Larkin Arnold v. Sony - Royalties Complaint

8/10/2019 Larkin Arnold v. Sony - Royalties Complaint

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PLACEAN x INONEBOXONLY ORIGIN

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IF DIVERSITY,

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PLAINTIFF

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DEFENDANT

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CITIZENSHIP BELOW

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CITIZENSHIP OF PRINCIPAL PARTIES (FOR DIVERSITYCASES ONLY)

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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

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CITIZEN OR S U B J E C T

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FOREIGN C O U N T R Y

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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

Larkin Arnold v. Sony - Royalties Complaint

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