In a royalty dispute between songwriter James Weatherly and Universal Music Publishing Group, the California Court of Appeal in Los Angeles has held that the songwriter's failure to promptly audit did

In a royalty dispute between songwriter James Weatherly and Universal Music Publishing Group, the California Court of Appeal in Los Angeles has held that the songwriter's failure to promptly audit did not prevent him from claiming the right to sue after the contractual limitations period had expired.

James Weatherly in 1974 entered into an exclusive songwriter's agreement with Keca Music Inc. The publisher was later acquired by either Universal Music Publishing Group or Universal-PolyGram International Publishing -- which one was the publisher at the time was in dispute and not resolved by the court. However, Universal Music described itself as an umbrella company that includes Universal-PolyGram.

The contract stated that Weatherly was entitled to 50% of all net sums actually received, after deduction of foreign taxes and any costs for collection, from sales and uses outside the United States (other than performance royalties).

He had the right to inspect the publisher's books and records to verify the accuracy of any transaction or entry, but not more than once during any one-year period. Also, all royalty statements were deemed binding unless the writer objected in writing within one year from the date of the statement. Any suit was to be commenced within one year after the date on which the publisher notified the writer that it denied the validity of the objection.

Weatherly received royalty statements twice per year. The statements included information in the following categories: type, catalog number, units, period, percentage received, amount received, writer's share and amount due.

Weatherly said he had no reason to believe that there was any problem with his accountings. His advisors interpreted the statements in the same way -- there was no reason to believe that an off-the-top fee was being charged or taken on foreign collections.

Weatherly hired Ali Adawiya to audit Universal Music's books in 2001. During the examination, Adawiya asked Anthony Saragueta, Universal's VP of royalties, whether the company was reporting 100% of the amount received by the foreign companies "at source." Saragueta responded that it reported 75%. Adawiya said that Saragueta refused to give him the source documents but told him that foreign affiliates were taking 25% off the top.

Adawiay wrote Universal Music a letter, criticizing the accounting practice: Local foreign overseas offices reported 100% of the receipts to a Universal Music main office located in the United Kingdom, keeping 25% before reporting 75% to other offices in the United States. He claimed that the amount actually received by the local foreign offices should be reported.

Universal Music responded to the letter, claiming that Keca Music was a U.S. corporation. Since Keca was the "publisher," Universal correctly applied a 50% royalty rate -- the percentage due to Weatherly on amounts received -- to the amounts received in the United States.

The parties disputed the meaning of the information in the "percentage received" column on the royalty statements received by Weatherly -- nearly every entry contained the number 100. Weatherly interpreted it as the monies received for his songs.

Universal Music's brief stated that the "percentage received" column had nothing to do with the existence or amount of any subpublishing fees; it reflected Universal-PolyGram's ownership percentage of each individual song based on whether Weatherly wrote alone or with co-writers.

Weatherly filed suit in October 2002, claiming improper calculation of his royalty payments. He sued for rescission, an accounting, open book account, breach of fiduciary duty, constructive fraud, violation of California Business & Professions Code section 17200 et seq. (unfair business practices), breach of contract and breach of the covenant of good faith and fair dealing (bad faith).

The breaches included activities relating to the collection of royalties, calculation of the amount of royalties, the accounting and the failure to provide requested documentation.

The court granted a demurrer without leave to amend on the bad-faith claim, and summary judgment on the remaining causes of action on the basis of the contractual limitations period in the agreement. Since Weatherly had the right to audit the books at any time but chose to delay, the trial court held, the "delayed discovery" rule did not toll this limitations period. Weatherly appealed.

While the Court of Appeal reversed the summary judgment and the demurrer, the opinion was not certified for publication.

After receiving petitions, however, the court certified one portion of the legal discussion for publication on Jan. 12 to become legal precedent. It pertains to tolling the contractual limitations period.

Weatherly claimed that the statute of limitations period -- as provided by law and as agreed by contract -- should be tolled because he provided evidence that the royalty statements were misleading. They indicated that his 50% share was being calculated on 100% of all monies Universal received.

Universal Music claimed that Weatherly had the means to discover any alleged wrongdoing by auditing the books. Since he failed to do so before 2001, he could not proceed on his action since the one-year contractual limitations period could not be tolled. The court noted that there is some legal support for this argument.

However, other cases rejected this conclusion, the court wrote. "Where no duty is imposed by law to make inquiry, and where, under the circumstances, a prudent man would not be put on inquiry, the mere fact that means of knowledge are open and not availed of does not operate to give constructive notice of the facts," the court wrote, quoting from prior case law.

The court wrote that Weatherly's argument went beyond the claim that a prudent person would not have been put on inquiry notice prior to the audit. He argued that he was misled by the royalty statements where the entries listed 100% in the "received" column.

A defendant cannot hinder the plaintiff's discovery through misrepresentation and then fault the plaintiff for failing to investigate, the court wrote, referring to a Ninth Circuit Court of Appeals decision.

When a plaintiff is prevented from discovering his cause of action, the court wrote, he should not suffer by the time-bar of the statute of limitations -- whether contractual or statutory. The defendant should not profit from the plaintiff's ignorance.

The court concluded that the right to conduct an audit does not mean that the party was not diligent in discovering whether he had a claim where there was evidence that the plaintiff was "hindered" from discovering the breach by the defendant's misrepresentations.

The case was remanded to the trial court.

Case: Weatherly v. Universal Music Publishing Group
Court: California Court of Appeal, appellate no. B170395, Los Angeles County Superior Court no. BC282826
Counsel for Weatherly: Anthony Kornarens with Spellberg & Kornarens, Santa Monica, Calif.
Counsel for Universal Music Publishing Group: Russell Frackman, Jeffrey Goldman and Nicole Harris with Mitchell Silberberg & Knupp, Los Angeles