Exploring the Delayed Discovery Doctrine, Doctrine of Estoppel, and their Implications on Contesting and Objecting to Incoming Profit Participation Accountings and Royalty Statements

Your favorite royalty auditor and forensic accountant is here to make sure California attorneys know of the potential application of the delayed discovery doctrine and the doctrine of estoppel in contesting incoming profit participation accountings or royalty statements, notwithstanding contractual or statutory limitations. I believe such legal doctrines, along with the relevant cases I will highlight, provide compelling grounds for certain creative and licensor clients to challenge such accountings or statements.

1. Delayed Discovery Doctrine: The delayed discovery doctrine allows for the tolling or extension of limitations periods when a plaintiff could not have reasonably discovered the existence of a claim. It recognizes that in certain situations, a plaintiff may be unaware of the facts giving rise to a cause of action until a later date.

By applying the delayed discovery doctrine, our clients may be able to argue that they were not reasonably aware of the inaccurate or improper profit participation accountings/statements until a later point, beyond the contractual or statutory limitations. This would provide them with an opportunity to contest and seek redress for the extended period covered by the accountings or statements.

2. Doctrine of Estoppel: The doctrine of estoppel, in the context of profit participation accountings and/or royalty statements, can block entertainment companies and licensees from imposing statutory or contractual limitations on audit or other damages claims, if they have previously acted in a manner inconsistent with the position that such claims shall be limited. Estoppel arises when a party's prior conduct or representations reasonably induced another party to rely on those actions to their detriment.

Applying the doctrine of estoppel, our clients may argue that a company's past conduct, representations, or acceptance of actions misled them into believing their rights were being properly accounted for, and as a result, they refrained from auditing or taking legal action within the contractual or statutory limitations periods. This would potentially estop the other party from invoking those limitations to shield themselves from our clients' challenges.

Relevant Cases: I would like to draw your attention to two notable cases that support certain arguments for delayed discovery and motions to estop a company from imposing limitations on your clients audit and damages claims:

1. Weatherly v. Universal Music Pub. Group, 23 Cal. Rptr. 3d 157, 125 Cal. App. 4th 913 (Ct. App. 2004). This case showed that conducting an audit is not necessary to reach the level of diligence required to make delayed discovery claims.

2. Wind Dancer Production Group v. Walt Disney Pictures, 10 Cal. App. 5th 56, 215 Cal. Rptr. 3d 835 (Ct. App. 2017): This case involves a dispute over profit participation accountings and the application of the doctrine of estoppel. It establishes that a party's acceptance, authorization, or prior conduct can estop them from using contestability clauses and written amendment clauses to defend against claims challenging the accuracy of profit participation statements, thereby allowing for a longer contestability period.

Conclusion: Given the potential application of the delayed discovery doctrine and the doctrine of estoppel, along with the persuasive precedent set by the mentioned cases, it is crucial that you, as counsel to profit participants or royalty recipients, thoroughly explore these legal doctrines to contest the incoming profit participation accountings/statements for periods longer than the contractual or statutory limitations allow. By leveraging these arguments, we can effectively advocate for our clients' rights and pursue a fair resolution.

I would greatly appreciate the opportunity to discuss these matters further with you. Call my office to clear conflicts for a consultation (424) 248-8866.

And, if you know of other important cases, please comment!

I Love My Job

There are many different aspects of royalty accounting and auditing that make it a highly rewarding profession. To start, royalty accountants and auditors get to work with some of the most creative people in the world - musicians, songwriters, and other music industry professionals - and the greatest IP attorneys of all time.

No two days are ever the same in this line of work, but when our team gets messages like the above from clients, it is a golden shining moment for the professionals at our firm, Boschan Corp.

Upcoming Audit and Objection Notice Deadlines for P.E. 12/31

Attn. Counsel:

Wait not until March to enlist our assistance. Gratitude from your auditors, Boschan Corp. (424) 248-8866

Calendar: Wednesday, December 9, 2015: Talk on Royalty & Participation Audits

The Beverly Hills Bar Association will present on Wednesday, December 9, 2015 a program on royalty and profit participation audits:

Our founder, auditor and forensic accountant Cedar Boschan, will lead top accounting and legal audit professionals in discussion about:

• Drafting accounting, objection and audit provisions in contracts
• Making the call to audit, hiring an auditor and issuing audit and objection notices
• Working closely with accountants to smoothly complete audits
• Negotiating tolling agreements, settlements and, at times, litigating

Forensic accountant and royalty auditor Cedar Boschan Moderates Panel at Lawry's

The panelists will discuss these and other elements of modern royalty and profit participation audits to empower attorneys in attendance to optimize settlements for your clients.  
Speakers include an auditor and a litigator who mutually represent plaintiffs including Richard Dreyfuss in a current case against Walt Disney Pictures, as well as an executive from MGM:

• Neville Johnson, Esq.; Partner at Johnson & Johnson LLP
• Edward Slizewski, Esq.; Senior Vice President at Metro-Goldwyn-Mayer Studios Inc.
• David Robinson, CPA; Owner at Robinson & Company
• Moderator: Cedar Boschan; Founder, Boschan Corp.

Attorneys who attend the lunch at Lawry's The Prime Rib in Beverly Hills (or who watch the program online) may receive 1.5 hours of MCLE credit.

Registration is now open - click here to register!

Controlled Composition Clauses: Myths Dispelled

Entertainment lawyer Wallace Collins wrote an article for Music Think Tank entitled "Beware of the Controlled Compositions Clause."

While I wholeheartedly agree with the premise of Mr. Collins' post (i.e., watch out for controlled composition clauses) and I appreciate that he couldn't cover all of the details extensively in a single post, the piece does not appear to have been fact checked and when I tried to comment on the Music Think Tank site, I received error messages and the site would not allow my comments to be posted.

In any case, as a royalty auditor who audits compliance with statutory mechanical royalty rates as well as controlled composition provisions, I feel compelled to point out the following regarding Mr. Collins' and Music Think Tank's post. Thus, I am posting my comments here on The Auditrix blog:

Example of language similar to that found in typical controlled composition clauses

First of all, in practice, statutory royalty rates are effectively *maximum* rates, not minimum rates, as Mr. Wallace and Music Think Tank state. (The term "minimum statutory rate" as used in controlled composition provisions references the fact that there is a minimum rate that applies to uses that are five minutes or less; higher rates apply for uses that exceed five minutes.) As much as I wish that my music publishing and composer clients were entitled to minimum rates that would be equivalent to a minimum wage, they are not.  The statutory rates are simply the reportable rates for compulsory licenses and since negotiated licenses virtually never exceed statutory rates, statutory rates are effectively a cap and not minimum rates at all.

Secondly, while I understand that it used to be a common practice of record companies to cross-collateralize mechanical and artist royalties, which is an issue that Mr. Wallace and Music Think Tank warn readers to beware of, I believe many labels were sued over this practice decades ago and I haven't seen it in my 14 years of royalty audits. In fact, modern artist agreements specifically prohibit this. (However, many contracts do allow for recoupment from artist royalties of "excess mechanicals" which are mechanical payments to publishers that exceed the cap set forth in applicable controlled composition provisions. Despite this, such provisions do not prevent the publisher from collecting royalties and, in practice, we do not see many excess mechanical charges against artist royalties in any case.)

Finally, the Digital Performance Right in Sound Recordings Act of 1995 prohibits record companies from applying controlled composition provisions for digital phonorecord exploitations (i.e., permanent downloads) in most but not all cases, which is a glaring omission from the piece, since it drastically reduces the the impact of most controlled composition clauses.  Due to this law (and the fact that streaming services are responsible for paying US publishing royalties for streaming exploitations) the exploitations that are potentially subject to controlled composition provisions are mainly US sales of physical CDs and vinyl, which are less than half of overall US sales. (Not to mention that US sales are equal to or less than foreign sales for most of my clients, and the controlled composition provisions are largely inapplicable outside the US.)

Also, to Mr. Collins' point that there is a question as to whether one writing partner can bind another is the fact that the Department of Justice is considering requiring publishers (or their agents) to engage in what is called 100% licensing, in which any rightsholder can issue a license for 100% of a song. Sony/ATV's Martin Bandier recently wrote a letter to songwriters about this issue (which relates to much more than controlled compositions) and The Association of Independent Music Publishers (AIMP) (of which I am the national treasurer) recently presented a program on the topic, a video of which members can view at AIMP.org (viewing this discussion is well worth the cost of membership, if you aren't already a member).

Of course, there are many more crucial details to understand about controlled composition provisions, especially as they relate to audiovisual content and premium uses, which is why many attorneys consult with us during the contract negotiation process. No one can be expected to know everything about the arcane world of royalties, so such negotiations are usually a team effort.

Why You Need a Better YouTube Strategy

I was recently honored to speak with an elite group of L.A.'s best business managers about how YouTube drives a recording artist's recoupment of video accounts and earnings.

According to a recent Viacom study, 91% of 13-40 year olds "listen to the song/watch the video on YouTube prior to purchasing."

Yet, YouTube cannibalizes record sales and it and Vevo - through which UMG and SONY take an extra cut - pay controversially low royalty rates.

Thus, whether independent or major, your clients are best served by a very thoughtful YouTube business strategy.

Here are four points I consider when helping business managers develop a YouTube financial plan for music clients:

• Cost - Fund production costs with brand integration, engage in budgeting, document approvals, make sure clients aren't subsidizing production
• Collections - Consider re-records.  Also, metadata tells licensees who to pay, so you want to get it right (see this Metadata style guide for tips).
• Control - Don't let Vevo ads erode brand equity.
  
• Compliance - For crowdfunded videos, we provide tax planning and verification of accredited investors for a 506 offering.
• Claims - Potential audit findings include incorrect recoupment and/or cross-collateralization, incorrect costs, so-called "digital breakage," Vevo fees, publishing synch fees

Are you a business manager, attorney, personal manager or advisor?

Call me today at 424.248.8866 to influence these and other key factors of your clients' financial success.