The right to create derivative works is one of the exclusive rights of a copyright holder.

This adaptation right is often referred to as the most powerful of all the exclusive rights in copyright, because the right to adapt and to modify permits the grantee the right to improve a copyrighted work, and creates new copyrights that vest in the developer of the derivative work, subject to the rights in the preexisting work.

This article attempts to provide a practical understanding of derivative works and their importance in structuring business — including e-commerce — transactions involving the right to create derivative works. It also discusses several strategic considerations relating to derivative works.

This area of law is of critical importance to rightsholders and business partners, and is of particular importance in the growth of up-and-coming e-commerce firms, which need flexibility with intellectual property and rights, and whose principles and counsel need a keen understanding of these issues to promote and sustain healthy expansion.

Derivative Works

Section 101 of the Copyright Act defines "[a] 'derivative work' as a work based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgement, condensation, or any other form in which a work may be recast, transformed, or adapted. A work consisting of editorial revisions, annotations, or other modifications which, as a whole, represent an original work of authorship, is a 'derivative work'." 17 U.S.C. §101. Derivative works are also known as "new versions."

It is important to understand that a derivative work refers to the work as a whole, and not just to the modifications. Another basic principle applicable to derivative works provides that "[t]he copyright in a derivative work is independent of, and does not affect or enlarge the scope, duration, ownership, or subsistence of, any copyright protection in the preexisting material." 17 U.S.C. §103(2). The preexisting material in the original work is part of the derivative work, but the copyright in the derivative work extends only to the material contributed by the author of the derivative work, as distinguished from the preexisting material employed in the work. 17 U.S.C. §103(2). It's important to keep in mind that the preexisting material employed in the derivative work is part of the copyrighted derivative work as a whole, but the copyright owner of the derivative-work copyright does not obtain exclusive copyright rights in the preexisting material.

Under §106(2) of the Copyright Act, the copyright owner has the exclusive right to prepare and authorize others to prepare derivative works based on a copyrighted work. So, where the copyright owner grants another party the right to prepare a derivative work, a new exclusive copyright in and to the derivative work springs into  existence upon creation and fixation of the derivative work in tangible media.

No Termination of Licenses Made by Author

Many practitioners do not appreciate that under the Copyright Act, "a derivative work prepared under authority of the grant [to prepare a derivative work] before its termination may continue to be utilized under the terms of the grant after its termination." 17 U.S.C. §203(b). Termination of the grant to prepare derivative works affects the right to prepare future derivative works, based on the preexisting copyrighted work, but not the continued utilization of any derivative works made lawfully during the grant of the license from the copyright owner. This basic principle is reaffirmed in §304(c)(6)(A) of the Copyright Act. In the absence of contract restrictions, the owner of the copyrights in the new version has the full panoply of exclusive copyrights in the new version as a whole, including the right to make derivative works based on the new version as a whole — but not the right after the original copyright owner's termination of the right to create derivative works based on the original preexisting copyrighted material.

Practical Consequences

The practical consequences of §§203(b) and 304(c)(6)(A) of the Copyright Act need to be appreciated fully. The following example illustrates the practical consequences of this termination prohibition.

Let's assume a copyright owner of the copyrights in a book enters into an agreement with a movie producer to produce a movie based on a book, i.e., a derivative work based on an original copyrighted book. The movie version is produced. Now, assume that the movie producer is vested with the copyright rights in the movie version. Even if the book author is upset with the movie and wants to delete all the dialogue in the movie that is based on the book, the book copyright owner cannot terminate the movie producer's copyright in the derivative work that was lawfully made during the period in which the right to prepare derivative works was in effect.

Here's another example to explain this principle. This issue of termination arose in a case to which I served as an expert legal witness. In this case, a large public company was a licensee of a computer-software product in source code form and had the right to develop, modify, adapt and enhance the licensed software — a source-code development license. The source-code license required the licensee to return the source code to the software vendor in the event that the licensee's business was acquired by another company. When the sale of the business occurred, the software vendor sought to prevent the licensee from transferring the enhanced software to the purchaser, on the grounds that the enhanced software was based on and contained source code that had to be returned to the software vendor. The question was what software, if any, did the licensee have the right to transfer to the purchaser? This was a huge issue because the business being sold was heavily dependent on the licensed software that had been enhanced over many years to meet the licensee's specific business requirements. And this is an issue quite likely to crop up in e-commerce.

The case was resolved by settlement without a court ruling; however, I believe that the source-code license was a development license granting the licensee the right to make derivative works. The issues should have been resolved pursuant to §203(b). The software vendor wanted every line of source code that could be identified as the original licensed source code to be returned. Requiring that all identifiable fragments of original source code be returned would have been a disaster. Under §203(b), the licensee had independent copyright rights in the enhanced derivative program as a whole, subject to the software vendor's copyright rights in the preexisting licensed copyrighted source code. The licensee was vested with all the exclusive copyright rights in the customized version of the software as a whole, just like the movie producer was vested with all the copyrights in the movie version of the book on which the film was based.

Practical Advice

Copyright owners granting licensees the right to prepare derivative works based on their copyrighted works need to keep the potential consequences of derivative works in mind. Drafters of any license need to contemplate the potential competition of any derivative work against the preexisting work from which it is derived. The license should guard against such unwanted competition by restricting the market for the derivative works, to the extent possible, to markets that do not compete directly with the market for the preexisting licensed work.

The license granting the right to prepare derivative works should also consider §203(b) and §304(c)(6)(A) by restricting the market for any derivative works. The restrictions should apply to the licensee and to the licensee's permitted successors and assigns. The diligence in this case will keep rights right, and business running smoothly.