By Neville L. Johnson and Douglas L. Johnson
With the beginning of the new decade we can look back at recent cases that may have gone unnoticed but will undoubtedly have a farreaching impact. Three recent cases are of note to practitioners in the entertainment space, involving arbitrations, rescission of unpaid contracts, and joke-theft.
I. Arbitrator's Mandatory Disclosures in Arbitration
Nationally, legal disputes are increasingly resolved with arbitration, driven primarily by contractual obligations. Large employers pick a preferred arbitration provider and process claims en masse through the same organization. Arbitration is purportedly fast and efficient because it lacks the layers of rules of a regular courtroom. In Monster Energy Co. v. City Beverages, LLC,1 the Ninth Circuit added a layer of protection, holding that “before an arbitrator is officially engaged to perform an arbitra- tion,” the arbitrator must disclose any ownership interest he or she has with his or her arbitration association. This change to mandatory disclosures in arbitration is likely to go nationwide, because it is so simple, yet provides a great deal of protection for parties in arbitrations and ensures that arbitration awards are not overturned.
a. Rules of Arbitration
An arbitrator's ethical duties and required disclosures are governed by nonuniform sources, such as state law, rules of the arbitrator's arbitration association, or other rules, such as those promulgated by prominent legal associations. Despite this variation, all these ethical guide- lines uniformly require that the arbitrator must remain neutral in all dealings and mandates the disclosure of any affiliations, ownerships, and/or partnerships with other companies in order to ensure impartiality. However, until recently, this disclosure rule did not apply to ownership with the arbitration organization itself.
In Monster Energy v. City Beverages, Monster Energy terminated its agreement with City Beverages (which was doing business as Olympic Eagle) and the parties proceeded to arbitration. The two parties chose from a list of neutral arbitrators provided by Judicial Arbitra- tion and Mediation Services, Inc. (JAMS), the arbitration organization specified in their agreement. The arbitrator ruled in favor of Monster Energy. However, Olympic Eagle later discovered that the arbitrator was a co-owner of JAMS, JAMS had administered 97 arbitrations for Monster Energy over the previous five years, and this information had not been disclosed before Olympic Eagle accepted the supposedly neutral arbitrator.
When Monster Energy asked the district court to con- firm its award, Olympic Eagle brought this new information forward and asked the district court to set aside the arbitration. Due to “Repeat Player” bias involved in the arbitration, Olympic Eagle displayed evidence of unfair arbitration process and ruling, over which the court has jurisdiction.
b. “Repeat Player” bias
This phrase refers to the notion that an arbitrator will be biased towards “Repeat Players.” Repeat Player bias is the inherent partiality an arbitrator holds when he, she or they become involved with one party multiple times. The Repeat Player bias provides certain parties advantages in arbitration either by the party's influential power from the repeated business, or by the use of asymmetric information to assist one player in the arbitration selection process.
Repeat Players can either be defendants or plaintiffs who appear often in arbitration, typically winning as a result in a legal dispute. In fact, JAMS' data reports a 79.9% increase in chance of winning if the firm is considered a “super repeat player” law firm and an employee's probability of winning increased 55.1% if he was represented by a “high-level” repeat player firm.2 Thus a firm, or individual utilizing the same arbitrator or arbitration company can create an inherit advantage for itself in arbitrations that are already essentially insulated from judicial review.
c. Holding of Monster Energy Co. v. City Beverages
In Monster Energy Co. v. City Bevs.,3 the district court ruled in favor of Olympic Eagle, holding that: [B]efore an arbitrator is officially engaged to perform an arbitration, to ensure that the parties' acceptance of the arbitrator is informed, arbitrators must disclose their ownership interests, if any, in the arbitration organizations with whom they are affiliated in connection with the proposed arbitration, and those organizations' non- trivial business dealings with the parties to the arbitration.
Here, the Arbitrator's failure to disclose his ownership interest in JAMS—given its nontrivial business relations with Monster Energy—creates a reasonable impression of bias and supports vacatur of the arbitration award.4
JAMS should have disclosed to other side that it frequently worked with Monster Energy. The Supreme Court has held that vacatur of an arbitration award is supported where the arbitrator fails to “disclose to the parties any dealings that might create an impression of possible bias.”5 In a concurrence, Justice White noted that when an arbitrator has a “substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed,”6 a formulation of the rule that we have adopted.
d. Dissent in Monster Energy, Co., Arbitration Is Always Biased
In contrast, Judge Friedland argued, dissenting, that no one should be surprised that the arbitrator was biased, because the arbitration system is inherently biased. He believed that Olympic Eagle could not claim to be surprised when it agreed to resolve any future disputes in a forum lacking the judicial protections built into the constitution. Judges are paid by the government, while arbitrators, by contrast, have an economic stake in cultivating repeat customers and not losing the top clients of their firms. Therefore, arbitrators have incentives to craft decisions amenable to frequent customers. “This feature of private arbitration, even if distressing, is an inevitable result of the structure of the industry.”7 Although many practitioners would agree with Judge Friedland, the Supreme Court feels otherwise.
e. Disclosure Rules Expanded
The court in Monster Energy held that firms must disclose their loyalties to all parties prior to arbitration. Specifically, JAMS was required to reveal its longstanding business with Monster Energy before any arbitration began. Given that JAMS has administered 97 arbitrations for Monster Energy over the five years prior to this case, Olympic Eagle was extremely disadvantaged.
An arbitrator's duty of disclosure is a continuing duty, in every case. Concurrently, there is no limit to the number of attempts to challenge a proposed arbitrator. An arbitrator must disclose (1) any matter that could cause a person to be doubtful of the arbitrator's impartiality and (2) any interest that could be affected by the outcome of the arbitration.
To protect the validity of arbitration proceedings, arbitrators should follow this rule of disclosure, even if it is not yet required in their jurisdictions. Monster Energy lost its arbitration award because the “supposed” neutral arbitrator proved not to be impartial once JAMS's loyal- ties were disclosed. Practitioners should be aware of these rules when heading to arbitration, as these rules will af- fect litigation decisions, payouts, and penalties.
The foregoing is relevant to the entertainment mar- ketplace where virtually all arbitration agreements require JAMS as a neutral. So, determine if the arbitrator is a shareholder in the arbitration entity.
II. Rescission of Unpaid Royalty Agreements
In the late 1990s, the Kingsmen, a music group, was not receiving royalties for its hit song “Louie, Louie.” Across three litigation actions, the court granted it an extreme remedy, rescission of the contract and transferring to it ownership of the copyrights and master recordings. The court so readily granted such a remedy because it was indisputable that “[…] the Kingsmen have never received a single penny of the considerable royalties that ‘Louie, Louie' has produced” over the preceding 30 years.8
In the music industry, many artists want the rights to their masters. The possibility of retrieving these coveted recordings is tantalizing to plaintiffs and worrying to defendants. Most significantly, the court affirmed that the “statute of limitations did not bar rescission of the contract because every ongoing breach of the contract by defendants started the clock anew.”9
a. Rescission in California
“Rescission, or the act of rescinding, is where a contract is canceled, annulled, or abrogated by the parties, or one of them.”10 This “unwinding” of a contract is done to bring the parties, as close as possible, back to the position they were before the contract. However, every state has slightly different rules for when this remedy is appropriate.
In California, a party to a contract may rescind the contract under Cal. Civ. Code § 1689(b)(2) if “the consideration for the obligation of the rescinding party fails,
in whole or in part, through the fault of the party as to whom he rescinds.” Normally, a party to a contract must promptly bring a claim or have it precluded by the statute of limitations. However, the Kingsmen case set a California precedent that an “ongoing breach” can “start the clock anew” on the statute of limitations and permit rescission.
b. Peterson v. Highland Music
In Highland Music, the Ninth Circuit Court of Appeals affirmed the district court's conclusion that the statute
of limitations did not bar rescission of the contract, as the obligation to pay royalties functioned like an installment contract where every failed payment was a separate breach that “starts the clock afresh” for statute of limitations purposes.11 For example, in Conway v. Bughouse, Inc.,12 the court looked at how money would be paid under a pension contract in determining how a party's failure to make any given payment should affect the tolling of the statute of limitations:
The total amount of money to be paid to [the pensioner] is not a fixed sum which is to be paid out over a period of time. To the contrary, the total amount owed is unascertainable until the date of [the pensioner's] death because each payment is separate and contingent upon [the survival of the pensioner and his adherence to the terms of the contract]. As each payment is separable from the others and is not a part of a total payment, the agreement should logically be considered an installment contract for purposes of determination of the application of the statute of limitations.
Royalties, too, are “not a fixed sum,” but are rather “separable from the others and . . . not a part of a total payment[.]” Therefore, the court in Highland Music reasoned that if California law were to bar a party from seeking a remedy of rescission after the statute of limitations had once passed, it would have the effect of forever barring rescission regardless of any future breaches. In the light of this inequitable result, it held that every missed payment was a separate breach that “starts the clock afresh” for statute of limitations purposes.13
c. Rescission in New York
However, each state has different requirements. New York has similar requirements to California, but empha- sizes the requirement that the party seeking rescission file promptly. In Huntington Village Dental, PC v. Rathbauer, the court explained the circumstances under which a plaintiff is entitled to rescission of a contract. The court refused to grant the plaintiff summary judgment on its claim for rescission, notwithstanding “evidence of slight, causal and/or technical breaches of the” parties' contract and instead granted the defendants summary judgment on the plaintiff's rescission claim, explaining:
As a general rule, rescission of a contract is permitted for such a breach as substantially defeats its purpose. It is not permitted for a slight, casual or technical breach, but only for such as are material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract. […]
However, by choosing not to terminate the contract at the time of the breach, the nonbreaching party surrenders his or her right to terminate later based on that breach.14
d. Litigation in New York
In New York, courts are reluctant to grant rescission where there have been some royalties paid. In Nolan v. Sam Fox Publishing Company, Inc.,15 the plaintiff did not receive “74% of the royalties due him” for the preceding six years, and “Fox failed to pay any royalties on income from foreign sources, royalties on income from licensing of the song for public performances, and royalties on income from printed material other than piano copies.” Still, the court held that “none of [these breaches] were substantial enough or were so material as to justify rescission by Nolan, maintaining that Nolan could ‘be rendered whole by an award of monetary damages.'”16
However, it is reasonable to believe that a New York court would grant rescission where, as in Highland Music, no payment of due royalties ever occurred. While damages may only be able to extend as far back as the statute of limitations allows, rescission enables the court to compensate a plaintiff for the substantial injustice of decades of unpaid royalties.
III. Joke Theft
In 2016, Alex Kaseberg filed a lawsuit against Conan O'Brien and his company Conaco, LLC for “joke theft.”17 Kaseberg wrote four jokes on separate occasions, regard- ing topics such as Delta Airlines, Tom Brady, the Washing- ton Monument, and Bruce Jenner, and published them on his personal blog and Twitter. Kaseberg then claimed that they were each subsequently featured in the monologue segment of the “Late Night With Conan O'Brien” (Conan) show; thus, the case for “joke-theft.” Joke theft may be a mortal sin in the comedy world, but what does it mean in a court of law? In practicality, this case for “stolen jokes” is a claim for copyright infringement.
a. Copyrighted Jokes
Kaseberg alleged that his jokes should be considered “literary works” that are his intellectual property and filed multiple applications with the United States Copyright Office (USCO) over the course of the litigation.18 This turned out to be a monumental hurdle, which Kaseberg only partially cleared. Jokes short enough to fit in a Tweet are so short as to offer little original authorship, only the exact expression of the idea would be protected, and this will not stop other versions of the joke that were independently created.
b. Words and Short Phrases Are Uncopyrightable
The U.S. Copyright Office expressly states that it will not even entertain a copyright registration for “words and short phrases.”19 A joke short enough to fit in a Tweet may not be copyrightable as a practical matter, and litigants are required to register their copyrights before filing suits.20 This is meant to prevent ridicoulous claims, although potential plaintiffs may be so incentivized by the possibility of statutory damages, including attorney fees, to attempt such an uphill battle.
In Kaseberg v. Conaco, Kaseberg filed five indepen- dent registrations, one for each of his claimed jokes, and only four were even considered by the Copyright Office. These four “literary works” spent years of litigation at the Copyright Office, with Kaseberg spending extensive periods of time arguing the copyrightability of his “literary works,” because 280 characters is so close to the “short phrases” normally barred by the Copyright Office under 37 CFR § 202.1(a).
c. Copyright Protects Expression, Not Ideas
If the Copyright Office does consider registration of a Tweet, copyright protection exists only for the fixed original expression of an idea when it is infringed without a legal defense, such as independent creation, fair use, or parody. In addition, copyright law emphasizes the “idea-expression dichotomy.”21 Thus, in the context of “joke-theft,” a copyright infringement would only occur if a party were to replicate the exact delivery of the original joke without a lawful defense—meaning the slightest variation will defeat a claim for “joke-theft.”
Kaseberg's original tweet on June 9, 2015 was: “Three towns, two in Texas, one in Tennessee, have streets named after Bruce Jenner, and now they have to consider changing them to Caitlyn. And one will have to change from a Cul-De-Sac to a Cul-De-Sackless.” O'Brien delivered this in his monologue on the same night: “Some cities that have streets named after Bruce Jenner are trying to change the streets' names to Caitlyn Jenner. If you live on Bruce Jenner cul-de-sac it will now be cul-de-no-sack.”
Given that the central comedic ideas of both jokes were the same, the method of delivery still differed significantly. From the word choice to the grammatical structure, the expressions of the sentences were inherent- ly distinct. Copyright law protected Kaseberg's expression, not the idea of his joke—making Kaseberg's claim of copyright infringement to be a weak claim, at best.
d. Lawful Defense—Independent Creation
This ties together with O'Brien's asserted lawful defense—independent creation. He described how com- mon the phenomenon is in the age of social media, “Two years ago one of our writers came up with a joke referencing Kendall Jenner's illfated Pepsi commercial, and so did 111 Twitter users.” O'Brien essentially argued that there is a limited amount of news stories per day that are worthy of comedy material, and the factual set-ups often lead themselves to similar punchlines – therefore it truly is common, and almost unavoidable, to encounter similar jokes.
This was exhibited in Walker v. Time Life Films, Inc.,22 where the court affirmed that a mere scènes à faire, “scene that must be done” or the required set dressings of a genre, is unprotectible because it lacks sufficient original expression. Similarly, the joke that was expressed on “Conan” could be considered nothing more that the scènes à faire of topical comedy prevalent with the late-night comedy host. Just as O'Brien's joke echoed Kaseberg's, so too will the topical jokes of Seth Meyers, Jimmy Kimmel, and Stephen Colbert echo each other on a nightly basis.
Ultimately, the case resulted in a settlement between the two parties in 2019. O'Brien described to Variety: “Four years and countless legal bills have been plenty.” However, while there is not binding precedent, this signals that there are settlements to be had for “joke theft.”
While the terms of the settlement are still unknown, filings from April 2019, just before the lawsuit was settled, show that the court:
• Denied the plaintiff's motion to Amend;
• Granted the defendant's Motions in Limine to ex- clude the plaintiff's experts,
• Granted the defendant's Motions in Limine to exclude evidence of widespread joke dissemination; and
• Denied three-quarters of the plaintiff's Motions in Limine to exclude the defendant's evidence.
That a settlement was reached may encourage liti- gious comedians and comedy writers to pursue claims that were previously considered untenable. Practitioners should consider these difficulties before bringing a “joke- theft” lawsuit, or be ready with these arguments to deter potential litigants.
Developing this sense of where the judicial winds are blowing can make or break a case. Practitioners on both sides need to be prepared for new arguments and have cutting-edge case law to back them up. Knowing if judges are becoming more skeptical of arbitrations or if certain remedies are becoming disfavored can influence arguments one will present. On the other hand, a clever attorney with the right case could win big and return an artist his, her or their masters, or possibly win a claim for joke-theft.
Monster Energy Co. v. City Beverages, LLC, (2019) 940 F.3d 1130.
Chandrasekher, Andrea and Horton, David, Arbitration Nation:
Data from Four Providers Vol. 109 cal. l. rEv. 1 (2019).
Monster Energy Co., 940 F.3d at 1130.
Id. at 1138.
Commonwealth Coatings Corp. v. Cont'l Cas. Co., 393 U.S. 145, 149 (1968).
Id. at 151-52 (White, J., concurring).
Monster Energy Co., 940 F.3d at 1139 (Friedland, M. dissenting).
Peterson v. Highland Music, 140 F.3d 1313 (1998).
Blacks Law Dictionary.
Peterson, 140 F.3d at 1320-21.
Conway v. Bughouse, Inc., 105 Cal.App.3d 194 (1980).
Peterson, 140 F.3d at 1320-21.
Huntington Village Dental, PC v. Rathbauer, 2014 NY Slip Op. 51545(U) (emphasis added).
15. Nolan v. Sam Fox Publishing Company, Inc., 499 F.2d 1394, 1398 (2d Cir. 1974).
16. Id. at 1396.
17. Kaseberg v. Conaco, 2016 U.S. Dist. LEXIS 97581.
19. 37 C.F.R. § 202.1(a).
20. See Fourth Estate Public Benefit Corp. v. Wall-Street.com, 586 US _ (2019).
21. See Baker v. Selden, 101 U.S. 99 (1879) (Holding that the law does not protect the idea itself but rather the specific expression of that idea.).
22. Walker v. Time Life Films, Inc., 784 F.2d 44 (2d Cir. 1986).
Neville L. Johnson and Douglas L. Johnson are partners at Johnson & Johnson LLP, in Beverly Hills, CA, practicing entertainment, media, business and class action litigation. Max Segal is an Associate there and helped in drafting this article.
Reprinted with permission from: Entertainment, Arts and Sports Law Journal, Spring 2020, Vol. 31, No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.