Eminem Court Papers

Case 2:07-cv-03314-PSG-MAN Document 175-2 Filed 12/03/2008 Page 1 of 30
1 Richard S. Busch (TN Bar No. 014594) (pro hac vice)

rbusch@kingballow.com
2 KING & BALLOW
315 Union Street, Suite 1100
3 Nashville, TN 37201
(615) 259-3456 Facsimile: (615) 726-5417
4
Paul H. Duvall (State Bar No. 73699)
5 pduvall@kingballow.com
KING & BALLOW
6 9404 Genesee Avenue, Suite 340
La Jolla, CA 92037-1355
7 (858) 597-6000 Facsimile: (838) 597-6008
8 Mark L. Block (State Bar No. 115457)
mblock@glaserweil.com
9 GLASER, WEIL, FINK, JACOBS, & SHAPIRO, LLP
10250 Constellation Blvd., 19th Floor
10 Los Angeles, CA 90067
(310) 553-3000 Facsimile: (310) 556-2920
11 Attorneys for Plaintiffs F.B.T. Productions, LLC and Em2M, LLC
12 UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
13
14 F.B.T. PRODUCTIONS, LLC, et ) Case No. CV 07-03314 PSG (MANx)

15 al., )
MEMORANDUM AND POINTS
)
16 AND AUTHORITES IN SUPPORT
Plaintiffs, )
OF PLAINTIFFS’ MOTION FOR
17 v. )
SUMMARY JUDGMENT
)
18 AFTERMATH RECORDS doing )
Date: January 5, 2009
19 business as AFTERMATH )
Time: 1:30PM
ENTERTAINMENT, et al., )
20 Place: Roybal, Courtroom 790
)
Honorable Philip S. Gutierrez
21 Defendants. )
)
22 Discovery Cut-Off: Nov. 3, 2008
)
Final Pretrial Conference: Jan. 12,
23 )
2009
)
24 Jury Trial: Feb. 3, 2009
)
25 )
)
26 )
27
28
Plaintiffs’ Motion for Summary Judgment Case No. CV07-03314 PSG (MANx)
1
TABLE OF CONTENTS
2
I. INTRODUCTION……………………………………………………1
3
II. STATEMENT OF FACTS…………………………………………...2
4
A. Aftermath/F.B.T. Agreements………………………………………..2
5
1. 1995 Agreement between F.B.T and Eminem………………...2
6
2. The 1998 Agreement…………………………………………..2
7
3. The 2000 Novation…………………………………………….3
8
4. The 2003 Agreement…………………………………………..4
9
a. The 2004 Amendment…………………………………..5
10
B. Digital Downloads and Other Third Party Uses……………………...6
11
C. Types of Digital Downloads…………………………………………7
12
D. UMG’s Contracts with Third Party Permanent Download and
13
Mastertone Providers…………………………………………………8
14
1. iTunes Permanent Download Agreement……………………...9
15
2. Mastertone Agreements………………………………………11
16
E. UMG’s Royalty Treatment of Revenues from Digital Uses………...12
17
1. The Letter from Music Industry Attorneys…………………...13
18
F. UMG’s Characterization of Its Arrangements………………………14
19
G. UMG’s Royalty Treatment of Third Party Compilation Albums…...15
20
H. The Royalty Audit…………………………………………………...15
21
ARGUMENT
22
III. GENERAL STANDARD FOR SUMMARY JUDGMENT
23
MOTIONS…………………………………………………………..16
24
IV. IF UMG HAS LICENSED THE EMINEM MASTERS, PLAINTIFFS
25
ARE ENTITLED TO ROYALTIES BASED ON 50% OF UMG’S
26
NET RECEIPTS…………………………………………………….17
27
1. Any Ambiguity in the 1998 or 2003 Agreements Must be
28
Construed Against Defendants……………………………….19
i
1
2. The Master License Provision is Not Restricted to “Ancillary”
2
Income………………………………………………………..20
3
B. The Third Party Digital Download Providers are Licensees………..21
4
1. UMG’s Relationiships with Third Party Digital Download
5
Providers are Analogous to Other Situations Where the Master
6
License Provision Applies……………………………………23
7
2. UMG Has Admitted it Licenses Composition Copyrights to
8
Apple for Some of These Same Songs in Another Case……..24
9
V. THE UNDISTPUTED FACTS DEMONSTRATE THAT UMG
10
UNDERPAID PLAINTIFFS $159,332 BASED ON A MMIS-ALLOCATION OF
11
CONSTS BETWEEN PLAINTIFFS AND EMINEM……………………………25
12
VI. CONCLUSION……………………………………………………...25
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
ii
1
TABLE OF AUTHORITIES
2
3
Cases
4 Anderson v. Liberty Lobby, Inc.,
5 477 U.S. 242, 247-248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986)………...17
6
Badie v. Bank of America,
7 67 Cal. App. 4th 779 (Cal. App. 1st Dist. 1998)….. …………………..…..19
8
Barnett v. Centoni,
9 31 F.3d 813, 815 (9th Cir. 1994)………………………….………….…….16
10
Graham v. Scissor-Tail, Inc.,
11
28 Cal. 3d 807, 812-818 (1981)……………………………………………19
12
May v. American Trust Co.,
13
135 Cal. App. 385, 393 (Cal. App. 1933)………………………...………..18
14
15 Microsoft Corp. v. DAK Indus. (In re DAK Indus.),

66 F.3d 1091, 1095 (9th Cir. 1995). ………….…….……………………..21
16
17 Morey v. Vannucci,
64 Cal. App. 4th 904, 75 Cal. Rptr. 2d 573, 578
18
(Cal. Ct. App. 1998)………………………………………………………..17
19
20
Neal v. State Farm Ins. Cos.,
188 Cal. App. 2d 690, 695 (Cal. App. 1st Dist. 1961).…………………….19
21
22 People ex rel. Lockyer v. R.J. Reynolds Tobacco Co.,

107 Cal. App. 4th 516, 132 Cal. Rptr. 2d 151, 157 (Cal. Ct. App. 2003)… 17
23
24 Rissetto v. Plumbers & Steamfitters Local,

25
343, 94 F.3d 597, 600-601, 605 (9th Cir. 1996).…...……….……………..25
26 Shuptrine v. Brown
27 No. 81-5628, 1983 U.S. App. LEXIS 13307 * 6 (6th Cir. March 14,
1983)……………………………………………………………………..9, 22
28
iii
2 SoftMan Prods. Co. v. Adobe Sys.,

171 F. Supp. 2d 1075 (C.D. Cal. 2001)…………………………………….22
3
4 States v. Wise,
5
550 F.2d 1180 (9th Cir. 1977), cert. denied, 434 U.S. 929)……………..…..9
6 UMG Recordings v. Augusto,

7 558 F. Supp. 2d 1055, 1060 (C.D. Cal. 2008) …….……………………….21
8
United States v. Wise,
9 550 F.2d 1180, 1190 (9th Cir. 1977)……………………………………….22
10
Wilson v. City of Fountain Valley,
11 372 F. Supp. 2d 1178, 1183 (C.D. Cal. 2004)………..…………….………16
12
13

14
Statutes
15
17 U.S.C. § 106(1), (3)………………………………………………………..22, 23
16
17 U.S.C. § 109(a)………………………………………………………………….9
17
Cal. Civ. Code, § 1638……………………………………………………………17
18
Cal. Civ. Code, § 1644……………………………………………………………18
19
Cal. Civ. Code § 1654…………………………………………………………….19
20
21
Other Authorities
22
2 Melville B. Nimmer & David Nimmer,
23
Nimmer on Copyright § 8.12[B][1][a] (2008)………………………………9
24
25
26
27
28
iv
1 I. INTRODUCTION
2 Plaintiffs F.B.T. Productions, LLC (“F.B.T.”) and Em2M, LLC (“Em2M”)
3 (collectively, “plaintiffs”)1 respectfully submit this memorandum of points and
4 authorities in support of their motion for summary judgment. As shown below,
5 summary judgment in favor of plaintiffs is appropriate on all claims in this action.
6 On the First and Third2 Counts, the clear and unambiguous language of the
7 relevant recording agreements state:
8 On masters licensed by us or our Licensees to others for their
9
manufacture and sale of records or for any other uses, your royalty
shall be an amount equal to fifty percent (50%) of our net receipts…
10
11 (Plaintiffs’ Statement of Undisputed Facts (“SOF”) ¶ 1 (emphasis added).)
12 Despite attempting to camouflage their agreements with third parties as
13 something other than licenses, defendants have indisputably licensed plaintiffs’ master
14 recordings for such “uses” by way of permanent digital downloads and Mastertones,
15 but have not paid plaintiffs pursuant to this provision. To the extent extrinsic evidence
16 is considered, such evidence indeed supports this conclusion, and summary judgment
17 on Counts One and Three in favor of plaintiffs is appropriate.
18 On the second cause of action, it is undisputed, and defendants admit, that
19 defendants have improperly calculated the allocation of certain costs as between
20 Eminem and plaintiffs, resulting in an underpayment to plaintiffs of $159,332. (Id.
21 ¶ 2.) Defendants acknowledged this underpayment in writing yet refuse to remit the
22 amount owed to plaintiffs. (Id. ¶ 5.)
23
1
Plaintiffs are entities made up of the individuals who discovered and signed the superstar rap artist
24 Marshall B. Mathers, III p/k/a Eminem (“Eminem”). (SOF ¶ 3) As discussed herein, plaintiffs claim
an entitlement to additional royalties payable for the use and exploitation of master recordings of
25 performances by Eminem (the “Eminem masters”) through contracts with defendant Aftermath
Records d/b/a Aftermath Entertainment (“Aftermath”), a joint venture made up of 1) Interscope
26 Records, a California general partnership; 2) Interscope Records, an unincorporated division of
UMG Recordings, Inc.; and 3) ARY, Inc. (collectively, “defendants”). (Id. ¶ 4.)
2
Count 3 asks the court to enter a declaratory judgment holding that the 1998 and 2003 Agreements
27 among plaintiffs and defendants obligate defendants to pay royalties equal to fifty percent (50%) of
their net receipts from the licensing by defendants or defendants’ Licensees of the Eminem Masters
28 to Music Download Providers and Mastertone Providers. (Doc. No. 100 ¶¶ 53-56) Summary
judgment on this count is appropriate for the same reasons it is appropriate on Count 1, which asks
for a judgment of breach of contract on the same basis. (See Id. ¶ 37-43.)
Plaintiffs’ Motion for Summary Judgment 1 Case No. CV 07-03314 PSG (MANx)
1 II. STATEMENT OF FACTS

2 A. Aftermath/F.B.T. Agreements
3 1. 1995 Agreement between F.B.T. and Eminem
4 Jeff and Mark Bass are the individuals who, in approximately 1995, discovered
5 the budding rapper Marshall B. Mathers, III p/k/a Eminem (“Eminem”) and signed
6 him to their production company, F.B.T. Productions. (SOF ¶ 6.) F.B.T. had been
7 formed in or around 1995 and was unaffiliated with any large or well-established
8 entity in the music business. (Id. ¶ 7.) Pursuant to their agreement, F.B.T. was
9 engaged to produce records containing master recordings of performances by
10 Eminem. (Id. ¶ 8.) Joel Martin serves as the managing agent of F.B.T. and has been
11 granted a share of F.B.T.’s royalties payable under its agreements with and involving
12 Eminem. (Id. ¶ 9.) Mr. Martin is the sole member of plaintiff Em2M, LLC and
13 assigned it his royalty share. (Id. ¶ 10.)
14 2. The 1998 Agreement
15 Eminem’s debut album, Infinite, was released in approximately 1996 but was
16 not commercially successful. (Id. ¶ 11.) Eminem was little known as a rap artist
17 Detroit and was represented by Paul Rosenberg, a lawyer fresh from law school with
18 little professional experience in the music industry. (Id. ¶ 12.) As of 1998, Mr.
19 Rosenberg had never negotiated a contract with a major record label. (Id. ¶ 13.)
20 Eminem remained in relative obscurity until coming to the attention of Jimmy
21 Iovine, head of Universal Music division Interscope Records, and the well-known rap
22 artist and record producer Andre Rommel Young, Jr., p/k/a Dr. Dre. (Id. ¶ 14.) Mr.
23 Martin and Jeff and Mark Bass pooled funds to arrange a trip to Los Angeles to meet
24 with Interscope Records executives, and Dr. Dre decided to offer Eminem a record
25 deal. (Id. ¶ 15.) Dr. Dre “wanted Eminem signed quickly,” and Aftermath and
26 Interscope’s representatives presented him with a form based on prior Aftermath
27 agreements. (Id. ¶ 17.) Although drafts show that Eminem was able to negotiate
28 some increased advances, royalty rates remained largely unchanged throughout the
1 negotiation process, and the recording agreement (the “1998 Agreement”) was
2 finalized in “four or five days.” (Id. ¶¶ 18-19.) No other record label was negotiating
3 for Eminem’s services at that time. (Id. ¶ 20.)
4 The 1998 Agreement provides a royalty rate for “full-price records sold in the
5 United States” by defendants that varies between 12% (for “records other than LPs”)
6 to 20% (for LPs 4 through 7, after escalation) of the Suggested Retail List Price. (Id.
7 ¶ 21.) For licenses of the Eminem masters to third parties, Paragraph 4(c)(v) of the
8 1998 Agreement states, on masters “licensed” by defendants or their licensees to
9 others “for their manufacture and sale of records or for any other uses, your royalty
10 shall be an amount equal to fifty percent (50%) of our net receipts from the sale of
11 those records or from those other uses of the masters” (the “Master License”
12 provision). (Id. ¶ 22 (emphasis added).)
13 Master License provisions are contained in many artist recording agreements,
14 the purpose of which is to provide a higher royalty rate when the record company
15 licenses the master recordings to third parties, since in such situations the record
16 company does not incur the expensive incremental costs associated with
17 manufacturing and distributing potentially millions of records associated with a
18 release. (Id.) The Master License provision is a catch-all intended to apply to all
19 licensed uses of the master recordings not specifically provided for in the recording
20 agreement, as shown by the fact that, on its face, this provision applies to licenses for
21 the “manufacture and sale of records” and for “any other uses.” (Id. ¶¶ 1, 24.) The
22 record company drafts this provision as broadly as possible. (Id. ¶ 25.) This
23 provision is essentially “non-negotiable,” especially in the case of a new artist without
24 a competing record company bidding for his services. (Id. ¶ 26.)
25 3. The 2000 Novation
26 An agreement dated September 27, 2000 (the “2000 Novation”) altered the
27 legal relationship among F.B.T., Eminem and Aftermath to give Aftermath a direct
28 relationship with Eminem. (SOF ¶ 28.) Plaintiffs retained a right to royalty income
1 under this agreement; Aftermath agreed to render separate accountings to FBT and
2 Eminem, and the 2000 Novation specified the royalty share of each. (Id. ¶¶ 29-30.)
3 The 2000 Novation also increased the royalty rates payable for certain sales of
4 records, removed or modified the reductions on some configurations (e.g., CDs), and
5 amended various other provisions of the 1998 Agreement. (Id. ¶¶ 32-33.) The 2000
6 Novation made no changes to the Master License provision and made no reference to
7 permanent downloads or any other digital configuration.3 (Id. ¶¶ 34-35.)
8 4. The 2003 Agreement
9 A new term artist agreement dated July 2, 2003 was entered into between
10 Aftermath and Eminem (the “2003 Agreement”) which, by its terms, terminated the
11 term of the 1998 Agreement. (SOF ¶ 37.) By this time, Eminem had been a superstar
12 recording artist for several years, having released hugely successful records in 1999,
13 2000 and 2002; Eminem had also starred in the movie 8 Mile and a number of songs
14 by Eminem were featured prominently in the movie. (Id. ¶ 38.)
15 The 2003 Agreement made a number of changes, increasing advances and
16 royalty percentages as befit Eminem’s increased stature. (Id. ¶ 39.) Although F.B.T.
17 was no longer “furnishing the services” of Eminem (as it had been in 1998), due to the
18 2000 Novation, both F.B.T. and Joel Martin (for Em2M) remained royalty
19 participants. (Id. ¶¶ 40-41.) Although certain royalty rates, such as those for sales of
20 LPs were increased in the 2003 Agreement, the structure and wording of the royalty
21 provisions was not altered. (Id. ¶ 43.) The Master License provision went
22 substantively unchanged.4 (Id. ¶ 44.)
23
24
25
26 3
While Compact Discs are digitally encoded (as opposed to the “analog” encoding on, for example,
vinyl records) (SOF ¶ 36), the phrase “digital configuration” and similar phrases such as “digital
27 uses” are used herein to apply only to digital formats intended for transmission over the internet or
mobile
4
phone networks.
28 Certain paragraphs were renumbered, and the Master License provision now fell in paragraph
5(c)(v). (SOF ¶ 44.) Also, the reference to “NRS” Licensees was deleted; defendants have
explained that the reference to “NRS” in the 1998 Agreement was inconsequential. (Id. 45.)
1 Yet, by 2003, as discussed more fully below, UMG Recordings, Inc.5 had
2 entered into its initial license agreement with Apple Computer, Inc., for iTunes, and
3 was therefore aware of the impact such licenses would have on its royalty obligations.
4 (Id. ¶¶ 47-48.) Therefore, beginning in early 2003, UMG and its affiliated labels,
5 including defendants in this action, began requiring that all new recording
6 agreements with artists contain a provision expressly specifying how royalties would
7 be paid for the licensing of that artist’s master recordings for permanent download,
8 conditional or limited downloads, and streams. (Id. ¶ 49.). During the negotiation of
9 the 2003 Agreement with Eminem, however, there was no discussion of what royalty
10 rates would apply to digital uses of the Eminem masters, whether permanent
11 download, Mastertone, streaming, or anything else, and no additional language
12 proposed by UMG similar to what they required in other artist contracts. (Id. ¶ 50.)
13 Instead the Master License provision of the 1998 agreement remained in the 2003
14 agreement unchanged. (Id. ¶ 44.)
15 Rand Hoffman is the head of Legal and Business Affairs of defendant
16 Interscope Records, drafted and negotiated the 2003 Agreement on behalf of
17 Interscope, and was defendants’ 30(b)(6) witness in this action on various topics. (Id.
18 ¶ 51.) Mr. Hoffman testified in this action that there were no discussions during
19 negotiations as to whether the Master License provision applied to digital downloads.
20 (Id. ¶ 52.) He admits, however, that the Master License provision would indeed apply
21 to permanent downloads if the agreements between defendants and the download
22 providers are licenses. (Id. ¶ 53.)6
23 a. The 2004 Amendment
24 An amendment was made to the 2003 Agreement as of November 1, 2004.
25 (SOF ¶ 56.) The amendment only modified the 2003 Agreement and therefore only
26
27 5
6
Defendant Interscope is an unincorporated division of UMG Recordings, Inc, see supra at 1 fn1.
28 Mr. Hoffman claims, however, that the unspoken intent of the parties was that the provision would
not apply. An email produced by Mr. Hoffman after discovery closed contradicts that contention.
(SOF ¶¶ 54-55.)
1 applied to releases occurring after the date thereof. (Id. ¶ 57.) The amendment
2 increased the advance for an upcoming LP, changed the share of plaintiffs’ passive
3 income participation, and altered some royalty rates in relation to the so-called
4 “escalation” provision.7 (Id. ¶ 58.) With regard to such escalations, the amendment
5 provided that for full-price records sold in the United States, “[s]ales of Albums by
6 way of permanent download shall be treated as USNRC Net Sales for the purposes of
7 escalations…” (Id. ¶ 59 (emphasis added).) Eminem’s representative Mr. Stiffelman
8 requested this change to clarify how permanent downloads of albums would be treated
9 when determining escalations. (Id. ¶ 61.) It was only discussed that full album sales
10 by way of permanent downloads would count toward escalations. (Id. ¶ 63.) The
11 amendment left the Master License provision unchanged.
12 B. Digital Downloads and Other Third Party Uses
13 By 1998, UMG had created a specialized department to explore the nascent
14 digital marketplace for music, but the market was still undeveloped and little legal
15 commerce in music over the internet was taking place. (SOF ¶ 64.)
16 By July 2003, when the 2003 Agreement was entered into, the digital
17 marketplace had matured significantly. (Id. ¶¶ 65-66.) Several recording industry
18 attempts, including initiatives by defendants and their parent Universal Music Group
19 (“UMG”), to release music in digital formats had been attempted but failed or
20 produced only limited consumer interest, such as Farm Club, Full Audio, Music Net
21 and Pressplay. (Id. ¶ 67.) As a result, UMG was actively seeking digital licensing
22 relationships with third parties such as Apple, Cingular, Sprint and T-Mobile, to whom
23 UMG could license its master recordings, and who had the technology and
24 infrastructure to then reproduce and make downloaded music available to consumers.
25 (Id. ¶ 68.) Apple’s iTunes Music Store launched in 2003 and quickly became the
26
27 7
Recording agreements frequently raise the royalty rate for sales of a given album when certain
28 sales levels are reached. (SOF ¶ 60.) Here, for example, the 1998 Agreement provided for a royalty
rate of 18% on the first 500,000 copies of LPs 1 through 3 sold, 18.5% for sales between 500,000
and 1 million, and 19% for sales in excess of 1 million. (Id. ¶ 62.)
1 largest source of legal permanent downloads on the internet, via its licensing
2 agreements with record labels. (Id. ¶¶ 69-70.)
3 C. Types of digital downloads
4 iTunes and many other companies offers to consumers, through their licenses
5 with record labels, what are known as “permanent downloads” – digital copies of
6 master recordings that, once downloaded, reside permanently on an end-user’s
7 computer (or iPod, etc.).8 (SOF ¶¶ 71, 73.). In general, iTunes, for example, receives
8 a digital file from the record label pursuant to its licensing agreement (discussed in
9 more detail below), encodes the digital file with Digital Rights Management
10 technology (“DRM”), reproduces that digital file, and maintains it on its servers and
11 the servers of yet another third party (“Akamai”) so that the file is available when an
12 end user wishes to purchase it from iTunes for permanent download. (Id. ¶ 74.)
13 Although the DRM limits, for example, how many computers the user can then put a
14 given song on, the user need not pay any more money or sustain a relationship or
15 account with iTunes to retain access to the songs he has downloaded. (Id. ¶ 75.)
16 “Streaming” of music is a process whereby a user can listen to a song but no
17 copy is created on his local machine. (Id. ¶ 76.) The service receives the master
18 recording from the record label and manufactures and reproduces it in the same way
19 as discussed above with respect to permanent downloads (id. ¶ 77), but the user can
20 only listen to the song more-or-less contemporaneously with its transmission. (Id. ¶
21 78.) It is not possible to listen to a stream, or to re-listen to a song that has just been
22 streamed, without connecting to the provider. (Id. ¶ 79.)
23 “Conditional downloads” are a form of actual download, with the restriction
24 that a user must maintain a subscription to a given service in order to be able to
25 download songs, or continue to listen to songs downloaded. (Id. ¶ 80.) The process
26
27
28 8
While other companies also offer permanent downloads of music, iTunes is by far the industry
leader. (SOF ¶ 72.)
1 of making the songs available to end users by the third party licensee is the same as
2 discussed above with respect to permanent downloads. (Id. ¶ 81.)
3 “Mastertones” are a category of digital uses covering more than one product
4 and are typically short clips (approximately 30 seconds) of a master recording that
5 plays on a mobile device to signal an incoming telephone call. (Id. ¶ 82.) Most
6 common are Mastertones that a user purchases and permanently downloads from a
7 provider, and which are functionally similar to a permanent download. (Id. ¶ 83.)
8 Other forms of Mastertones – for example, T-Mobile’s “ringback tones” play not for
9 the purchaser but rather for a third party who calls the purchaser, and are stored on a
10 central server and “streamed” to the caller. (Id. ¶ 84.) Again, the Mastertone
11 provider receives the master recording from the record label and makes it available to
12 users in the same manner as that discussed above for permanent downloads. (Id. ¶ 85.)
13 D. UMG’s Contracts with Third Party Permanent Download and
14
Mastertone Providers
15 Since approximately 2001, UMG has entered into licensing agreements with
16 various third parties granting those entities the rights to reproduce and distribute UMG
17 music to consumers over the internet in the forms discussed above. (SOF ¶ 86.)
18 In this litigation, UMG has produced approximately eighty agreements granting
19 various entities these rights to reproduce and sell UMG’s music (including the
20 Eminem masters) as permanent downloads and Mastertones. (Id. ¶ 87.)9 Although the
21 contracts differ somewhat, most are similar in terms of the rights granted to the third
22 parties and their general structure. (Id. ¶ 89.) Defendants have confirmed that the
23 process by which digital files are transferred to the third party digital download
24 providers and then offered and reproduced for end-users, are largely identical. (Id. ¶
25 90.) Due to these similarities and to limit the burden on the Court, a few select
26
27
28 9
The remaining 120 or so agreements are for conditional downloads, streaming, and other services.
(SOF ¶ 88.)
1 agreements are discussed herein, which are representative of the other contracts and
2 relationships at issue. (Id. ¶ 91.)
3 1. iTunes Permanent Download Agreement
4 On December 13, 2002, UMG and Apple entered into an agreement (the
5 “iTunes Agreement”), 10 under which UMG licenses to Apple numerous rights. (SOF
6 ¶ 92.) UMG specifically grants Apple the right “to make available to End Users
7 Downloads of Universal Sound Recordings” and “to make Reproductions of the
8 Universal Sound Recordings solely insofar as they are necessary to the Performance
9 or Download of the Universal Sound Recordings.” (Id. ¶ 95.) Exhibit A to the iTunes
10 Agreement, titled “Additional Terms and Conditions” states that nothing in the
11 agreement gives Apple any ownership interest in the Universal Sound Recordings,
12 including any copyright ownership interest. (Id. ¶ 96.) Other provisions give UMG
13 the right to terminate the agreement at any time and to demand that iTunes cease
14 selling some or all of the master recordings licensed to it (Id. ¶ 97.).11 Other
15 provisions reserve to UMG “any and all rights not expressly granted” and provide
16 other limitations in the rights granted to Apple (e.g., territorial limitations). (Id. ¶
17 102.) The agreement provides that upon termination, Apple “shall be required to
18 immediately cease using the Universal Sound Recordings on the Service,” must return
19 any physical CDs received from Universal and must destroy all digital files
20 embodying Universal Sound recordings. (Id. ¶ 103.) For each song (or album) “sold”
21 by iTunes, Apple must pay UMG a “wholesale price” of the larger of $0.70 for each
22 individual song download and $7.00 for each download of a full album, or 70% of the
23 price Apple charges to its customers. (Id. ¶ 104.) This fee also serves as consideration
24 “for each compliant Reproduction made by Apple of a Universal Sound Recording.”
25
26 10
The 2002 Apple agreement was “amended and restated” dated April 28, 2006. (SOF ¶ 93.) The
provisions
11
discussed above did not change substantively. (Id.)
27 Thus, it is indisputable that Apple does not have any “first sale” rights, which a purchaser (as
opposed to a licensee) would have if it purchased a CD from a record label. See 17 U.S.C. § 109(a);
28 2 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 8.12[B][1][a] (2008); Shuptrine v.
Brown, No. 81-5628, 1983 U.S. App. LEXIS 13307 * 6 (6th Cir. March 14, 1983) (citing States v.
Wise, 550 F.2d 1180 (9th Cir. 1977), cert. denied, 434 U.S. 929); Kenswil Dep. at 129:21-130:17.)
1 (Id. ¶ 105.) Apple retains the sole right to set the price at which it will offer
2 permanent downloads to users. (Id. ¶ 106.)
3 The iTunes service operates on an “on demand” basis: when a user selects a
4 song to download and pays Apple for that song, the sound recording file is replicated
5 and transmitted to the user, resulting in a copy on the user’s computer. (Id. ¶ 107.)
6 Apple does not maintain an inventory that is “depleted” when a user downloads a file
7 and cannot “run out” of copies (as a store selling physical product might). (Id. ¶ 108.)
8 Although the iTunes agreement is careful to avoid characterizing itself as a
9 “license,” other provisions of the contract show the parties viewed it as such. For
10 example, paragraph 2(h) of Exhibit A to the agreements, “No Further Licensing or
11 Obligation,” states that “Except for the rights granted by Universal to Apple in section
12 1 of the Agreement, no further rights are granted to Apple in or under the
13 agreement…” (Id. ¶ 109.) The iTunes “Terms of Service” agreement similarly refers
14 to content “owned by Apple and/or its licensors.” (Id. ¶ 110.)
15 Steve Jobs, CEO of Apple, discussed his company’s relationship with UMG as
16 that of a “license” in an essay titled “Thoughts on Music” dated February 6, 2007.
17 (Id. ¶ 111.) He explained Apple’s need to “license rights to distribute music from
18 others,” mentioning Universal and the other large record companies, and Apple’s
19 subsequent success in “licens[ing] their music to distribute legally over the Internet.”
20 (Id. ¶ 112) Although he consistently referred to Apple “licensing” music from “the big
21 four music companies” (Id.), when deposed in this case he claimed not to know
22 whether his company’s relationship with Universal was, in fact, a license. (Id. ¶ 113.)
23 Mr. Cue, Vice President of iTunes, has also characterized Apple’s relationship
24 with UMG (and other rights-holders) as a license. In a written statement submitted to
25 the Copyright Royalty Board, Mr. Cue repeatedly states that iTunes has “licensed”
26 “millions of songs” from copyright holders, and explains that “royalty payments”
27 pursuant to these “licensing agreements” are the most significant cost faced by iTunes.
28
1 (Id. ¶ 114.) Yet, like Mr. Jobs, Mr. Cue professed not to know whether the iTunes
2 Agreement was a license when deposed. (Id. ¶ 115.)
3 It is undisputed that, contractually, no title to any UMG master recordings or to
4 the digital audio files embodying those recordings passes to Apple, nor does title pass
5 to any third party permanent download provider. (Id. ¶ 116.)12
6 2. Mastertone Agreements
7 In approximately 2003, UMG began negotiating with various third party entities
8 who wanted to offer UMG songs to consumers for use on mobile phones as
9 Mastertones. (SOF ¶ 120.) UMG entered into agreements with the major cellular
10 telephone network carriers, including Sprint, Nextel, Cingular, and T-Mobile. (Id. ¶
11 121.) These contracts were primarily drafted by representatives of the third party
12 Mastertone Providers and presented to UMG on a “take it or leave it” basis due to the
13 superior bargaining position of the Mastertone providers. (Id. ¶ 122.) These
14 agreements are similar with one another, and UMG grants similar if not identical
15 rights to each Mastertone provider.
16 Most of these agreements, unlike the permanent download agreements
17 discussed above, explicitly state they are granting the Mastertone provider in question
18 a “license” to reproduce and distribute Mastertones embodying UMG music (among
19 other things). (Id. ¶ 123.). The only one of the agreements referenced above between
20 UMG and a Mastertone provider that does not explicitly call the grant of rights from
21
12
22 Defendants claim that Apple is not a licensee, but instead, supposedly, a “reseller” of UMG master
recordings, much like a Best Buy or a Tower record store. (SOF ¶ 117.) Unlike a reseller, however,
23 it is undisputed in this action that (1) nowhere does the agreement call Apple a reseller (id. ¶ 118);
(2) title to the digital file supplied by defendants to Apple does not transfer to Apple (id. ¶ 116); (3)
24 Apple reproduces the master recordings, and maintains such reproductions on its servers, which
requires a license, while a reseller like Best Buy or Tower does not (id. ¶ 107); (4) Apple has no
25
“first sale” rights (see supra at 9 fn11); and (5) since UMG sells nothing to Apple, and Apple has no
26 obligation to pay Apple anything unless and until an end user downloads a song, there is no sale
between UMG and Apple, much less a resale to a consumer. Although no support is found in any of
27 the agreements, in response to this litigation, representatives of UMG and Apple have concocted the
claim that the sale from UMG to Apple, as well as the supposed resale to the consumer, occurs
28 simultaneously at the time of the download. (Id. ¶ 119.)
1 UMG a “license” is the agreement with T-Mobile, the only one for which UMG was
2 able to negotiate certain wording. (Id. ¶¶ 124-125.) However, the initial draft of the
3 agreement did refer to this grant as a “license,” but the word “license” was changed to
4 “authorization” and “right” in a March 18, 2004 revision by UMG, clearly in order to
5 attempt to camouflage the agreement as something other than a license. (Id. ¶ 127.)
6 T-Mobile did not oppose or question this change because they “did not feel it was
7 material.” (Id. ¶ 128.) All of these “grant of rights” provisions, including that in the
8 T-Mobile agreement, explicitly grant the rights to reproduce and distribute UMG’s
9 intellectual property. (Id. ¶ 129.)
10 Other provisions in these contracts also contain indicia of a license. All of the
11 agreements make it clear that all intellectual property rights in the UMG recordings
12 (and the Mastertones embodying those recordings) are reserved to UMG and no
13 ownership rights therein are granted. (Id. ¶ 130.) They are also all for a limited term
14 and most explicitly state the Mastertone providers’ rights in the UMG content expire
15 upon termination. (Id. ¶ 131.) UMG keeps tight control over its content subject to
16 these agreements as shown by provisions giving UMG the right to unilaterally request
17 the removal of any of its recordings from the Mastertone services. (Id. ¶ 132.)
18 The Mastertone agreements, like the iTunes Agreement described above,
19 provide for recurring and ongoing benefits to UMG: payments based on the quantity
20 and price of the Mastertones delivered to subscribers. (Id. ¶ 133.) For each
21 Mastertone delivered to a subscriber UMG is owed the greater of $1.00 or 50% of the
22 price charged consumers. (Id. ¶ 134.)
23 E. UMG’s Royalty Treatment of Revenues from Digital Uses
24 In approximately late 2002 – at approximately the same time the iTunes
25 agreement was being negotiated – UMG made the company-wide decision to pay
26 royalties for permanent downloads reproduced and distributed by third party providers
27 under the royalty provision applicable to defendants’ sales of physical product, not
28 under the Master License provision. (SOF ¶ 135.) At about the same time, and before
1 the 2003 Agreement was entered into, UMG, again on a company-wide basis, altered
2 its standard form artist contract to expressly treat permanent downloads under the
3 “record” royalty provision. (Id. ¶ 136.)
4 In contrast to its royalty treatment of permanent downloads, UMG treats
5 income from streaming and conditional download agreements (which they refer to
6 collectively as “subscription” agreements) as licenses of master recordings, and pay
7 royalties under the Master License provision. (Id. ¶¶ 137-138.) UMG provides the
8 same audio files to its third party partners whether they are destined for use via
9 streaming, conditional download or permanent download. (Id. ¶ 139.)
10 For all of these digital uses UMG has only minimal costs: no manufacturing,
11 packaging or distribution costs. (Id. ¶ 140.) If any of these costs (or something
12 analogous to them) exist, the third party digital download providers incur them, not
13 UMG.13 (Id. ¶ 141.) There is absolutely no legitimate explanation for the unilateral
14 decision by UMG to treat permanent downloads and Mastertones by third parties as
15 sales of records by UMG but conditional downloads and streams as licenses, since the
16 agreements with the third parties in both cases are virtually identical. (Id. ¶ 142.)14
17 1. The Letter from Music Industry Attorneys
18 UMG’s unilateral royalty decision did not go unnoticed by music artists and
19 their representatives and, on March 24, 2004, approximately 27 attorneys representing
20 both prominent artists and record companies in the music industry signed a letter to
21
13
22 For this reason, the “new medium” deduction specified in the 1998 and 2003 Agreements is also
inapplicable to digital downloads. The “new medium” deduction is included in artist contracts with
23 the anticipation that new technologies may have increased costs for the record company. (Id. ¶ 144.)
Because the licensing of masters to third parties results in the third parties bearing all such costs,
applying the deduction in this circumstance would be contrary to the intent of the contracting parties.
24 (Id.) It is uncontested that UMG does not take this deduction either for conditional downloads and
streams (which are paid under the Master License provision) or permanent downloads and
25 Mastertones. (Id. ¶ 145.)
14
UMG witness David Weinberg, who negotiated many of UMG’s agreements with the digital
26 providers, when asked what made conditional downloads and streams “license” but not permanent
downloads and Mastertones, could only offer the res ipsa reasoning that “one involves the sale of
records, the other does not.” (SOF ¶ 146.) Yet, Mr. Weinberg also acknowledged that the Master
27 License provision would apply to masters licensed to third parties for use on a compilation album
that is sold by that third party. (Id. ¶ 147.) The question of whether the permanent download and
28 Mastertone contracts involve “sale of records” is irrelevant since the master licensing provision at
issue herein explicitly provides that it applies to licenses for the manufacture and sale of records or
for any other uses.” (Id. ¶ 1.)
1 the heads of the major record labels.15 (Id. ¶ 148.) The signatories to this letter
2 included Mr. Gary Stiffelman, who represents Eminem and negotiated the 2003
3 Agreement on his behalf, Mr. Peter Paterno, who represents Aftermath and negotiated
4 all of the relevant agreements with Eminem in this case on Aftermath's behalf, and
5 other prominent attorneys representing artists, labels and producers. (Id. ¶¶ 149-150.)
6 In their letter, the attorneys took issue with this royalty treatment, arguing royalties for
7 these uses should be paid under the provisions in artist contracts analogous to the
8 Master License clause at issue here. (Id. ¶ 148.)
9 F. UMG’s Characterization of Its Arrangements
10 Although UMG is careful to avoid use of the word “license” in most of its
11 agreements with permanent download providers,16 its representatives continually refer
12 to UMG’s actions as “licensing” their music in public statements. (SOF ¶ 155.) For
13 example, in sworn written testimony given before the Copyright Royalty Board,
14 Lawrence Kenswil, who is an attorney and Universal’s Executive Vice President of
15 Business Strategy, formerly the head of Universal eLabs, refers to UMG’s actions as
16 “licensing” sound recordings and “digital rights.” (Id. ¶ 156.)17 Jimmy Iovine, head
17 of defendant Interscope Records, is quoted in a magazine article as referring to
18 Apple’s need to “secure licenses from…the labels” and made similar references to
19 labels “licensing” music for various uses in a videotaped interview. (Id. ¶¶ 158-159.)
20 In addition, in an action proceeding in the Eastern District of Michigan in which
21 defendant Aftermath is a named party, Aftermath has admitted and argued that it
22
23 15
The "major" record labels as of March 2004 consisted of Sony Music Entertainment, Warner
Music Group, EMI Recorded Music, Universal Music Group and BMG Entertainment. (SOF ¶
24 153.) BMG and Sony have since been combined into a single company. (Id ¶ 154.) These
companies all made similar decisions with respect to the royalty treatment of permanent downloads
25 at
16
approximately the same time.
With the exception of the T-Mobile agreement, UMG has had less success in excluding this word
26 from their Mastertone agreements. (SOF ¶¶ 123-124.) When questioned about this, Mr. Weinberg
explained that these agreements were largely presented on a “take it or leave it” basis (id. ¶ 122)
meaning UMG did not have the opportunity to negotiate the removal of the word “license.”
17
27 Although Mr. Kenswil claimed that in this sentence, “electronic distribution” included only
“customized radio, subscription services, video streaming,” and not permanent downloads or
28 Mastertones – i.e., only the forms that UMG concedes are licenses– he claims that the phrase
“electronic distribution” used on the very next page in the same statement does include permanent
downloads. (SOF ¶ 157.)
1 licenses the compositions which are embodied in the Eminem masters to Apple for use
2 on the iTunes service. (Id. ¶ 160.) If the musical compositions are being licensed, the
3 master recordings embodying those compositions must also be licensed.
4 G. UMG’s Royalty Treatment of Third Party Compilation Albums
5 It is undisputed that any income UMG receives for the license of one or more
6 Eminem masters for use on a third-party compilation album would be accounted to
7 plaintiffs under the Master License provision, despite the fact that the third party
8 would sell physical CDs containing the Eminem master (along with other songs).
9 (SOF ¶ 174.) There are a number of similarities between UMG’s licensing of master
10 recordings for use on compilation albums and the permanent download and
11 Mastertone agreements described above.
12 First, royalties due UMG under a compilation album license are a percentage of
13 the retail price. (Id. ¶ 175.) The retail price of the final product is set by the third
14 party licensee, not UMG. (Id. ¶ 176.) A compilation license also grants the third party
15 similar rights to the agreements specified above: to reproduce, distribute and sell the
16 master recording. (Id. ¶ 177.) UMG provides a copy of the master recording to the
17 third party licensee in whatever format the licensee requests, possibly including
18 digital. (Id. ¶ 178.)
19 Compilation licenses contain limitations similar to those discussed above,
20 specifying that the rights granted are limited to the specific configurations requested
21 (and may include the right to distribute the album via permanent download or other
22 digital means), cease upon termination or shortly thereafter,18 and title to neither the
23 master recording nor the embodiment of the master passes to the third party. (Id. ¶¶
24 179-184.)
25 H. The Royalty Audit
26
27
28 18
At least some of UMG’s compilation licenses appear to allow a “sell-off period” after termination
so that remaining inventory is not a total loss to the licensee. (SOF ¶ 187.)
1 A royalty audit conducted by the Gary Cohen Corporation on behalf of

2 plaintiffs and Eminem covering the period January 1, 2002 to June 30, 2005 showed
3 UMG was paying plaintiffs royalties on permanent downloads and Mastertones based
4 on the royalty rate applicable to full price records sold by defendants in the United
5 States instead of the rate under the Master License provision. (SOF ¶ 191.) This
6 royalty treatment resulted in an underpayment of over $650,000 to plaintiffs and
7 Eminem through June 30, 2005, the period covered by the audit. (Id. ¶ 193) Through
8 April 2008, this underpayment has reached at least $1,340,754. (Id. ¶ 194.)
9 The audit revealed numerous other accounting inconsistencies separate and
10 apart from the digital issue discussed above. (Id. ¶ 195.) Defendants’ written
11 response to the audit, a letter dated May 8, 2007, denied almost all the claims in the
12 audit, including the digital claim described above, but admitted an underpayment to
13 F.B.T. of $159,332 stemming from incorrect allocation of costs as between Eminem
14 and plaintiffs. (Id. ¶ 196.) UMG’s 30(b)(6) witness in this action admits that the
15 $159,332 is owed to plaintiffs, and could not articulate any potential set-off amounts.
16 (Id. ¶ 197.)
17 ARGUMENT
18 III. GENERAL STANDARD FOR SUMMARY JUDGMENT MOTIONS.
19 A motion for summary judgment should be granted if there is no genuine issue
20 as to any material fact and the moving party is entitled to judgment as a matter of law.
21 See Fed. Rule Civ. Proc. Rule 56; Wilson v. City of Fountain Valley, 372 F. Supp. 2d
22 1178, 1183 (C.D. Cal. 2004). While any inferences drawn from the evidence
23 presented will be viewed in a light most favorable to the nonmoving party, the party
24 seeking summary judgment bears only the initial responsibility of showing there is no
25 genuine issue for trial, before the nonmoving party must introduce evidence. Wilson,
26 at 1183. Moreover, the moving party is not initially required to introduce evidence
27 negating an element on which the non-moving party will bear the burden of proof at
28 trial. Id. The moving party need only point out to the Court that, on at least one such
1 element, no evidence supports the non-moving parties’ case. Id.; see also Barnett v.
2 Centoni, 31 F.3d 813, 815 (9th Cir. 1994).
3 Thereafter, the nonmoving party may not rest upon the mere allegations or
4 denials of his pleading but rather must set forth specific facts showing that there is a
5 genuine issue for trial. Wilson, at 1183. Furthermore, "the mere existence of some
6 alleged factual dispute between the parties will not defeat an otherwise properly
7 supported motion for summary judgment; the requirement is that there be no genuine
8 issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-248, 106
9 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).
10 IV. IF UMG HAS LICENSED THE EMINEM MASTERS, PLAINTIFFS ARE
11
ENTITLED TO ROYALTIES BASED ON 50% OF UMG’S NET RECEIPTS
12 A. The Plain Language of the 1998 and 2003 Agreements Entitles

Plaintiffs to 50% of UMG’s Net Receipts for Licensed Uses of the Eminem
13
Masters
14
As the initial step in contract interpretation under California law,19 [w]here the
15
language of a contract is clear and not absurd, it will be followed. Cal. Civ. Code,
16
§ 1638.
17
However, if parties dispute the meaning of contractual language, "the first
18
question to be decided is whether the disputed language is 'reasonably susceptible' to
19
the interpretation urged by the party. If it is not, the case is over." People ex rel.
20
Lockyer v. R.J. Reynolds Tobacco Co., 107 Cal. App. 4th 516, 132 Cal. Rptr. 2d 151,
21
157 (Cal. Ct. App. 2003). The trial court “must provisionally receive any proffered
22
extrinsic evidence which is relevant to show whether the contract is reasonably
23
susceptible of a particular meaning,” and it is reversible error to refuse to do so based
24
on the Court’s conclusion that the language of the contract is clear and unambiguous
25
on its face. Morey v. Vannucci, 64 Cal. App. 4th 904, 75 Cal. Rptr. 2d 573, 578 (Cal.
26
Ct. App. 1998) (citations omitted).
27
28
19
The 1998 and 2003 Agreements, and the 2000 Novation specify that California law applies (cite.)
1 The plain language of the 1998 and 2003 Agreements states that,
2 “notwithstanding the forgoing [royalty provisions],” for “masters licensed…to others
3 for their manufacture and sale of records or for any other uses your royalty rate shall
4 be an amount equal to fifty percent (50%) of [defendants’] net receipts.” (SOF ¶ 1
5 (emphasis added).) Because the relationships between UMG and the third party
6 permanent download and Mastertone providers constitute licenses, see infra at 21-25,
7 plaintiffs are entitled to royalties based on 50% of defendants’ net receipts.
8 "The words of a contract are to be understood in their ordinary and popular
9 sense, rather than according to their strict legal meaning; unless used by the parties in
10 a technical sense, or unless a special meaning is given to them by usage, in which case
11 the latter must be followed." Cal. Civ. Code, § 1644. Practice and usage of this
12 provision in the music industry also favors this view: the Master License provision has
13 always been applied as a “catch-all” to encompass any scenario in which master
14 recordings were licensed to third parties. (SOF ¶ 24.) Although defendants may argue
15 the policies adopted in or around 2003 by the major music companies of accounting
16 for permanent downloads as though they were sales of physical records by the record
17 companies themselves constitutes evidence of industry custom, the record shows that,
18 as soon as this position was made known, the individuals being accounted to (e.g., the
19 artists) objected to the record companies. (SOF ¶ 148.) For example, in
20 approximately November 2003, Eminem’s representative Gary Stiffelman, stated his
21 client’s objections to this practice to Mr. Hoffman, head of Business and Legal Affairs
22 for defendant Interscope (a part of UMG). (Id. ¶ 55.) Taking a novel position that is
23 immediately opposed by the only other parties affected cannot constitute evidence of
24 industry custom or practice, since custom must be “certain and uniform in order that it
25 may be recognized as valid and enforceable in a court of law.” See May v. American
26 Trust Co., 135 Cal. App. 385, 393 (Cal. App. 1933). Custom “must be so uniform in
27 its operation that the parties must be presumed to have known it and acted in reference
28 to it.” Id. Here, the only “custom” defendants might allege – defendants’ policy of
1 paying for permanent downloads and Mastertones – was “established” in late 2002
2 (SOF ¶ 135), and artist representatives made their disagreement with this policy
3 known immediately. (Id. ¶¶ 55, 148.) Defendants acknowledge that the mere fact that
4 record companies unilaterally decided to self-servingly pay for digital downloads
5 under the provisions applicable to physical sales does not establish an industry
6 custom. (Id. ¶ 151.)
7 Aftermath’s own attorney, in the March 24, 2004 letter described above (see
8 supra at 13-14), supported plaintiffs’ position in this case, despite his recent change of
9 heart now that the client he represents has been sued. (Id. ¶ 150.) In Mr. Paterno’s
10 own words, artists should be paid “whatever they’re able to negotiate.” (Id. ¶ 152.)
11 Plaintiffs ask no more here than that they be paid at the rate provided for in their
12 contracts.
13 1. Any Ambiguity in the 1998 or 2003 Agreements Must be
14
Construed Against Defendants
15 Even if the Court were to find the language in the 1998 and/or 2003
16 Agreements unclear, “the language of a contract should be interpreted most strongly
17 against the party who caused the uncertainty to exist.” Cal. Civ. Code § 1654. This
18 rule is applied with particular force in the case of “adhesion contracts.” See, e.g.,
19 Badie v. Bank of America, 67 Cal. App. 4th 779 (Cal. App. 1st Dist. 1998); Neal v.
20 State Farm Ins. Cos., 188 Cal. App. 2d 690, 695 (Cal. App. 1st Dist. 1961).
21 A contract of adhesion is one which is “imposed and drafted by the party of
22 superior bargaining strength,” and thus “relegates to the subscribing party only the
23 opportunity to adhere to the contract or reject it.” Neal v. State Farm, 188 Cal. App. 2d
24 690, 694 (Cal. App. 1st Dist. 1961) (citing Kessler, Contracts of Adhesion (1943), 43
25 Columb. L. Rev., p. 629.). A contract of adhesion may be found even when certain
26 provisions of a contract are negotiable. See, e.g., Graham v. Scissor-Tail, Inc., 28 Cal.
27 3d 807, 812-818 (1981) (finding an adhesion contract even when the form contract
28 had blanks such as “hours of employment” and “wage agreed upon.”). Here, it is
1 uncontested that, when the 1998 Agreement was being negotiated, and despite the fact
2 that Dr. Dre wanted to complete the contract “quickly,” Eminem had essentially no
3 power from which to negotiate, and the Master License provision in particular was
4 one upon which record companies insist. (SOF ¶ 26.)
5 Even if the court did not find the 1998 and 2003 Agreements were contracts of
6 adhesion, there is also no dispute that the 1998 Agreement was drafted based on a
7 “standard” Aftermath form and that the 2003 Agreement was adapted from and largely
8 identical to the 1998 Agreement, meaning that Aftermath (or UMG) is the drafter.
9 Thus, even if the contracts – or the Master License provision – were found to be
10 ambiguous (which they are not), they should be construed against defendants and in
11 favor of plaintiffs.
12 2. The Master License Provision is Not Restricted to “Ancillary”
13
Income
14 David Weinberg, Senior Vice President, Business and Legal Affairs for
15 Universal’s eLabs, advanced the position that the Master License provision applied
16 only to “ancillary receipt income” or “ancillary income.” (SOF ¶ 162.) However,
17 neither the phrase “ancillary receipt income” nor “ancillary income” appears in the
18 Master License provision of either agreement (id. ¶ 163), and Mr. Weinberg’s
19 testimony is directly contradictory to the testimony of Mr. Hoffman, who stated that
20 nothing in the 1998 or 2003 Agreements states that only licenses that are “ancillary to
21 the main business” would fall under the Master License Provision. (Id. ¶ 165) Mr.
22 Weinberg further testified that because UMG viewed the Master License provision as
23 limited to “ancillary receipts” and considered Mastertones and permanent downloads
24 “sales of their records,” they paid royalties pursuant to the royalty provision
25 applicable to physical sales by defendants. (Id. ¶ 166.) When asked why UMG
26 accounts differently for conditional downloads licenses offered by third parties versus
27 permanent downloads offered by third parties, Mr. Weinberg answered that
28 conditional download contracts “did not involve the sale of records.” (Id. ¶ 167.) This
1 answer, however, no way helps defendants, since the Master License provision, by its
2 terms, applies to licenses for the “manufacture and sale of records.” (Id. ¶ 1.)
3 Finally, permanent downloads and Mastertones can hardly be considered a part
4 of UMG’s “core product,” since they make up only a very small percentage of its
5 revenues. For example, when the most recent of the agreements between plaintiffs
6 and defendants was signed, in 2004 (the first year the Recording Industry Association
7 of America (“RIAA”) tracked digital sales), digital downloads were less than 2% of
8 total domestic sales. (SOF ¶ 168.) As of 2007, the most recent year for which figures
9 are available, permanent downloads plus Mastertones account for only approximately
10 20% of total sales in the United States. (Id.)
11 B. The Third Party Digital Download Providers are Licensees
12
In determining whether a transaction is a sale or a license, courts must analyze the
13
"economic realities" of the transaction. Microsoft Corp. v. DAK Indus. (In re DAK
14
Indus.), 66 F.3d 1091, 1095 (9th Cir. 1995). The label on an agreement does not
15
determine whether or not it will be construed as a license. UMG Recordings v.
16
Augusto, 558 F. Supp. 2d 1055, 1060 (C.D. Cal. 2008) (citing DAK Indus., 66 F.3d at
17
1095 n.2).
18
UMG Recordings v. Augusto, a recent case from the Central District of California,
19
is instructive, having involved this same question of whether or not something had
20
been “licensed” or “sold.” Id. There, plaintiff UMG sued Augusto alleging copyright
21
infringement by his actions of selling promotional CDs (“Promo CDs”) sent to “music
22
industry insiders.” Id. at 1058. Augusto purchased the CDs from music shops and
23
online auctions and sold them through the online auction site eBay. Id. UMG alleged
24
the Promo CDs were “licensed,” not sold, as evidenced by language printed on each
25
CD stating that it remained the property of UMG, was only “licensed” to the recipient
26
and could not be sold. Id. On cross-motions for summary judgment, the Court
27
considered whether the CDs had in fact only been licensed to Augusto, or whether title
28
had passed. Id. at 1060.
1 First, the Court considered whether the owner (UMG, both there and here)
2 intended to regain possession. “[T]he distributor of a copyrighted product's intent to
3 regain possession is strong evidence that the product was licensed, not sold, to the
4 recipient.” Id.; see also United States v. Wise, 550 F.2d 1180, 1190 (9th Cir. 1977)
5 (finding that movies “licensed” to theaters for distribution, and which required the
6 return to Universal following expiration of the agreements, were licenses). While the
7 Court found UMG “gives the Promo CDs” away, “never to be returned,” id. at 1061,
8 here UMG’s contracts with the third party digital download providers explicitly
9 requires either return or destruction of UMG Content at termination. (SOF ¶ 103, 131,
10 180.) This is “strong evidence” that the Eminem masters were licensed. See Augusto,
11 558 F. Supp. 2d at 1060.
12
Second, the Court noted that licenses generally provide “recurring benefits,”
13
and the absence of such a benefit there argued against the finding of a license. Id. at
14
1061 (citing DAK Indus., 66 F.3d at 1096; SoftMan Prods. Co. v. Adobe Sys., 171 F.
15
Supp. 2d 1075 (C.D. Cal. 2001)). Here, the arrangements UMG has with iTunes and
16
other digital download providers explicitly require recurring benefits in the form of a
17
fee to be paid to UMG for each permanent download or Mastertone. (SOF ¶¶ 104-
18
105, 134.)
19
Third, the Augusto Court considered whether there was any “benefit” to a
20
license for UMG, and found there was none; this was in contrast to prior cases
21
involving software which “must be copied onto a computer to function.” Augusto,
22
558 F. Supp. 2d at 1061-62. Although the Augusto case involved packaged music
23
CDs which “are not normally subject to licensing,” this case involves master
24
recordings, which are normally subject to licensing, as multiple witnesses for
25
defendants testified. (SOF ¶ 174.) The benefit of licensing here is plain: because the
26
process of providing permanent downloads and Mastertones to end users involves
27
reproducing and distributing the master recordings (id. ¶¶ 74, 77, 90, 95, 123, 129),
28
and these are two rights exclusive to the copyright owner (UMG) (see 17 U.S.C.
1 § 106(1), (3)), the permanent download and Mastertone providers must have licenses
2 in order to engage in these activities without infringing on copyright.
3 Although both of the Apple executives deposed declined to offer an opinion on
4 whether their agreements with UMG were licenses (SOF ¶¶ 113, 115), both believed
5 Apple’s agreements with UMG provided it whatever rights Apple needed to offer,
6 reproduce and distribute UMG sound recordings through its iTunes store. (Id. ¶ 173.)
7 The T-Mobile representative deposed in this case similarly stated T-Mobile did not
8 view the deletion of the word “license” by UMG as a “material change.” (Id. ¶ 128.)
9 Defendants’ contention that the permanent download providers and Mastertone
10 providers are merely “reselling” UMG downloads is a legal fiction which cannot
11 stand. For the same reasons UMG is indisputably licensing its master recordings to
12 these third parties, it is not “selling” anything – no title to property is passing and
13 UMG retains the ownership and title to its master recordings. (Id. ¶¶ 116, 181.) UMG
14 does not send multiple individual audio files to permanent download and Mastertone
15 providers for them to provide to customers; rather, it sends a single file to the third
16 party which the third party then reproduces and distributes to its customers. (Id. ¶¶
17 74, 77, 90, 95, 123, 129.)
18 1. UMG’s Relationships with Third Party Digital Download
19
Providers are Analogous to Other Situations Where the Master
License Provision Applies
20
In fact, the interactions among UMG, and the permanent download and
21
Mastertone providers are precisely analogous to other situations in which the Master
22
License provision indisputably applies.
23
For example, one prototypical situation in which UMG will account based on
24
50% of its net receipts is when it has licensed a master recording to a third party entity
25
for that entity to include on a compilation album. (SOF ¶ 174.) In that scenario,
26
UMG sends the third party licensee a copy of the master recording (and grants the
27
right to reproduce and distribute copies of that recording), and the licensee does so.
28
(Id. ¶ 177.) Because the record company is not paying for manufacturing,
1 distribution, transportation, packaging, etc. in such an arrangement, its costs are

2 substantially lower, and this dynamic justifies the increased royalty rate. (Id. ¶ 182.)
3 Here, defendants have admitted that they incur minimal costs in creating digital
4 copies of its master recordings for third party permanent download and Mastertone
5 providers, having submitted evidence the cost to provide an entire album to such a
6 third party is approximately $800.00. (Id. ¶ 183.) Beyond that, UMG representatives
7 have admitted they incur essentially no additional cost for each copy of the sound
8 recording subsequently sold. (Id. ¶ 184.) The same is true of synchronization licenses
9 (whose income to UMG is admittedly accounted to artists under the Master License
10 provision), whereby a master recording is synchronized with audiovisual works (e.g.,
11 is used in TV or movies): the only cost to UMG is that of providing a copy of the
12 master recording in question to the licensee. (Id. ¶ 185.)
13 By contrast, when the record company itself manufactures, reproduces and
14 distributes physical product through its own subsidiaries and affiliates, it incurs costs
15 ranging from 25% to 40% of the price it ultimately charges to retailers. (Id. ¶ 186.)
16 These substantial costs are used to rationalize the much lower royalty rate applicable
17 to such physical sales – between 12% and 20%, for Eminem.
18 Given this contrast, and the costs UMG faces when licensing its music to
19 permanent download and Mastertone providers, it is clear the Master License
20 provision should apply to these uses as well.
21 2. UMG Has Admitted it Licenses Composition Copyrights to Apple
22
for some of these same songs in another case
23 As discussed above, UMG has argued in pleadings and depositions taken in

24 another case, Eight Mile Style, et al. v. Apple, et al., No. 07-cv-13164, proceeding in
25 the Eastern District of Michigan, that it licenses compositions written (in part) by
26 Eminem to Apple. (SOF ¶ 160.) Aftermath has argued that composition licenses in
27 that case are granted to Apple in the same 2002 and 2006 iTunes Agreements
28 discussed above by the same “grant of rights” provisions which, here, they contend do
1 not grant licenses. (Id) Although master recordings and compositions have separate
2 copyrights, UMG has argued that they granted rights in both by a single provision in
3 one document. (Id.) Defendants cannot take the inconsistent position that the same
4 words grant one thing with regard to the composition copyright (a license) but another
5 with regard to the master recording copyright. See, e.g., Rissetto v. Plumbers &
6 Steamfitters Local, 343, 94 F.3d 597, 600-601, 605 (9th Cir. 1996.)
7 V. THE UNDISPUTED FACTS DEMONSTRATE THAT UMG UNDERPAID
8
PLAINTIFFS $159,332 BASED ON A MIS-ALLOCATION OF COSTS
BETWEEN PLAINTIFFS AND EMINEM
9
As described above, and in plaintiffs’ Second Amended Complaint, UMG’s
10
written response to the 2005 Audit Report contested some claims (including the claim
11
related to royalties for permanent downloads and Mastertones), but also specifically
12
acknowledged that defendants had underpaid plaintiffs by $159,332. (SOF ¶ 197.)
13
Plaintiffs have repeatedly requested that defendants pay this amount, and
14
defendants only response has been to claim that plaintiffs should seek recovery instead
15
from Eminem. (SOF ¶ 198.) However, under the agreements in question, it is the
16
duty of Aftermath to account directly to plaintiffs and pay the amounts due under the
17
contracts. (Id. ¶¶ 29-30.) Defendants’ May 8, 2007 letter constitutes an admission
18
that these amounts are properly owing to plaintiffs under the Agreements, as does the
19
testimony of their designated representative on this claim. (Id. ¶ 196.)
20
VI. CONCLUSION
21
Plaintiffs are entitled to summary judgment on all counts.
22
DATED: December 3, 2008 Respectfully submitted,
23
KING & BALLOW
24
/s/ Richard S. Busch
25 Richard S. Busch (TN Bar No. 014594)
26 rbusch@kingballow.com
KING & BALLOW
27
28 Attorneys for Plaintiffs

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Case 2:07-cv-03314-PSG-MAN Document 175-2 Filed 12/03/2008 Page 1 of 30

1 Richard S. Busch (TN Bar No. 014594) (pro hac vice)

14 F.B.T. PRODUCTIONS, LLC, et ) Case No. CV 07-03314 PSG (MANx)

15 Microsoft Corp. v. DAK Indus. (In re DAK Indus.),

22 People ex rel. Lockyer v. R.J. Reynolds Tobacco Co.,

24 Rissetto v. Plumbers & Steamfitters Local,

2 SoftMan Prods. Co. v. Adobe Sys.,

6 UMG Recordings v. Augusto,

11 (Plaintiffs’ Statement of Undisputed Facts (“SOF”) ¶ 1 (emphasis added).)

12 Despite attempting to camouflage their agreements with third parties as

17 on Counts One and Three in favor of plaintiffs is appropriate.

18 On the second cause of action, it is undisputed, and defendants admit, that

19 defendants have improperly calculated the allocation of certain costs as between

20 Eminem and plaintiffs, resulting in an underpayment to plaintiffs of $159,332. (Id.

22 amount owed to plaintiffs. (Id. ¶ 5.)

1 II. STATEMENT OF FACTS

1 A royalty audit conducted by the Gary Cohen Corporation on behalf of

12 A. The Plain Language of the 1998 and 2003 Agreements Entitles

1 distribution, transportation, packaging, etc. in such an arrangement, its costs are

23 As discussed above, UMG has argued in pleadings and depositions taken in

28 Attorneys for Plaintiffs

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