‘Tis Often Better to Willfully Withhold Royalties than Exceed the Scope of the License

You are a licensee to many, many copyright licenses, whether you know it or not. Most of them—such as the ordinary applications you have on your computer, or song files you’ve downloaded from iTunes—shouldn’t keep you awake at night. At least, not too much, so long as you make sure you don’t make more copies than you paid for. These licenses are like borrowing a tool from your neighbor that you never ever have to return. Yeah, it’s technically his, but for practical purposes, it’s yours.[ref]We’ll put aside the practical point that publishers rarely sue their own customers, unless there’s a lot at stake and the relationship can’t be salvaged. Or they’re stupid.[/ref]
But some licenses are like renting little plots of land. So long as you stay on your little plot, you’re OK. Once you step off, though, you’re a trespasser. And these are often (but not always) licenses important to your business.
An example might be a license to translate a novel into Polish and to sell copies of the translated novel in Europe, in exchange for a portion of the proceeds. If you translate the novel into Lithuanian[ref]Did you know Lithuanian is thought to be the modern language closest to the grammatical structure of the base Indo-European language?[/ref], you’ve infringed the copyright in the novel (specifically, the adaptation or “derivative works” right). If you distribute copies of your Polish Translation in North America, you’ve infringed the copyright in the novel (specifically the distribution right). Even if you never distribute the Lithuanian translation, or only sold a single copy in North America, you’re an infringer and could be subject to nasty statutory damages.[ref]But surely, the jury will take this into account in setting statutory damages at the low end. Right?[/ref]

Face the Dance Music

By contrast, most off-the-shelf[ref]Yes, I know we download software these days, but you know what I mean.[/ref] software gives the buyer a perpetual, worldwide licenses to use the software. But even there, you have to be a little bit careful, since some software publishers (most notably Microsoft) love to sell (and price) software licenses according how it’s supposed to be used. This is how we end up with distinctions like “Home and Student” (where the limitation is non-commercial use) and “Home and Business” (where there is no such limitation), plus nuances like “Home Use” (where you can use your “professional” version at home for work).[ref]Microsoft licenses are especially complex and opaque, though they’re getting better. But even Apple makes a home/business distinction, in that a “family” can have multiple copies of an application on the family’s various computers, but a business must purchase separate licenses for each computer. You can kind of see why that might be.[/ref]
But, let’s say, after you’ve translated that novel into Polish and sold millions of copies of the translated into Europe, you decide to pocket all the royalties. The agreement said you had to pay a certain percentage of proceeds to the author, but you said, screw it. You just keep pocketing tens of thousands of dollars that belong to the author.
Are you an infringer? Nope, as this messy case from Puerto Rico reminds us [ref]Involving a series of badly drafted contracts, RICO claims and Reggaeton-style music. In case you were wondering, decisions by U.S. District Court for the District of Puerto Rico have exactly the same weight as decision by any other U.S. District Court.[/ref]. The court dismissed claims of copyright infringement where it was based on non-payment of royalties, but permitted other copyright infringement claims to proceed where they were based on exceeding the scope of the license. In that case, the plaintiffs alleged they licensed song masters to the defendants but only for reproduction but the defendants made “derivative works” of the songs, which copyright law regards as a different exclusive right.[ref]The case is way more complicated because there were multiple license agreements that covered different defendants at different times, some of which included derivative works, but others left off that term (perhaps by oversight). Did I mention it involved the music industry?[/ref]
That might sounds counter-intuitive. You sell a copy in the wrong territory, and suddenly the full weight of copyright law comes to bear on you. You pocket $100,000 in royalties, and it’s just a breach of contract.
Sure, if you pocketed $100,000 in royalties, you’re on the hook for that $100,000, but at least you know what your maximum liability is (and you can hardly claim to be surprised when someone complains). But that one book you sold in North America? Even if you didn’t really mean to do it, you’re on the hook for somewhere between $750 and $30,000.[ref]If you meant to do it, increase the upper range to $150,000.[/ref] Now imagine if you had been asked to translate, say, five novels, and copies of all five were inadvertently sold in the North America. Now your range is $3750 to $150,000.[ref]Again, if the mistake were minor—just a few copies—I would sincerely expect the jury to take pity on you and tend toward the lower end of the range. After some crazy jury awards of copyright statutory damages in file-sharing cases, juries seem to be behaving more rationally, but they are still unpredictable. I fret more about statutory damages here, among other places.[/ref] Furthermore, if the amount is small enough—say, in the $50,000 range—it’ll cost your erstwhile partner about that much to recover the money (assuming you haven’t spent it).
Then again, before you start pocketing those royalties, snickering quietly to yourself, you might want to double-check the license agreement. It might contain a term permitting the author to terminate the license if you don’t pay your royalties on time.[ref]This is devastating where software is concerned, since you can’t even use the software without the license.[/ref] It might mimic some of copyright law’s more devastating tools, but through contractual provisions, such as shifting attorney’s fees, or perhaps even some kind of liquidated damages. And while it’s fun to spend other people’s money, if you can’t pay the judgment (remember, you’ve already been paying attorney fees), you can expect the judgment to make trouble for you for the rest of your life.
Moral: play nice, don’t automatically assume others will, and make sure you stay within the scope of your copyright licenses.
Thanks for reading!

Rick Sanders

Rick is the litigation half of Aaron & Sanders, PLLC; and, from 2012 to 2014, an adjunct professor at Vanderbilt University Law School, where he was teaching Copyright Law. Vandy also happens to be where he got his law degree in 2000. After graduation, he practiced at a major intellectual-property law firm in Silicon Valley for a few years. He returned to Nashville in 2004, where he worked for a large Nashville firm, practicing as much intellectual-property law as he could, but also a lot of commercial law. He left that firm in 2011 to start Aaron & Sanders with Tara Aaron, so he could practice intellectual-property law full time and work with start-ups and other non-institutional clients.