England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		11 March 2010

THE CHANCELLOR:

(Judgment commences in public)

1. This is the application of the claimants ("Pink Floyd") for summary judgment on part of their claim, that is to say claims 2, 3 and 4, for two declarations as to the proper construction of certain clauses in two agreements between the parties. The agreements and the clauses are the June 1999 Agreement, clause 9(d)(i) and a Master Licence Agreement ("the MLA") in respect of clauses 4.13 and 6.1(b)(i).
2. The first declaration relates to clauses 9(d)(i) of the June 1999 Agreement and clause 6.1(b)(i) of the MLA. They are, for all relevant purposes in the same form. The second declaration relates to clause 4.13 of the MLA which was also incorporated into the June 1999 Agreement.
3. I heard the argument in relation to the first declaration in private, as permitted by CPR 39.2(3). Accordingly, when I reach the stage in this judgment of considering the first declaration, I shall sit in private. I will re-open the court when I have concluded that part of my judgment. Accordingly my judgment on the application for summary judgment for the grant of the second declaration will be given in public, but not that in relation to the first.
4. The history of this matter common to both declarations is, in brief, as follows. The claimants are service companies for one or more members of the well known pop group called Pink Floyd. Between 1967 and 1992 there were a variety of earlier agreements between them (to which I shall refer later). On 17 June 1999 there was executed the June 1999 Agreement made between Pink Floyd and EMI terminating all earlier agreements relating to five named albums with effect from 1 March and 1 April relating to overseas sales and UK sales respectively. Secondly, there was executed the Master Licence Agreement (or MLA as I shall refer to it) conferring licences on EMI to exploit those albums for the consideration therein referred to.
5. Between 1 February 2000 and 27 September 2005, there were a number of subsequent agreements between the parties by which four further named albums became subject to the terms of the MLA.
6. On 27 March 2007, Pink Floyd notified EMI of their appointment of Prager & Fenton to carry out an audit of the royalty statements provided to Pink Floyd by EMI as permitted by clause 7 of the MLA for the period 1 July 2002 to 30 September 2007. The report of Prager & Fenton was produced on 17 July 2008 indicating in their view 15 areas of, according to them, under accounting with a total value of some £10 million plus.
7. The Claim Form in the proceedings now before me was issued on 31 March 2009 and the Amended Particulars of Claim were served on 5 June. All but four of the claims made either by Prager & Fenton and/or raised by the Amended Particulars of Claim have now been settled. The four that remain (using the original numbering) are (2) incorrect base price on digital sales; (3) unauthorised exploitation - single track downloads; (4) unauthorised exploitation - ring tones and streaming; (5) missing digital income - single track downloads. The first declaration sought concerns claim 2, the second relates to claims 3 and 4.
8. The Defence of EMI was duly served on 10 July 2009, and I shall need to refer to its terms in some detail later. On 5 October, there was a reply served by Pink Floyd and the application for summary judgment now before me was issued. At that point I will now clear the court and continue in private.

(Judgment continues in private)

9. I turn then to the first declaration. As the relevant terms of the two clauses are, for all relevant purposes, the same, I need only quote one of them. In argument that one was clause 9(d) of the June 1999 Agreement, which is the one to which I will refer. It is in the following terms, substituting the reference to EMI for the reference to EMIR in the original, and it reads as follows:

"In the event of the sales distribution by [EMI] or its Associates (whether directly or by licence) of EMI Recordings by the Artists hereunder by Online Distribution -

(i) such sales shall be deemed sales of Records for all purposes SAVE THAT the royalty in respect thereof shall (subject to the provisions of clause 9(d)(ii) hereof) be a XX% (XX per cent) share of EMI's receipts. EMI's receipts shall be calculated at the so-called "source" so that they shall incorporate the receipt of EMI's licensees sub-licensees affiliates or any third party obtaining rights in this respect directly or indirectly from EMI."

10. The June 1999 Agreement also contains a number of other clauses relevant to the first declaration. I start with clause 1(b) which incorporates various definitions contained in the MLA, namely:

"'Associate'

any person firm or company which is a connected person (as defined in the Income and Corporation Taxes Act 1988 Section 839) of the Licensee or which is an associated company of the Licensee within the meaning of Section 416 of that Act."

"'Royalty Calculation Price'

the price upon which royalties (not being mechanical royalties) due to the Company in respect of the sale of Records hereunder are calculated. Such price will be the Licensee's published price (or if no such published price exists the actual price gross of all discounts charged for such Records by the Licensee to the majority of dealers in such country) exclusive of VAT or other sales taxes of such Records gross of all discounts (howsoever arising) in the country of sale of which the Licensee's Records are customarily available to dealers."

Then it continues with reference to a handling charge which I need not read out.

11. Clause 4(b) incorporated royalty rates by reference to the second schedule thereto which specified the royalty rate for certain online distributions to be a percentage of "receipts". Clause 9(a) confirmed that the rights granted to EMI under both agreements included rights of online distribution. Clause 9(d)(ii) contains a provision allowing an increase in the royalty rate for online distributions payable by EMI to Pink Floyd. … This uses, as a comparator, dealer prices less certain specified expenses.
12. Clause 9(e) defines "online distribution" in these terms:

"'Online distribution'

shall mean distribution of recordings via telephone, satellite, cable, point of sale manufacturing or other means of direct transmission to the consumer over networks or through the air now known or hereafter invented."

13. I turn then to the pleadings. In the Amended Particulars of Claim it is asserted (and I quote from paragraph 20):

"In breach of the said provisions of the June 1999 Agreement and the MLA, the Defendant has accounted to the Claimants only in respect of XX% of its own receipts, rather than XX% of the receipts "at source" (ie receipts by the licensees, sublicensees, affiliates or any third party obtaining rights in this respect directly or indirectly from the Defendant)."

14. In paragraph 42.2.1 of the Particulars of Claim, there are set out the terms of the first declaration sought, namely:

"Upon the true construction of the June 1999 Agreement and/or the MLA, internet music providers (such as, for example, iTunes) are "sub-licensees affiliates or any third party obtaining rights in this respect directly or indirectly from [the Defendant]" within the meaning of Clause 9(d)(i) of the June 1999 Agreement or clause 6.1(b)(i) of the MLA, so that the Defendant is obliged to account to the Claimants in respect of income received at source by such providers."

15. The Defence of EMI sets out in paragraphs 22 to 33 what it contends is the factual matrix relevant to the first declaration. Paragraphs 22 to 25 deal with the transition in conventional licensing agreements from royalties calculated on retail prices, common in the 1960s, to wholesale or dealer prices in the 1990s. Paragraphs 26 to 29 deal with the evolution of "at source" accounting to counteract the activities of recording companies, or at least some of them, in accumulating the receipts in subsidiary or associated companies without them being brought into account for the purposes of the royalty payable by the recording company to the artist.
16. Paragraph 29 asserts that, following on from a particular case which is referred to:

"… it became standard practice for references to "at source" income to be included in royalty provisions linked to receipts. This is a term of art in the record industry which is used to include all monies received at the level of the exclusive licensee for any particular territory (ie, the person in each territory who distributes to retailers), whether by wholly owned subsidiaries, associated companies, third party licensees or sub-publishers in the pool to be considered when calculating royalties due to the artist. Many record companies operate through exclusive third party licensees in certain territories where the economics and scale of the market do not justify maintaining a subsidiary or associate company. Such wording provides certainty for both record companies and artists to the extent of the royalty pool. The purpose of such wording is to capture all monies received at the exclusive licensee level, and not to expand the royalties pool to retailers."

17. The consequence of those facts as asserted in paragraph 30 is as follows:

"In this context therefore, in an agreement made in 1999 by experienced parties negotiating royalty agreements, "third party licensees" would have been understood to refer to any companies to whom the record companies exclusively licence their catalogue for distribution within a particular territory."

18. In paragraph 31 of the Defence the transition referred to in general terms in paragraphs 22 to 25 is traced through various earlier agreements between Pink Floyd and EMI. In paragraph 32 it is asserted that EMI would not have agreed to a royalty of XX per cent on retail prices as it was known to all concerned to be impractical and, as asserted in paragraph 33, that the construction favoured by Pink Floyd would result in the royalty of XX per cent being calculated on the retail prices charged by the relevant third party. The Defence then continues in paragraphs 34 and 35 as follows:

"34. It is EMI's case that upon the true construction of the MLA the statement in clause 6.1(b)(i) of the MLA upon which the Claimants rely means that the receipts of any person to whom EMI has exclusively licensed its rights for an entire territory with the intent that such party should further distribute those rights to retailers within that territory (ie a third party acting in the exclusive third party licensee role which would normally be performed by an affiliated company) would be included; but that the receipts of the retailers such as iTunes would not. EMI will rely upon the facts and matters set out in paragraphs 22 to 33 above.

35. Further or alternatively it is EMI's case that a proviso that "Licensee's receipts" shall in no case include the receipts of a third party selling Recordings by on-line distribution to members of the public should be implied as a matter of business efficacy and to give effect to the true intentions of the parties. EMI will rely upon the facts and matters set out in paragraphs 22 to 33 above."

19. Both parties adduced witness statements containing what they contend was relevant evidence. EMI relies on the evidence of Mr Alasdair George contained in a witness statement made by him on 22 January 2010. He is put forward as an expert in the music industry. He sets out what he describes as the factual background within which the June 1999 agreement and the MLA were negotiated, in particular the meaning ascribed by the music industry to the phrase "at source".
20. In paragraphs 19 to 27 he deals with the transition to which the Defence of EMI referred in paragraphs 22 to 25 of its Defence and comments on some consequences of the construction favoured by Pink Floyd. In paragraphs 28 to 34, he deals with the meaning in the music industry of the term "at source". In that context I should refer to what he has to say in paragraphs 28, 31 and 33. They are in the following terms:

"28. Clause 9(d)(i) of the June 1999 Agreement and clause 6.1(b)(i) of the MLA both provide for the Claimants' royalties as a percentage of the Defendant's receipts calculated 'at the so-called "source"'. The term "at source" is commonly used in the music industry, albeit more commonly in music publishing agreements, where a writer's royalty entitlement is normally calculated as a percentage of monies generated from exploitation of the relevant copyrights, rather than (as is usually the case with recording agreements, and certainly those to which a major record company is a party) as a percentage of the price of a record."

I pass then to paragraph 31 which reads as follows:


"The term "at source" is usually defined in some detail in music publishing agreements. Even where it is not specifically defined, it is my view that any experienced music lawyer would understand (and would, in 1999, have understood) a reference to publisher's receipts "calculated at source" to mean the receipts of the publisher, and that of its sub-publishers (whether or not associated with the publisher). I do not believe that any experienced music lawyer would take such a term to mean that it included the receipts of the end licensee or sub-licensee in the chain of title where that party was a user of the licensed copyright, or obtained that license other than in carrying on the business of a music publisher."

He then goes on to add an illustration. I pass then to paragraph 33 in which, in the second half he says this:


"The royalty calculation in relation to On Line Distribution is based on the Defendant's receipts 'at the so-called "source"'. I take the view that any experienced music business lawyer negotiating in 1999 would have understood the phrase 'at the so-called "source"' as dealing with the concern about local licensees' retentions reducing the Claimants' royalty entitlement, but would equally have understood that it did not bring into account the price at which a third party online retailer sells to consumers."

21. He concluded in paragraph 36 as follows:

"Based on my extensive experience of the music industry, and in particular of negotiating this type of contract, it is my opinion that any experienced music industry lawyer in 1999 would have understood the phrase "at source", or "at the so-called source" as in the relevant clause to exclude the receipts of third party retailers. This is because of the move away from calculating royalties based on retail price and because of the standard meaning of "at source". Similarly in my opinion, any experienced music industry lawyer would have understood that a record company would not offer the same royalty rate in respect of royalties calculated on PPD and "retail price". No experienced music industry lawyer would have expected an agreement to provide for royalties to be calculated based on actual retail price."

22. Pink Floyd's response to the witness statement of Mr George was a witness statement of their solicitor, Mr Howard Randell Jones made on 22 February 2010. He deals at some length with the course of the negotiations leading up to the conclusion of the June 1999 agreement and the MLA and refers to what he considered to be the parties' understanding or part of them. Counsel for EMI objected to this evidence on the well-established basis that evidence of the negotiations leading up to an agreement and of the parties' subjective understanding of it, are not admissible evidence on questions of its construction. This was not disputed. Counsel for Pink Floyd made it clear that he only relied on the evidence of Mr Jones for the purposes of rebutting any suggestion that the phrase "at source" should bear an industry meaning inconsistent with its meaning in the context in which it appears and for the purpose of showing the state of the respective parties' knowledge at the time the June 1999 Agreement and the MLA was concluded.
23. EMI responded with the witness statement of Mr Stephen Cooke. He pointed out that at the time the June 1999 Agreement and the MLA were negotiated, the concept of digital exploitation or online distribution was in its infancy so that who would exploit what and how could not be predicted.
24. Both parties addressed me on the well-known principles of construction explained by Lord Hoffmann in his speeches in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, pages 912-913, BCCI v Ali [2002] 1 AC 251, paragraph 39, and Chartbrook v Persimmon Homes Limited [2009] 1 AC 1101, paragraph 14. There was no dispute that the principle to be applied is that indicated in the question posed in paragraph 14 of Chartbrook, namely:

"... what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean."

25. The issue before me is more limited. I am not trying the action or a preliminary issue in it. The question is whether, in the terms of CPR 24.2(a)(ii), EMI has a real prospect of defending Pink Floyd's claim for the two declarations sought on this application. In approaching that issue I bear in mind the approach indicating by Mummery LJ in Doncaster Pharmaceuticals Group Limited v Bolton Pharmaceutical Company 100 Limited [2007] FSR 3, paragraphs 10 to 12 and 17 to 18, and by Moore-Bick LJ in ICI Chemicals & Polymers Limited v TTE Training Limited [2007] EWCA Civ 725, paragraphs 12 to 14.
26. Counsel for Pink Floyd accepted that the circumstances surrounding the conclusion of the June 1999 Agreement and the MLA may be relevant to its construction, but his principal submission was that the meaning of the phrase "at source" was defined by the words that followed namely "EMI's licensees, sub-licensees, affiliates or any third party obtaining rights in this respect directly or indirectly from EMI". On that basis he submitted no generalised industry meaning derived from music publishing could limit it when used in connection with the as yet untried opportunity for online digital exploitation, rather, he suggested, the succeeding words confirm the construction advanced by Pink Floyd in showing that third party retailers such as iTunes are included. He submitted that EMI had shown no arguable ground with any real prospect of success for excluding them.
27. Counsel for EMI frankly admitted that the limitations which she sought to place on the words of the relevant clauses could not be derived from the provisions of the agreements themselves. She contended that the necessary limitation may be supplied by (1) the factual matrix indicated by the evidence of Mr George and the documents to which he referred; and (2) the absence of any reference in the relevant clauses to "retailers". She emphasised the need to recognise the overriding importance of the surrounding circumstances as shown in particular by Lord Hoffmann in paragraphs 4 and 5 in the passages from his speech on page 913 of the report of the ICS case and paragraph 25 of his speech in Chartbrook.
28. In relation to the particular terms used, she contended that the reference to "any third party obtaining rights" is to avoid the limitation to associates not to include the ultimate retailer, whoever he might be. She observed that, if those words were taken literally, then there was no need to refer earlier to sub-licensees or affiliates. She commented that the receipts of the ultimate retailer might well not be known to EMI and she emphasised that XX per cent would not have been the appropriate rate to apply to the final retail price. She contended that the purpose of the clause was to ensure that EMI received the same return for digital sales as for the sale of a physical product but not more.
29. It is common ground that in 1999, online or digital exploitation of sound recordings was contemplated but did not then exist. Its commerciality was unknown. That was the circumstance known to both parties which, as it seems to me, should be the starting point. There is, therefore, no a priori reason why the phrase "at source" primarily used in relation to music publishing but also in relation to sales of physical sound recordings, should be adopted as such for royalty calculations relevant to online or digital exploitation. Further, the context in which the phrase was used in the two clauses in issue, shows that the parties did not intend it to be so understood.
30. The words which followed were appended, as Mr George in paragraph 31 indicated was to be expected, to provide the parties' own definition of the phrase 'at source'. Accordingly, the issue of construction boils down to the objective ascertainment of the meaning which the parties intended to convey by their use of those words.
31. Both parties accept that their meanings are plain if the words used are taken at face value. Counsel for EMI was plainly correct when she accepted that no limitation on their meaning could be derived from the terms of the agreements as a whole.
32. So for present purposes it is necessary to consider the limitations for which EMI contends, in order to ascertain whether it has a real prospect of resisting the declarations sought by Pink Floyd.
33. The limitation alleged is that set out in paragraphs 30 and 34 of the Defence, namely that the reference to "third party licensees" is confined to those to whom the record companies have granted exclusive licences for distribution within a particular territory. The consequence of that meaning is said to be that retailers are thereby excluded. In paragraph 35 of the Defence it is asserted that third parties selling to members of the public by online distribution should be excluded. This limitation, or parts of it, appears to be supported by the evidence of Mr George.
34. It appears to me that this contention of EMI is unsustainable. First, the context is set by the opening words of clause 9(d), namely:

"… the sales distribution by EMI or its Associates (whether directly or by licence) … by On-line Distribution."

Thus the distribution is not confined to licensees, whether exclusive or not, and the distribution envisaged includes, in the definition of online distribution "direct transmission to the consumer".

35. Second, as the opening words of paragraph (i) make clear, the provision is dealing with all sales by online distribution, not some only. Third, given the reasons for using the concept of "at source", it would be natural in the case of a wholly new concept of exploitation, to give the widest possible definition of the pool to be taken account of for royalty purposes. As I have already pointed out, the June 1999 agreement itself refers to two other quite distinct pools for royalty calculations (XX per cent of receipts and the royalty calculation price), either of which on the submissions of EMI would have been more appropriate.
36. Fourthly, notwithstanding the vigorous counter-arguments of counsel for EMI, I do not see how, as a matter of construction, it is possible to exclude just retail sales. I know of no reason why a sub-licensee of EMI should not be both a wholesaler and a retailer. It is not possible as a matter of construction to include his wholesale sales but to exclude his retail sales, nor, if it is accepted that such sales of an exclusive licensee are to be included, can I see any basis as a matter of construction for excluding such sales in the case of a sub-licensee who is not exclusive, but including them in the case of one who is. Exclusivity is simply not referred to at all.
37. Fifthly, it may be, as counsel for EMI submitted, that the words used involve some duplication in that "any third party obtaining rights in this respect directly or indirectly from EMI" is almost certainly a sub-licensee or an affiliate, but such duplication exists, whichever party's construction is the right one. Sixthly, given the fact that the commerciality of online distribution was unknown in June 1999, I do not consider that it is possible to predicate what was an appropriate royalty rate or what was an appropriate level of return for Pink Floyd or EMI.
38. Both parties sought to derive support from the provisions of clause 9(d)(ii). For my part, I do not see that they are of any assistance in the construction of the previous paragraph.
39. For all these reasons, I do not consider that EMI has a real prospect of success in its defence of the claim insofar as Pink Floyd seeks the first declaration. In summary, I do not consider that the factual matrix relied on is capable of displacing the clear meaning of the words used nor can such factual matrix justify the implication of a term in the opposite sense to that meaning.
40. Accordingly, I will make the first declaration.

(Judgment continues in public)

41. I turn then to the second declaration. This depends on the proper construction of clause 4.13 of the MLA. Substituting the references to claimants and defendant for those given on the clause, it reads as follows:

"The [defendant] warrants undertakes and agrees with [the first claimant]

…

not to couple Records delivered hereunder with other master recordings or to sell in any form other than as the current Albums and to exploit the Albums in exactly the same form as to track listing and timing as are delivered hereunder (without limitation there are no rights to sell any or all of the Records as Single records other than with the Company's prior written consent which may be absolutely withheld)."

42. In their Amended Particulars of Claim, Pink Floyd allege, and it is not disputed, that EMI has permitted the sale of single track downloads of individual recordings on an album. In addition, it is alleged and not disputed that the EMI has permitted the sale of part of a single track as a ring tone and of the whole of a single track by "streaming", that is to say, direct transmission of sound to the consumer without the creation of any copy on the consumer's receiving device.
43. The declaration sought is:

"Upon the true construction of the MLA, Clause 4.13 of the MLA applies to Online Distribution, so that the Defendant is not entitled to exploit the recordings on the MLA Albums (or other Albums now subject to the terms of the MLA) by Online Distribution or by any other means other than the original Album configurations, without the prior written consent of the Claimants which may be absolutely withheld (including by means of ringtones and streaming)."

44. In its Defence, EMI asserts that the restriction imposed by clause 4.13 relates "only to the sale of physical records and not to recordings distributed on line". It also sets out alternative defences of consent and estoppel which will go to trial even if I make the second declaration.
45. For present purposes, therefore, the only issue on this part of the case is whether clause 4.13 applies to digital exploitation or distribution. Does EMI have a real prospect of succeeding in its contention to that effect?
46. It is not suggested that there is any relevant factual matrix. It is a pure question of the true construction of the clause in the context of the MLA as a whole. First, it is necessary to refer to other provisions in the MLA. By clause 1, EMI was granted sole and exclusive rights to manufacture records, of online distribution and "to any form of exploitation of embodying sound alone not currently used in the sale of Records" subject in the last mentioned case to the consent of Pink Floyd.
47. By clause 12.1 the definitions which followed applied to the MLA. They include definitions of 'album', 'records' and 'single' in the following terms:

"'Album' any sound alone record derived in whole or in part from the Master Tapes.

'Records' any sound alone devices manufactured by the Licensee in a configuration now known and currently exploited together with formats to be devised and derived in whole or in part from the Master Tapes.

'Single' a seven inch 45 rpm Record and/or a twelve inch (45 rpm or 33 1/3 rpm) Record (and/or the Compact Disc and/or the cassette and/or DVD and/or other agreed format equivalent thereof and all other equivalent means of exploitation the rights to which are granted to the Licensee as specified herein) containing not less than two (2) tracks or more than four (4) tracks."

48. Counsel for Pink Floyd asserts that the purpose of clause 4.13 was to preserve the artistic integrity of the albums. Consequently, he submitted, it must extend to digital as well as physical recordings. Indeed, there would be no sense in including it if it did not. He submits that the inclusion of online distribution in the rights granted by clause 1 demonstrates that it does so extend. He contends that this interpretation is confirmed by clause 6.1(b)(i) in that it provides for online distribution to be deemed to be the sale of a physical record for all purposes.
49. He points out that the definition of a single as including "all other equivalent means of exploitation", naturally embraces digital or online distribution. Similarly, the definition of record includes "formats to be devised". The definition of album comprises "any sound alone record". If record is used in the loose sense, then it includes digital exploitation, and if it is used in this defined sense, it includes future formats.
50. This is disputed by counsel for EMI. She points out that, except for online distribution, the rights granted by clause 1.4 are subject to the absolute prior written consent of Pink Floyd. She notes that many provisions of the MLA, in particular clauses 4.6, 4.8 and 4.12 to name but a few, can only apply to the physical product. She submits that this is confirmed in the case of clause 4.13 by the definitions of Album and Records, when compared with that of Online Distribution. Accordingly she submits the deeming provision in clause 6.1(b)(i) cannot be taken literally.
51. I start from the proposition, which was not disputed, that the purpose of clause 4.13 is to preserve the artistic integrity of the album. That purpose is as relevant to online distribution as to the sale of physical product. Further, it was the purpose of the MLA, as evidenced by the opening words of clause 6.1(b)(i), to treat online distribution so far as possible, the same way as the exploitation of the physical product. No doubt some other clauses are not appropriate to online exploitation, but the presumption arising from clause 6.1(b)(i) is that a provision should extend to digital and physical product alike, unless there is something in its nature or its terms to suggest otherwise.
52. There is nothing in the definition of the words "Album" and "Record" to suggest that those terms are confined to physical product only. In the case of the definition of "Single", digital product is clearly included in the part which refers to "all other equivalent means of exploitation". This is important because the words in parenthesis in clause 4.13 state in terms that there are "no rights to sell any or all of the records as Single records". As those words are declaratory as to the effect of both the earlier prohibitions contained in clause 4.13, it confirms their application to online distribution or exploitation of singles as defined.
53. For these reasons I do not consider that EMI has demonstrated a real prospect of resisting the grant of the second declaration either. Accordingly, I will by way of summary judgment make that declaration too.