GAI Audio of New York, Inc. v. Columbia Broadcasting System, Inc.

• Decision Date: 26 June 1975
• Docket Number: No. 521,521
• Citation: 27 Md.App. 172,340 A.2d 736
• Parties: , 188 U.S.P.Q. 75 GAI AUDIO OF NEW YORK, INC. et al v. COLUMBIA BROADCASTING SYSTEM, INC. et al.
• Court: Court of Special Appeals of Maryland

Page 172

27 Md.App. 172

340 A.2d 736, 188 U.S.P.Q. 75

GAI AUDIO OF NEW YORK, INC. et al v. COLUMBIA BROADCASTING SYSTEM, INC. et al.

No. 521.

Court of Special Appeals of Maryland.

June 26, 1975.

Paul S. Podolak, Elkton, and O. John Rogge, New York City, with whom were Robert B. Barnhouse, Baltimore, Barton Nachamie, A. Michael Fox and Arutt, Nachamie & Benjamin, New York City, on the brief, for appellants

M. King Hill, Jr., and Michael A. Pretl, Baltimore, with whom were Smith, Somerville & Case, Baltimore, on the brief, for appellees.

Argued before ORTH, C. J., and POWERS and MOORE, JJ.

MOORE, Judge.

This appeal brings before us for the first time, and in the context of a civil action for compensatory and punitive damages, the nationwide phenomenon of 'piracy' or 'duplication' of musical recordings. ¹

Columbia Broadcasting System, Inc., and Atlantic Recording Corporation, appellees, are the owners of exclusive contracts with popular recording artists and are the manufacturers and distributors of tapes and records on which performances of such artists are recorded. Appellants are four corporations and one individual who, in 1971 and 1972, without appellees' consent, duplicated and sold more than a half-million copies of appellees' tapes at a plant in Elk Mills, Cecil County, Maryland. ²

On May 2, 1972, appellees brought suit in the Circuit Court for Cecil County, alleging unfair competition, conversion and conspiracy, each claiming $300,000 in compensatory and punitive damages against Deeds Music Company, Inc., Deeds Electronic Company, GAI Audio of New York, Inc., Jack Kessler, and ALP Distributing Company. A writ of attachment on original process was issued and certain equipment and other personal property of the appellants, including 58,682 assorted 8-track stereophonic tapes, were seized by the Sheriff of Cecil County on May 3, 1972.

After discovery in this and a related federal proceeding ³ Kesco Textile Company, Inc. ('Kesco'), Playgirl Industries, Inc., Playgirl Fashions, Inc., and Julius Kessler were added as additional parties-defendant by leave of court on February 28, 1973 and July 23, 1973.

The trial before Judge H. Kenneth Mackey, sitting without a jury, began on January 28, 1974 and consumed six (non-consecutive) days. During the course of trial, on February 7, 1974, the defendant, Deeds Music Company, Inc., consented to entry of judgment against it in the amount of $150,000. All claims against the remaining defendants were reserved. The latter offered no testimony and rested at the close of plaintiffs' case. ⁴

On March 1, 1974, at the conclusion of the trial, Judge Mackey, in an oral opinion from the bench, entered judgment nisi against each of the other defendants under the counts alleging unfair competition and civil conspiracy, ⁵ in the amounts of $93,701.74 in compensatory and $50,000 in From those judgments, made absolute on March 7, 1974, appeals were taken by GAI Audio of New York, Inc., Playgirl Industries, Inc., Playgirl Fashions, Inc., and Julius Kessler.

punitive damages in favor of Columbia Broadcasting System, Inc., and $53,383.25 in compensatory and $25,000 in punitive [340 A.2d 740] damages in favor of Atlantic Recording Corporation. Appellees were awarded itemized costs totalling $8,102.99 and were awarded judgment of condemnation absolute against the attached chattels. (A comprehensive supplemental opinion was thereafter filed on May 3, 1974).

I FACTUAL BACKGROUND

From the extensive record in this case, the numerous exhibits and the opinion and supplemental opinion of Judge Mackey, the following facts emerge:

Early in 1971, Mr. Jack Kessler, who had engaged in tape duplicating operations elsewhere in the United States, ⁶ embarked upon a similar enterprise in Maryland. He did so, not alone, but with the extraordinary assistance of his brother, Julius Kessler and an associate of Julius, one Daniel Eisenstein, who were engaged in business in New York's 'garment district.' The trial court found:

'In the Spring of 1971 Daniel Eisenstein, New York City entrepreneur, formed the Maryland Corporation, Deeds Electronics Co. Inc. He later changed the name of this corporation to Elk Mills Enterprises Inc. About the same time Jack Kessler appeared operating a sole proprietorship known as Deeds Electronic Inc. Mr. Kessler rented buildings from the Defendant, Kesco Textile Company Inc., purchased raw material and supplies and leased equipment from G.A.I. Audio of New York Inc., another Defendant, and in the Kesco building at 'Jack Kessler's brother, Julius, was, during all times pertinent to this suit, President of G.A.I. Audio of New York Inc., Kesco Textile Company Inc. and Play Girl Fashions Inc., all of which corporations were subsidiaries of Play Girl Industries Inc. of which he was also President. Daniel Eisenstein was the Secretary-Treasurer of each of said corporations. Each corporation shared common office space at 225 West 35th Street, New York City. G.A.I. Audio of New York Inc. had no employees.' (Emphasis added.)

Elk Mills, Cecil County, Maryland commenced a tape bootlegging operation wherein he duplicated the tapes of the Plaintiffs, put them in cartidges, packaged them and sold them on the open market. He employed upwards of a score of young ladies, used very sophisticated equipment and turned out these duplicated tapes by the tens of thousands.' (Emphasis added.) The trial court thus described the role of Julius Kessler:

In the fall of 1971, after the U. S. Congress passed Public Law 92-140 amending the copyright law to extend protection to sound recordings and to provide for criminal penalties effective February 15, 1972, Jack Kessler attempted to insulate himself and presumably his associates, from potential federal liability by transferring the duplicating end of the operation to Mr. Leonard Lockhart, a practicing lawyer in Elkton.

Mr. Lockhart had been providing legal advice to Jack Kessler, specifically with regard to the compulsory licensing provisions of the Copyright Act, 17 U.S.C. § 1(e). ⁷ Mr The transfer was accomplished first by

Lockhart was of the opinion that so long as appellants paid 2 cents a copy to the original composer of the music they could duplicate records and tapes of major companies with impunity. The trial judge, in his Supplemental Opinion found that Daniel Eisenstein told Lockhart that Jack Kessler 'had certain troubles with the Internal Revenue Service and felt that he would like to get out of the tape duplicating operation.' The court expressed doubt that the attorney was aware of the pendency of Public Law 92-140.

Mr. Lockhart's formation of a Delaware corporation, Deeds Music Company, Inc. (Deeds), with himself as president and sole stockholder. Then, on November 11, 1971, Mr. Lockhart went to a meeting at 225 W. 35th Street, New York City, with Jack Kessler and his brother, Julius Kessler, Barton Nachamie, an attorney, and Daniel Eisenstein.

With respect to the agenda of the New York meeting, the trial court found:

'When Leonard (Lockhart) arrived in New York Mr. Nachamie, on behalf of the other participants, already had several papers prepared. These consisted of a lease of the real estate 'for the purpose of manufacturing and recording tapes and similar devices electronically.' In this lease Deeds rented from Kesco for a period from November 15, 1971 to March 14, 1972 at an annual rental of $18,000. This was signed by Julius Kessler, President of Kesco, and Leonard Lockhart, President of Deeds Music Company, Inc. The tenant had an option to renew the lease for three (3) years at an annual rental of $24,000. Mr. Nachamie also had prepared a lease of the equipment from GAI Audio of New York, Inc. to Deeds Music Company, Inc. signed by Julius Kessler, President of GAI, and Leonard H. Lockhart, President of Deeds. The rental was $1,000 per week, total rent $191,000.00, effective November 15, 1971. An inventory of the equipment is attached to the lease. The list commenced with one Ampex duplicator and the Thereafter, Jack Kessler continued to live within 300 yards of the duplicating plant at Elk Mills and, in addition, as head of a newly established 'ALP Distributing Company,' he occupied business space in a separate room adjacent to the terminus of Lockhart's production line. Jack Kessler, as ALP, distributed all of the tapes copied by Deeds. He was, in fact, Deeds' only customer and paid Deeds $1.15 per tape. The tapes were resold for about $3.00 retail. ⁸

second item is 5 Ampex slaves. Another agreement of the same date between GAI and Deeds signed by Julius Kessler, President of GAI, and Leonard H. Lockhart, President of Deeds called for GAI to provide raw materials on consignment to Deeds to be paid for within 30 days. These were proven to be the raw materials necessary essary to operate the duplicating process and to package the finished tapes. Four (4) days later when Leonard was back in Elkton he agreed with Jack Kessler-an agreement that had been discussed in New York with the other parties-that Deeds Music Company, Inc. would buy from Deeds Electronics Company, an individual proprietorship owned by Jack Kessler, the business for the sum of $5,000. This agreement of sale refers to a 'Memorandum of Understanding Between GAI Audio of New York, Inc., Jack Kessler and Deeds Music Company, Inc. signed November 11, 1971.' This agreement was signed by Jack Kessler, individually, and Leonard H. Lockhart as President of Deeds Music Company, Inc.' (Emphasis added.)

Selected for duplication were the most popular and best selling tapes of the appellees. Mr. Lockhart, called as an adverse witness by the appellees, testified in this connection:

'You see, Altantic and Columbia have a great gimmick in what they do. They put two good songs During the relatively short period of its existence, from November 15, 1971 until March 31, 1972, Deeds Music Company under Leonard Lockhart had gross income of approximately...