CA No
|CA No. 09-55817 |
|Consolidated with CA No. 09-56069 |
|DC No. CV-07-03314 PSG (MANx) |
|UNITED STATES COURT OF APPEALS |
|FOR THE NINTH CIRCUIT |
|F.B.T. PRODUCTIONS, LLC AND EM2M, LLC, |
|Plaintiffs and Appellants, |
|v. |
|Aftermath Records, doing business as Aftermath Entertainment; Interscope Records; and UMG Recordings, Inc., |
|Defendants and Appellees. |
| |
|Appeal From Judgment And Post-Judgment Orders |
|Of The United States District Court |
|For The Central District Of California |
|(Hon. Philip S. Gutierrez, Presiding) |
| |
|Appellants’ opening brief |
|[REDACTED FOR PUBLIC FILE] |
| |
|Jerome B. Falk, Jr. (No. 39087) |Richard S. Busch (TN No. 014594) |
|Daniel B. Asimow (No. 165661) |King & Ballow |
|Sara J. Eisenberg (NY No. 4434551) |315 Union Street, Suite 1100 |
|Howard Rice Nemerovski Canady Falk & Rabkin |Nashville, Tennessee 37201 |
|A Professional Corporation |Telephone: 615/259-3456 |
|Three Embarcadero Center, 7th Floor |Facsimile: 615/726-5417 |
|San Francisco, California 94111-4024 | |
|Telephone: 415/434-1600 | |
|Facsimile: 415/677-6262 | |
|Attorneys for Plaintiffs and Appellants F.B.T. Productions, LLC and Em2M, LLC |
CORPORATE DISCLOSURE STATEMENT
PLAINTIFFS AND APPELLANTS F.B.T. PRODUCTIONS, LLC AND EM2M, LLC ARE MICHIGAN LIMITED LIABILITY CORPORATIONS, HAVE NO PARENT COMPANY, AND NO PUBLICLY HELD COMPANY OWNS 10% OR MORE OF EITHER COMPANY’S STOCK.
DATED: December 28, 2009.
|Respectfully, |
|Jerome B. Falk, Jr. |Richard S. Busch |
|Daniel B. Asimow |King & Ballow |
|Sara J. Eisenberg | |
|Howard Rice Nemerovski Canady | |
|Falk & Rabkin | |
|A Professional Corporation | |
| |
|By /s/ Jerome B. Falk, Jr. |
|Jerome B. Falk, Jr. |
|Attorneys for Plaintiffs and Appellants F.B.T. Productions, LLC and Em2M, LLC |
introduction and summary of argument 1
jurisdictional statement 6
issues presented 6
statement of facts 8
A. F.B.T. Discovers And Signs Eminem. 8
B. F.B.T. And Eminem Contract With Aftermath. 9
C. Digital Online Music Services Explode Into The Music Industry. 12
1. Types Of Digital Music Downloads. 13
2. Appellees Enter Into Licensing Agreements With Third Party Digital Media Providers. 14
3. Appellees Create A New Royalty Rate For Downloads And Amend Their Form Contracts To Reflect This New Rate. 15
D. F.B.T. Discovers That Appellees Have Been Underpaying In A Variety Of Ways; F.B.T. Initiates This Lawsuit. 16
E. District Court Proceedings. 17
1. Pre-Trial Proceedings. 17
2. Trial And Judgment. 20
3. Post-Trial Proceedings. 20
Standard Of Review 21
argument 25
I. The Jury’s erroneous interpretation of the recording agreements CAnnot Stand. 25
A. This Court Reviews Contract Interpretation De Novo And F.B.T. Has Not Waived Its Right To De Novo Appellate Interpretation Of The Recording Agreements. 25
B. The Masters Licensed Provision Covers All Licenses To Third Parties, Including Licenses To Third Party Digital Media Providers. 26
1. The Plain Language Of The Contract Establishes That The Masters Licensed Provision Covers All Licenses, Including Licenses To Third Party Digital Media Providers. 26
2. The Relevant Extrinsic Evidence Confirms That The Masters Licensed Provision Covers All Licenses, Including Licenses To Third Party Digital Media Providers. 30
3. Appellees’ Assertedly Contrary Evidence Is Irrelevant. 35
C. Appellants Did Not Waive The Right To De Novo Interpretation Of The Contract By This Court, Or The Right To A Legally Correct Interpretation. 39
II. The Court Should have Determined AS A MATTER OF LAW That The Third Party Download Agreements Were Licenses, Or At A Minimum Instructed The Jury On This ISSUE AND Permitted F.B.T. To Introduce evidence THAT Appellees and Apple Admitted the agreements were licenses. 44
A. Characterization Of The Third Party Download Agreements Is A Question Of Law. 45
B. The Undisputed Evidence Overwhelmingly Supported Appellants’ Position That The Third Party Download Agreements Were Licenses. 46
C. F.B.T. Did Not Waive This Argument. 48
D. Even If Interpretation Of The Third Party Download Agreements Was A Fact Issue Properly Submitted To The Jury, A New Trial Is Required Due To Erroneous Instructional And Prejudicial Evidentiary Rulings. 49
1. The District Court Failed To Properly Instruct The Jury. 50
2. The District Court Improperly Excluded The Pre-Litigation Statements Admitting That The Agreements Are “Licenses.” 51
III. the improper exclusion of the “paterno letter” also requires reversal. 54
A. The District Court Erred In Excluding The “Paterno Letter.” 56
B. The Improper Exclusion Of The “Paterno Letter” Severely Prejudiced Appellants. 58
IV. the district court’s award of attorneys’ fees should be reversed. 60
A. If The Judgment Is Reversed, Appellees Will No Longer Be A Prevailing Party Entitled To Fees. 61
B. The District Court Incorrectly Thought It Lacked Discretion To Deny Fees To Appellees. 61
Conclusion 64
Cases
Ajaxo Inc. v. E*Trade Group Inc., 135 Cal. App. 4th 21 (2005) 64
APL Co. Pte. Ltd. v. UK Aerosols Ltd., 582 F.3d 947 (9th Cir. 2009) 23
Badie v. Bank of Am., 67 Cal. App. 4th 779 (1998) 22
Baker v. Delta Air Lines, 6 F.3d 632 (9th Cir. 1993) 59, 60
Berkla v. Corel Corp., 302 F.3d 909 (9th Cir. 2002) 64
California Nat’l Bank v. Woodbridge Plaza, L.L.C., 164 Cal. App. 4th 137 (2008) 38
City of Hope Nat’l Med. Ctr. v. Genentech, Inc., 43 Cal. 4th 375 (2008) 21, 22
Clarendon Nat’l Ins. Co. v. Ins. Co. of the W., 442 F. Supp. 2d 914 (E.D. Cal. 2006), aff’d, 290 Fed. App’x 62 (9th Cir. 2008) 21
Dean v. TWA, 924 F.2d 805 (9th Cir. 1991) 60
Doe I v. AOL, L.L.C., 552 F.3d 1077 (9th Cir. 2009) 21, 23
Doe I v. Wal-Mart Stores, Inc., 572 F.3d 677 (9th Cir. 2009) 23
Dorn v. Burlington N.S.F.R.R., 397 F.3d 1183 (9th Cir. 2005) 43
Dresser Indus., Inc. v. Gradall Co., 965 F.2d 1442 (7th Cir. 1992) 43
Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008) 30
Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal. App. 4th 944 (2003) 24
Garcia v. Truck Ins. Exch., 36 Cal. 3d 426 (1984) 23, 39
Goodman v. United States, 369 F.2d 166 (9th Cir. 1966) 57
Greger Leasing Corp. v. Barge Pt. Potrero, No. C-05-5117 SC, 2008 WL 4830751 (N.D. Cal. Nov. 6, 2008) 64
Hamman v. Sw. Gas Pipeline, Inc., 821 F.2d 299, vacated in part on other grounds on reh’g, 832 F.2d 55 (5th Cir. 1987) 43
Hampton v. Paramount Pictures Corp., 279 F.2d 100 (9th Cir. 1960) 47
Hess v. Ford Motor Co., 27 Cal. 4th 516 (2002) 22
Heston v. Farmers Ins. Group, 160 Cal. App. 3d 402 (1984) 56, 57
Hsu v. Abbara, 9 Cal. 4th 863 (1995) 63
Interstellar Starship Servs., Ltd. v. Epix Inc., 184 F.3d 1107 (9th Cir. 1999) 61
Jacques v. DiMarzio, Inc., 386 F.3d 192 (2d Cir. 2004) 43
Jenkins v. Union Pac. R.R., 22 F.3d 206 (9th Cir. 1994) 50
Jerden v. Amstutz, 430 F.3d 1231 (9th Cir. 2005) 54, 60
L.K. Comstock & Co. v. United Eng’rs & Constructors, Inc., 880 F.2d 219 (9th Cir. 1989) 24
MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993) 47
Martin Bros. Constr., Inc. v. Thompson Pac. Constr., Inc., No. C058944, 2009 WL 4456380 (Cal. Ct. App. Dec. 4, 2009) 21, 22
McHugh v. United Serv. Auto. Ass’n, 164 F.3d 451 (9th Cir. 1999) 38
Med. Operations Mgmt., Inc. v. Nat’l Health Labs., Inc., 176 Cal. App. 3d 886 (1986) 22, 23, 38, 39
Medtronic, Inc. v. White, 526 F.3d 487 (9th Cir. 2008) 42
Microsoft Corp. v. DAK Indus., 66 F.3d 1091 (9th Cir. 1995) 50
Milenbach v. Comm’r, 318 F.3d 924 (9th Cir. 2003) 23
Oahu Gas Serv., Inc. v. Pac. Res., Inc., 838 F.2d 360 (9th Cir. 1988) 26
Obrey v. Johnson, 400 F.3d 691 (9th Cir. 2005) 58
Parsons v. Bristol Dev. Co., 62 Cal. 2d 861 (1965) 22, 39
Peake v. Chevron Shipping Co., 245 Fed. Appx. 680 (9th Cir. 2007) 60
Producers Dairy Delivery Co. v. Sentry Ins. Co., 41 Cal. 3d 903 (1986) 30, 37
Qualls v. Lake Berryessa Enters., Inc., 76 Cal. App. 4th 1277 (1999) 22
Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758 (2001) 30
Silver Creek, L.L.C. v. BlackRock Realty Advisors, Inc., 173 Cal. App. 4th 1533 (2009) 7, 8, 61, 62, 63
Stanford Univ. Hosp. v. Fed. Ins. Co., 174 F.3d 1077 (1999) 26
Tompkin v. Philip Morris USA, Inc., 362 F.3d 882 (6th Cir. 2004) 50
Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995) 47
UMG Recordings, Inc. v. Augusto, 558 F. Supp. 2d 1055 (C.D. Cal. 2008) 50
United Commercial Ins. Serv., Inc. v. Paymaster Corp., 962 F.2d 853 (9th Cir. 1992) 21, 24
United States v. Carman, 577 F.2d 556 (9th Cir. 1978) 45
United States v. Hands, 184 F.3d 1322 (11th Cir. 1999) 57
United States v. Wise, 550 F.2d 1180 (9th Cir. 1977) 47, 50
Vision Info. Servs., L.L.C. v. Comm’r, 419 F.3d 554 (6th Cir. 2005) 45
Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769 (9th Cir. 2006) 47
Warfield v. Alaniz, 569 F.3d 1015 (9th Cir. 2009) 45
Warner Bros., Inc. v. Curtis Mgmt. Group, Inc., No. 91-4016, 1995 WL 420043 (C.D. Cal. Mar. 31, 1993) 31
Winet v. Price, 4 Cal. App. 4th 1159 (1992) 22
Wolf v. Walt Disney Pictures & Television, 162 Cal. App. 4th 1107 (2008) 22
Statutes
28 U.S.C. §1291 6
Cal. Civ. Code
§1638 26
§1644 48
§1717 5, 8, 21
Cal. Code Civ. Proc. §1858 30
Other Authorities
9C C. Wright, et al., Federal Practice and Procedure §2553 (2008) 42
Donald S. Passman, All You Need To Know About The Music Business 377-78 (3d ed. 1997) 12
I. introduction and summary of argument
Digital downloading of music through online applications such as iTunes has become an extraordinarily popular alternative to purchasing music on physical media such as compact discs, tapes and phonograph records. This appeal concerns the correct interpretation of the applicable contract royalty provisions when applied to certain types of digital music downloads—namely, permanent downloads of recorded albums and songs (hereafter “permanent downloads”), and permanent downloads of mastertones (i.e., 30-second or less audio clips of a song that signal an incoming call on a cellphone) (hereafter “mastertones”). The contracts in question, made before the digital download era had begun, are between Appellees—recording companies Aftermath Records and its co-owners Interscope Records, and UMG Recordings, Inc.—and rap artist Eminem and Appellants F.B.T. Productions, LLC and Em2M, LLC (collectively, “F.B.T.” or “Appellants”). Under those contracts, Appellees are contractually required to pay 50% royalties on “masters licensed by [Appellees] . . . to others for their manufacture and sale of records or for any other uses.”
On its face, the language of this “Masters Licensed” provision fits these digital downloads like a glove. Under their contracts with companies like Apple (for its iTunes download application), Appellees grant—that is, “license”—the right to copy the digital files embodying original music recordings, to manufacture the files into permanent downloads or mastertones, and to allow end users to download the recordings onto devices like an iPhone or an iPod. Those agreements do not transfer ownership of the copyrighted recordings, or even of the digital file containing the recordings, to the digital media provider; ownership is retained by Appellees. The license agreements substantially restrict the uses to which the licensed recordings may be put, and the geographic area in which the licensee may exercise its rights.
Nevertheless, Appellees have refused to pay 50% royalties under the Masters Licensed provision for digital downloads of songs appearing on Eminem albums. Instead, Appellees take the position that a different royalty clause applies, and that the Masters Licensed provision does not apply to the license agreements between Appellees and the digital media companies. When F.B.T. discovered that Appellees were not accounting for these downloads as licenses, F.B.T. sued Appellees for breach of contract. The District Court refused to interpret the disputed contract provisions and submitted those issues to the jury, which returned a general verdict for Appellees on F.B.T.’s claims regarding permanent downloads and mastertones. On March 17, 2009, the court entered final judgment based on the jury’s verdict.
Interpretation of a contract provision is an issue of law which this Court determines de novo unless there are material extrinsic fact disputes turning on the credibility of witnesses. There is no material extrinsic fact dispute here. The underlying historic facts are undisputed. There is no dispute as to “custom and practice.” Disputes as to the proper inferences to be drawn from undisputed facts remain questions of law for the court to determine. The District Court attempted to justify its decision to submit the contract interpretation issues to the jury on the basis of conflicting testimony of expert witnesses about the correct interpretation of the contract. That testimony is legally irrelevant because it goes to the ultimate question of law. See pp.37-38; Part I(B)(3), infra. This Court therefore must interpret the Masters Licensed provision de novo. The question of contract interpretation is not close, for several reasons.
First, on its face, the Masters Licensed provision applies to all licenses, including licenses to third party digital media providers such as Apple. See Part I(B)(1), infra. None of the extrinsic evidence presented at trial would persuade a reasonable person that the parties intended the provision to mean anything different. To the contrary, the undisputed extrinsic evidence uniformly confirms that the Masters Licensed provision covers all licenses, including licenses for permanent downloads and mastertones. For example, royalties for transfers of albums to record clubs that reproduce the entire album for sale to club members are treated under the Masters Licensed provision. Royalties for conditional downloads and “streaming”—which involve transfer of electronic files in the same manner as for use with permanent downloads and mastertones—are also treated under the Masters Licensed provision. Moreover, in 2002, Appellees amended their standard form agreements to specify that digital downloads would be treated as record sales by Appellees (to which a lower royalty rate applies) rather than under the Masters Licensed provision—strong evidence that they were concerned that under the prior contract forms, such as those at issue here, the Masters Licensed provision would apply. See Part I(B)(2), infra.
Second, the only extrinsic evidence mentioned by the District Court as supportive of Appellees’ interpretation was legally irrelevant. The court pointed to what it characterized as “custom and practice” testimony about how the Masters Licensed provision had been applied as of the time of contracting. Since there was no digital downloading taking place at that time, this testimony amounted to opinion testimony on the ultimate legal question of how the Masters Licensed provision should be interpreted; such testimony is legally irrelevant and must be disregarded. See Part I(B)(3), infra.
Third, Appellees’ contention that their agreements with digital download providers such as Apple are not “licenses” is preposterous. Again, there are no material extrinsic facts in dispute, and so this issue of contract interpretation is also a question of law that this Court determines de novo. See Part II(A), infra. The download agreements provide that Appellees retain title to the copyrighted recordings and to the digital files containing the recordings, and limit the uses to which the material can be put. As a matter of federal copyright law, they are licenses. There is no evidence that the parties to this agreement for the transfer of copyrighted material agreed that the term “license” would have a non-standard meaning. See Part II(B), infra.
Fourth, even if the issue of whether the download agreements are licenses was a question properly submitted to the jury, the judgment must be reversed because the District Court refused to instruct the jury on the proper legal standard for making this determination and erroneously excluded pre-litigation statements of Universal and Apple employees admitting that the third party digital download agreements are “licenses.” See Part II(D), infra.
Fifth, reversal is also required because the District Court precluded F.B.T. from introducing a letter—signed by the very lawyer who represented Aftermath during negotiation of the primary agreement at issue—which interpreted the standard clause at issue in this case as meaning that record companies should account for permanent downloads as licenses, and which specifically rejected the very argument made by Appellees in this case. Had the jury known that the attorney who drafted and negotiated the relevant agreement for Appellees signed a letter advocating F.B.T.’s interpretation, the trial would have played out very differently. See Part III, infra.
Following entry of judgment, the District Court granted attorneys’ fees to Appellees under Section 1717 of the California Civil Code. This fee award cannot stand. As an initial matter, if the judgment is reversed then Appellees will no longer be prevailing parties. See Part IV(A), infra. And even if the judgment is upheld, the District Court erroneously believed that its hands were tied by a recent California Court of Appeal decision holding that a trial court abused its discretion when it concluded there was no prevailing party in a mixed verdict case. The court was mistaken. This Court should remand the issue of attorneys’ fees to allow the District Court to reconsider its conclusion with a proper understanding of the extent of its discretion. See Part IV(B), infra.
II. jurisdictional statement
Plaintiffs and Appellants F.B.T. Productions, LLC and Em2M, LLC appeal from the Final Judgment entered in the District Court on March 17, 2009, the order dated May 12, 2009, denying Appellants’ motion for a new trial, and the Amended Final Judgment entered in the District Court on July 6, 2009. 1-ER-31, 20, 1. This Court has jurisdiction to hear the appeal from these final decisions of the District Court under 28 U.S.C. §1291. Notices of Appeal were timely filed on May 29, 2009, and July 9, 2009. 4-ER-723, 724.
III. issues presented
Whether Appellees should pay royalties on permanent downloads and mastertones pursuant to the provision in the parties’ contract that applies to “masters licensed by [Appellees] . . . to others for their manufacture and sale of records or for any other uses”? 5-ER-838 ¶4(c)(v). In particular:
Whether, on its face, this contract provision applies to all licenses, including licenses to third party digital media providers?
Whether the extrinsic evidence introduced by the parties would persuade a reasonable person that the provision means anything other than this facial meaning?
Are Appellees’ agreements with third party digital media providers licenses?
Did the District Court err by:
Refusing to instruct the jury on the proper legal standard for determining whether the third party download agreements were licenses?
Excluding pre-litigation statements of Universal and Apple executives admitting that the third party download agreements are licenses?
Excluding a letter—signed by the lawyer who represented Appellee Aftermath during negotiation of the primary agreement at issue—which argued that record companies should account for permanent downloads as licenses?
Whether the fee award for Appellees should be reversed? In particular:
Whether the fee award should be reversed if the underlying judgment is reversed?
Did the District Court err in believing that the California Court of Appeal’s recent decision in Silver Creek, L.L.C. v. BlackRock Realty Advisors, Inc., 173 Cal. App. 4th 1533, 1540 (2009), deprived it of discretion to determine that there was no prevailing party for purposes of awarding fees under California Civil Code Section 1717?
IV. statement of facts
A. F.B.T. Discovers And Signs Eminem.
In the early 1990s, Mark and Jeff Bass discovered budding rapper Marshall B. Mathers, III p/k/a Eminem (“Eminem”). 3-ER-510:17-511:1. At that time, Eminem was a little known rapper in Detroit. Over the next few years, Mark and Jeff Bass “groom[ed]” Eminem and let him record music in their facility. 3-ER-511:2-10, 514:17-515:4. Several years later, in 1995, Mark and Jeff signed Eminem to their production company, F.B.T. Productions, LLC.[1] 3-ER-511:12-17; 6-ER-1054. Specifically, F.B.T. and Eminem signed an “Exclusive Artist Recording Agreement” in which Eminem agreed to “render exclusive services to [F.B.T.] to furnish master recordings.” 6-ER-1054.
B. F.B.T. And Eminem Contract With Aftermath.
After signing Eminem to F.B.T. in 1995, Mark and Jeff Bass gathered funds to take Eminem to rap shows around the country so he could showcase his skills and generate “buzz.” 3-ER-512:7-14. In 1997, Eminem performed at a show in California. A junior employee of Interscope Records (“Interscope”), who was in attendance at that concert, obtained a copy of Eminem’s CD and brought it to the then-president of Interscope, Jimmy Iovine. 3-ER-507:21-22, 508:3-15, 513:3-25. Shortly thereafter, Mr. Iovine gave Eminem’s album to Andre Rommel Young, Jr., p/k/a Dr. Dre. 3-ER-509:4-6. Dr. Dre and Interscope were co-owners of a record label called Aftermath Records (“Aftermath”). 3-ER-494:19-21.[2]
Dr. Dre liked what he heard. He was “very excited about signing Eminem and wanted to get him in the fold as quickly as he could.” 3-ER-484:2-4; see also 3-ER-483:22-484:19, 495:22-496:8, 509:4-8. Dr. Dre called Mark Bass to set up a meeting with Eminem (3-ER-516:11-18), and within a few days they had entered into a contract. 3-ER-484:5-7. Specifically, on March 9, 1998, F.B.T. entered into an agreement with Aftermath (the “1998 Agreement”), whereby F.B.T. agreed to furnish to Aftermath “the exclusive recording services of” Eminem. 5-ER-834.
The 1998 Agreement, which was based on a form contract drafted by Aftermath’s attorney, Peter Paterno (3-ER-485:16-486:7), set forth the royalty payments that Aftermath would make to F.B.T. in various situations. Paragraph 4(a)(i) of the 1998 Agreement—the “Records Sold” provision—specified the royalty to be paid to F.B.T. when Eminem records were sold by Aftermath through normal retail channels in the United States. 5-ER-837 ¶4(a). This royalty rate ranged from 12% to 20% of the adjusted retail price depending on such factors as the aggregate number of records sold. Id. Importantly, however the 1998 Agreement went on to state that “notwithstanding the foregoing,” a different royalty would be paid on “masters licensed by [Aftermath] . . . to others for their manufacture and sale of records or for any other uses.” 5-ER-837-38 ¶¶4(c), (c)(v). This second provision—the “Masters Licensed” provision—set a significantly higher royalty rate of 50% of Aftermath’s net receipts for all Eminem masters licensed to others by Aftermath.[3] 5-ER-838 ¶4(c)(v).
In 2000, F.B.T., Eminem and Aftermath entered into an amendment to the 1998 Recording Agreement (the “2000 Novation”). 5-ER-875. Pursuant to the 2000 Novation, Aftermath and Eminem were given a “direct relationship” (i.e., F.B.T. was no longer responsible for furnishing Eminem’s services to Aftermath), but F.B.T. retained a right to royalty income on Eminem’s recordings. 3-ER-472:8-23, 478:2-22; 4-ER-590:11-17. The 2000 Novation also increased the royalty rate provided under the Records Sold provision (3-ER-475:18-24; 5-ER-875 ¶7), but the substance of the Records Sold and Masters Licensed provisions was unchanged. 5-ER-889; 3-ER-475:25-477:3.[4]
In 2003, Eminem and Appellees entered into a new agreement that terminated the 1998 Agreement. The new agreement made a number of changes, but incorporated the Records Sold and Masters Licensed provisions of the 1998 Agreement verbatim. 5-ER-898 ¶5(a)(i), 899 ¶5(c)(v). The 1998 and 2003 agreements are referred to collectively herein as the “Recording Agreements.”[5]
As a result of these contracts and amendments, the current situation is as follows: Eminem and Aftermath have a direct relationship, and F.B.T. and Eminem both receive a portion of the royalties paid by Appellees on Eminem’s music. Pursuant to the Recording Agreements, the current royalty rate on records sold by Aftermath in the United States is 22-23% of the adjusted retail price. 5-ER-1011 ¶2(a). But “notwithstanding” that provision, the royalty rate on “masters licensed by [Aftermath] . . . to others” is 50% of Aftermath’s net receipts. 5-ER-837-38 ¶¶4(c), (c)(v).
C. Digital Online Music Services Explode Into The Music Industry.
In 1998, online music services were in a nascent state. 4-ER-644:14-15; 3-ER-502:4-7.[6] Within the next few years, however, digital music exploded. Napster and other “illegitimate online services that neither pa[id] artists nor record companies nor [sought] permission to use the music they exploit[ed]” began offering music to internet users in 1999. 6-ER-1250; 4-ER-644:19-20. And beginning in 2001, UMG began entering into contracts that granted third parties the right to legally reproduce and distribute UMG music to consumers over the internet in several different forms. See, e.g., 2-ER-261 ¶86.
1. Types Of Digital Music Downloads.
Permanent Downloads: iTunes and many other companies offer consumers permanent downloads—digital copies of master recordings that, once downloaded, reside permanently on an end-user’s computer (or iPod, MP3 device, etc.). 2-ER-257 ¶¶71, 73. Once downloaded, the user need not pay any more money or sustain a relationship or account with the seller to retain access to the song he has downloaded.
Streaming: Streaming of music is a process whereby a user can listen to a song while connected to the internet, but no copy is created on his local machine. 2-ER-258 ¶76. It is not possible to re-listen to a song that has just been streamed without connecting to the provider. 2-ER-259 ¶79.
Conditional Downloads: Conditional downloads are similar to permanent downloads, except that the user must maintain a subscription to a given service in order to be able to download songs, or to continue to listen to songs already downloaded. Id. ¶80.
Mastertones: Finally, mastertones are a category of digital uses that covers more than one specific product. Typically, mastertones are short clips (approximately 30 seconds) of a master recording that plays on a mobile device to signal an incoming telephone call. 2-ER-260 ¶82. Most common are mastertones that a user purchases and permanently downloads from a provider. Id. ¶83. Other forms of mastertones—such as T-Mobile’s “ringback tones”—play for third parties who call the purchaser’s cellular phone. Id. ¶84.
2. Appellees Enter Into Licensing Agreements With Third Party Digital Media Providers.
Since approximately 2001, UMG has entered into licensing agreements with various third parties, granting those entities the rights to reproduce and distribute UMG music to consumers over the internet in the forms discussed above. 2-ER-261 ¶86; see also, e.g., 5-ER-1013; 6-ER-1131, 1165. In the course of this litigation, UMG produced approximately eighty agreements granting various entities these rights to reproduce and sell UMG’s music (including the Eminem masters) as permanent downloads and Mastertones. 4-ER-681, 688-95, 712-13.[7] Although the contracts differ somewhat, most are similar in terms of the rights granted to the third parties and their general structure. 3-ER-570:1-15, 575:15-579:20. Pursuant to these agreements, Appellees do not sell anything to the download providers; the download providers do not obtain title of the digital files; ownership of all information remains with Appellees; the download providers have no first sale rights; and Appellees obtain recurring benefits from the single transaction. See, e.g., 5-ER-1013; 6-ER-1165, 1256; see also 3-ER-554:17-557:8, 571:20-572:17.
3. Appellees Create A New Royalty Rate For Downloads And Amend Their Form Contracts To Reflect This New Rate.
Starting in around 2002, just as Universal began entering into the third party digital download agreements discussed above, both Aftermath and UMG/Interscope amended their form agreements to specify that digital downloads would be paid as record sales by the record companies, and not as licenses, even if the agreements with digital media companies were licenses. See, e.g., 5-ER-951 ¶9.02(c)(1)(i); 5-ER-862 ¶A-1(d)(7); 3-ER-497:8-500:7; 4-ER-594:18-595:6. Around that same time, Interscope/UMG created a new royalty structure, not expressly provided in the Recording Agreements, to pay artists for permanent downloads and mastertones. 6-ER-1250; 3-ER-530:21-535:14. UMG’s General Counsel instructed all labels, including Interscope and Aftermath, to offer to amend existing recording agreements to provide that this new royalty arrangement would apply to license agreements under which third parties sold permanent downloads. 6-ER-1250; 3-ER-536:24-539:25, 540:18-23; 4-ER-591:6-592:7, 593:21-25. Notably, neither Eminem nor F.B.T. agreed to this proposal: the operative agreements in this case are the 1998 and 2003 Agreements—both based on standard forms that predated the digital download era.
D. F.B.T. Discovers That Appellees Have Been Underpaying In A Variety Of Ways; F.B.T. Initiates This Lawsuit.
In February 2006, a royalty audit was performed by the Gary Cohen Corporation on behalf of F.B.T. and Eminem that covered the period from January 1, 2002, through June 30, 2005. This audit revealed that Appellees were paying F.B.T. royalties for permanent downloads and mastertones based on the rates set forth in the Records Sold provision of the Recording Agreements. 1-ER-22. The audit also revealed that Appellees had been underpaying F.B.T. in a variety of other ways. See 6-ER-1066. On May 8, 2007, Appellees’ Royalty Audit Manager sent a letter to F.B.T. responding to the results of the 2006 Audit (the “Audit Response”). 6-ER-1124. The Audit Response rejected most of the claims raised in the 2006 Audit, but admitted that F.B.T. was owed a total of $159,332. 6-ER-1129.
On May 21, 2007, F.B.T. filed a complaint for breach of contract damages and a declaratory judgment based on Appellees’ underpayment for digital download royalties. 2-ER-36. The parties continued to discuss the issues raised in the 2006 Audit that were not a part of the pending case, but eventually Appellees refused to settle these disputes as well. 2-ER-51, 81-82. Accordingly, on March 6, 2008, F.B.T. filed a second suit raising an additional issue relating to the 2006 Audit. 2-ER-51.
Appellees moved to dismiss the second F.B.T. case but the District Court sua sponte consolidated the two cases and directed F.B.T. to file an amended complaint. 2-ER-92. F.B.T. filed a Second Amended Complaint on June 10, 2008, which added Count II. 2-ER-95. Count II concerned a single issue: it alleged that Appellees had misallocated costs between F.B.T. and Eminem, resulting in an underpayment to F.B.T. 2-ER-111-113 ¶¶44-52.[8] Appellees admitted this mistake and acknowledged an underpayment to F.B.T. totaling $159,332, but refused to remit this amount to F.B.T., claiming it should instead be deducted from overpayments to Eminem. 6-ER-1124.
E. District Court Proceedings.
1. Pre-Trial Proceedings.
On December 3, 2008, both parties moved for summary judgment. CR 170, 175. In its motion, F.B.T. asked the court to rule as a matter of law that the Masters Licensed provision applied to permanent downloads and mastertones. 2-ER-170-72. Shortly thereafter, F.B.T. filed a Memorandum of Contentions of Fact and Law setting forth its claims and the evidence supporting them, and also identifying “issues of law” F.B.T. anticipated the court would decide, including “[w]hether defendants’ relationships with permanent download and Mastertone providers constitute licenses of the Eminem masters” and, if so, “whether the Master License provision of the 1998 and 2003 Recording Agreements specifies the applicable royalty.” 2-ER-232-35. Consistent with the belief that the court should interpret the Recording Agreements as a matter of law, the parties also submitted a joint proposed jury instruction—Instruction No. 25A—to be filled out by the court, by which the court would instruct the jury as to any aspects of contractual interpretation it decided as a matter of law. 3-ER-422.
The District Court denied both parties’ summary judgment motions on January 20, 2009. 3-ER-427. In its decision, the court stated that summary judgment was only appropriate if the agreements were “unambiguous” and found the Recording Agreements “reasonably susceptible to more than one interpretation” based on the extrinsic evidence before it. 3-ER-354, 358. The court further noted that F.B.T. had presented evidence “which would support a finding that at least some of the agreements between Defendants and third-party permanent download providers are licenses,” but declined to rule that the agreements before it were in fact licenses. 3-ER-432-33. In discussing this issue, the court identified the evidence it considered relevant to this determination, including whether Appellees obtained recurring benefits from the single transaction, and whether title to anything was passing to the download providers. Id.
Given the language in this order, F.B.T. drafted and submitted to the court a proposed jury instruction on the question of whether the agreements with third-party permanent download providers are licenses. 3-ER-438. Appellees subsequently submitted an opposition, and F.B.T. replied. 3-ER-444, 455. In the proposed instruction and in the reply, F.B.T. stated that the instruction should be given only if the court did not find as a matter of law that the download agreements were licenses. 3-ER-443:4-7; 440:10-12; 456-57.
On March 2, 2009, the District Court held a conference to settle the jury instructions. In response to a question by the court, counsel for F.B.T. agreed that Instruction 25A was not applicable given the court’s findings in the summary judgment decision that there were conflicts in the extrinsic evidence and that the disputed contractual provisions were reasonably susceptible to different interpretations. 4-ER-627:6-7. A few minutes later, the court also denied (without explanation) F.B.T.’s proposed supplemental instruction on extrinsic evidence. 4-ER-628:7-14.
Prior to trial, Appellees also made several motions in limine. For example, Appellees successfully moved to exclude a March 24, 2004 letter signed by 27 prominent music industry attorneys, including the lawyer who represented Aftermath during negotiation of the 1998 Agreement and whose own form was the basis for the relevant agreements in this case, Peter Paterno (the “Paterno Letter”). Clerk’s Record (“CR”) 221; 2-ER-185. In the letter, which was sent to the heads of all five “major” record companies (including Appellees), the signatories—including Mr. Paterno—argued that the companies should “recognize the arrangements between the major labels and independent electronic distributors as licenses, for which we feel there can be no bona fide dispute,” and pay artists according to the applicable licensing provisions of their contracts. 2-ER-187. The court granted Appellees’ motion to exclude the Paterno Letter without hearing or explanation. 1-ER-35. Similarly, Appellees moved to exclude statements and prior testimony by several Apple and UMG representatives admitting that the third party download agreements are licenses. CR 223. The court granted this motion without hearing or explanation as well. 1-ER-35.
2. Trial And Judgment.
Trial commenced on February 20, 2009. After several days of testimony, the case was submitted to the jury on March 5, 2009. The next day, the jury returned a general verdict for Appellees on Count I and for F.B.T. on Count II in the amount of $159,332. 4-ER-722; 5-ER-832. On March 17, 2009, the District Court entered an order on Count III (the declaratory relief claim relating to Appellees’ underpayment of royalties for digital downloads) and final judgment on all three counts. 1-ER-33, 31.
3. Post-Trial Proceedings.
On March 30, 2009, F.B.T. filed a motion for a new trial. CR 533, 534. The District Court denied the motion on May 12, 2009. 1-ER-20. Meanwhile, on May 4, 2009, Appellees had moved for attorneys’ fees under California Civil Code Section 1717. CR 569. On May 26, 2009, F.B.T. filed a cross motion for attorneys’ fees, arguing that it—not Appellees—was the prevailing party for purposes of awarding fees under Section 1717 because it was the only party that recovered any monetary relief. CR 585. Appellees sought $2,427,059.80 in fees while Appellants sought $43,474. The District Court granted Appellees’ motion in its entirety and denied F.B.T.’s motion on June 25, 2009. 1-ER-4. The court entered an amended final judgment, including the $2,427,059.80 attorneys’ fee award on July 6, 2009. 1-ER-1. These timely appeals followed and were consolidated by this Court on October 19, 2009.
V. Standard Of Review
This Court reviews contract interpretation de novo unless interpretation of the contract turns on the resolution of a material extrinsic fact dispute bearing on credibility. Doe I v. AOL, L.L.C., 552 F.3d 1077, 1081 (9th Cir. 2009). In the absence of such material extrinsic fact disputes, interpretation of a contract is a question of law. United Commercial Ins. Serv., Inc. v. Paymaster Corp., 962 F.2d 853, 856 (9th Cir. 1992); Clarendon Nat’l Ins. Co. v. Ins. Co. of the W., 442 F. Supp. 2d 914, 922 (E.D. Cal. 2006), aff’d, 290 Fed. App’x 62 (9th Cir. 2008); Martin Bros. Constr., Inc. v. Thompson Pac. Constr., Inc., No. C058944, 2009 WL 4456380, at *8 (Cal. Ct. App. Dec. 4, 2009); City of Hope Nat’l Med. Ctr. v. Genentech, Inc., 43 Cal. 4th 375, 395 (2008); Parsons v. Bristol Dev. Co., 62 Cal. 2d 861, 865-66 (1965); Wolf v. Walt Disney Pictures & Television, 162 Cal. App. 4th 1107, 1126-27, 1134 (2008); Qualls v. Lake Berryessa Enters., Inc., 76 Cal. App. 4th 1277, 1283 (1999); Badie v. Bank of Am., 67 Cal. App. 4th 779, 799 (1998). “When the interpretation of a contract does not turn upon the credibility of extrinsic evidence . . . interpretation is purely a judicial function to be exercised according to the generally accepted canons of interpretation.” Martin Bros., 2009 WL 4456380, at *8.
Contract interpretation remains a question of law even when extrinsic evidence has been admitted on the contract interpretation issue, so long as there are no material factual disputes as to “foundational extrinsic evidence.” See Parsons, 62 Cal. 2d at 865; Badie, 67 Cal. App. 4th at 799. “Foundational extrinsic evidence,” a phrase taken from Medical Operations Management, Inc. v. National Health Laboratories, Inc., 176 Cal. App. 3d 886, 891 (1986), refers to disputes over the historic facts—i.e., disputes about “the credibility of extrinsic evidence” (id.), such as whether a particular letter was sent, or a particular statement made, during the contract negotiations. See, e.g., Hess v. Ford Motor Co., 27 Cal. 4th 516, 527 (2002). Contract interpretation also remains a question of law if the only disputed extrinsic evidence is irrelevant or otherwise inadmissible. See Winet v. Price, 4 Cal. App. 4th 1159, 1165-66 & n.3 (1992).
Finally, contract interpretation remains an issue of law even where disputes exist about the inferences to be drawn from uncontradicted extrinsic evidence:
[I]t is only when conflicting inferences arise from conflicting evidence, not from uncontroverted evidence, that the trial court’s resolution is binding. The very possibility of . . . conflicting inferences, actually conflicting interpretations, far from relieving the appellate court of the responsibility of interpretation, signalizes the necessity of its assuming that responsibility. (Med. Operations Mgmt., Inc., 176 Cal. App. 3d at 891 (quoting Parsons, 62 Cal. 2d at 866 n.2 (citation and internal quotation marks omitted)))
See also Garcia v. Truck Ins. Exch., 36 Cal. 3d 426, 439 (1984) (“It is solely a judicial function to interpret a written contract unless the interpretation turns upon the credibility of extrinsic evidence, even when conflicting inferences may be drawn”) (emphasis added).
Questions of law—such as interpretation of a contract that does not turn on the resolution of a material extrinsic fact dispute bearing on credibility—are reviewed de novo by this Court. Doe I, 552 F.3d at 1081 (“Where the interpretation of contractual language . . . does not turn on the credibility of extrinsic evidence but on an application of the principles of contract interpretation, we review the district court’s interpretation de novo”); APL Co. Pte. Ltd. v. UK Aerosols Ltd., 582 F.3d 947, 951 (9th Cir. 2009) (“Contract interpretation is . . . reviewed de novo”); Doe I v. Wal-Mart Stores, Inc., 572 F.3d 677, 681 (9th Cir. 2009) (“Contract interpretation is a question of law that we review de novo”); Milenbach v. Comm’r, 318 F.3d 924, 930 (9th Cir. 2003) (“The interpretation and meaning of contract provisions are questions of law reviewed de novo”).
Accordingly, and because none of the alleged factual disputes in this case relate to “foundational extrinsic evidence” (see Part I(B)(3), infra), the interpretation and meaning of the Recording Agreements at issue in this case are a questions of law that are reviewed by this Court de novo. Founding Members of the Newport Beach Country Club v. Newport Beach Country Club, Inc., 109 Cal. App. 4th 944, 955 (2003) (“[W]hen the competent extrinsic evidence is not in conflict, the appellate court independently construes the contract”).[9]
VI. argument
I.
The Jury’s erroneous interpretation of the recording agreements CAnnot Stand.
A. This Court Reviews Contract Interpretation De Novo And F.B.T. Has Not Waived Its Right To De Novo Appellate Interpretation Of The Recording Agreements.
In its order denying F.B.T.’s new trial motion, the District Court concluded that F.B.T. waived its right to have the court interpret the contract. Specifically, the court found that F.B.T. allowed the issue of contract interpretation to go to the jury by withdrawing proposed instruction No. 25A, which would have required the Court to instruct the jury as to the meaning of the Recording Agreement. 1-ER-24-25; 3-ER-422. This is beside the point at this stage of the proceedings.[10] There is certainly no claim that F.B.T. stipulated to a different standard of review for this Court to apply to the judgment (or the jury verdict) on appeal. The applicable standard of review is that stated in the Standard of Review section above: review is de novo unless interpretation of the contract depends on the resolution of a material extrinsic fact dispute turning on the credibility of witnesses. See pp.21-25, supra. This rule applies even where the trial court submitted the contract interpretation to the jury. See Oahu Gas Serv., Inc. v. Pac. Res., Inc., 838 F.2d 360, 368 (9th Cir. 1988) (applying de novo review to a jury’s determination on an issue of law).
B. The Masters Licensed Provision Covers All Licenses To Third Parties, Including Licenses To Third Party Digital Media Providers.
This Court should independently interpret the Masters Licensed provision in accordance with its plain meaning as applicable to all licenses with third parties.
1. The Plain Language Of The Contract Establishes That The Masters Licensed Provision Covers All Licenses, Including Licenses To Third Party Digital Media Providers.
The words of the contract are the starting point for any contract interpretation. Cal. Civ. Code §1638; Stanford Univ. Hosp. v. Fed. Ins. Co., 174 F.3d 1077, 1083 (1999). Here, the plain meaning of the words leaves no doubt that the Masters Licensed provision covers all licenses, including licenses to third party digital media providers.
Paragraph 4(a) of the Recording Agreements—the “Records Sold” provision—specifies the royalty on “full-price records sold in the United States . . . through normal retail channels.” 5-ER-837 ¶4(a); Appendix (“App.”). If this provision stood alone as the only relevant provision in the contract, it presumably would apply to the permanent downloads at issue in this case. But the Records Sold provision does not stand alone. To the contrary, the Recording Agreements go on to say in Paragraph 4(c) that “[n]otwithstanding the foregoing,” a different royalty rate applies for “masters licensed by us or our NRS Licensees to others for their manufacture and sale of records or for any other uses.” 5-ER-837-38 ¶¶4(c), (c)(v); App.
There is nothing remotely ambiguous about the phrase “notwithstanding the foregoing.” Its meaning is simple: if what follows the phrase applies, then what preceded the phrase does not. Several witnesses—including the General Counsel of Universal and Aftermath’s attorney who negotiated the 1998 Agreement—so testified.[11] In the context of the Recording Agreements, the phrase indicates that if the words of the Records Sold provision and the Masters Licensed provision both apply, then the Masters Licensed provision (which follows the phrase) trumps the Records Sold provision (which precedes it). See 4-ER-647:11-18.
For this reason, the interpretational issue in this case is not which of the two relevant provisions—Records Sold or Masters Licensed—best fits the transaction in question. The only issue is whether the Masters Licensed provision applies to all licenses, including licenses to third party digital media providers. If so, the Records Sold provision is inapplicable.
The Masters Licensed provision applies to “masters licensed by us . . . to others for their manufacture and sale of records or for any other uses.” 5-ER-838 ¶4(c)(v). The word “master” is defined in Paragraph 16(d) of the Recording Agreements as “a recording of sound, without or with visual images, which is used or useful in the recording, production or manufacture of records.” 5-ER-846 ¶16(d), 914 ¶16(d); 3-ER-487:25-488:9. The digital file provided to digital download companies is a “recording of sound.” See 3-ER-564:6-11; 3-ER-520:7-9. And there can be no dispute that the digital file—the “master”—is provided to the third party digital media providers “for their manufacture and sale of records,” since the downloads ultimately sold to consumers by the third party digital media providers fall squarely into the definition of “record” provided in Paragraph 16(e) of the Recording Agreements: “all forms of reproductions . . . manufactured or distributed primarily for home use.” 5-ER-846 ¶16(e), 914 ¶16(e); see 3-ER-564:6-18.[12]
Accordingly, the plain language of the Masters Licensed provision establishes that it applies to all licenses, including licenses to third party digital media providers. Indeed, even UMG’s own General Counsel admitted that there is nothing in the Masters Licensed provision that would justify refusing to pay royalties for digital downloads under that provision if the download agreements between Appellees and the third party providers are licenses. 3-ER-524:11-525:25.
Appellees have nevertheless argued that the Masters Licensed provision does not cover all licenses (and does not cover the downloads at issue here regardless of whether the agreements are licenses) because the provision only covers some licenses—namely licenses for synchronizations,[13] compilation albums[14] or other licenses to incorporate Universal recordings into a third party’s product. See, e.g., 2-ER-128; 3-ER-469:24-471:23; 4-ER-659:14-660:17. But as the discussion above shows—and as UMG’s own witnesses admitted (3-ER-526:9-17, 492:13-493:15)—there is nothing in the language of the Masters Licensed provision limiting its application in this way—i.e., that it would apply to some licenses of masters and not to others. Appellees are seeking to add an implied exception into a contract provision of general applicability, but it would be improper for this Court to read such a limitation into the contract. Doing so would violate the “fundamental principle that in interpreting contracts . . . courts are not to insert what has been omitted.” Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758, 764 (2001); see also Cal. Code Civ. Proc. §1858 (“In the construction of a statute or instrument, the office of the Judge is simply to ascertain and declare what is in terms or substance contained therein, not to insert what has been omitted, or to omit what has been inserted”); Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 954 (2008). Nor, as we show below, would anything in the extrinsic evidence persuade a reasonable person that the provision means anything other than the ordinary meaning of its words.
2. The Relevant Extrinsic Evidence Confirms That The Masters Licensed Provision Covers All Licenses, Including Licenses To Third Party Digital Media Providers.
Extrinsic evidence is relevant only if, and only to the extent that, it demonstrates that the parties meant something other than the ordinary meaning of the words of the contract. See Producers Dairy Delivery Co. v. Sentry Ins. Co., 41 Cal. 3d 903, 913 (1986) (explaining that unless the extrinsic evidence “would . . . persuade a reasonable [person] that the instrument meant anything other than the ordinary meaning of its words, it is useless”) (citation and internal quotation marks omitted). The relevant extrinsic evidence overwhelmingly confirms F.B.T.’s interpretation of the contract—that the Masters Licensed provision applies to all licenses—and refutes Universal’s assertion that the provision only applies when Universal licenses a portion of an album for incorporation into a third party’s product.
Much of the extrinsic evidence was about performance under standard agreements that closely resembled the 1998 and 2003 agreements (see 4-ER-617:4-9; 657:13-658:6, 659:10-16), and performance under these similar form agreements is relevant to the interpretation of the two agreements at issue here. See Warner Bros., Inc. v. Curtis Mgmt. Group, Inc., No. 91-4016, 1995 WL 420043, at *11-12 (C.D. Cal. Mar. 31, 1993). The most compelling extrinsic evidence in this regard involves record clubs. It is undisputed that Universal licenses entire albums to record clubs (like Columbia House and BMG), who then manufacture records and sell them to club members.[15] It is also undisputed that when it engages in these transactions with record clubs, Universal pays 50% royalties to artists under the Masters Licensed provision. 3-ER-490:20-492:11, 519:6-17, 586:8-588:1.[16] These record club transactions—which involve neither a “compilation” nor a “synchronization”—are the closest (low-tech) analogy to permanent downloads addressed in the record of this case—and they are paid under the Masters Licensed provision, not the Records Sold provision.
Similarly compelling is Universal’s royalty treatment of conditional downloads and streams,[17] which are the closest (high-tech) analogy to the permanent downloads at issue in this case. Interscope/UMG pays F.B.T. and others for conditional downloads and streams under the Masters Licensed provision. See 6-ER-1250; 3-ER-522:24-523:2, 527:8-13, 530:21-24, 547:22-24, 566:21-567:2. In these situations, Appellees provide the same electronic file to third parties as they do with permanent downloads and the download companies—whether permanent, conditional or both—are put to the same requirements. See, e.g., 3-ER-528:2-530:16, 551:24-552:5, 553:19-25, 564:6-18, 567:23-568:3, 569:7-570:25, 571:4-585:4; 4-ER-600:21-602:8.
The fact that Appellees pay royalties for record clubs, conditional downloads and streams under the Masters Licensed provision belies their argument that the provision only applies to products akin to synchronization and compilation albums
Along the same lines, undisputed testimony established that the only question in determining whether the Masters Licensed provision applies has always been simply whether the transaction between the record label and a third party doing the selling is a license. See 3-ER-480:21-24, 481:1-8; 4-ER-615:7-21, 618:3-5, 645:9-14, 648:1-12, 649:7-10. Indeed, Universal’s expert, Jeffrey Harleston, who works directly for UMG’s General Counsel, admitted that he did not know of a single license to which the Masters Licensed provision had not historically applied. 4-ER-615:7-21, 618:3-5, 664:12-665:1.
In addition, undisputed extrinsic evidence explaining the reasons for the different royalty rates supports F.B.T.’s interpretation of the contract. F.B.T. presented uncontradicted evidence that the lower royalty rate in the Records Sold provision was intended to compensate Appellees for the responsibility and costs of manufacturing, storing and distributing each individual unit—and that no such cost is borne by Appellees when they provide a digital file to a third party and license that party to make records. 3-ER-473:20-474:14; 4-ER-609:20-613:3, 615:12-616:13; 3-ER-552:11-18; 6-ER-1253. The senior vice president of business and legal affairs at UMG testified that the cost to Appellees for the sale of physical CDs is approximately $1.25 per unit. 4-ER-671:2-22. Meanwhile, the cost to Appellees to create a digital file of an entire Eminem album is approximately $800 (regardless of the number of units sold)—and the download providers are required to reimburse Appellees even for that. 3-ER-554:2-9; 6-ER-1253, 1256-60. Furthermore, Appellees incur no individual unit manufacturing or distribution costs regardless of how many times the album, or an individual track, is downloaded. 3-ER-558:3-14; 6-ER-1253. The sale of ten million CDs of an Eminem album results in Appellees incurring more than $12 million in manufacturing costs (before counting the significant costs of warehousing and distributing the goods), while the download of ten million of the same album on iTunes ultimately costs them nothing in manufacturing and distribution costs. 4-ER-671:2-22; 3-ER-557:20-559:10.
Finally, it is undisputed that around 2002, just as Universal began entering into third party digital download agreements, both Aftermath and UMG/Interscope amended their form agreements to specify that digital downloads would be paid as record sales by the record companies, and not as licenses, even if the new agreements were licenses. See, e.g., 5-ER-951 ¶9.02(c)(1)(i), 862 ¶A-1(d)(7); 3-ER-497:8-500:7, 541:4-543:9, 544:17-546:2; 4-ER-594:18-595:6. It is also undisputed that in 2002, Interscope/UMG created a new royalty structure, not found in the Recording Agreements at issue in this case, to pay for permanent downloads and mastertones. See 6-ER-1250; 3-ER-530:21-535:14. UMG’s General Counsel instructed all labels, including Interscope and Aftermath, to offer to amend existing recording agreements to provide that this new royalty arrangement would apply to license agreements under which third parties sold permanent downloads. See 6-ER-1250; 3-ER-536:24-539:25, 540:18-23; 4-ER-591:6-592:7, 593:21-25. The most reasonable inference to draw from these undisputed facts is that Appellees were concerned that the Masters Licensed provision would apply to such downloads under the pre-existing agreements (such as those at issue here).[18] Indeed, the senior lawyer at Interscope admitted that concern over such claims was “one reason” they amended the form. 4-ER-595:11-596:17.
All of this evidence confirms what the plain language of the Masters Licensed provision establishes—namely, that the provision applies to all licenses to third parties, including licenses to third party digital media providers.
3. Appellees’ Assertedly Contrary Evidence Is Irrelevant.
In opposition to the clear language of the agreements discussed in Part I(B)(1), supra, and the overwhelming extrinsic evidence discussed in Part I(B)(2), supra, Appellees offered only evidence that was, for all practical purposes, beside the point. Before discussing this evidence, and why it is neither relevant nor helpful to Appellees, it is worth noting what is not in the extrinsic evidence that Appellees rely on:
( There is no evidence in the record that “notwithstanding the foregoing” means anything other than its ordinary meaning: that in the event of a conflict, what comes after trumps what came before.
( There is no evidence in the record that the digital files provided to third party digital media providers are not “masters” within the meaning of the Recording Agreements.
( There is no evidence in the record indicating that it was “custom and practice” at the time of contracting to pay royalties for digital downloads under the Records Sold provision. (Nor could there be any such evidence since downloads were not a common commercial practice at the time of contracting).
( There is no evidence in the record indicating that at the time of contracting the parties discussed digital downloads or which provision should apply to such downloads.
A close examination of the allegedly contrary evidence that is in the record reveals that none of it created a material dispute of fact as to foundational extrinsic evidence.[19] Nor would that evidence persuade a reasonable person that the Masters Licensed provision means anything other than the plain meaning set forth above. It is therefore irrelevant. See Producers Dairy Delivery Co. v. Sentry Ins. Co., 41 Cal. 3d 903, 913 (1986).
The only purported material extrinsic fact dispute claimed by the District Court was what it called “conflicting expert testimony.” The court concluded that “it was the task of the jury to resolve the factual conflict by assessing the credibility of the witnesses.” 1-ER-26. The court was mistaken. There was no conflict in the testimony as to how the Masters Licensed provision was applied by those in the music industry at the time of contracting, or how digital downloads (or comparable uses) have been treated under similar contracts. To the contrary, all Appellees’ expert witnesses did was: (1) offer inadmissible legal opinions as to the ultimate issue of law; and (2) describe uncontroverted circumstances in which the Masters Licensed provision had been applied in the past. Neither of these creates a material extrinsic fact dispute that prevents contract interpretation from being a question of law or contradicts the common-sense interpretation of the Masters Licensed provision advocated by F.B.T.
With respect to the former, the experts did present conflicting opinions on what the foundational extrinsic evidence meant and what inferences could be drawn from it—i.e., what the Masters Licensed provision means. See, e.g., 4-ER-662:19-663:24, 661:9-23, 492:12-493:14, 615:4-624:24. But such testimony goes to the ultimate issue of law—the meaning of the disputed contract provisions—and must be disregarded. See, e.g., McHugh v. United Serv. Auto. Ass’n, 164 F.3d 451, 458 (9th Cir. 1999) (Graber, J., dissenting) (explaining that expert testimony on an ultimate issue of law is “entitled to no consideration because, as this court has held, expert testimony is inappropriate in matters of law that are reserved for the court’s determination”). Moreover, even if it were admissible, such testimony would not create a conflict in the foundational extrinsic evidence under California law. See, e.g., Med. Operations Mgmt., Inc. v. Nat’l Health Labs., Inc., 176 Cal. App. 3d 886, 891 (1986); Parsons, 62 Cal. 2d at 866 n.2; see also California Nat’l Bank v. Woodbridge Plaza, L.L.C., 164 Cal. App. 4th 137, 143 (2008) (conflicting testimony concerning the parties’ differing interpretations of the contract does not amount to a conflict in the extrinsic evidence).
With respect to the latter, UMG’s expert did testify that the Masters Licensed provision had been applied in the past to certain types of uses (for instance, when a recording was incorporated into another party’s product, such as a compilation CD, TV show soundtrack, or movie soundtrack), and that he could not recall a situation where a record company had sold its own “core product” and the Masters Licensed provision had been applied. 4-ER-656:1-18, 658:25-660:17, 661:24-662:18.
This testimony does not create a factual dispute for the simple reason that it is not disputed. F.B.T. did not (and does not) dispute that the Masters Licensed provision has been applied in such situations; the dispute is over the inference that should be drawn from this fact (i.e., whether only these types of licenses are covered by the Masters Licensed provision). Differing inferences from undisputed historical facts do not create a material extrinsic fact dispute. Med. Operations Mgmt., Inc., 176 Cal. App. 3d at 891 (citing Parsons v. Bristol Dev. Co., 62 Cal. 2d 861, 866 n.2 (1965)); Garcia v. Truck Ins. Exch., 36 Cal. 3d 426, 439 (1984).
In addition to being undisputed, this testimony proves nothing. It establishes nothing more than that the Masters Licensed provision applies to licenses to use music in compilation CDs, television and movies, but that fact sheds no light on whether the provision is limited to such uses or also applies to other situations—in particular, to permanent downloads and mastertones that only recently gained market popularity.
C. Appellants Did Not Waive The Right To De Novo Interpretation Of The Contract By This Court, Or The Right To A Legally Correct Interpretation.
As explained above, there are no material disputes of extrinsic fact in this case. Accordingly, interpretation of the Recording Agreements is a question of law which this Court determines de novo on appeal regardless of whether the District Court or the jury interpreted the contract at trial and regardless of whether F.B.T. waived any objection to submitting contract interpretation to the jury. See Part I(A), supra. But even if this Court believes that a waiver of this objection at the District Court could somehow affect the standard of review on appeal, this Court should still interpret the contract de novo because F.B.T. did not in fact waive its objection to submitting contract interpretation to the jury.
The District Court found that F.B.T. “waived this argument by failing to raise it prior to submission of the case to the jury” (1-ER-24), and by acquiescing to the withdrawal of a proposed jury instruction that would have required the court to instruct the jury as to the meaning of the Recording Agreement. 1-ER-24-25; 3-ER-422. The District Court was mistaken.
As an initial matter, F.B.T. raised this argument repeatedly. On December 3, 2008, F.B.T. filed a motion for summary judgment, arguing that there was no material conflict in the evidence and asking the Court to interpret the contracts as a matter of law. CR 175; 2-ER-149. On December 22, 2008, F.B.T. filed a Memorandum of Contentions of Fact and Law, which identified the proper interpretation of the contract as an “issue[] of law” for the Court to decide. 2-ER-202. On December 29, 2008, F.B.T. filed an opposition to Defendants’ motion for summary judgment in which F.B.T. again asserted that “the defendants have not . . . even created genuine issues of material fact necessary to defeat plaintiffs’ motion for summary judgment.” 2-ER-302. Finally, on January 16, 2009, the parties filed Joint Instruction No. 25A, entitled “No Conflict in Extrinsic Evidence—Court Interprets Contract” (3-ER-422), which left a blank space for the Court to insert its interpretation of the relevant agreements once it announced its interpretation by ruling on the summary judgment motions then pending before it. Accordingly, the District Court’s assertion that F.B.T. failed to raise this argument prior to submission of the case to the jury is erroneous.
The District Court’s assertion that F.B.T. waived this argument by acquiescing in the withdrawal of Instruction 25A is similarly erroneous. By then, the court had denied both parties’ summary judgment motions, finding that the disputed contractual provisions were reasonably susceptible to different interpretations and that the court could not itself interpret the contract because there were material conflicts in the extrinsic evidence. 3-ER-427. Subsequently, the court held a conference to settle the jury instructions. It was in this context that, in response to a question by the court, F.B.T.’s counsel agreed that Instruction 25A was not applicable given the court’s findings in the summary judgment decision that there were conflicts in the extrinsic evidence and that the disputed contractual provisions were reasonably susceptible to different interpretations. 4-ER-627:6-7. Given the court’s prior rulings, counsel’s statement can only be understood as an acceptance of and respect for the fact that the court had made a definitive ruling that rendered the instruction (which was, by its own terms, to be filled out by the court and given only if the court found that the disputed terms were not reasonably susceptible to differing interpretations, and that there was a material extrinsic fact dispute) inapplicable.
Just last year, this Court held that a similar expression of “agreement” did not constitute waiver of a party’s objection to a jury instruction. In Medtronic, Inc. v. White, 526 F.3d 487, 495 (9th Cir. 2008), the appellant’s counsel responded “I think that’s fine,” after the District Court read the disputed instruction. The court nevertheless rejected the argument that counsel had waived any objection by “acquiescing” in the instruction. The court concluded that the right to raise the issue on appeal was preserved because the “futility exception” was satisfied. Id. at 495-96.
Pursuant to the “futility exception,” the failure to object to a jury instruction “may be disregarded if the party’s position previously has been made clear to the trial judge and it is plain that a further objection would be unavailing.” 9C C. Wright, et al., Federal Practice and Procedure §2553, at 63 (2008); see also Medtronic, Inc., 526 F.3d at 495. This rule reflects fundamental standards of professionalism and respect for the courts, and the present situation falls squarely within this “futility exception.” The District Court was fully aware of F.B.T.’s position that it could and should interpret the Recording Agreements, a position that F.B.T. explicitly argued in its summary judgment motion 2-ER-154, 170-72, 178), its opposition to Appellees’ summary judgment motion (2-ER-302), and its trial brief. 2-ER-204, 234-35. Each of these methods of raising an argument has been deemed sufficient, standing alone, to make a court aware of a party’s position and satisfy the futility exception. See Jacques v. DiMarzio, Inc., 386 F.3d 192, 201 (2d Cir. 2004); Dresser Indus., Inc. v. Gradall Co., 965 F.2d 1442, 1450 (7th Cir. 1992); Hamman v. Sw. Gas Pipeline, Inc., 821 F.2d 299, 303, vacated in part on other grounds on reh’g, 832 F.2d 55 (5th Cir. 1987). Moreover, the court explicitly rejected F.B.T.’s position in its written opinion denying summary judgment. 3-ER-427. In these circumstances, there was every reason to believe a further objection would be unavailing, especially given the court’s frequent admonitions that it would not revisit its prior decisions. See Dorn v. Burlington N.S.F.R.R., 397 F.3d 1183, 1189 (9th Cir. 2005); 3-ER-464:22-465:11, 549:7-550:20.[20]
For these reasons, the Court should interpret the Recording Agreements de novo, and determine that royalties on licenses for downloads and mastertones are governed by Paragraph 4(c) of the contract. Alternatively, the Court should hold that the District Court erred in failing to grant a new trial on this issue.
II.
The Court Should have Determined AS A MATTER OF LAW That The Third Party Download Agreements Were Licenses, Or At A Minimum Instructed The Jury On This ISSUE AND Permitted F.B.T. To Introduce evidence THAT Appellees and Apple Admitted the agreements were licenses.
F.B.T.’s argument has always had two steps to it: first, that the Masters Licensed provision applies to all licenses, and, second, that the third party download agreements between Appellees and digital download providers like Apple are licenses. It is impossible to know from the jury’s general verdict in this case why it reached the decision it did: its decision could have been based on a misinterpretation of the contract (i.e., that the Masters Licensed provision did not cover all licenses), or it could have been based on a misapprehension about the nature of the download agreements at issue (i.e., that they are not licenses within the meaning of the Masters Licensed provision). If it was the former, the judgment must be reversed because the contract interpretation is erroneous. See Part I, supra. If it was the latter, the judgment must be reversed because the court should have determined as a matter of law that the agreements were licenses. Moreover, at a minimum, the judgment must be reversed because the District Court made a series of errors that deprived Appellees of a fair trial on this issue.
A. Characterization Of The Third Party Download Agreements Is A Question Of Law.
Whether an agreement constitutes a license or a sale is a question of contract interpretation that, like every question of contract interpretation, is a question of law unless there are material extrinsic facts in dispute. See pp.21-24, supra; Warfield v. Alaniz, 569 F.3d 1015, 1019 (9th Cir. 2009) (citing United States v. Carman, 577 F.2d 556, 562 (9th Cir. 1978)); Vision Info. Servs., L.L.C. v. Comm’r, 419 F.3d 554, 558 (6th Cir. 2005) (determining the “legal issue” of whether an agreement constituted a sale or a license by applying standard principles of contract interpretation). Here, the specific question of whether Appellees’ agreements with third party digital media providers constitute sales or licenses is a question of law because there was no conflicting material evidence on this issue. The terms of the agreements were undisputed. There was no dispute about any of the other “foundational extrinsic evidence” presented on this issue, such as whether Appellees obtain recurring benefits from the single transaction. See 3-ER-571:20-572:17, 554:17-557:8; see also 5-ER-1013; 6-ER-1131, 1165, 1256. And although there was conflict in the opinion testimony offered about the ultimate legal issue—i.e., whether in the opinion of the experts the agreements were licenses or sales (see, e.g., 4-ER-606:18-608:6, 618:12-619:21), that testimony is legally irrelevant. See pp.37-38, supra. Moreover, such testimony—which at most creates a dispute over the proper inferences to draw from undisputed facts—does not create a material extrinsic fact dispute. See p.23, supra. Accordingly, this issue is also a question of law that must be determined de novo on appeal.
B. The Undisputed Evidence Overwhelmingly Supported Appellants’ Position That The Third Party Download Agreements Were Licenses.
As a matter of common sense, it is difficult to imagine how the grant of authority to a third party to copy digital files and to create downloads and mastertones for transfer and sale to customers who want to purchase songs could be anything but a license. Appellees do not sell anything to the download providers; the download providers do not obtain title of the digital files[21]; ownership of all information remains with Appellees; the download providers have no first sale rights; the transfer is subject to use restrictions, including geographic restrictions[22]; and Appellees obtain recurring benefits from the single transaction—namely, payments based on the volume of downloads. See, e.g., 5-ER-1013; 6-ER-1131, 1165, 1256; see also 3-ER-554:17-557:8, 571:20-572:17. In contrast, when Appellees sell a record to a retailer, title immediately passes to the retailer; the retailer has first sale rights; the retailer can do with the record what it wants; the retailer can resell the record; and the record label credits the artist’s account at the time of the sale. 3-ER-529:17-530:16, 560:18-561:6, 562:23-563:13, 565:13-17; 4-ER-13:11-614:10.
When the parties to these download agreements for the transfer of rights to copyrighted works used the term “license,” they used a term that has a well-understood meaning in the field of copyright law. It is well settled that where a copyright owner transfers a copy of copyrighted material, retains title, limits the uses to which the material may be put, and is compensated periodically based on the transferee’s exploitation of the material, the transaction is a license. See, e.g., Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769, 785 (9th Cir. 2006); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330 (9th Cir. 1995); MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); United States v. Wise, 550 F.2d 1180, 1190-91 (9th Cir. 1977); Hampton v. Paramount Pictures Corp., 279 F.2d 100, 103 (9th Cir. 1960).
The District Court said that “[t]he issue for the jury . . . was not what a license is as a matter of copyright law, but rather what the parties intended when they agreed to the ‘records sold’ and ‘masters licensed’ provisions in the Eminem Agreements.” 1-ER-27. We of course agree with the court’s statement that the ultimate issue is what the parties agreed to. But absent concrete evidence that the parties agreed to a non-standard use of the familiar term “license,” the fact that these agreements for the transfer of copyrighted material unquestionably conferred a “license” in the ordinary legal sense of the term is dispositive. See Cal. Civ. Code §1644. Here, there was no extrinsic evidence that Appellees and the third party digital media providers (such as Apple) used the term “license” in a non-standard way or that the parties intended it would have any other meaning.
C. F.B.T. Did Not Waive This Argument.
In its ruling on F.B.T.’s motion for a new trial, the District Court rejected the foregoing argument solely on the ground that F.B.T. “waived any claim that the Court should have ruled as a matter of law that the third-party agreements were licenses because they never sought such a ruling prior to the submission of the issue to the jury.” 1-ER-27. Not so. F.B.T.’s summary judgment motion asked the court to rule as a matter of law that the download agreements were “licenses.” 2-ER-174-78. The court declined to do so even with respect to those agreements submitted to it. Notably, the court said that F.B.T. had presented evidence “which would support a finding that at least some of the agreements between Defendants and third-party permanent download providers are licenses,” but declined to rule that the agreements before it were in fact licenses. 3-ER-432-33. Moreover, F.B.T. reiterated this idea in its Memorandum of Contentions of Fact and Law. 2-ER-232-34. Accordingly, as with the issue of contract interpretation (see Part I(C), supra), further requests for a ruling as a matter of law would have been futile. Indeed, given the court’s refusal to give F.B.T.’s proposed jury instruction concerning the factors to consider in determining whether an agreement is a license, it was entirely reasonable to presume that the court would be unwilling to take the further step of instructing the jury that the agreements were licenses as a matter of law based on those same factors.
In any event, as shown above, the issue of whether the download agreements are licenses is ultimately a question of law that this Court determines de novo. Even if F.B.T. failed to preserve its objection to submission of the issue to the jury, the de novo standard of review remains the same. See pp.25-26, supra.
D. Even If Interpretation Of The Third Party Download Agreements Was A Fact Issue Properly Submitted To The Jury, A New Trial Is Required Due To Erroneous Instructional And Prejudicial Evidentiary Rulings.
If—contrary to the foregoing—the issue of whether the download agreements are “licenses” was properly given to the jury, reversal would nevertheless be required for two reasons. First, the District Court refused to instruct the jury on the proper legal standard for making this determination. Second, the court improperly excluded pre-litigation statements of Universal and Apple employees admitting that the download agreements are “licenses.”
1. The District Court Failed To Properly Instruct The Jury.
Where a court errs in not giving a jury instruction and that error is not harmless, the verdict cannot stand. See, e.g., Jenkins v. Union Pac. R.R., 22 F.3d 206, 210 (9th Cir. 1994). On appeal, failure to give a jury instruction is reversible error if “(1) the omitted instruction is a correct statement of the law, (2) the instruction is not substantially covered by other delivered charges, and (3) the failure to give the instruction impairs the requesting party’s theory of the case.” Tompkin v. Philip Morris USA, Inc., 362 F.3d 882, 901 (6th Cir. 2004).
Appellants proposed a specific instruction on this issue. See 3-ER-438. The instruction set forth factors discussed in UMG Recordings, Inc. v. Augusto, 558 F. Supp. 2d 1055, 1060-61 (C.D. Cal. 2008), and drawn directly from Ninth Circuit precedent: intent to regain (or retain) possession of the item at issue, recurring benefits accruing to the contractor, and a “benefit” to the contractor such as facilitating a given transaction without jeopardizing intellectual property rights. Microsoft Corp. v. DAK Indus., 66 F.3d 1091, 1095-96 (9th Cir. 1995), and United States v. Wise, 550 F.2d at 1190-91.
The failure to give this instruction substantially impaired Appellants’ theory of the case. Without guidance from the court, the jury was at sea in attempting to evaluate both Appellees’ claim that the download agreements were sales arrangements and Appellants’ considerable evidence that the agreements bore the indicia of licenses. Indeed, the jury was even led by Appellees to believe that F.B.T. had wasted its time by presenting evidence going to the factors articulated in the proposed instruction. 4-ER-673:15-675:11.
2. The District Court Improperly Excluded The Pre-Litigation Statements Admitting That The Agreements Are “Licenses.”
Before F.B.T. filed this case, representatives of UMG and parties on the other side of the download agreements repeatedly admitted that the agreements are licenses:
Larry Kenswil, Head of UMG’s eLabs Division: In 2006, Larry Kenswil testified under oath before the Copyright Royalty Board. 5-ER-816. In the course of that testimony, Kenswil repeatedly stated that Appellees license their recordings for electronic distribution. See, e.g., 5-ER-817 (“As President of eLabs, I oversee all of UMG’s efforts to license sound recordings for electronic distribution”) (emphasis added); id. at 5-ER-820 (discussing UMG’s “approach to licensing”); 5-ER-821 (“Indeed, UMG licenses distribution of its contents over wireless networks separately from licensing for services that allow access only over fixed lines”) (emphases added); 5-ER-822 (“When UMG licenses its sound recordings in the marketplace for digital distribution, UMG requires licensees to pay not only reasonable royalty fees, but also to meet extensive security requirements”) (emphases added); 5-ER-822-24 (discussing aspects of UMG’s “voluntary licensing agreements”).
Eddy Cue, Head of Apple’s iTunes Division: Eddy Cue also testified under oath before the Copyright Royalty Board, and also admitted that the agreements are licenses. See 2-ER-196 (arguing that an increase in the mechanical royalty rate for digital downloads would “reduce overall license revenues paid to copyright holders”) (emphasis added); 2-ER-197-98 (“The most significant cost that [the iTunes Store] has to meet is that of the licensing agreements that it has entered into with record labels”) (emphasis added).
Steve Jobs, Co-Founder and Chief Executive Officer of Apple, Inc.: In February 2007, Steve Jobs authored an essay called “Thoughts on Music.” 2-ER-190. In that essay, Jobs explained that
[s]ince Apple does not own or control any music itself, it must license the rights to distribute music from others, primarily the “big four” music companies: Universal, Sony BMG, Warner and EMI. . . . When Apple approached these companies to license their music to distribute legally over the Internet, they were extremely cautious and required Apple to protect their music from being illegally copied. (Id. (emphases added))
Jimmy Iovine, Chairman of Appellee Interscope: In 2005, Jimmy Iovine authored an article in which he too admitted that the download agreements are licenses. 2-ER-193 (explaining that Steve Jobs started iTunes before “‘securing licenses from any of the labels’”) (emphasis added). Similarly, during an informal interview Iovine did for a friend (3-ER-379), Iovine called the download agreements licenses. 3-ER-390 (“If we advantage people, it’s really going to be very, very—our license will be very valuable”) (emphasis added).
The District Court granted Appellees’ motion in limine to exclude all of these statements. At trial and in its order denying F.B.T.’s motion for a new trial, the court explained that it excluded this evidence because the declarants were “unconnected to the recording agreements.” 4-ER-631:12-642:7; see also 1-ER-28-29. This missed the point of the proffered testimony. A central issue in this case was whether the download agreements between Appellees and digital download providers like Apple were licenses or sales. The excluded statements of Kenswil, Cue, Jobs, and Iovine were directly pertinent to this issue and demonstrated that, at less guarded moments, Appellees (and Apple)—the parties to those third party download agreements—admitted that they were properly characterized as licenses. This would have been powerful evidence in support of F.B.T.’s position that the agreements were, in fact, licenses. Particularly in the context of this case, where F.B.T. was limited to eight hours of testimony (3-ER-466:8-23) and could not possibly present evidence about the specifics of each of the approximately eighty download agreements produced in this case, the inability to introduce the contracting parties’ admissions that the agreements are licenses was severely prejudicial.
Moreover, these statements would have severely undermined the credibility of key defense witnesses—including David Weinberg, an attorney with UMG’s eLabs Division who negotiated several of the download agreements, and Jeffrey Harleston, Appellees’ expert witness—who testified that the agreements were not licenses, but sale/re-sale agreements. See, e.g., 4-ER-603:8-604:23, 606:18-608:6, 666:8-667:1, 667:25-668:9. These statements also would have reinforced one of F.B.T.’s primary themes: the lengths to which Appellees went to camouflage the download agreements as something other than a license agreement. For example, David Weinberg scratched out the word “license” in a draft mastertone agreement prepared by T-Mobile. He claimed he did so not out of a concern about the Masters Licensed provision but because the nature of the transaction was a sale/resale transaction. 4-ER-605:2-12, 606:18-607:23. The sworn testimony of his boss, Larry Kenswil, that the agreements are indeed license agreements, would have undermined the credibility of this testimony. Accordingly, and especially in light of the District Court’s failure to properly instruct the jury (see Part II(D)(1), supra), this erroneous evidentiary ruling requires reversal. See Jerden v. Amstutz, 430 F.3d 1231, 1240-41 (9th Cir. 2005) (explaining that this Court must consider errors cumulatively).
III.
the improper exclusion of the “paterno letter” also requires reversal.
In March 2004, Peter Paterno, a lawyer who represented Aftermath during the 1998 negotiations of the recording agreement at issue in this case and who drafted the standard form used as the basis for the 1998 Agreement, signed a letter addressed to the heads of all the “major” record companies, including Appellees, taking the position that record companies should “recognize the arrangements between the major labels and independent electronic distributors as licenses, for which we feel there can be no bona fide dispute,” and should pay artists according to the applicable licensing provisions of their contracts. 2-ER-187. He also stated that it is incorrect for labels to treat downloads as normal retail channel sales under the Records Sold provision—the very claim Appellees make in this case. Prior to trial, Appellees moved in limine to exclude the Paterno Letter. CR 221. The court granted Appellees’ motion without hearing or explanation. 1-ER-35. When F.B.T. raised the issue again at trial, the court again ruled that the Paterno Letter could not be introduced. 3-ER-504:15-506:25. The court stated then that it was maintaining its position because the Paterno Letter was not specifically tied to the agreements at issue in this action. 3-ER-505:17-506:2. When F.B.T. raised the issue in its motion for a new trial, the court determined that the Paterno Letter had been properly excluded because the letter was sent several years after the Recording Agreements were drafted and entered into and was therefore “not relevant to show [Appellees’] intent at the time they entered into the contracts.” 1-ER-28. Neither of the court’s stated reasons for excluding the letter are correct. The court’s decision to exclude the letter was error and severely prejudiced Appellants.
A. The District Court Erred In Excluding The “Paterno Letter.”
The Paterno Letter constitutes a direct admission by the adverse party—through its attorney—concerning the parties’ intent. While unexpressed intent ordinarily should not be considered in interpreting a contract, there is a fundamental exception: an admission by the adverse party to a contract that its understanding at the time of contracting was consistent with the other side’s proposed interpretation is admissible to help interpret the contract, even if the witness never expressed that understanding during the negotiations. See Heston v. Farmers Ins. Group, 160 Cal. App. 3d 402, 413-15 (1984). The Paterno Letter—which constitutes compelling evidence that Aftermath intended the Masters Licensed provision to be a broad provision that covered all licenses—falls squarely within this doctrine.
The court’s initial reason for excluding the Paterno Letter—that it was not specifically tied to the Recording Agreements at issue in this action—is erroneous. The Masters Licensed provision is a standard provision in recording agreements. See 4-ER-617:4-9. And the Recording Agreements in this case were drawn from Paterno’s own files and prepared on his form. 3-ER-485:16-486:7. Accordingly, Paterno’s views—as expressed in the letter—directly addressed the central question in this case: the meaning of the industry-standard Masters Licensed clause that he himself inserted into the 1998 and 2003 Recording Agreements.
The court’s later-stated reason for excluding the Paterno Letter—that it was sent several years after the Recording Agreements were drafted and signed and was therefore “not relevant to show [Appellees’] intent at the time they entered into the contracts”—is similarly erroneous. If Paterno wrote a letter ten years from now explaining exactly what he was thinking when he drafted the licensing provision, there can be no doubt that it would be relevant circumstantial evidence of his intent at the time of contracting, despite the passage of time. Likewise, a question to Paterno at trial about what he had intended at the time he wrote the agreement would of course be proper. See Heston, 160 Cal. App. 3d at 413-15. The fact that the Paterno Letter is a less direct assertion of the parties’ contemporaneous intent does not alter the basic principle that the passage of time does not render such a communication irrelevant. If anything, the passage of time goes to the weight of the evidence—but Appellees could have asked Paterno whether he had arrived at the conclusion expressed in the letter after 1998, and the jury could have then evaluated the credibility of the testimony and the probative value of the evidence.
In addition, the Paterno Letter should have been admitted to impeach Paterno’s testimony. See, e.g., United States v. Hands, 184 F.3d 1322, 1327 (11th Cir. 1999); Goodman v. United States, 369 F.2d 166, 169 (9th Cir. 1966). First, Paterno testified at his deposition that he viewed lawsuits such as this case as “baseless.” See 3-ER-351:13-14. This testimony occurred before he knew Plaintiffs were aware of his letter or an email he sent an associate stating that the letter was unlikely to yield results and therefore a particular rights-holder “should sue.” See 3-ER-351-52, 363 ¶¶34-35. The jury should have been allowed to see that Appellees’ attorney, who drafted the form used as the basis for the Recording Agreements and whose office was responsible for drafting and negotiating the actual Recording Agreements on Appellees’ behalf, had advocated the very position that he now calls “baseless” and that Appellees oppose. Second, Mr. Paterno denied at trial that the reason he amended his own form agreement was because of a concern that artist representatives could argue that the licensing provision applied to permanent downloads and mastertones. 3-ER-501:2-22, 502:21-503:11. He said it never crossed his mind that artists could make this argument. 3-ER-502:21-503:11. F.B.T. should have been permitted to introduce the Paterno Letter to impeach this testimony.
B. The Improper Exclusion Of The “Paterno Letter” Severely Prejudiced Appellants.
The District Court’s exclusion of the Paterno Letter materially prejudiced Appellants. “[W]hen reviewing the effect of erroneous evidentiary rulings, [this Court] will begin with a presumption of prejudice.” Obrey v. Johnson, 400 F.3d 691, 701 (9th Cir. 2005). That presumption will be rebutted only if the party defending the exclusion can show “that it is more probable than not that the jury would have reached the same verdict even if the evidence had been admitted.” Id. Appellees cannot make such a showing here. To the contrary, Paterno was a key witness in the case; the letter would have had a powerful effect on the jury had it learned that Appellees’ own contract negotiator agreed with F.B.T.’s interpretation and had specifically rejected Appellees’ central argument in this case that third party download sales should be paid as if the record labels were selling CDs through retailers. 2-ER-187.
Moreover, if this Court concludes—contrary to F.B.T.’s argument in Part I(B)(3), supra—that the custom and practice testimony presented during trial did, in fact, create a conflict that precludes interpretation of the contract as a matter of law, the importance of this evidence is even more manifest. If custom and practice testimony as to the meaning of the contract was admissible and critical to the disposition of the case, then exclusion of the letter severely prejudiced F.B.T. by preventing F.B.T.’s expert, David Berman, from using it to support his position, and allowing several of Appellees’ witnesses—including their custom and practice expert—to testify that downloads should be paid under the Records Sold provision without fear of being confronted with a letter from Appellees’ own attorney setting forth a contrary position.
In sum, the exclusion of the Paterno Letter was devastating to F.B.T.’s case and its exclusion warrants a new trial. As in Baker v. Delta Air Lines, 6 F.3d 632 (9th Cir. 1993), where this Court reversed and remanded for a new trial based on a court’s improper evidentiary ruling, the excluded evidence was “crucial to Appellants’ claim” and constituted the “only documentary evidence” of Appellees’ subjective intent at the time the recording agreements were entered into. Id. at 642, 646; see also Dean v. TWA, 924 F.2d 805, 812 (9th Cir. 1991); Peake v. Chevron Shipping Co., 245 Fed. Appx. 680, 683 (9th Cir. 2007).[23]
IV.
the district court’s award of attorneys’ fees should be reversed.
F.B.T.’s breach of contract case involved two separate alleged breaches of the Recording Agreements by Appellees. The first, making up Counts I and III of the Second Amended Complaint, dealt with royalties for permanent downloads and is the subject of this appeal. The second breach, Count II, alleged that Appellees had failed to correctly allocate certain costs as between F.B.T. and Eminem and, as a result, underpaid F.B.T. After a five-day trial at which the parties put on evidence concerning both claims of breach, the jury returned a mixed verdict. F.B.T. obtained the full relief requested on Count II, but the jury returned a verdict in Appellees’ favor on Count I. In other words, F.B.T. won a judgment ultimately amounting to nearly a quarter million dollars, while Appellees received no monetary relief.
A. If The Judgment Is Reversed, Appellees Will No Longer Be A Prevailing Party Entitled To Fees.
If the judgment is reversed, then the fee award must be reversed as well because Appellees will no longer have prevailed and they will not be entitled to fees under the Agreement. See Interstellar Starship Servs., Ltd. v. Epix Inc., 184 F.3d 1107, 1112 (9th Cir. 1999).
B. The District Court Incorrectly Thought It Lacked Discretion To Deny Fees To Appellees.
Even if the judgment is affirmed, the fee award should be reversed and remanded for reconsideration. The District Court’s decision on fees indicates that it believed its hands were tied by the recent decision in Silver Creek, L.L.C. v. BlackRock Realty Advisors, Inc., 173 Cal. App. 4th 1533, 1540 (2009), in which the California Court of Appeal held that a trial court abused its discretion when it concluded there was no prevailing party in a mixed verdict case. Specifically, the language of the District Court’s decision implies that the court believed it would necessarily be an abuse of discretion under Silver Creek to find no prevailing party in this case because Appellees here (like the plaintiff in Silver Creek) “were successful on the greater claims in terms of monetary value.” 1-ER-6. But Silver Creek is distinguishable from the situation presented here for two reasons.
First, Silver Creek involved an alleged breach of a contract for the sale of land. Under the terms of the contract between Silver Creek (the seller) and BlackRock (the buyer), BlackRock was to assume the favorable existing loans on the properties, but was required to do so under terms and conditions which were reasonably satisfactory to Silver Creek. 173 Cap. App. 4th at 1536. If the agreement was terminated because BlackRock was unable to negotiate a satisfactory assumption of the loans, Silver Creek’s performance would be excused and BlackRock’s deposit would be returned. Id. at 1537. So, “[a]s Silver Creek recognized in its post trial brief, the agreements dictated which party received the deposit once the trial court determined the contract provisions upon which Silver Creek had terminated the agreements.” Id. at 1539. In other words, if the court determined that the agreement was properly terminated by Silver Creek because BlackRock failed to negotiate a satisfactory assumption of the loans, Silver Creek would be permitted to terminate the agreement (thus achieving its main litigation objective), but would be required to repay the deposit. Accordingly, if Silver Creek prevailed on the “primary” issue in the case, it necessarily followed that it would lose the deposit. In such a situation, it is entirely reasonable to say—as the Court of Appeal did—that Silver Creek was the real winner and the prevailing party. The only reason Silver Creek lost the “secondary” issue was that it won the “primary” issue. Here, however, there is no such link between the issues presented in Count I and the issues presented in Count II. The questions were entirely severable and either party could have won or lost on either or both issues.
Second, BlackRock did not achieve its litigation objective or obtain the relief it sought. BlackRock sought either specific performance or return of its deposit plus breach of contract damages. Id. at 1536. It did not seek return of its deposit alone, and, in fact, indicated through its behavior both before and during trial that this was an unacceptable outcome. Before trial, it rejected an offer from Silver Creek to take its deposit and terminate the agreement. During trial, BlackRock representatives testified that “it was not willing to merely accept its deposit and walk away.” Id. at 1537. In other words, return of the deposit was never a litigation objective for BlackRock, so the fact that it received the deposit was not a victory. Here, by contrast, recovery of the money alleged in Count II to be owed to F.B.T. was always a litigation objective—and one on which F.B.T. ultimately prevailed.
Accordingly, Silver Creek does not dictate the outcome of this case and the District Court retained discretion to determine that neither party “prevailed.” See Hsu v. Abbara, 9 Cal. 4th 863, 876 (1995). The Court should remand the issue of attorneys’ fees to allow the District Court to reconsider its conclusion with this proper understanding of the extent of its discretion.
Both parties here obtained part of the relief they sought. F.B.T. recovered $242,454.87, including prejudgment interest, or approximately 15.5% of the total requested in Count I and Count II. Parties who recovered a smaller percentage of the damages they sought have been deemed prevailing parties for purposes of awarding attorneys’ fees. See Ajaxo Inc. v. E*Trade Group Inc., 135 Cal. App. 4th 21, 58-59 (2005) (6.7%). In fact, the relief F.B.T. received is greater in percentage terms than in any reported case where fees were denied to the plaintiff (much less any case where fees were awarded against the plaintiff). See, e.g., Greger Leasing Corp. v. Barge Pt. Potrero, No. C-05-5117 SC, 2008 WL 4830751, at *5 (N.D. Cal. Nov. 6, 2008) (denying fees when plaintiff recovered less than 7% of claimed damages); Berkla v. Corel Corp., 302 F.3d 909, 920 (9th Cir. 2002) (upholding denial of fee request when plaintiff recovered approximately 2% of what was sought). In light of these authorities, it is far from clear that the District Court would award such large fees to Appellees if it understood that it had discretion to rule otherwise. On remand, the District Court may (and indeed should) either find F.B.T. to be the prevailing party or find there to be no prevailing party at all.
VII. Conclusion
For the foregoing reasons, the Final Judgment for Appellees should be reversed with directions to enter a judgment for Appellees or, failing that, to
retry the matter. In addition, the Order granting Appellees’ Motion For Attorney Fees should be reversed.
DATED: December 28, 2009.
|Respectfully, |
|Jerome B. Falk, Jr. |Richard S. Busch |
|Daniel B. Asimow |King & Ballow |
|Sara J. Eisenberg | |
|Howard Rice Nemerovski Canady | |
|Falk & Rabkin | |
|A Professional Corporation | |
| |
|By /s/ Jerome B. Falk, Jr. |
|Jerome B. Falk, Jr. |
|Attorneys for Plaintiffs and Appellants F.B.T. Productions, LLC and Em2M, LLC |
W03 122809-178190001/PB10/1600698/F
statement of related cases
Counsel for Plaintiffs and Appellants are not aware of any related cases within the meaning of Circuit Rule 28-2.6.
DATED: December 28, 2009.
/s/ Jerome B. Falk, Jr.
Jerome B. Falk, Jr.
CERTIFICATE OF COMPLIANCE PURSUANT TO FED. R. APP. p. 32(a)(7)(C) AND CIRCUIT RULE 32-1 FOR CASE NUMBER 09-55817
1. This brief complies with the type-volume limitation of Federal Rule of Appellate Procedure 32(a)(7)(B) because this brief contains 15,152 words, excluding the parts of the brief exempt by Federal Rule of Appellate Procedure 32(a)(7)(B)(iii).
2. This brief substantively complies with the typeface requirements of Federal Rule of Appellate Procedure 32(a)(5) and the type style requirement of Federal Rule of Appellate Procedure 32(a)(6) because it has been prepared in a proportionally spaced typeface in 14.5 point Times New Roman.
DATED: December 28, 2009.
/s/ Jerome B. Falk, Jr.
Jerome B. Falk, Jr.
APPENDIX
1998 RECORDING AGREEMENT—
RELEVANT EXCERPTS
4. (a) Your royalty rate (which is inclusive of all third parties, such as producers, artists, vocalists, and other persons entitled to royalties in connection with the Masters), payable in respect of one hundred percent (100%) of U.S. Net Sales, computed at the applicable percentage, indicated below, of the Royalty Base Price, will be the following:
On full-price records sold in the United States:
(i) (A) LPs 1, 2 and 3: eighteen percent (18%) for the first five hundred thousand (500,000) net sales through normal retail channels in the United States (“USNRC Sales”), eighteen and one-half percent 18.5%) for USNRC Sales in excess of five hundred thousand (500,000) but not in excess of one million (1,000,000), and nineteen percent (19%) for USNRC Sales in excess of one million (1,000,000), computed prospectively on an LP-by-LP basis.
(B) LPs 4, 5, 6 and 7: nineteen percent (19%) for the first five hundred thousand (500,000) USNRC Sales, nineteen and one-half percent (19.5%) for USNRC Sales in excess of five hundred thousand (500,000) but not in excess of one million (1,000,000), and twenty percent (20%) for USNRC Sales in excess of one million (1,000,000), computed prospectively on an LP-by-LP basis.
(i) Twelve percent (12%) for records other than LPs.
* * * *
(c) Notwithstanding the foregoing:
(v) On masters licensed by us or our NRS Licenses to others for their manufacture and sale of records or for any other uses, your royalty shall be an amount equal to fifty percent (50%) of our net receipts from the sale of those records or from those other uses of the masters.
VIII. CERTIFICATE OF SERVICE
I hereby certify that on December 28, 2009, I electronically filed the foregoing APPELLANTS’ OPENING BRIEF [REDACTED FOR PUBLIC FILE] with the Clerk of the Court for the United States Court of Appeals for the Ninth Circuit by using the appellate CM/ECF system.
I certify that all participants in the case are registered CM/ECF users and that service will be accomplished by the appellate CM/ECF system.
/s/ Jerome B. Falk, Jr.
Jerome B. Falk, Jr.
-----------------------
[1]IN ADDITION TO MARK AND JEFF BASS, F.B.T. HAS A THIRD MEMBER, JOEL MARTIN, WHO ACTS AS THE MANAGING AGENT OF F.B.T. AND HAS BEEN GRANTED A SHARE OF F.B.T.’S ROYALTIES PAYABLE UNDER ITS AGREEMENTS WITH AND INVOLVING EMINEM. MR. MARTIN IS THE SOLE MEMBER OF PLAINTIFF AND APPELLANT EM2M, LLC, AN ENTITY TO WHICH MR. MARTIN ASSIGNED HIS ROYALTY SHARE.
[2]Aftermath and its co-owners Interscope and UMG Recordings, Inc. (“UMG” or “Universal”) are collectively referred to as “Appellees.”
[3]For the Court’s convenience, the relevant sections of the contract are set forth in their entirety in the attached Appendix.
[4]The royalty rates went up again in 2004, but again the substance of the relevant provisions was unchanged. 5-ER-1011 ¶2a, 1012 ¶5; 3-ER-475:18-477:3.
[5]The Recording Agreements were, in essence, form agreements with very slight (and not pertinent) modifications from standard recording agreements used throughout the industry. The basic structure of the agreements—the distinction between Records Sold and Masters Licensed, the absence of a provision expressly addressing digital downloads, and the broad grant of rights to the label to exploit the artists’ recordings—were common to recording agreements at the time. See, e.g., 4-ER-646:1-9; 3-ER-485:16-486:7.
[6]In 1997, Donald S. Passman, a prominent entertainment attorney wrote:
At the time of this writing, it’s not practical to download music very quickly. . . . A few years ago, Aerosmith did a promotion where they allowed a new single to be downloaded. For a record that was approximately two and one-half minutes in length, it took anywhere from 45 minutes to one and one-half hours to download the copy (depending on your modem speed). (Donald S. Passman, All You Need To Know About The Music Business 377-78 (3d ed. 1997))
[7]In addition, approximately 120 agreements for conditional downloads, streaming and other services have been produced. 2-ER-263 ¶88.
[8]The Recording Agreements allow Appellees to charge certain costs against F.B.T.’s and Eminem’s accounts and provides precisely how these costs are to be divided between F.B.T. and Eminem. 2-ER-98 ¶7. The 2006 Audit showed that Appellees had been dividing these costs incorrectly, charging F.B.T. more than their contractual share.
[9]Notably, even if there were material disputes of extrinsic fact, this Court would still review the ultimate question of contract interpretation de novo, even though it would defer to the jury’s resolution of those fact disputes. In cases involving material extrinsic fact disputes, those factual disputes are deemed to have been resolved favorably to appellees—but the reviewing court nonetheless decides for itself what the disputed contract provisions mean. See United Commercial Ins. Serv., Inc., 962 F.2d at 856; L.K. Comstock & Co. v. United Eng’rs & Constructors, Inc., 880 F.2d 219, 221 (9th Cir. 1989) (“[I]f the contract interpretation involves a review of factual extrinsic evidence, the findings of fact themselves are reviewed under the ‘clearly erroneous’ standard, but the principles of contract law applied to those facts are reviewed de novo”) (emphasis added). As explained in United Commercial,
the interpretation of a contract is a question of law subject to de novo review. If interpretation requires the resolution of disputed facts or a determination of the credibility of extrinsic evidence, the appellate court will defer to the district court’s resolution of those issues if it is supported by substantial evidence. But once the facts are resolved, the interpretation of the agreement in light of those facts is a question of law. (962 F.2d at 856 (emphasis added))
[10]Moreover, at the time F.B.T. acquiesced in the withdrawal of the instruction, further argument that the court should have interpreted the contract itself would have been futile. See Part I(C), infra. The District Court therefore erred by concluding that F.B.T.’s acquiescence constituted a waiver of its consistent position that contract interpretation was a question of law that should be decided by the Court. Id.
[11]3-ER-521:4-15 (testimony of Universal’s General Counsel: “Q. And you understand that ‘notwithstanding the foregoing’ means that whatever comes next is—to the extent there’s a conflict, controls over what came before? A. “Yes”); 3-ER-489:11-15 (testimony of Aftermath’s attorney: Q. And ‘notwithstanding the foregoing’ means what—no matter what was said before, what comes next controls; correct? A. It means that to the extent that something that comes after is inconsistent with something that came before, then later controls”); 3-ER-482:8-12.
[12]Even if this last point were disputed, the Masters Licensed provision would still be applicable since it applies to “masters licensed by us . . . to others for their manufacture and sale of records or for any other uses.”
[13]In a synchronization license situation, a third party takes a recording, and incorporates that recording into its own audio-visual work, such as when a song is used in a television program, a movie, or a commercial. 4-ER-655:9-14.
[14]In a compilation album situation, a third party takes one track from the record company’s album and incorporates it into a different album. 4-ER-655:15-24.
[15]Specifically, record clubs provide their members with albums on a regular basis. The member can either return the album (and pay nothing) or keep the album (and pay the club). 4-ER-598:8-599:8.
[16]In a departure from the standard form, record clubs are addressed in a separate paragraph of the royalty provisions in the two agreements at issue here. Recording agreements frequently do not contain a specific provision on record clubs, instead dealing with them in the catch-all provisions for licensing generally—that is, the Masters Licensed provision. 3-ER-490:22-491:21; 4-ER-653:24-654:1. For instance, that is the case in Universal’s amended 2003 form agreement. See 4-ER-651:16-21. Accordingly, evidence about the accounting for record club royalties under the standard form agreement is probative of the meaning of the term “Masters Licensed” in the industry.
[17]Conditional downloads and streams are discussed and defined on pp.13-14, supra.
[18]Because this Court reviews the contract interpretation de novo, this Court can decide what inferences to draw from the undisputed historical facts. The fact that more than one inference can be drawn from these facts does not create a material dispute of extrinsic fact that prevents contract interpretation from being a question of law. As discussed above (see pp.23-24, supra), contract interpretation remains a question of law even where disputes exist about the inferences to be drawn from uncontroverted extrinsic evidence.
[19]As discussed throughout, there was no evidence presented that created a material extrinsic fact dispute over whether permanent downloads are covered by the Masters Licensed provision. In addition, this Court must separately examine whether there was evidence presented that could create a conflict over whether mastertones—30 seconds or less of an individual song that plays on a cell phone to signal an incoming call—are covered by that provision. There was not. Indeed, there was no evidence presented by Appellees that mastertones would not be covered even under their narrow interpretation of the Masters Licensed provision. Accordingly, the jury’s verdict cannot stand with respect to permanent downloads or mastertones.
[20]The fact that the court ultimately rejected F.B.T.’s position in its opinion denying F.B.T.’s motion for a new trial (see 1-ER-25-26) confirms that further objection at the jury instruction conference would indeed have been futile.
[21]For example, the agreement with Apple dated December 13, 2002 provided that “[n]othing in this Agreement should be construed as giving Apple any ownership interest in any Universal Content or rights related thereto,” and added that “this Agreement does not grant to Apple . . . any copyright ownership interest in any Universal Content . . . .” 5-ER-1020-21.
[22]Appellees’ agreement with Apple, for example, provided that the “content rights granted in Section 1 of the Agreement shall be limited to the United States, its territories, commonwealths and possessions.” 5-ER-1020.
[23]This error and the District Court’s erroneous exclusion of statements by UMG and Apple representatives admitting that the third party agreements are licenses (see Part II(D), supra) both denied F.B.T. a fair trial—and each alone requires reversal. Individually and cumulatively, these exclusions severely prejudiced F.B.T. See Jerden v. Amstutz, 430 F.3d 1231, 1240-41 (9th Cir. 2005).
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