Publishing

Character Exclusivity in Rights Deals

By Simon N. Pulman

In this increasingly competitive media landscape, companies are seeking to create entertainment brands that can endure, serve as the basis for dozens of hours of content on the new generation of owned-and-operated premium platforms, and extend across various forms of media. However, transmedia deals are seldom straightforward, and may create issues that one is less likely to encounter when negotiating a relatively simple deal for a book-to-film adaptation.

One such issue is character exclusivity – the idea that when an entertainment property has multiple rightsholders, certain characters (or, in hyper-complex instances, certain characteristics of certain characters) are owned exclusively by only one rightsholder. The phenomenon of character exclusivity (and the schism in a property that it tends to create) tends to arise from one of three main deal-making circumstances, as follows:

Creator Sequels

Traditionally, a purchaser in a rights deal acquired only one “installment” of a property, such as a novel. In the event that the author of that novel decided to write a sequel, the film and television rights in that sequel would typically be “held back” for a period of time (usually between three and seven years), and the purchaser of the first book would have a first negotiation right and some kind of matching right to acquire the rights in the sequel.

That structure is fine when one is acquiring a discrete novel for which a sequel is a hypothetical future possibility, and which would be (if written) a direct continuation of the original story. It works less well when a property is conceived from the ground up as a series, an anthology, or a shared universe (more on that below). However, even this relatively simple traditional structure begs the question: what happens if the original purchaser does not acquire a sequel?

Most studios include some form of the below language in their option agreements with respect to the creator’s reserved sequel rights:

“If Purchaser does not acquire any Author-Written Sequel, then Owner’s right to dispose of any rights in such Author-Written Sequel shall not include the right to produce or cause the production of any audiovisual production which contains any of the characters or incidents contained in the original Property.”

In essence, this language provides that a creator can sell sequel rights to a third party (subject to the holdback and first negotiation/matching right), but not rights to any characters that appear in the original work. So, to illustrate, the author of Bridget Jones could sell the screen rights to the second Bridget Jones book, but would not be permitted to grant rights to the character Bridget Jones (feel free to replace “Bridget Jones” with “Harry Potter,” “Harry Bosch,” “Frodo” or any other character of your choosing).

Suffice to say, this creates instant character exclusivity and in many instances makes the development of a sequel by a new buyer unworkable.

On the subject of “creator sequels,” it is also worth mentioning that contractual standards that were very simple when formulated to address the acquisition of discrete works such as novels or plays may be much less elegant in the modern world. For example, it may be difficult to discern the line between the “original property” and a “sequel” when you have an ongoing comic book series with multiple spinoffs. How about a true crime podcast anthology that presents multiple “seasons” focused on different crimes, under one united brand? Or what about a video game where updates are presented via a series of continuous downloadable updates, as opposed to individual and clearly separate releases at brick-and-mortar retailers?

These are issues that we are thinking about and addressing on a daily basis and should evidence why it is important that rightsholders and purchasers alike engage experienced rights counsel!

“Studio Created” Elements

Another provision commonly found in rights purchase agreements reads substantially as follows:

“The Reserved Rights do not include, and Owner will have no right to exploit or use, any new or changed element created by or for Purchaser and/or any new characters, new characterizations and other new elements from any production produced by Purchaser.”

Think of this as the “Daryl Dixon” clause. When AMC optioned and developed “The Walking Dead” comic books for television, they created Daryl as a new character. Daryl promptly went on to become one of the most popular characters in the series.

Because of the clause above, the comic book writer and publisher were not permitted to use Daryl in the source material – or in connection with any other reserved rights (such as video games and merchandising based on the comic book, as opposed to the TV series).

Historically, there were good reasons for this clause. It does not make sense for the author to be unjustly enriched by the studio’s creativity and investment, and the inclusion of a new character back in the original source material could trigger additional guild or contractual obligations (in essence, putting the purchaser on the hook for exploitation that it doesn’t control).

However, we are finally moving towards a paradigm where characters move fluidly across media and different forms of exploitation – where new movies are promoted in Fortnite, and where Freddy Krueger, the Demogorgon, and Michael Myers can all appear as killers in Dead by Daylight. In gaming in particular, there may be a compelling reason for a game publisher to be able to use a character in their games who initially appeared in a television series. Moreover, the expectation of audiences is increasingly that there will be some level of coordination and consistency across media, and so it may be necessary to reexamine the necessity of this clause in very specific circumstances.

Shared Universes

The concept of character exclusivity becomes particularly complicated in the instance of a “shared universe” – a vast sprawling story world that may encompass dozens of separate narratives that could be tied together by relatively obscure or minimal narrative threads. Think Brandon Sanderson’s Cosmere or, of course, the Marvel Universe.

For a shared story universe, it is possible, or even likely, that different characters or story elements will be controlled by different rightsholders. This concept has become familiar to audiences due to the X-Men and Avengers living (up to now) in completely separate story universes – or via the high profile and very public negotiations that were necessary to bring Spider-Man to the Marvel Cinematic Universe. Absent special arrangement, characters are “stuck” in one universe and cannot “cross over” – even if they did so routinely in the source material. This may lead to audience confusion and frustration.

Of course, there are exceptions to every rule and in addition to the aforementioned Spider-Man example, two characters were “shared” by Fox and Disney pre-merger – Scarlet Witch and Quicksilver (who appeared in the X-Men franchise starting with Days of Future Past, and in the MCU starting with Avengers: The Age of Ultron (after a brief post-credits appearance in Winter Soldier). However, the two iterations of the characters were played by different actors and, there were purportedly very specific contractual stipulations on how they could be characterized in each universe.

While the concept of a “shared universe” applies mostly to superhero and fantasy worlds, there are still potential repercussions for creators in other genres. For example, an author who writes crossovers between two book series (as Michael Connolly has done with the Bosch and Lincoln Lawyer books), or includes an Easter egg type cameo in their romance novel with a character from another book may be inadvertently creating rights and contractual issues that must be carefully addressed (and may be potentially headache inducing). Of course, the most successful US author of all – Stephen King – does this routinely. But creators must be careful because it is unlikely that they have the leverage that King does over his intellectual property!

Congratulations to CDAS Client Colson Whitehead on Winning a Second Pulitzer Prize

Just announced, Colson Whitehead received the Pulitzer Prize for The Nickel Boys. He was previously awarded the Pulitzer Prize in 2017 for his best-seller The Underground Railroad, making him one of only four authors to win the Pulitzer twice for fiction.

MiMO Studio to Adapt “The Pout-Pout Fish” as Animated TV Movies

On behalf of publisher Macmillan, Simon Pulman and Marc Hershberg negotiated the deal for MiMO Studio to adapt award-winning pre-school book series The Pout-Pout Fish, written by Deborah Diesen and illustrated by Dan Hanna, for multiple animated TV movies. A New York Times best seller when released in 2008, The Pout-Pout Fish received the Bank Street – Best Children’s Book of the Year award the following year.

Content in Quarantine: Copyright Best Practices During a Pandemic

By Scott J. Sholder

At a time when we are stuck at home, working or “working” (or, sadly for many, not working) the tenet that content is king has never been more relevant.  From Disney+ releasing “Frozen II” and “Onward” early to help placate restless youngsters, to DreamWorks releasing “Trolls World Tour” for “theatrical” in-house rental, to Instagram sensation DJ D Nice offering his “Club Quarantine” and “Homeschool” IG parties and Spotify playlists, there is something for everyone on one platform or another.  Musicians are even offering special live-streamed performances from their homes (thank you Dave Grohl, Billy Joe Armstrong, et al.).

While the Disney and DreamWorks releases were clearly authorized corporate decisions, the world of quarantine content becomes murkier when one turns their overly scrubbed fingers to the keyboard.  Of course, the lead singers of Foo Fighters and Green Day, respectively, likely have the rights to publicly perform music they wrote, and reports indicate that DJ D Nice made licensing deals to avoid copyright claims stemming from his streaming discotheques.  But in the further corners of social media, the always-gray field of copyright has spawned more than its usual fifty shades in the time of COVID-19.  So, what about musicians performing other artists’ songs?  Fitness instructors on Instagram Live with their playlists thumping in the background?  The Internet Archive[i] offering its own “Emergency Library” of digital copies of books (a decision decried by the Authors Guild and Association of American Publishers, but claimed to be fair use by archive.org)?  Or DJs who, unlike DJ D Nice, did not have permission to publicly perform or remix the music featured during that IG virtual dance party?

At least in the latter case, some DJs and performers streaming on Instagram Live have reported that they’ve had their streams cut short by copyright infringement claims over use of musical content without authorization.  Lesser-known and aspiring artists (who, like many, are out of work at this time) are having their online raves canceled mid-performance.  But at the same time, artists whose content is being used may also be out of work and may be incentivized, perhaps more than usual, to enforce their copyright rights and preserve their dwindling income streams.  This presents a sensitive nuance to an already delicate balance between online content usage and rights enforcement. 

There is no timelier example of COVID-era copyright enforcement than Richard Liebowitz, the infamous plaintiff’s lawyer behind more than 2,000 copyright infringement lawsuits filed by photographers over the last four years.  His business model – which he characterizes as fighting for photographers’ rights, and much of the digital media industry characterizes as “trolling” – has, like COVID-19, mutated to adapt to its new circumstances.  It was recently reported[ii] that, despite quarantine and widespread isolation (or perhaps because of it), Liebowitz’s filings have actually increased, with his firm filing 51 lawsuits between mid-March and early April (39% of all copyright infringement lawsuits filed since the World Health Organization declared a global pandemic).[iii]  Likewise, porn studio Strike 3 Holdings is also keeping busy during the pandemic, having filed a more modest 11 new lawsuits since mid-March.[iv]  The uptick in these types of cases is potentially correlated to the increased use of content during quarantine and the reduced number of opportunities for photographers and other content creators to earn a living.  So, what’s a pandemic hermit to do?

The short answer: the same thing you’d do in pre-COVID life.  Even in these strange times of social distancing and mandatory isolation, the same rules apply even when unauthorized content use is undertaken for seemingly laudable reasons such as alleviating boredom, distracting your kids, or entertaining your Instagram followers.  For better or for worse, there is no exception in the Copyright Act for what’s going on out there, so vigilance in defense as well as enforcement is paramount.  For instance, the test for fair use set out in section 107 of the Copyright Act of 1976 requires a lot more than benevolence in alleviating boredom or even supplementing one’s income during hard times to successfully fend off a claim of infringement.  One of the keys to establishing a viable fair use defense is “transformative use” – use of existing content that adds new expression, meaning, or message to the original underlying work.  Simply using the content as intended, even in an unprecedented environment, almost certainly will not be considered transformative.  As tempting as it may be to utilize others’ content for a seemingly good cause, good intentions do not a fair use make. 

Best practices for content usage remain largely unchanged.  The first-tier best solution is to use vetted licensed content (ideally pursuant to representations, warranties, and indemnification from the licensor) or seek permission, preferably in writing, directly from the copyright owner.  There are plenty of options out there for many types of content.  Licensing agencies like Getty Images, Shutterstock, Adobe, and Pond5 are stalwarts for visual content.  Many book and journal publishers are now offering resources[v] for newly minted home teachers.  Creative Commons licenses and use of public domain material are also viable options, particularly for photographic content, although may be less useful for things like popular music and are not always fool proof.  Music licensing is a unique beast that could fill an entire treatise, but suffice it to say that several licenses may be required depending on the nature of the use, including public performance licenses from performing rights organizations like ASCAP, BMI, SESAC, and Global Music Rights, “mechanical” licenses from music publishers and “master use” licenses from labels when content is downloadable, and synchronization licenses from publishers and record labels for music that is cued up with accompanying video content.  It’s certainly worth noting that some sites offer royalty-free and low-cost licensable music, such as Freeplay Music, Audioblocks, and Free Music Archive, without the added worry of the music licensing labyrinth.

Reliance on defenses like fair use should be a last resort, and in such cases, it is always wise to seek advice from an experienced copyright lawyer.  And, on the other side of the equation, if you believe your content is being used in a way that violates your copyright rights, platforms like YouTube and Instagram have DMCA takedown forms for removal of infringing content, but recent developments in the law require at least some consideration of whether the user has potential defenses (such as fair use) before submitting a takedown notice.

As we stay vigilant against the virus that is causing so much havoc worldwide, we must also make sure that we stay within the bounds of the law and mitigate our legal risks as we mitigate our health risks.  While troubled times such as these call for cooperation, collaboration, forgiveness, and flexibility, absent content owners and users working together to reach mutually beneficial arms-length deals, or the creation of a collective effort to allow free use of IP like that of Open COVID Pledge[vi] for health-based patents and technology, the rules remain as they were even if the world outside doesn’t.   

This article appeared in the May 1st issues of LAW360 Intellectual Property, LAW360 Media & Entertainment, and LAW360 Coronavirus.


[i] “Announcing a National Emergency Library to Provide Digitized Books to Students and the Public,” Internet Archive Blogs (Mar. 24, 2020), https://blog.archive.org/2020/03/24/announcing-a-national-emergency-library-to-provide-digitized-books-to-students-and-the-public/

[ii] Bill Donahue, “During Pandemic, Prolific Copyright Lawyer Keeps Suing,” Law360 (Mar. 27, 2020), https://www.law360.com/ip/articles/1257593/during-pandemic-prolific-copyright-lawyer-keeps-suing?nl_pk=db11a53e-b04f-44a7-96e1-76824544133d&utm_source=newsletter&utm_medium=email&utm_campaign=ip

[iii] See id.

[iv] See id.

[v] “What Publishers Are Doing to Help During the Coronavirus Pandemic,” Association of American Publishers, https://publishers.org/aap-news/covid-19-response/

[vi] Open Covid Pledge (Apr. 7, 2020), https://opencovidpledge.org/

CDAS IP Group and Partner Nancy Wolff Recognized in Chambers USA 2020


The highly regarded “Guide to the Top Lawyers and Law Firms” described CDAS as a “highly skilled boutique offering excellent capabilities handling trademark and copyright infringement cases, as well as substantial portfolio management matters. [CDAS] exhibits expertise acting for market-leading entertainment, media and digital platform clients.” In addition to recognizing the firm for Intellectual Property: Trademark, Copyright & Trade Secrets (New York), Nancy Wolff was also recognized as “a leading attorney in IP issues relating to digital media, counseling clients in a broad range of matters including disputes and licensing.”


Nancy Wolff Featured in ABA Grassroots Initiative Discussing the CASE Act

As part of ABA Day, Nancy participated in a CASE Act Introduction and discussed implications of The Copyright Alternative in Small-Claims Enforcement (CASE) Act of 2019 and its creation of the Copyright Claims Board as an alternative forum to pursue low-value claims of $30,000 or less. Listen to the panel here.

S.D.N.Y. Holds that Publishers May Embed Content Publicly Posted on Instagram Platform — (Sinclair v. Ziff Davis, LLC et al.)

By Lindsay Edelstein

Since the emergence of social media, courts, content creators, and publishers alike have been grappling with legal issues concerning the practice of “embedding” copyrighted content.  Following the controversial February 2019 decision in Goldman v. Breitbart News, LLC – rejecting the Ninth Circuit’s “server test” and holding that an embed constitutes a “public display” exposing a content user to liability under the Copyright Act – the pendulum had seemingly swung in favor of content owners, creators, and licensors. 

Yesterday, however, Judge Kimba Wood of the U.S. District Court for the Southern District of New York, issued a ruling in Sinclair v. Ziff Davis, LLC et al, providing publishers and other content users with a defense to alleged copyright infringement premised on the practice of embedding in the context of social media platforms: a valid sublicense granted to the user by Instagram via the interrelated agreements available on its platform. 

Sinclair, a professional photographer, publicly shared her copyrighted photograph “Child, Bride, Mother/Child Marriage in Guatemala” on her public Instagram page, which was viewable by anyone.  Media and entertainment platform Mashable made an offer to license the photograph from Sinclair for use in an article entitled “10 female photojournalists with their lenses on social justice.”  Sinclair rejected Mashable’s offer, but Mashable proceeded to use Instagram’s application programming interface, or “API,” to embed Sinclair’s original Instagram post in its article.  The embed frame of Sinclair’s Instagram post, as it appeared in the Mashable article, was hosted on Instagram’s servers, linked back to Sinclair’s Instagram page, and included the photograph, Sinclair’s original caption, and the date of the original post.  The Mashable article specifically discussed Sinclair and her work above the embed.  Sinclair filed suit against both Mashable and its parent company Ziff Davis, LLC for copyright infringement.

Mashable’s chief argument was that Instagram’s integrated agreements (i.e., its Platform Policy, Terms of Use, and Privacy Policy) clearly granted it a sublicense to display the photograph.  Indeed, the Terms of Use stated that, by posting content to Instagram, the user “grant[s] to Instagram a non-exclusive, fully paid and royalty-free, transferable, sub-licensable, worldwide license to the Content that you post on or through [Instagram], subject to [Instagram’s] Privacy Policy.”  Pursuant to Instagram’s Privacy Policy, users can revoke Instagram’s sub-licensable right by designating the content at issue as “private.”  Because Sinclair posted the photograph publicly, Judge Wood opined, “Plaintiff made her choice.  This Court cannot release her from the agreement she made.” 

While the Court conceded that Instagram’s integrated agreements could be more concise and accessible, it declined to accept Sinclair’s contention that the agreements were unenforceable because they were purportedly “circular,” “incomprehensible,” and “contradictory.”

Judge Wood also touched upon a real dilemma faced by professional photographers: deciding whether to remain in “private mode” on one of the most popular public photo sharing platforms in the world, or to promote and share work publicly.  On the one hand, sharing content publicly allows widespread exposure and can be effectively used to market and promote one’s work.  Indeed, many photographers today use Instagram as a digital portfolio, showcasing their works to the masses.  On the other hand, if sharing content publicly grants a valid sublicense to publishers of digital content, the licensing value of such content may be diminished.

This holding is likely to send shock waves throughout the creative community as rights holders may be forced to rethink how they make their works available to the public.  Alternatively, for publishers and media entities, it allows use of publicly available content provided the publisher uses the embed API that links directly back to the Instagram account user’s full Instagram page. 

As with the Goldman case, the Sinclair holding is not binding on other courts and does not create a per se rule with respect to the practice of embedding, and each case will likely depend on the specific circumstances present. In Goldman, the photographer never posted to Twitter, but rather shared his image of Tom Brady in a private Snapchat, with one friend capturing a screen grab and further distributing it on the Twitter platform.  Twitter’s terms, unlike Instagram’s, do not grant publishers a sublicense to embed using the Twitter environment.  Users of content should note that the Instagram Privacy Policy requires the user to obtain consent before using content in an ad.

Moving forward, courts will likely consider the terms of service (including the content owner’s choice of privacy settings) and the type of embedding at issue (i.e., the “framing” of standalone images as in Goldman, versus the prototypical “embedding” using Instagram’s API as in Sinclair).  Courts may also consider the context of the use at issue as well, such as whether the use of the image transformed the purpose of the original work, or whether it is merely illustrative of the article.   Before considering embedding any content, publishers should carefully review all relevant terms of service and seek legal counsel as platform policies are not uniform and there is uncertainty in the law.

How Broadway Podcasts Are Bucking the Trend

By Marc Hershberg

As the spread of COVID-19 has forced almost all Americans to stay at home, many podcast programs have seen the size of their audiences shrink. One podcast publisher shared that the number of people downloading its shows has dropped 19 percent over the past two weeks, and Lindsay Graham of the audio production company Airship confirmed that his firm was “down 20 percent across the board.”

Click here to read how Broadway Podcast Network seems to be bucking the trend.

Allen v. Cooper: Supreme Court Upholds State Sovereign Immunity in Copyright Row Over State’s Unauthorized Use of Videos and Images of Blackbeard’s Famed Shipwreck

By Lindsay R. Edelstein

In a technical win for states facing federal claims under the Copyright Act, on Monday, March 23, 2020, the United States Supreme Court struck down the Copyright Clarification Act of 1990 (the “CRCA”), which had allowed states to be sued in federal court for copyright infringement.  Allen v. Cooper, No. 18-877, 2020 WL 1325815 (U.S. Mar. 23, 2020).  The Supreme Court, however, did not foreclose the possibility of later abrogating such sovereign immunity, should Congress draft a tailored, constitutional statute addressing infringement by states.  The decision is available here.

The underlying action was brought by videographer Frederick Allen, who was hired by marine salvage company Intersal, Inc. to document the recovery of Queen Anne’s Revenge, a vessel commandeered by Edward Teach (better known as Blackbeard), and shipwrecked nearly 300 years ago off the North Carolina Coast.  Allen registered the copyrights in all his works created during the ten-year excavation with the U.S. Copyright Office, including videos and photographs of guns, anchors, and other remains on the ship.

The state of North Carolina, which had engaged and contracted with Intersal to conduct the recovery efforts but did not have authorization or a license to use certain of Allen’s works, published some of Allen’s photographs and videos online and in a newsletter.  In response to the unauthorized publications, Allen sued the state for copyright infringement in federal district court.

North Carolina moved to dismiss, invoking the doctrine of sovereign immunity, which precludes federal courts from hearing suits brought by individuals against nonconsenting states.  According to Allen, however, the doctrine was abrogated in the copyright context by Congress with its enactment of the CRCA, which provides, in pertinent part, that states “shall not be immune, under the Eleventh Amendment [or] any other doctrine of sovereign immunity, from suit in Federal court” for copyright infringement.  17 U. S. C. § 511(a).  The district court agreed with Allen and denied North Carolina’s motion. 

North Carolina appealed the case to the U.S. Court of Appeals for the Fourth Circuit, which reversed the district court’s ruling, relying heavily on Florida Prepaid Postsecondary Ed. Expense Bd. v. College Savings Bank, 527 U. S. 627 (1999), which had repudiated the Patent and Plant Variety Protection Clarification Act (“Patent Remedy Act”); the Patent Remedy Act was modelled after the CRCA with identical language concerning sovereign immunity. While the district court had conceded that Florida Prepaid precluded Congress from using its Article I powers (the power to “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries”) to take away a state’s sovereign immunity, it opined that abrogation of a state’s immunity could still be achieved under Section 5 of the Fourteenth Amendment, which authorizes Congress to “enforce” the commands of the due process clause. 

In reversing the district court’s ruling, the Fourth Circuit cited the requirement that a Section 5 abrogation be “congruent and proportional” to the Fourteenth Amendment injury.  Because the Supreme Court had previously rejected Congress’s attempt, in the Patent Remedy Act, to abolish the states’ immunity in patent infringement suits, the Fourth Circuit held that there was nothing to distinguish the situation in Allen in the context of copyright, which involved a statute with identical language, and related allegations of intellectual property infringement.  

In an opinion authored by Justice Kagan, the Court unanimously sided with the Court of Appeals, holding that “Florida Prepaid all but prewrote our decision today.”  The Court agreed that Article I did not give Congress the authority to enact the CRCA, per the reasoning in Florida Prepaid.  While Allen argued that the Court’s post-Florida Prepaid decision in Cent. Virginia Cmty. Coll. v. Katz, 546 U.S. 356 (2006) – abrogating sovereign immunity with respect to Article I’s bankruptcy clause – changed the analysis, the Court distinguished Katz as “a good-for-one-clause-only holding” that only concerned the bankruptcy clause.  

The Court’s central issue with the CRCA was informed by language found in Section 5 of the Fourteenth Amendment which requires that Congress enforce limitations on states’ authority when they violate due process with “appropriate legislation.”  The word “appropriate” in this context has been interpreted to mean that there must be “a congruence and proportionality between the injury to be prevented or remedied and the means adopted to that end.”  Because, the Court explained, an infringement must be intentional, or at least reckless, to come within the reach of the due process clause, and because the CRCA would impermissibly abrogate states’ sovereign immunity for merely negligent infringement or honest mistakes (which would not violate due process, according to the Court), the CRCA was unconstitutional.  

Allen asserted that the CRCA’s legislative record – namely, a 1988 report by the then-Register of Copyrights arguing that individuals would suffer immediate harm if they were unable to sue infringing states in federal court – was enough to distinguish it from the Patent Remedy Act at issue in Florida Prepaid.  But the Court found the purported evidence of states’ infringement in that legislative record to be unimpressive because, despite undertaking an exhaustive search, the Register only came up with a dozen possible examples of state infringement, some of which were not corroborated.  The CRCA, the Court opined, was enacted to “guard against sloppiness,” not correct constitutional wrongs, and this justification was not sufficient to withstand constitutional scrutiny. 

Significantly, the Court did leave an opening for Congress to pass a valid copyright abrogation law and “effectively stop states from behaving as copyright pirates” or “digital Blackbeards” in the future, if it “appreciate[s] the importance of linking the scope of its abrogation to the redress or prevention of unconstitutional injuries – and of creating a legislative record to back up that connection.”

While the Allen decision certainly sets a limitation on an individual’s ability to prosecute certain copyright claims, it has left the door open for Congress to draft a statute abrogating state sovereign immunity where a state’s infringement is intentional or reckless.  Furthermore, because such a determination is often fact-specific, if such a statute is enacted, federal courts may see an increase in cases filed against states that proceed, at the very least, to the discovery stage.  But for now, copyright owners do not have any recourse against states for copyright infringement, which likely will cause concern to publishers and others in the creative community as to whether state governments will take advantage of the safe passage the Court has provided them at least in the short run.

Contractual Disruptions: How They Arise and How to Prepare

By Elizabeth Altman and Tyler Horowitz

With the recent spread of the novel coronavirus COVID-19 and its unprecedented precipitation of social-distancing, work-from-home policies, shelter-in-place orders, and limitations on foreign travel, many individuals may be questioning whether certain contractual obligations are excused. This article provides a primer on the contract concepts of force majeure, impossibility and impracticability, and related provisions that affect, and may in certain instances excuse, performance of contractual duties owing to changed circumstances outside any signatory’s control.

Force Majeure

A force majeure clause is a contract provision that excuses a party’s performance of its obligations under a contract when events beyond the party’s control make performance impossible. To invoke a contract’s force majeure clause, a party must typically demonstrate that (1) a disruptive event enumerated by the force majeure clause has occurred; (2) the risk of nonperformance was not foreseeable; and (3) that the event has rendered the party’s performance impossible.

A party looking to invoke a force majeure clause must follow several steps:

First, a party must examine the contract’s definition of what constitutes a “force majeure” event and demonstrate that the change in circumstances was included within the definition. Force majeure events will have been enumerated within a force majeure clause and generally include: Acts of God; severe acts of nature or weather events including floods, fires, earthquakes, hurricanes, or explosions; war; acts of terrorism; epidemics; acts of governmental authorities such as expropriation or condemnation; changes in laws and regulations; and strikes and labor disputes.

Determining whether a force majeure clause applies is a highly fact-intensive exercise, because whether a party is excused for non-performance stems from the specific contractual language used within an agreement. For example, some contracts’ force majeure provisions may specify disease, epidemics, or pandemics as cause for non-performance, while others may only refer to disease-related disruptions by reference to “Acts of God” or catch-all phrases such as “any event or circumstance beyond the reasonable control of the affected party.”

Where disease-related occurrences have been specifically enumerated, a party may find it easier to invoke its force majeure clause in the context of COVID-19. It may be more challenging where, instead, there is only catch-all language in place; however, a catch-all phrase, or similarly broad language (such as a force majeure clause that begins its list with “including, but not limited to”), may provide some protection, particularly if courts relax their traditional preference for excusing performance solely based on clearly enumerated circumstances, in response to an onslaught of COVID-19 related contract disputes. Additionally, where a party can point to a governmental restriction in place because of COVID-19, it may have additional grounds to defend nonperformance. 

Second, an affected party must demonstrate a causal link between the force majeure event and its failure to perform. In other words, a party’s performance must be impossible because of the changed circumstances surrounding the contract. For example, in light of COVID-19, the owner of a performing arts venue may successfully argue that recent government orders in his or her state have made it impossible to continue under contract with scheduled performances and obligations to performers, considering the widespread uptick in closures of non-essential businesses. On the other hand, should both parties to a contract be capable of conducting transactions online and/or having a history of remote online transactions, it may be more difficult to argue that COVID-19 has rendered performance impossible (at least without demonstrating other exigent circumstances).

Upon successfully invoking a force majeure provision, a party may either suspend performance or terminate the contract outright, depending on the scope of its force majeure clause. It is thus important to verify the terms of the clause, which may also dictate that force majeure coverage will only kick in after a certain period has elapsed, such as 90 days.

If the contract does not contain a force majeure clause, a party may turn to the common law defenses of impossibility or impracticability to excuse performance (though note that New York only recognizes impracticability in rare circumstances, such as in connection with sales of goods under the Uniform Commercial Code). A party may also invoke additional contract provisions where present, such as the “Material Adverse Effect” provision common to many commercial contracts.

Impossibility & Impracticability

Impossibility and impracticability exist where circumstances extraneous to a contract render a party’s performance either impossible or impractical. Although the contract itself was adequately formed and would otherwise maintain its binding effect, these defenses recognize that a post-formation change in circumstances has fundamentally altered the ability of the parties to perform under it. A party’s performance will be excused if the following elements are met:

  • An unforeseen event has occurred. Akin to the events enumerated in force majeure clauses, these may include natural disasters, strikes, and other major events.
  • The nonoccurrence of this event was a basic assumption of the contract. At the time of contracting, the parties did not foresee the event that has since occurred, regardless of whether it was theoretically “foreseeable”. This assumption of nonoccurrence need not be explicitly outlined within the contract, but must be generally apparent from the nature, terms, and purpose of the contract. Under the Uniform Commercial Code, which governs sales of goods, a “[d]elay in delivery or non-delivery in whole or in part by a seller . . . is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.” U.C.C. § 2-615. For example, this provision may apply in the event of a labor dispute where striking workers fail to deliver a shipment of the seller’s goods. In such cases, a seller must seasonably notify the buyer of the delay or non-delivery, and, where a seller may still partially perform, must allocate production and deliveries among customers in a “fair and reasonable” manner.
  • The effect of the event has rendered the party’s performance impossible or impracticable. The changed circumstance must be extreme, such that it is unduly burdensome or impossible for the party to comply as originally planned; where impossibility is concerned, under New York law, the subject matter of the contract must have been destroyed or the means of performance must have been rendered objectively impossible. The party seeking relief from its obligations under the existing contract must also show that it was not at fault in causing the event. The reasoning behind this requirement is clear: a party should not be able to take advantage of his or her own misconduct. Here, it is also important to determine how risk has been allocated between the parties under the contract. Even where the other requirements are met, if the adversely affected party assumed the risk of the occurrence of the changed circumstances during contract formation (impliedly or explicitly), it will not be able to invoke impossibility or impracticability. To gauge risk allocation, a party should examine the express language of the contract (i.e., what disruptive events the parties contemplated, and which party was to bear the associated loss and expense), or even the parties’ course of business and dealings. Industry customs may also provide clues to proper risk allocation. For example, industry custom in property rentals is for a premises owner to obtain casualty insurance rather than the party hosting its event on site. As such, risk for the loss of the property would flow more naturally to the owner.

Other Contract Clauses

Various additional contractual provisions may relate to an unexpected event like COVID-19.

  1. Material Adverse Change (MAC) Clause

Many commercial contracts include a material adverse change clause (otherwise known as “material adverse effect”). Where present, this clause could excuse performance or allow a party to suspend performance should a materially adverse change occur. Events constituting a materially adverse change are, as with force majeure provisions, commonly enumerated specifically within the contract and typically also involve wide-scale disruptions.

Historically, MAC clauses have been difficult to enforce, as courts are wary of excusing contractual performance for short-term changes in circumstances, but as is possible with force majeure and related defenses, courts may shift their stance in the coming months. For example, following the September 11, 2001 attacks, New York courts were more amenable to viewing declining rental prices in Manhattan as grounds to declare a material adverse change (See In re Lyondell Chem. Co., 567 B.R. 55, 123 (Bankr. S.D.N.Y. 2017), aff’d, 585 B.R. 41 (S.D.N.Y. 2018) (citing River Terrace Assocs., LLC v. Bank of N.Y., 10 Misc. 3d 1052(A), 2005 WL 3234228 (N.Y. Sup. Ct.), aff’d, 23 A.D.3d 308 (N.Y. App. Div. 2005))). Further, New York courts have allowed commercial parties to cease contractual performance based on demonstrated extensive financial losses during the pendency of a merger (see Katz v. NVF Co., 100 A.D.2d 470, 471 (N.Y. App. Div. 1984)).

  • Covenants

Commercial contracts commonly contain covenants obligating parties to undertake or refrain from certain behavior. While it is unlikely that parties would have allocated obligations or risk regarding COVID-19 in a covenant, it is worth revisiting covenants within a contract to gauge whether they will affect or be affected by current circumstances. For example, many agreements include covenants obligating parties to provide notice that they are invoking force majeure or that material events have occurred that could give rise to litigation or loss beyond the ordinary course of business.

  • Termination Provisions

Even if parties may not utilize force majeure or other contractual provisions to justify non-performance under a contract, there may be termination provisions that kick in based on the occurrence of certain contingencies, whether at-will or otherwise, such as for late delivery or a breach of a “time is of the essence” clause. It is worth viewing any such provisions within the context of the larger defenses of impossibility, impracticability, and force majeure excusal of nonperformance, in case the other party nonetheless attempts to invoke these doctrines to negate invocation of a termination provision.

This is not the law’s first brush with the unexpected, and although this is a time of wide-reaching uncertainty, woven into contract law, particularly, is a system to guide parties through the serious impacts that unexpected events may have. Our team at Cowan, DeBaets, Abrahams & Sheppard LLP will continue to provide updates on legal developments related to the present circumstances and we are available should you request further or specific guidance.

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