Entertainment and Media Litigation Update

Garcia v. Google: “Doubtful” Copyright Ownership Claim in Film Performance Does Not Outweigh First Amendment Right to Free Speech

Why it matters: In a closely watched case that tests the limits of copyright protection, on May 18, 2015, the Ninth Circuit sitting en banc reversed its panel decision in Garcia v. Google et al. and found that the district court had not abused its discretion when it denied the motion for preliminary injunction filed by an actress who claimed a “dubious and unprecedented” copyright ownership interest in her performance contained within the controversial film Innocence of Muslims.

Detailed discussion: On May 18, 2015, the Ninth Circuit sitting en banc reversed its panel decision and upheld the district court’s denial of injunctive relief in Garcia v. Google et al., finding the plaintiff actress’s copyright ownership claim to her performance in a controversial film to be highly doubtful both legally and factually and could not serve as a basis for a “takedown” injunction of the film. The Court stated at the outset that “[i]n this case, a heartfelt plea for personal protection is juxtaposed with the limits of copyright law and fundamental principles of free speech. The appeal teaches a simple lesson—a weak copyright claim cannot justify censorship in the guise of authorship.”

To briefly recap the facts: In 2011, actress Cindy Lee Garcia (Garcia) gave a cameo performance with two lines in what she was led to believe was an “action-adventure thriller” set in ancient Arabia titled Desert Warrior, for which she was paid $500. Garcia later learned that the movie’s writer-director (now in jail on an unrelated matter) was using five seconds of her footage in an anti-Muslim film titled Innocence of Muslims that, among other things, depicted the Prophet Mohammed as a murderer, pedophile and homosexual. Garcia’s lines were dubbed over into Arabic so that she appeared to be posing a derogatory question about the Prophet. Almost a year after she filmed the part, in July 2012, the writer-director posted an almost 14-minute trailer from Innocence of Muslims to YouTube (the video-sharing site owned by Google). After it was translated into Arabic, news outlets credited it with inciting the subsequent violent incidents that occurred throughout the Middle East (including the September 11 Benghazi attack). Shortly thereafter, an Egyptian cleric issued a fatwa against anyone involved in Innocence of Muslims, including the actors, and Garcia began receiving death threats. Garcia attempted through various means (including multiple “takedown” notices under the Digital Millennium Copyright Act) to get Google to remove the film from YouTube and its other platforms, but when that failed she turned to the courts. On September 19, 2012, Garcia sued unsuccessfully in California state court for a TRO and preliminary injunction, alleging invasion of privacy, false light and various other torts. She voluntarily dismissed that case on September 25, 2012, after her request for injunctive relief was denied, and instigated her federal lawsuit for a preliminary injunction in district court for the Central District of California a day later on September 26. This time, Garcia relied on the federal copyright laws and claimed a copyright ownership interest in her performance in the film that was being infringed. District Court Judge Michael W. Fitzgerald denied the injunction on November 30, finding that Garcia was not likely to succeed on the merits of her “unclear” copyright claim. Moreover, given that at that point the trailer had already been online for five months, the injunction was not necessary to prevent irreparable harm.

Garcia appealed the district court decision to the Ninth Circuit (panel), which in February 2014 reversed the district court in a divided decision with Judge Alex Kozinski writing the majority opinion. Even though the panel found Garcia’s copyright claim to be “fairly debatable,” it still found it likely that she would succeed on the merits and suffer irreparable harm from continued play of the trailer. Thus, the panel granted the preliminary injunction requiring Google to remove the trailer from YouTube and other Google platforms (the panel had issued a 24-hour “secret takedown order” at the beginning of the appeal, which it later limited to versions of the trailer that contained Garcia’s performance). Apart from stating that the First Amendment does not protect copyright infringement, the panel did not address the First Amendment ramifications of its decision.

The Ninth Circuit sitting en banc sided with the district court and dissolved the panel’s injunction. While the Court was “sympathetic to [Garcia’s] plight” given the “vicious frenzy” against her that the trailer incited, it emphasized that “the claim against Google is grounded in copyright law, not privacy, emotional distress, or tort law, and Garcia seeks to impose speech restrictions under copyright laws meant to foster rather than repress free expression.”

The Court found that the applicable law and facts did not “clearly favor” Garcia’s copyright claim so as to warrant an injunction. Under the Copyright Act, the Court found Innocence of the Muslims to be an “audiovisual work characterized as a motion picture and is derivative of the script,” and that “Garcia is the author of none of this and makes no copyright claim to the film or the script. Instead, Garcia claims that her five-second performance itself merits copyright protection.” The Court placed great weight on the fact that the U.S. Copyright Office had found that Garcia’s performance was not a copyrightable work, writing when it rejected her application that “longstanding practices do not allow a copyright claim by an individual actor or actress in his or her performance contained within a motion picture.” The Copyright Office went on to say that Innocence of Muslims is a “single integrated work . . . . Assuming Ms. Garcia’s contribution was limited to her acting performance, we cannot register her performance apart from the motion picture.” The Court stated that a finding of copyright ownership in an individual performance within a motion picture would “splinter” the motion picture into many different works, resulting in a legal morass.

Moreover, the Court found that Garcia’s claims of irreparable harm were “too attenuated from the purpose of copyright” and cited to her months-long delay in seeking an injunction after the trailer was uploaded, among other things, as undercutting her irreparable harm claim. The Court concluded that, based on the “doubtful copyright claim” and lack of irreparable harm, the district court did not abuse its discretion in denying the injunction.

As to free speech concerns, the Court stated that the panel’s injunction “gave short shrift to the First Amendment values at stake” and “censored and suppressed a politically significant film—based upon a dubious and unprecedented theory of copyright. In so doing, the panel deprived the public of the ability to view firsthand, and judge for themselves, a film at the center of an international uproar.” The Court further noted that “[t]he panel’s takedown order of a film of substantial interest to the public is a classic prior restraint of speech.”

The Court concluded that “[a]t this stage of the proceedings, we have no reason to question Garcia’s claims that she was duped by an unscrupulous filmmaker and has suffered greatly from her disastrous association with the Innocence of Muslims film. Nonetheless, the district court did not abuse its discretion when it denied Garcia’s motion for a preliminary injunction under the copyright laws.” In his dissent, Judge Kozinski continued to argue for copyright protection of Garcia’s performance and did not mince words about his thoughts on the majority opinion, stating at the outset that “the majority is wrong and makes a total mess of copyright law, right here in the Hollywood Circuit.”

Click here to read the Ninth Circuit en banc opinion in Cindy Lee Garcia v. Google, Inc., YouTube LLC et al., 12-57302 (9th Cir. 2015) (en banc).

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California District Court Rules That Twitter Not Required to Reveal Identities of Anonymous Users

Why it matters: On March 2, 2015, a California district court ruled that online social networking site Twitter, a nonparty to an underlying defamation lawsuit, could not be compelled by subpoena to reveal the identities of the two “John Doe” anonymous Twitter users in that case. The court’s decision relied squarely on First Amendment grounds, holding that “the defendants’ First Amendment rights [to speak anonymously] outweigh plaintiffs’ need for the requested information.” This case illustrates the growing tension regarding anonymous speech on social networking sites, between an online poster’s First Amendment right to anonymous speech and a business’s right to find out the identity of a poster whose derogatory comments are harming its reputation and livelihood.

Detailed discussion: On April 25, 2014, Music Group Macao Commercial Offshore Limited (Music Group), a Philippines-based holding company for pro audio and music product brands, filed a complaint in Washington district court against two “John Doe” Twitter users with anonymous accounts under the names of "@NotUliBehringer" and "@FakeUli", respectively. The complaint primarily alleged that the John Does had defamed Music Group and its CEO Uli Behringer by anonymously posting “malicious” comments on Twitter that they “knew to be untrue” about the Music Group’s products and its CEO. Music Group subpoenaed Twitter in Washington district court for the users’ names, addresses and other personal information. When Twitter failed to respond to the subpoena, Music Group filed a motion to compel in the Northern District of California (where Twitter is headquartered). For its part, Twitter “took no position on the merits” of the underlying case and was willing to comply with the subpoena if the court so ordered after making the necessary legal analysis to ensure that the “appropriate First Amendment standard is met and that the [Doe defendants’] right to anonymous free speech is protected.”

In her decision not to enforce the subpoena against Twitter, Magistrate Judge Laurel Beeler began her analysis with the “well-established” principle that the First Amendment protects the right to anonymous speech. Judge Beeler then acknowledged that, where the anonymous speech is alleged to be unlawful, there might be circumstances where the anonymous speaker’s free speech rights are outweighed by the plaintiff’s need to know the speaker’s identity in order to pursue his claim. To assess this balance, the Court used the standard enunciated in the case of Highfields Capital Management, L.P. v. Doe, 385 F. Supp. 2d 969 (N.D. Cal. 2005), which provides for a “two-pronged approach” focusing on the “nature” of the anonymous speech. Under the first prong of the Highfields test, the plaintiff must first persuade the court that there is a “real evidentiary basis” for believing that the speaker has engaged in “wrongful conduct that has caused real harm to the interests of the plaintiff.” If the plaintiff is successful in convincing the court under the first prong, then under the second “balancing” prong the court must “assess and compare the magnitude of the harms that would be caused” to the parties’ respective interests if the speaker’s identity were to be disclosed. If the court’s assessment shows that disclosing the speaker’s identity would cause “relatively little harm to the defendant’s First Amendment and privacy rights” but is “necessary to enable [the] plaintiff to protect against or remedy serious wrongs,” then the court should allow the disclosure.

With the Highfields test in mind, Judge Beeler examined the challenged speech in the Music Group case. The Court first looked to the comments made by the "@NotUliBehringer" account, which it determined fell into two categories of derogatory speech. The first category consisted of “direct and indirect commercial criticism of Music Group’s business practices and products” which, the Court found, was legitimate commercial speech that enjoys First Amendment protection. The second category of comments was directed at the CEO—one indirectly accusing the CEO of tax evasion and the other accusing the CEO of “traveling internationally while concealing things inside his body.” Judge Beeler found the first comment to be “troubling,” the second “merely crass,” and both were onetime comments made by someone who had an “obvious grudge” against Music Group’s CEO. Moreover, as the more serious tax-evasion comment was directed at the CEO, who is not a party to the suit, Music Group most likely could not use it to pursue an indirect defamation claim against the John Does. Even if that were not the case, however, the Court said that the tax-evasion comment would fail under the second “balancing” prong of the Highfields test because a onetime “rant” comment would not outweigh the accountholder’s First Amendment right to anonymous speech: “the court is more concerned that breaching the defendant’s anonymity for this single remark would unduly chill speech and ‘deter other critics from exercising their First Amendment rights.’ ” Thus, the Court found that Twitter could not be compelled to reveal the identity of the "@NotUliBehringer" accountholder.

Judge Beeler then looked to the “more serious” comments made by the "@FakeUli" account, which said that the Music Group “designs its products to break in 3-6 months” and “encourages domestic violence and misogyny,” and that the CEO “engages with prostitutes.” The Court found that “[i]f the first comment falls within the realm of legitimate commercial criticism, the last comments are plainly defamatory and are so per se.” The Court noted again that, as the CEO is not a party to the suit, Music Group could not pursue defamation claims on his behalf with respect to the “engages with prostitutes” comment; however, the Court found the comment that Music Group “encourages domestic violence and misogyny” satisfied the “real evidentiary basis” component of the first prong of the Highfields test and moved on to the second “balancing” prong.

While Judge Beeler initially equated the “encourages domestic violence and misogyny” comment to “fighting words and obscenity” that the First Amendment doesn’t protect, a URL attached to the comment leads to a short comedic video promoting one of Music Group’s products (amusingly described by the Court). Judge Beeler concluded that, once the comment is viewed in context with the video, it is clear that the comment was intended to be “joking and ironic” and does not fall out of First Amendment protection simply for being in “poor taste.” The harm to Music Group from the “joke” comment clearly did not outweigh "@FakeUli’s" First Amendment right to anonymous speech, and thus Twitter could not be compelled to reveal his identity.

In reaching her decision not to enforce the subpoena against Twitter, Judge Beeler relied on established Ninth Circuit case law precedent with respect to the First Amendment right to anonymous speech. This is important because another challenge in California to an online user’s right to anonymous speech could be imminent. On April 16, 2015, the Virginia Supreme Court relied on narrow jurisdictional grounds to vacate a state court of appeals judgment that had held online social networking site Yelp in civil contempt for failing to comply with a nonparty subpoena served on it by Virginia-based Hadeed Carpet Cleaning, Inc. (Hadeed). Hadeed had filed a defamation lawsuit in Virginia circuit court in 2012, alleging that three John Doe defendants had falsely represented themselves to be Hadeed customers and posted negative reviews about Hadeed’s carpet cleaning services on Yelp, which had a harmful effect on Hadeed’s business. As in the Music Group case, Hadeed served a subpoena on Yelp in Virginia (where it is registered to do business), seeking information about the identity of the John Doe defendants. The information they were seeking, however, could only be accessed by Yelp employees from administrative databases located at Yelp’s principal place of business in San Francisco. In its decision vacating the court of appeals’ order, the Court never addressed the First Amendment issues argued by Yelp in the lower courts, finding instead that the circuit court in Virginia was not empowered to enforce a subpoena against “non-resident non-parties” for the production of documents located in another state, in this case California.

It would not be surprising for Hadeed to now go after Yelp in California, and indeed Hadeed’s attorney was quoted as saying that they are weighing this option. If he does, however, and as we saw from the Music Group case, Hadeed would come up against established Ninth Circuit First Amendment case law in this area. One of the Public Citizen attorneys representing Yelp seemed to welcome the idea of Hadeed pursuing Yelp in California, saying that “[i]f Hadeed turns to California courts to learn the identities of its critics, those courts will require it to show evidence to meet the well-accepted First Amendment test for identifying anonymous speakers. And so far, Hadeed has not come close to providing such evidence.”

Click here to read the Corrected Order on Subpoenas in the case of Music Group Macao Commercial Offshore Limited, et al. v. John Does, No. 3:14-mc-80328- LB (N.D. Cal.).

Click here to read the Virginia Supreme Court decision in Yelp, Inc. v. Hadeed Carpet Cleaning, Inc. (Va. 2015).

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An (Anti) SLAPP in the Face: California District Court Finds That Rightscorp Did Not Abuse Legal Process With DMCA Subpoenas

Why it matters: On May 8, 2015, a California district court found that copyright enforcement agent Rightscorp did not commit abuse of process by exploiting Section 512(h) of the Digital Millennium Copyright Act, which provides for the issuance of subpoenas to Internet service providers compelling them to identify their copyright infringing customers.

Detailed discussion: On May 8, 2015, District Judge Dale S. Fischer of the Central District of California issued an order in the ongoing case of Blaha v. Rightscorp, Inc. et al. granting the motion brought by copyright enforcement agent Rightscorp, Inc. (Rightscorp) to strike the abuse of process cause of action from the first amended class action complaint filed by plaintiff John Blaha (Blaha) on March 9, 2015. Blaha had filed his complaint against Rightscorp, certain management individuals and Rightscorp clients Warner Bros., BMG Rights Management (US) LLC and Does 1-10 alleging, among other things, that Rightscorp and its clients abused the legal process by exploiting Section 512(h) of the Digital Millennium Copyright Act (DMCA). Section 512(h) authorizes copyright owners to ask federal district court clerks to issue subpoenas to Internet service providers (ISPs), requiring the ISPs to identify suspected copyright infringing customers, even though no lawsuit has been filed and no judge is involved.

Blaha argued that Rightscorp knew that its use of the DMCA subpoena process was improper based not only on established case law but also because Rightscorp had “beat a hasty retreat” when recently challenged on its use of Section 512(h) in a Texas district court. Thus, Blaha argued, “copyright troll” Rightscorp abused the legal process when it subsequently sought to exploit Section 512(h) in California district court.

First, a brief description of Rightscorp’s business model: In court filings, Rightscorp described itself as being “in the business of digital rights enforcement and work[ing] on behalf of copyright owners to identify online infringements and to mitigate the damage caused by such infringers.” Rightscorp stated that it uses a patent-pending proprietary technology to identify the “unique” Internet addresses that Rightscorp in good faith believes are being used by infringers of its clients’ copyrighted works. It then issues infringement notices to various ISPs, asking them to, in turn, forward the notices to their customers at the Internet addresses identified by Rightscorp. If the alleged infringers respond to the notices forwarded by the ISP, Rightscorp attempts to settle the past infringements with them on behalf of its clients at a rate of $20 per infringement. If the alleged infringers do not respond to the notices, Rightscorp resorts to the subpoena process prescribed by Section 512(h) of the DMCA in order to obtain from the relevant ISPs the identities of the alleged infringers. It is these DMCA subpoenas and Rightscorp’s use of them to identify Blaha and others similarly situated that constituted the abuse of process cause of action in Blaha’s complaint.

In the May 8 order, Judge Fischer granted Rightscorp’s motion to strike the abuse of process cause of action based primarily on California’s Anti-Strategic Lawsuit Against Public Participation (Anti-SLAPP) statute, which had been enacted to deter meritless lawsuits designed to chill another’s First Amendment rights to free speech and petition in connection with a “public issue.” Before getting to the merits, the judge first addressed Blaha’s argument that the state Anti-SLAPP statute was inapplicable because his abuse of process claim was a federal one “arising under” the use of subpoenas authorized by a federal law. The Court disagreed, finding that “the Supreme Court has explicitly rejected the idea of a federal common law tort of abuse of process.”

With the applicability of California’s Anti-SLAPP statute so established, the Court next examined the “two-pronged” legal standard applicable to motions to strike brought under the statute. The Court stated that, under the first prong, it “must first decide ‘whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity.’ ” If such a showing is made, the Court must decide under the second prong “ ‘whether the plaintiff has demonstrated a probability of prevailing on the claim.’ ” The Court concluded that only when both prongs of the Anti-SLAPP test are satisfied with respect to a cause of action, i.e., it “arises from protected speech or petitioning and lacks even minimal merit,” then it will be considered a SLAPP subject to being stricken under the statute.

Judge Fischer found “no question” that the first prong of the test was satisfied in this case. The abuse of power claim was specifically based on Rightscorp’s use of the Section 512(h) DMCA subpoena process in its efforts to identify suspected copyright infringers, which the Court found to be “protected action” specifically covered by the Anti-SLAPP statute.

The Court then considered the second prong of the test, finding that for Blaha to demonstrate a probability of prevailing on his abuse of process cause of action, he would have to show that Rightscorp had either an ulterior motive in pursuing the DMCA subpoenas or intended to use the process improperly. The Court found the “first fatal deficiency” in Blaha’s ability to prevail on his abuse of process claim to be his inability to claim an ulterior motive on the part of Rightscorp. The Court pointed out that, whether or not Rightscorp’s exploitation of Section 512(h) was valid under the circumstances, there was no allegation that Rightscorp sought to do anything with the DMCA subpoenas other than its stated intent, i.e., to learn the identity of alleged copyright infringers. Given that this was what Section 512(h) was created for, “a disclosed motive is, by definition, not ulterior.”

The Court found the “second fatal deficiency” in Blaha’s ability to prevail on the abuse of process claim to be the fact that it was barred by the California litigation privilege, which applies to communications made in judicial proceedings by litigants to “achieve the objects of the litigation” and that have some “connection or logical relation” to the litigation. The Court concluded that Blaha’s abuse of process claim was based entirely on the communications that Rightscorp made to the federal court clerks in order to obtain the DMCA subpoenas, which communications were clearly covered by the California litigation privilege.

With the abuse of process cause of action stricken by the Court (Blaha’s attorneys are considering an appeal to the Ninth Circuit), Blaha’s lawsuit will continue with respect to his other cause of action that Rightscorp violated the Telephone Consumer Protection Act with repeated robo-calls made to the alleged infringers’ cell phones in its effort to seek settlements. In the meantime, Rightscorp will in all probability continue exploiting the Section 512(h) DMCA subpoena process as it seeks the identities of recalcitrant infringers from ISPs, notwithstanding that the use of Section 512(h) has declined in recent years. This is mainly due to the landmark case of Recording Industry Association of America v. Verizon, 351 F.3d 1229 (D.C. Cir. 2003), where the RIAA had used the DMCA subpoena process in an attempt to get Verizon to identify infringing customers. The DC Circuit found that Section 512(h), as presently drafted, does not authorize the issuance of subpoenas to ISPs who merely provide Internet connections to suspected infringers (i.e., who act merely as a conduit) but do not actually store the allegedly infringing materials on their own servers. The DC Circuit’s opinion in Verizon was later followed by the Eighth Circuit in Recording Industry Association of America v. Charter Communications, Inc., 393 F.3d 771 (8th Cir. 2005), and both the DC Circuit and Eighth Circuit cases were recently cited as precedent in Georgia’s Northern District by Judge William S. Duffy in his ruling granting a motion to quash brought by an ISP in response to a DMCA subpoena served on it by Rightscorp. The case, titled In Re Subpoena Issued to Birch Communications, Inc. f/k/a CBeyond Communications LLC, arose out of the DMCA subpoenas obtained by Rightscorp in the Central District of California, and Judge Duffy granted the motion to quash just three days before Judge Fischer’s order in Blaha.

The Georgia and California district court orders are not inconsistent, however. Even though the ISP in the Georgia case had requested that sanctions be imposed against Rightscorp for its improper use of Section 512(h), Judge Duffy declined, stating that “[t]he issuance of a subpoena under Section 512(h) to a conduit ISP is an issue of first impression in our Circuit, and the Court agrees that Rightscorp’s interpretation of Section 512(h), ‘although not persuasive, is not frivolous, [was not illogical] and . . . Rightscorp’s issuance of the subpoena [was not] unreasonable.’ ” As Judge Fischer pointed out in the California case when striking the abuse of process claim, the issue before her was not the validity of Rightscorp’s exploitation of Section 512(h) to get DMCA subpoenas issued to ISPs; it was whether Rightscorp abused the legal process when it sought to do so. Judge Fischer concluded that it did not.

Click here to read the Order dated 5/8/15 in the case of Blaha v. Rightscorp Inc., et al., CV-14-9032 DSF (C.D. Cal.).

Click here to see the Order dated 5/5/15 in In Re Subpoena Issued to Birch Communications, Inc. f/k/a CBeyond Communications LLC, 1:14-cv-3904-WSD (N.D. Ga.).

For more on this matter, see Recording Industry Association of America v. Verizon, 351 F.3d 1229 (D.C. Cir. 2003) and Recording Industry Association of America v. Charter Communications, Inc., 393 F.3d 771 (8th Cir. 2005).

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Universal Music Group Settles With Recording Artists Over Digital Downloads

Why it matters: In April, Universal Music Group agreed to pay approximately $11.5 million to settle a class action lawsuit brought by over 7,000 recording artists who claimed that they were underpaid royalties from digital downloads of their music that had been characterized as “sales” rather than higher royalty rate “licenses.” The settlement follows similar “digital download” class action settlements involving Sony and, more recently, Warner Music Group.

Detailed discussion: On April 28, 2015, the district court judge in the consolidated class action Rick James, et al. v. UMG Recordings, Inc., preliminarily approved “as falling within the range of reasonableness” a settlement under which UMG Recordings, Inc. (“UMG”) agreed to pay approximately $11.5 million to a certified class of approximately 7,500 recording artists to resolve breach of contract claims alleging the underpayment of royalties resulting from UMG and its affiliated company Capitol Records LLC (Capitol) characterizing digital downloads of the artists’ music as “sales” (for which they would receive around 15% of net receipts) instead of “licenses” (for which they would receive a 50-50 split). For purposes of the case, digital downloads were defined to include permanent downloads, “mastertone” cellular ringtones and, in the case of Capitol, digital streams.

In addition to covering attorneys’ fees and administrative costs, UMG also agreed in perpetuity to increase by 10% all digital download royalty payments going forward (with no cap) to “Class Members,” who generally consisted of all “persons or entities (or their successors)” who had contracts with a UMG or Capitol U.S. record label between January 1, 1965, and April 30, 2004, that contained specified “records sold” and “masters licensed” royalty rate provisions (or, in the case of Capitol, that were part of its “Legendary Artists Program”). As part of this “prospective relief,” UMG agreed that the Class Members will “lock in” certain safeguards to their future digital download royalty calculations to prevent reductions due to “packaging” or other similar methods under which the digital downloads may be sold.

The motion to approve the settlement filed with the district court on April 14, 2015 details the parties’ protracted negotiations and mediation sessions starting in 2012, and the extensive discovery that included the review by the plaintiffs of over 11,000 recording contracts and numerous contentious discovery disputes presided over by a magistrate judge. The motion also details, as important to placing the UMG settlement in context, the history of the “digital downloads” class action suits that were filed against the four largest U.S. record companies: Sony (filed in 2006, settled in 2011), Warner Music Group (filed in 2011, settled in 2014), and Capitol EMI (later combined with the UMG class action for purposes of settlement) and UMG (both filed in 2011). Warner Music Group was the first of the 2011 class actions to settle in 2014, and the parties used it as a “template or starting point” in the UMG settlement.

One of the considerations the judge looked to in deciding to approve the settlement was “[t]he strengths and risks of Plaintiff’s case.” The judge pointed out that there has not yet been a ruling on the substantive issue underlying the case, i.e., whether the digital downloads at issue should properly be characterized as “licenses” or “sales.” The judge acknowledged that Eminem, an “individual plaintiff,” had successfully litigated the issue in F.B.T. Prods, LLC v. Aftermath Records, 621 F.3d 958 (9th Cir. 2010, cert. denied 2011), but felt that this case could be differentiated based on varying contract language and defenses available, and the years of litigation that would ensue if the case were not settled would be “risky, expensive and create substantial delay in recovery to Class Members, many of whom recorded their music in the 1970s, 1980s and 1990s.”

UMG, who admitted no wrongdoing in the settlement, said in a statement that “[a]lthough we are confident we appropriately paid royalties on digital downloads and adhered to the terms of contracts, we are pleased to amicably resolve this matter and avoid continued legal costs.” One of the lead plaintiffs’ lawyers, Len Simon, highlighted the issue when he said that “[t]his settlement is a fair resolution of this controversy over how to compensate artists for their valuable work in a new medium which we believe was not contemplated by their contracts, many drafted in the 1970s or 1980s. And it compensates these artists now, rather than after additional years of litigation and uncertainty.”

Click here to read the Notice of Motion and Motion for Preliminary Approval of Class Action Settlement in James et al. v. UMG Recordings, Inc., CV 11-01613 (N.D. Cal. 2015).

Click here to read the UMG press release dated 4/14/15 titled “UMG and Class Action Attorneys Propose Settlement Agreement on Digital Download Royalties.”

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Thunderheads on the Horizon for SoundCloud?

Why it matters: Over the past year, free digital music streaming service SoundCloud has been attempting to “go legit” and stave off mounting outrage from the music industry by negotiating royalty agreements for the millions of songs on its service, the vast majority of which are unlicensed. On June 4, 2015, SoundCloud announced that it had reached a royalty deal with Merlin, a consortium that represents approximately 20,000 independent record labels. This followed the announcement in November 2014 that SoundCloud had reached a royalty deal with major label Warner Music. SoundCloud has been unsuccessful in its negotiations with the two other major music groups, Sony and Universal Music, however, and recent rumblings (since disputed) indicate that copyright infringement lawsuits may be imminent.

Detailed discussion: SoundCloud is a Berlin-based free digital music streaming and sharing service that was founded in 2008. SoundCloud describes itself on its website as “the world’s leading social sound platform where anyone can create sounds and share them everywhere” and has said that its service is accessed by approximately 350 million people on a monthly basis, and, on average, at least 175 million people “click play” at least once. SoundCloud is popular with independent musicians and labels because the service allows them to premiere and publicize new music, which can be easily shared via Facebook, Twitter, and other social networks. New Zealand singer/songwriter Lorde is just one independent artist who rose to fame after posting songs such as “Royals” on SoundCloud. SoundCloud has increasingly come under fire from the music industry because most of the millions of songs on its service are unlicensed and therefore “non-monetized,” i.e., they don’t generate royalties. SoundCloud’s CEO Alexander Ljung has indicated SoundCloud’s intention to create a premium subscription tier while maintaining an ad-supported free tier (similar to Spotify). To this end, SoundCloud has been attempting to enter into license agreements with the major and independent labels and artists that would provide for the payment of royalties and, in some cases, the purchase of an equity stake in the company.

SoundCloud’s licensing attempts with the major labels have been met with mixed results. While it successfully entered into a licensing deal with Warner Music in November 2014 that reportedly also had Warner Music purchasing a 5% equity stake in the company, negotiations have broken down with Universal Music and Sony, leading Sony to pull tracks of many of its biggest artists, including Adele, Kelly Clarkson and Kesha, from SoundCloud in May 2015. On June 4, 2015, SoundCloud announced that it had entered into a licensing deal covering approximately 20,000 independent record labels through Merlin, a consortium that negotiates the digital music rights for these smaller companies.

But all this may be too little, too late. According to a June 22, 2015, Digital Music News article, “multiple executives close to the situation” have indicated that “Universal Music Group, Sony Entertainment and the Recording Industry Association of America (RIAA) will soon be filing lawsuits against SoundCloud for ‘massive copyright infringement.’ ” As for SoundCloud’s recent seemingly positive deal with Merlin, the Digital Music News article points out that Merlin had signed a similar deal with the now defunct music streaming service Grooveshark, “essentially validating the company right to the bitter end.” On the other hand, a June 24, 2015 Billboard article raises doubts that SoundCloud will soon be buried under an avalanche of copyright infringement lawsuits, stating that “sources with knowledge of the situation at Sony Music and Universal Music Group say they have no knowledge of any imminent litigation against SoundCloud.” We will monitor this fluid situation and report back.

Click here to read the Digital Music News article dated 6/22/15 titled “Exclusive: SoundCloud Bracing for Massive Copyright Infringement Lawsuits…” by Paul Resnikoff.

Click here to read the Billboard article dated 6/24/15 entitled “Majors Have No Plans to Bury SoundCloud Under Mountain of Litigation, Say Sources” by Andrew Flanagan.

For more on this matter, read the following: (1) New York Times article dated 6/4/15 titled “SoundCloud Reaches Royalty Deal With 20,000 Record Labels” by Ben Sisario; (2) Digital Music News article dated 11/5/14 titled “WMG Signs Licensing Deal with SoundCloud, Will Get 5% of the Company” by Nina Ulloa; and (3) New York Times article dated 8/21/14 titled “Popular and Free, SoundCloud Is Now Ready for Ads” by Ben Sisario.

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