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August 16, 2005.

JOEL TURTLE, et al., Plaintiffs,
SANCTUARY RECORDS GROUP, INC., et al., Defendants.

The opinion of the court was delivered by: MAXINE CHESNEY, District Judge


Before the Court is the motion, filed April 26, 2005 by counter-defendants Joel Turtle and Matthew Kaufman pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss the counterclaim filed by counter-plaintiffs Sanctuary Records Group, Inc., and Sanctuary Records Group Limited (collectively, "Sanctuary").*fn1 Sanctuary has filed opposition, to which Turtle and Kaufman have replied.*fn2 Having read and considered the papers filed in support of and in opposition to the motion, the Court deems the matter appropriate for decision on the papers and rules as follows.


  On July 19, 1993, Beserkley Audio and Video, Inc. ("Beserkley") and Sanctuary, through a predecessor, entered into an agreement titled Assignment of Catalogue of Master Recordings ("Assignment").*fn3 Under the Assignment, Beserkley assigned Sanctuary the rights to certain "Recordings," including the "exclusive right to manufacture and sell records derived from the Recordings." (See Assignment ¶ 2.1.) Beserkley also warranted that "the original musical compositions comprising the Recordings will be available to [Sanctuary] for exploitation in the form of Records at no more than the standard rate of license fees prevailing," (see id. ¶ 4.16), and that Sanctuary would have no obligation to third parties except for "the obligation to account to publishers of the original musical compositions in accordance with standard industry practice," (see id. ¶ 4.15).*fn4

  In its counterclaim, Sanctuary alleges Turtle and Kaufman are the "controlling shareholders of Beserkley," (see Counterclaim ¶ 66), and control the publishing rights to the musical compositions comprising the recordings, (see id. ¶ 69). Sanctuary also alleges that, after it acquired the rights to the recordings, Sanctuary "sought a mechanical license from [Turtle and Kaufman] at the statutory rate on the customary accounting terms," (see id. ¶ 63), but that Turtle and Kaufman "refused to issue to [Sanctuary] licenses to release and distribute the recordings . . . at the statutory rate in accordance with their customary accounting practices," (see id. ¶ 64.) As a result, Sanctuary alleges, Turtle and Kaufman interfered with the performance of the Assignment, and Sanctuary was "required" to withdraw its distribution of the recordings. (See id. ¶¶ 71, 72.)


  In its counterclaim, Sanctuary alleges one claim, specifically, "Tortious Interference with Contract." (See id. at 8:11.) "The elements which a plaintiff must plead to state the cause of action for intentional interference with contractual relations are (1) a valid contract between plaintiff and a third party; (2) defendant's knowledge of this contract; (3) defendant's intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage." See Quelimane Co. v. Stewart Title Guaranty Co., 19 Cal. 4th 26, 55-57 (1998) (internal quotation and citation omitted).

  Here, the contract at issue, in relevant part, concerns copyrights in musical works. The Copyright Act provides that a copyright owner has an exclusive right to reproduce the work, see 17 U.S.C. § 106, but further provides for an exception when a person seeks to record certain copyrighted musical works, see 17 U.S.C. § 115(a)(1). Specifically, the Copyright Act provides: "When phonorecords of a nondramatic musical work have been distributed to the public in the United States under the authority of the copyright owner, any other person, including those who make phonorecords or digital phonorecord deliveries, may, by complying with the provisions of this section, obtain a compulsory license to make and distribute phonorecords of the work." See id. To obtain a compulsory license, a person must give timely notice to the copyright owner before making and distributing phonorecords of the work. See 17 U.S.C. § 115(b)(1). Thereafter, the compulsory licensee must pay the copyright owner, on a monthly basis, a statutory royalty rate, see 17 U.S.C. §§ 115(b)(2), (c)(5), and must provide the copyright owner with an accounting in the manner set forth in the Code of Federal Regulations, see 17 U.S.C. § 115(c)(5). If a person seeking to distribute copies of a musical work does not obtain a compulsory license, the person must obtain a private license from the copyright holder. See 17 U.S.C. § 115(c)(3)(B); see, e.g., Edward B. Marks Music Corp. v. Foullon, 171 F. 2d 905, 908 (2nd Cir. 1949) (holding where parties enter into negotiated license agreement, parties' rights are governed by private agreement and not by Copyright Act).

  Here, as noted, Sanctuary alleges that Turtle and Kaufman interfered with the Assignment between Sanctuary and Beserkley by refusing to issue a private license to Sanctuary. In response, Turtle and Kaufman first argue that the Assignment cannot be interpreted as including a promise by Beserkley to negotiate a private license with Sanctuary. (See Pls.' Mot. at 5:5-8.) This argument is unavailing because Sanctuary does not allege that Beserkley promised that Beserkley would negotiate a private license; rather, Sanctuary's theory is that Beserkley warranted that Turtle and Kaufman would issue a private license. (See Counterclaim ¶¶ 59-60, 63-64, 72.)

  Turtle and Kaufman next argue that because a compulsory license is available under 17 U.S.C. § 115, any refusal by Turtle and Kaufman to issue a private license to Sanctuary "did not affect Beserkley's claim that the license was available." (See Pls.' Mot. at 9:9-11.) In other words, Turtle and Kaufman take the position that the Assignment does not include a warranty by Beserkley that Turtle and Kaufman would issue a private license to Sanctuary, but rather a warranty only that a statutory license would be "available." (See id. at 9:9-11.) From the face of the Assignment and the allegations in the counterclaim, however, the Court cannot find that the language of the Assignment is susceptible only to one interpretation. For example, it cannot be determined at this stage of the proceedings that the obligation to "account . . . in accordance with standard industry practice," (see Assignment ¶ 4.15), is a reference to compulsory licenses. See 17 U.S.C. § 115 (c)(5).*fn5 In short, the Assignment contains an ambiguity as to whether Beserkley purported to warrant only that a compulsory license was available or that Turtle and Kaufman, as owners of the copyrights in the musical works, would issue a private license at standard rates and in accordance with standard industry accounting practices. On a motion to dismiss, the Court must resolve the ambiguity in favor of Sanctuary, the non-moving party. See Falkowski v. Imation Corp., 309 F. 3d 1123, 1132 (9th Cir. 2002), as amended, 320 F. 3d 905 (2003) (holding where issue of whether defendant has contractual duty cannot be resolved from face of contract because of ambiguities therein, contract claims not subject to dismissal)

  Turtle and Kaufman further argue that because Sanctuary could have obtained a compulsory license, Sanctuary cannot establish it suffered any damage as a result of any refusal to issue a private license. Sanctuary, however, has alleged it was damaged; specifically, Sanctuary has alleged that Sanctuary was "required to withdraw from distribution" of the Recordings. (See Counterclaim ¶ 71.) If the ambiguity in the Assignment were resolved in Sanctuary's favor, the Court cannot say that it is "clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." See id. (internal quotation and citation omitted).

  Finally, Turtle and Kaufman argue that, even assuming the Assignment includes a warranty by Beserkley that Turtle and Kaufman would issue a private license, Turtle and Kaufman cannot be liable to Sanctuary because Turtle and Kaufman "were under no duty or obligation to ever negotiate such a deal." (See Pls.' Mot. at 10:11-12.) The California Supreme Court, however, has held that, irrespective of whether there is "nothing wrong" with the act claimed to constitute the interference, a claim for intentional interference can be stated, as long as the plaintiff alleges the defendant engaged in the act with the intent to cause a breach of contract or otherwise disrupt a contractual relationship. See Quelimane, 19 Cal. 4th at 55-57 (1998) (holding where plaintiff and third party entered into contract for sale of land and plaintiff alleged that defendant title company, acting with intent to disrupt contract, refused to issue title insurance policy to buyer, plaintiff, as seller, stated claim against title company; rejecting defendant's argument that "there was nothing wrong in its refusal to issue the policy," and finding "[i]ntentionally inducing or causing a breach of an existing contract is ? a wrong in and of itself"). Here, in light of Sanctuary's having alleged that Turtle and Kaufman were aware of the Assignment and that they intended, when they refused to issue a private license, to interfere therewith, Turtle and Kaufman are not entitled to dismissal on the ground that a refusal to issue a private license is not, in the abstract, wrongful.


  For the reasons set forth above, counter-defendants' motion ...

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