harry fox agency vs. tvt
TRANSCRIPT
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P. Gregory Schwed (PS-0861)
Barry I. Slotnick (BS-9796)
Jason Blumberg (JB-1033)
LOEB & LOEB LLP
345 Park Avenue
New York, New York 10154-1895(212) 407-4000
Hearing Date: March 7, 2008 at 11:00 a.m.
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK--------------------------------------------------------- X
In re:
TEEVEE TOONS, INC., d/b/a TVTRECORDS,
Debtor,
:
:
::
:::
:
Chapter No. 11
Case No. 08-10562 (ALG)
--------------------------------------------------------- X
LIMITED OBJECTION OF THE HARRY FOX
AGENCY TO CASH COLLATERAL MOTION
TO THE HONORABLE ALAN L. GROPPER:
The Harry Fox Agency, Inc. (“HFA”), on behalf of its nearly 35,000 music publisher-
principals, asserts a limited objection to the above-captioned debtor’s (“TVT” or the “Debtor”)
proposed cash collateral order, and states as follows:
Summary of Argument
1. TVT seeks the unrestricted use of cash generated under the proposed cash collateral
order, to continue the operation of its business. However, TVT ignores inconvenient but critical
facts: HFA terminated for cause TVT’s licenses to use copyrighted musical compositions and
TVT never bothered to obtain licenses to use hundreds of other copyrighted musical
compositions in the first place. As a result, TVT has no legal authority to manufacture and
distribute much of its musical catalog, which it is apparently still exploiting as a debtor-in-
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possession. Without valid copyright licenses, TVT cannot continue to manufacture or distribute
recordings of these musical compositions. TVT is therefore implicitly asking this Court to give
its official imprimatur to TVT’s continuing and illegal post-petition copyright infringement. As
shown below, the law prohibits this result, and the cash collateral order must be modified to
protect the rights of the copyright owners.
2. While HFA has no desire to derail TVT’s reorganization or sale efforts, HFA intends
to protect the copyright ownership rights of its principals, the music publishers, and the
songwriters they represent. The Debtor’s first day orders go to great pains to attempt to give
broad protection to recording artists and certain lienors and producers. But TVT makes no
attempt to even address, let alone safeguard, the interests of music publishers and songwriters
who provide the irreplaceable foundation for TVT or any record company. TVT’s
reorganization presumably depends upon its continuing ability to sell CDs in its inventory,
record and press new CDs and otherwise exploit the sound recordings in its catalog. However, to
the extent TVT is infringing copyrights – which it is presumably doing at this very moment –
TVT is essentially operating a renegade business, as illegal its own way as if the Debtor sought
permission to operate an auto “chop shop” with stolen cars.
3. Accordingly, HFA (1) objects to the cash collateral order to the extent it permits the
Debtor’s use of cash for continued infringement of copyrights held by music publishers
represented by HFA; and (2) reserves the right to seek damages and/or injunctive relief under the
Copyright Act with respect to such post-petition infringing use, against both the Debtor and any
non-debtor parties complicit in such willful infringement.
4. This Objection is supported by Declarations of (1) Christos P. Badavas, Vice
President and Senior Counsel of HFA (“Badavas Decl.”), and (2) Barry Slotnick, HFA’s outside
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counsel (“Slotnick Decl.”), and documents attached thereto, to which references are made
passim.
Background.
5. HFA is the leading “mechanical” licensing and collection agency in the United States,
representing about 35,000 music publishers with nearly 1.9 million songs in their repertoire.
Licenses that permit the recording and distribution of musical compositions embodied in CDs,
records, tapes and certain digital configurations are commonly referred to as “mechanical”
licenses. Badavas Decl. ¶ 2.
6. HFA is the agent for these thousands of music publishers and serves as a “one stop
shop” for most mechanical licensing in the United States. Id. ¶ 3.
HFA Licenses are Compulsory Licenses, Entitling the
Copyright Owners to the Full Protection of the Copyright Act.
7. The Copyright Act of 1976, 17 U.S.C. § 101 et seq. (the “Copyright Act”), extends
copyright protection to, among other things, musical works and sound recordings. Id. § 102.
The Copyright Act grants a copyright owner the exclusive right to reproduce copyrighted works
“in copies or phonorecords1“ and to “distribute copies or phonorecords of the copyrighted work
to the public by sale.” § 106. This exclusive right is qualified by Section 115 of the Copyright
Act (“Section 115”), which provides that once phonorecords of a non-dramatic musical work
have been publicly distributed in the United States with the copyright owner’s consent, anyone
1 “Phonorecords” are defined in Section 101 of the Copyright Act as:
“[m]aterial objects in which sounds, other than those accompanying a motion picture or other
audiovisual work, are fixed by any method now known or later developed, and from which the
sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid
of a machine or device. The term phonorecords includes the material object in which the sounds
are first fixed.”
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else may obtain a “compulsory” license to make and distribute phonorecords of the work upon
compliance with certain statutory and regulatory requirements. § 115 (a).2
8. Anyone who wishes to obtain a compulsory license must serve a “notice of
intention.” § 115 (b)(1). Failure to give timely notice forecloses the possibility of a compulsory
license and makes actionable the manufacture and distribution of phonorecords, as acts of
copyright infringement. § 115 (b)(2).
9. In addition, a compulsory licensee must render detailed monthly accounting
statements made under oath, accompanied by the payment of royalties. § 115 (c). The copyright
owner is also entitled to an annual statement certified by a public accountant. § 115 (c)(5).
10. If a compulsory licensee fails to render monthly payments and the appropriate
accounting, or in any way fails to comply with the requirements of Section 115, a copyright
owner may give notice of termination to such licensee. If the default is not cured within 30 days
after written notice by the copyright owner, then the statute provides for an automatic
termination of the compulsory license. § 115 (c)(6). Such termination renders the making and/or
distribution of all phonorecords for which the royalty has not been paid, acts of infringement
under section 501 and fully subject to the remedies provided by section 502 though 506 and 509
of the Copyright Act (which can include damages, enhanced statutory fees, injunctive relief and
attorneys’ fees). Id.
2The compulsory license was first introduced with the passage of the Copyright Act of 1909, when the
recording industry was in its infancy and Congress became concerned that a single piano rollmanufacturer – the Æolian Company – would restrict musical variety and choices by buying up all the
recording rights from popular songwriters. See , e.g.., 2 Melville B. Nimmer and David Nimmer, Nimmer
on Copyright, § 8.04[A], at 8-58.3 (2002). The compulsory license, while ensuring that musical
compositions were readily available to the general public, also was designed to adequately compensate
the creators. See , e.g., H.R. Rep. 2222, 60th
Cong., 2d Sess., at 7 (1909) (“The main object [of the
compulsory license] . . . [is to] give to the composer an adequate return for the value of his
composition[.]”).
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11. Licenses issued by HFA on behalf of its principals (“HFA License”) expressly
incorporate the terms set forth in Section 115 and recite that the record company has requested a
license under the compulsory license provision of the Copyright Act. HFA Licenses further
indicate that the user of the copyrighted work shall have all the rights granted to, and all the
obligations imposed on, users of copyrighted works under the Copyright Act, with certain
exceptions. These exceptions, all of which benefit the prospective Licensee, include (1) waiving
the statutory notice requirement and (2) permitting quarterly accounting and payment schedules
in lieu of the monthly schedule prescribed by Section 115. In cases where publishers consent,
the royalty rates may be set below the statutory level. HFA thus affords prospective copyright
licensees numerous practical advantages over the rigorous requirements of Section 115. Id. ¶ 4.
12. Courts have for many years held that HFA Licenses are mere variations of the
compulsory licensing provisions of the Copyright Act and not a private contract. See Joy Music,
Inc. v. Seeco Records, 166 F. Supp. 549, 550 (S.D.N.Y. 1958) (holding that although parties
departed from the exact terms of the Copyright Act by varying the accounting period, lowering
the royalties for several songs and dispensing with notice requirements, “these mutually
convenient variations, were not sufficient to support the contention that theirs was a private
licensing agreement . . .”); Shapiro, Bernstein & Co. v. Gabor, 266 F. Supp. 613, 614 (S.D.N.Y.
1966) (concurring with the Joy decision and stating that “relatively minor variations [such as the
amounts of royalties, time and manner of payment and dispensing with the notice requirement]
were not sufficient to make the agreement a private licensing agreement”).
13. Indeed, HFA Licenses are regularly characterized as “written variations of the
compulsory license.” See, e.g., Peer Int’l Corp. v. Luna Records, Inc., 887 F. Supp. 560
(S.D.N.Y. 1995) (awarding damages under to the Copyright Act, because of defendants’
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substantial underpaying of royalties for numerous compositions for which it had obtained
“written variations of the compulsory licenses” from plaintiffs through HFA); Leadsinger, Inc. v.
BMG Music Publ’g., 512 F.3d 522, 525 (9th Cir. 2008) (assuming, in the course of rendering
decision, that HFA Licenses are compulsory licenses under Section 115).
14. Moreover, since HFA Licenses are merely variations of Section 115 compulsory
licenses, the judiciary has consistently held that once infringement has been proved, the
copyright owners are entitled to the full range of statutory remedies afforded by the Copyright
Act. See, e.g., Peer Int’l Corp v. Luna Records, Inc., 887 F. Supp. 560 (S.D.N.Y. 1995)
(awarding enhanced statutory fees, attorneys’ fees and injunctive relief for infringement claimed
under HFA Licenses).
15. It should be noted that those seeking a mechanical license need not go through HFA.
A license applicant is also free to (1) directly negotiate a license from the music publisher; or (2)
obtain a compulsory license under the statutory scheme. Despite these alternatives, most record
companies – like TVT – rely heavily on HFA to obtain mechanical licenses, because of the
above-mentioned numerous practical advantages. Badavas Decl. ¶ 5.
TVT Has No Authority to Use HFA’s Publisher-Principals’ Copyrighted Works.
16. In the past, TVT availed itself of thousands of HFA Licenses, each of which covered
one specific song for inclusion on a specific phonorecord. Id. ¶ 6.
17. In about April 2004, HFA commenced a royalty compliance examination (“RCE”)
of TVT’s books and records. As is customary, HFA used both its in-house auditors and the well-
regarded music industry accounting firm of Prager & Fenton. Id. ¶ 7.
18. The RCE (which, excluding schedules and exhibits, is attached as Exhibit A to the
Badavas Declaration) disclosed an underpayment of royalties by TVT from 1997 to 2002, which,
together with interest, totaled approximately $7.3 million. See “Summary of Findings” (last
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page of Ex. A)3
Prager & Fenton noted that: “TVTs failure to comply with our request has
severely limited the scope of our examination.” Badavas Decl. Ex.A at p. 5. Prager & Fenton
further reported that their test procedures of licensed selections “disclosed significant
discrepancies in which sales of licensed selections were either unreported or underreported.” Id.
at p. 7. The RCE also complained about TVTs “slow response to our data requests”; TVT’s non-
responsiveness to certain critical inquiries about royalty discrepancies; and TVT’s refusal to even
set a meeting at which Prager & Fenton could verify certain and apparent inventory
irregularities. Id. at pages 3-4, 9.
19. HFA submitted the RCE report to TVT in approximately January 2007. Despite
several attempts by HFA to solicit TVT’s substantive response and a commitment by TVT’s
CEO to provide one by June 2007, TVT failed to meaningfully comment on the RCE, let alone
address the issues identified by the RCE or pay the improperly withheld royalties. Badavas
Decl. ¶ 9.
20. Accordingly, on November 7, 2007, counsel for HFA sent to TVT a notice stating
that TVT was in default under the terms of its licenses and declaring that, pursuant to section
115(c)(6) of the Copyright Act, unless the defaults were remedied within 30 days from the date
of the notice, the compulsory licenses would be automatically terminated. Badavas Decl. ¶ 10;
Slotnick Decl. ¶ 3. A copy of that notice is annexed to the Slotnick Declaration as Exhibit A (the
“Termination Notice”).
3 Because of TVT’s lack of cooperation “severely limited” Prager & Fenton’s investigation, the RCE was
marked “preliminary and tentative,” and Prager & Fenton had to materially qualify the RCE. Badavas
Decl. Ex.A at p. 5. However, it should also be noted that the RCE only covered the period through
December 31, 2002. HFA has not had the opportunity to examine TVT’s books and records with respect
to the period from January 1, 2003 to date. Based on its experience with respect to, inter alia, the RCE,
HFA expects that any examination of this subsequent period would show additional underreported
royalties. Badavas Decl. ¶ 8.
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21. During the 30 days following the date of the Termination Notice, TVT made no
effort to cure the license defaults. TVT’s principal, Steven Gottlieb, did contact HFA’s counsel
by phone, and asked that HFA withdraw the Termination Notice. That request was denied.
Badavas Decl. ¶ 11; Slotnick Decl. ¶ 4.
22. Accordingly, at the end of the 30-day period (December 7, 2007), all of the HFA
Licenses issued to TVT were automatically terminated under the express terms of the Copyright
Act (Badavas Decl. ¶ 12; Slotnick Decl. ¶ 5):
“Such termination renders either the making or the distribution, or both, of allphonorecords for which the royalty has not been paid, actionable as acts of
infringement under section 501 and fully subject to the remedies provided bysections 502 through 506 and 509.” Copyright Act § 115(c)(6).
23. In addition to terminating the existing licenses, the Termination Notice informed
TVT that no further HFA Licenses would be granted in the future. Badavas Decl. ¶ 13; Slotnick
Decl. ¶ 6. HFA, therefore, placed all license requests from TVT on hold. Badavas Decl. ¶ 13.
Subsequently, TVT has neither applied for, nor has HFA granted, any subsequent mechanical
HFA Licenses. Id.
24. After the expiration of the 30 day cure period described above, TVT representatives
finally met with HFA and engaged in some preliminary discussions, and TVT provided a
response to one claim in the RCE. However, TVT continues to manufacture and distribute
phonorecords embodying HFA’s publisher-principals’ copyrighted musical works and generate
revenues from such activities – even though the rights to use the underlying copyrights have
been terminated or were never granted. Id. ¶ 14.
25. Apart from continuing to exploit works for which the licenses were terminated, TVT
is also operating illegally in a different way. Specifically, in light of TVT’s failure to respond to
the RCE, HFA undertook an examination of TVT’s top album releases to determine whether any
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contained unlicensed copyrighted works (the “Never Licensed Works”) administered by HFA on
behalf of its publisher-principals. As part of this examination, HFA analyzed “SoundScan,” a
widely used industry service for tracking album sales, and reviewed its own records. In addition,
HFA contacted its publisher-principals to determine if TVT had obtained a license of any Never
Licensed Works directly from the publisher. Id. ¶ 15.
26. In total, HFA identified 259 Never Licensed Works that it believes TVT used
without license authority (whether from HFA or directly from a publisher-principal of HFA).
See schedule annexed to the Badavas Declaration as Exhibit B. Simply put, TVT is using
substantial numbers of musical compositions owned by publishers represented by HFA,
apparently without even bothering to apply for a license at all. The amount of unpaid royalties
on the Never Licensed Works – if TVT had bothered to seek a license – would have amounted to
at least approximately $3,000,000, exclusive of interest, for record sales through December 31,
2006. Id. ¶ 16.4 In addition, TVT’s infringing use of the Never Licensed Works potentially
entitles HFA to a statutory damage award of $150,000 per work (see, infra, note 5)), which,
assuming the use of all of the Never Licensed Works are actionable infringements, would
amount to over $35,000,000.
27. In short, TVT’s copyright infringement of HFA’s publisher-principals’ works is
widespread.
TVT Cannot Operate its Business Illegally in this Chapter 11,
by Continuing to Exploit Unlicensed Musical Compositions
28. It is axiomatic that a debtor-in-possession must operate legally and cannot violate
the law in its post-petition operations. See 28 U.S.C. § 959 (permitting lawsuits against a debtor-
4 By noting the hypothetical royalties on the Never Licensed Works, HFA is by no means waiving itsright to pursue other remedies provided for under the Copyright Act, including enhanced statutory fees foreach infringing act.
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in-possession, without leave of the court appointing them “for acts or transactions in carrying on
business” (subsection (a)), and requiring a debtor-in-possession to operate in accordance with
valid laws (subsection (b))); see also In re St. Mary’s Hospital, 86 B.R. 393, 398 (E.D. Pa. 1988)
(“[28 U.S.C. §959] requires a debtor to conform with applicable federal, state and local law in
conducting its business.”); U.S. v. Harris, 177 U.S. 305 (1900) (“it may be conceded that it was
the intention of Congress [in enacting predecessor statute to 28 U.S.C. §959] to subject receivers
of railroad companies . . . to the valid laws and regulations of the State and the United States…”)
29. Courts have also routinely held that debtors-in-possession cannot exploit intellectual
property that they are not authorized to use. See, e.g., In re Television Studio School of New
York, 77 B.R. 411 (Bankr. S.D.N.Y. 1987) (per Judge Brozman) (28 U.S.C. §959(a) permits
lawsuit against post-petition copyright infringement by debtor, despite automatic stay); Laramie
Limited v. Yes! Entertainment Corp., 244 B.R. 56, 60 (D.N.J. 2000) (automatic stay did not
apply to action to enjoin post-petition patent infringement; otherwise, “bankrupt businesses
which operated post-petition could violate patent rights with impunity”); Bambu Sales, Inc. v.
Sultana Crackers, Inc., 683 F. Supp. 899 (E.D.N.Y. 1988) (allowing injunction case to proceed,
despite automatic stay, because bankruptcy laws “‘should not be used as a shield behind which a
debtor may sustain the misappropriation of a trade name to which he is not rightfully entitled’”)
(citations omitted).
30. A debtor’s improper post-petition action also harms the estate, because a tortious act
committed by the debtor gives rise an administrative claim. See, e.g., Reading v. Brown, 391
U.S. 471 (1968) (tort claimants awarded administrative expense priority for damages sustained in
post-petition fire cause by receiver’s negligence.)
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31. To sum up: HFA does not object to the entirety of the cash collateral order, but
rather objects to the limited extent that the cash collateral order suggests that the Debtor, secured
lenders, or other third parties may place in the stream of commerce or otherwise exploit
unlicensed phonorecords. Any such public dissemination or use would constitute a continuing
and illegal infringement of many copyrighted works. Copyright infringement is a tort, as to
which all participants are jointly and severally liable. Screen Gems-Columbia Music, Inc. v.
Metlis & Lebow Corp., 453 F.2d 552, 554 (2d Cir. 1972) (“Copyright infringement is in the
nature of a tort, for which all who participate in the infringement are jointly and severally
liable.”); Sygma Photo News, Inc. v. High Soc. Magazine, Inc., 778 F.2d 89, 92 (2d Cir. 1985)
(“All persons and corporations who participate in, exercise control over, or benefit from the
infringement are jointly and severally liable as copyright infringers.”) All parties are hereby on
notice that HFA and its publisher-principals intend to enforce these rights.5
32. As noted above, HFA has no desire to impede this Chapter 11 case. However, any
relief requested by the Debtor must be shaped in a way that protects the rights of the music
publishers.
33. A substantial portion of the TVT musical catalog is unlicensed and the Debtor’s
proposed use of cash to exploit these unlicensed properties is a continuing copyright
infringement. It is incumbent upon the Debtor and other interested parties to propose solutions
that do not openly and illegally violate the rights of the musical publishers.
5 Section 504(c) of the Copyright Act gives copyright owners the option of seeking actual or statutorydamages. An award of statutory damages for willful infringement may be, at the Court’s discretion, asmuch as $150,000 per copyrighted work. Section 505 allows a successful party to recover, with theCourt’s discretion, its costs and attorneys’ fees.
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Request for Waiver of Memorandum of Law
34. This Limited Objection does not raise any novel issues of law. Accordingly, HFA
respectfully requests that the Court waive the requirement of Rule 9013-1(b) of the Local
Bankruptcy Rules for the Southern District of New York that a separate memorandum of law be
submitted.
WHEREFORE, HFA (1) respectfully requests that the cash collateral order be entered
only in a manner that protects the rights of the publishers represented by HFA, and (2) reserves
the right to seek injunctive relief and/or damages (whether as an administrative, constructive
trust or other claim) under the Copyright Act for infringing use, against both the Debtor and any
non-debtor parties complicit in such willful infringement.
Dated: New York, New York March 6, 2008
LOEB & LOEB LLP
By: /s/ P. Gregory SchwedP. Gregory Schwed (PS-0861)
Barry I. Slotnick (BS-9796)Jason Blumberg (JB-1033)
345 Park Avenue
New York, New York 10154-1895(212) 407-4000
Attorneys for The Harry Fox Agency, Inc.