Having established that Martin and Katie own the copyright in the card (Susan’s contribution was considered too small to receive copyright protection), consider who has the rights to exploit the card?
The correct answer is option 4: Whilst Martin and Katie are the copyright owners of the entire work (the card) they do not have rights to exploit the card until they have ‘cleared’ (obtained a licence to use) the third party content included in the card. Therefore Katie’s recording of ‘Happy Birthday To You’ which included her performance (singing) would need to be cleared. Copyright in the music and lyrics of ‘Happy Birthday To You’ is likely to be held by Stevie Wonder himself (unless assigned to another company) and would need clearance. When using third party content, it is usual practice to identify third party rights owners. Note: Katie and Martin need to have a contract between them in relation to exploitation of the card - see notes referring to incorrect answer 2.
You would also need to consider Moral Rights. Moral rights give authors the right to assert that they must always be named as author and to object to ‘derogatory treatment’ of their work. Derogatory treatment includes any manipulation or editing of their work in ways that damage the integrity of the work or the reputation of the author, and extends to include setting the work in a context that may damage its integrity or the reputation of the author. For a fuller explanation of moral rights please read Moral Rights.