Capitol Records, Inc. v. Erickson

• Decision Date: 11 December 1969
• Citation: 2 Cal.App.3d 526,82 Cal.Rptr. 798
• Parties: , 40 A.L.R.3d 553, 164 U.S.P.Q. 465 CAPITOL RECORDS, INC., a California corporation, Plaintiff and Respondent, v. Richard W. ERICKSON, Christopher G. Hamlin, Patrick Osborn, Edwin Bethune, andRobert Pascual, doing business as Phoenix Tapes, Defendants and Appellants. Civ. 34107.
• Court: California Court of Appeals Court of Appeals

Page 798

82 Cal.Rptr. 798

2 Cal.App.3d 526, 40 A.L.R.3d 553, 164 U.S.P.Q. 465

CAPITOL RECORDS, INC., a California corporation, Plaintiff and Respondent, v. Richard W. ERICKSON, Christopher G. Hamlin, Patrick Osborn, Edwin Bethune, andRobert Pascual, doing business as Phoenix Tapes, Defendants and Appellants.

Civ. 34107.

Court of Appeal, Second District, Division 1, California.

Dec. 11, 1969.

Hearing Denied Feb. 5, 1970.

WOOD, Presiding Justice.

Defendants (Phoenix, hereinafter) appeal from an order granting a preliminary injunction ¹ restraining Phoenix, pending the hearing and determination of the action, from transferring to magnetic tape any performances embodied in phonographic recordings produced and sold by plaintiff recording company (Capitol, hereinafter).

Phoenix contends that the court erred in granting the injunction.

For the purposes of the preliminary injunction, there is no dispute as to the facts. Phoenix is admittedly in the business of selling prerecorded stereophonic tape cartridges, which it produces as follows: Phoenix purchases on the open market records and tapes of musical performances which have been produced, recorded, and sold by Capitol. Phoenix then makes 'master' recordings from the records and tapes which it purchased, and used the master recordings to produce tape cartridges which it sells to the general public. ² On the front of each cartridge package Phoenix affixes a label which bears the title of the recorded performance and the names of the performing artists; and, on the back of the cartridge package, it affixes a label bearing the following words: 'No relationship of any kind exists between Phoenix and the original recording company nor between this recording and the original recording artist. This tape is not produced under a license of any kind from the original company nor the recording artist(s) and neither the original recording company nor artist(s) receives a fee or royalty of any kind from Phoenix. Permission to produce this tape has not been sought nor obtained from any party whatsoever.'

It is admitted that Phoenix does not seek or obtain permission of Capitol or permission of the recording artists, to reproduce the records or tapes; and that Phoenix does not pay any fee or royalty to Capitol, or to the recording artist, or to the welfare and pension funds of the musicians' union. Phoenix does set aside a 'Composers' Trust Account' to which Phoenix contributes two cents 'per tune,' and from which Phoenix pays the statutory two-cent royalty required to be paid to the copyright proprietor of the musical composition recorded on the tapes sold by Phoenix.

Some of the evidence ³ in support of the application for the preliminary injunction was in substance as follows:

For many years Capitol has been engaged in the manufacture and sale of records in which the performances of noted recording artists are embodied, and Capitol is a leading manufacturer of such records in the United States and has attained a worldwide reputation as a manufacturer of records of the highest artistic and technical quality. The records manufactured by Capitol are in the form of discs and prerecorded magnetic tapes. The tapes are often sold in the form of tape cartridges, which have recently received substantial acceptance by the public for use in homes and automobiles. In the past ten years, the sales volume of tapes has increased substantially. Since 1965, Capitol has expended in excess of $10,000,000 in recording 'master recordings,' and has expended in excess of $35,000,000 to advertise and exploit its records. A master recording is the original recorded performance and it is used to manufacture the discs and tapes which are sold. Among other recordings, Capitol made master recordings of eleven performances by a vocal group known as 'The Lettermen,' and from those recordings Capitol produced an album entitled 'Goin' Out of My Head.' The Lettermen granted to Capitol the sole and exclusive right to manufacture and sell records embodying the performances by The Lettermen, and the sole and exclusive right to use the name 'Lettermen' in connection with the sale of such records. The cost of producing said album, exclusive of costs for studio time, engineers, and materials, was $25,000. The album was distributed for sale in March 1968 and, as of July 1968, Capitol had derived $500,000 gross receipts from sales of the album. A weekly publication entitled 'Cash Box' is a leading publication in the recording industry. It publishes a weekly survey of record sales in the form of a chart entitled 'Top 100 Albums,' that lists the albums which, according to statistics, are currently the best selling albums. The chart lists, for each album, the name of the performing artist, the title of the performance, and the name of the manufacturer. Commencing in May 1968 the album 'Goin' Out of My Head' appeared on the chart for 16 weeks, and it was in fourteenth position on the chart at its 'highest point.' Said album also appeared on the 'Top 20 LP's' chart of 'Billboard,' another publication in the recording industry. From one of Capitol's albums of 'Goin' Out of My Head,' Phoenix produced tape cartridges which bore the title 'Goin' Out of My Head,' and the name of the recording artists, 'The Lettermen.' Said cartridges also bore the aforementioned label to the effect that there was no relationship between Phoenix and the original recording company, etc. Phoenix circulated advertisements to wholesale and retail dealers offering to sell tape cartridges of such album and other albums on Billboard's 'Top 20 LP's.' In May 1968 a representative (Mr. Hamlin) of Phoenix contacted a national distributor of tape cartridges for automobiles and told said distributor that Phoenix was in the business of duplicating records and tape cartridges manufactured by other manufacturers and that Phoenix would sell the duplicated product for less than the price charged by the original manufacturers. Mr. Hamlin offered to sell tape cartridges of 'Goin' Out of My Head' by 'The Lettermen' at a substantial discount. The distributor recognized the 'title' as that of a successful album manufactured by Capitol; and Mr. Hamlin said that it was the intention of Phoenix 'to test the law' and that it would be helpful if a national distributor handled the products of Phoenix. The distributor refused to purchase any of the tape cartridges because he desired to acquire 'only such product as had been legitimately manufactured and paid for' and which could be acquired 'through the normal and customary channels of trade.' The distributor stated that the only reason he would consider purchasing Phoenix tape cartridges was his fear that the 'pirated tape cartridges' offered by Phoenix might be sold to his competitors at prices substantially under the prices which we would pay for the 'legitimate product.'

There was also some evidence to the effect that on its tape cartridges of the Lettermen album Phoenix altered the order of the eleven performances of The Lettermen which comprised the album as produced and sold by Capitol; ⁴ and that (in opinion of a recording engineer) the quality of the Phoenix tapes was 'dubbed off' (reproduced) from a record sold commercially, and the cartridges were of inferior quality, technically and audibly, and were not of the standard of quality maintained by Capitol, which maintains one of the highest technical standards in the recording industry.

Appellant contends that the court erred in granting the preliminary injunction. It argues in effect that its conduct in duplicating recordings produced by Capitol without permission of Capitol or the recording artists, and then selling the duplicated recordings in competition with Capitol, is condoned by the decisions in Sears, Roebuck & Co. v. Stiffel Company, 376 U.S. 225, 84 S.Ct. 784, 11 L.Ed.2d 661, and Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669; and that a state court cannot, on the theory of unfair competition or otherwise, enjoin such conduct.

In the Sears case, Sears manufactured a pole lamp which was 'a substantially exact copy' of a pole lamp manufactured by Stiffel, and Sears sold its pole lamps at a price lower than the price for which the Stiffel lamps were sold. Stiffel's lamp was not patentable under federal law. The trial court found that there was some confusion by the public as to the source of the lamps, and found that Sears was guilty of unfair competition. (To establish a case of unfair competition under Illinois law, it was necessary to prove that there was 'palming off'--'likelihood of confusion as to the source of the products.') The Supreme Court stated (pp. 230--231 of 376 U.S., pp. 788--789 of 84 S.Ct.) that 'the patent system is one in which the uniform federal standards are carefully used to promote invention while at the same time preserving free competition,' and that a state 'could not * * * extend the life of a patent beyond its expiration date or give a patent on an article which lacked the level of invention required for federal patents.' It was also said (pp. 231--232, 84 S.Ct. p. 789): 'An unpatentable article, like an article on which the patent has expired, is in the public domain and may be made and sold by whoever chooses to do so. What Sears did was to copy Stiffel's design and to sell lamps almost identical to those sold by Stiffel. This it had every right to do under the federal patent laws. That Stiffel originated the pole lamp and made it popular is immaterial. 'Sharing in the goodwill of an article unprotected by patent or trade-mark is the exercise of a right possessed by all--and in the free exercise of which the consuming public is deeply interested.' (Citation.) To allow a State by use of its law of unfair competition to prevent the copying of an article which represents too slight an advance to be patented would be to permit the State to block off from the public...