Tax Planning When Selling Real Estate

The tax rules on selling real estate whether it is residential real estate or commercial real estate can be very complicated and you should know the basic rules before you decide to sell and set a selling price.  Below is a summary of some of the rules when selling a real estate.  Whenever selling real estate a comprehensive review of legal and tax implications should occur.

 

Sale of Personal Residence Property

Congress has provided certain tax incentives for home ownership and one of these incentives is the exclusion of gain in certain circumstances when selling a personal residence.  These rules have changed several times over recent years but currently up to $500,000 of gain on the sale of personal residence property can be excluded by a married couple ($250,000 for a single person) if the residence has been used by the couple as their primary residence in 2 of the last 5 years.  This exclusion cannot be used more than once in the last 2 years or if the property was acquired in a like kind exchange.  You can still exclude some gain on the sale of a primary residence if you: (i) changed your place of employment; (ii) had a sudden health issue or (iii) underwent some other unforeseen circumstance or hardship. (See IRS publication 523 for further details.) 

If the capital gain (difference between net selling price and original cost of the residence plus improvements) exceeds the exclusion amount, then the gain is taxed at the long term capital gain rate if held more than 12 months.  These rates vary from 0%, 15% to 20% depending on your tax bracket.

 

Sale of Commercial or Rental Property

The tax implications on selling commercial or rental property are totally different than selling personal residence property.  First, you need to determine the tax basis of the real estate which is computed by taking the cost of the property plus improvements and then subtracting depreciation on the property over the years.  The difference between this basis and the net selling price then gives you the gain on the sale of the property.  There are several planning options you have to use to either defer the gain or eliminate it entirely discussed below.  You should also be aware that you first need to determine if the gain is taxed at normal long term capital gain rates if the property has been held for at least 12 months (0%, 15% or 20%). The net investment tax may also apply to add another tax at 3.8% depending on adjusted gross income.

Any depreciation that the seller has taken on the property over the years must first be recaptured on a sale if the selling price exceeds the tax basis of the property.  So, first the gain on recapture is taxed at the seller’s top marginal rate up to 25% and then once all the depreciation is recaptured the remaining gain gets taxed at the lower capital gains rate.

A seller usually has the option to spread the gain over several years if the sale is on an installment basis.  However, be careful, as normally the tax on recapture income cannot be deferred and is due for the year of sale.

I have many clients who come to me for estate planning, and they want to sell business property to their children or gift it to them to reduce their estate for Medicaid planning purposes.  While there have been recent proposals to eliminate the step up in tax basis on death, under current law property owned by a decedent at death is stepped up to its fair market value and all the gain that would have been due on a sale is eliminated.  The new owner can sell the property at the new stepped-up basis with no capital gain being triggered.  Note that on a gift of property the tax basis of the party giving the property carries over to the party receiving the gift so on a later sale this built in gain gets taxed.  Many elderly clients choose to retain their property so their heirs receive the free step up in basis at death by inheritance rather than making a gift to a child where the basis carries over.

One last option to consider when disposing of commercial or rental property to defer capital gains is to consider doing a like kind exchange under section 1031 of the internal revenue code.

Trade or business property can be exchanged for trade or business property and if the new property has a fair market value exceeding the fair market value of the property disposed of the gain on the exchange can be deferred or entirely eliminated at death.  These rules are very complex and beyond the scope of this article but sometimes can be used to defer capital gains.  The party exchanging the property should be aware that any gain that is deferred in the exchange reduces the tax basis of the property received in the exchange which in turn reduces potential depreciation deductions and also increases the later gain on the sale of the property received.  There are also significant costs in structuring the exchange so that it will qualify for section 1031 and sometimes the cost of doing the exchange plus the reduced depreciation deductions and later increased gain cause taxpayers to forego a like kind exchange.

 

In summary extensive planning should take place when disposing of real estate to maximize the net after-tax proceeds from the sale.

 

Robert W. Zimmerman – Hurtado Zimmerman, SC

Hurtado Zimmerman SC

Wausau, WI

Brian Zimmerman to Co-Chair ABA Construction Forum Fall Meeting

 

Brian R. Zimmerman – Hurtado Zimmerman, SC, and Catherine W. Delorey (grsm.com), of Gordon Rees, will Co-Chair the American Bar Association- Forum on Construction Law’s National Fall Meeting. 2023 Fall Meeting (americanbar.org).  The program will be September 27-29, 2023 in Washington DC.

Join us at the ABA Forum on Construction Law’s 2023 Fall Meeting – Navigating Government Construction: Don’t Make a Federal Case Out of It.

 The program, appropriately set in our Nation’s Capital, offers a journey into the world of government construction. There is no better place than Washington, D.C. to learn to navigate the minefield of requirements applicable to your clients who may be literally trying to drain a swamp. This is a must attend event for all construction/government contracts lawyers, consultants, and those who would like to venture into or learn more about the practice area.

The Program promises to engage both new and seasoned attorneys alike, with plenary sessions and workshops covering both introductory and advanced topics related to government construction. Our sessions are loaded with esteemed judges, sharp in-house counsel, experienced government lawyers, and skilled private practitioners, all with particular knowledge to impart to attendees. Session topics include: Navigating the government claims process and procedures; Delay, disruption, and pricing of claims on federal projects F Green and sustainable government spending; Cybersecurity threats and obligations of government contractors; Termination on government projects; ADR with the government Prior to the main program, we will offer a practicum: “A Guide to Bid Protests.”

At the practicum, our faculty, including Judge Marian Blank Horn, will take a federal bid protest from start to finish and share insight on the process for federal bid protest. In addition, renowned speaker, Bob Kendrick, President of the Negro Leagues Baseball Museum in Kansas City, Missouri, and host of the Black Diamonds Podcast , will speak as a part of the Forum’s Diversity Breakfast series.

Mr. Kendrick is a dynamic and engaging speaker and the leading authority on the topic of the Negro Leagues baseball history and its connection to issues relating to sports, race, and diversity. Washington, D.C. in the Fall promises beautiful weather and a welcoming city with countless memorials, museums, and monuments to explore. Please check out our D.C. Insider’s Guide and Restaurant Guides courtesy of Forum Chair, John Marshall Cook. There is so much to do, you will need an extra day or two!

 

President Biden Mandates Project Labor Agreements on Large-Scale Federal Construction Projects (July 2022)

President Biden Mandates Project Labor Agreements on Large-Scale Federal Construction Projects

On February 22, 2022, President Biden issued Executive Order 14063[i] requiring the use of “project labor agreements” (PLAs) on large-scale Federal construction projects effective immediately.

Executive Order Terms:

Pursuant to the Order, Federal agencies, when awarding any contract in connection with a “large-scale” Federal construction project, or obligating funds to such project, must require that every contractor or subcontractor engaged in construction on the project agree, to negotiate or become a party to a PLA with one or more labor organizations for that project.

A PLA is a pre-hire collective bargaining agreement with one or more labor organizations (i.e. unions) that  establishes the terms and conditions of employment for a specific construction project[ii].

Large-scale construction projects are defined as those where the estimated cost of the construction to the Federal Government is $35 million or more.  This threshold is subject to future adjustment for inflation.[iii] 

The PLA for the project must[iv]:

  • bind all contractors and subcontractors through the specifications in all relevant solicitation provisions and contract documents;
  • allow all contractors and subcontractors to compete for contracts and subcontracts without regard to whether they are otherwise parties to collective bargaining agreements;
  • contain guarantees against strikes, lockouts, and similar job disruptions;
  • set forth effective, prompt, and mutually binding procedures for resolving labor disputes arising during the term of the project labor agreement;
  • provide other mechanisms for labor-management cooperation on matters of mutual interest and concern, including productivity, quality of work, safety, and health; and
  • fully conform to all statutes, regulations, Executive Orders, and Presidential Memoranda.

There are limited exceptions[v] to the PLA requirement where an agency finds that the requirements would:

  • Not advance the Federal government’s interests in achieving economy and efficiency, based upon the following factors:
    1. Project is of short duration and lacks operational complexity;
    2. Project will involve only one craft or trade;
    3. Project will involve specialized construction work that is available from only a limited number of contractors or subcontractors
    4. Agency’s need for the project implicates other similar factors.
  • Substantially reduce the number of potential bidders and frustrate full and open competition, based upon an inclusive market analysis; or
  • Would be inconsistent with federal law based upon short duration or complexity, compelling urgency, or potential reduction in potential bidders.

The Order applies only to Federal construction projects and does not apply to projects financed through grant dollars to non-federal entities.[vi]

It will be implemented through the Federal Acquisition Regulations (FAR), with a timeline of 120 days for the FAR Council to propose such regulations and proceed through the final rulemaking process.[vii]

Federal agencies must publish. on a centralized public website, data showing the use of PLAs on large-scale construction projects, as well as descriptions of any exceptions granted.[viii]  Agencies must also report quarterly this information to the Office of Management and Budget (OMB).

Prior History

President Biden’s Order follows President Barack Obama’s 2009 Executive Order 13502, which revoked President George W. Bush’s 2001 Executive Orders 13208 and 13808, both of which prohibited the required use of PLAs on Federal construction projects.

President Obama’s Order did not require the use of PLAs, but only permitted Federal agencies to “on a project-by-project basis, require the use of a project labor agreement by a contractor” for projects over $25 million.

Policy Consideration

The Biden Administration explained the policy consideration behind the Order requiring PLAs:

Large-scale construction projects pose special challenges to efficient and timely procurement by the Federal Government. Construction employers typically do not have a permanent workforce, which makes it difficult to predict labor costs when bidding on contracts and to ensure a steady supply of labor on contracts being performed.  Challenges also arise because construction projects typically involve multiple employers at a single location, and a labor dispute involving one employer can delay the entire project.  A lack of coordination among various employers, or uncertainty about the terms and conditions of employment of various groups of workers, can create friction and disputes in the absence of an agreed-upon resolution mechanism.  These problems threaten the efficient and timely completion of construction projects undertaken by Federal contractors.  On large-scale projects, which are generally more complex and of longer duration, these problems tend to be more pronounced. [ix]

Opposition:

The Associated Builders and Contractors (ABC), along with other construction and business associations, issued strong criticism of the Order, saying that “it will exacerbate the construction industry’s skilled workforce shortage, needlessly increase construction costs and reduce opportunities for local contractors and skilled trades people” and require companies to agree to recognize unions as representatives for their employees and follow union requirements. This ultimately discourages competition and increases costs of construction by 12-20%.[x] The industry groups also argues that “PLAs steer contracts to unionized contractors and workers at the expense of the best-quality nonunion contractors and workers who want to compete fairly at a price best for taxpayers.”

A legal challenge to the Order is likely given the stated opposition to the PLA mandate, and particularly in light of the 2018 United States Supreme Court decision in Janus v. Am. Fed. of State, County and Municipal Employees, Council 31, et al.[xi], which held that the First Amendment prohibits non-union public employees from being forced to pay union dues, without their consent, for costs of collective bargaining on their behalf.

Read the article on The Wisconsin State Bar Website here.


[i] Executive Order 14063, Use of Project Labor Agreements for Federal Construction Projects, (Feb. 4, 2022).

[ii] Id. § 2(e).

[iii] Id. § 2(c).

[iv] Id. § 4.

[v] Id. § 5.

[vi] Id. § 7.

[vii] Id. § 8.

[viii] Id. § 6.

[ix] Id. § 1(a).

[x] Associated Builders and Contractors, News Releases, (Feb 3, 2022): https://www.abc.org/News-Media/News-Releases/entryid/19230/president-biden-s-pro-pla-executive-order-will-increase-costs-to-taxpayers-and-exacerbate-skilled-labor-shortage-says-abc

[xi] 138 S.Ct. 2448 (2018).

 

The information contained on this website is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors. You should not act or refrain from acting on the basis of any content included on this website without retaining an attorney.

Lots to Think About: Contracting in Response to How Global Events Affect Construction (March 2022)

Global events have presented an ever shifting set of obstacles for the construction industry. Early on in the COVID-19 pandemic, actual and expected shutdowns created severe uncertainties in the industry. Later, governmental requirements on both public and private projects posed challenges. Beyond the direct impacts of illness from COVID-19, lagging disruptions in the availability of materials and equipment have severely impacted the industry. A string of other adverse events have also contributed to increased prices or reduced availability of materials, including the global micro-chip shortage, import/export tariffs, Texas power grid disruptions, and now the war in Ukraine. Lumber prices may have peaked and are now subsiding, but the war in Ukraine and other events have caused spikes in other commodities, including oil and gas prices. These industry disruptions have plagued progress and pose substantial risks of delays and cost overruns. In response, construction companies need to ensure that they contract to anticipate certain risks.

Material Price Increases

The timing of bidding, ordering, contracting, and delivery of materials are all critical considerations in the evaluation of material price increases on a construction project. Without express contract language excusing performance or permitting a cost increased, Wisconsin law generally does not entitle a party to additional cost or time due to material price increases, even when prices change.

A variety of price escalation clauses can be utilized to transfer risk between parties, which generally include the following forms:

  • Any Increase/Day-One. A clause allowing for any increase allows a contractor to increase its price during the project or after a set date. Because these clauses are open ended, they expose the upstream party to all risks of price increases for all materials, or specific materials if designated. As a result, these clauses function similar to allowances, although potentially not permitting the upstream party the benefit of price decreases.
  • Threshold. A threshold clause sets a specified threshold over which the contractor is entitled to a price increase. With this structure, the contractor will share the risk up to the threshold and the owner (or other upstream party) will bear the risks in excess of that threshold. Parties can also negotiate a cap to the owner’s high-end risk at a higher threshold.
  • Delay price escalation clauses set the triggering milestone at a date within which the contractor has locked prices. The clause allows the contractor to increase its price if the project or portion thereof is delayed beyond a milestone date.

Price escalation clauses are often negotiated to be a combination the three types. For example, a contractor may be entitled to a price increase beyond a certain threshold, provided the project is subject to delay beyond a set milestone date when prices may be readjusted. In addition, the amount of increase to the contract price may be adjusted for the actual costs incurred or to mirror the pro-rata changes in industry material price indexes such as the producer price index.

Delays

Early on in the pandemic, as construction project delays, cancelations, and shut-downs, resulting from COVID-19 first were becoming known, parties turned to the general language of force majeure or “act of God” contract clauses, often invoking “governmental orders” or the catch-all “unavoidable casualties or other causes beyond the Contractor’s control” as the basis for excuse from performance  As the pandemic has continued, the global effects have become more publicized and understood, and governmental shutdowns have largely ceased. In turn, parties have become increasingly limited in their willingness to excuse delays or pay increased costs due from COVID-19.  The result is increased potential for claims and conflict.

Construction companies should proceed cautiously because generic force majeure clause on their own, may not excuse performance related to pandemic or supply chain disruptions, particularly as they may be known at the time of contracting. Generally, for force majeure to apply the non-performance must be “caused by circumstances beyond the reasonable control of the [invoking party] or by an event which is unforeseeable at the time the parties entered into the contract.” Goldstein v. Lindner, 2002 WI App 122, ¶31, 254 Wis. 2d 673, 687, 648 N.W. 2d 892.

Considering information currently available about the means of symptoms, transmission, testing, treatments, and vaccinations, in addition to the material unavailability and price increase issues discussed above, it may be increasingly challenging to demonstrate that delays due to an infected work force are unforeseeable or constitute force majeure.

As a result, a party seeking to excuse performance may need to show specifically how the circumstances of the delay were unforeseeable. 

Conclusion

As the last few years have demonstrated, numerous potential and novel obstacles could affect the success of a construction project. Contractors should work with their counsel to craft contract clauses tailored to each specific project and designed to anticipate risks that may arise during the course of construction.

By: Attorneys Brian R. Zimmerman and Bryan T. Kroes

 

The information contained on this website is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors. You should not act or refrain from acting on the basis of any content included on this website without retaining an attorney.

Construction Material Price Increases: Options for Contractual Risk Shifting (July 2021)

Brian R. Zimmerman

Recent surges in material prices have caused many construction industry participants to question their rights and remedies under their contracts as well as change their future contracts to address substantial price increases. Brian Zimmerman discusses the recent price increases and the contract clauses implicated thereby.

During the COVID-19 pandemic, construction material prices rose substantially and, in some cases, skyrocketed to record high levels.1

Lumber prices reached historic highs in May 2021, with futures prices rising from $423 per thousand board feet as of Jan. 8, 2020, to a $1,607 per thousand board feet on May 10, 2021.2

Although lumber prices have started to fall, prices are still nearly double January 2020 prices. The rise in lumber prices has largely been attributed to increased demand for new homes and renovations resulting from lifestyle changes brought on by COVID-19, while at the same time lumber mills’ output shrunk due to worker shortages and work limitations due to COVID-19.3

Although lumber prices have garnered the most media attention, prices for numerous construction materials have increased dramatically. Producer price indexes for construction inputs, rose 19.7% between April 2020 and April 2021.4 These price increases include raw materials such as lumber, steel, aluminum, and plastic/PVC materials, as well as manufactured products including appliances, HVAC equipment, and flooring materials.

The cause of the price increases include direct impacts from the COVID-19 pandemic due to manufacturing plant shutdowns, along with more indirect impacts such as supply chain disruptions, increased demand, and labor shortages. Other events have also increased prices or reduced availability of materials, including the global microchip shortage, import/export tariffs, and the Texas blackouts experienced earlier this year.

With such dramatic price increases, many have questioned whether common law principles provide relief.

Frustration of Purpose, Impossibility, Impracticability, and Acts of God

Common law principles of “frustration of purpose or impossibility, impracticability, and acts of God” may excuse a party’s obligation to perform a contract due to unforeseen events beyond the parties’ control.

For example, in McMillan v. Fox,5 the court excused the failure of delivery of specific piles of lumber that were burned in a fire. The court found that the continued existence of the lumber was an implied condition of performance and the fire rendered performance impossible.

The UCC § 2-615 (codified by the Wisconsin UCC at Wis. Stat. section 402.615) also excuses delays in delivery or nondelivery in whole or in part where performance is impracticable by the occurrence of a contingency, the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

Some courts have applied these doctrines to substantial material price increases. For example, the Supreme Court of the State of New York in Moyer v. City of Little Falls6 excused a contractor’s performance of a municipal waste disposal contract, where one of two local landfills closed and dumping charges rose by more than 666% times the price at the time of the original contract.

Wisconsin, however, lacks precedent holding that material price escalations alone are outside the contemplation of the parties and that substantial price increases are sufficient to excuse performance.

As a result, although circumstances related to the current material shortages or future government actions may create fact-specific circumstances excusing performance, material price increases alone are unlikely to excuse a contractor from performance under common law principles.

Contract Clauses Impacting Transfer of Material Price Escalations

The following are four contract clauses that can impact the transfer of material price escalations.

Price Locks, Deposits, and Early Procurement

Generally, the longer the duration of a project, the higher the risk that material prices change during the term of the project. Nonetheless, as the recent lumber price surge has shown, even short-term projects may be impacted by rapid price changes. Accordingly, the timing of bidding, ordering, contracting, and delivery of materials are all critical considerations in the evaluation of material price escalation on a construction project.

Price quotes for commodity type materials, as well as certain other manufactured materials, often include limited price lock periods during which the prices are held. With the major price fluctuations some suppliers and subcontractors have revised their provisions, from periods allowing acceptance up to 90 days, down to limited windows of five days or fewer, or in some instances no holds at all on pricing.

The timing of acceptance of prices, along with the common requirements of deposits or payment in full in order to hold such prices, creates complications when upstream contracts may not be signed yet or standard contract language may limit the contractor’s ability to bill the owner for deposits or payments for materials that have not been delivered to the project.

These early procurement complications may be alleviated by anticipation of these issues with the contract and negotiating conditions for payment of amounts expended to lock pricing. Another means to alleviate early pressure to lock prices prior to the full project contract is for owners to place deposits where necessary for price locks.

Force Majeure Clauses

Force majeure, French for “greater force,” are the most common clauses utilized to excuse a parties’ performance for unforeseeable circumstances beyond a parties’ control that prevent performance. Force majeure clauses are “interpreted in accordance with their language and context.”7 As a result, performance will only be excused if the specific circumstances are excused by the force majeure clause. Further, force majeure clauses only excuse nonperformance if caused by circumstances beyond the control of the party charged with performance.8 As a result, the specific language of the force majeure clause is critical to determination whether performance is excused in the specific circumstances presented.

Force majeure clauses most often excuse time related performance and do not specifically provide relief to a contractor for material price increases. For example, the American Institute of Architects’ AIA Document A201-2017 General Conditions of the Contract for Construction (perhaps the most commonly used contracting document in the construction industry), includes the following clause:

Section 8.3.1. If the Contractor is delayed at any time in the commencement or progress of the Work by (1) an act or neglect of the Owner or Architect, of an employee of either, or of a Separate Contractor; (2) by changes ordered in the Work; (3) by labor disputes, fire, unusual delay in deliveries, unavoidable casualties, adverse weather conditions documented in accordance with Section 15.1.6.2, or other causes beyond the Contractor’s control; (4) by delay authorized by the Owner pending mediation and binding dispute resolution; or (5) by other causes that the Contractor asserts, and the Architect determines, justify delay, then the Contract Time shall be extended for such reasonable time as the Architect may determine.

The AIA version of force majeure deals only with causes of delays or extension of time for the project, but provides no direct remedy for additional costs resulting from the delay. In particular it does not address events of material price increases.

Other types of force majeure clauses may permit price increases due to events of force majeure, although those cost increases will often be tied to the additional costs resulting from project time extension. These time extension costs most often include increased costs for supervision and general conditions costs such as jobsite trailer rentals, temporary facilities, site utilities, and other similar costs. Although clauses differ, the most common clauses require the delay to be a result of causes beyond the contractor’s control, nonconcurrent with noncompensable causes, and be delays to a critical path of the project. Some clauses also require the delay be “nonconcurrent” with other causes that are not excused under the contract.

Where delays are compensable under a force majeure clause, such delays may provide an opening for a contractor to make a claim for material price increases to the extent such price escalation occurs during, and as a result of, the period of compensable delay. Such claims would likely require the contractor to establish that the price escalation is a result of the project delay. For example, delays in the owner’s selection of materials may prevent a contractor from ordering materials until a later date resulting in increased costs, both those associated with the selection itself and those that are ancillary for such installation. Other types of delays might provide an opening for such a claim as well, for example where weather events cause extended delays and prevent ordering of materials resulting in price increases.

Given the potential for cascading consequences of delays, both contractors and owners should be aware of the scope and remedies available under force majeure clauses and take care to avoid causing delays that may provide exposure to industry wide price increases.

Allowance Clauses

Within Lump Sum and Cost Plus Fee with GMP contract structures, allowance clauses are often used to budget costs for specified categories of work where pricing is undetermined at the time the contract is executed.

Allowances will usually identify a budget amount within the contract price, with the contractor entitled to bill the actual cost of the work or materials. Where costs exceed the set allowance, the contractor is permitted to increase the Lump Sum or GMP amount by the amount of the increase. Where costs are less, the Lump Sum or GMP is adjusted down by the difference. As a result, the allowance clause creates a partial Cost Plus Fee pricing structure for only a portion of the work.

Allowances are often used for categories of work that may not be fully known at the time of contracting where information is incomplete, such as preliminary plans, unknown soil conditions, or pending owner selections.

Depending on the clause, allowance clauses may apply to materials prices or the costs of both materials and labor. Where the allowance clause includes materials, the risk of price increases for those materials will be effectively transferred to the owner. Allowances are employed on the vast majority of large construction projects. As a result, these ubiquitous clauses may be used as a relatively subtle method for contractors to pass along price increase risk for specific categories or materials without changing the overall price structure or risk allocations for the project.

Price Escalation Clauses

Although used less frequently than force majeure and allowance clauses, price escalation clauses are becoming increasingly common. These clauses allow a contractor to increase its contract price due to market price increases. They take a variety of different forms with a myriad different provisions, but with three general categories:

(1) Any Increase/Day-One. Any increase or day-one clauses allow a contract price increase for any increase in material pricing during the project on or after a set date, often the date of bidding or contract date. As these clauses are open ended and expose the upstream party to the complete risk of price increases, they often designate the specific categories of materials to which the price increase is allowable. As a result, these clauses function much in the same way as allowances, although potentially not permitting the upstream party the benefit of price decreases. Given the broad exposure presented to the upstream party, these clauses are used less frequently.

(2) Threshold. A threshold price escalation clause sets a specified threshold over which the contractor is entitled to a price increase. As a result, the parties take on a share of risk for material price increases dependent on the threshold set. With this structure the contractor will share the risk up to the set percentage increase and the owner (or other upstream party) is protected from market changes up to that threshold, but will bear the high-end market changes. The contractor’s risk is effectively capped, with the owner’s risk being open ended, although the parties could contract to cap the owner’s high-end risk at a higher threshold. The ConsensusDocs 200.1 Time and Price Impacted Material Amendment provides a form of a threshold price escalation clause.

(3) Delay. A delay price escalation clause provides for the contractor to increase its price if the project or portion thereof is delayed beyond a milestone date. Generally, these clauses set the triggering milestone at a date within which the contractor has locked prices and delays in ordering would result in suppliers being able to adjust prices. For example, the Wisconsin Department of Transportations’ standard specifications allow for increased material costs due to delay.9

Escalation clauses may include an amalgamation of the three types whereby a contractor may be entitled to a price increase beyond a certain threshold, provided the project is subject to delay beyond a set milestone date when prices may be readjusted. As a result, there can be further risk sharing between the parties with the contractor being able to obtain price increases provided there is an event outside the contractor’s control, but with the contractor still assuming some risk of price increases.

Within the price escalation clauses, the amount of increase to the contract price may be adjusted for the actual costs incurred or mirror changes in industry material price indexes such as the producer price index.

Given the current market conditions, price escalation clauses are becoming increasingly common. Such clauses present both parties an opportunity to contemplate the circumstances of material price increases before they become a substantial burden on either side. Although parties are generally incentivized to transfer such risks to the other, failing to manage and apportion the risks may be counterproductive for a construction project and render one party in a position of being unable to perform creating a precarious position for both sides.

Conclusion: Worth the Attention

Whatever the cause, changes in material prices pose a significant risk to the parties on any construction project.

This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.

 

Endnotes

1 Joe Hernandez, Lumber Prices Are Finally Dropping After They Soared During The Pandemic, NPR.org, June 21, 2021.

2 Commodity Price Graph for Lumber from July 6, 2020, to July 6, 2021, NASDAQ.com.

3 Hernandez, supra note 1.

4 Proliferating Materials Price Increases and Supply Chain Disruptions Squeeze Contractors and Threaten to Undermine Economic Recovery, AGC.org, May 13, 2021.

5 McMillan v. Fox, 90 Wis. 173, 62 N.W. 1052 (1895).

6 Moyer v. City of Little Falls, 510 N.Y.S.2d 813 (N.Y. Sup. Ct. 1986).

7 Wisconsin Elec. Power Co. v. Union P.R. Co.,557 F.3d 504, 507 (7th Cir. 2009).

8 Goldstein v. Lindner, 2002 WI App 122, ¶ 31, 254 Wis. 2d 673, 687, 648 N.W.2d 892, 899.

9 See Wisconsin Department of Transportation 2021 Standard Specifications, 109 Measurement and Payment, §109.4.7.2.5.

109.4.7.2.5 Materials Escalation or Material Storage
(1) The department will pay the contractor for increased material costs or material storage costs due to the delay. Obtain the engineer’s approval before storing material due to a delay.

 

The information contained on this website is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors. You should not act or refrain from acting on the basis of any content included on this website without retaining an attorney.

Legal and Practical Issues in Outdoor Musical Entertainment (May 2021)

Bryan T. Kroes[1] Hurtado Zimmerman SC – Wauwatosa, Wisconsin

Outdoor entertainment is not new by any means. Traveling circuses in the United States have been traced back to the late 1700s. Traveling medicine shows peppered the American landscape throughout the 1800s into the 1900s. Fast forward to the present and you will find a panoply of outdoor musical entertainment hosted every year across the world on every single scale. Some are large festivals like California’s Coachella and Milwaukee, Wisconsin’s own Summerfest®, the “World’s Largest Music Festival” ®. Others are hosted in small taverns and honky-tonks by folks who set up outdoor stages to draw in patrons with the hopes of selling some drinks and having some fun. Most go off without a hitch, however, every once in a while, tragedy strikes, requiring us to take a step back to analyze event logistics and what can be done to improve them.

The appeal of outdoor entertainment is undeniable – some would argue there is nothing better than sitting outside a warm summer day, cold drink of your choice in hand, listening to your favorite music – regardless of the venue. The planning and successful execution of outdoor musical entertainment, on the other hand, is a whole other monster and is not something that can or should be done on a whim or without know-how and preparation. In it no simplistic feat, to say the least, to convert a side lot, empty field, park, or racetrack into a venue, complete with stage, sound, lighting, effects, concessions and crowd control. On top of the show, municipal requirements regarding zoning, noise and gatherings have an overarching presence on the ability for an outdoor musical performance to legally occur.

Starting in March, 2020, as none of us worldwide will ever forget, COVID-19 changed the face of the entertainment industry as we know it. As the pandemic raged across the world, we saw almost overnight the large-scale cancelation of nearly every event that would have gathered people together for any reason – from closing non-essential businesses to the shutdown of nearly every live music event, both indoor and out. What may have not been as widely publicized, however, was that in the face of business collapse, many small business owners in the entertainment field re-imagined their business models to stay afloat. All political and health policy considerations aside, some operations simply moved outdoors. To those owners, if building a stage with an outdoor bar meant not losing business, then so be it. Musicians and business owners also got creative. Promoters in several states hosted drive-in concerts: where you still got to see real live music, but from the safety of your car. In the outskirts of Chicago, revered country-punk musician Jon Langford partnered with Fitzgerald’s Night Club by setting up in the bed of a Chevy pick-up truck and driving around town to bring his music to the people. Despite the darkest hours of the pandemic, musicians still found a way to forge ahead.  

As vaccines go in arms and live entertainment starts to ramp back up again, outdoor entertainment will continue to thrive, bringing in droves of adoring fans and generating revenues. In the next few pages, I will touch upon some of the legal and practical issues in outdoor entertainment. Please note, this article is not intended to be comprehensive or state-specific. Instead, it is intended to offer a high-level analysis of general considerations to guide counsel towards more precise contract drafting and best practices in counseling clients. When in doubt, please be sure to check state- and local-specific ordinances, statutes and case law.

Preliminary Planning for Outdoor Musical Entertainment

As any teenage aspiring rock musician well knows as their garage band dreams are dashed by police shutting down a make-shift venue, organizing and successfully executing an outdoor musical event may meet some resistance from the neighbors and municipal authorities. Municipal regulations and zoning, by their very nature, are municipality-specific and best practices for any promoter or aspiring concert organizer include consulting applicable municipal ordinances and zoning codes, in addition to working amicably with applicable municipal officials as a first step in the process.

Zoning ordinances constitute an exercise of the government’s police power to promote public, health, safety, and welfare and, as legislative enactments, are entitled to a strong presumption of constitutionality. Matter of Town of Islip v Caviglia, 73 N.Y.2d 544, 550-551, 540 N.E.2d 215, 542 N.Y.S.2d 139 (1989). A party challenging a zoning ordinance generally carries a burden to prove its unconstitutionality beyond a reasonable doubt. McMinn v. Town of Oyster Bay, 66 N.Y.2d 544, 548, 488 N.E.2d 1240, 1242, 498 N.Y.S.2d 128, 130 (1985). These principals have been clarified in a number of cases in a wide array of jurisdictions interpreting many different ordinances.

Noise and volume have long been a concern for municipalities and promoters, who unsurprisingly tend to be on opposite ends of the same argument. The Ward v. Rock Against Racism case is a fantastic example of that battle:  for several years Rock Against Racism (RAR) had sponsored outdoor rock concerts at New York City’s Central Park, furnishing its own sound equipment and technicians. Ward v. Rock Against Racism, 491, U.S. 781, 781 (1989). The City received numerous noise complaints and as a result, shut off the power to the sound equipment after RAR ignored repeated requests to lower the volume at one of its concerts. Id. Litigation ensued, with RAR arguing that their freedom of speech was impermissibly being impeded. Justice Kennedy, speaking on behalf of the U.S. Supreme Court, decided that while music, as a form of expression and communication, is protected under the First Amendment of the U.S. Constitution, the government may impose reasonable restrictions on time, place, or manner of protected speech, even of speech in public forum, as long as restrictions are: 1) justified without reference to content of regulated speech, 2) are narrowly tailored to serve significant governmental interest, and 3) leave open ample alternative channels for communication of information. Id. at 790-792. A municipal noise regulation designed to ensure that musical performances at a public band shell did not disturb surrounding residents was determined to be a “content-neutral” time, place or manner regulation, which would be upheld as long as it was narrowly tailored to serve a significant governmental interest and left open ample alternative channels of communication. Id. at 803.

In another example the Town of Delaware commenced an action against a landowner seeking a permanent injunction to prevent the landowner from holding a three-day music and camping festival on his 68-acre property, citing the municipality’s zoning ordinance as the basis for the prohibition. Town of Delaware v. Leifer, 34 N.Y.3d 234, 237-238, 139 N.E.3d 1210, 1213, 116 N.Y.S.3d 630, 633 (2019). The Court of Appeals of New York decided: 1) the proposed festival was not encompassed within the permitted principal or accessory use as a single-family residence, 2) the zoning law’s theater and land use restriction was a content-neutral time, place, and manner restriction, 3) restrictions were narrowly tailored to serve the town’s legitimate interests, 4) the zoning law was not overbroad, 5) the zoning law afforded the landowner sufficient notice that the music festival was a prohibited land use, and as such, 6) the injunction against the landowner to advertise, sell tickets, and hold the festival on his property was not overly expansive. Id. at 245-246.

While it is not often that live music producers decide to take on City government for the purposes of challenging zoning that would act to prohibit such live music, when the stakes are high, sometimes a legal challenge is the only option. Tanner v. City of Virginia Beach, came out on the other end of the spectrum as Leifer, and is an example of a situation in which a prohibitive zoning ordinance was not dispositive. In that case, after suit was brought by a club and music venue, the Supreme Court of Virginia decided that 1) an ordinance was impermissibly vague and 2) unconstitutional language in the ordinance could not be severed from the ordinance and that the remaining language of the ordinance given a definite and permissible construction. Tanner v. City of Virginia Beach, 277 Va. 432, 674 S.E.2d 848 (2009). The ordinance at issue provided:

It shall be unlawful for any person to create, or allow to be created any unreasonably loud, disturbing and unnecessary noise in the city or any noise of such character, intensity and duration as to be detrimental to the life and health of persons of reasonable sensitivity or to disturb or annoy the quiet, comfort or repose of reasonable persons. The following acts, among others, are declared to be loud, disturbing and unnecessary noise in violation of this section, but such enumeration shall not be deemed exclusive:

1) the playing of any television set, radio, tape player, phonograph or any musical instrument in such a manner or with such volume as to annoy or disturb the quiet, comfort or repose of reasonable persons. …

5) the use of any drum, loudspeaker or other instrument or device for the purpose of attracting attention, by creation of noise, to any performance, show or sale or display of merchandise.

Id. at 435-436, citing Virginia Beach City Code §23-47.

In making its decision, the Virginia Supreme Court determined that the ordinance further failed to give “fair notice” to citizens, as required by the due process clause of the U.S. Constitution, because it did not contain ascertainable standards, and thus, the ordinance was impermissibly vague. Id. at 440. Further, the Court noted that terms used in the ordinance were inherently vague because they required persons of average intelligence to guess at the meaning of those words, and the ordinance’s terms left the decision up to the police to make the determination of whether the persons considered to be reasonable would be disturbed or annoyed. Id. at 440-441.

Depending on whether the entertainment structure (be it a stage, gazebo, or other) is erected, municipal building codes must also be considered.

This Concert Venue is a Construction Site…

Before the first chord is struck at an outdoor concert, the site is for all intents and purposes, a construction site and it should be treated that way. For large events, multiple large semis bring literally tons of staging, sound, light, and effects equipment to be set up in a short amount of time by trained professionals.

During initial set-up and load-in, and after the show at load-out, people who are not essential to the organized chaos should not be permitted on or near the activities. In my days as a stagehand, I recall seeing one very inebriated individual dodging through the other stagehands onstage after a concert, trying desperately to get backstage (not knowing that the band itself had long before departed). He weaved in and out of moving carts, forklifts, and under descending rigging for a short time before he was swiftly ejected by security. He was oblivious to the fact that directly above him were thousands of pounds of sound and light equipment that were very purposefully coming down, but could have severely injured him as his presence was wholly unanticipated.

For small events, the same principals apply only on a smaller scale, however, safety precautions are no less important. Just because a stage has been built does not mean it can structurally withstand a band, their gear and sound equipment. Imagine the extra live loads applied when the audience is invited onstage by an overly-exuberant cover band frontman to belt out every “bap-bap-ba” of “Sweet Caroline”. Similarly, if an overhang or roof of any type is to be constructed, it should be able to withstand adequate loading, not only for wind, but also for any light or sound rigging that may be applied to it. Consultation with a competent structural engineer regarding the construction of any such structure is essential. Consultation and certain requirements may also be required under local building or zoning code.

As the Indiana State Fair stage collapse in 2011 showed, mother nature can easily overcome staging, resulting in massive injuries and loss of life. In that instance, seven fans died and 58 were injured. Keeping that case in mind, competent personnel and authority is needed. Regardless of the size of the show, there should be people hired who know how to build a stage, safely attach sound, lighting and effects and execute all logistics and operations. There should be some key personnel on staff who can make critical decisions regarding safety and monitor weather. If a storm is coming through, there should be an understanding of who will make the determination of whether the show will go on or if it is time to evacuate.

Training and supervision of stagehands is also key. Oftentimes with larger shows, there will be a call of local individuals to work as stagehands. Sometimes those folks have experience in areas like construction, sound, lights, and electricity; other times, they just are music lovers. Either way, the importance of training cannot be understated. It only takes one person to plug in two ends of an electrical run before it is meant to be connected for disaster to strike. Most times, and although counterintuitive for the untrained stagehand, abandoning a falling member rather than trying to catch it can mean the difference between life and death. Highly specialized tasks such as electricity and rigging should also not be performed by untrained individuals without possessing applicable certifications. Stagehands should not be expected to possess super strength either and teamwork should be enthusiastically utilized.

Fatigue of stagehands and other personnel should be monitored, especially during long calls or in extreme high or low temperatures. Personnel should be offered plenty of fluids, breaks, and time to rest (especially in cases of long calls). Sometimes relieving someone of their duties for the day when they are showing signs of fatigue can be best for all parties and can avoid accidents.

The Show Must Go On (Safely)…

Overarching everything about outdoor entertainment is safety for all:  performers, staffs, and patrons alike. Regardless of the size or nature of the event, everyone wants it to be successful and no-one wants to make front page news as being part of a tragedy.

There are, of course, some inherent dangers involved in attending outdoor musical events: unpredictable or severe weather events, crowd control issues, uneven terrain, other fans obstructing (by standing, sitting, or lying down) pedestrian paths or points of egress, and unsecured seats, just to name a few. Add some drinks or other sense-impairing substances to the mix and there is plenty that could go wrong.

Promoters won’t be able to anticipate every unanticipated risk, however, with plenty of foresight and planning, identifying and reasonably planning for anticipated risks is the key to a successful event.

  1. Tort Liability

At the heart of almost every claim arising out of outdoor musical entertainment is tort liability. In order to sustain a negligence action, a plaintiff must present sufficient factual evidence to establish the existence of a duty, a breach of that duty and injury proximately caused by that breach of duty. Rozowicz v. C3 Presents, LLC, 2017 IL App (1st) 161177, 95 N.E. 3d 1277, 1282, 420 Ill. Dec. 181, 186. (internal citations omitted). Unless a duty is owed, there can be no negligence. Id. at ¶12.

In determining whether a duty exists in a negligence case of that sort, the court considers whether a relationship existed between the parties such that a legal obligation is placed on one party for the other party’s benefit. Id. at ¶13. The factors a court will determine include: 1) the reasonable foreseeability of the injury, 2) the likelihood of the injury, 3) the magnitude of the burden of guarding against the injury, and 4) the consequences of placing the burden on the defendant, with weight given to each factor depending on the circumstances of the particular case. Id.

Further, to establish a prima facie case of proximate cause, the plaintiff must show that defendant’s negligence was the substantial cause of events which produced the injury. Maheshwari v. City of New York, 2 N.Y.3d 288, 295, 810 N.E.2d 894, 898, 778 N.Y.S.2d 442, 446 (2004).

In the world of live music, a concert attendee is considered a business invitee for purposes of determining a duty of care. Rozowicvz,, 95 N.E. 3d 1277 at ¶14. As to their invitees, mass gathering permittees “have a common-law duty to minimize foreseeable dangers on their property, including the criminal acts of third parties.” Maheshwari, 2 N.Y.3d at 294.  The scope of that duty is defined according to the likelihood that such behavior will occur and endanger attendees based on past experience. Bynum v. Keber, 135 A.D. 3d 1066, 1067, 23 N.Y.S 3d 654, 656, 2016 N.Y. (2016) (internal citations omitted).

  1. Adverse Conditions

Adverse conditions abound in outdoor entertainment: rain, mud, poorly lit areas, trees, water slicks, and even people on the ground. There are plenty of opportunities for issues. When an adverse condition is open and obvious, generally, the possessor (landowner, producer, promoter, lessee) does not owe a duty of care to invitees because the landowner could not reasonably be expected to anticipate that people will fail to protect themselves from any danger posed by such obvious condition. Rozowicz, 95 N.E. 3d 1277 at ¶15. “Obvious” means that ‘both the condition and the risk are apparent to and would be recognized by the reasonable person, in the position of the visitor, exercising ordinary perception, intelligence, and judgment.” Id. at ¶16.

There are several exceptions to the open and obvious doctrine. First, there is the distraction exception, which applies when the possessor has a reason to expect that the invitee’s attention may be distracted, so that he or she will not discover what is obvious, or will forget what he or she has discovered, or otherwise fail to protect him or herself against it. Id. at ¶20. This exception applies only when evidence exists from which a court can infer that the plaintiff was actually distracted. Id.

There is also a deliberate encounter exception to the open and obvious doctrine, which refers to a situation where the possessor has a reason to expect that the invitee will proceed to encounter the known or obvious danger because to a reasonable person in his or her position, the advantages of doing so would outweigh the apparent risk. Id. at ¶22. Courts analyzing the deliberate encounter exception to the open and obvious danger doctrine must focus on what the possessor should reasonably anticipate the invitee will do. Id.

In the case of Rozowicz, where the patron did fall and break her ankle after slipping on mud at the outdoor Lollapalooza festival, the Appellate Court of Illinois, First District, First Division, held that: 1) mud was an open and obvious condition, 2) evidence did not support the patron’s claim that she was “actually distracted” to the extent that she would not discover or forget she had discovered the obvious slippery muddy condition, 3) the deliberate encounter exception did not apply to outweigh the obvious risk created by the mud, and 4) the lessee owed no duty to the concert patron to prevent her and other patrons from slipping on the open and obvious slippery conditions created by the mud. Id.

Private parties are not the only ones who have to be conscious of adverse conditions in outdoor entertainment. In the case of Martinelli v. Hopkins, a spectator at an outdoor music concert who was injured by a falling rotting tree that other drunken spectators had caused to fall by knocking down a snow fence brought a negligence action against the town that had issued the entertainment license. Martinelli v. Hopkins, 787 A.2d 1158 (2001). The Supreme Court of Rhode Island determined that the town engaged in egregious conduct, thereby losing immunity under the public-duty doctrine, in granting an entertainment license to the owner of private property, where it was determined that the town failed to inspect the premises despite being on notice of increasing attendance at the festival and also failed to inquire about the projected number of attendees and the amount of free alcohol the owner intended to make available. Id. at 1168.

  1. Crowd Control

Crowd control can be a difficult issue at any outdoor event, especially as promoters are tasked with ensuring that only the people who paid are given access to the otherwise open-air event. Strategically placed barriers can be easily assembled to provide proper crowd control measures. At the same time, however, a possessor of land (whether concert producer, promoter, owner, or operator) generally has a duty to provide a reasonable means of egress from his or her property, regardless of whether that property is an enclosed concert venue or outdoors. See Rozowicz, 95 N.E. 3d 1277 at ¶17.

Occasionally, and unfortunately, individuals can get injured or killed when attending an outdoor musical event, for a variety of reasons. During the outdoor Roskilde Festival 2000 in Roskilde, Denmark, a rain-drenched crowd pushed towards the stage forming a human stampede in slippery and muddy conditions. In all, nine music fans lost their lives and twenty-six were injured. Another example is the electronic music festival Love Parade in 2010 in Duisberg, Germany. The festival grounds, which consisted of a route had a reported capacity of 250,000, however reports of up to 1.4 million attendees were admitted. As attendees approached a tunnel, a massive crush of bodies ensued and twenty-one people died. Insufficient crowd control was cited as the cause.

The possessor owes a duty to invitees to provide an adequate degree of general supervision of the crowd invited by exercising reasonable care against foreseeable dangers under circumstances prevailing. See Rotz v. City of New York, 143 A.D.2d 301, 304, 532 N.Y.S.2d 245, 247 (1988). In order to show that negligent crowd control by a property possessor was a proximate cause of a guest’s injuries, the injured guest must establish that he or she was unable to find a place of safety or that his or her free movement was restricted due to alleged overcrowding conditions. Santodonato v. Clear Channel Broadcasting, Inc., 26 A.D.3d 543, 544, 809 N.Y.2d 608 (2006).

The outcomes of various real-world scenarios can vary widely and are unsurprisingly highly fact intensive. In the Rotz case, Mr. Rotz was in attendance at a free Diana Ross concert held in New York’s Central Park. Rotz, 143 A.D.2d at 302. While he was standing during the performance, completely surrounded by people “jammed in like sardines”, a commotion erupted (with someone allegedly shouting “get out of the way, there’s a lion, a lion”) and “everybody started running and they just ran on top of everybody.” Id.  In the course of the stampede, Mr. Rotz was unable to move and was knocked down and trampled upon, suffering a serious fracture to his left leg. Id. The Court noted that “the inquiry as to what risks were reasonably to be perceived must be framed in terms of what risks or dangers should reasonably have been anticipated by the City from the gathering of an extremely large crowd to hear a free concert by a renowned entertainer in Central Park on a summer evening. In light of common contemporary experience, a jury could certainly find that, in the absence of adequate supervision and control of that crowd, it was reasonably foreseeable that disorder, unruliness, a melee or riot could erupt from some cause ignited by the vagaries of myriad individuals “jammed together” in a heightened atmosphere.” Id. at 305. The Court continued by stating that the “jury could reasonably find that the risk of a riot or a stampede could have been averted, or its consequences contained by adequate crowd control measures which would have inhibited or prevented the eruption of precipitating incidents such as individual or group altercations, arguments or other provocative causes and that defendant City failed to exercise the reasonable care necessary under the circumstances to avoid that foreseeable risk.” Id.

An opposite outcome occurred in the Santodonato case, in which a woman who joined a large crowd outside a radio station where a celebrity was falsely represented to have been giving an in-person appearance, fell during crowd movement and sustained a fatal head injury. Santodonato, 26 A.D. 3d at 544. In that case the Court determined that the owner’s alleged negligence in controlling the crowd was not a proximate cause of the spectator’s fall, nor was the radio station’s misrepresentation regarding the celebrity’s in-person appearance. Id. at 545. In making its determination, the Court noted that the evidence showed that there were many individuals present who safely avoided the flow of the crowd, including testimony that indicated that no-one was within the decedent’s immediate vicinity in the moments preceding her accident. Id. The Court further noted that “there can be no liability when the defendant’s act ‘merely furnished the condition or occasion upon which a plaintiff’s injuries were received” and since the plaintiff did not demonstrate a “substantial cause of the events which produced the decedent’s injury,” the plaintiff did not meet his burden. Id.

  1. Safety and Security

Although landowners and permittees have a common-law duty to minimize foreseeable dangers on their property, including criminal acts of third parties, they are not insurers of visitor safety. Maheshwari, 2 N.Y.3d 288, 294, 810 N.E.2d 894, 897, 778 N.Y.S.2d 442, 445. Foreseeability and duty are not identical concepts; foreseeability merely determines scope of duty once duty is determined to exist. Id. As touched on above, in cases arising out of injuries sustained on another’s property, the scope of the possessor’s duty is defined by past experiences and the likelihood of conduct on part of third persons which is likely to endanger the safety of the visitor. Id.

In the Maheshwari case, randomly and without provocation, four unidentified people attacked the plaintiff in the parking lot at a music festival in a New York City park. The Court was tasked with determining whether the plaintiff could hold the City and the concert producer liable. The Court of Appeals of New York determined that the unprovoked assault was not foreseeable as the result of any security breach, as required to hold the City and concert producer liable. In making that determination, the Court noted that the types of crimes committed at past concerts were of lesser degree and would not have led the City and the producer to predict that such an attack could have occurred or could have been prevented. Id. at 294, 897-898, 445-446.

A similar outcome to Maheshwari was noted in Florman v. City of New York, where a concert attendee who was criminally assaulted with a car by a driver in a stadium parking lot brought an action against for negligence against the City, the concert producer and the parking service. Florman v. City of New York, 293 A.D.2d 120, 741 N.Y.S.2d 233 (2002). The Supreme Court, Appellate Division, First Department, New York ruled: 1) the offender’s actions were not a foreseeable consequence of city and concert producer’s alleged failure to provide adequate security, and 2) the attendee failed to establish that inadequate security was a proximate cause of her injuries. Id. at 126-127, 238-239.

Where people go to enjoy music, oftentimes they also bring with them mind-altering substances. Producers and promoters, in turn have a duty to exercise reasonable care in curtailing the use of such illegal drugs. See Bynum, 135 A.D. 3d at 1067 (Where plaintiffs successfully allege that defendants knew or should have known of the widespread presence and use of illegal drugs at a music festival, the plaintiff adequately stated a cause of action for negligence based on the defendant’s failure to exercise reasonable care in curtailing the use of illegal drugs on the festival grounds.) Competent and diligent security can aid in such curtailment.

In fact, hiring competent and diligent security is essential. When I say “competent and diligent security”, I mean not some guy who is a regular at the bar and is getting paid in free beer that is being consumed as he working his shift. Instead, I mean someone who has experience in entertainment security and, perhaps most importantly, is sober. Being competent does not only mean keeping people out of certain places with brute force. It also means being able to intelligently think through a scenario and act accordingly. The Rhode Island Station Nightclub fire which killed 100 people is a great example of the competent security requirement. As the fire intensified, one security guard blocked a critical exit typically meant for band members only, likely because those were his limited instructions.[2] It was not until a panicked individual forced past the security guard that he reluctantly abandoned his post. It is unknown how many people’s lives may have been saved had that security guard allowed patrons to exit through the stage door.

Outdoor concert producers or promoters will have to be cognizant that if challenged, they will have to meet their initial burden that they did indeed provide adequate security measures. A good example of such met burden occurred in Marrero v. City of New York, et. al., where after the complainant made allegations of injuries sustained at an outdoor Ozzfest concert, the respondents submitted evidence showing that meetings were held with the NYPD to assess security plans proposed, that 215 personnel to secure the concert were provided, and that security was sufficient for a crowd of almost three times the actual crowd in attendance. Marrero v. City of New York, et. al., 102 A.D. 3d 409, 958 N.Y.S.2d 51 (2013).

Conclusion

Outdoor musical entertainment can be loads of fun and can produce some of life’s best memories and experiences. In planning those events, however, it is critical to perform a well-reasoned cost/benefit analysis so that risk is not allocated disproportionately. It is not worth risking injury, loss of life, and ultimate litigation just to try to get a few extra dollars in anticipated revenues by overcrowding, cutting corners on safety or security, or forging ahead in opposition of mother nature. True unanticipated accidents may happen, however, with the right amount of planning and risk management, there is no reason a successful outdoor event of any scale cannot be accomplished.

Bryan T. Kroes is a senior associate attorney with Hurtado Zimmerman SC and is a founding member and Treasurer of the Wisconsin Entertainment Lawyers Association. For more information, e-mail him at bkroes@hzattys.com or call him at 414-727-6250.


[1]An enormous debt of gratitude must also be given to Andrew Lukowski and Attorney Yu Ha Kim for their assistance with this article.

[2] Barylick, John. Killer Show. ForeEdge. 2012. P. 73-74.

 

The information contained on this website is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors. You should not act or refrain from acting on the basis of any content included on this website without retaining an attorney.

Not the Same Old Song: Mechanical Licensing Collective Offers New Blanket License for Digital Uses of Music

the mlc logoSongwriters, lyricists, composers, and music publishers now have a new and ideally more consistent way to collect their fair share of mechanical royalties from streaming and download services in the U.S.

On Jan. 1, the Mechanical Licensing Collective, or MLC, began full operations by offering its new blanket mechanical license, allowing access to its public search for musical works, and opening registration for its online portal.

The MLC marks a significant milestone in a long battle to ensure that songwriters, composers, lyricists, and music publishers receive fair payment for the exploitation of their music in the digital and streaming age.

Copyright law historically was predicated on the idea that music would be enjoyed through a physical product. The technology driving music use, however, progressed at a rate much more quickly than the law and, as such, loopholes were discovered when various types of music delivery were developed that were not dealt with in the law. Congress revised copyright law in the late 1990s to account for digital downloads, but soon thereafter, streaming services (e.g. Spotify) increased in popularity, until those services became one of the primary vehicles for music consumption.

Since streaming was not specifically dealt with in copyright law, digital-service providers set up their own royalty-payment systems, which in turn, meant far less money would be paid to songwriters, composers, lyricists and publishers. For example, one stream could yield between 1/3 to 1/2 of a penny. Record companies, song performers, music publishers, and songwriters all take a share of each stream.  

Seeing declining product sales and downloads together with an increase in music consumption through streaming, many artists and advocacy groups became outspoken that resulting minimal royalties were unfair and made it difficult for musicians and songwriters to make a living from their music. To remedy the matter, Congress unanimously passed the Music Modernization Act of 2018, which revised copyright law by establishing a new compulsory blanket licensing system for digital-service providers offering permanent downloads, limited downloads and interactive streaming.

Under the MMA, the Register of Copyrights was directed to designate an entity to administer the new license, in addition to developing and maintaining a database of musical works that is both publicly available and comprehensive. In 2019, the Register of Copyrights designated the MLC as that entity, and Jan. 1, 2021 was set as the date the MLC was charged with offering the blanket license. 

To understand exactly what the MLC administers requires an understanding of copyright law as related to musical works. Every musical work or “song” contains two distinct copyrights: 1) the composition, which is comprised primarily of music, including any accompanying words, and 2) the sound recording, which is the recording or fixation of performance of a composition. There can be many sound recording copyrights, but only one composition copyright. For example, the song, “I Will Always Love You” was written by Dolly Parton. Dolly and her own music publishing company, Velvet Apple Music, own the composition copyright. When Whitney Houston covered the song, her record label obtained a copyright in her sound recording, but not in the composition itself. The MLC only licenses musical compositions, but not sound recordings.

There are several types of licenses for musical works. The MLC, though, is only dealing with mechanical licenses, which are licenses that allow a musical composition to be reproduced and distributed, without accompanying visual images. Traditionally, that right had applied to physical medial such as vinyl, CDs or cassettes, but it also applies to digital media. The MLC does not administer a license for music that accompanies visual images, such as what is offered by YouTube. The MLC also only deals with interactive streaming, which lets listeners choose whichever song they would like to listen to.

As to the nature of the blanket license itself, the MLC administers one license designed to permit a licensee to use any composition in a particular catalog. Without a blanket license, the licensee must individually obtain from each applicable copyright owner a license for every song it wishes to use on its platform. As pre-MMA practices demonstrated, obtaining licenses individually was not practical. The blanket license mechanism is much more efficient and is similar to the way musical performing-rights organizations such as ASCAP, BMI, SESAC and GMR administer licenses for public performances of compositions.

Because of the global nature of the Internet, music can be broadcast and received with ease nearly anywhere in the world. The MLC, however, only operates to collect mechanical royalties in the United States. 

On the Jan. 1, 2021 license availability date, any digital music provider that offers interactive streaming or downloading may obtain a blanket license directly from the MLC. Examples of existing companies include Spotify, Apple Music, or Amazon Music. The license is not limited to existing companies and new companies seeking to provide digital-music services can connect with the MLC to obtain a license for their intended services.

As songs are streamed or downloaded using digital-music providers, the provider sends a use report to the MLC, which in turn employs that data to calculate applicable royalties due to songwriters, lyricists, composers and publishers. The royalties the MLC will pay to songwriters and publishers fall under 17 U.S.C. §115 and the MMA requires the Copyright Royalty Board to establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and willing seller. This standard is intended to accurately reflect a fair price for mechanical royalties and replace the policy-based rates previously set by the streaming services themselves.

If songwriters, lyricists, composers, or music publishers have registered with the MLC, meaning they have assigned a right to the MLC to collect mechanical rights on their behalf, the MLC will distribute royalties on a monthly basis. This monthly payment calendar is much more frequent than the quarterly or even bi-annual payments some songwriters receive from other royalty sources. The key, however, is that the songwriters, lyricists, composers and publishers must register with the MLC and register all compositions for which they would like the MLC to collect royalties. This includes providing the MLC with information on songwriter, lyricist, composer, and publisher identities and ownership splits and making sure the MLC has other unique song-identification information. If a songwriter is already represented by a large publisher, that publisher may already be registered with the MLC to collect royalties on the songwriter’s behalf. It is still a good idea, however, for a songwriter, lyricist or composer to check their registered compositions to ensure there is no missing or incorrect data. There is no fee to register with the MLC to begin collecting royalties.

Although still in its infancy, the MLC has already done a fantastic amount of work prior to Jan. 1, 2021, including a data-quality initiative and numerous webinars, to ensure a smooth transition into full operations. While it may take a little time to adapt to the new procedures, one this is for certain – the MLC is a much-needed and welcomed step in the right direction to ensuring that songwriters, lyricists, composers and music publishers are adequately compensated for their compositions.

For more information on the MLC, including access to the public search of registered compositions or to register as a songwriter, composer, lyricist or music publisher, go to: https://www.themlc.com/.

 

Bryan Kroes is and associate attorney with Hurtado Zimmerman SC and is a founding member and treasurer of the Wisconsin Entertainment Lawyers Association. For more information, email him at or call him at 414-727-6250.

 

The information contained on this website is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors. You should not act or refrain from acting on the basis of any content included on this website without retaining an attorney.

Construction and Copyright, Part 2: Practical Considerations

Construction attorneys need to be familiar with intellectual property principles and copyright matters associated with their client’s businesses. In part 2 of this two-part series, Bryan Kroes discusses additional practical copyright considerations, including trademarks and patents.

In Part 1, we discussed copyright basics and architectural plans as one asset that could be protected by copyright. See Construction and Copyright, Part 1: Don’t Forget about IP.

Here in Part 2, we discuss additional practical copyright considerations, including that designs and architectural works aren’t the only copyrightable material to come out of the construction process.

Photos and Videos

Many construction companies want to promote their business using “before and after” or progress photographs of their work. If the construction company hires a third-party photographer or videographer to photo-document the construction site, absent an understanding to the contrary, the photographer owns the photos or video, not the construction company.

In these situations, a contract should be developed identifying the construction company’s right to use the photographs and the rights that are conveyed and retained by the photographer or videographer.

In the construction contract with the owner, the construction company should also identify whether it has a right to use pictorial depictions of the owner’s property, and to what extent it can use those works.

Marketing Materials

Going hand and hand with photographs and videos are a construction company’s marketing materials.

If a construction company creates its own marketing materials – whether website content, pamphlets, presentations, sales sheets, or literature – all may be afforded copyright protection.

Although notice via a copyright symbol (©) is no longer required under U.S. copyright law, it is never a bad idea to label all copyrightable marketing materials with the copyright symbol, to put the public on notice as to the company’s ownership of the copyrighted works.

If a company utilizes its in-house staff to create its copyrightable works, whether designs, marketing materials, websites, presentations, contracts, templates, or company-specific literature, the company should establish either via employee handbook or separate agreement whether the works are works made for hire and as such, owned by the company or the individual author.

Using Outside Copyrighted Material

While a good deal of original content may be created for marketing purposes, companies should be careful to not use any elements in their marketing materials that are owned by someone else.

A common misperception is that if a photo, video or song is found online, then it is fair game to put it in your marketing materials or on your website. On the contrary, just because you found a nice photograph or song online that fits your marketing or presentation aesthetic, does not mean you can use it without permission from the owner. You will have to either obtain a license or find an alternate work to use.

Finding the perfect licensable photo, video, or music for your marketing materials is actually a lot easier than you may think. In fact, Wisconsin is an underrated hotbed of creativity, and there are many wonderfully talented artists, photographers, videographers, and musicians who would love to discuss using their services for your marketing materials.

Other Copyrightable Materials

Copyright protection can also extend to other items a construction company uses in its day-to-day business – including contracts, proprietary documents, and certain forms so long as there is a de minimis expression of originality. If you create an original use or arrangement of words, then there is no reason you cannot claim a copyright in that particular arrangement. In fact, many of the construction contract suites (i.e., AIA and ConsensusDocs®) claim copyright in their contracts.

While many companies use existing project management or accounting computer programs, or software such as ProCore® or QuickBooks®, occasionally, a construction or design company may have an in-house staff person who develops a new computer program or software to aid in project management or accounting.

In such cases, copyright protection for that new program or software – to the extent it is original and does not infringe on another copyright – can and should be explored. A word of warning, however: if the new program or software incorporates or interfaces with elements of another existing program or software to improve functionality, then that new program or software may actually be infringing.

What Cannot Be Copyrighted

While there are many things that can be given copyright protection, a few things cannot:

  • ideas – the expression of an idea can achieve copyright protection, but the idea itself cannot;
  • website domain names;
  • facts and commonly known information, including historical facts;
  • functional aspects of a work. For example, if an aesthetic design has been dictated by functional concerns, that design may not achieve copyright protection;
  • works of the U.S. government; and
  • blanks and forms that do not contain a degree of creativity or original expression.

This list is not exhaustive, but merely representative.

Trademark (Not Copyright)

Another misconception is that you can copyright a business name, title, slogan, or logo. Trademark, not copyright law, affords protection for those items.

Like copyrights, trademarks are a federally protected intellectual property right. The Lanham Act1 defines federal trademark protection and trademark registration rules, in addition to granting the United States Patent and Trademark Office (USPTO) administrative authority over trademark registration.

Trademarks – along with their closely-related cousins, service marks, and trade dress – include any word, name, symbol, device (including even sounds and scents), or any combination thereof, used to or intended to identify and distinguish the goods or services of one seller or provider from those of others, and to indicate the source of goods or services.

Simply put, a trademark is a brand name. Generally, a person or entity obtains trademark rights and ownership via continued use – registration makes a public record that a mark is being used. To obtain a federal trademark registration, the registrant must show use of that source designator in interstate commerce.

Wisconsin also has its own state-specific trademark registration, codified in Wis. Stat. chapter 132.

Patent or Trade Secrets (Not Copyright)

Copyright law also does not cover methods or systems of operation – for those, look to patent or trade secret law.

United States patent law is codified in Title 35 of the U.S. Code, and is authorized by the U.S. Constitution, Article One, Section 8, clause 8. The United States Patent and Trademark Office (USPTO) holds administrative authority over granting patents.

Any person who invents or discovers a new or useful process, the machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent after a successful patent prosecution.

Wisconsin’s Uniform Trade Secret Act, located in Wis. Stat. section 134.90, is meant to provide rights and remedies for espionage, theft, bribery, misrepresentation, and breach or inducement of a breach of a duty to maintain secrecy over information, including a formula, pattern, compilation, program, device, method, technique, or process.

Conclusion: Something to Keep in Mind

Copyrights and other intellectual property may not be the first thing to come to mind in the context of construction law, but they certainly are important to ensure a well-rounded and complete set of legal services.

This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.


Endnote

1 15 U.S.C. §1051, et seq.

 

The information contained on this website is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors. You should not act or refrain from acting on the basis of any content included on this website without retaining an attorney.

Construction & Copyright, Part 1: Don’t Forget About Intellectual Property

Construction attorneys should be familiar with intellectual property principles and copyright matters associated with their clients’ businesses. In part 1 of this two-part series, Bryan Kroes provides an introduction to copyright and how it intersects with construction projects.

Construction projects, by their very nature, operate in the world of tangible property. Quite obviously, tradespersons use machinery and tools to fit building materials together to construct physical buildings.

With material goods acting as both the figurative and literal foundation of the industry, construction companies, and by extension, their construction contracts, could easily focus solely on the tangible elements of each project.

While the tangible property is absolutely essential for a successful construction project, construction companies should not overlook the equally important world of intangible intellectual property. Intangible property rights not only comprise the basis of a commercially successful construction company but are also critical in providing ongoing revenue streams.

Construction attorneys similarly should acquaint themselves with intellectual property principles pertaining to their client’s business and be prepared to advise or refer those clients accordingly.

There are four general categories of intellectual property: copyrights, trademarks, patents, and trade secrets. An exhaustive survey of each category would far outweigh the scope of this article, so I will focus solely on copyrights.

Copyright Law – an Introduction

United States copyright law is contained in Title 17 of the United States Code, with protection being afforded to original works of authorship fixed in any tangible medium of expression, now known or later developed, either directly or with the aid of a machine or device.1

Works of authorship include the following categories:

• literary works;
• musical works, including any accompanying words;
• dramatic works, including any accompanying music;
• pantomimes and choreographic works;
• pictorial, graphic, and sculptural works;
• motion pictures and audiovisual works;
• sound recordings; and
• architectural works.

Copyright in a work protected under copyright law vests initially in the author or authors of the work.2 Works can also be considered “works made for hire” in which case, the employer or other person for whom the work was prepared is considered the author for purposes of copyright law, and, unless the parties have expressly agreed otherwise in a written instrument, that person or entity for whom the work was created owns all of the rights in the copyright.3

The owner of a copyright has the exclusive rights to do and authorize any of the following:

• reproduce the copyrighted work in copies;
• prepare derivative works based on the copyrighted work;
• distribute copies of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;
• in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;
• in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and
• in the case of sound recordings, to perform the copyrighted work publicly by means of digital audio transmission.

The author of the work (whether the person who created it or the person for whom it was created, in the case of a work made for hire) does not have to register the work with the U.S. Copyright Office in order to have copyright ownership right.

Instead, copyright vests in the author the moment the work is fixed in a tangible format, and, for works created after Jan. 1, 1978, last for the life of the author plus 70 years.4 In the case of joint works prepared by two or more persons, the copyright lasts for the life of the last surviving author, plus 70 years.5 For works made for hire, copyright protection lasts for 95 years from the year of its first publication, or 120 years from the year of its creation, whichever expires first.6

Benefits of Copyright Registration

Although the owner or author is not required to register a work, registration with the U.S. Copyright Office does have its significant benefits.
First, registration means prima facie evidence of the validity of the copyright.7 Registration also gives the owner of the copyright the ability to bring a civil action for infringement, and the owner could be awarded statutory damages of $750 to $30,000 per infringing work, together with attorneys’ fees and costs.8

As actual damages can be difficult to prove, and litigation can be long and complex, the ability to collect those statutory damages, costs, and attorneys’ fees are a significant reason to register a copyright. With the passing of the Copyright Alternative in Small-Claims Enforcement (CASE) Act in late 2020, a small claims procedure is now established that, once up and running, may provide an affordable remedy to copyright owners for infringement.

Application to the Construction Industry

Because so much of copyright law applies to the creative arts, it is easy to see why some may not immediately recognize application to the construction industry. However, the opportunities are many.
Perhaps the most obvious application is that “architectural works” are called out specifically in copyright law as a protectable class. An “architectural work” is defined as the “design of a building as embodied in any tangible medium of expression, including building, architectural plans, or drawings.”9 This includes the overall form, as well as the arrangement and composition of spaces and elements in the design, but does not include individual standard features.

Regardless of a company’s business model, there is great value in protecting any architectural work. For example, a design professional creating a unique architectural work should protect their plans to preserve rights and remedies if an infringing work emerges elsewhere. Certain companies with a portfolio of architectural works (for example, subdivision homebuilders) also may want to protect their architectural works as a company asset. Since the duration of copyright protection lasts for many years, the owner of an architectural work can both protect and exploit their work to their own financial gain and stability well after initial creation.

Considerations for Copyright Provisions in Construction and Design Contracts

Construction and design contracts should include copyright provisions by clearly identifying who owns the design and what types of uses are permitted.
Although an end-user may sanction and pay for architectural work, they may not be the owner of the design – a fact that could create quite a bit of misunderstanding or lead to a dispute if not addressed at the initial contracting stage.

If a work is going to be work made for hire, then that needs to be unequivocally stated. If the designer is going to retain the copyright ownership in the work, however, there is nothing stopping them from using that same design or elements thereof later on in a similar design, subject to scenes a faire (standard element) restrictions.

As such, if an owner has sanctioned a highly unique building where the design professional retains copyright ownership, the owner needs to address whether or not the same design can be reused again, if there is a geographical restriction on such use, and if there will be consideration for such restriction. If the design professional grants a license to another person to use the architectural work, any limitations on that license should also be clearly stated in the contract.

Due to the exclusive rights afforded to copyright owners, if a particular design is going to have any building life-cycle use, these additional uses need to be addressed at the initial contracting stage.

For example, if someone other than the copyright owner will create as-built drawings or utilize the drawings for operations and maintenance purposes, derivative work issues could potentially arise, if not addressed in the contract.

Building Information Modeling and Copyright Considerations

Building Information Modeling (BIM) presents its own unique challenges when it comes to copyright.

In fact, ConsensusDocs has created a Building Information Modeling Addendum (ConsensusDocs® 301) to accompany its suite of construction contracts. The default language in the addendum contemplates that each contributor grants to the owner and the other contributors limited, nonexclusive licenses to reproduce, distribute, display, make derivative works of, and otherwise use certain model elements for that particular project only. However, that language can be negotiated and modified to expand or limit rights.

BIM, by its very nature, includes multiple people contributing to what is intended to be a unified end result. As such, considerations of whether the resulting model will or will not be considered a joint work need to be addressed. Similarly, risk allocation among the various model contributors must be addressed.

Read more in Part 2


Endnotes

1 17 U.S.C. §102(a)

2 17 U.S.C. §201(a)

3 17 U.S.C. §201(b)

4 17 U.S.C. §302(a)

5 17 U.S.C. §302(b)

6 17 U.S.C. §302(c)

7 17 U.S.C. §410(c)

8 17 U.S.C. §§ 504-505.

9 17 U.S.C. §101

 

The information contained on this website is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors. You should not act or refrain from acting on the basis of any content included on this website without retaining an attorney.

THE CASE ACT: New law could provide an affordable remedy for copyright infringement

copyright imageCopyright protection may not be an everyday topic for construction and design companies, but it certainly should be considered as part of a comprehensive business plan.

Any person or company that owns copyrightable material, whether a construction company, architecture or design firm or marketing firm, may enjoy the copyright protections afforded under U.S. copyright law. Protectable material can include architectural works and designs, construction contracts, progress photos and videos, proprietary documents, and marketing materials, to name a few.

Under the typical copyright enforcement system, an owner of copyrighted material that wants to pursue an action for infringement is limited to federal court as the venue for those claims. The process can be not only lengthy but also burdened with significant attorneys’ fees and costs. For many creators of content that is otherwise properly protected under copyright law, the prospective costs of litigation are prohibitive. Effectively, some copyright owners are left without an affordable remedy to enforce their rights.

Starting in 2016, legislators started exploring a way to provide copyright owners with an affordable remedy for small copyright-infringement and misrepresentation claims. The first attempt was the CASE Act of 2016, which was never passed. On May 1, 2019, two companion bills were introduced in the House of Representatives and Senate, known collectively as the Copyright Alternative in Small-Claims Enforcement Act of 2019, or the CASE Act of 2019 for short. The act sat idle for the rest of 2019 and most of 2020, without good prospects. Then, in an interesting turn, the act was added to Congress’s omnibus spending and COVID-19 relief bill, which was passed on December 21, 2020, and signed into law on December 27, 2020.

Still very much in its infancy and without having been tested, the CASE Act could provide copyright owners with an affordable remedy to enforce their rights.

Copyright claims board and scope

The CASE Act sets up a voluntary small-claims board within the copyright office to give copyright owners an alternative method to resolve claims for all categories of copyrighted work. Under the act, three full-time copyright claims officers will serve on the copyright claims board and not fewer than two full-time copyright claims attorneys will assist in the administration of the board. The copyright claims officers must have substantial experience in the evaluation, litigation or adjudication of copyright-infringement claims and have represented or presided over a diversity of copyright interests, including those of both owners and users of copyrighted works.

The board will make rulings with respect to claims, counterclaims, and defenses of copyright infringement under the copyright law as well as claims for misrepresentation.

Damages

Allowable damages before the board would be up to $30,000, with a subcap of $15,000 in statutory damages per work infringed, if the work was registered in a timely manner pursuant to copyright law. If the work was not registered in a timely manner, statutory damages would not exceed $7,500 per work infringed, or a total of $15,000 in any one proceeding. The board would also be able to award actual damages and lost profits for infringement in accordance and may consider, as an additional factor in assessing damages, whether the infringer has agreed to cease or mitigate the infringing activity. Also, the board would be able to further order that an infringing party ceases its infringing conduct.

Except in cases of bad faith, the parties would bear their own attorneys’ fees and costs. Should it be found that a party acted in bad faith by pursuing a claim, counterclaim, or defense for a harassing or other improper purpose, then the board could award reasonable attorneys’ fees and costs to any adversely affected party in an amount of not more than $5,000.

Statute of limitations and registration requirements

Claims will need to be commenced within three years after they accrue. There will be two conditions required before filing a case: a) the owner of the copyrighted work at issue must first deliver a completed application, deposit, and fee for registration to the copyright office, and b) the registration must have either been issued or not refused. The board may not issue a determination until a) a registration certificate has been issued by the copyright office, submitted to the board, and put on offer to the other parties to the proceeding, and b) the other parties have been provided an opportunity to deal with the registration certificate. If the registration certificate for the work is pending, the proceeding will be stayed until the certificate can be submitted to the copyright claims board.

Administration

Proceedings before the board will be conducted at the offices of the board without requiring in-person appearances by parties or witnesses. Instead, proceedings will take place by means of written submissions, hearings, and conferences carried out through Internet-based applications or other telecommunications. By the time of this writing, the practical mechanics for such hearings have not yet been fully developed.

Opt-out feature

A special feature of the CASE Act is its opt-out feature, under which a respondent has sixty days from the date of service of a complaint to provide written notice that it opts out of the process. If the respondent opts out in a timely manner, the proceedings will be dismissed without prejudice.

Smaller claims

Consideration has also been given to very modest claims having total damages not exceeding $5,000, exclusive of attorneys’ fees and costs. In those cases, the CASE Act instructs the register of copyrights to establish regulations to provide for review by at least one copyright claims officer, rather than the entire board.

Failure to pay damages and appeals

If a party fails to pay damages or otherwise comply with the relief granted by the board, the prevailing party has one year after the date of final determination to apply to the United States District Court for the District of Columbia, or any other appropriate federal U.S. district court, for an order confirming the relief awarded.

In practice

Although the CASE Act may be appealing in theory, it remains to be seen how the administration of cases will proceed in practice. There may still be some administrative hurdles.

At first glance, a process relying heavily on written submittals may not be attractive to people – unrepresented litigants, for instance – who are not used to standard court proceedings.

The opt-out feature could also be problematic. If a respondent simply opts out, the copyright owner’s sole avenue for relief becomes the federal district court they sought to avoid in the first place.

As the age of COVID has taught us, there remain technological impediments to remote hearings. These include dropped calls, distorted video and audio, and delayed signals that can make electronic communications difficult or impossible. A court hearing plagued with technical defects could unduly result in prejudice toward whichever party is having the issues.

Additionally, file-transfer protocols and file-size limits could cause trouble with exhibit uploads, storage, and presentations. For example, architectural drawings tend to be very large not only when they’re in a physical format but also when they’re submitted as electronic files. Compression into another file type could affect a critical component of the work at issue or even be presented as tampering or spoliation of evidence.

Another concern may be board capacity and backlogs. Depending on popularity, a single three-person Copyright Claims Board and two-attorney support staff may not be enough to handle a multitude of small cases in a timely fashion.

Despite some process concerns, the CASE Act deals with a great many procedural issues and, in a year when it seemed like no issue could bring political parties together, has garnered bipartisan support to reform a copyright enforcement system that was not practical for the very people who need most to benefit from its protections. The CASE Act, therefore, could be a much-needed resource for content creators and small businesses alike, giving them affordable and attainable protection of their copyrighted works.

For more information about the CASE Act, or copyright protections presently available, reach out to Bryan Kroes at Hurtado Zimmerman SC or call 414-727-6250.

 

The information contained on this website is provided for informational purposes only, and should not be construed as legal or tax advice on any subject matter. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors. You should not act or refrain from acting on the basis of any content included on this website without retaining an attorney.