A Nonprofit s Guide to Basic Copyright Issues

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1 A Nonprofit s Guide to Basic Copyright Issues Prepared by Mosher & Associates, LLC 33 N. LaSalle St., Ste Chicago, IL

2 A NONPROFIT S GUIDE TO BASIC COPYRIGHT ISSUES Many tax-exempt organizations have intellectual property rights that warrant careful identification and protection. The law recognizes four basic types of intellectual property: copyrights, trademarks, patents, and trade secrets. This article gives a brief overview of copyright law; examines two important and often misunderstood copyright doctrines: works made for hire and fair use ; and offers practical legal considerations when transferring copyrighted works. A BRIEF OVERVIEW OF COPYRIGHT LAW The U.S. Constitution gives Congress the authority to promote the progress of the useful arts, by securing for limited times to authors, the exclusive right to their respective writings. This exclusive right has been expanded to a bundle of separate rights which enable the owner to control how the creative work is used. These include the right to reproduce the work, to prepare derivative works based on the original, to distribute copies to the public, and to perform and display the work publicly. Similar to ownership in land, copyrights can be leased, sold, donated, inherited, and divided into parts. For nonprofit organizations, copyright ownership rights may exist for its informational literature, training materials, and even employees speeches. More generally, copyright protection is available for writings, music, dramatic and choreographic works, motion pictures, forms of art, models, and diagrams. The protection is secured automatically when an author fixes the creative idea in a tangible form of expression. Thus, publishing or registering the work is not required to secure a copyright. However, registering a work with the U.S. Copyright Office is often a prudent decision because it creates a public record, furthers notice of a claim of copyright, and allows the owner to file a claim for copyright infringement. If the copyright is registered within three months of the original publication date, or before infringement begins, the nonprofit can include claims for "statutory" damages and attorney's fees when enforcing its copyright. In addition, it may be beneficial to include the symbol, year, name of the copyright owner, and the phrase all rights reserved on distributed works. Although notice is no longer legally required, it identifies the copyright owner, notifies the public that the that the work is protected by copyright, and shows the year of first publication. In addition, a proper notice of copyright can override a defense of innocent infringement in the event that the protected work is infringed. Notably, copyrights are limited in duration - depending on how and when an original work was created -and all works will eventually become public domain materials. CURRENT TERMS OF COPYRIGHTED WORKS: Works of individual authors- life of the author plus 70 years. Works for hire, anonymous and pseudonymous works- 95 years after work s first publication or 120 years from creation, whichever expires first. Works first published before 1923= public domain. Works first publish between 1923 and 1964 whose term was not renewed 28 years after their first publication = public domain. Works first published between 1923 and 1964 whose term was renewed after their first publication have a 95 year term protection. Works first published on or after January 2, 1964 but before January 1, 1978 have terms of 67 years.

3 A NONPROFIT EMPLOYER S GUIDE TO WORKS MADE FOR HIRE Many nonprofits, particularly educational and religious organizations, have employees who compose music or write articles or books during office hours with the use of the nonprofit s resources (such as office, computer, library, and staff). Who owns the copyrights to these works is an important, and often confusing, legal question. Generally, copyright protection is automatically secured to an author once he or she fixes the creative idea in a tangible form of expression. However, when the work is prepared by an employee in the course of his or her employment, the copyright law doctrine known as works made for hire supersedes this general ownership principle in favor of economics by recognizing the author s employer as the copyright s rightful owner. The 1976 Copyright Act defines works made for hire as a work prepared by an employee within the scope of his or her employment. The term employee is liberally applied under the federal common law of agency. This is the same standard used to determine whether an individual is an employee or independent contractor for federal income tax purposes. Whether a work is prepared during the scope of employment is a difficult question. Generally, if the work is created during office hours on the nonprofit s premises using the resources of the nonprofit, the work is prepared in the scope of employment, and the nonprofit employer is, as a matter of law, the rightful owner of the copyrighted works. Notwithstanding, copyright law allows an employer and employee to agree in writing that copyrighted works subject to the works made for hire doctrine will belong to the employee. But, enabling the employee to own the copyright interests, and benefit from potentially valuable royalties in future years, creates particularly troublesome federal income tax consequences for the nonprofit employer. Copyright interests constitute charitable assets which are prohibited from inuring to the benefit of a private individual under IRC sec. 501(c)(3), except in exchange for commensurate services provided. If these copyright interests are transferred to the employee, the nonprofit must value and report them as a taxable compensation to the employee. If the interests are not properly valued and reported as taxable income, the nonprofit employer could be placing its tax-exempt status in peril by providing impermissible private benefits. If the employee receiving the benefits of the copyright is also an individual in a position to exercise substantial influence over the affairs of the nonprofit, the organization could be engaging in unlawful excess benefit transactions, potentially exposing the organization s managers and the employee to significant federal excise tax penalties (see Pitfalls & Penalties of Compensation in Mosherlaw Update, 3 rd Quarter, 2007). Given the IRS increased scrutiny of tax-exempt organizations, nonprofit employers and employees should be cognizant of the potential legal issues associated the works made for hire doctrine, and take great care in the structuring, managing, and reporting of copyright arrangements to ensure full compliance with copyright and federal tax laws.

4 IT S FAIR USE! We now turn now to fair use, which can limit a copyright owner s rights. While fair use is most often encountered by teachers, students, and educational institutions, the scope of this legal doctrine extends well beyond academia. Fair use is a legal defense that can be raised by a defendant in copyright infringement claims. The Copyright Act specifies that the use of a copyrighted work... for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. Contrary to common perceptions, no bright-line test exists for fair use based on the percentage of work used. While the Act provides four factors which courts apply to determine whether the defense is valid, these factors are broad and subjective and thus leave judges with significant discretion. Nevertheless, the factors provide a helpful starting point to understanding this ambiguous legal area. The first factor generally evaluated by courts in a fair use defense is the purpose and character of the alleged infringement. Was the copyrighted work used for commercial purposes? Was there some transformative value added in the use? The second factor is the nature of the copyrighted work. Courts will more likely uphold a fair use defense for portions of an encyclopedia or textbook than a poem or play. Third, courts evaluate the amount and substantiality of the portion used. The more used, the less likely it will be considered fair use. Finally, courts evaluate the effect of the use upon the work s potential market or value. The threshold for this last element is minimal, and courts will generally find that this factor is satisfied if some meaningful likelihood of future harm to the copyright owner exists. While the four factors provide some guidance, they do little to equip a nonprofit for the day-today copyright situations. How is a nonprofit to navigate these murky waters? The best course of action for use of copyrighted materials is to always seek written permission, whether it be the author, publisher, or other third-party. Religious organizations may consider using a licensing clearinghouse such as ASCAP or BMI to cover copyrighted music used in worship services and other activities. For nonprofits engaged in classroom instruction, adopt the Agreement on Guidelines for Classroom Copying in Not- For-Profit Educational Institutions, available on the internet. Materials that will be distributed by nonprofits for any commercial purposes should be particularly vetted for any potential infringement issues.

5 TRANSFERRING COPYRIGHT INTERESTS A copyright consists of a bundle of separate rights that are divisible. This means that, just like property rights, one or more of these rights can be transferred to another person. Court cases abound with disagreements over whether a copyright was properly transferred, how many of the specific rights were transferred, and whether additional restrictions existed to prohibit the transferee s use of the work. Many copyright owners, particularly within the nonprofit community, are unfamiliar with the legal minutiae surrounding copyright transfers. In fact, organizations often rely on form contracts found on the internet. Or even worse, they elect to not use a written agreement at all. These situations can start-off well- quick, cheap, and easy. However, all too often, the result is an unpleasant and costly legal disaster for all parties as they attempt to sort through ambiguous terms, and prove unwritten intentions months and years after the transfer. Organizational leaders will do well to seek legal counsel before entering into any copyright transaction. Below are three initial considerations that can help savvy leaders be prepared to work with legal counsel to prepare a clear and unambiguous agreement. When considering a copyright transfer, begin by reviewing the bundle of rights contained in a copyright. These include the right to reproduce the work, to prepare derivative works based on the original, to distribute copies to the public, and to publicly perform and display the work. Next, decide whether you want to assign or license the particular rights transferred. An assignment of a copyright is like a sale, and the transferer no longer has the ability to exercise control over how the work is used. In contrast, a license enables the author to retain certain rights but allows a third-party to exercise some or all of the rights without fear of a copyright infringement suit. For many situations, a license is preferable to an assignment since it enables the owner to maintain ownership. Third, if licensing, evaluate whether the recipient will receive the rights on an exclusive or nonexclusive basis. While it is wise to have all copyright transfers in writing, transfers of exclusive rights are required by law to be in writing and signed by both parties. Granting a nonexclusive license will enable multiple individuals to use the work for the specific right granted, sometimes simultaneously. For example, an author may grant more than one publisher a nonexclusive rights to publish the works. Finally, decide whether any geographical or time limitations should be incorporated into an agreement. For additional information or counsel related to a copyright or other intellectual property issue, please contact an attorney in our office. O:\OfficeManagement\Website\Articles\Intellectual Property\NfpCpyrt.IP10.wpd

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