United States v. Gallant

• Decision Date: 08 August 1983
• Docket Number: No. 83 Cr. 053 (DNE).,83 Cr. 053 (DNE).
• Citation: 570 F. Supp. 303
• Parties: UNITED STATES of America v. John GALLANT, Defendant.
• Court: U.S. District Court — Southern District of New York

570 F. Supp. 303

UNITED STATES of America v. John GALLANT, Defendant.

No. 83 Cr. 053 (DNE).

United States District Court, S.D. New York.

August 8, 1983.

COPYRIGHT MATERIAL OMITTED

John S. Martin, Jr., U.S. Atty., S.D.N.Y., New York City (Martin L. Perschetz, Asst. U.S. Atty., New York City, of counsel), for plaintiff.

Gallop, Dawson, Kimelman & Clayman, New York City (Steven Kimelman and Charles Clayman, New York City, of counsel), for defendant.

MEMORANDUM OPINION AND ORDER

EDELSTEIN, District Judge:

FACTUAL BACKGROUND

The defendant, John Gallant ("Gallant") is charged in a forty-nine count indictment with fourteen counts of mail fraud, 18 U.S.C. § 1341 (Counts 1 through 14); four counts of wire fraud, 18 U.S.C. § 1343 (Counts 15 through 18); nine counts of interstate transportation of stolen property, 18 U.S.C. § 2314 (Counts 19 through 27); and, twenty-two counts of copyright infringement, 17 U.S.C. § 506(a) (Counts 28 through 49). There is no dispute as to the facts giving rise to the indictment.

From October 1, 1979 to May, 1981 Gallant worked as a salesman at Gallant International, his father's apparel business. In May, 1981, agents of the Federal Bureau of Investigation searched Gallant International¹ and discovered that, in addition to selling women's clothing, Gallant was selling "bootleg" record albums from his father's warehouse. A bootleg album is an unauthorized recording of a live performance that is recorded either at the performance or from a radio or television broadcast of the performance and is not available for purchase as an authorized recording. Bootleg albums usually carry blank labels that make no suggestion that the album is authorized by the performer or the performer's record company, and the sound quality is generally inferior to that of studio recordings.²

The search uncovered thousands of bootleg albums of popular contemporary recording artists performing copyrighted musical compositions.³ The search also uncovered business records, such as invoices, journals and United Parcel Service receipts, reflecting shipments of bootleg albums to record distributors and retailers throughout the United States. Gallant sold these bootleg albums primarily as a wholesaler.

Gallant has moved pursuant to Fed.R. Crim.P. 12(b)(2) to dismiss counts 1 through 27 of the indictment on the ground that the indictment fails to establish a cognizable scheme to defraud or to transport stolen property interstate. He does not dispute the sufficiency of the allegations of counts 28 through 49, the copyright infringement counts. 17 U.S.C. § 506(a).

DISCUSSION

A. Gallant's Challenge to the Mail and Wire Fraud Counts.

Gallant has moved to dismiss counts 1 through 14 and 15 through 18 of the indictment charging him with mail fraud, 18 U.S.C. § 1341 and wire fraud, 18 U.S.C. § 1343, respectively. Counts 1 through 18 charge Gallant with unlawfully, wilfully and knowingly

defrauding recording artists, musical composers, music publishing companies, and recording companies, thereby depriving them of their rightful royalties, payments and income, and infringing on their lawful property and contractual rights, by distributing, selling and offering for sale phonograph records containing performances of musical compositions which were reproduced illegally and without authorization of their copyright proprietors.

Indictment ¶ 2. The indictment further alleges that Gallant engaged in a scheme and artifice, involving the use of the mails and wires, to sell hundreds of thousands of dollars of unauthorized phonorecords containing illegally reproduced copyrighted compositions. Id. ¶ 3. The government contends that by virtue of this scheme Gallant obtained money and property by means of fraud. Specifically, the government contends that Gallant defrauded the copyright holders who possess the exclusive rights to distribute and reproduce recordings containing their copyrighted works.

Gallant contends the indictment fails to state a cognizable scheme to defraud because he made no false statements, misrepresentations or promises to the copyright holders. Simply stated, Gallant's position is that while he may have infringed the copyright holders' copyrights, he defrauded no one. Affidavit of Steven Kimelman, sworn to March 23, 1983 ¶ 9.

18 U.S.C. §§ 1341 and 1343 prohibits the use of the mails or of wire, radio or television communication for "any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises...." The two elements of the offense are: (1) use of the mails or wires; (2) to further a scheme to defraud. Gallant has not denied that he used the wires and mails in connection with his distribution of the bootleg records. The issue raised by the defendant's motion therefore is whether the distribution and sale of bootleg records is a scheme to defraud.

The elements of fraud are well established: (1) the defendant must have made an affirmative misrepresentation or nondisclosure; (2) that deception must be material; and (3) it must be done in contemplation of harm to the defrauded party or gain to the defendant. United States v. Bronston, 658 F.2d 920, 927 (2d Cir.1981), cert. denied, 456 U.S. 915, 102 S.Ct. 1769, 72 L.Ed.2d 174 (1982).⁴ The government does not contend that Gallant made any affirmative misrepresentation in furtherance of the alleged scheme to defraud. Instead, the government asserts that, under the copyright law, one who intends to distribute recordings of copyrighted musical compositions is under a duty to disclose his plans to the copyright owner. Because Gallant failed in this duty, the government argues, he committed a fraud.

The government initially asserted that the compulsory license provision, 17 U.S.C. § 115 (which allows a party seeking to make and distribute a copyrighted work to do so by serving a notice on, and paying a royalty to, the copyright holder) imposes upon record bootleggers a "duty" to disclose their activities to the copyright holder. The government further argued that a bootlegger's failure to comply with the notice provision constitutes a breach of a duty to disclose and that this is a "scheme to defraud" under a mail and wire fraud prosecution.

Gallant argued that the compulsory license provision is inapplicable because it refers only to one who seeks to "make and distribute phonorecords of the copyrighted work." It is undisputed that Gallant operated solely as a middleman who distributed, but did not "make," bootleg records. The government subsequently conceded that § 115 was not applicable. See Letter of Assistant United States Attorney Martin L. Perschetz, dated May 6, 1983 (the "Perschetz Letter"), p. 1-2.

The government argues that even if § 115 does not impose a duty to disclose upon bootleg record distributors, that fact only serves to underscore Gallant's violation. The government reasons that the compulsory license provision of § 115 is a limitation upon a copyright holder's exclusive right to reproduce and distribute musical compositions under 17 U.S.C. §§ 106(1) and 106(3). That is, § 115 allows someone to reproduce and distribute a copyrighted work without the copyright owner's permission, if the requirements of § 115 are met. Hence, the government argues, if § 115 was unavailable to Gallant, then he had a stronger and an unconditional duty to obtain the copyright holders' permission to distribute their musical compositions. To obtain their permission, logically, he would have to disclose to them his proposed activity. This duty to disclose, the government argues, is at least as forceful as any duty under § 115, and a violation of it can be a scheme to defraud. See the Perschetz Letter, p. 2-3.

Section 106 of the Act makes clear that one who obtains a valid copyright in a musical composition has an exclusive right to reproduce and distribute the copyrighted material. United States v. Powell, 701 F.2d 70 (8th Cir.1983); Capitol Records, Inc. v. Mercury Records Corp., 221 F.2d 657 (2d Cir.1955). Gallant was under a duty to obtain a consensual license from the copyright holders to distribute records of their copyrighted compositions.

The government contends Gallant's failure to obtain a license from the copyright holders is a breach of a duty Gallant owed to the copyright holders and the basis for a fraud prosecution. See Transcript of May 9, 1983 hearing, 11. In support of its position, the government cites a line of authority in this Circuit holding that a fraud prosecution may be predicated upon the defendant's failure to disclose information the defendant was under a duty to disclose. See United States v. Newman, 664 F.2d 12, 19 (2d Cir.1981); Bronston, supra, 658 F.2d at 926; United States v. Von Barta, 635 F.2d 999, 1006 (2d Cir.1980), cert. denied, 450 U.S. 998, 101 S.Ct. 1703, 68 L.Ed.2d 199 (1981).

While the court concurs with the government's reading of the case law that in certain circumstances a breach of a duty to disclose may provide the basis for a mail or wire fraud prosecution, most of the cases cited by the government are inapposite in that they involve a breach of a fiduciary, not a statutory, duty.⁵ A statutory disclosure duty, as opposed to a fiduciary duty, does not protect a relationship that is based upon trust. The government does not contend that a fiduciary duty existed in the present case. The court finds the authority relied upon by the government to be unpersuasive on this issue.

The government also claims that a breach of a statutory duty to disclose information is cognizable under the fraud statutes. In support of this contention, it cites United States v. Buckley, 689 F.2d 893, 898 (9th Cir.1982), United States v. Melvin, 544 F.2d 767, 774 (5th Cir.), cert. denied, 430 U.S. 910, 97 S.Ct. 1184, 51 L.Ed.2d 587 (1977) and United States v. Brewer, 528 F.2d 492, 496 (4th Cir.1975).

In Buckley, the fraud prosecution was based on the defendants'...