larkin arnold v. sony - royalties complaint
TRANSCRIPT
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PLACEAN x INONEBOXONLY ORIGIN
H 1
Original
2
Removed
from
L-l
3
Remanded
LJ^
Reinstated
or LJ 5
Transferred
from 6
Multidistrict
Proceeding
State
Court from Reopened Specify
District Litigation
I-] 3. allp.rtlr.pr.s.ntl Appellate
1' Court
| | b. Atleastone
party Ispro se.
PLACE
AN x INONEBOXONLY BASIS OFJURISDICTION
IF DIVERSITY,
INDICATE
1
U.S.
PLAINTIFF
2
U.S.
DEFENDANT
3
FEDERAL QUESTION
[x]4 DIVERSITY
CITIZENSHIP BELOW
(U.S. NOT A PARTY)
CITIZENSHIP OF PRINCIPAL PARTIES (FOR DIVERSITYCASES ONLY)
(Place an
[X]
in on e box for Plaintiff and on e box for Defendant)
[~l 7
Appeal
toDistrict
Judge from
Magistrate Judge
Judgment
C IT IZ E N OF
THIS S T AT E
PT F DE F
[H [] 1
CITIZEN OR S U B J E C T
O F A
FOREIGN C O U N T R Y
PT F DE F
[ ]3 [ ]3
[ ] 4 i 4
PTF DEF
INCORPORATED and PRINCIPALPLACE [ ]5 [ ]5
OF
BUS IN ES S IN A N O T HE R S T A TE
CITIZEN OF
ANOTHER
STATE M 2 [ ]2 I N C ORPORAT ED
or
P R IN C IP A L P L A C E
OF
BUSINESS
IN THIS STATE
PLAINTIFF(S)
ADDRESS ES)
AND COUNTY IES)
LARKIN
A R N O L D
28 0 South Beverly Drive
S u i t e
2 6
Beverly Hills, CA 90212
DEFENDANT(S) ADDRESS ES) AN D
COUNTY IES)
S O N Y
M U S I C E N T E R T A I N M E N T
5 5 0 M A D I S O N A V E N U E
NE W
YORK, N EW Y OR K 10022
F O R EI G N N A TI O N
[ ]6
[]6
DEFENDANTS) ADDRESS
UNKNOWN
REPRESENTATION IS HEREBY MADETHAT, AT THIS TIME, I HAVE BEEN UNABLE, WITH REASONABLE DILIGENCE,TO ASCERTAIN
RE9IBENCE ADDRESSES
O F T H E F O LL OW ING D E FE N DA N TS :
Checkone: THIS ACTION SHOULD BE ASSIGNED TO: WHITE PLAINS \x\ MANHATTAN
(DO NOT
check
either box if th is a PRISONER PETITION/PRISONER CIVIL
RIGHTS
COMPLAINT.)
DATE^2 12 2 14
SIGNATURE O
ATTORNEY
O
RECORD
ADMITTED TO
PRACTICE N THIS DISTRICT
R E C E I P T
C
Magistrate
Judge
istobedesignated
by
theClerk ofNRfi20Ui\iLAi *
Magistrate Judge
Ruby J. Krajick, Clerk of Court by
. Deputy Clerk, DATED
UNITED STATES DISTRICT COURT (NEW YORK SOUTHERN)
[]
NO
W YES
DATE
ADMITTED
Mo.
10 Yr. 1976 )
Attorney Bar
Code KEG5703
is
so
Designated.
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Richard S. Busch (SB 5613)
K I N G & B A L L O W
315
Union
Street, Suite 1 10 0
Nashville,
Tennessee
37201
Telephone:
615)259-3456
Facsimile: 615)726-541
Kenneth E. Gordon (KG 5703)
GORDON, GORDON & SCHNAPP, P. C.
437
Madison Avenue, 39th
Floor
Ne w
York,
N e w Y or k
10022
Telephone: (212) 355-3200
Facsimile: 212)355-3292
Attorneys for Plaintiff
14
O
A
r
UNITED
S TATES
D I ST R IC T C O U R T
SOUTHERN
DISTRICT OF NEW
YOR K
JUDGE
TO R R ES
L ARKI N
ARNOLD,
Plaintiff,
Case No
OI t;
O
COMPLAINT FOR BREACH OF
j; ?
CONTRACT - ;?
SO NY
MUSIC
ENTERTAINMENT,
D EM A ND F O R JURY TRIAL
Defendan t
Plaintiff LarkinArnold ( Plaintiff), by and through his attorneys, for his Complaint
against the Defendant named above alleges as follows:
PART I E S
1.
Pl a i n t i f f is a C al i f o r n i a r esi d ent .
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2. Defendant Sony Music Entertainment ( Sony ) is a Delaware General
Partnership, whose partners are citizens
of
Delaware and New York. Sony's principal
place o fbusiness is located at 550 Madison Avenue, Ne w York, Ne w
York
10022.
JU R IS D IC T IO N AN D VEN U E
3. The jurisdiction of this Court is based upon 28 U.S.C. 1332 as there is complete
diversity
of
citizenship between the parties, and the amount in controversy exceeds
75,000.00 exclusive
of
interest and costs. This action for declaratory judgment is
brought pursuant to 28 U.S.C. 2201 which is within the exclusive jurisdiction
of
federal
courts pursuant to 28 U.S.C. 1331.
4. Personal jurisdiction over Sony is proper in this Court on the grounds that (a)
Sony transacts business in the State
of
New York; (b) Sony's wrongful conduct, alleged
herein, occurred in the State ofNew York and in this District; and, (c) the Agreement, as
defined below, was entered into in this District and the parties agreed the validity,
interpretation and legal effect of the Agreement would be governed by the laws
of
the
S t at e
o f
N e w
Y o r k .
5. Venue is proper in this District pursuant to 28 U.S.C. 1391(b)(1) and (c)(2).
FACTUAL ALLEGAT IONS
6. L ar ki n A rn ol d i s one o f t he m os t well-known
an d
s ucces sf ul executives in the
music industry. In 1970, Arnold became one
of
the first African-Americans to be hired
as an attorney by a major record label when he joined Capital Records. In 1973, Arnold
created the Black Music Division for Capitol Records where he discovered Natalie Cole,
Peabo Bryson along with signing numerous other artists including Bill Cosby.
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7. Eventually, Arnold joined Sony's predecessor in interest where among other
accomplishments: he was the executive in charge
of
Michael Jackson's Thriller album.
Arnold was also responsible for signing Marvin Gaye and Eddie Murphy to Columbia
and Teena Marie to Epic. While working for Sony's predecessor, Arnold discovered
LutherVandros and Ne w Kids on the Block, among others.
8.
On
or about October 7, 1980 and January 1, 1987, Arnold entered into
employment Agreements, as modified on August 15, 1983 and April 11, 1991 and other
dates (the Agreements ) with Sony's predecessor in interest CBS Records. (Sony and its
predecessor are collectively referred to as Sony hereinafter).
9. Pursuant to and during the terms
of
the Agreement, Arnold signed numerous gold
and platinum selling acts to recording agreements with Sony and was responsible for the
recording careers
of
many
of
Sony's most important acts including Marvin Gaye, Luther
Vandross, New Kids on the Block, Michael Jackson, Gladys Knight, and Earth Wind &
Fi r e.
10. In consideration
of
Arnold's performance under his employment Agreement,
Sony agreed to
pa y
Arnold under a certain enumerated royalty structure and to account to
Arnold under that royalty structure.
11. During the period beginning on January 1, 2007 and continuing through the
present, Sony has failed to properly account to and pay Plaintiff under the royalty
structure set forth in the Agreement.
12. As set forth in the Agreements, Arnold engaged a royalty examiner in order to
examine
Sony s
books and records and determine the amount
of
royalties due Arnold for
the period January 1, 2007 until December 31, 2010.
On
or about November 8, 2011, the
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royalty examiner provided a detailed audit report to Sony regarding its findings (the
Audit ) and putting Sony on notice
of
a number
of
breaches
of
the Agreements. The
Audit determined Sony underpaid Arnold for the period in question by hundreds of
t h o u san d s
o f
dollars.
13. While waiting for Sony to respond to the Audit, Arnold and Sony entered a
tolling/standstill agreement, which was subsequently extended on multiple occasions.
Arnold complied with the terms o f the standstill agreement and is no w able to file his suit
co n si st en t w i t h
t h o se t e r m s .
14. During this period, Arnold put Sony on notice its failure to correctly account to
and pay hi m were ongoing. Arnold objected to the statements issued after the Audit and
set forth his basis for those objections in multiple communications with Sony. In sum,
Sony has underpaid Arnold by approximately 1,300,000 inclusive of interest.
15. The Audit determined, among other items, that Arnold was underpaid for the
distribution
of
permanent downloads, mastertones, and ringtones.
16. Under the terms
of
the October 27, 1980 Agreement, royalties are payable to
Arnold based on the his pro-rata share of 50% of Sony's net receipts. Paragraph 4.3 of
the 1980 Agreement states:
Master Recordings. The profit participation with respect to any Master Recording
embodying performances by Participating Act recorded during the Employment Period
and leased or licensed by CBS to others for their distribution
of
Records in the United
States shall be your allocable share of 50%
of
CBS' net receipts from its Licensee during
the Employment Period, computed after deduction
of
all Copyright, AFM and other
applicable third party payments; your allocable share of such net receipts shall be the
ratio that your otherwise applicable profit participation rate bears to the aggregate basic
royalty percentage rates
of you and any artist, producer and other persons or entities
entitled to royalties in respect of such records.
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17. Pursuant to Paragraph 17
of
the Modification dated August 15, 1983, which
amended Paragraph 11.1 of the 1980 Agreement, CBS shall pay you profit participation
in perpetuity pursuant to the provisions of Section 4 with respect to Records recorded by
Participating Acts during the Employment Period. Under the terms
of
the Agreement,
music downloads, mastertones, and ringtones are Phonograph Records.
18. Sony has consistently failed to properly account to and
pa y
Plaintiff for Master
Recordings licensed or leased to third-party Music Download and Mastertone Providers,
such as iTunes (Apple), eMusic, amazon.com, Verizon Wireless and others. Music
Download and Mastertone Providers are third-parties that leased or licensed Master
Recordings from Sony and then distributed music downloads, mastertones, and ringtones
to end users on computers, cell phones, or other devices.
19. After January 1, 2007, Sony leased or licensed the relevant Master Recordings to
third-party Music Download and Mastertone Providers, so that those third-party Music
Download and Mastertone Providers could distribute music downloads, mastertones, and
ringtones to the public. Sony received monies for this leasing and continuously and
persistently failed to account to and pay Plaintiff the 50% of net receipts due to Plaintiff
pursuant to the terms
of
the Agreement.
20. Instead, between January 1, 2007 and present, Sony systematically accounted to
and paid Plaintiff for the Master Recordings licensedor leased to third parties, including
third party Music Download and Mastertone Providers at lower royalty rates, under
provisions of the Agreements, which are applicable only to Phonograph Records sold by
Sony, and are not applicable to the leasing or licensing
of
Master Recordings.
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21. The Ninth Circuit in
F.B.
T
Prods. LLC
v.
Aftermath Records
621 F.3d 958 (9th
Cir. 2010),
held
that income from Music Download an d Mastertone Providers
wa s
licensing (or leasing in Sony's parlance) income. This decision means Plaintiffis entitled
to
be
paid on Sony's income from Music Download and Mastertone Providers under the
Masters leased provision
of
the Agreements.
22. Sony's failure to correctly
pa y
Plaintiff for music downloads, mastertones, and
ringtones derived from the relevant Master Recordings leased or licensed to Music
Download and Mastertone Providers has resulted in Sony underpaying Plainti ff in an
amount which can only be determined after Sony has provided an accurate accounting,
bu t believed to be in excess
o f
200,000.
23. In addition, the Audit revealed Sony has failed to account for all exploitations
of
the Master Recordings causing additional underpayments to Arnold. For instance, in
responding to the Audit, Sony admits it failed to correctly account to and pay Arnold for
certain Luther Vandross Master Recordings. However, Sony has not yet corrected this
e r r o r
24. The Audit also revealed Sony took incorrect container deductions in determining
the amounts due to Arnold. Sony admits its taking
of
a container deduction resulted in
Arnold being underpaid by 6,348 for domestic products and 2,632 for products sold in
foreign territories. However, Sony has not yet corrected this error resulting in Arnold
being deprived of approximately 10,000 that is rightfully his.
25. Additionally, the Audit determined Sony underpaid Arnold by 7,598
domestically and 614 for foreign territory sales by taking incorrect net sales reductions.
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Sonyhas agreed with the royalty examiners that Arnold was underpaid by 8,000, but has
failed to
correct t h is e r ro r .
26. Sony also reduced the amount payable to Arnold based on configuration
reductions. However, the Agreements do not provide for a configuration reduction.
Sony agrees that it has underpaid Arnold by 12,424 domestically based on its
unwarranted taking
of
a configuration reduction, but again Sony has failed to correct its
error. Additionally, Sony's incorrect configuration deductions resulted in an additional
4,522 underpayment for foreign sales.
27. The Audit determined Sony has underpaid Arnold for the sale
of
non-catalog
products. For instance,
SM E
took a ten percent wholesale deduction from these sales
even though the Agreements do not allow for such a deduction. Additionally, Sony took
a 50 percent royalty reduction on certain non-catalog records. However, under the terms
of the Agreements such a royalty reduction does not apply when records are sold to the
public. Sony has admitted it underpaid Arnold in an amount in excess
of
950 for non-
catalog records, but it has not corrected this error or paid Arnold the money due him.
This same calculation problem for non-catalog records resulted in an additional 273
underpayment to Arnold based on sales from foreign territories.
28. The Audit found certain products were sold, but not reported to Arnold. Sony
admits certain exploitations were not reported to Arnold. However, Sony has not
quantified its admission. The Audit determined this failure to pay resulted in Arnold
being underpaid by at least 35,000.
29. Sony also underpaid Arnold by 860 by taking an unwarranted budget
reduction for the
albums
King
Pop, Michael Jackson s This Is It, and Thriller 25th
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Anniversary
Edition even though those albums were not Budget Records as defined by
paragraph 12.7 of the 1980Agreement. Sony has admitted to this underpayment, but has,
to date, fai led to correct it.
30. The Audit determined Arnold was underpaid
by
in excess
of
23,000 based on
Sony's failure to pay Arnold using the proper Royalty Base Price as defined by paragraph
12.35(b)
of
the Agreements. Sony admits in determining the Royalty Base Price, it used
a constructed retail price, instead of the actual suggested retail price (as required by the
Agreements). However, Sony denies it has any liability for this failure, arguing such a
constructed retail price is the industry custom and practice method of determining the
Royalty Base Price. This ignores the plain language of the Agreements and has resulted
in a significant underpayment to Arnold.
31. In addition, Plaintiff has a reasonable belief that Sony has, through acts known
and unknown, failed to accurately account to and pay Plaintiff for Sony's exploitation of
the Master Recordings covered
by
the Agreements.
32. Sony's failure to correctly account to and pay royalties to Plaintiffhas resulted in
Plaintiff being significantly underpaid under the terms of the Agreements. Sony's
underpayment
of
royalties to Plaintiff is the direct and proximate cause
of
financial harm
to
Plaintiff.
33. Sony also withheld money due to Arnold in order to cover certain foreign income
taxes Sony was obligated to pay. However, the Agreements do not allow for the
deduction of Sony's foreign tax obligations from royalties due to Arnold. This failure
resulted in Arnold being underpaid by at least 3,917.
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34. The Audit also determined Sony failed to account to Arnold for master use and
compilation income derived from the relevant Master Recordings. This failure to account
to Arnold has resulted in Sony underpaying Arnold for more than 10,000 due him.
35. Upon information and belief, Sony has continued to incorrectly account to and
pay Plaintiff in the period after the specific written notice was sent to Sony. Such
continuing failure to account to and
pa y
Plaintiff has resulted in additional substantial
financial damage to Plaintiff.
36. The royalty examiner engaged to conduct the Audit rolled forward the
underpayments to Arnold by reviewing statements issued
by
Sony following the
conclusion
of
the period audit. The statements begin with the period starting January 1,
2011 and continuing through December 31, 2014.
37. This examination
of
the post-Audit statement issued by Sony showed that Sony's
failure to correctly account to and
pa y
Arnold continued through at least December 31,
2014 and resulted in an additional underpayment to Arnold in excess
of
350,000.
38. For instance, Sony's failure to correctly account to and pay Arnold 50%
of
its net
receipts as set forth above resulted in an underpayment in excess
of
161,000.
39. Additionally, in the post-Audit period Sony failed to account to and pay Arnold
for more than 118,000 for unreported digital sales and more than 1,600 for ancillary
i n co m e.
40. The examination of the post-Audit statements shows that Sony failed to account
to and pay Arnold for approximately 12,000 in royalties due for the distribution
of
physical products in the United States.
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41. Finally, a review of the post-Audit statements shows underpayments of in excess
o f
15,000 for foreign distributions.
C LA I M
I
Breach o f Contrac t
42. Plaintiffre-alleges each and every allegation in paragraphs 1 through 24 as if fully
se t f o r th h e r ei n .
43. The Agreements are valid and enforceable contracts between Plaintiff and Sony.
44. Plaintiffhas performed all his obligations under the Agreements.
45. Sony has failed to comply with the terms
of
the Agreements and failed to fulfill
its obligations under the Agreements by failing to properly account to and pay Plaintiff
royalties to Plaintiff.
46. By reason
of
the foregoing and other acts not presently known by Plaintiff, Sony
has knowingly and materially breached its contractual obligations to Plaintiff under the
Agreements.
47. Sony's material breach
of
the Agreements is the legal cause
of
substantial damage
to Plaintiff for which Plaintiff seeks monetary damages in an amount to
be
determined at
the time
of
trial, which, upon information and belief, is in excess
of
400,000.
PRAYER
FO R
REL I EF
WHEREFORE, Plaintiffprays for judgment against Sony as follows:
1. Compensatory damages, the exact amount o f which to be determined at the time
o f
trial,
bu t
in an amount
no t
less than 1,000,000;
2. An award
of
actual and reasonable attorneys' fees and costs for services rendered
to Plaintiff in this action;
3. An award ofpre- and post-judgment interest;
1 0
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4.
Atrialbyjuryonall
triable issues; and
5. Such other and further
relief
as the Court deems
just
and proper.
Dated:
December
12, 2014
Ne w
York,
N e w Y or k
By: /s/ Richard Busch
Richard S. Busch (SB 5613)
KI NG & B A L L O W
31 5 Union Street, Su ite 1 10 0
Nashville, Tennessee 37201
Telephone:
615)259-3456
Facsimile: (615)726-541
By:
11
/
7^
Kenneth E. Gordon (KG 5703)
GORDON,
GORDON &
SCHNAPP,
P.C.
437 Madison
Avenue,
39th
Floor
New York, New York 10022
Telephone: (212) 355-3200
Facsimile: (212) 355-3292