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08/28/02:
DKs v ATR Appeal

CONTENTS
I.   Introduction
II.  Statement of Facts
III. Procedural History
IV.  Argument on       Appeal
V.   Conclusion
      Re-Appeal
VI.  Argument on       Cross-Appeal
VII.Conclusion
      Re Cross-Appeal

II. STATEMENT OF FACTS
A. The Parties
B. Dead Kennedys
C. The Decay Music Partnership
D. Alternative Tentacles Records
E. Biafraís Fiduciary and Contractual Breaches
F. Biafraís Deception About Underpayment of Royalties
G. Termination of the ATR Agreement

II.  STATEMENT OF FACTS

A. The Parties.

The parties are the San Francisco punk rock band DEAD KENNEDYS d/b/a DECAY MUSIC, a California general partnership, and three of the partnershipís four members - EAST BAY RAY (guitar), KLAUS FLOURIDE (bass), and D.H. PELIGRO (drums) - on the one hand, and the fourth member, JELLO BIAFRA (lead vocals) and d/b/a ALTERNATIVE TENTACLES RECORDS, on the other hand.

B. Dead Kennedys.

DEAD KENNEDYS toured and recorded from 1978 to 1986.  The bandís body of work, created during that time, consists of sound recordings of its studio and live performances, musical compositions or songs, video recordings of its live performances, record album artwork, as well as related intellectual property, including the bandís name and associated logos, symbols and marks.  This work still has appeal; even now, the band sells in excess of 100,000 records worldwide each year.

C. The Decay Music Partnership.

Although it stopped performing and recording music in 1986, the band continued to conduct business as Decay Music, a California general partnership, composed of the bandís four members.  The band members formed the Decay Music partnership in or around 1981.  They memorialized the material terms of the partnership in a written agreement - reviewed, approved, dated and signed by all four partners - in April 1991 (the "1991 Partnership Agreement").  Each partner has an equal ownership and voting interest in the partnership with partnership matters subject to majority vote.

At all relevant times, Decay Music acted as the bandís exclusive business entity, paying the costs of creating, and with exclusive management of and control over the rights in and to, all of the bandís recorded performances (with the exception of its first studio effort), its songs, its album artwork, as well as the balance of the bandís intellectual property.  For over 20 years, Decay Music was (and remains) the sole and exclusive vehicle for approving all matters relating to band business, including entering into contracts and other business relationships with third parties and collecting and distributing all monies derived from the use of the bandís work.

Each Decay Music partner performed, composed and recorded music while a member of the band, and all of the bandís recorded performances and musical compositions were the result of creative collaboration.  Each of the band members shared, and continues to share, through the Decay Music partnership, in all income derived from all of the bandís creative work - as memorialized in the 1991 Partnership Agreement.

D. Alternative Tentacles Records.

DEAD KENNEDYS formed Alternative Tentacles Records ("ATR") in late 1981 as a record label to release the work of other bands.  ATR was conceived as a partnership venture, jointly administered by Biafra, East Bay Ray and the bandís then-personal manager.  In an oral agreement reached later, the partnership transferred ownership of ATR to Biafra, who thereafter operated it as a sole proprietorship.

In or around 1984, Decay Music recovered physical possession of and control over certain of the bandís early recordings from a defunct record label.  To insure the continued availability of DEAD KENNEDYS music to the public, Decay Music agreed to let ATR manufacture and distribute the bandís records.

The terms of the at-will oral agreement concluded between East Bay Ray (acting for Decay Music) and ATRís then-General Manager are not in dispute.  The partnership granted ATR the limited right to manufacture and distribute the bandís records in the U.S., in return for (1) promoting the bandís records, (2) paying Decay Music an artist royalty (for use of the recorded performances) equal to or higher than the rate paid any other artist on the label, and (3) paying a mechanical royalty (for use of the underlying musical compositions or songs) equal to ten times the current U.S. statutory rate as set by federal law, including any increases thereto.  Biafra was advised of and agreed to the terms and conditions governing this relationship.

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E. Biafraís Fiduciary and Contractual Breaches.

After Biafra assumed sole ownership and control of ATR, he ceased promoting the sale of DEAD KENNEDYS records.  This was so even though the band was by far ATRís largest-selling act, accounting for 50% or more of the record labelís total sales.

Instead, Biafra used the proceeds from the bandís record sales to promote his own solo artist "spoken-word" career and to record and release expensively produced vanity albums. (e.g., a 3 vinyl picture disc spoken word album)  According to Biafra, DEAD KENNEDYS records "sold themselves," and the only useful way to promote those records was to promote Biafra himself.  The result was a loss of DEAD KENNEDYS record sales - to the partnershipís detriment.

In addition, starting after 1988, Biafra ceased paying the partnership any increase in the mechanical royalty it was entitled to for use of the musical compositions appearing on DEAD KENNEDYS records as the federal statutory rate increased.  This was so even though (1) as Biafraís own music industry expert acknowledged, written license agreements Decay Music had with its previous record labels provided for such an increase; and (2) ATR implemented at least one such increase in 1986, after Biafra assumed its ownership and control.

ATR met with hostility periodic efforts by the other partners, primarily East Bay Ray, to address this issue (the statutory rate increases marginally every two years). (Feb. 28, 1997 letter from Greg Werckman to East Bay Ray - characterizing Rayís request to discuss mechanical rate issue as "simply greedy;" Klaus Flouride "flabbergasted" by ATRís treatment of Ray at follow-up meeting; Ray called "greedy" at follow-up meeting).  As a result, ATR owed Decay Music a sizeable sum, only a portion of which, because of the applicable limitations period, the partnership could recover in damages.

Together with a business partner, Biafra also had an interest in the manufacture and distribution of DEAD KENNEDYS records in the U.K. and Europe.  (Decay Music had agreements with record labels in other countries for the manufacture and distribution of DEAD KENNEDYS records overseas. [Shock Records Agreement])  This was pursuant to a separate license agreement between Decay Music and a foreign business entity, Alternative Tentacles UK ("AT UK"), which, until its demise, Biafra owned in part.  When AT UK failed, owing Decay Music over $20,000 in record royalties, all four Decay Music partners agreed that the partnership should terminate that license, and authorized Biafra in writing to recover its intellectual and personal property for the partnershipís benefit.

Instead, Biafra appropriated for himself the rights in the AT UK recordings and related personal property (tapes, packaging, etc.); he then licensed those rights to the network of third-party overseas distributors he was then assembling as part of ATRís expansion into worldwide distribution - paying the partnership a royalty - rather than the sum he was receiving from those third parties.  This resulted in a diversion of approximately $35,000 over a nine-month period from the Decay Music partnership.

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F. Biafraís Deception About Underpayment of Royalties.

Biafra concealed from the other Decay Music partners an underpayment of royalties (totaling over $110,000, with interest) by ATR to Decay Music dating back to 1989.  When, in early 1998, ATRís then-General Manager, Kristin Von Till, brought the underpayment directly to his attention, Biafra hid the indebtedness from his partners and embarked on a course intended to prevent them from learning or confirming that ATR owed Decay Music these monies.  Biafra then disguised the sum, offering it as new consideration in negotiations with the partnership, to lure the other partners into a written contract with ATR for exclusive worldwide distribution of the bandís recorded music - in perpetuity.

The jury heard the following evidence:  Ms. Von Till became General Manager of ATR in late 1996.  When she first calculated the bandís record royalties (one of her duties as General Manager), she noticed a discrepancy between its rate and the rate paid all the other bands on ATR.

Ms. Von Till understood that ATR paid all artists on the label the same royalty rate.  She also knew how important DEAD KENNEDYS was to the label.  She therefore immediately informed Greg Werckman, Biafraís personal manager and the person responsible for the royalty statements to Decay Music before Ms. Von Tillís arrival, of what she had found.

Werckman "hemmed and hawed," discouraging Ms. Von Till from pursuing the matter.  When, in December 1997, the band met with ATR, Werckman instructed Ms. Von Till not to mention to the other band members the discrepancy she had discovered - that "nothing would really change Ö and it would be over."

That meeting, her first with the other band members, was contentious.  [footnote: Among other things, the band was concerned that ATR had increased the wholesale price charged retailers for records (and therefore the retail price the public paid), but had failed to pass on any part of that increase to its artists via an increased royalty (calculated for all ATR artists as a percentage of a recordís retail price).  When the band persisted, the talk turned ugly.  Upon East Bay Rayís suggesting that ATRís expressions of hostility were "not the way a record label should be treating one of its best selling musicians," Werckman told him: "Maybe you are not a musician."  Notwithstanding this abuse, Ray was ultimately proved correct, and the parties resolved the issue pendente lite in Decay Musicís favor.]   Following it, she pressed Werckman on her earlier discovery, and he agreed to set up a meeting with Biafra after the holiday season to discuss it.  In the meantime, she prepared a written report on the subject.

Present at that early 1998 meeting, along with Biafra, Werckman and Ms. Von Till, was Richard Stott, Biafraís long-time friend and personal attorney.  Stott, who represented the band, its partnership and the other Decay Music partners in a range of matters, announced his intentions immediately upon being told of the royalty discrepancy by Ms. Von Till:

"I recall that the first thing that Rick Stott said was, basically, ĎGreat, we can pay [Decay Music] what they should have been getting paid all along and make them think it is a royalty raise, so Ray will get his royalty raise and it will just be what we should have paid them all along.í"
Biafra not only failed to halt this plan, but seconded it - "adamant" that his partners not be told the truth.

(The trial court earlier ruled, in connection with a discovery motion rejecting Biafraís attempt to conceal evidence of his fraud by assertion of the attorney-client privilege, that the other partners "have made a prima facie showing that the services of [Mr.] Stott were sought or obtained to enable or aid [Biafra] to commit or plan a fraud involving the withholding of material information and misrepresentation of the nature of funds being offered or paid [Decay Music] and the purpose therefor."  Accordingly, the trial court permitted Ms. Von Till to testify about her conversations with Biafra and Stott on the subject.)

Even though it was clear to all present that ATR owed monies to Decay Music (including Biafra, who admitted that the participants at this meeting "knew the [bandís royalty rate] was wrong"), Stott and Biafra instructed Ms. Von Till neither to disclose the existence of the royalty shortfall, nor to pay it, in order to maintain the sum as a lever to extract concessions for Biafra in negotiations then taking place with the partnership.  The back royaltiesí use as a "bargaining tool" with Decay Music was a strategy that even Werckman objected to - and later termed "a mistake." (May/June 1999 Punk Planet Article "Kill Your Idols")

Following the meeting, Biafra continued to stress to Ms. Von Till (who favored disclosing and paying the royalty discrepancy) the importance of keeping this information from his partners.  According to Ms. Von Till, "It was kind of a heated discussion on his part about the fact that Ray couldnít be told about the true nature of this money that was due to them or Ray would go after [him]."

ATR executed the fraud precisely as conceived.  In a response to a letter to him from Decay Musicís counsel, Michael Ashburne, whom the partnership had hired to represent its interests in negotiations with ATR, Stott wrote:

"First let me point out a fundamental error in your letter.  The proffered payment of a [retroactive] royalty. . .is in consideration of a new Licensing Agreement.  It is not a royalty owed Decay Music nor is it an arrearage on royalties.  As your clients well know Decay Music has been paid every dime it has earned from ATR over the last ten years."

Stott made and repeated this false statement on Biafraís behalf over the course of several months in extended correspondence with Mr. Ashburne, conditioning any payment upon the partnershipís entering into a perpetual worldwide license agreement with ATR for exclusive distribution of the bandís recordings.  (Letter from Stott to Ashburne, dated July 13, 1998 -"You refer to a Ďdiscrepancyí in the accountings but no such discrepancy exists.").

At the same time, Biafra refused to confirm to his partners whether ATR paid other artists - including Biafra himself - the same or a greater record royalty rate than DEAD KENNEDYS, asserting (through Stott) that the information was "confidential."  In obstructing the other partnersí inquiry, Stott later characterized their request for that information as motivated by "greed."

When Ms. Von Till revealed the true facts to East Bay Ray in the Fall of 1998 (resulting in her dismissal from ATR), he was "appalled; he didnít want to believe that that was really going on."  This disclosure was followed by more stonewalling on ATRís part, leading to a breakdown in what by then was a year-long negotiation between Decay Music and ATR.

In October 1998, Biafra paid the amount in issue (without interest) into Mr. Ashburneís client trust account on condition that it not be released without Biafraís consent or a court order.  That consent came in January 2000 - an admission, almost two years after first being told of the royalty underpayment, that Biafra owed this money to the partnership and the other partners.

G. Termination of the ATR Agreement.

On September 30, 1998, the Decay Music partnership voted to terminate its agreement with ATR.  Although he received reasonable notice of a partnership meeting for that date, Biafra failed to attend.  Notwithstanding notices of termination sent by Mr. Ashburne both to Biafra and to third parties on Decay Musicís behalf, ATR ignored the partnershipís vote and continued to sell DEAD KENNEDYS records.

 

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last updated 06/22/04