Sunday, June 21, 2009

What's a Song Worth? (Part One)

I've taken some work home from the Kernochan Center at Columbia University, where I'm doing research this summer. (See disclaimer below--the opinions on this blog are mine, not those of the Center). The question I'm looking at is this: How do you put a dollar value on an author's intellectual property interests when he or she dies? Inquiring IRS agents and estate planners want to know.

Some people think that intellectual property shouldn't be inherited; I'll come back to this issue often in this blog. But as the law stands right now these rights can and need to be valued at a number of points: when an author wants to sell the rights, when the heirs want to cash in instead of holding onto them, when a judge wants to split up the value in a divorce settlement, when the IRS is valuing an estate, when a bank is taking them as security for a loan, etc.

To answer the question, you've got to answer two others first: what are the contours of the rights, and what standard do you use to value them?  

The "contours" question is less vague than it sounds.  In 1978 a Copyright Act went into effect that completely re-envisioned how a copyright is born and expires. That was fine for copyrights that came into being after the new act kicked in, but what about works that were created under the old act? People had made plans based on the rights in existence. They purchased them, sold them, traded them, licensed them; authors bought bungalows on the Jersey shore with the rights as security. If Congress was going to change how long these rights last, some were going to get less than they bargained for, and some were going to get more. Matters got more complicated in 1998, with the controversial "Sonny Bono Copyright Extension Act" that added another twenty years to the life of copyright.

So Congress made some retroactive changes to the lives of these existing copyrights to try to bring them in line with the principles of the new act, without upsetting people's "investment-backed expectations" arising under the old act. Some of these changes involved giving authors the right to take back copyrights they had sold to others--"termination rights." There was already a way to do this under the old act (in theory only), but in order to treat everybody more or less equally under the new act, some special termination rights were given only to certain categories of authors or heirs.

As far as I've figured, eighteen basic scenarios apply when an author or other artist dies today, based on all of the questions that determine whether or not the works fall under these exceptions. When was the copyright registered? Under whose name? Was the author alive 28 years later? Was the work created between 1951 and 1963? And so on.

But eventually you get to the end of the decision tree and you have a number of formulas that tell you how long the copyright will last, who owns it, and who can get it back when. Although we don't know yet how much this makes the copyrights worth in absolute terms, we can get an almost complete scale of relative values, since the formulas all use the same limited set of variables. For example, we can say that one copyright will be in the publisher's hands for the next five years, at which point the heirs will have the option to negotiate for a higher royalty rate, which will remain in effect for a remaining nineteen years until the work goes into the public domain.  In another case you'll have the same scenario but with different numbers of years at the old royalty rate and the new one.

Then it's up to the IRS, or the potential purchaser, or the bank, or the divorce court, to decide what value to give to a year of copyright ownership.  Then it's just plugging numbers into the formulas.  Sounds simple, right? I'll talk about this in Part Two.


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