IP Law Daily, COPYRIGHT—S.D.N.Y.: Music publisher must arbitrate question of arbitrability of infringement claims, (Oct 18, 2013)

By Thomas Long, J.D.

A New Jersey-based music publishing company (“Cartagena”) was required to arbitrate claims against an advertising agency (“JWT”) and a bank (“Popular”) for infringing a copyrighted recording of a song by distributing the recording in manners that exceeded the scope of a license agreement, the federal district court in New York City has decided (Cartagena Enterprises, Inc. v. J Walter Thompson Co., October 16, 2013, Scheindlin, S.). The threshold question of whether the claims were arbitrable under a clause in the agreement was itself subject to arbitration. In addition, claims brought by recording company and co-plaintiff Rico Records, LLC (“Rico”) were transferred to the U.S. District Court for the District of Puerto Rico.

Background. Cartagena was formed under New York law, although the primary location of both Cartagena and Rico’s businesses was New Jersey. The companies were owned by the same family.

Cartagena held the exclusive copyright to the musical composition “Y No Hago Más Ná.” Rico owned the sound recordings for the albums “La Universidad de la Salsa” and “Salsa Classics Revisited,” which both included recordings of “Y No Hago Más Ná,” and has registered its copyrights for both albums. Rico exclusively owned the artwork for the album “Salsa Classics Revisited,” and the registered copyrights to the sound recording for the album “Bailando con el Mundo,” which included a recording of a song called “Don Goyo.”

On July 22, 2011, Cartagena and JWT entered into a license agreement allowing JWT to create a derivative work of “Y No Hago Más Ná,” entitled “Echar Pa’ Lante,” as part of an advertising campaign for Popular. Both JWT and Popular are based in Puerto Rico. Under the agreement, Cartagena remained the owner of copyrights to “Y No Hago Más Ná” and would become the sole owner of the rights to “Echar La’ Lante” after the six-month license period ended. The license limited JWT’s right to exploit “Echar La’ Lante” only in certain media within Puerto Rico during the six-month advertising campaign. JWT’s only right with respect to “Y No Hago Más Ná” was to publish the lyrics in a newspaper in Puerto Rico one time during the license period.

The agreement contained an arbitration clause that stated that any dispute arising from or that is related to the agreement shall be resolved by arbitration in San Juan, Puerto Rico. Another section of the agreement specified that the contract was to be governed by the laws of the Commonwealth of Puerto Rico.

In October 2011, Cartagena informed JWT that it had breached the license agreement by (1) distributing “Echar Pa’ Lante” to movie theaters throughout Puerto Rico; (2) using “Echar Pa’ Lante” as Popular’s telephone “on-hold” music; and (3) posting “Echar Pa’ Lante” on soundcloud.com. JWT denied the breaches and stated that it had ceased any alleged unauthorized uses. After the six-month license period ended, JWT distributed video excerpts of “Echar Pa’ Lante” and “Don Goyo” and cover art from “Salsa Classics Revisited” to numerous advertising awards organizations worldwide, which hosted the videos on their websites. JWT and Popular also posted the videos on their websites and on social media sites.

Cartagena and Rico filed suit against the defendants, alleging copyright infringement and breach of contract. The defendants moved to dismiss the suit for lack of subject matter jurisdiction, citing the arbitration clause in the license agreement, and moved to transfer Rico’s claims to the federal district court in San Juan, Puerto Rico.

Arbitrability of Cartagena’s claims. Cartagena did not dispute that its breach of contract claim was subject to the arbitration clause. With regard to the copyright claims, the court first examined the threshold issue of whether the court or the arbitrator would decide arbitrability.

There was “clear and unmistakable evidence” that the parties intended the arbitrator to decide the issue of arbitrability, the court said. First, the parties incorporated the American Arbitration Association (“AAA”) rules into their agreement. The Second Circuit has held that parties that incorporate AAA rules into their agreement are assenting to arbitrate issues of arbitrability. Therefore, the AAA rule allowing the arbitrator to determine his or her own jurisdiction governed. Second, the language of the arbitration clause evidenced the parties’ intent to arbitrate the question of arbitrability. The agreement stated that “[a]ny claim or dispute that arises from or is related to the Agreement … shall be resolved by arbitration.”

However, there was a question as to whether the parties also intended to permit Popular—a non-signatory to the agreement—to compel the arbitration of arbitrability issues. Nothing in the first sentence of the arbitration clause—agreeing to resolve “[a]ny claims or dispute that arises from or is related to the Agreement” by arbitration—limited arbitration to the parties, the court said. Limiting language was found in the second sentence: “[T]he parties to the Agreement agree to abide by the arbitration decision” (emphasis added). Nevertheless, according to the court, the principle of equitable estoppel allowed Popular to compel arbitration of the arbitrability issue.

Cartagena’s claims against Popular were clearly intertwined with Cartagena’s claims against JWT. Cartagena alleged that, “[i]n addition to the infringing Videos produced and distributed by JWT, JWT Puerto Rico and Popular, Popular also distributed videos [] that breached the License Agreement and infringed Cartagena’s copyright.” The issue was the same: whether or not the defendants breached the terms of the agreement and infringed Cartagena’s copyright by distributing and posting the videos. Cartagena’s claims against Popular were factually intertwined with the subject matter of the agreement. In fact, Cartagena treated Popular as a signatory to the agreement by alleging that Popular breached it, the court noted.

The parties’ close relationship also supported the application of equitable estoppel. It was clear that Cartagena had entered into the agreement with the intent of binding Popular to its terms. Cartagena had treated Popular as a co-licensee; thus, Cartagena was compelled to arbitrate the issue of arbitrability with all defendants.

Transfer of Rico’s claims. The defendants moved to transfer Rico’s claims to the District of Puerto Rico. The plaintiffs could have brought the action in that district, which has subject matter jurisdiction over copyright claims, in which JWT and Popular were located, and in which a substantial part of the events giving rise to the claims occurred. Rico argued, however, that the Southern District of New York was “a proper forum.”

In the court’s view, the factors of convenience and justice favored transfer. Rico would not be inconvenienced by the transfer because after Cartagena’s claims were sent to the arbitrators in Puerto Rico, only Rico would remain in the New York district. Because Rico was based in New Jersey, its forum choice was given little weight, regardless of whether its preferred attorney was located in New York. Both Rico and Cartagena were owned by the same family, and Cartagena had signed an agreement stating that it would arbitrate disputes arising from the agreement in Puerto Rico. Thus, Rico could not plausibly allege that transfer there would be inconvenient.

The convenience and availability of the witnesses and the evidence also favored transfer. The convenience of the witnesses was the most important factor, the court said. All of the witnesses involved in the design, development, and distribution of the videos for the Popular ad campaign were in Puerto Rico. Third-party witnesses also were located there, such as the musical group that recorded the songs at issue. Rico’s potential New York-based witnesses all lacked personal knowledge of the material facts.

The locus of operative facts clearly was in Puerto Rico, where the allegedly infringing videos were made and distributed. The remaining factors—the relative means of the parties, the forum’s familiarity with the governing law, and trial efficiency—also favored transfer. Accordingly, the motion to transfer was granted.

The case is No. 13 Civ. 4238 (SAS).

Attorneys: Nicole Haff (Balber, Pickard, Battistoni, Maldonado, & Van Der Tuin, P.C.) for Cartagena Enterprises, Inc. C. Andrew Keisner (Davis & Gilbert, L.L.P.) for J. Walter Thompson Co.

Companies: Cartagena Enterprises, Inc.; Cartagena Publishing; Rico Records LLC; J. Walter Thompson Co.; J. Walter Thompson USA, Inc.; J. Walter Thompson Company Caribbean; JWT Puerto Rico Inc.; Banco Popular de Puerto Rico

Cases: Copyright NewYorkNews