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December 2, 2015


Reviewed by Keenan Popwell

The music industry, more than ever, is a maze of murky legal concepts, evolving business models and industry practices that continue to confound many outsiders. Steve Gordon's newly released fourth edition of his tome The Future of the Music Business provides the closest thing to a map.

Broadly speaking, The Future of the Music Business is structured similarly to a survey textbook. After an entertaining foreword by Amanda Palmer, in which she cheekily encourages those with insufficient commitment to try insurance sales instead, Mr. Gordon begins with a 10,000 foot view of the current state of the business.

In the chapters that follow, he employs clear, engaging prose to work through the structure of today's business. This includes concise explanations of practically important legal issues, such as copyright termination rights and fair use. The book covers anything from lyric licensing to 360 record deals, from pan-European music publishing licenses to net neutrality.

The exhaustive nature of Mr. Gordon's survey alone will prove useful for those readers seeking a broad understanding of the music industry. As a 12-year veteran of the music industry, that was certainly not my goal, but I enjoyed this book for its focused explanations of areas of the industry outside my expertise.

The survey textbook format runs the risk of relegating The Future of the Music Business to reference book status. However, every time I felt overrun with facts, Mr. Gordon shifted one of his many engaging interviews with industry luminaries and rising stars from all sectors of the business, thus ensuring that the book doubles as an engaging straight-through read.

Keennan Popwell is Sr. Corporate Counsel for Rhapsody International in New York City and a member of the New York Bar. Popwell represents Rhapsody on a broad range of matters, with a particular focus on label and publisher licensing.

Updates to the book are available at www.FutureoftheMusicBusiness.com
To purchase: www.amazon.com/Future-Music-Business-Succeed-Technologies/dp/1480360651/ref=sr_1_1?s=books&ie=UTF8&qid=1448398346&sr=1-1&keywords=future+of+the+music+business

Center for Art Law Case Updates

The following case selection first appeared in this week's Center for Art Law newsletter:

Yale University v. Konowaloff, (2nd Cir. Oct. 20, 2015) aff'ing 5 F.Supp.3d 237 (2014) -- The Court of Appeals upheld the 2014 ruling to dismiss the claim by a French citizen, Pierre Konowaloff, against Yale University challenging ownership rights in Van Gogh's "The Night Cafe." The artwork in dispute belonged to Konowaloff's great-grandfather, Ivan Morozov, whose art collection was nationalized by the Soviet authorities following the 1917 Bolshevik Revolution. At least two work from the Morozov collection had been sold to American collectors in the 1930s.

Authors Guild v. Google Inc., 13-4829-cv (2nd Cir. Oct. 16, 2015) aff'ing 770 F. Supp. 2d 666 (S.D.N.Y. 2011) -- Circuit Judges, including Pierre N. Leval, who coined the term "transformative use" in 1990, ruled that the Google book scanning project was permissible under the fair use exception to the 17 U.S.C. Copyright Law. Court held that the Google Book project does not serve as a market substitute to the original works. On the contrary, it augments public knowledge about Plaintiff's books without providing the public with a substantial substitute for matter protected under the law.

Crawford v. Weider Health and Fitness, 2015 WL 6447396 (NY Sup. Oct. 22, 2015) - Gray Crawford, former owner of the defunct Kundus Gallery in San Francisco, has filed suit in New York Supreme Court for the return of a 500+ year old Buddha statue. Crawford alleges that he bought the piece from a London dealer in 1975 for $10,000 and had it stolen from him in 1983. He was unable to find the Buddha until August when it appeared in the highlights of an upcoming Sotheby's auction. Sotheby's agreed to pull the work from the auction but returned it to Weider Health and Fitness, a California-based company who claims ownership of the work and consigned it to Sotheby's for sale.

U.S. v. Brugnara, 2015 WL 5915567 (N.D. Cal. 2015) -- Real estate mogul Luke Brugnara was sentenced to seven years in federal prison following May convictions of wire and mail fraud, escape, contempt and making false statements in court. Brugnara, who represented himself at trial, never paid an art dealer for a bronze Edgar Degas sculpture shipped to him in 2014, claiming both that it was a gift and that it was stolen by the deliverymen. Brugnara's post-trial attorney argued that he was never competent to stand trial because of untreated bipolar disorder, delusions and narcissism. The court denied the request for a competency hearing and reasoned that he would probably not submit to a court ordered treatment plan anyway.

The Center for Art Law strives to create a coherent community for all those interested in law and the arts. Positioned as a centralized resource for art and cultural heritage law, it serves as a portal to connect artists and students, academics and legal practitioners, collectors and dealers, government officials and others in the field. In addition to the weekly newsletter (http://cardozo.us2.list-manage.com/subscribe?u=78692bfa901c588ea1fe5e801&id=022731d685), the Center for Art Law subscribers receive updates about art and law-related topics through its popular art law blog (http://itsartlaw.com/blog/)and calendar of events (http://itsartlaw.com/events/). The Center for Art Law welcomes inquiries and announcements from firms, universities and student organizations about recent publications, pending cases, upcoming events, current research and job and externship opportunities. To contact the Center for Art Law, visit our website at: www.itsartlaw.com or write to itsartlaw@gmail.com.

December 7, 2015

Center for Art Law Mixer

Center for Art Law is hosting an art law mixer this Thursday, December 10. We are delighted to announce that our topic this month will be real estate and art, and that we will have two speakers. Joining us will be Kristen Sakoda, Deputy General Counsel of the New City Department of Cultural Affairs, and Alan S. Kleiman, real estate attorney and member of Epstein Becker & Green P.C.

We will be delivering food, drinks and a healthy doze of art law discourse. It would be lovely if you could pass this information on to your members so they can join us in Brooklyn at Minus Space.

Hopefully, they can take a break from studying to join us.

Details about the event and tickets can be found by following the link bellow:


December 8, 2015

NYC's Commuter Benefits Law Effective January 1

By Kristine Sova

Beginning January 1, 2016, unless otherwise exempted, NYC employers with 20 or more full-time employees must offer full-time employees the opportunity to use pre-tax income to pay for their commutes. The Department of Consumer Affairs (DCA), the same agency responsible for enforcing the NYC Earned Sick Time Act (Paid Sick Leave Law), has the responsibility for enforcing NYC's Commuter Benefits Law.

Under the new law, a full-time employee is any employee who works an average of 30 or more hours per week in the most recent four weeks, any portion of which was in NYC.

The new law does not apply:

To federal, state or local governmental agencies/employers;
Where a collective bargaining agreement (CBA) exists between an employer and employees, except if the employer has 20 or more full-time employees who are not covered by the CBA, in which case the employer must offer these employees commuter benefits; or
Where the employer is not required by law to pay federal, state or city payroll taxes.

In addition to the exemptions noted above, the DCA also has authority to waive the requirements of the Commuter Benefits Law if an employer presents compelling evidence that complying with the new law would significantly harm the business's finances.

Employers must give their full-time employees a written offer of the opportunity to use pre-tax income to purchase qualified transportation fringe benefits and maintain a record of the offer and employees' responses. Employers may use the sample form available on the DCA website at http://www1.nyc.gov/assets/dca/downloads/pdf/about/CommuterBenefits-EmployerComplianceForm.pdf to document compliance. Records must be kept for two years.

The new law gives employers a six-month grace period (from January 1st to July 1st) to begin offering a commuter benefits program. Employers will not be subject to penalties for violations that take place before July 1. The law also gives employers 90 days to correct a violation before the DCA is authorized to seek penalties.

Employers who do not yet offer commuter benefits programs to their employees should consult their tax advisors to review any tax implications for their businesses and their employees.

Russia Is Developing An Anti-Doping Program

By Sergey Yurlov

Russia is developing its anti-doping program as a result of a ban imposed by the International Association of Athletics Federations on the Russian Athletics Federation.

On November 23rd, Draft Law No. 936021-6 "On the amendment to the Criminal Code of the Russian Federation" (the Bill), was introduced into the State Duma (http://asozd2c.duma.gov.ru/addwork/scans.nsf/ID/6CD0A0EDCECA6CBA43257F0600527CF3/$FILE/936021-6.PDF?OpenElement). The Bill imposes criminal liability for the following actions:

• Inducing the commission of anti-doping rules violations: Punishable by a fine of 500,000 Rubles ($7,500), or the amount of wages or income of a convicted person for a period to six months with or without the prohibition to hold certain offices or carry on certain activities for a term up to three years; and

• fraud of an athlete consisting in the transfer of prohibited substances or in the application of prohibited methods under the guise of permitted medicines or methods: Punishable by a fine in the amount to 2 million Rubles ($29,555.28), or in the amount of wages or income of a convicted person for a period up to three years, or imprisonment for a period of up to three years with or without the prohibition to hold certain offices or carry certain activities for a term up to three years.

According to the Bill, the inducers are coaches, doctors and other persons responsible for the training procedure of a particular athlete. To be sentenced by a court, those subjects should commit the above mentioned actions before, during or after a sporting competition.

Thus, the Bill imposes criminal liability of support personnel, but not athletes. In accordance with its Explanatory Note (Note), the Bill is aimed at combating doping, especially with people who induce athletes to take prohibited substances or/and use prohibited methods.

According to the Note, inducing constitutes intentional actions (persuasion, offers, counseling or fraud), even just once, intended to create a desire to use prohibited substances or methods. On its face, it is a good idea to criminalize inducing the commission of anti-doping rules violations. However, it appears that the Bill has the following disadvantages:

1) It provides for criminal liability of sports personnel only. In order to clean up modern sports, we should take certain measures aimed at educating and guiding athletes in doping issues. For example, we should organize meetings to discuss how to avoid taking prohibited substances when choosing sport nutrition.

2) It imposes criminal liability of support personnel. We should keep in mind that some athletes take prohibited substances or/and use prohibited methods without notifying their coaches, doctors and other officials. In such cases, those athletes are personally liable for anti-doping rules violations. Unfortunately, the Bill is silent about this.

3) It is impossible to eradicate doping only by putting into force new laws. Recent doping and corruption scandals have evidenced that there is a deep problem with sports governance on both national and international levels. Therefore, the problem should be resolved by taking both organizational and legal measures.

As of today, it is not clear when the Bill will be enacted. In the meantime, it appears that the Russian government will pushing the Parliament to enact the Bill as soon as possible.

December 14, 2015

Month in Review

By Zak Kurtz

Europe Plans to Ease Copyright Rules On Digital Content

Last Wednesday, European policy makers announced new plans to overhaul the European Union's copyright rules, including new rules that will reshape which online video and music services are available. The new rules would allow Europeans to temporarily view movies and videos they have bought on a digital service, no matter where they are in the 28-member bloc. Copyright restrictions currently limit access to the European country in which the content is bought. The announcements are part of Europe's efforts to create a so-called "digital single-market." The goal is to offer Europeans "unfettered access to online services across the region -- a single set of rules for all digital players here -- so that the European Union can better fulfill its promise of a unified market of more than 500 million people." Critics say that the new rules for online distribution could favor larger companies, Like Netflix and Google, and hurt smaller regional players.

The new rules on digital content are expected to go into effect in 2017. However, the European Parliament and the 28 member states still must still approve them.


Rodeo Stars' Plan for Tour Are Opposed By Sports Governing Body

The winner of the National Finals Rodeo was decided in Las Vegas this past Saturday; however, the biggest news in the sport will be decided in a Texas courthouse in 2016. Last Wednesday, the Elite Rodeo Athletes (E.R.A.) announced a 2016 regular season schedule. This decision to start their own rodeo tour by some of the sports biggest stars is now at the heart of an important legal battle.

Over 80 of the sport's top athletes have already committed to the new E.R.A tour schedule, and each will be given an ownership share in the enterprise. More importantly, the E.R.A also announced that a television contract from Fox Sports was already in place.

While the new tour sounds great for the rodeo cowboys, they lack the support of the Pro Rodeo Cowboys Association (P.R.C.A.), the governing body of the sport. This past fall, the P.R.C.A. reacted to E.R.A.'s plans by changing its bylaws for 2016. The 2016 laws now state that anyone with a financial interest in a competing rodeo association cannot buy an annual P.R.C.A. membership card, which is required to compete in any of the P.R.C.A.'s 624 sanctioned rodeos in North America. That includes the season-ending National Finals Rodeo, which has a $10 million purse.

To combat this decision, the E.R.A. filed a class-action antitrust lawsuit against the P.R.C.A. last month in United States District Court in Dallas. A hearing is scheduled for December 29th.


'Happy Birthday to You' Case Settled

According to Law 360 BREAKING NEWS, Warner/Chappell Music settled the highly anticipated class action 'Happy Birthday to You' copyright case to avoid further litigation about how much it must repay the thousands who licensed the right to use the song.

United States Women Dig In and Force Soccer to Give Ground

In the midst of a 10-city victory tour, the United States Women's National Soccer Team stood up for the sport, and told U.S. Soccer officials that its players would not set foot on the artificial turf field that was to be the playing surface for the game against Trinidad and Tobago. When hit with this news, U.S. Soccer was forced to cancel the match. It must now address this issue before the remainer of the tour gets cancelled.

According to reporters, the women claimed that the field "was not good enough." The team posted on pictures of the field on Instagram, including a photo of an injured player who hurt herself on the turf, and made other comments indicating that they were fed up with such playing conditions.

Most glaringly, the team noted that the men's national team does not play on artificial turf. Even when it schedules a game in a stadium that has turf, sod is laid down, regardless of the cost. The women, however, were set to play eight of the 10 games of their current World Cup victory tour on artificial turf. That might now change, as it appears that the players have won this battle.

In response to the team's announcement, U.S. Soccer stated: "In the future, we will hear them out and discuss what we can do before it ever gets to that point."

Danh Vo and Bert Kreuk Settle Legal Battle Over Artwork

Bert Kreuk, a wealthy Dutch art collector, and Danh Vo, a Danish and Vietnamese installation artist, recently settled a bitter legal dispute over a commissioned artwork piece created by Danh Vo for an exhibition. The feud had lingered for months over claims of broken promises and name-calling, because the two had never signed a formal contract for an installation by Mr. Vo.

This case received international attention last summer, after a Rotterdam judge ordered Vo to complete the work within one year or face daily fines. The two men ended the bitter dispute after six hours of negotiations at an appeals court in Hague. The settlement agreement stated that Mr. Vo did not have to create a large work commissioned in 2013 for $350,000 by Mr. Kreuk.


Pistorius Found Guilty of Murder by Appeals Court

On Thursday, December 3rd, Oscar Pistorius was convicted of murder by a South African appeals court. The Supreme Court of Appeal overturned a lower court's conviction on the less serious charge of manslaughter. The decision adds another layer to the terrible tragedy that followed a celebrity athlete's plunge from greatness.

According to Justice Lorimer Eric Leach of the appeals court: "The accused ought to have been found guilty of murder on the basis that he had fired the fatal shots with criminal intent." The murder conviction means that Pistorius will head back to jail, where he spent one year of a five year prison sentence before being put under house arrest at his uncle's mansion in Pretoria this past October.

In South Africa, the minimum sentence for murder is 15 years. However, exceptional circumstances in this case, including time already served, Pistorius' disability, and his status as a first-time offender, could mean that he will get a lesser sentence. The sentencing decision will be left up to the North Gauteng High Court, where Pistorius was tried. The South African media reported that Judge Thokozile Masipa, who presided over the original trial, would handle the matter.


New York Judge Rebuffs Daily Fantasy Sports Sites Initial Requests

Last month, the New York Attorney General attempted to shut down the daily fantasy sports businesses in New York State of DraftKings and FanDuel. He initiated this legal battle by sending cease-and-desist letters to the two sites, claiming that they were offering illegal gambling under New York law. In response, DraftKings and FanDuel argued that they offered games of skill, not of chance, as defined by New York's gambling laws.

In separate complaints filed in State Supreme Court in Manhattan, FanDuel and DraftKings first asked a judge for an injunction, arguing that the Attorney General Eric Schneiderman had wrongly characterized their businesses as illegal gambling operations. The judge, however, rejected the requests of the daily fantasy sports website operators for an immediate restraining order to stop Attorney General Schneiderman until they could present their case, as each company claimed that it faced irreparable damage.

After this initial decision, DraftKings said that it was "confident in our legal position" and that it intended to keep operating in New York. DraftKings said that it had 375,000 New Yorkers among its 2.5 million players, and that Mr. Schneiderman had told the company's vendors in letters that it was at risk of not doing business in New York anymore.

FanDuel claimed that it had hundreds of thousands of users in New York -- among more than one million over all -- and that it had been unable to process New Yorkers' deposits since Friday. The company said that Schneiderman's office had already contacted the bank and payment processors handling FanDuel's customer deposits and withdrawals, deterring the customers from continuing to do so.


Daily Fantasy Sports Site Appears to Close Digital Loophole

Earlier this month, the New York Times reported that users in all six of the states in which daily fantasy sports are considered illegal were able to place bets and avoid a loophole on the DraftKings site. Since then, DraftKings appears to have closed the easily accessible loophole.

The technique, using a proxy server, is one of the simplest and most widely available services to let a computer appear to be somewhere other than its true location when its user logs on to a website. However, since early December, DraftKings appeared to close that loophole, and will now decline users logging on in those states. Draftkings released a statement that "proxies are now being blocked." FanDuel and other sites are blocking users for similar reasons as well.


Museum of Modern Art To Return Work to Heirs of Jewish Collector

The Museum of Modern Art (MoMA) has decided to end a 10-year skirmish and return an Ernst Ludwig Kirchner landscape to the heirs of its original Jewish owner. The decade long quest included archive detectives, location mix-ups, vintage postcards and a coveted art collection torn apart by war. The MoMA made an official statement, announcing that the German expressionist painter's 1917-18 canvas "Sand Hills (By Grünau)" rightly belongs to the heirs of a Berlin writer, Max Fischer, who had to leave his art behind when he fled Germany for the U.S. in late 1935.


December 15, 2015

Understanding the Option Agreement for a Screenplay

By Wallace Collins

Many writers dream that some day their stories or scripts will garner interest and develop into feature films or TV projects. Usually, the first step is taken when a producer or a production company, or even a movie studio, offers the writer a contract known as an option agreement. As with all such matters where art meets commerce, I always advise that if one is asked to sign anything - other than an autograph - one's lawyer should review it first. Every writer should have a literary agent and a lawyer advising him or her about his or her business dealings once this stage of the process arrives, where artistic creation spills over into the business world.

An option agreement at its most basic is a contract whereby the writer grants someone, for a period of time and for a payment, the right to make a film of the writer's screenplay. The three material issues that usually arise in negotiating such a deal are: 1) the length of the option period, 2) the amount of the option payment and 3) the purchase price if the project comes to fruition. How each of these issues will be resolved will vary depending on the negotiating leverage of the respective parties (i.e., whether the writer is a beginner or has had prior success in the industry, and whether the producer is an experienced player or just a fledgling production company trying to get traction).

An option agreement will designate an "option period", or length of time granted to a producer or studio to commence production of the project. It can range from six months to two years, or longer, depending on the negotiations. Such agreements frequently include additional periods of time for the producer to extend the length of the agreement in consideration of additional payments to the writer.

The option agreement will also set forth an "option payment", which is the amount to be paid to the writer as consideration for allowing the producer the privilege of utilizing the writer's screenplay for development purposes. Again, depending on the negotiating strength of each side, this could range from a very small amount (e.g., a few hundred dollars or even one dollar) to a larger payment (tens of thousands of dollars). Then, if the other party wants to extend the option period for an additional length of time, there should be additional payments to the writer. In most cases, these additional payments will be negotiated to be substantial even if the first payment is small. The amount of the option payments will vary, depending on the negotiation process and other factors, such as the writer's track record in the industry and the potential budget of the film or TV project. Some industry experts have said that as a rule of thumb, option payments are frequently equivalent to 10% of the purchase price, but these amounts are always negotiable, and writers need to be careful not to allow themselves to be taken advantage of in the rush of excitement that surrounds interest in their screenplays.

Another material term in an option agreement is the "purchase price", which is the amount of money that the writer will receive in the event the screenplay is made into a feature film or TV project. The purchase price is often calculated on a sliding scale as a percentage of the budget, so as the budget of the film project grows, so will the purchase price, although as with all negotiated terms this too can vary greatly.

When properly negotiated, an option agreement can be a win-win situation for both the writer and the producer. The writer is paid to lease his or her screenplays for a limited period of time, while the producer attempts to get the project green-lighted by a studio or production company. If this happens, the writer will receive a nice purchase price for the screenplay. If it does not happen during the option period, then the writer keeps the option payment or payments paid to date, and all rights to the screenplay revert back to the writer. The writer could then decide to option the script again to another producer. From the producer's perspective, an option agreement gives the producer an opportunity to hold on to a screenplay exclusively for a period of time, without having to lay out a lot of money up front while trying to get the project off the ground.

December 21, 2015

Who's On First? - Fair Use Decision in "Hand to God" Infringement Suit

By Barry Werbin

This case involves the hit off-Broadway show "Hand to God" (with a run time of one hour and 55 minutes), which incorporated a little over a minute of Abbott & Costello's famous Who's on First comedic routine as part of a sketch featuring the lead character in the show and his hand puppet. The same scene had also been incorporated into a promotional video to commercially promote the show and sell tickets.

The original routine had been performed by the comedic duo in different lengths in two Abbott & Costello films, One Night and The Naughty Nineties, for three minutes and almost nine minutes, respectively. After a long assessment of the plaintiffs' standing to sue and ownership of the copyrights in Who's on First, Judge Daniels upheld the show producer's fair use defense.

The court found that the first Section 107 factor, the nature of the copyrighted work, favored the plaintiffs because the original routine was a creative work, although the court viewed this factor as having less importance in light of the other factors.

The discussion about quantitative and qualitative proportionality under the third Section 107 factor is interesting, because the court found that while the minute plus segment used in the show was not insignificant, such use only "slightly" tipped the fair use scale in favor of the plaintiffs in light of the "highly transformative nature of the new use [that] ultimately outweighs this comparatively less important factor."

On the effect of the use on the potential market (4th factor), although the plaintiffs argued that they lost licensing and royalty revenues, the court found this only relevant to the market for the original work. Here, the court found it "unlikely that a reasonable observer of the new work would find that [this] reenactment of the Routine could usurp the market for the original Abbott and Costello performance of the Routine," also noting that the transformative use of the routine could arguably "broaden the market for the original work" by exposing it to an entirely new generation.

Finally, as for the second statutory factor assessing the purpose and character of the use, the court found this to be a transformative use, consistent with Cariou v. Prince, 714 F.3d 694 (2d Cir. 2013), cert. denied, 134 S. Ct. 618 (2013). The court emphasized that the Second Circuit had done away with any requirement that a use had to "comment" on an original work to warrant fair use protection. Despite the overt commercial use of the routine in the promotional video for the show, the court found this did not undermine the fair use defense because the Supreme Court had made it clear in Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994), that commercial use did not preclude a Section 107 defense, and that here "the for-profit secondary use [in the promo video] is not determinative...."

Applying the Second Circuit's transformative use test and assessing whether the show's use of the routine "merely 'supersede[s] the objects' of the original ... or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning or message," the court found that "the tone of the new performance is markedly different" than the original routine. In particular, while the original Abbot & Costello work was a two-man vaudeville comedy sketch, the use of the work in "Hand to God" "has only one actor performing the Routine in order to illustrate a larger point. The contrast between [the lead character's] seemingly soft-spoken personality and the actual outrageousness of his inner nature, which he expresses through the sock puppet, is, among other things, a darkly comedic critique of the social norms governing a small own in the Bible Belt."

Despite the routine's performance in the show nevertheless getting audience laughs, the court did not find that this defeated the transformative use argument. According to the court, the humor evoked from use of the skit in the show does not derive from Who's on First itself being funny, but for different reasons based upon an inside joke in the show's own dialogue involving the exposure of a lie by the main character. The court thus found that this statutory factor "weighs strongly in favor of Defendants."

This is one case where you'd probably need to see the show itself to make an informed assessment. Use of the skit in a commercial promotional video to promote sales, however, does raise some fair use eyebrows, as the selection of that specific content out of nearly two hours of total show content was likely done specifically because of the fame associated with the Who's on First skit itself.

Post Cariou, we likely will be seeing more district court decisions applying an even broader scope of transformative use, as this is the path now clearly defined in the Second Circuit.

The decision is available here:Whos on First decision.pdf

December 23, 2015

Center for Art Law Case Updates

The following case selection first appeared in this week's Center for Art Law newsletter:

Mueller v. Michael Janssen Gallery, No. 1:15-cv-04827 (S.D.N.Y. June 22, 2015)-- Ohio-based collector Scott Mueller filed suit in federal court alleging several causes of action arising from his purchase of Cady Noland's "Log Cabin" from a German gallery. Noland objected to the sale when she learned that Mueller planned to restore the 1990 work. Mueller then exercised his contractual rights under the buy-back option. However, the seller has returned only $600,000 of the $1.4 million purchase price.

Williams v. Roberto Cavalli S.p.A., CV 14-06659-AB JEMX (C.D. Cal. 2015)-- A federal court in California denied defendant Roberto Cavalli's motion to dismiss claims by three San Francisco street artists that the Italian designer appropriated the plaintiffs' artwork for use in its clothing designs. In addition to alleging copying, the artists also claimed that their stylized signatures were replaced by the "Just Cavalli" mark on the final designs, constituting unlawful removal of copyright management information and a false designation of origin.

Tierney v. Moschino S.p.A., No. 2:15-cv-05900 (C.D. Cal. Aug. 5, 2015) -- Brooklyn graffiti writer "Rime" filed suit against Moschino and Jeremy Scott in federal court, alleging that the designers reproduced his 2012 mural "Vandal Eyes" on their high-profile apparel. The plaintiff further alleges that the defendants added his name and falsified his "Rime" signature on the clothing and in advertisements.

The Creative Foundation v Dreamland Leisure Limited [2015] EWHC 2556 (Ch) -- England's High Court of Justice recently held that a tenant was not entitled to remove a Banksy mural from its exterior walls. Although the work was painted without consent, the court held that, in cutting the mural out from the wall and planning to sell it in the United States, the tenant was not merely carrying out its repair obligations under the lease agreement by unlawfully removing a valuable chattel from the premises without the landlord's consent.

The Center for Art Law strives to create a coherent community for all those interested in law and the arts. Positioned as a centralized resource for art and cultural heritage law, it serves as a portal to connect artists and students, academics and legal practitioners, collectors and dealers, government officials and others in the field. In addition to the weekly newsletter (http://cardozo.us2.list-manage.com/subscribe?u=78692bfa901c588ea1fe5e801&id=022731d685), the Center for Art Law subscribers receive updates about art and law-related topics through its popular art law blog (http://itsartlaw.com/blog/)and calendar of events (http://itsartlaw.com/events/). The Center for Art Law welcomes inquiries and announcements from firms, universities and student organizations about recent publications, pending cases, upcoming events, current research and job and externship opportunities. To contact the Center for Art Law, visit our website at: www.itsartlaw.com or write to itsartlaw@gmail.com.

December 27, 2015

Congress Gave Certain Entertainment Industry Investors A Christmas Present for 2015 and 2016! Section 181 is Back for Film & TV Projects and Now Theatrical Projects, Too

By Marc Jacobson

Now, certain investors in film and theatrical projects that begin production in 2015 or 2016 may deduct their investments in the year in which the entity that receives the money actually spends the money. While tax on the profits will always have to be paid and the tax benefit of the deduction, once recouped, also creates taxable income, certain investors will get a current deduction, which is always welcome, because it reduces the investor's current tax liability.

Not every investor is eligible for the benefit of this deduction. Some prominent bloggers gloss over this requirement. (See, "The Producers Perspective," By Ken Davenport, http://bit.ly/KD181blog) Only investors who (a) have qualifying passive income, generally from real estate rents and income are eligible for this benefit, and then only up to the amount of their passive incomes in that year, or (b) are producers who pursue producing as an active trade or business, can reap this benefit. A doctor or dentist, successful stockbroker, and the like, who does not have passive rental income and who may be the traditional source of film, TV and theater investment, is not able reap the benefit of this deduction.

Revised §181 of the Internal Revenue Code (the Code) provides that investors in Film and TV Productions, and now, thankfully, Theatrical Productions, may deduct their investments in the year incurred, provided that certain steps are taken and rules are followed. When we read the Consolidated Appropriations Act of 2016 and the Protecting Americans from Tax Hikes Act of 2015 (http://bit.ly/Sec169HR2029) that President Obama signed into law on December 18, 2015, we don't see any mention of the passive activity rules. We also don't see it in the text of the old or new §181 of the Code, but we do see it in the accompanying regulations. (http://bit.ly/IRSregsForSec181)

However, any tax preparer worth his or her salt will tell you that while §181 is clear on its face and makes no mention of the passive activity rules, the taxpayer and his or her preparer must consider the entire Code when preparing a tax return. That includes things like the Alternative Minimum Tax, (http://bit.ly/AltMinTax) as well as §469 of the Code, (http://bit.ly/Sec469PassiveActivityLimited) entitled "Passive Activity Losses and Credits Limited" and its accompanying regulations.

The Code limits the benefit of deductions for Passive Activity. (Id.) Most investors in Film, TV and Theatrical Productions invest their money, watch carefully what happens with the "show," then sit back and wait for a return of capital and hopefully a profit, paid out ideally over the life of copyright. That is passive activity, completely legitimate and welcomed by the producers of and the investors in the show. Yet the Code says that if an investor does that, and does it in Film, TV and now, thankfully, Theatrical Productions, the investor can only deduct that investment against passive income received that year from real estate investments, and only up to the amount of that real estate passive income.

Therefore, if the investor had passive rental income of $50,000, but invested $75,000 in the qualifying Film, TV or Theatrical Production, only $50,000 would be deductible. If the investment were $35,000, then the full amount of the investment would be deductible, because the passive income exceeded that amount. All of this, of course, assumes that the entity that receives the investment owns the property, spends the money, makes the proper election in a timely fashion, and otherwise complies with the law. (This blog is only to alert people to the overall limitations on the benefit of the investment, and not to discuss all the steps necessary to qualify for the deduction.)

The only other method by which the investment can be deducted is if a person who is already active in the trade or business of the production makes the investment. The Tax Court in Storey v. Commissioner (http://bit.ly/Storey-v-Commissioner) outlined how a documentary filmmaker was found to be a producer and thus eligible to reap the benefit of the Code §181. It is instructive for the rest of us about what constitutes being active in a trade or business sufficient to qualify as a producer eligible for the current deduction.

The following assumptions show how this works on a film production with a cost of $2 million, received and spent entirely in one calendar year, where the traditional model applies where the investors recoup their money in full, first, before any "profit participation" is distributed to talent or other contributors to a film:

• The production follows the steps necessary to qualify under §181 when filing its tax return for the year in question.

• The investors all have passive rental income in excess of their individual investments.

• All of the investors are in a tax bracket of 50%

• The production then receives license income of $1.5 million, significantly less than the cost of production.

In this example, the investors in the aggregate had a net after-tax risk of $1 million, since the deduction "saves" them 50% of the actual cost of the investment. When the production receives $1.5 million as license income, the investors will receive cash of $1.5 million, an amount in excess of their tax-advantaged investments, thus creating taxable income. Although the production's license income is less than the cost of production, the investors are "in profit" before the picture itself reaps a cash on cash profit. This surely will continue to be an incentive for such investors to invest again with that producer, and with other producers as well.

The reinstatement of §181 for 2015 and 2016 is a welcome incentive for producers and will likely help create more films, TV shows, and live theatrical events. It is only for a certain few, however. Further, its effect is to only accelerate the deductibility of the investment, which is only meaningful for as long as the show does not return the investment or a profit. Tax will always need to be paid on income in excess of the tax-advantaged investment. It is important to consult with a tax advisor for more information.

About December 2015

This page contains all entries posted to The Entertainment, Arts and Sports Law Blog in December 2015. They are listed from oldest to newest.

November 2015 is the previous archive.

January 2016 is the next archive.

Many more can be found on the main index page or by looking through the archives.