The problem of buyout contracts and possible solutions – Finnish and Polish perspective

In this article current challenges of the copyright market will be presented i.e. the problem of buy-out clauses in contracts transferring the copyrights. Additionally, the author will demonstrate solutions that are already implemented into law (conventional) and propose adaptation of other legal instruments – extended collective license (non-conventional).  While believing that such adaptation is possible, the author explains in-depth the idea behind the chain of copyright transfer and how it will be affected by the introduction of an extended collective license.

Digitalisation is an inevitable part of the current landscape of audiovisual works (hereinafter referred to as: “AV works”). Starting before and booming during the pandemic, the audiovisual market has been rapidly transforming. New services such as streaming platforms emerged. AV works (understood as a bundle of different works like music, pictures, screenplay etc.) have become increasingly accessible for society in the form of subscriptions.

To access the world of AV works, the end-user simply has to subscribe to a streaming platform. However, we should not forget the parties that have been involved in the process of making an AV work available to the public – creatives, as well as other parties such as: producers and distributors.

It is necessary to note, that the chain of creation is no longer linear. It is no longer a mere transfer of copyrights from the creator to the producer and further to the distributor. Instead, due to the constant development of streaming platforms, this chain is mixed. It means, that oftentimes, the producer and the distributor of AV works are the same entity – the streaming platform itself. Its complex structure has caused a lot of questions regarding its legal nature. One of them is, how the copyrights are being transferred within this chain. Another layer of complexity is added by the fact that the transfers of copyrights are usually negotiated in contracts governed by non-EU law and often based on another legal system.[i] Such is the situation in most cases since the streaming platforms originate from the United States of America. That is why most of the contracts are based in the anglo-saxon legal system (common law). In the USA, the most common and popular legal paradigm regarding copyright transfer is the so -called “work for hire”. Based on this principle most of the contracts by and between creators and producers-distributors, contain so-called buy-out clauses. These are clauses in which creators agree to transfer all rights[ii] in exchange for a lump-sum payment. The problem appears when said lump sum payment is not proportional with the final financial profit of the production and distribution of an AV work. The question follows, how creators can request and enforce their right to fair remuneration.

The EU legislator noticed this problem and, the Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright and related rights in the Digital Single Market and amending Directives 96/9/EC and 2001/29/EC (hereinafter referred to as: “Digital Single Market Directive”) established legal mechanisms that secures creator’s positions. Said mechanisms are introduced mainly in Chapter 3 (articles 18 – 20) of the Digital Single Market Directive. In article 18 the EU legislator provided a strict rule that the creator, who is transferring his rights for further exploitation, is entitled to appropriate and proportionate remuneration. In this regard it is worth mentioning the recital 73 of the Digital Single Market Directive in which the legislator clearly states that a lump sum payment is per se acceptable but cannot be a usual practice [vide: (…) A lump sum payment can also constitute proportionate remuneration, but it should not be the rule. (…)]. Article 20 though is about a contract adjustment mechanism, allowing a creator to claim additional remuneration from the party with whom the creator entered into a contract.

The aim of this article is to present this rather broad landscape of issues connected with the transfer of copyrights – starting from addressing problems in copyright contractual relationships, through defining buy-out clauses, and ending on proposing solutions. Moreover, this article will focus on and will interweave experience from two countries – Finland and Poland.

Emerging problems on the copyright market

Undisputably, copyright law is changing. It has needed to adapt to the reality of widespread digitalisation of works, because currently people require AV works to be available on demand in at any time and in any situation. In my opinion, such attitude is common across the globe. Finland and Poland, as two EU Member States, also face such change. Both countries are dealing with the challenges of omnipresent digitalisation, although having differences in legal regulations.

It is worth noting that only in 2023, the Center for Cultural Policy Research Cupore conducted research in the area of contract terms for creators and producers (hereinafter referred to as: “Cupore Study”). The results of the surveys were quite disappointing. Nearly 60% of the companies, that participated in the survey responded that technological development negatively affected their ability to receive fair compensation for the use of their rights. Furthermore, creators stated that they struggle due to an unequal position in contractual negotiations, and with not receiving fair remuneration, which is unlikelier when negotiating with bigger and more dominant companies like producers or distributors. Moreover, creators often do not believe in their ability to change the unreasonable and unfair contract clauses to their advantage.[iii] It seems that the main issue concerning equality in copyright contract negotiations stems from the terms regulating remuneration for the transfer of the copyrights.

The abovementioned study covered only Finland; however, it seems that such problems are universal and even applicable to the Polish copyright market. The problems related to remuneration result from so-called buyout-clauses, which are often included in the copyright contracts in both Poland and Finland.

The EU study done specifically on this topic, dated 2023, presents several interesting findings.  First, contracts containing such clauses, do not make a distinction between moral and economic rights, which is a primary principle in European copyright law. The reason behind this, as mentioned, is that often the purchasers of the copyright, which can be either producer, distributor, or mix thereof, are companies based in USA. The U.S. copyright system sees a creator’s right to a work as a bundle of rights – both economic and moral, all of which can be contractually transferred.

In contrary, European law divides copyright into two separate rights – moral and economic. Moral rights come into existence at the moment a work is created. These types of rights are strongly connected to the creator and are embodied in the bond that unites the creator with their work. The notable distinction between moral and economic rights is that, while economic rights are also born to the creator, they are transferable. Therefore, unlike economic rights, moral rights remain with the creator.

This distinction was well explained by the Polish Supreme Court, which in one of its judgements, stated that the bond between a creator and their work is “understood as the creator’s relationship to the work resulting from the creative’s psychological, emotional and intellectual connection to the work.”[iv] In section 3 of Finnish Copyright Law  states that “The right conferred to the author by this section may be waived by him or her with binding effect only in regard of use limited in character and extent.” On the contrary, in Polish law “the close association of these rights with the creator means that they cannot be transferred or waived, nor are they subject to a time limit.”[v] In Polish law, it impossible to waive moral rights, but the creator can state that he would not enforce them at all.

Regarding buyout clauses – they impose on the creator an obligation to transfer all their rights just for a lump sum. As mentioned above, a lump sum should not be and in fact, cannot be established as a general rule in contracts.

Interestingly, according to the EU study, some contracts contain clauses that are even much more harmful to creators than a mere lump sum payment. Such clauses require creators to waive their right to claim additional remuneration after signing the contract. Some of the clauses examined by the JURI Committee of the EU Parliament, straightforwardly impose that “The Author will not receive any additional compensation of any kind.”[vi]

Such practices endanger creators. It is unjust that more significant AV market players, such as producers or distributors (or a mixed entity of these) can include such terms in contracts and demand that creators, as the weaker party accept them. Unsurprisingly, the EU legislator decided to intervene and regulate this issue primarily in articles 18 – 20.

Potential solutions to the problem of buyout clauses in copyright contracts

In my opinion, it is valuable to consider the copyright landscape broadly. In other words, other entities are also connected to the copyright market i.e. collective management organisations (hereinafter referred to as: “CMO”). Their purpose is to support and act on behalf of the creators. Notably, according to the Cupore Study, a vast majority of creators have doubts or not enough knowledge on how CMOs operate. It was also mentioned in the study that some copyright transfer contracts include a request to cease CMO intermediation. Such a request is often related to a specific work that is the subject of a copyright contract. This request is entirely unfair for creators. It seems that the bigger parties, knowing their position and strength, simply take advantage of the creators’ weaker negotiation position which they inevitably have as individuals. Such leverage sheds light on the principle of contractual equality.

That is why the EU legislator decided to interfere in order to level the copyright playground. These are:

1. a requirement that the creator’s remuneration for transfer of rights is appropriate and proportionate;
2. a contractual adjustment mechanism;
3. reports on the exploitation of a work from the parties to whom the creator has transferred his copyrights

 General legal instruments securing creators remuneration

1) requirement that the creator’s remuneration for transfer of rights is appropriate and proportionate

In the Digital Single Market Directive, in recital 73, it is pointed out that the above mentioned factors relate to “the actual or potential economic value of the licensed or transferred rights, taking into account the author’s or performer’s contribution to the overall work or other subject matter and all other circumstances of the case, such as market practices or the actual exploitation of the work.” In section 28a of the Finnish Copyright Law, it clearly states that: “where the author transfers the exclusive rights or grants an exclusive licence for the exploitation of a work, the author shall be entitled to receive an appropriate and proportionate remuneration”.

Legal scholars in their articles explain the meaning of the terms “appropriate” and “proportionate”. One such scholar stated that in fact these terms are very similar if not the same in a contextual meaning.[vii] Therefore, the emphasis is placed on the fairness and equality of the remuneration acquired for copyright transfer in the name of the creator. Implementing such requirement is surely to the benefit of the creators. However, beyond merely regulating what the remuneration should be, respective and proper instruments should be introduced to implement it. In my opinion, one such instrument would be a contractual adjustment mechanism, described below.

2) contractual adjustment mechanism

This mechanism is also referred to as a “bestseller clause”. Interestingly, in Poland after transposition of the Digital Single Market Directive into the Polish Copyright Act, there was a slight change in the wording of the article covering this issue (art 44). Prior to transposition, this provision of law recognized the term “gross disproportion” between the creator’s remuneration and the benefits of the purchaser of the creator’s economic rights or licensee. However, after implementation, the wording has been changed, and it currently focuses on disproportionately low remuneration in relation to the benefits of the copyright purchaser or licensee. If such a situation occurs, the creator is entitled to demand an appropriate increase in remuneration through the courts. The term “disproportionately low remuneration,” like the concept of “gross disproportionality,” is vague, and the law does not define it. Moreover, compared to the previous provision, the legal requirements allowing the creator to invoke the “bestseller clause” have been relaxed. This is because, despite the determining of disproportionality of benefits, which requires that one of the benefits is significantly lower than the other, we no longer need to expect that such disproportionality is gross, exceptional or visible at first glance. Surely, such a legal instrument supports a creators’ position after the signing of a copyright contract.

3) reports on the exploitation of a work from the parties to whom the author has transferred his copyrights

In general, it must be remembered that directives are the law of a minimum standards. They set a minimum level of harmonisation. In other words, Member States are entitled to introduce stricter regulations in their legal systems. In Finland, for example, section 30a of Copyright Statute states that “the original author has the right to receive on a regular basis, at least once a year, a report containing up to date, relevant and comprehensive information on the exploitation of his or her work from the parties to whom the author has transferred his or her rights or granted an exclusive licence.” A similar solution is also implemented into article 47¹ of the Polish Copyright Act, where the information can be requested “(…) not less frequently than once a year and not more frequently than once a quarter. (…)”. This instrument allows creators to control and gather necessary i.e. financial data after the transfer of copyright to other parties. Later, it can serve as a reference point for claiming an adjustment of remuneration for the transfer of rights.

Extended collective license as a specific instrument securing creators remuneration based on a Finnish law

Providing some background and relying on the findings from the Cupore Study, the role of the CMOs among creators is still underrated. There is still a lack of knowledge regarding the purpose and objective of CMOs’ operations. A CMO is an institution that gathers creators from a specific field into one entity, usually in the form of an association. It not only helps in promoting creators work, but above all, it deals with creators’ financial matters, especially concerning remuneration distribution. Moreover, it serves as an intermediary in any dispute that a creators have for example related to contracts. The CMO is entitled to act on behalf of creators in court proceedings, in particular to “(…) seek the application of the measures, procedures and remedies, and to bring legal proceedings for the purpose of enforcing such rights (…)”, however, only if provided by a specific provision of law of the Member State.[viii] Therefore, the main purpose of CMO is simply to support creators.

Furthermore, apart from already mentioned instruments that help creators to regain control over the amount of remuneration for transfer of their rights, such as i.e. “bestseller clause”, my proposal to secure creator’s remuneration is to use the institution of an extended collective license (hereinafter referred to as: “ECL”). Reflecting on the history of ECL, in the literature the credits for the creation of this institution is given to a Swedish professor of labour law – Svante Bergström.[ix] He introduced the ECL scheme in a work titled “Program för upphovsträtten”. Afterwards, in the 1960s ECL has been implemented into the Finnish law in the area of broadcasting and re-transmissions.[x]

It is a legal instrument that, by the virtue of law, extends the licence granted to creators who are not members of a CMO. As regulated in section 26 of the Finnish Copyright law – “(…) a licensee who has obtained an extended collective licence by virtue of aforementioned agreement, may, under terms determined in the agreement, use all works by authors in the same field (…)”. In other words, the end-user can access works of members and non-members of a CMO by entering into one agreement with the CMO representative in a specific filed. Several prerequisites, set by the Finnish Copyright law, must be fulfilled in order to apply the ECL scheme:

1. The CMO must be sufficiently representative in relation to works used on a national level- Finland, of creators in the same field with respect to the type of work and categories of rights covered by the agreement. The CMO must be approved by the Ministry of Education and Culture in Finland as an approved extended collective licensing organisation and then with regard to this agreement, is deemed to represent authors of other works in the same field (section 26);
2. There must exist a provision of law, by virtue of which the agreement is extended to non-members of the CMO;
3. Non-members of the CMO must have been guaranteed with an opt-out system, meaning the ability to withdraw their work from usage by the end-user;
4. Non-members of the CMO must have been guaranteed with individual remuneration.

ECL is a solution for mass use of works, especially in the era of digitalisation. When considering AV works, it should be borne in mind that they are a bundle of different works starting from music and ending to the visual appearance of the work such as in a movie. ECL has been a successful licensing scheme for broadcasting and re-transmission. Considering the market for AV works and the chain of copyright transfers (creator-producer or producer-distributor-end-user), one might think that ECL solely refers to the chains last part as in the contract between distributor or producer-distributor and the end-user. However, in my opinion the use of ECL should be extended to earlier stages of the chain.

The process of copyright transfer in the AV market, can be divided into three parts as described below.

In the first part, the copyright is transferred from the creator to the producer in a specific field of exploitation of the AV work. It is interesting to note that in Poland, for instance, it is presumed that the producer of n AV work acquires exclusive economic rights for the exploitation of those works within the framework of the AV work as a whole, pursuant to a contract for the creation of such a work or a contract for the use of an existing work (art. 70 of the Polish Copyright Act).

In the second part, the producer usually transfers the copyrights to the distributor i.e. the broadcaster or the owner of a streaming platform, which is done in a specific area such as: broadcasting, retransmission or making the work publicly available in such a way that anyone can access it at a chosen place and time.

The third part is about the end-user who, enters into a licensing agreement with a streaming platform in order to be able to view movies. Here, a CMO would play a key role. It would act as an intermediary between the distributor and the end-user. It could be argued that the ECL scheme fits perfectly in these situations, mostly because it provides the end-user with the possibility of screening and presenting the movie in such a manner that enables access at a chosen place and time, even if the distributor does not hold all the copyrights to an AV work (understood as an bundle of different works like music, pictures, screenplay etc.). Taking into consideration the main characteristics of an ECL, all of them would be fulfilled – the CMO is sufficiently representative in terms of the works used at the national level – in Finland, there is a provision of law that extends the license effect onto non-members of a CMO.  In my opinion there should be no option for non-members of a CMO to opt-out from the scheme simply because it would hinder the possibility of making the work – a movie – available to the public. Citing after a scholar Zhang Zijan, such a solution has been already adopted in Danmark.[xi]

However, more often, the first part of the copyright transfer process in the AV market can be further divided into two stages. The first as explained above, and the second, where the creator enters into a contract not just with the producer (as above) but with a producer-distributor (an entity that is both producer and distributor). Here, the contract for the copyright transfer will also cover broadcasting, retransmission or making the work publicly available in such a manner that anyone can access it at a chosen place and time. In such an example, there is no second part as described above, which means that after the transfer of copyright onto the producer-distributor, follows the part where the end-user enters into a licensing contract with the streaming platform.

Therefore, the CMO intermediation would be inevitable. However, this raises the question of why should the CMO intermediation not be redirected to the first part, i.e. the contractual relationship between the creator and a producer or producer-distributor. I believe that this simply requires change of perspective. After all, the producer or producer-distributor in this contractual configuration can also be perceived as an end -user. As mentioned above, AV works comprise of different individual works. Therefore, it might be that the copyright to multiple individual works belong to one creator who will be acting on behalf of others. However, it is possible to imagine a situation where one of the creators of an AV work is associated with the CMO while others are not. Therefore, I see no obstacles to the use of an ECL scheme to solve these issues. If some creators of AV works are not satisfied with the contract with the producer or producer-distributor or simply do not wish their work to be used, they can opt-out and request discontinuation of the use of their works. At the same time, it should be borne in mind, that creators who have chosen to opt-out from the ECL scheme are still entitled to individual remuneration paid for the use of their work until the date of discontinuance. This is a great feature of the ECL scheme, because it allows non-members of CMOs to still receive remuneration.

In conclusion, there are conventional and non-conventional solutions to the problem of buy-out clauses in copyright contracts i.e. “bestseller clause” or the proposed adaptation of an ECL scheme.

Conclusions

According to the final resolution of the Cupore Study approximately 80 % of the survey respondents believe that the copyright legislative environment should be changed.[xii] This relates to the need to increase the awareness among creators especially about their rights, legal opportunities and the support available to them through entities that support creator’s rights such as CMOs.

Undoubtedly, it is important for creators to receive appropriate and proportionate remuneration for the transfer of their copyrights. Currently, there are some legal instruments to secure this right. Among the various solutions are statutory obligations requiring that the creator’s remuneration for transfer of copyrights is appropriate and proportionate. There is also the “bestseller clause” and the statutory ability to request reports on the exploitation of a work from the parties to whom the author has transferred their copyrights. There are also other legal instruments dedicated to improving the contractual position of creators i.e. the institution of ECL. I believe that the ECL scheme can be used in a creator’s contractual relationships in multiple stages as presented above – not only between distributor or producer-distributors and end-user. Implementing the ECL scheme at an earlier stage of the chain of copyright transfer would be advantageous for creators, who will have the opportunity to benefit from the CMO intermediation during the contractual negotiations. On the other hand, producers or producer-distributors will have a method to secure their position, especially in a situation where they have not acquired all copyrights to the AV work. In addition, non-members of the CMO who wish to opt-out from the ECL scheme are still entitled to request individual remuneration for exploitation of their work. Having that in mind and the fact that ECL is based on a free negotiation between the parties to the copyright contract, it can sometimes be perceived as a semi-mandatory licensing scheme.[xiii] But despite that, ECL seems to balance the position of all its parties, end-users, creators (members of a CMO’s) and third parties (non-members of a CMO), well.

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Viitteet:

[i] S. Carre, S. Le Cam, F. Macrez “Buyout contracts imposed by platforms in the cultural and creative sector” 2023.

[ii] Usually without distinction between moral and economic rights.

[iii] T.Kautio, N.Lefever “Sopimussuhteet muutoksessa audiovisuaalisen alan tekijänoikeudellisia kysymyksiä”.

[iv] Judgement of the Supreme Court –  Civil Division, dated 21st March 2014 r., IV CSK 407/13

[v] Judgement of the Supreme Court –  Civil Division, dated 21^st March 2014 r., IV CSK 407/13].

[vi] S. Carre, S. Le Cam, F. Macrez “Buyout contracts imposed by platforms in the cultural and creative sector” 2023 p.26.

[vii] R. Xalabarder, “The Principle Of Appropriate And Proportionate Remuneration Of Art.18 Digital Single Market Directive: Some Thoughts For Its National Implementation”.

[viii] Judgment Of The Court (Fifth Chamber) 23 November 2023, Case C‑201/22, point 49.

[ix] Z. Zhang,. Transplantation of an Extended Collective Licensing System – Lessons from Denmark. IIC 47, 640-672 (2016), p. 643.

[x] Z. Zhang,. Transplantation of an Extended Collective Licensing System – Lessons from Denmark. IIC 47, 640-672 (2016), p. 643.

[xi] Z. Zijan,. Transplantation of an Extended Collective Licensing System in China, 3 China Legal Sci. 71, 100 (2015), p. 81.

[xii] T.Kautio, N.Lefever “Sopimussuhteet muutoksessa audiovisuaalisen alan tekijänoikeudellisia kysymyksiä”.

[xiii] Z. Zijan,. Transplantation of an Extended Collective Licensing System in China, 3 China Legal Sci. 71, 100 (2015), p. 81.

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Kannen kuva: iStock/EvgeniyShkolenko