BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SB 650 (Lieu)
As Amended January 6, 2014
Hearing Date: January 14, 2014
Fiscal: No
Urgency: No
RD
SUBJECT
Motion Pictures
DESCRIPTION
This bill would provide that a licensee of nonexclusive rights
in a motion picture that is produced pursuant to one or more
collective bargaining agreements (CBAs) governed by the laws of
the United States takes its nonexclusive license in such motion
picture subject to any perfected security interest securing the
obligation to pay residuals as set forth in the applicable CBA
and arising from exploitation under such license. This bill
would specify that the terms "motion picture" and "residuals"
have the meaning ascribed to such terms under the applicable
CBAs.
This bill would remove a sunset on related provisions dealing
with the rights of a licensee under a nonexclusive license.
BACKGROUND
Article 9 of the Uniform Commercial Code (UCC) covers security
interests in personal property. It was rewritten and modernized
by the Uniform Law Commission (ULC, formerly the National
Conference of Commissioners on Uniform State Laws, or NCCUSL) in
the late 1990s and in the process the ULC addressed security
interests in general intangible property (such as intellectual
property). Every state has adopted Article 9 as revised, and
California's revised Article 9 became effective on July 1, 2001.
(See AB 45 (Sher, Ch. 991, Stats. 1999).)
As a whole, the new Article 9 simplifies and clarifies the rules
(more)
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for creation, perfection, priority and enforcement of a security
interest. More specific to this bill, the 1999 revisions to
Article 9 of the UCC created rights for licensees of general
intangibles such as intellectual property comparable to the
rights of buyers of goods in the ordinary course of business.
(U. Com. Code Sec. 9321.)
At the time that California considered adoption of the revised
Article 9, the Directors Guild of America, Inc. and the Screen
Actors Guild expressed concerns about how the proposed revision
to Section 9321 would affect their operations. As reflected in
the Senate Judiciary Committee analysis of the 1999 revisions:
The Screen Actors Guild is concerned about the
application of this rule to their industry. They say
that with the rapidly developing technology in their
industry, it is difficult for them at this time to forego
the value of a perfected security interest from a
licensee, even if the license is a nonexclusive license.
Example is given of an actor's residuals from movie
rights to a film rented out by Blockbuster Video, a
nonexclusive licensee. Technology may develop such that
they should be able to enforce their security interest
against a nonexclusive licensee they say, in three years
or so, and therefore suggest that this particular
provision sunset in three years, subject to reenactment.
The drafters of Article 9 resist this vigorously. They
state that a nonexclusive licensee will not "take free"
of a security interest created by the licensor to its
sublicensor if the first license was "exclusive."
(Sen. Judiciary Com., analysis of SB 45 (1999-2000 Reg.
Session), April 13, 1999, p. 10.)
While the ULC assured them at the time that the then-proposed
language of Section 9321 would not have a negative impact in
practice, the groups asked for time to evaluate the impact of
the new Section 9321 on their actual operations. The
Legislature then 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 four times,
most recently to January 1, 2015.
This bill would remove the sunset on the provisions of Section
9321, thereby extending them indefinitely, but would also add a
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new provision relating to the nonexclusive rights of a licensee
in a motion picture that is produced pursuant to one or more
collective bargaining agreements, where there is a perfected
security interest securing the obligation to pay residuals, as
specified.
CHANGES TO EXISTING LAW
1. Existing law 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. (U. Com. Code Sec. 9321(b).)
Existing law 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. (U. Com. Code Sec. 9321(c).)
Existing law 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. (U. Com. Code Sec.
9321(a).)
Existing law includes a January 1, 2015 sunset date for the
above added provisions, unless a later enacted statute deletes
or extends that date, as specified.
This bill would delete the January 1, 2015 sunset date for the
above provisions.
This bill would add that, notwithstanding the above
provisions, a licensee of nonexclusive rights in a motion
picture that is produced pursuant to one or more collective
bargaining agreements (CBAs) governed by the laws of the
United States takes its nonexclusive license in such motion
picture subject to any perfected security interest securing
the obligation to pay residuals as set forth in the applicable
CBA and arising from exploitation under such license. This
bill would specify that the terms "motion picture" and
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"residuals" have the meaning ascribed to such terms under the
applicable CBAs.
2. Existing law provides that, operative January 1, 2015, 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. (U. Com. Code Sec. 9321 as
operative January 1, 2015.)
This bill would delete the above provision.
COMMENT
1. Stated need for the bill
According to the author, "SB 650 would enable the motion
production industry to continue its practice of paying some
compensation to artists by use of 'residuals,' delayed payment
based on rebroadcast or exploitation of productions. This
surgical exemption protects residuals in the case of
nonexclusive licenses, which, under [existing law, Uniform
Commercial Code] Section 9321(b), are not subject to security
interests. [The proposed] Section 9321.1 preserves the use of
residuals, a time-honored practice in the industry, which
Section 9321 could upset. SB 650 would also delete the sunset
in Section 9321."
Co-sponsors of the bill, the Directors Guild of America, Screen
Actors Guild-American Federation of Television and Radio
Artists, and Writers Guild of America, West add:
The co-sponsors of this bill, the Directors Guild of America,
Screen Actors Guild- American Federation of Television and Radio
Artists, Writers Guild of America West, Inc., and the Motion
Picture Association of America (MPAA) add:
The need for [the proposed] Section 9321.1 came about as the
result of an extensive review by the Guilds and MPAA with
respect to business developments in our industry. In general,
licensees of intellectual property and other general
intangibles take their rights subject to security interests
that previously have been granted in that property by
licensors. However, as licenses were increasingly used in a
variety of industries, the current Section 9321(b) created an
exception to this rule, protecting the rights of nonexclusive
licensees in the ordinary course of business, such that these
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nonexclusive licensees are able to take their rights free of
the security interests granted by the licensor. When Section
9321 was first enacted in 1999, rights in motion pictures were
almost invariably granted on an exclusive basis, so this
exception to the general rule had little effect upon motion
picture distribution.
However, as digital distribution techniques have evolved,
motion picture rights increasingly are licensed on a
nonexclusive basis. This change in practice affects the
ability of the Guilds to protect payment of "Residuals" to
Guild members. Each Guild routinely obtains security interests
from motion picture producers, so that motion picture rights
are collateral for payment of Residuals based on exploitation
of those rights; but with nonexclusive licenses, the
effectiveness of Guild liens could be limited. The stability
of Residuals payments are of critical economic concern to the
tens of thousands of Guild-represented members who live and
work in California. Moreover, as the trade group for motion
picture producers and distributors in California and across
the world, and with Guild collective bargaining agreements in
effect among the Guilds and the MPAA member companies, the
MPAA also has a substantial interest in the need for clarity
with respect to the business problems presented by Section
9321 in general, and with respect to Residuals in particular.
[This bill] addresses Residuals collection issues in a manner
that will be advantageous to Californians working in or
affected by the motion picture industry:
Residuals collections will not be affected by whether a
particular motion picture license happens to be exclusive
or nonexclusive.
As the representative for the motion picture companies
that fund the great majority of Residuals payments, the
MPAA believes this approach is sensible.
Interests of nonexclusive licensees in any other
industry are not affected, as [the proposed] Section 9321.1
is specific to rights in motion pictures. [ . . . ]
2. A surgical carve out aimed to remove the need for an
existing sunset
This bill seeks to add a new section to the Commercial Code
which would specify the rights of a licensee under a
nonexclusive license in a motion picture, under certain
circumstances. Existing law, Section 9321 of California's
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Commercial Code, provides a uniform rule which specifies that a
licensee in ordinary course of business, as defined, 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. Essentially, under this language, when a customer
legally purchases a movie from a retailer, the customer would
receive a nonexclusive license for the movie, and the
actors/directors/writers would not be able to go after the
consumer to collect on any security interest in the movie
itself. That being said, since the enactment of this section in
1999, the Legislature has revisited these provisions and has
determined it is best to extend the sunset on four separate
occasions because of ongoing concerns by the motion picture
industry with respect to protecting residuals held by their
members. (See Background).
Though it is unclear whether Section 9321 has ever caused a
disruption in the payment of residuals over the last 14 years,
the author offers the following explanation for why the industry
continues to have concerns:
Historically, motion picture productions were distributed on
the basis of exclusive licenses. Recently, distribution is
fracturing. Different media, including, for example, mobile
media, are growing. Nonexclusive distribution of film
productions undermines the ability of MPAA members and the
Guilds to preserve the high-structured, well-understood, and
collectively-bargained system of residual payments.
As a result of negotiations aimed at finding a long-term
solution that would resolve such concerns, SB 650 would add a
new provision to the Commercial Code that would follow Section
9321. This proposed provision would provide that,
"notwithstanding the foregoing" (Section 9321), a licensee of
nonexclusive rights in a motion picture that is produced
pursuant to one or more collective bargaining agreements (CBAs)
governed by the laws of the United States takes its nonexclusive
license in such motion picture subject to any perfected security
interest securing the obligation to pay residuals as set forth
in the applicable CBA and arising from exploitation under such
license. Since that provision resolves the longstanding
concerns about Section 9321, the bill would also remove Section
9321's sunset date, thereby extending those provisions
indefinitely.
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While at the time of the 1999 revisions the sponsoring
organization (National Conference of Commissioners on Uniform
State Laws, now the Uniform Law Commission) resisted carving out
special rules for a particular segment of one industry for fear
of undermining uniformity, the Uniform Law Commission writes
that "[t]he provisions of [SB] 650 would strongly support the
advantages of uniformity of state law that the Uniform
Commercial Code creates for individuals and businesses. If
[this bill] is enacted, California Commercial Code 9321 would
remain uniform, except for the narrow exception [to address a
specific problem relevant in California]."
It should be noted that Section 9321 would still apply within
the motion picture industry (i.e. the licensee would take its
non-exclusive rights free of any security interest) unless both
of the following elements are met: (1) the motion picture is
produced pursuant to one or more collective bargaining
agreements governed by the laws of the United States, and (2)
there is a perfected security interest securing the obligation
to pay results as set forth in the applicable CBA and arising
from exploitation under such license. If either of those
elements is not met, as would be true in all other scenarios
involving nonexclusive licenses, the licensee would take its
rights 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. For example,
the customer who purchases a movie from a retailer would
continue to receive a nonexclusive license for the movie, and
the actors/directors/writers would not be able to go after the
consumer to collect on any security interest in the movie
itself.
Arguably, by codifying language specific to the concerns over
residuals and removing objections to the deletion of Section
9321's sunset, SB 650 would provide a more stable and permanent
rule with respect to the rights of licensees in nonexclusive
licenses.
3. Clarifying amendment
The following clarifying amendment is proposed to avoid
confusion by what is meant by the term "foregoing" when
referencing back to Section 9321 in the new, freestanding
provision that addresses the specific concerns of the movie
industry:
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On page 3, line 18 strike "Notwithstanding the foregoing"
On page 3, line 5, insert "Except as is otherwise provided
under Section 9321.1,"
Support : None Known
Opposition : None Known
HISTORY
Source : Directors Guild of America; Motion Picture Association
of America; Screen Actors Guild-American Federation of
Television and Radio Artists; Writers Guild of America, West
Related Pending Legislation : None Known
Prior Legislation :
SB 6 (Lieu, Ch. 54, Stats. 2013), reenacted the provisions of
Section 9321 that lapsed on January 1, 2013 as an urgency
measure and extended the sunset to January 1, 2015.
AB 224 (Portatino, Ch. 315, Stats. 2009), extended the sunset to
January 1, 2013.
AB 2303 (Committee on Judiciary, Ch. 567, Stats. 2006), extended
the sunset to January 1, 2010.
SB 283 (Sher, Ch. 235, Stats. 2003), extended the sunset to
January 1, 2007.
SB 45 (Sher, Ch. 991, Stats. 1999), See Background.
Prior Vote : Not relevant to the current version of this bill.
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