Rey v. Lafferty
990 F.2d 1379 (1993)
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Rule of Law:
A licensor's contractual right to approve ancillary products, conditioned on approval not being unreasonably withheld, allows the licensor to reject a product based on subjective aesthetic criteria concerning the product's overall quality, not just the depiction of the licensed character. Furthermore, a license granting rights for a specific medium, such as "television viewing," does not implicitly extend to new technologies like videocassettes if the contract lacks broad language covering future uses.
Facts:
- In 1977, Margret Rey, owner of the 'Curious George' copyright, granted Milktrain Productions an option to produce 104 animated film episodes.
- Milktrain partnered with Lafferty Harwood & Partners (LHP), an investment firm, for financing, and Rey granted them a limited license (the 'Rey License') to produce the episodes 'solely for broadcast on television.'
- After the project faced financial trouble, a 1979 'Revised Rey License' (RRL) was executed. During these negotiations, Rey expressly refused to grant LHP ancillary product rights.
- In 1983, after the episodes were completed, Rey and LHP signed an 'Ancillary Products Agreement' (APA) granting LHP rights to license 'Curious George' for spin-off products, subject to Rey's prior approval which could 'not be unreasonably withheld.'
- Pursuant to the APA, LHP's agent proposed a line of 'Curious George' pajamas to be marketed by Sears.
- Rey rejected the pajama proposal, citing the 'hard, ugly [and] bright yellow' material and a sketch of the character she found 'plump' and 'not recognizable.'
- Rey also harshly criticized the first installment of an educational software trilogy by DLM Inc., which subsequently withdrew its plans to complete the series.
- After Rey terminated the APA in 1989, LHP continued marketing books and Sony videos based on the 104 episodes, withholding royalties from Rey.
Procedural Posture:
- Margret Rey filed suit against Lafferty Harwood & Partners (LHP) in the United States District Court for breach of contract and copyright violations.
- LHP filed a counterclaim against Rey for breach of contract, alleging she unreasonably withheld approval of various ancillary products.
- Following a bench trial, the district court found for Rey on her claim, awarding her $256,327 in royalties for books and videos LHP produced.
- The district court also found for LHP on its counterclaim, ruling that Rey had unreasonably withheld approval for several products and awarded LHP $317,000 in damages.
- Both Rey (as appellant on the counterclaim) and LHP (as appellant on the royalty claim) appealed the district court's judgment to the U.S. Court of Appeals for the First Circuit.
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Issue:
Does a contractual clause allowing a copyright holder to approve 'any product' and providing that such approval 'will not be unreasonably withheld' permit the holder to reject products based on the quality of the item itself, such as the fabric of pajamas, and not merely the quality of the character's depiction?
Opinions:
Majority - Cyr, Circuit Judge.
Yes. A contractual right for a copyright holder to approve an ancillary 'product' extends to the entire article, not just the depiction of the licensed character, and withholding approval based on the product's quality is not unreasonable if the licensor articulates a material reason related to the artistic and commercial integrity of their creation. The court found that the plain, unambiguous meaning of 'product' in the Ancillary Products Agreement (APA) referred to the entire tangible good. Therefore, Rey was within her rights to consider the quality of the pajama fabric and not just the drawing of Curious George. The duty to act 'reasonably' required Rey to articulate a material reason for disapproval, which she did. Her aesthetic concerns about the 'junky' quality of the pajamas were reasonably related to protecting the integrity and commercial value of her artistic creation. The court reversed the district court's finding that Rey's disapproval was a breach of contract, concluding that her actions with respect to the Sears pajamas, Eden toys, and DLM software were all permissible under the APA.
Analysis:
This decision significantly clarifies the scope of a creator's approval rights in licensing agreements, affirming that subjective aesthetic judgment can constitute a 'reasonable' basis for rejecting a product. It empowers licensors to maintain quality control over not just the use of their intellectual property but the tangible goods with which it is associated, protecting the brand's long-term value and reputation. The ruling also reinforces a narrow interpretation of copyright licenses concerning new technologies, placing the burden on licensees to explicitly contract for rights to future, unforeseen uses rather than assuming a broad grant. This provides greater protection to creators who may not anticipate future technological shifts when granting licenses.
