Consolidated with CA No. 09-56069
DC No. CV-07-03314 PSG (MANx)
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
F.B.T. Productions, LLC and Em2M, LLC,
Plaintiffs and Appellants,
v.
Aftermath Records, doing business as Aftermath Entertainment; Interscope Records; and UMG Recordings, Inc.,
Defendants and Appellees.
Appeal From Judgment And Post-Judgment Orders
Of The United States District Court
For The Central District Of California
(Hon. Philip S. Gutierrez, Presiding)
Appellants’ opening brief
[REDACTED FOR PUBLIC FILE]
Jerome B. Falk, Jr. (No. 39087)
Daniel B. Asimow (No. 165661)
Sara J. Eisenberg (NY No. 4434551)
Howard Rice Nemerovski Canady Falk& Rabkin
A Professional Corporation
Three Embarcadero Center, 7th Floor
San Francisco, California 94111-4024
Telephone: 415/434-1600
Facsimile: 415/677-6262 / Richard S. Busch (TN No. 014594)
King& Ballow
315 Union Street, Suite 1100
Nashville, Tennessee 37201
Telephone: 615/259-3456
Facsimile: 615/726-5417
Attorneys for Plaintiffs and Appellants F.B.T. Productions, LLC and Em2M, LLC
-52-
CORPORATE DISCLOSURE STATEMENT
Plaintiffs and Appellants F.B.T. Productions, LLC and Em2M, LLC are Michigan limited liability corporations, have no parent company, and no publicly held company owns 10% or more of either company’s stock.
DATED: December28, 2009.
Respectfully,Jerome B. Falk, Jr.
Daniel B. Asimow
Sara J. Eisenberg
Howard Rice Nemerovski Canady
Falk& Rabkin
A Professional Corporation / Richard S. Busch
King& Ballow
By /s/ Jerome B. Falk, Jr.
Jerome B. Falk, Jr.
Attorneys for Plaintiffs and Appellants F.B.T. Productions, LLC and Em2M, LLC
-52-
Table of Contents
Page
introduction and summary of argument 1
jurisdictional statement 6
issues presented 6
statement of facts 8
A. F.B.T. Discovers And Signs Eminem. 8
B. F.B.T. And Eminem Contract With Aftermath. 9
C. Digital Online Music Services Explode Into The Music Industry. 12
1. Types Of Digital Music Downloads. 13
2. Appellees Enter Into Licensing Agreements With Third Party Digital Media Providers. 14
3. Appellees Create A New Royalty Rate For Downloads And Amend Their Form Contracts To Reflect This New Rate. 15
D. F.B.T. Discovers That Appellees Have Been Underpaying In A Variety Of Ways; F.B.T. Initiates This Lawsuit. 16
E. District Court Proceedings. 17
1. Pre-Trial Proceedings. 17
2. Trial And Judgment. 20
3. Post-Trial Proceedings. 20
Standard Of Review 21
argument 25
I. The Jury’s erroneous interpretation of the recording agreements CAnnot Stand. 25
A. This Court Reviews Contract Interpretation De Novo And F.B.T. Has Not Waived Its Right To De Novo Appellate Interpretation Of The Recording Agreements. 25
B. The Masters Licensed Provision Covers All Licenses To Third Parties, Including Licenses To Third Party Digital Media Providers. 26
1. The Plain Language Of The Contract Establishes That The Masters Licensed Provision Covers All Licenses, Including Licenses To Third Party Digital Media Providers. 26
2. The Relevant Extrinsic Evidence Confirms That The Masters Licensed Provision Covers All Licenses, Including Licenses To Third Party Digital Media Providers. 30
3. Appellees’ Assertedly Contrary Evidence Is Irrelevant. 35
C. Appellants Did Not Waive The Right To De Novo Interpretation Of The Contract By This Court, Or The Right To A Legally Correct Interpretation. 39
II. The Court Should have Determined AS A MATTER OF LAW That The Third Party Download Agreements Were Licenses, Or At A Minimum Instructed The Jury On This ISSUE AND Permitted F.B.T. To Introduce evidence THAT Appellees and Apple Admitted the agreements were licenses. 44
A. Characterization Of The Third Party Download Agreements Is A Question Of Law. 45
B. The Undisputed Evidence Overwhelmingly Supported Appellants’ Position That The Third Party Download Agreements Were Licenses. 46
C. F.B.T. Did Not Waive This Argument. 48
D. Even If Interpretation Of The Third Party Download Agreements Was A Fact Issue Properly Submitted To The Jury, A New Trial Is Required Due To Erroneous Instructional And Prejudicial Evidentiary Rulings. 49
1. The District Court Failed To Properly Instruct The Jury. 50
2. The District Court Improperly Excluded The Pre-Litigation Statements Admitting That The Agreements Are “Licenses.” 51
III. the improper exclusion of the “paterno letter” also requires reversal. 54
A. The District Court Erred In Excluding The “Paterno Letter.” 56
B. The Improper Exclusion Of The “Paterno Letter” Severely Prejudiced Appellants. 58
IV. the district court’s award of attorneys’ fees should be reversed. 60
A. If The Judgment Is Reversed, Appellees Will No Longer Be A Prevailing Party Entitled To Fees. 61
B. The District Court Incorrectly Thought It Lacked Discretion To Deny Fees To Appellees. 61
Conclusion 64
-iv-TABLE OF AUTHORITIES
Page(s)
Cases
Ajaxo Inc. v. E*Trade Group Inc., 135 Cal. App. 4th 21 (2005) 64
APL Co. Pte. Ltd. v. UK Aerosols Ltd., 582 F.3d 947 (9th Cir. 2009) 23
Badie v. Bank of Am., 67 Cal. App. 4th 779 (1998) 22
Baker v. Delta Air Lines, 6 F.3d 632 (9th Cir. 1993) 59, 60
Berkla v. Corel Corp., 302 F.3d 909 (9th Cir. 2002) 64
California Nat’l Bank v. Woodbridge Plaza, L.L.C., 164 Cal. App. 4th 137 (2008) 38
City of Hope Nat’l Med. Ctr. v. Genentech, Inc., 43 Cal. 4th 375 (2008) 21, 22
Clarendon Nat’l Ins. Co. v. Ins. Co. of the W., 442 F. Supp. 2d 914 (E.D. Cal. 2006), aff’d, 290 Fed. App’x 62 (9th Cir. 2008) 21
Dean v. TWA, 924 F.2d 805 (9th Cir. 1991) 60
Doe I v. AOL, L.L.C., 552 F.3d 1077 (9th Cir. 2009) 21, 23
Doe I v. Wal-Mart Stores, Inc., 572 F.3d 677 (9th Cir. 2009) 23
Dorn v. Burlington N.S.F.R.R., 397 F.3d 1183 (9th Cir. 2005) 43
Dresser Indus., Inc. v. Gradall Co., 965 F.2d 1442 (7th Cir. 1992) 43
Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) 30
Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal. App. 4th 944 (2003) 24
Garcia v. Truck Ins. Exch., 36 Cal. 3d 426 (1984) 23, 39
Goodman v. United States, 369 F.2d 166 (9th Cir. 1966) 57
Greger Leasing Corp. v. Barge Pt. Potrero, No. C-05-5117 SC, 2008 WL 4830751 (N.D. Cal. Nov. 6, 2008) 64
Hamman v. Sw. Gas Pipeline, Inc., 821 F.2d 299, vacated in part on other grounds on reh’g, 832 F.2d 55 (5th Cir. 1987) 43
Hampton v. Paramount Pictures Corp., 279 F.2d 100 (9th Cir. 1960) 47
Hess v. Ford Motor Co., 27 Cal. 4th 516 (2002) 22
Heston v. Farmers Ins. Group, 160 Cal. App. 3d 402 (1984) 56, 57
Hsu v. Abbara, 9 Cal. 4th 863 (1995) 63
Interstellar Starship Servs., Ltd. v. Epix Inc., 184 F.3d 1107 (9th Cir. 1999) 61
Jacques v. DiMarzio, Inc., 386 F.3d 192 (2d Cir. 2004) 43
Jenkins v. Union Pac. R.R., 22 F.3d 206 (9th Cir. 1994) 50
Jerden v. Amstutz, 430 F.3d 1231 (9th Cir. 2005) 54, 60
L.K. Comstock& Co. v. United Eng’rs& Constructors, Inc., 880 F.2d 219 (9th Cir. 1989) 24
MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9thCir. 1993) 47
Martin Bros. Constr., Inc. v. Thompson Pac. Constr., Inc., No. C058944, 2009 WL 4456380 (Cal. Ct. App. Dec.4, 2009) 21, 22
McHugh v. United Serv. Auto. Ass’n, 164 F.3d 451 (9th Cir. 1999) 38
Med. Operations Mgmt., Inc. v. Nat’l Health Labs., Inc., 176 Cal. App. 3d 886 (1986) 22, 23, 38, 39
Medtronic, Inc. v. White, 526 F.3d 487 (9th Cir. 2008) 42
Microsoft Corp. v. DAK Indus., 66 F.3d 1091 (9th Cir. 1995) 50
Milenbach v. Comm’r, 318 F.3d 924 (9th Cir. 2003) 23
Oahu Gas Serv., Inc. v. Pac. Res., Inc., 838 F.2d 360 (9th Cir. 1988) 26
Obrey v. Johnson, 400 F.3d 691 (9th Cir. 2005) 58
Parsons v. Bristol Dev. Co., 62 Cal. 2d 861 (1965) 22, 39
Peake v. Chevron Shipping Co., 245 Fed. Appx. 680 (9th Cir. 2007) 60
Producers Dairy Delivery Co. v. Sentry Ins. Co., 41 Cal. 3d 903 (1986) 30, 37
Qualls v. Lake Berryessa Enters., Inc., 76 Cal. App. 4th 1277 (1999) 22
Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758 (2001) 30
Silver Creek, L.L.C. v. BlackRock Realty Advisors, Inc., 173 Cal. App. 4th 1533 (2009) 7, 8, 61, 62, 63
Stanford Univ. Hosp. v. Fed. Ins. Co., 174 F.3d 1077 (1999) 26
Tompkin v. Philip Morris USA, Inc., 362 F.3d 882 (6th Cir. 2004) 50
Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9thCir. 1995) 47
UMG Recordings, Inc. v. Augusto, 558 F. Supp. 2d 1055 (C.D. Cal. 2008) 50
United Commercial Ins. Serv., Inc. v. Paymaster Corp., 962 F.2d 853 (9th Cir. 1992) 21, 24
United States v. Carman, 577 F.2d 556 (9th Cir. 1978) 45
United States v. Hands, 184 F.3d 1322 (11th Cir. 1999) 57
United States v. Wise, 550 F.2d 1180 (9th Cir. 1977) 47, 50
Vision Info. Servs., L.L.C. v. Comm’r, 419 F.3d 554 (6th Cir. 2005) 45
Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006) 47
Warfield v. Alaniz, 569 F.3d 1015 (9th Cir. 2009) 45
Warner Bros., Inc. v. Curtis Mgmt. Group, Inc., No. 91-4016, 1995 WL 420043 (C.D. Cal. Mar.31, 1993) 31
Winet v. Price, 4 Cal. App. 4th 1159 (1992) 22
Wolf v. Walt Disney Pictures& Television, 162 Cal. App. 4th 1107 (2008) 22
Statutes
28 U.S.C. §1291 6
Cal. Civ. Code
§1638 26
§1644 48
§1717 5, 8, 21
Cal. Code Civ. Proc. §1858 30
Other Authorities
9C C.Wright, et al., Federal Practice and Procedure §2553 (2008) 42
Donald S. Passman, All You Need To Know About The Music Business 377-78 (3d ed. 1997) 12
-ix-Iintroduction and summary of argument
Digital downloading of music through online applications such as iTunes has become an extraordinarily popular alternative to purchasing music on physical media such as compact discs, tapes and phonograph records. This appeal concerns the correct interpretation of the applicable contract royalty provisions when applied to certain types of digital music downloads—namely, permanent downloads of recorded albums and songs (hereafter “permanent downloads”), and permanent downloads of mastertones (i.e., 30-second or less audio clips of a song that signal an incoming call on a cellphone) (hereafter “mastertones”). The contracts in question, made before the digital download era had begun, are between Appellees—recording companies Aftermath Records and its co-owners Interscope Records, and UMG Recordings, Inc.—and rap artist Eminem and Appellants F.B.T. Productions, LLC and Em2M, LLC (collectively, “F.B.T.” or “Appellants”). Under those contracts, Appellees are contractually required to pay 50% royalties on “masters licensed by [Appellees]... to others for their manufacture and sale of records or for any other uses.”
On its face, the language of this “Masters Licensed” provision fits these digital downloads like a glove. Under their contracts with companies like Apple (for its iTunes download application), Appellees grant—that is, “license”—the right to copy the digital files embodying original music recordings, to manufacture the files into permanent downloads or mastertones, and to allow end users to download the recordings onto devices like an iPhone or an iPod. Those agreements do not transfer ownership of the copyrighted recordings, or even of the digital file containing the recordings, to the digital media provider; ownership is retained by Appellees. The license agreements substantially restrict the uses to which the licensed recordings may be put, and the geographic area in which the licensee may exercise its rights.
Nevertheless, Appellees have refused to pay 50% royalties under the Masters Licensed provision for digital downloads of songs appearing on Eminem albums. Instead, Appellees take the position that a different royalty clause applies, and that the Masters Licensed provision does not apply to the license agreements between Appellees and the digital media companies. When F.B.T. discovered that Appellees were not accounting for these downloads as licenses, F.B.T. sued Appellees for breach of contract. The District Court refused to interpret the disputed contract provisions and submitted those issues to the jury, which returned a general verdict for Appellees on F.B.T.’s claims regarding permanent downloads and mastertones. On March17, 2009, the court entered final judgment based on the jury’s verdict.
Interpretation of a contract provision is an issue of law which this Court determines de novo unless there are material extrinsic fact disputes turning on the credibility of witnesses. There is no material extrinsic fact dispute here. The underlying historic facts are undisputed. There is no dispute as to “custom and practice.” Disputes as to the proper inferences to be drawn from undisputed facts remain questions of law for the court to determine. The District Court attempted to justify its decision to submit the contract interpretation issues to the jury on the basis of conflicting testimony of expert witnesses about the correct interpretation of the contract. That testimony is legally irrelevant because it goes to the ultimate question of law. See pp.37-38; Part I(B)(3), infra. This Court therefore must interpret the Masters Licensed provision de novo. The question of contract interpretation is not close, for several reasons.
First, on its face, the Masters Licensed provision applies to all licenses, including licenses to third party digital media providers such as Apple. See Part I(B)(1), infra. None of the extrinsic evidence presented at trial would persuade a reasonable person that the parties intended the provision to mean anything different. To the contrary, the undisputed extrinsic evidence uniformly confirms that the Masters Licensed provision covers all licenses, including licenses for permanent downloads and mastertones. For example, royalties for transfers of albums to record clubs that reproduce the entire album for sale to club members are treated under the Masters Licensed provision. Royalties for conditional downloads and “streaming”—which involve transfer of electronic files in the same manner as for use with permanent downloads and mastertones—are also treated under the Masters Licensed provision. Moreover, in 2002, Appellees amended their standard form agreements to specify that digital downloads would be treated as record sales by Appellees (to which a lower royalty rate applies) rather than under the Masters Licensed provision—strong evidence that they were concerned that under the prior contract forms, such as those at issue here, the Masters Licensed provision would apply. See Part I(B)(2), infra.