SYDNEY--The Australian record industry's attempts to launch a copyright infringement case against Kazaa is facing another stumbling block. Lawyers for Kazaa's Sydney-based parent Sharman Networks lodg





Breaking News

Internet Giants Join Forces Against Spammers

By Paul Bond

LOS ANGELES--Time Warner's America Online unit has joined its rivals in suing people and companies responsible for unwanted e-mail advertisements known as spam.

The collaborative effort between AOL, Microsoft, EarthLink and Yahoo! marks the first major industry lawsuits filed under a new federal anti-spam law known as the CAN-SPAM Act, which went into effect Jan. 1.

Violators could be subject to massive fines, including as much as $100 per violation of CAN-SPAM. AOL also cites a Virginia law that might allow it to collect $1 for each spam sent to its members.

The four Internet giants filed six separate lawsuits in four states against hundreds of defendants. Some lawsuits name individuals and companies accused of spamming, while others name John Does who are described in such terms as "cable descrambler spammers" and "get rich quick spammers," depending on the kinds of products their e-mails advertised.

The four companies, which are responsible for the bulk of the nation's Internet and e-mail services, accuse various spammers of, among other things, sending junk e-mails without an unsubscribe option, using deception to sell products and disguising the origin of their e-mails.

When e-mail users have insisted that spammers remove them from their lists, they have simply sold the e-mail addresses to other spammers, one lawsuit alleges.

The coordinated effort by the four participants, who gathered last Wednesday in Washington, D.C., to discuss the lawsuits they filed the preceding day, is partially the result of an anti-spam alliance they formed 11 months ago.

"Consumers should take note that the new law not only empowered us to help can the spam, but also to can the spammers as well, and we'll do that, one spam kingpin at a time if necessary," says AOL executive vp and general counsel Randall Boe.

One AOL lawsuit alleges that the company has received more than 100,000 complaints in less than a year about e-mails allegedly sent by Davis Wolfgang Hawke and unknown co-conspirators selling products under such headings as "the Banned CD" and "personal lie detectors."

Another accuses 40 John Does of being responsible for a half-million complaints from AOL users in just a few months. Those particular spam e-mails advertised pornography, business opportunities and low mortgage rates, with some spams including the false subject line, "important message from AOL."

Paul Bond is tech editor with Billboard sister publication The Hollywood Reporter.

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IFPI's Piracy War In Russia Heats Up

By Nick Holdsworth

MOSCOW--As the piracy battle rages in Russia, the IFPI is suing a key producer of pirated CDs for over $1 million.

The civil case against Roff Technologies, which operates an optical disc plant near Moscow allegedly producing pirate copies of top artists like Christina Aguilera, Justin Timberlake and U2, is the second major set of claims filed against a Russian CD plant since the IFPI announced an offensive targeting key suspects in Russia's piracy ring.

Russia is one of the IFPI's top three priority markets in the fight against piracy. The number of CD plants has doubled in the past three years in Russia, IFPI says, and pirate sales now outstrip legitimate sales. There is also evidence suggesting that pirate products are being exported from Russia to at least 26 countries, making it a key source of mass-produced pirate product.

A preliminary hearing of the civil suit for one of a multitude of claims totaling $1.4 million on behalf of IFPI members was heard in a Moscow court two weeks ago, and another claim is due before the court Monday.

A similar case launched in December against Moscow's Russobit-Soft optical plant is in progress.

"We are committed to an ongoing campaign to address the growing threat from plants in Russia that are manufacturing infringing product that appears on the international market," says IFPI chairman and CEO Jay Berman.

The IFPI is also demanding that Roff Technologies halts further production of pirated titles and that equipment used in their manufacture be confiscated.

Konstantin Zemchenkov, head of the Russian Anti-Piracy Organization, says the IFPI's case would be stronger if it pursued criminal rather than civil cases.

"It is very, very difficult to win a civil case in Russia with evidence produced abroad," Zemchenkov says. "It would be better to have expertise produced here in Russia as our procedures are different from those used in London."

"Criminal cases have a better chance of success in Russia, but let's hope the IFPI is successful," Zemchenkov says. "It would certainly help in the battle against piracy here."

Nick Holdsworth is a writer with Billboard sister publication The Hollywood Reporter.

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Infinity Memo Charges GMs To Curb Indecency

By Phyllis Stark

NASHVILLE-- Infinity Broadcasting is urging general managers and program directors at radio stations to toe the line on indecency.

The company issued a memo Feb. 27 clarifying its stance on indecency on the airwaves. The memo clarifies a previous memo sent to the same GMs and program directors Feb. 18.

The recent memo, written by Infinity attorney Steven Lerman, of Leventhal Senter & Lerman in Washington, D.C., addresses specific questions raised by some Infinity managers. The memo could serve as a model for indecency policies at other broadcast companies.

The memo states that it is the government's job to determine whether particular material is or isn't indecent as a matter of law. The memo notes that expletives, particularly the so-called "seven dirty words," are not the only things considered indecent by the FCC.

"In addition to expletives, indecent material generally includes language or sound effects which describe or simulate sexual acts, sexual organs or excretory functions as well as sexually-oriented double entendre and innuendo where the context of the speech makes the references clear," the memo states.

Lerman also spells out what he refers to as "coarse language," to be avoided on Infinity stations. "Included in this category would be terms such as 'prick,' 'dick,' 'pussy,' 'titty bar,' 'hard-on,' 'asshole,' 'douchebag,' 'scumbag,' 'twat,' 'cock' and similar coarse words and phrases," the memo states.

"General managers and program directors should direct their talent generally to eliminate these references on-air and replace them with more benign terminology."

Addressing questions about who is responsible for editing syndicated personalities, including Infinity's Howard Stern, Tom Leykis and Don & Mike, the memo says "all stations should delete indecent syndicated material even if the program in question has been previously edited at the origination point.

In the case of Infinity-originated programming, however, the primary responsibility for ensuring that the program contains no indecent material falls on the editor and management of the originating station.

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P2P Group Await Label Action

By Samantha Chang

WASHINGTON--P2P United is awaiting reaction this week from the heads of the five major record labels after writing to them individually last Thursday.

P2P United is urging the Big Five to make Audible Magic software, which has been touted as a solution to unlawful music downloading, available for independent testing and analysis.

In its missives, P2P United noted that the RIAA had waved off a similar request made to RIAA chairman Mitch Bainwol on Feb. 24. At the time, the RIAA said it could not fulfill the request, citing the proprietary nature of Audible Magic's program.

Accordingly, P2P United wrote to Audible Magic CEO Vance Ikezoye on March 9, requesting access to the software in order to facilitate independent tests. Ikezoy had not replied to that inquiry as of last Friday.

In its letter to Ikezoye last Tuesday, P2P United asked him to "cease misleading the public and policy-makers by characterizing your 'fingerprinting' software as a 'filter."

The activist group also urged Ikezoye to clarify whether he believes that Audible Magic should be adopted as a technological mandate for all peer-to-peer communications and,if so, whether such a mandate should apply to other popular forms of electronic communication, such as conventional e-mail and instant messaging.

P2P United awaits Ikezoye's reaction this week. Meanwhile, Big Five execs had no public comment as of last Friday.

The letters were sent to Roger Ames of Warner Music Group; Rolf Schmidt-Holta of BMG; Andrew Lack of Sony; Doug Morris of Universal; Alain Levy of EMI; and Adam M. Eisgrau of Flanagan Consulting LLC.

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U.K. Firm Launches Online Music Payment System

By Samantha Chang

NEW YORK--The Music Engine, a London-based digital music infrastructure firm, is launching a new online payment system for the music industry.

The service, called MusicPay, will offer micropayment systems and non-credit card payment methods. The venture enters a space currently occupied by micropayment firms like Peppercoin and Clickshare.

Music Engine provides systems for online and mobile environments, handling direct royalty payments and currency transfers.

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Washington Report

FTC Chief: 'Do Not Spam' List Won't Work

By Associated Press

WASHINGTON--The Federal Trade Commission will submit a report to Congress by mid-June establishing a 'do not spam' list.
However, FTC chairman Timothy Muris, is skeptical that a national anti-spam list will mean fewer unwanted e-mails for computer users.

The federal "Can Spam" legislation that went into effect Jan. 1 encourages the agency to create a "do-not-spam" list of e-mail addresses. It is similar to the FTC's popular do-not-call registry that blocks unwanted phone calls from telemarketers.

People would sign up for the service and submit their e-mail addresses to the government. E-mail senders would then be barred from e-mailing those addresses.

Chairman Timothy Muris, repeating comments he made before the bill passed, said he does not think the FTC can come up with a way to enforce such a list and significantly reduce unwanted e-mail.

"I've seen nothing to change my mind," he said at a conference sponsored by the Consumer Federation of America.

"The beauty of the Internet, of course, is that you can e-mail anybody, anywhere in the world. The bane of the Internet is that anybody, anywhere in the world, can e-mail you," Muris said.

The problem, he said, is tracking down the spammers. Many are overseas. Many use aliases or conceal their identities by routing e-mail through hacked or unprotected computers.

Sen. Charles Schumer, D-N.Y., said the list is the last hope for consumers who are tired of daily e-mail pitches for weight loss plans and body-enhancing products.

"Nothing else has worked so far in the effort to blast spam," Schumer said. "We're counting on and expecting the FTC to go all out in its efforts to come up with a way to make this registry work."

Muris said new tools, such as applying a fee to send e-mails, may have to be explored.

"It may come to that, and that system has some attraction," he said. But he added: "I hope we don't have to resort to a system that requires major changes."

Microsoft Corp. Chairman Bill Gates has suggested the idea of buying "stamps" for e-mail as a way of fighting spam.

The FCC is considering how to protect consumers from receiving spam on their cell phones and other wireless devices.

More than 60% of all Internet e-mail sent worldwide is spam, says Linda Smith Munyan, a spokeswoman for Brightmail, a San Francisco company that helps Internet providers block spam. Only 7% of e-mail was spam in 2001.

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Congress Boosts Indecency Fines

By Brooks Boliek

WASHINGTON--The U.S. House of Representatives overwhelmingly approved legislation last Thursday that directs the Federal Communications Commission to fine broadcasters up to $500,000 for airing smutty TV or radio programming.

The vote was 391-22, with one lawmaker voting present. Similar legislation is pending in the Senate.

"We want to send a message, whether it's a shock jock or DJ or the person with the finger on the button," says Rep. Fred Upton, R-Mich., the legislation's chief author. "This stuff has got to stop."

The bill would raise the maximum fine for a broadcast license holder to $500,000 from $27,500. The fine for a performer would skyrocket to $500,000 from $11,000, and the FCC regulation that requires an individual to receive a warning first is repealed. While the commission has had the authority to fine a nonlicensee for years, it has never done so in an indecency case.

It also includes provisions that automatically designate a broadcaster's license for a revocation hearing if the broadcaster is found guilty of three indecency complaints.

While the bill won overwhelming passage, it has its share of detractors. Rep. Gary Akerman, D-N.Y., called the legislation a blatant attempt to silence critics of the government.

"To impose a fine on speech you don't like, it doesn't have a chilling effect, it's a freezing effect. It freezes people out," he said. "The test of freedom of speech is if you tolerate ugly speech. These fines become weapons of mass communication, and no one will own them but the White House and their Big Media friends."

The Bush administration strongly endorsed the bill in a memo to lawmakers Thursday.

Akerman and other lawmakers accused Clear Channel Communications of yanking popular radio shock jock Howard Stern because he criticized President Bush.

"He spoke out against the president," Akerman said. "Now he's paying the price."

Clear Channel executive vp Andrew Levin dismissed those accusations. "It's amazing to me how these conspiracy theories get invented and take on a life of their own," he said. "What we did with Howard's show, we did because he broadcast sexually explicit language that has no place on the airwaves."

Upton defended his legislation, saying the critics are wrong.

"This doesn't change the standards," he said. "This is the public airwaves. You can't tell me this stuff should be on the air."

As defined by the FCC, material is indecent if it "in context, depicts or describes sexual or excretory activities or organs in a patently offensive manner as measured by contemporary community standards for the broadcast medium."

Obscene speech is not protected by the First Amendment and cannot be broadcast at any time, but indecent speech can safely be aired between 10 p.m. and 6 a.m. because the courts and the FCC have determined that children are not a big part of the audience.

While the House leadership allowed Rep. Janice Schakowsky, D-Ill., the ability to offer an amendment stripping the language that puts individuals at risk of the $500,000 fine, she chose not to.

"You can see the numbers," she said. "I'm going to work to get a stand-alone bill. We need to build a coalition, get more people involved. It might also help if we get a little distance between Janet Jackson's breast so we can get people to see it's a First Amendment issue."

Upton said the amendment had no chance.

"It reminded me of 'The Sound of Music,' " he said. "The amendment was going to the graveyard one way or the other."

The Senate Commerce Committee on Wednesday approved its own version of the bill. If it is approved by the Senate, the differences will have to be ironed out in a conference committee.

Upton said the biggest problem with the Senate legislation is an amendment adopted by the committee that suspends for one year the FCC's new media ownership rules while the General Accounting Office determines whether increasingly consolidated media industry leads to raunchier broadcasts.

"That's the one big sticking point," Upton said. "They have it, and we don't."

While pressure has been building on lawmakers to take action to clean up the airwaves, it picked up momentum after the now-infamous Feb. 1 Super Bowl halftime show during which Justin Timberlake exposed Jackson's breast to 90 million viewers.

Brooke Boliek writes for Billboard sister publication The Hollywood Reporter.

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FCC Seen Fining Clear Channel Show

By Associated Press

WASHINGTON--Federal regulators stepped up their campaign against indecency, proposing a $247,500 fine last Friday against the nation's largest radio chain for a Washington-based show.

The Federal Communications Commission cited Clear Channel Communications' "Elliot in the Morning" show for nine alleged violations "that involved graphic and explicit sexual material, and were designed to pander to, titillate and shock listeners."

The FCC proposed the maximum fine of $27,500 per incident.

"Elliot in the Morning" is heard on WWDC in Washington; WRXL in Richmond, Va.; and WOSC in Bethany Beach, Del.

The fine comes amid heightened public and political pressure on broadcasters to clean up their programming. Last Thursday, the House overwhelmingly passed legislation that would boost the maximum indecency fine to $500,000 per incident.

Last month, the FCC proposed a record $755,000 fine against Clear Channel for airing raunchy content on the "Bubba the Love Sponge" show in Florida. The disc jockey of that show was fired by Clear Channel, which did not contest the fine.

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U.S. Copyright Office Issues Interim Rules

By Bill Holland

WASHINGTON, D.C.--The U.S. Copyright Office on March 11 published its long-awaited interim regulations announcing notice and recordkeeping requirements for the use of sound recordings under two statutory licenses under the Copyright Act.

The new regulations apply to eligible nonsubscription transmission services (Internet-only webcasters and broadcast simulcasters), new subscription services, preexisting satellite digital audio radio services (XM and SIRIUS Satellite Radio), and business establishment services.

"This is a step in the right direction," says John Simson, executive director of SoundExchange, the collective jointly controlled by representatives of performers and record labels. "The establishment of specific reporting requirements will facilitate the distribution of royalties to thousands of artists and labels that are entitled to share in these statutory royalties."

The regulations require digital music services to provide SoundExchange with detailed reports on the use of sound recordings for two weeks every calendar quarter.

The reports of use are to include specific identifying information that will enable SoundExchange to distribute the royalties paid under the statutory license to those copyright owners and performers entitled to such royalties.

The regulations announced by the Copyright Office apply only on a prospective basis and do not address how digital music services will provide SoundExchange with notice of the use of sound recordings prior to April 1, the so-called "historic" Web cast start-up period of Oct. 28, 1998 to March 31, 2004.

"This means that artists and labels will still not be able to receive any of the royalties paid by webcasters prior to April 1, 2004," says Barrie Kessler, COO of SoundExchange.

"Without guidance on how we can distribute previously collected royalties, the Copyright Office has precluded SoundExchange from distributing royalties to those artists and labels who have been waiting for over five years to receive compensation for the commercial use of their creative works."

The Copyright Office has not yet specified the manner in which reports of use are to be delivered in electronic format, which will hinder the start of processing the reports.

The regulations are available at copyright.gov/fedreg/2004/69fr115.

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International Section

Kazaa Case Hits New Snag

By Christie Eliezer

SYDNEY--The Australian record industry's attempts to launch a copyright infringement case against Kazaa is facing another stumbling block.

Lawyers for Kazaa's Sydney-based parent Sharman Networks lodged an application March 11 for leave to appeal in the Australian Federal Court against a recent ruling on evidence on the potential civil case.

Sharman is seeking to appeal a March 4 ruling by Justice Murray Wilcox dismissing its application to have evidence collected during February raids in Australia declared invalid (ELW, March 8).

According to Sharman CEO Nikki Hemming, "This appeal is about standing up for what we believe in: the right for peer-to-peer technology to exist as a legitimate model for digital distribution." At press time, the court had not set a hearing date.

Lawyers representing Sharman have been fighting the threatened lawsuit since the raids by the Music Industry Piracy Investigation (MIPI) unit took place Feb. 6. The lawyers asked the Federal Court Feb. 10 to rule that evidence collected during the raids be ruled inadmissible.

At the time, Sharman argued that MIPI had obtained the order from Justice Wilcox by portraying the company as a "fly by night" operator, and had not disclosed that it was cooperating in a relevant appeal case being heard in a California court.

On March 4, Justice Wilcox dismissed Sharman's application. He ruled that the search order was necessary for the six record labels which fund MIPI to collect evidence of possible copyright infringement.

"It is obviously an essential part of the applicants' case to put evidence before the court about the dynamic operation of the Kazaa system," he wrote.

Justice Wilcox also said the non-disclosure by MIPI of Sharman's cooperation with the United States appeal court was "not material."

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France May Sue Apple Over IP Levies

By Paul Resnikoff

BOSTON--Apple is facing a hailstorm of negative press in France over unpaid intellectual property protection dues.

France's Sorecop traditionally levies charges on manufacturers of hard-disk players as well as CD-R and DVD-Rs to compensate artists who may be suffering from piracy. The tax system is also used in countries like Canada.

Apple is allegedly refusing to pay the fees, a move that could potentially muddy the waters for iTunes' European launch, with Sorecop threatening legal action.

A tax on "integrated hard disks" was created in 2002, adding players like iPod to recordable discs. So far, Apple has not commented on the controversy.

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Aussie High Ct. Favors Content Use

By Jacqueline Lee Lewes

SYDNEY--Snippets from programs on rival networks are now legal fodder for comedy writers after the Australian High Court ruled Thursday in a case instigated by the Nine Network against Network Ten's chat show "The Panel."

The Ten program in Australia was accused of infringing copyright laws because it didn't obtain consent for its use of footage from Nine shows in 1999 and 2000. But in a majority decision, the High Court ruled that permission is not needed for every image broadcast.

A ruling is still required on just how much footage can be legally broadcast without permission from the copyright holder. The High Court remanded the case back to the lower federal court on this issue.

Jacqueline Lee Lewes writes for Billboard sister publication The Hollywood Reporter.

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New Euro Law Calls For Tough Penalties On Pirates

By Emmanuel Legrand

LONDON--By adopting last week the European Union's IP Enforcement Directive, the European Parliament in Strasbourg, France is finally providing a framework to protect intellectual property rights.

The Parliament vote-330 in favor, 151 against and 39 abstentions-now puts Europe on an equal footing with the United States in terms of IP protection.

According to the EU's procedures, the Parliament's vote clears the way for the Directive to be adopted before the upcoming June European elections by the EU Council of ministers. Member states will then have two years to implement the Directive into their national legislation.

In a joint statement, organisations from the IP sector united in the anti-piracy coalition welcomed the vote. They state that the Enforcement Directive "provides a uniform level of protection in an EU that encompasses 25 Member States."

The bill is expected to have a significant economic impact, as it is estimated that over 5% of Europe's GDP is generated through creative works. Piracy and counterfeiting are costing billion of euros in lost revenues to the IP community.

The bill, presented by French conservative MEP Janelly Fourtou, the wife of Vivendi Universal chairman and CEO Jean-René Fourtou, was a compromise between the EU's Council of Ministers, the Commission and the Parliament.

The parliament fast-tracked the proposed text. Normally, such bills require two readings, but a Parliament rule allows bills to be voted after only a first hearing if they have previously been subject to a compromise.

"They used a procedure that rarely been used but it worked in our favour," says IFPI regional director for Europe Frances Moore.
The Business Software Alliance, which regroups representatives of IP organizations in areas as various as software, toys and music, described the law as "a step in the right direction," but said it falls short of their expectations.

"Rights holders are unhappy about it, but it is an in-between solution we can live with," says Francisco Mingorance, director of public policy for the Business Software Alliance. He adds that "far from being anti-consumer, it is designed to protect individuals from substandard goods."

The bill was opposed by telecom companies and ISPs, which challenged the liability provisions in the bill. Consumer and civil rights groups, some of which demonstrated before the European Parliament on the day the bill was passed, expressed concern that the bill would allow judges to prosecute individuals and charge them with prison sentences.

The Directive stipulates that main enforcement measures are to be applied only for breaches committed 'on a commercial scale." This excludes consumers who can be found "acting in good faith" copying recordings for their own use.

The bill, however, says that pirates and counterfeiters could be fined and have their bank accounts frozen and their financial records seized. Overall, it gives judges and prosecutors far more ranging investigative powers.

However, the House did not including criminal sanctions for infringements of intellectual property rights, preferring civil and administrative sanctions. The issue there, according to legal experts, has as much to do with the competence of the Parliament and the Commission as has to do with political willingness.

The Anti-Piracy Coalition expressed "regret that the Directive does not harmonise criminal penalties, despite support from the Commission and the Parliament for criminal measures in the Directive. Creative industries will continue to press for criminal sanctions at EU level and call on the institutions to address this issue urgently."

Nonetheless, a spokesperson for the Parliament, says, "The Directive will not affect any national provisions in Member States on criminal penalties for IPR infringement, nor will it affect Member States' international obligations, including those relating to criminal procedures and penalties."

IFPI's Moore describes the Directive "a harmonization of the best practices of civil enforcement measures. Many of these measures exist in many states but not all of them in all the states. They are efficient tools to fight piracy."

She points out that pirates are often linked to organized crime and recycle the relatively easy profits from piracy to fund other criminal activity such as arms trafficking and drug dealing.

This Directive, says Moore, levels up national legislations across the EU, including in the 10 new countries that will join the EU in June.

Even if the IFPI is not fully satisfied with the Directive, Moore sees several improvements that will allow copyright owners to take action. The Directive, for example, recognizes that organized groups like the IFPI, will be able to take action on behalf of its members.

On the disappointment front, the Parliament refused the notion of double damages, which would have granted damages of double of the initial prejudice. Instead, the Directive says that damages should "at least" equal the damages suffered.

"It sets a benchmark and member states can then decide if they want to go beyond that," says Moore (see below for the key points in the bill, as commented by the IFPI).

Moore says that the IP community will eagerly wait to see the implementation of the Directive into the national legislation of the EU member states.

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Dream Makers & Deal Breakers

RIAA Promotes Pierre-Louis

By Samantha Chang

NEW YORK--The Recording Industry Assn. of America has promoted Stan Pierre-Louis to senior vice president of legal affairs.

Pierre-Louis, who is based in Washington, D.C., previously was vice president of legal affairs.

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Manatt Adds 3 Litigation Associates

By Samantha Chang

NEW YORK--Manatt, Phelps & Phillips has hired three litigation associates: Richard B. Ellington, Beverly R. Frank and Shawn G. Hansen.

The trio specialize in commercial, intellectual property and securities litigation.

Ellington, who is based in New York, previously was a litigation associate with Sullivan & Cromwell in New York.

Frank is based in Los Angeles office and previously was a senior litigation associate with Weil Gotshal & Manges in New York.

Hansen is based in Palo Alto, Calif., and was an associate with TraskBritt P.C. in Salt Lake City, Utah.

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Thelen Reid Taps Gill, Stenberg As Partners

By Samantha Chang

NEW YORK--Thelen Reid & Priest LLP has named E. Ann Gill and Richard A. Stenberg partners with its private-equity practice.

Gill and Stenberg, who are based in New York, both previously practiced at Dewey Ballantine for 20 years.

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Miramax Unit Names Fink Sr EVP

By Carla Hay

NEW YORK--Miramax Home Entertainment in Los Angeles appoints Jeffrey Fink senior executive VP. He previously was president of sales and marketing at Artisan Home Entertainment.

Separately, Macrovision Corp. in Santa Clara, Calif., names Jim Wickett executive VP of corporate development. He previously was an independent consultant.

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Hard Rock Cafe Intl Names Dodds CEO

By Samantha Chang

NEW YORK--Hard Rock Cafe International, a subsidiary of The Rank Group PLC, names Hamish Dodds president and CEO.

Dodds, who previously was president/CEO of PepsiCo Beverages International, will be based in Orlando, Fla.

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Rhonda Vincent Signs Deal With Upper Management

By Ray Waddell

NASHVILLE--Herb Sandker, president of Upper Management, has signed a new management deal with Rounder Records recording artist Rhonda Vincent.

Upper Management will handle the day-to-day management of Vincent's career and tour schedule, including her endorsement with Martha White Inc.

Vincent is booked by Creative Artists Agency.

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Commentary

Royalties: An Auditor's Perspective

By Perry Resnick

Part 2 of 2

Many recording agreements still calculate royalties based on a percentage of the retail price, although there appears to be a slow migration to ward wholesale-based contracts.
Considering there are no "retail prices" in most countries of the world, this gives the record company much leeway in calculating retail-based royalties.

Since there are no retail prices upon which royalties can be calculated, record companies use "uplifts" in order to approximate the retail price. The problem is that "uplifted" wholesale prices rarely have any relation to the price at which records are sold in stores.

When we research the prices at which records are sold to consumers, the selling prices are invariably higher than the "constructed retail prices" used to calculate royalties. Furthermore, during audits, record companies will not provide any substantiation for the "uplift" percentages used to calculate royalties.

The answer to this is to have royalties calculated on the wholesale price rather than the retail price. There is no question as to the wholesale prices at which records are sold. Problems arise when "constructed" retail prices are used to approximate consumer prices. If a wholesale-based contract is not possible, try negotiating a fixed "uplift" percentage outside the U.S. and Canada. This enables an objective calculation rather than having to accept the record company's "uplifts."

One more area of contention during audits is what income the artist is entitled to share. Record companies receive significant amounts of income from numerous sources for the use of their entire catalogs. Although such income is not attributable to any specific artist, this income would not exist without the work of artists.

Record companies receive payments from MTV and other video outlets, foreign public performance income, blank tape levies, income from the use of its catalogs on airlines, background uses, settlements from unauthorized uses of recordings and record club "trademark fees." Although none of these types of income would be collected without the work of artists, record companies do not share these types of income with artists unless there is explicit language in the agreement. Even then, it is generally not paid without having to first conduct an audit.

It's a simple calculation to allocate unidentified income to specific artists, as long as the appropriate information is made available.

Without an explicit right to this type of income in the contract, information required for the calculation will be denied during an audit, and any claims of this type will be strongly disputed. Therefore, it is important to have a clause in the agreement that entitles the artist to an allocated portion of 50% of all income received by the record company, especially non-artist specific income. To be safe, include examples in the clause.

This type of "catch-all" clause is also important due to the rapidly-evolving nature of online sales. What was recently thought to be the next business model, subscription services, has not developed as expected. Now, a la carte download services, such as iTunes and Napster, are starting to have some success.

Contracts written two years ago when subscription services were the next big thing may not adequately address a la carte download services, and contracts being written now, when a la carte download services are popular, may not adequately address a yet-to-be invented type of sale.

Contracts reflect the issues that were important at the time they were written. Therefore, it is important to have a "catch-all" clause that covers all types of income received by the record company.

Finally, limitations should be put on all discretionary items, such as reserves, special program free goods, TV advertising deductions and independent promotion charges. Without explicit limitations, these deductions and costs can become excessive, and there will be no objective basis upon which to base a claim. "Reasonable" reserves are usually not reasonable to artists, but are to the record companies that set the parameters.

By having an auditor review the royalty provisions of contracts during the early stages of contract negotiations and provide comments, your clients' earnings can be maximized and future disputes may be avoided.

Perry Resnick is a senior manager with RZO LLC.

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Case Analyses

Gibson Guitar Wins Watershed Trademark Suit

By Ray Waddell

NASHVILLE--Gibson Guitar has won a watershed trademark infringement case against Stevensville, Md.-based guitar company Paul Reed Smith.

Paul Reed Smith is accused with using the body design on Gibson's Les Paul single cutaway guitar without permission.

Judge William J. Haynes of the U.S. District Court for the Middle District of Tennessee last week ruled that Paul Reed Smith infringed Gibson's valid trademark.

Gibson had claimed that the PRS "Singlecut" guitar infringed on the company's trademark which is registered for its Les Paul single cutaway guitar.

Included in the claim is the fact that the PRS model unjustly used the Les Paul design and would cause confusion in the marketplace and damages to Gibson Guitar, the amount of which now will be determined in the next phase of the proceedings.

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UMG Sued For Misappropriating Trade Secrets

By Samantha Chang

NEW YORK--Uncensored Music Network, a start-up group, is suing Universal Music Group and DirecTV for allegedly stealing its idea for a commercial-free premium TV channel touting musician freedom of expression.

Uncensored is seeking damages for an alleged loss of $49.75 million in financing and $10 million a month in profits. Uncensored is also pursuing an injunction.

In a complaint filed in Los Angeles Superior Court, Uncensored said that promises of financing for the new venture fell through after it was reported earlier this year that Universal was in talks for a similar DirecTV channel to be called "1AM" (short for First Amendment).

Uncensored said it ran its plans past both DirecTV and Street Records, a Universal subsidiary, last fall. Jimmy Iovine is now allegedly part of the Universal venture, after having received a copy of Uncensored's plan.

Case: Uncensored Music Network v. Universal Music and DirecTV

Filing counsel: Brian J. Jacobs

Causes of action: Misappropriation of trade secrets and unfair competition.

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Warner Bros. Sues For Illegal Film Distribution

By Samantha Chang

NEW YORK--Warner Bros. Entertainment and WV Films III is suing Carmine Caridi and Russell Sprague for illegally distributing the movies "The Last Samurai" and "Mystic River" on the Internet.

In a complaint filed in L.A. Superior Court, Warner alleges that Caridi gave Sprague VHS "screener" copies of films that were under consideration for the 76th annual Academy Awards.

The duo used the screeners to produce and distribute copies of the films in VHS and DVD formats and posted digital files of the films on the Internet, Warner alleges.

The plaintiffs are seeking an injunction and an undisclosed amount in damages.

Case: Warner Bros. Entertainment and WV Films III v. Carmine Caridi, Russell Sprague and Does 1-10

Filing counsel: Andrew M. White and David E. Fink, White O'Connor Curry & Avanzado, Los Angeles.

Cite: US CD California 04CV590

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Gibson Sues Over Illegal Circulation Of "The Passion"

By Samantha Chang

NEW YORK--Mel Gibson's film distribution group is suing a Los Angeles post-production firm, alleging that its employees illegally passed along copies of the movie "The Passion of the Christ" to journalists, friends and file-sharing services.

Gibson's company, Icon Distribution gave Lightning Media a master copy of the film in September 1993. Lightning was allowed to make several copies but was required to return the master to Icon.

Gibson alleges that Lighting workers made unauthorized copies of the film while doing post-production work and then circulated the copies to their friends.

According to the complaint, the copies then found their way to film critics at filmstew.com and the New York Post, which ran a story on the reactions of five people they asked to watch the movie.

The complaint states that illegal copies of "The Passion" may also have appeared on morpheus.com and kazaa.com.

Icon is seeking an injunction to halt distribution of the copies and an unspecified amount in damages.

Case: Icon Distribution v. Lightning Media and Does 1-10

Cite: US CD California CV 04-1476 JSL

Plaintiff Attorneys: George R. Hedges and William G. Berry of Quinn Emanuel Urquhart Oliver & Hedges

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Caterpillar, Disney Settle Trademark Suit

By Associated Press

PEORIA, Ill.--Caterpillar Inc. and the Walt Disney Co. have settled a trademark-infringement lawsuit that claimed a direct-to-DVD comedy released last year taints the equipment maker's image.

Caterpillar and Disney, which have been partners in other business projects, issued statements saying the deal was "amicable." Spokesmen for both companies declined to elaborate.

Settlement terms weren't disclosed in an order approved by Judge John Gorman of the U.S. District Court for the Central District of Illinois.

The Peoria, Ill.-based equipment maker filed the lawsuit last fall in the Central District of Illinois, alleging that the live-animated sequel "George of the Jungle 2" tarnished Caterpillar's reputation because its trademark yellow earth-moving equipment is linked to the film's villains.

Scenes that show an "evil attacking army" using Caterpillar bulldozers to attack George's jungle home leave a wrong impression about the company's environmental views, the lawsuit alleged. The lawsuit also maintained that the movie could cast Caterpillar in a bad light among young viewers, harming a children's product line that reported sales of $850 million in 2002.

Disney countered that the movie is an obvious comedy and that viewers won't confuse Caterpillar with the villains who battle George and his computer-animated animal friends.

Caterpillar first sought a temporary restraining order to block last October's release of the movie, a sequel to a theatrical release that earned more than $100 million.

Chief U.S. District Judge Joe B. McDade rejected the request, ruling that the film was filled with "well established cartoon cliches that clearly establish the fantastic nature of the movie." He called use of well-known trademarks a "common phenomenon" in films and television.

The lawsuit sought to recall 2.2 million copies of the movie to edit out Caterpillar's name and logo. Disney estimated that a recall would cost $1.1 million and that the copies had a total retail value of $47 million.

Case: Caterpillar Inc. v. Walt Disney Co. and Buena Vista Home Entertainment

Attorneys for Plaintiff: Joseph Norvell, Thomas Holt and David Fleming of Brinks Hofer Gilson & Lione in Chicago; and Timothy Bertschy and Robert Bennett of Heyl Royster Voelker & Allen in Peoria, Ill.

Attorneys for Defendant: Matthew Neumeier of Jenner & Block in Chicago and Roy Davis of Davis & Campbell in Peoria.

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