‘odd commercial result’, in which the claimant had paid US$10m for nothing, while the writers had obtained a huge windfall by recovering copyrights that they had previously sold and been paid for. Mummery LJ disagreed and pointed out that the claimant had failed to make enquiries as to whether Rive Droite had complied with its obligations under the song-writing agreements. Mummery LJ considered that the claimant's remedies were against Rive Droite (eg for misrepresentation or breach of warranty) and not against the writers. Of course, Rive Droite had long since gone into administration.

The case confirms the validity of automatic reverter clauses in copyright assignments, at least in relation to reverter following breach of contract. Such clauses are commonly encountered in the media sector. There are arguments for and against such provisions being legally effective. Where they are legally effective, there is a greater onus on the purchaser to do ‘due diligence’ on the chain of title. A potential solution where the facts are similar to those in Rive Droite would be for the purchaser to get the original owners of the copyright to execute some form of confirmatory assignment or waiver to ensure that they could not claim the copyright back. Insurance might also be available against this risk.

Although the case did not specifically decide the point, the Court of Appeal's judgments give some hope for assignors who wish to recover copyright from an insolvent company. Clause 18(b) of the song-writing agreements provided for an automatic reverter if the assignee went into liquidation. Such provisions are sometimes considered of doubtful legal effect in light of insolvency laws (particularly the Insolvency Act 1986), including those allowing a liquidator to reject ‘onerous’ contracts and those prohibiting unlawful preference of creditors. By clarifying that reverter provisions are not agreements to re-assign but take effect automatically, there may be greater prospect of recovering copyright from a liquidator who might otherwise refuse to re-assign.

Although not discussed by the Court of Appeal in their Rive Droite judgments, this author has been advised by specialist insolvency counsel that assignments of a determinable interest are encountered in other areas of business law. The technique is apparently used in relation to pension funds (to avoid the pension falling into the estate of an insolvent person) and in relation to subordinated debt obligations (eg this explains how an agreement by a junior creditor to pass any proceeds it obtained to a senior creditor could survive the insolvency of the junior creditor). As Neuberger J (as he then was) commented, obiter, in Money Markets v London Stock Exchange [2002] 1 WLR 1150:
It does appear well established that an interest granted on the basis that is inherently limited on insolvency is recognised by the court. In other words, a determinable interest, that is an interest with a limitation until insolvency, is valid …
However, great care is required in the drafting of any such provision to ensure that it does not fall foul of the insolvency laws mentioned earlier.

This author is interested in the possible implications of the Court of Appeal's judgments for patent assignments. Unlike section 90 of the Act, section 30 of the Patents Act 1977 makes no mention of partial assignments or assignments limited by time. Mummery LJ's reasoning for declaring automatic reverters to be legally effective was very much based on the wording of section 90, which did allow partial assignments. The other two judges in the Court of Appeal in that case were Morgan J and Sir Paul Kennedy, who both agreed with Mummery LJ's conclusions. Sir Paul Kennedy adopted the reasoning of Mummery LJ and made no further comment. On that basis, it might be argued that the majority in the Court of Appeal decided the matter on the wording of section 90, and the case has no relevance to patent assignments.

Morgan J, in contrast, commented on whether the claimant was right to contend that automatic reverter clauses were invalid under general common law principles governing personal property. Part of the claimant's case was that these general principles did not allow an automatic reverter of personal property based on a contingent event. He pointed out that automatic reverter had been possible in certain other areas of property law, eg under the School Sites Act 1841. His conclusion was that the claimant had failed to show that an automatic reverter was impossible under general principles of property law.

Morgan J's comments, as well as the practice in other areas of business law mentioned above, raise the possibility that automatic reverter provisions could be legally effective in assignments of other types of intellectual property. There appears to be nothing in section 30 of the Patents Act 1977 which prohibits automatic reverter provisions. Even if this is technically correct, there may be practical difficulties in persuading a national Patent Office (in the UK or elsewhere) to amend the register to reinstate a former proprietor, in the absence of a formal re-assignment.

1 comment:

  1. I am delighted to see a reference to the School Sites Act 1841. This statute has become of considerable relevance these days as various education authorities close schools. The authorities find, often to their surprise, that the closed school reverts to the heirs of the original nineteenth century donor as it ceases to be used for "educational purposes". Fraser & Fraser monitor such closures and claim on behalf of the heirs for a percentage.

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