BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 6
                                                                  Page  1

          Date of Hearing:  June 18, 2013

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                Bob Wieckowski, Chair
                       SB 6 (Lieu) - As Amended: April 8, 2013

                                  PROPOSED CONSENT

           SENATE VOTE  :  35-0
           
          SUBJECT  :  BUSINESS: RESIDUAL PAYMENTS

           KEY ISSUE  :  SHOULD THE LEGISLATURE REINSTATE, UNTIL JANUARY 1,  
          2015, PROVISIONS OF THE UNIFORM COMMERCIAL CODE THAT ENSURE  
          CONTINUING PAYMENT OF RESIDUALS TO PERFORMERS, WRITERS, AND  
          DIRECTORS BUT THAT SUNSET AT THE END OF 2012?

           FISCAL EFFECT  :  As currently in print this bill is keyed  
          non-fiscal.

                                      SYNOPSIS
          
          This non-controversial bill seeks to reinstate certain  
          provisions of California's Uniform Commercial Code which had  
          been operative for the past twelve years, but that sunset on  
          January 1, 2013 when no legislation was timely introduced to  
          extend their operation past that date.  According to the  
          directors, writers, and screen actors' guilds that are  
          sponsoring this bill, it is necessary to undo last year's repeal  
          of Section 9321 of the Commercial Code and restore the previous  
          language of this section, which ensures the continued payment of  
          residuals to its members by distributors of films and media when  
          such works are broadcast or shown.  The bill is also supported  
          by the Motion Picture Association of America, representing  
          distributors who are responsible for making residual payments to  
          guild members pursuant to collective bargaining agreements with  
          the guilds.  It is believed that a more permanent agreement  
          governing residual payments may be reached before the proposed  
          sunset date of January 1, 2015, eliminating the need for future  
          extensions of the sunset date.  In the meantime, however, both  
          sides agree that this urgency bill is needed to quickly restore  
          protection for residual payments while the stakeholders near  
          completion of negotiations to secure more permanent terms for  
          handling such payments.  There is no known opposition to this  
          bill, and it received no "No" votes in the Senate.








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           SUMMARY  :  Re-enacts repealed provisions of the Uniform  
          Commercial Code relating to the rights that certain licensees  
          take under a nonexclusive license where there is a security  
          interest in a general intangible.  Specifically,  this bill  :    

          1)Defines "licensee in ordinary course of business" as a person  
            that becomes a licensee of a general intangible in good faith,  
            without knowledge that the license violates the rights of  
            another person in the general intangible, and in the ordinary  
            course from a person in the business of licensing general  
            intangibles of that kind. 

          2)Provides that a person becomes a licensee in the ordinary  
            course if the license to the person comports with the usual or  
            customary practices in the kind of business in which the  
            licensor is engaged or with the licensor's own usual or  
            customary practices.

          3)Provides that a licensee in ordinary course of business takes  
            its rights under a nonexclusive license free of a security  
            interest in the general intangible created by the licensor,  
            even if the security interest is perfected and the licensee  
            knows of its existence.

          4)Provides that a lessee in ordinary course of business takes  
            its leasehold interest free of a security interest in the  
            goods created by the lessor, even if the security interest is  
            perfected and the lessee knows of its existence.

          5)Establishes a sunset date of January 1, 2015 for these  
            provisions, and makes them retroactively operative on January  
            1, 2013, negating their prior repeal on that date.

          6)States the intent of the Legislature to negate the repeal on  
            January 1, 2013 of existing provisions within Section 9321 of  
            the Commercial Code, in order to ensure economic stability and  
            continuity for the purposes of contract interpretation.

           EXISTING LAW  , Section 9321 of the Commercial Code, provides that  
          a lessee in ordinary course of business takes its leasehold  
          interest free of a security interest in the goods created by the  
          lessor, even if the security interest is perfected and the  
          lessee knows of its existence.   









                                                                  SB 6
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           COMMENTS  :  This non-controversial bill seeks to reinstate  
          certain provisions of California's Uniform Commercial Code which  
          had been operative for the past twelve years, but that sunset on  
          January 1, 2013 when no legislation was timely introduced to  
          extend their operation past that date.  According to the  
          directors, writers, and screen actors' guilds that are  
          sponsoring this bill, it is necessary to undo last year's repeal  
          of Section 9321 of the Commercial Code and restore the previous  
          language of this section, which ensures the continued payment of  
          residuals to its members while they continue to engage in  
          negotiations to secure more permanent terms for handling such  
          payments.

           Stated Need for the Bill.   This bill is co-sponsored by the  
          Directors Guild of America, Screen Actors Guild-American  
          Federation of Television and Radio Artists, and Writers Guild of  
          America (hereafter "Guilds").  According to the sponsors,  
          Section 9321 is important to the financial interests of their  
          members because:

               It is through the Guilds that writers, performers and  
               directors receive continuing payments, called residuals,  
               which are based on revenue derived from the continuing  
               exploitation of the works they create (e.g., home video,  
               new media and television exploitation).  The Guilds rely on  
               security interests or liens to protect payment of  
               residuals.  If distributors are able to take their licensed  
               rights free of Guild liens, the ability of the Guilds to  
               protect our members' financial interests will be  
               significantly impaired, even when those distributors are  
               contractually responsible for residual payments. . .  It is  
               critical that California's Commercial Code does not provide  
               lesser protections for authors, creators and performers  
               than exist in other states-this would be especially ironic,  
               given that California is home to the entertainment  
               industry. 


           Background on UCC Article 9.   According to the Uniform Law  
          Commission, Article 9 of the UCC governs secured transactions in  
          personal property.  Hundreds of millions of dollars of  
          commercial and consumer credit are granted every year in secured  
          transactions under UCC Article 9.  Specifically, Article 9  
          provides rules that govern any transaction, other than a finance  
          lease, that involves the granting of credit coupled with a  








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          creditor's interest in a debtor's personal property.  If the  
          debtor defaults, the creditor may possess and sell the property  
          to satisfy the debt.  The creditor's interest is called a  
          security interest, and perfection of the creditor's security  
          interest establishes the creditor's priority over other  
          creditors.  Article 9 specifies who has the first rights in the  
          collateral when two or more competing creditors have legally  
          enforceable interests in the collateral.  (Uniform Law  
          Commission, "UCC Article 9 Amendments Enacted in 26 States", May  
          22, 2012.)

          The last major revision of Article 9 occurred in 1999, when all  
          fifty states adopted provisions drafted by the Uniform Law  
          Commission seeking to simplify and clarify the rules governing  
          these types of secured transactions.  Among other things, the  
          1999 revisions to Article 9 enacted Section 9321 to create  
          rights for licensees of general intangibles (such as  
          intellectual property) comparable to the rights of buyers of  
          goods in the ordinary course of business.

           Compensation of guild members under previous Section 9321.  This  
          bill seeks to re-enact, until January 1, 2015, the language of  
          Section 9321 that was recently repealed by operation of a  
          December 31, 2012 sunset clause.  According to the sponsors,  
          guild members-writers, directors, performers-receive  
          compensation (known as "residuals") when the movies and TV  
          programs they worked on are broadcast through different media  
          such as cable television and DVDs, long after they have  
          completed their work on those works.  The sponsors note that  
          residuals provide a substantial portion of their members'  
          earnings, worth billions of dollars, and are typically paid by  
          the distributor of those works pursuant to collective bargaining  
          agreements with the guilds.

          According to the sponsors, the language of Section 9321 that  
          this bill seeks to re-enact was structured to protect consumers  
          and other licensees of intellectual property under non-exclusive  
          licenses, while at the same time ensuring that the guilds can  
          continue to pay out residuals in circumstances where a motion  
          picture distributor (also a licensee of intellectual property)  
          is not paying.  Section 9321 achieved this, they state, by  
          distinguishing non-exclusive licenses from the exclusive  
          licenses that are prevalent in the film industry.  Under the  
          language proposed to be re-enacted, when a consumer legally  
          purchases a movie, he or she receives a non-exclusive license  








                                                                  SB 6
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          for the movie, and the consumer is protected from any action by  
          an actor, director, or writer seeking to enforce against any  
          security interest in the movie itself.  At the same time, the  
          language proposed to be re-enacted allows the guilds to use  
          security interests to protect the residual payments that  
          distributors must make to their members.

           Re-enactment until January 1, 2015 is intended to maintain  
          previous protections while allowing current negotiations for a  
          more permanent solution to conclude before that date.   This  
          urgency bill would reinstate the repealed provisions of Section  
          9321 with an operative of January 1, 2013, and state the intent  
          of the Legislature to negate the prior repeal in order to ensure  
          economic stability and continuity for purposes of contract  
          interpretation.  The bill would sunset on January 1, 2015,  
          unless subsequent legislation is enacted to extend or repeal  
          that date.

          When Section 9321 was first enacted with the larger set of 1999  
          revisions to UCC Article 9, the guilds asked for time to  
          evaluate the impact of the new law on their members as it  
          applied to payment of residuals.  The Legislature agreed to  
          limit the operative effect of the new Section 9321 by including  
          a sunset date of January 1, 2004.  That original sunset date was  
          subsequently extended three times, most recently to January 1,  
          2013.  However, no bill was introduced in the 2011-12  
          legislative session to extend or repeal that sunset date.   
          Accordingly, then-existing Section 9321 was repealed on January  
          1, 2013, 12 years after it first took effect, thus leading to  
          the introduction of this urgency bill to restore those  
          provisions.

          According to the stakeholders, including the three major Guilds  
          and the Motion Picture Association of America (MPAA), the  
          previous language of Section 9321 should be reinstated to allow  
          current discussions between the stakeholders to reach a more  
          permanent solution specific to the entertainment industry.  It  
          is believed that a successful solution may be reached before the  
          sunset date of January 1, 2015 proposed by this bill, thus  
          eliminating the need for future legislation to re-extend the  
          sunset date for Section 9321. 

           REGISTERED SUPPORT / OPPOSITION  :

           Support 








                                                                 SB 6
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          California Commission on Uniform State Laws (sponsor)
          Directors Guild of America
          Motion Picture Association of America, Inc. (MPAA)
          Screen Actors Guild-American Federation of Television and Radio  
          Artists
          Writers Guild of America, West
           
            Opposition 
           
          None on file

           Analysis Prepared by  :   Anthony Lew / JUD. / (916) 319-2334