Business custom prevails in music and lyrics licensing

Licensing agreements are a common type of transaction used to promote the efficient allocation of IP rights. Thus, it is vital that both parties to a licensing agreement decide on the scope, duration and other limitations of the licence. However, even when expressly stipulated in the licensing agreement, the licence duration and scope may go beyond what was agreed to due to custom or business practice. On 6th May 2010 the Taiwanese IP Court rendered its judgment in a case involving a licensing agreement for music and lyrics in order to reconcile the rights of the parties (2009 Ming-Zhu-Shang-Zi no 11).

The two parties were both music companies. The licensee wished to produce vocal accompaniment works using musical instrument digital interface (MIDI). It entered into an exclusive licensing agreement with the licensor, whereby the licensor allowed the licensee to use the music and lyrics to 200 songs. The agreement stipulated the restrictions of the licence, including the duration. However, after the agreed licence period expired, the licensee continued to sell its MIDI works. Hence, the licensor accused the licensee of copyright infringement of its music and lyrics. The licensee argued that this was normal business practice and asserted its copyright in the MIDI works in its defence. The district court dismissed the licensor's complaint, and the IP Court affirmed the verdict.

The IP Court stated that there were three issues to be decided:

• Whether it is customary in the music business, in the case of vocal accompaniment works, for a licensee to hold a non-exclusive licence automatically after the original exclusive licence expires.
• Whether the licensee owned the copyright in the MIDI works.
• Whether the licensee had the right to reproduce, sell, rent or take other similar actions regarding the works.

With regard to the first issue, the IP Court surveyed the major record labels in Taiwan and the replies received were affirmative - in another words, the court recognised that it is customary in the record business for a licensee to hold a non-exclusive licence agreement automatically on expiration of a licensing agreement for vocal accompaniment works (eg, MIDI works). The court further explained that regarding vocal accompaniment works, the licensee must obtain the rights holders' approval and must sell the vocal accompaniment works - the licensor acknowledged this. If a licence is terminated when the exclusive licence agreement expires, the licensee will suffer substantial loss and will be unable to use the works and be economically efficient. As such, the court held that in this case, the licensee was non-exclusively licensed to use the music and lyrics for the 200 songs after the exclusive licensing agreement expired.

Furthermore, the IP Court also confirmed that the licensee owned the copyright in the MIDI works because they were produced in one set of proceedings, including transforming the licensed music and lyrics into electronic data and encoding such data into the music played on the keyboards or sound cards. The MIDI works also had different melodies and styles from the music and lyrics of the licensed songs. Thus, the court held that the licensee owned the copyright in the MIDI works, subject to Articles 10 and 10-1 of the Copyright Act.

Finally, the court held that the licensee had the right to reproduce, sell or rent MIDI works due to the reasons indicated above, and that it was the owner of the copyright in the MIDI works. Thus, the IP Court dismissed the licensor's appeal.

In sum, the IP Court confirmed the existence of a business custom and agreed that the licensee automatically obtained a non-exclusive licence after the expiration of the original exclusive licence. The judgment has clarified the legal situation that results when an original exclusive licensee agreement expires without further negotiation or renewal with respect to the vocal accompaniment works. In future, if a copyright owner wishes to stop such licensing, it will have to stipulate this explicitly in the licence agreement.