Much of the content in the world of copyright is created by independent artists or programmers or other creators who create original content to update or reinterpret or enlarge an existing copyrighted work. As an example, a film studio may hire an artist contractor to create a new painting based upon a preexisting film image or a famous scene from the film, or to creatively interpret a character in a film – one that calls into mind the movie but adds a new and creative image of a known character. Or a computer program vendor may call upon a contractor to write a new module or update existing files with new content and new functionality. In such cases, the contractor is being called upon to add his or her own creativity in some way to an existing work that is owned by the original copyright owner. That new content is defined in the Copyright Act as a derivative work: a work “based upon one or more preexisting works, such as a translation, musical arrangement, dramatization, fictionalization, motion picture version sound recording, art reproduction, abridgement, condensation, or other form in which a work may be recast, transformed, or adapted.” The Copyright Act says that a work which consists of “editorial revisions, annotations, elaborations, or other modifications which, as a whole, represent an original work of authorship, is a ‘derivative work.’”
If the owner of a copyright commissions an independent contractor to create the new version or new adaptation of the existing copyrighted work, and if the resulting work is sufficiently original to qualify as an original work of authorship itself, then the work is a derivative work under the Copyright Act, and protectible as such. In other words, the derivate work so created can be legally protected and an even registered with the Copyright Office. The legal protection of the work, however, only extends to the creative material contributed by the derivative work author.
The owner of the original copyright “holds a bundle of exclusive rights in the copyrighted work, among them the right to copy and the right to incorporate the work into derivative works.” In such a case, absent a properly prepared work for hire agreement or assignment, the “aspects of a derivative work added by the derivative author are that author’s property, but the element drawn from the pre-existing work remains on grant from the owner of the preexisting work.”
Rights owners are typically keenly aware of the potential value of the new derivative work, and they should be. The derivative work copyright becomes legally protectable once “fixed in a tangible medium of expression” and it can become of great value as a free-standing work, perhaps even competing in some way with the original work. The derivative work owner has the right to make reproductions of the work, or even new derivative works based upon the existing derivative work, drawing upon his or her own contribution of originality to the original preexisting work.
As a hedge of protection from the derivative work author, rights owners typically insist upon a work for hire agreement, as a condition to the right to create the new version or interpretation of the original. The programmer or independent artist asked to sign such an agreement is typically the “little guy” in the bargaining process for a license: fee assets and little bargaining power in the relationship. Yet even so, the artist or programmer has a genuine need for proper counsel before signing a work for hire agreement. This is because there are many ways to draft such an agreement that will protect the derivative author, or at least to limit the scope of the rights so granted.
Under such an agreement, the derivative author in effect transfers ownership in the derivative work to the rights owner. Such an agreement need only specify with the necessary clarity that the derivative work “shall be considered a work made for hire.” In the real world of art or programming or architecture, however, rights owners often forget to obtain the author’s signature on such agreements, or they resort to poorly prepared agreements borrowed or purchased from the internet, or otherwise do a poor job documenting the rights being transferred by the derivative author or his or her rights in the future should the rights owner not live up to its end of the bargain. Here is where copyright counsel can provide a vital contribution to both parties.
The lawyer representing the rights owner want to be sure to clarify with precision the rights transferred and any limits on those rights, such as the reversion of the rights transferred back to the derivative author if such terms are negotiated.
The lawyer representing the derivative author, on the other hand, will want to bargain for every contingency that may result in a reversion or limitation of the rights transferred, or at least to a steady income stream from future sales, and the right to audit for missed royalty and the right to sue in court for breach of the contract in proper circumstances. A properly counseled derivative work author, if he or she has the bargaining power in the relationship, will want to be sure to avoid costly arbitration proceedings in a distant forum, while the rights owner may often insist upon such terms. The give and take of the negotiation will often depend upon the quality and experience of the attorneys consulted. Various compromise solutions are available, which may include mediation clauses and prevailing party attorneys’ fees rights in order to encourage compromise rather than arbitration.
Where the work for hire agreement is not properly executed or is sloppily prepared, both parties are at risk in any resulting litigation or arbitration. If there is uncertainty about the scope of the agreement or whether the rights under it have reverted or are otherwise in doubt, one of the parties may seek relief in a federal district court. This is because federal courts have exclusive jurisdiction over copyright ownership disputes. Even if the derivative work is not registered with the Copyright Office, the matter of copyright ownership over the derivative work is properly decided in a federal court under the terms of the Copyright Act. 
The best way to avoid the costs and lost energy of a court battle, particularly for the “little guy” in the bargaining process, is to negotiate with proper counsel up front.