AllofEnmity--The Questionable and Troubling Legality of AllofMP3.com

Recently, just as music file-sharing services such as Grokster are being dealt severe blows from the courts, a lesser-known threat has arisen from Russian online music sites which offer downloads for a fraction of the price of legitimate sites in the U.S. Russian website AllofMP3.com offers an extensive catalog of artists including music not licensed for Internet download in the United States such as the Beatles and Led Zeppelin. (For a great discussion of the sea of micro payment and grey legal download sites the read this Guardian UK article.) Further, AllofMP3 offers the user a novel way to purchase and download music: users can to select the format and quality of the files they wish to download and files are priced by the megabyte with 250 MB costing around $5, bringing the average cost of a song to a mere 5 cents. These sites offer prices and services that sound too good to be completely legal, and may have an adverse impact on legitimate online music sites and the music industry in general.

The AllofMP3 website claims that it is licensed to distribute music pursuant to a license issued by the Russian Organization for Multimedia and Digital Systems (ROMS) whereby it pays royalties to copyright holders. (For More on ROMS ; ROMS Press Release.) Article 39 of the Russian “Law on Copyright and Related Rights” allows for the broadcast and cablecast of a phonogram “for general public knowledge” without the permission of a performer so long as royalties are paid through collective rights organizations such as ROMS. This has been widely interpreted as creating a compulsory licensing scheme with Internet music sites being classified as “broadcasts” or “cablecasts” for the purposes of this exemption. U.S. copyright law includes compulsory licenses for derivations of musical compositions, or “covers;” however, in order to copy the actual sound recording, a license must be granted by the copyright holder. Unlike U.S. copyright law, under the Russian compulsory license scheme, websites such as AllofMP3 can offer music by the Beatles because they need not receive permission from holders of copyrights to sound recordings. If this is the correct interpretation of Russian copyright law, and AllofMP3 does in fact have the proper license from ROMS, the service is probably legal in Russia.

Organizations such as the International Federation of the Phonograph Industries (IFPI) and the International Confederation of Societies of Authors and Composers (CISAC) have been pressuring Russia to either prosecute these websites or revise the copyright law. CISAC expelled ROMS from CISAC membership in October of 2004 for contravening internationally accepted collective administration principles by issuing licenses to copyright users without being given the authority to do so by copyright holders. Despite this pressure, Russian authorities declined in March of 2005 to take action against AllofMP3.com, reasoning that the Article 39 exception creates a loophole whereby Russian copyright law only covers physical media such as CDs and not digital files. (For more details see alex.moskalyuk.com.) Moreover, according to a recent article in the Register, ROMS has lost the backing of the Russian Authors' Organization (RAO) which the article interprets as placing ROMS in unlicensed waters.

If sites such as AllofMP3.com are legal under a compulsory licensing scheme in Russia, these licenses only apply to music to users within Russia and do not permit the sites to distribute music worldwide. Essentially, digital music files have become a new type of gray market good when sold to U.S. purchasers even though the Russian websites claim that they target Russians exclusively and provide disclaimers stating that users should consult the laws of their own nations. Sites such as AllofMP3.com raise the confounding problem of how one can impose import and export controls on digital files sold legally from a Russian website to U.S. purchasers who download, or import, these files across invisible international boarders. Even if importation of digital music files could be detected and prevented, Section 602 of the U.S. Copyright code permits importation one copy of a copyrighted work without the permission of the copyright holder for personal use.

With the successful defeat of Grokster handed down by the Supreme Court it seems likely that free file-sharing services in the U.S. are likely to decrease. This void may be filled by quasi-legitimate foreign online music sites offering superior service at a fraction of the price compared to a download from popular legitimate U.S. sites such as iTunes. It appears that there is very little that the music industry players can do besides pressure Russia to change its copyright laws, and even if successful in doing this, it is likely to be a slow and laborious process. In the meantime, the music industry should decide what legal actions to take, if any, and how to compete in the constantly changing global environment.

Erin Thayer

Delaware’s “Toys “R” Us Decision: Requirements for Corporate Sale Process

The recent Delaware Court of Chancery decision in Toys “R” Us Inc. Shareholder Lit. (C.A. No. 12-12-N (Del. Ch. June 22, 2005, Strine, V.C.)) is in keeping with the Court’s reluctance to second-guess the business judgment of a Board of Directors in structuring the sale of a company, provided that the Board has thoroughly considered all viable strategic alternatives and carefully educated itself on the value of the company’s business.

The case was brought by a group of Toys “R” Us stockholders seeking to enjoin the pending $6.6 billion sale of the company to a consortium of private equity investors headed by Kohlberg Kravits and Roberts & Co. (KKR). Agreement with KKR was reached after nearly a year were the Board and management conducted a wide-ranging evaluation of the company’s strategic alternatives and obtained detailed information regarding the value of its business and its real estate holdings. Originally having considered only selling individual divisions of the company, the Board finally determined that sale of the entire company was preferable.

In reaching its decision to deny the plaintiff’s motion to enjoin the sale, the court evaluated various aspects of the sale process, including the following:

□ By granting KKR a $247.5 million break-up fee, a right to match a later bid, and a $30 expense reimbursement if Toys “R” Us shareholders voted down the sale, plaintiffs argued that the Board had unreasonably deterred additional, and potentially more lucrative, offers for the company. The court held that the directors decision to protect the KKR deal was not unreasonable, given that KKR’s bid was $300 million higher than the next highest bid, the company had negotiated down the break-up fee from 4% to 3.75%, and in the court’s view the fee would not act “as a serious barrier to any bidder willing to pay materially more.”

□ The court did, however, point out that an “excessive” termination fee that “presents a more than reasonably explicable barrier to a second bidder” would be considered unfavorably and indicated that it would continue to consider break-up fees in a nuanced manner. Therefore, it cautioned that a fee lower than 3% would not by definition be regarded as reasonable.

□ Whereas the company had originally considered selling its divisions individually, after several of the bidders indicated an interest in purchasing the entire company, the Board decided to put the entire company up for sale and limit the auction to the four bidders who had initially conducted due diligence, in order to avoid “losing the birds in the hand”. The upholding the Board’s decision the Court emphasized that no new bidders had emerged even after the Wall Street Journal reported that two of the existing bidders had expressed interest in purchasing the whole company.

□ The Court also indicated its approval of the manner in which management and the Board had disentangled discussions regarding sale of the company with decisions regarding whether the purchaser would retain key managers and the CEO. During the negotiations, the company had in fact required KKR to remove a condition to the contract requiring existing management to run the company post-sale.

Simon Riviles

Using 501(c)(3) Money to Fund a Commercial Film

Arts projects (especially film) often require a great deal of financial serendipity to get off the ground. And with arts investments it’s often very difficult to lure investors with typical profit projections and business data.

Enter the 501(c)(3) non-profit organization. Non-profits by definition do not seek return on investment and provide funding to an enterprise based on entirely different metrics, such as merit, social good, and politics. Often filmmakers with socially themed works overlook this avenue to funding, as their film is structured as a for profit vehicle. They erroneously assume that as a result, they are not eligible for non-profit funds (due to the fact that to receive tax free donations a production must be organized as a 501(c)(3)). In fact, non-profits can act as “conduits” for a film production, channeling donations into the production, using their non-profit status to facilitate the transaction.

An example of this arrangement can be found at Film/Video Arts. Organized as a 501(c)(3), they offer filmmakers the opportunity to use their status as a means to funnel tax free donations into their productions. This can greatly alleviate the usual difficulty in getting profit minded investors to part with their money, by presenting them an alternate route to invest.

European Community Design Registration

Community design registration is an important alternative and valuable supplement to trademark protection in the European Union. The Registered Community Design System was introduced in April 2003 and established a new intellectual property right for the protection of designs and logos, harmonizing the various laws and protections previously afforded by each individual European Community member state. The new system has proven popular and efficient, as registration takes only three months regardless of the complexity of the application. As with other European Union protections, the primary advantage of the community design registration is that it an applicant to file a single registration for all EU countries and, if successful, receive protection in all 25 countries of the Community.

A “design” is designed broadly as “the appearance of the whole or a part of a product resulting from the features of, and in particular, the lines, materials, colors contours, shapes, textures and ornamentation of the product.” Registration broadly protects the “look and feel” of a design that is part of a logo. As with any national design registration, a requirement to obtaining protection is that the design is both novel and not identical to another design that has been made available to the public, and of a individual character that it does not bring to mind any existing design.

Community Design Registration arguably provides greater, or at least additional, protection to the security provided by the European Community Trade Mark. Design registration provides the holder with the exclusive right to use the design and to prevent the making, offering, putting on the market, importing, exporting, using or stocking for such purposes by other of products incorporating the design. The right provides protection regardless of the class for which the design is registered, as opposed to the Community Trade Mark which provides protection to the extent that the infringing trade mark is either identical or similar and for identical or similar goods.

Simon Riveles

FCC Gives Phone Companies a Fair Shake for BroadBand

The FCC has paved the way for phone companies dabbling in high speed internet access to play along side the cable companies that similarly dabble. For years Verizon, would have to lease its lines to competitors at a discount. Since the Supreme Court has recently barred a similar practice among cable companies, the FCC is inclined to follow suit with phone companies.

The Hero of Indian Joint Ventures

In the world of joint ventures, no nation embodies the concept more than India. This is especially evident in its now overheated motor industries, the overlooked ugly sister of the Indian IT industry. For years, the Indian government operated on a disclosure and joint venture policy, meaning that any foreign company wishing to enter the Indian market had to disclose various formulas, trade secrets, etc. and/or partner with a local Indian interest. That policy, among other things, kept Coke out of the subcontinent for 20 years due to Coca Cola’s fear of revealing the best-kept secret recipe next to the Colonel’s 11 herbs and spices. Nonetheless, other companies learned to use the platform as a viable means to penetrate a massive market. The best example of this is the two-wheeled vehicle market.

Hero Honda Motors, Ltd. is one of India’s most successful joint ventures and anyone who has traveled there recently can tell you about the magic of seeing a gleaming new fiberglass, steel and concrete showroom in the middle of a desolate muddy highway stretch. Indians take their motorcycles very seriously and have traditionally looked to them as the entrée into middle class living, as opposed to the more expensive and less wieldy automobile. Hero motorcycles tapped into this market early in India’s history piggybacking a motorized division off of a booming bicycle operation. Once the motorized division reached a critical mass, Hero went searching for a foreign partner to bless it with a technological edge. Ironically, Honda was last on the list, but a marriage was forged. So lucrative was this marriage that the joint venture has posted profits each and every quarter since its inception in 1984.

Instructive for its nimble use of each partner’s assets, the joint venture is an excellent case study of developing market exploitation. Both partners expertly leveraged their contributions. They made skilled use of Honda’s brand name and goodwill, making its trademark a prominent component of all advertising and branding materials. Hero leveraged its superior understanding of the local markets and their psychology, tapping into the top advertising firms to convey its message. Hero also developed a highly agile, and increasingly efficient local workforce. Meanwhile, Honda’s world famous engine technology created generations of excellent motorcycles.

Despite, this rosy picture, attorneys must be sensitive to the cyclical nature or the growing pains of joint ventures and the need to provide or guard against partner flexibility and maneuverability. Indeed, as Hero Honda is entering its mature phase, the two partners are sending signals of impending inter-competition, courting other venture partners and establishing separate brand identities and market segments. Against the backdrop of the simmering relations within other joint ventures such as TVS-Suzuki, this is not surprising. As Hero and Honda maneuver and circle for potential advantage as adversaries, each set of attorneys must stand ready to protect and leverage the assets each side has nurtured. Moreover, to the extent the joint venture continues in the face of competition from the partners themselves, this will create legal issues.

Click here for an excellent and probing case study of the Hero Honda joint venture.

Kaiser Wahab