Clause & Effect: <b>Courts Rule on Audit Rights, Moral Clauses, And TV Talent Rights in Program Trademarks

The following article is a roundup of recent court decisions on provisions in entertainment industry contracts.

Songwriting and recording agreements usually include a provision covering artist royalty audit rights. (See the article in this issue on the California law that takes effect Jan. 1, 2005 regarding audit rights in recording agreements.) But what happens when a songwriter or recording artist waits a lengthy time to conduct an audit of the music publisher's or record label's accounting books? In a case decided in December 2004 by the Court of Appeal of California, Second Appellate District, Division Eight, a music publisher argued that a songwriter's decade-long delay in conducting a royalty audit amounted to a lack of diligence that barred the songwriter from using the delayed-discovery doctrine in his royalty suit against the publisher. However, the court of appeal reversed the lower court's grant of summary judgment that had been issued in favor of the music publisher. Weatherly v. Universal Music Publishing Group (UMPG), B170395.

James Weatherly entered into an exclusive songwriter's agreement with KECA Music in 1974; UMPG subsequently acquired KECA's rights. Provisions in the songwriting agreement stated:

(1) Writer is entitled to “fifty per cent (50%) of any and all net sums, after deduction of foreign taxes, actually received (less any costs for collection) by Publisher from sales and uses directly related to subject musical compositions in countries outside of the United States (other than public performance royalties….)”

(2) “Writer shall have the right, upon the giving of at least ten (10) days written notice to Publisher, to inspect the books and records of Publisher, insofar as the same concerns Writer, at the expense of Writer, at reasonable times during normal business hours for the purpose of verifying the accuracy of any transaction or entry relating to the accounting of all sums to which Writer may have the right to object … but no more than once in any one (1) year period during the term hereof.”

(3) “All royalty statements and other accounts rendered by Publisher shall be binding upon Writer and not subject to any objection for any reason, unless such objection is specific and is made in writing, stating the basis thereof, and delivered to Publisher within one (1) year from the date of such statement or account, and Writer shall be barred from maintaining or instituting any suit based on such objection unless such suit is commenced within one (1) year after the date on which Publisher notifies Writer that it denies the validity of the objection.”

UMPG sent royalty statements and payments to Weatherly two times a year. In 2001, Weatherly asked financial advisor Ali Adawiya to conduct an audit of UMPG on Weatherly's behalf. During the audit, Adawiya discovered that UMPG was paying Weatherly based on 75%, rather than 100%, of revenues that foreign companies received “at the source” (ie, at the foreign companies' offices) from uses of Weatherly's compositions. This occurred because UMPG's U.K. office retained 25% of the royalty revenues sent it by other foreign offices before forwarding the balance to UMPG in the United States.

Weatherly filed suit in L.A. Superior Court in 2002 alleging underpayment to him by UMPG. The trial court granted summary judgment for UMPG by concluding that the one-year statute of limitations in the songwriting agreement barred Weatherly suit. UMPG had successfully argued that because the disputed accounting practice began in 1990, Weatherly's had to conduct an audit and file suit by 1991. The trial court also sustained UMPG's demurrer to Weatherly's cause of action for breach of the implied covenant of good faith and fair dealing, without leave for Weatherly to amend his complaint.

In reversing, the court of appeal first stated in its unpublished opinion: “All of the evidence ' the Agreement, the parties' conduct, and the essence of the dispute ' indicate that this case involves the amount of periodic payment of royalties, not Weatherly's entitlement to royalties. The Agreement reflects each payment is divisible and the alleged breach of contract is not a single breach with continuing impact. The Agreement provides that the Publisher will pay royalties biannually. The Agreement itself suggests that the same breach may be repeated as it provides that 'no waiver by either party hereto of any breach of any covenants or provisions of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant or provision.'”

On the issue of whether Weatherly should be denied use of the delayed discovery doctrine in his suit, the songwriter argued that the relevant limitations period should be tolled because the royalty statements sent him by UMPG were misleading. The court of appeal sided with Weatherly, noting, “Applying the discovery rule in the context of a claim of a misrepresentation, the Ninth Circuit held, under California law, a defendant cannot hinder the plaintiff's discovery through misrepresentations and then fault the plaintiff for failing to investigate. … Applied here, the right to conduct an audit is not dispositive of diligence where there is evidence that the plaintiff was 'hindered' from discovering the breach by the defendant's misrepresentations.”

The court of appeal went on to rule: that there was a triable issue of fact as to whether the songwriting agreement was meant to allow for the deduction of a subpublishing fee; that any knowledge that Weatherly's advisors earlier may have had of alleged improper deductions from royalties shouldn't be attributed to the songwriter at this point; and that Adawiya had stated in a declaration that UMPG “declined to show me many of its books and records concerning Mr. Weatherly that I asked to review in connection with my audit of UMPG on behalf of Mr. Weatherly. UMPG's refusal to show me these records prevented me from completing the Audit.”

(The court of appeal also decided, for purposes of reversing the lower court's summary judgment ruling, that the evidence supported Weatherly's claim that the notation “100%” in a column titled “% Rcvd” in his royalty statement had misled him into believing that no foreign subpublishing fees were being deducted from the royalties that UMPG paid him. The court also decided that Weatherly could amend his complaint to add the claim for breach of covenant of good faith and fair dealing ' based on an argument that UMPG had failed to negotiate at arms length for the costs of royalty collection ' because the claim was different from breach of contract.)

For royalty participants, the court of appeal's ruling, of course, is good news. It indicates that such participants may have a lighter burden in moving forward with an audit (though the new California law requires recording contract participants to conduct a royalty audit within three years of an accounting period). Particularly encouraging to royalty participants may be the court of appeal's refusal to accept UMPG's primary argument that “one with the right to monitor another's performance under a contract is charged with the knowledge he would have obtained if he had done so.”

* * *

Actors/Morals Clauses

A Manhattan federal district court decided that the ABC TV-network properly fired actor Michael Nader from the soap opera “All My Children” after Nader was charged with criminal sale of cocaine and resisting arrest. Nader v. ABC Television Inc., 330 F. Supp. 2d 345.

Nader's talent agreement contained a morals clause that stated:

“MISCONDUCT. If, in the opinion of ABC, Artist shall commit any act or do anything which might tend to bring Artist into public disrepute, contempt, scandal, or ridicule, or which might tend to reflect unfavorably on ABC, any sponsor of a program, any such sponsor's advertising agency, any stations broadcasting or scheduled to broadcast a program, or any licensee of ABC, or to injure the success of any use of the Series or any program, ABC may, upon written notice to Artist, immediately terminate the Term and Artist's employment hereunder. In the event ABC terminates Artist's services pursuant to the provisions of this Paragraph, ABC shall be discharged from all obligations hereunder by making any and all payments earned and payable on account of services performed by Artist prior to such date of termination. The guarantee, if any, applicable to the cycle in which such termination is effective shall be automatically reduced to the number of programs produced in such cycle and on which Artist rendered services prior to the effective date of such termination. In addition to whatever other right ABC may have, ABC may also remove Artist's credit, if any, from all such programs on which such credit may have appeared.”

Nader's complaint against ABC alleged, among other things, that ABC discriminated against Nader based his cocaine-addiction “disability” and that the TV network had breached the talent agreement. Granting summary judgment for ABC on all of Nader's claims, the district court noted, “The on- and off-stage melodrama of 'All My Children' may make for successful soap opera, but as a lawsuit it's a bust.”

The court concluded, “ABC's letter of March 16, 2001 expressly notified Nader that he was being terminated because he had breached the morals clause of his contract. This was a facially legitimate reason for termination, because the morals clause permits ABC to terminate any 'Artist' if 'in the opinion of ABC, Artist shall commit any act or do anything which might tend to bring Artist into public disrepute, contempt, scandal, or ridicule, or which might tend to reflect unfavorably on ABC.'”

***

TV Program Hosts/Trademark Rights

The U.S. District for the District of Minnesota granted a temporary restraining order (TRO) blocking ShopNBC from using a name for a jewelry line developed by a program host while she worked for the network. Connelly v. ValueVision Media Inc., 04-4559. In 1999, plaintiff Karen Connelly signed an agreement that stated: “Employee agrees that all inventions, innovations or improvements in the method of conducting Employer's business or otherwise related to Employer's business (including new contributions, improvements, ideas and discoveries, whether patentable or not or otherwise protectable by copyright, trademark, common law or trade secret law) conceived or made by Employee during the employment period belong to the Employer. Employee will promptly disclose such inventions, innovations and improvements to Employer and perform all actions reasonably requested by Employer to establish and confirm such ownership.”

In 2002, Connelly developed a “Sincerely Yours, Karen” line of jewelry that she claimed was covered by a new agreement ' that she signed with ShopNBC the same year ' under the language “all inventions or innovations developed by Employee solely as part of her involvement with Outside Interests (as that term is elsewhere defined in the 2002 Agreement).” The new agreement defined “Outside Interests” in part as “the business that she owns, which is a business engaged in the sale of jewelry. … on television and through the internet.” The agreement further stated that “Employer consents to Employee's ownership and participation in the above described Outsider Interest.”

The “Sincerely Yours, Karen” show began airing in 2002. Connelly quit working for ShopNBC in July 2004. She subsequently filed suit in Minnesota federal court asking for a TRO or preliminary injunction over the network's continued sale of the jewelry line and airing of the show, later renamed “Sincerely, Yours.” ShopNBC claimed to own the “Sincerely Yours, Karen” mark on the ground that it first been used while the 1999 agreement was in effect. The network also argued that under the 2002 agreement, the term “Outside Interests” didn't apply to improvements in ShopNBC's business.

Granting Connelly's motion for a TRO ' while urging the parties to settle the dispute ' the district court noted “the language of the 2002 Agreement specifically acknowledged that Connelly's participation in the 'Sincerely Yours, Karen' endeavor was outside of the Agreement and also recognized that Connelly would own the trademarks related to the 'Sincerely Yours, Karen' business. At a minimum, the term 'Outside Interests' is ambiguous and the parol evidence of the parties' discussions and negotiations leading up to the execution of the 2002 Agreement support the conclusion that the 2002 Agreement specifically contemplated and excluded Connelly's 'Sincerely Yours, Karen' business.”

The following article is a roundup of recent court decisions on provisions in entertainment industry contracts.

Songwriting and recording agreements usually include a provision covering artist royalty audit rights. (See the article in this issue on the California law that takes effect Jan. 1, 2005 regarding audit rights in recording agreements.) But what happens when a songwriter or recording artist waits a lengthy time to conduct an audit of the music publisher's or record label's accounting books? In a case decided in December 2004 by the Court of Appeal of California, Second Appellate District, Division Eight, a music publisher argued that a songwriter's decade-long delay in conducting a royalty audit amounted to a lack of diligence that barred the songwriter from using the delayed-discovery doctrine in his royalty suit against the publisher. However, the court of appeal reversed the lower court's grant of summary judgment that had been issued in favor of the music publisher. Weatherly v. Universal Music Publishing Group (UMPG), B170395.

James Weatherly entered into an exclusive songwriter's agreement with KECA Music in 1974; UMPG subsequently acquired KECA's rights. Provisions in the songwriting agreement stated:

(1) Writer is entitled to “fifty per cent (50%) of any and all net sums, after deduction of foreign taxes, actually received (less any costs for collection) by Publisher from sales and uses directly related to subject musical compositions in countries outside of the United States (other than public performance royalties….)”

(2) “Writer shall have the right, upon the giving of at least ten (10) days written notice to Publisher, to inspect the books and records of Publisher, insofar as the same concerns Writer, at the expense of Writer, at reasonable times during normal business hours for the purpose of verifying the accuracy of any transaction or entry relating to the accounting of all sums to which Writer may have the right to object … but no more than once in any one (1) year period during the term hereof.”

(3) “All royalty statements and other accounts rendered by Publisher shall be binding upon Writer and not subject to any objection for any reason, unless such objection is specific and is made in writing, stating the basis thereof, and delivered to Publisher within one (1) year from the date of such statement or account, and Writer shall be barred from maintaining or instituting any suit based on such objection unless such suit is commenced within one (1) year after the date on which Publisher notifies Writer that it denies the validity of the objection.”

UMPG sent royalty statements and payments to Weatherly two times a year. In 2001, Weatherly asked financial advisor Ali Adawiya to conduct an audit of UMPG on Weatherly's behalf. During the audit, Adawiya discovered that UMPG was paying Weatherly based on 75%, rather than 100%, of revenues that foreign companies received “at the source” (ie, at the foreign companies' offices) from uses of Weatherly's compositions. This occurred because UMPG's U.K. office retained 25% of the royalty revenues sent it by other foreign offices before forwarding the balance to UMPG in the United States.

Weatherly filed suit in L.A. Superior Court in 2002 alleging underpayment to him by UMPG. The trial court granted summary judgment for UMPG by concluding that the one-year statute of limitations in the songwriting agreement barred Weatherly suit. UMPG had successfully argued that because the disputed accounting practice began in 1990, Weatherly's had to conduct an audit and file suit by 1991. The trial court also sustained UMPG's demurrer to Weatherly's cause of action for breach of the implied covenant of good faith and fair dealing, without leave for Weatherly to amend his complaint.

In reversing, the court of appeal first stated in its unpublished opinion: “All of the evidence ' the Agreement, the parties' conduct, and the essence of the dispute ' indicate that this case involves the amount of periodic payment of royalties, not Weatherly's entitlement to royalties. The Agreement reflects each payment is divisible and the alleged breach of contract is not a single breach with continuing impact. The Agreement provides that the Publisher will pay royalties biannually. The Agreement itself suggests that the same breach may be repeated as it provides that 'no waiver by either party hereto of any breach of any covenants or provisions of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant or provision.'”

On the issue of whether Weatherly should be denied use of the delayed discovery doctrine in his suit, the songwriter argued that the relevant limitations period should be tolled because the royalty statements sent him by UMPG were misleading. The court of appeal sided with Weatherly, noting, “Applying the discovery rule in the context of a claim of a misrepresentation, the Ninth Circuit held, under California law, a defendant cannot hinder the plaintiff's discovery through misrepresentations and then fault the plaintiff for failing to investigate. … Applied here, the right to conduct an audit is not dispositive of diligence where there is evidence that the plaintiff was 'hindered' from discovering the breach by the defendant's misrepresentations.”

The court of appeal went on to rule: that there was a triable issue of fact as to whether the songwriting agreement was meant to allow for the deduction of a subpublishing fee; that any knowledge that Weatherly's advisors earlier may have had of alleged improper deductions from royalties shouldn't be attributed to the songwriter at this point; and that Adawiya had stated in a declaration that UMPG “declined to show me many of its books and records concerning Mr. Weatherly that I asked to review in connection with my audit of UMPG on behalf of Mr. Weatherly. UMPG's refusal to show me these records prevented me from completing the Audit.”

(The court of appeal also decided, for purposes of reversing the lower court's summary judgment ruling, that the evidence supported Weatherly's claim that the notation “100%” in a column titled “% Rcvd” in his royalty statement had misled him into believing that no foreign subpublishing fees were being deducted from the royalties that UMPG paid him. The court also decided that Weatherly could amend his complaint to add the claim for breach of covenant of good faith and fair dealing ' based on an argument that UMPG had failed to negotiate at arms length for the costs of royalty collection ' because the claim was different from breach of contract.)

For royalty participants, the court of appeal's ruling, of course, is good news. It indicates that such participants may have a lighter burden in moving forward with an audit (though the new California law requires recording contract participants to conduct a royalty audit within three years of an accounting period). Particularly encouraging to royalty participants may be the court of appeal's refusal to accept UMPG's primary argument that “one with the right to monitor another's performance under a contract is charged with the knowledge he would have obtained if he had done so.”

* * *

Actors/Morals Clauses

A Manhattan federal district court decided that the ABC TV-network properly fired actor Michael Nader from the soap opera “All My Children” after Nader was charged with criminal sale of cocaine and resisting arrest. Nader v. ABC Television Inc., 330 F. Supp. 2d 345.

Nader's talent agreement contained a morals clause that stated:

“MISCONDUCT. If, in the opinion of ABC, Artist shall commit any act or do anything which might tend to bring Artist into public disrepute, contempt, scandal, or ridicule, or which might tend to reflect unfavorably on ABC, any sponsor of a program, any such sponsor's advertising agency, any stations broadcasting or scheduled to broadcast a program, or any licensee of ABC, or to injure the success of any use of the Series or any program, ABC may, upon written notice to Artist, immediately terminate the Term and Artist's employment hereunder. In the event ABC terminates Artist's services pursuant to the provisions of this Paragraph, ABC shall be discharged from all obligations hereunder by making any and all payments earned and payable on account of services performed by Artist prior to such date of termination. The guarantee, if any, applicable to the cycle in which such termination is effective shall be automatically reduced to the number of programs produced in such cycle and on which Artist rendered services prior to the effective date of such termination. In addition to whatever other right ABC may have, ABC may also remove Artist's credit, if any, from all such programs on which such credit may have appeared.”

Nader's complaint against ABC alleged, among other things, that ABC discriminated against Nader based his cocaine-addiction “disability” and that the TV network had breached the talent agreement. Granting summary judgment for ABC on all of Nader's claims, the district court noted, “The on- and off-stage melodrama of 'All My Children' may make for successful soap opera, but as a lawsuit it's a bust.”

The court concluded, “ABC's letter of March 16, 2001 expressly notified Nader that he was being terminated because he had breached the morals clause of his contract. This was a facially legitimate reason for termination, because the morals clause permits ABC to terminate any 'Artist' if 'in the opinion of ABC, Artist shall commit any act or do anything which might tend to bring Artist into public disrepute, contempt, scandal, or ridicule, or which might tend to reflect unfavorably on ABC.'”

***

TV Program Hosts/Trademark Rights

The U.S. District for the District of Minnesota granted a temporary restraining order (TRO) blocking ShopNBC from using a name for a jewelry line developed by a program host while she worked for the network. Connelly v. ValueVision Media Inc., 04-4559. In 1999, plaintiff Karen Connelly signed an agreement that stated: “Employee agrees that all inventions, innovations or improvements in the method of conducting Employer's business or otherwise related to Employer's business (including new contributions, improvements, ideas and discoveries, whether patentable or not or otherwise protectable by copyright, trademark, common law or trade secret law) conceived or made by Employee during the employment period belong to the Employer. Employee will promptly disclose such inventions, innovations and improvements to Employer and perform all actions reasonably requested by Employer to establish and confirm such ownership.”

In 2002, Connelly developed a “Sincerely Yours, Karen” line of jewelry that she claimed was covered by a new agreement ' that she signed with ShopNBC the same year ' under the language “all inventions or innovations developed by Employee solely as part of her involvement with Outside Interests (as that term is elsewhere defined in the 2002 Agreement).” The new agreement defined “Outside Interests” in part as “the business that she owns, which is a business engaged in the sale of jewelry. … on television and through the internet.” The agreement further stated that “Employer consents to Employee's ownership and participation in the above described Outsider Interest.”

The “Sincerely Yours, Karen” show began airing in 2002. Connelly quit working for ShopNBC in July 2004. She subsequently filed suit in Minnesota federal court asking for a TRO or preliminary injunction over the network's continued sale of the jewelry line and airing of the show, later renamed “Sincerely, Yours.” ShopNBC claimed to own the “Sincerely Yours, Karen” mark on the ground that it first been used while the 1999 agreement was in effect. The network also argued that under the 2002 agreement, the term “Outside Interests” didn't apply to improvements in ShopNBC's business.

Granting Connelly's motion for a TRO ' while urging the parties to settle the dispute ' the district court noted “the language of the 2002 Agreement specifically acknowledged that Connelly's participation in the 'Sincerely Yours, Karen' endeavor was outside of the Agreement and also recognized that Connelly would own the trademarks related to the 'Sincerely Yours, Karen' business. At a minimum, the term 'Outside Interests' is ambiguous and the parol evidence of the parties' discussions and negotiations leading up to the execution of the 2002 Agreement support the conclusion that the 2002 Agreement specifically contemplated and excluded Connelly's 'Sincerely Yours, Karen' business.”