ROYALTY ROUNDUP Loan-Out Companies; Limitations Defense

The 2010 ruling by the U.S. Court of Appeals for the Ninth Circuit that artists can be entitled, under their pre-existing recording agreements, to half of record-label income from digital sales has triggered claims involving thousands of artists. F.B.T. Productions LLC v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010). Following are three recent developments in this litigation area.

First, the U.S. District Court for the Northern District of California dismissed a suit by Mexican artist Graciela Beltran seeking 50% of record label income from the sale of sound-recording downloads. Beltran v. Capitol Records LLC, 12-cv-1002. Beltran claimed in her class action case that online sales of her recordings should be deemed third-party licenses made by Capitol and EMI to such digital services as iTunes, rather than calculated at lower-royalty-paying physical product sales. Beltran's complaint sought a declaratory judgment and alleged an open book account, breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of California Business & Professions Code '17200 for unfair competition.

Beltran's suit was based on a 1995 agreement between EMI Latin and Beltran's loan-out entity, G.B. Tesoro Music. District Judge Yvonne Gonzalez Rogers first ruled that Beltran could proceed with her claim as a third-party beneficiary of the EMI Latin agreement. The recording contract stated: 'Graciela Beltran under G.B. Tesoro Music, professionally known as, 'Graciela Beltran,' hereafter referred to as 'You,' or 'Artist' for the purpose of making records for us.' Judge Rogers noted: 'Additional references in the agreement to 'You,' 'you' and 'Artist' create some ambiguity whether those terms refer to the loan-out company or to Beltran individually. ' Moreover, and in addition to the ambiguity in the agreement itself, royalty payments were not made to G.B. Tesoro Music, but instead were sent to Graciela Beltran and listed Beltran as the payee. These allegations are sufficient to plead a basis for standing to enforce the agreement as a third party beneficiary.'

But District Judge Rogers went on to dismiss Beltran's suit on the ground that the loan-out company G.B. Tesoro Music, of which Beltran was sole shareholder and officer, was an inactive, suspended corporation. Under Cal. Rev. & Tax Code '23301, according to Judge Rogers: 'Were the Court to allow her to proceed on her own behalf without regard to the corporation's suspended status, Beltran would obtain the benefits of the corporate form without its burdens. She would be using the corporate entity to contract, yet would retain the right to sue as an individual, third party beneficiary even when the corporation could not on account of its failure to comply with its corporate obligations and tax liabilities.'

Again citing '23301, Judge Rogers dismissed a similar digital-royalty suit by Dale Bozzio, lead singer of the band Missing Persons, whose loan-out corporation entered into a recording agreement with Capitol in 1983. The corporation had become inactive in 1998, two-years after the band broke up. Judge Rogers explained: 'Bozzio is directly, though not necessarily entirely, responsible for the suspended status of the corporation. While the loan-out corporation here is not in Bozzio's sole control, she has alleged that she is its president and the 'driving force' behind it. ' [But] whether Bozzio could revive the corporation on her own does not present a question of fact barring dismissal, as she contends.' Bozzio v. EMI Group Ltd., 12-cv-2421.

But District Judge Rogers refused to dismiss a digital royalty suit by members of the music group Tavares over their 1973 and 1976 recording agreements with Capitol Records. Tavares v. Capitol Records LLC, 12-cv-3059. Capitol argued that Tavares was barred from proceeding with claims older than two years, due to a two-year statute of limitations in their recording contracts for raising royalty objections, counted from the time the royalty statements were rendered.

Judge Rogers observed, however: 'Here, Plaintiffs allege that the royalty statements they received were misleading and did not put them on notice that Capitol was actually licensing digital masters to third-parties while reporting those earnings at the 'records sold' rate rather than the 'masters licensed' rate. Plaintiffs allege that they did not learn facts that would put them on notice of this misconduct until the extensive press coverage of F.B.T. Productions LLC v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010). ' Plaintiffs allege that this was the first time they learned that the business arrangements between a major record company and Digital Providers involved licenses of master recordings. Thus, Plaintiffs have pleaded a basis for tolling the contractual limitations period based upon delayed discovery.'

But Judge Rogers did dismiss the Tavares's claim for punitive damages, which generally aren't allowed under California law for breach of the covenant of good faith and fair dealing.

Stan Soocher is Editor-in-Chief of Entertainment Law & Finance and a tenured Associate Professor of Music & Entertainment Industry Studies at the University of Colorado's Denver Campus. He can be reached at [email protected] or via www.stansoocher.com.

The 2010 ruling by the U.S. Court of Appeals for the Ninth Circuit that artists can be entitled, under their pre-existing recording agreements, to half of record-label income from digital sales has triggered claims involving thousands of artists. F.B.T. Productions LLC v. Aftermath Records , 621 F.3d 958 (9th Cir. 2010). Following are three recent developments in this litigation area.

First, the U.S. District Court for the Northern District of California dismissed a suit by Mexican artist Graciela Beltran seeking 50% of record label income from the sale of sound-recording downloads. Beltran v. Capitol Records LLC, 12-cv-1002. Beltran claimed in her class action case that online sales of her recordings should be deemed third-party licenses made by Capitol and EMI to such digital services as iTunes, rather than calculated at lower-royalty-paying physical product sales. Beltran's complaint sought a declaratory judgment and alleged an open book account, breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of California Business & Professions Code '17200 for unfair competition.

Beltran's suit was based on a 1995 agreement between EMI Latin and Beltran's loan-out entity, G.B. Tesoro Music. District Judge Yvonne Gonzalez Rogers first ruled that Beltran could proceed with her claim as a third-party beneficiary of the EMI Latin agreement. The recording contract stated: 'Graciela Beltran under G.B. Tesoro Music, professionally known as, 'Graciela Beltran,' hereafter referred to as 'You,' or 'Artist' for the purpose of making records for us.' Judge Rogers noted: 'Additional references in the agreement to 'You,' 'you' and 'Artist' create some ambiguity whether those terms refer to the loan-out company or to Beltran individually. ' Moreover, and in addition to the ambiguity in the agreement itself, royalty payments were not made to G.B. Tesoro Music, but instead were sent to Graciela Beltran and listed Beltran as the payee. These allegations are sufficient to plead a basis for standing to enforce the agreement as a third party beneficiary.'

But District Judge Rogers went on to dismiss Beltran's suit on the ground that the loan-out company G.B. Tesoro Music, of which Beltran was sole shareholder and officer, was an inactive, suspended corporation. Under Cal. Rev. & Tax Code '23301, according to Judge Rogers: 'Were the Court to allow her to proceed on her own behalf without regard to the corporation's suspended status, Beltran would obtain the benefits of the corporate form without its burdens. She would be using the corporate entity to contract, yet would retain the right to sue as an individual, third party beneficiary even when the corporation could not on account of its failure to comply with its corporate obligations and tax liabilities.'

Again citing '23301, Judge Rogers dismissed a similar digital-royalty suit by Dale Bozzio, lead singer of the band Missing Persons, whose loan-out corporation entered into a recording agreement with Capitol in 1983. The corporation had become inactive in 1998, two-years after the band broke up. Judge Rogers explained: 'Bozzio is directly, though not necessarily entirely, responsible for the suspended status of the corporation. While the loan-out corporation here is not in Bozzio's sole control, she has alleged that she is its president and the 'driving force' behind it. ' [But] whether Bozzio could revive the corporation on her own does not present a question of fact barring dismissal, as she contends.' Bozzio v. EMI Group Ltd., 12-cv-2421.

But District Judge Rogers refused to dismiss a digital royalty suit by members of the music group Tavares over their 1973 and 1976 recording agreements with Capitol Records. Tavares v. Capitol Records LLC, 12-cv-3059. Capitol argued that Tavares was barred from proceeding with claims older than two years, due to a two-year statute of limitations in their recording contracts for raising royalty objections, counted from the time the royalty statements were rendered.

Judge Rogers observed, however: 'Here, Plaintiffs allege that the royalty statements they received were misleading and did not put them on notice that Capitol was actually licensing digital masters to third-parties while reporting those earnings at the 'records sold' rate rather than the 'masters licensed' rate. Plaintiffs allege that they did not learn facts that would put them on notice of this misconduct until the extensive press coverage of F.B.T. Productions LLC v. Aftermath Records , 621 F.3d 958 (9th Cir. 2010). ' Plaintiffs allege that this was the first time they learned that the business arrangements between a major record company and Digital Providers involved licenses of master recordings. Thus, Plaintiffs have pleaded a basis for tolling the contractual limitations period based upon delayed discovery.'

But Judge Rogers did dismiss the Tavares's claim for punitive damages, which generally aren't allowed under California law for breach of the covenant of good faith and fair dealing.

Stan Soocher is Editor-in-Chief of Entertainment Law & Finance and a tenured Associate Professor of Music & Entertainment Industry Studies at the University of Colorado's Denver Campus. He can be reached at [email protected] or via www.stansoocher.com.