Fantasy, Inc. v. La Face Records (1998)

Sampler: TLC "Switch"

Sampled: Jean Knight "Mr. Big Stuff"

FANTASY, INC., Plaintiff, v. LA FACE RECORDS; SO SO DEF RECORDINGS, INC.; and SO SO DEF PRODUCTIONS, INC., Defendants.

CIV-S-98-0856 DFL DAD, Decided: November 10, 1998

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA

49 U.S.P.Q.2D (BNA) 1148

Decision by: DAVID F. LEVI, DJ

Plaintiff Fantasy, Inc. brings this suit for common-law copyright infringement, fraud, breach of contract, failure to pay for goods sold and delivered, and unfair business practices against defendants LaFace Records, So So Def Recordings, Inc. ("SSDR") and So So Def Productions, Inc ("SSDP"). Fantasy filed an earlier suit against LaFace in the Northern [*2] District of California for federal copyright infringement, Fantasy, Inc. v. LaFace Records, No. C-96-4384 SC ENE (N.D. Cal.), which has been dismissed under Federal Rule of Civil Procedure 12(b)(6).

Defendants now move to dismiss under Rule 12(b)(6) based on the res judicata effect of the dismissal of the Northern District suit.

I.

The following factual allegations are taken from Fantasy's complaint.

On September 12, 1994, Diane Makowski, an agent for defendants, wrote to Fantasy, Inc., asking for permission to incorporate a sample, or a replication of sounds, from the song "Mr. Big Stuff" into the song "Switch," to be included on CrazySexyCool, the then-upcoming album by the rhythm-and-blues act TLC. She included a cassette tape copy of "Switch" with her letter. "Mr. Big Stuff" was originally released by Stax Records in 1971, and was re-released by Fantasy on the 1981 compilation 15 Original Big Hits, Volume I. Fantasy owns the copyright to the Big Hits recording. Fantasy wrote back on October 10, 1994 and proposed license terms, including a $ 5,250 advance against the first 175,000 units sold, and a per-unit fee of 3 [cents] thereafter. Fantasy asserts that [*3] Makowski agreed to these terms by signing the letter and returning it to Fantasy.

Shortly after this correspondence took place, LaFace Records released CrazySexyCool, which included "Switch." The album was successful, eventually selling roughly ten million copies. Despite the album's success, however, defendants never paid any royalties to Fantasy. In early 1996, Fantasy sent a formal license agreement to defendants, along with a demand for payment of royalties with interest and late fees. Makowski returned the signed license agreement on May 29, 1996, with some amendments. In response to Fantasy's demand for interest and late fees, she stated that LaFace

was not obligated to pay either [Fantasy] or [SSDP] until the resolution of this sampling matter as evidenced by a fully-executed licensing agreement. Payments could not therefore be deemed late until after the expiration of the accounting period following the delivery of a copy of the fully executed licensing agreement to LaFace. We therefore can not agree with the demand made in your letter for payment of interest or late fees (unless payments are not timely made after the next due date).

(Pl's Complaint, [*4] Exh. D at 1.) Over the next six months, Fantasy attempted to work out a licensing agreement with defendants, but was unable to come to terms. Fantasy eventually filed suit on December 5, 1996 against LaFace (but not SSDP) in the Northern District of California, alleging that "Switch" infringed Fantasy's copyright to the Big Hits recording of "Mr. Big Stuff."

By order dated June 24, 1997, Judge Samuel Conti of the Northern District dismissed Fantasy's complaint, holding that (1) Fantasy had failed to state a claim under federal copyright law because the federal copyright statute does not apply to sound recordings produced before 1972, and (2) Fantasy had failed to state a claim for common-law copyright infringement because the statute of limitations on that claim had expired. n1 (See Defs' Motion, Exh. A at 4-6.) Fantasy then filed an application for leave to file a motion for reconsideration, asserting (1) that it had not been given the opportunity to address the statute of limitations issue, and (2) that LaFace had deliberately misled Fantasy as to the release date of CrazySexyCool, causing Fantasy to delay bringing suit until after the statute had run. By order dated [*5] August 14, 1997, Judge Conti denied the application, rejecting Fantasy's argument that it had delayed bringing suit because of misleading representations by LaFace. (See id., Exh. B at 3.) Fantasy promptly appealed the dismissal.

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n1 Fantasy did not assert a claim for common-law copyright infringement in its complaint in the Northern District case, but Judge Conti considered the merits of a common-law copyright claim sua sponte in his June 24 Order.

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With its appeal pending before the Ninth Circuit, Fantasy filed this suit on May 12, 1998 against LaFace, SSDP, and SSDP's sister corporation, SSDR. The current complaint alleges commonlaw copyright infringement, fraud, breach of contract, failure to pay for goods sold and delivered, and unfair business practices against all defendants. All of the allegations in the complaint arise out of defendants' use of "Mr. Big Stuff." Defendants now move to dismiss.

II.

Defendants contend that Fantasy's suit should be dismissed because it is precluded by the doctrine [*6] of res judicata. Federal law determines the preclusive effect of a federal judgment. See Sullivan v. First Affiliated Sec., Inc., 813 F.2d 1368, 1376 (9th Cir. 1987) (citing Limbach v. Hooven & Allison Co., 466 U.S. 353, 361-62, 104 S. Ct. 1837, 1842-43, 80 L. Ed. 2d 356 (1984)). Under federal law, res judicata bars a party from bringing a claim where (1) a court of competent jurisdiction (2) has rendered a final judgment on the merits (3) on the same cause of action in (4) a previous action involving the same parties or their privies. See Siegel v. Federal Home Loan Mortg. Corp., 143 F.3d 525, 528 (9th Cir. 1998). Moreover, "res judicata bars all grounds for recovery that could have been asserted, whether they were or not, in a prior suit between the same parties on the same cause of action." Id. at 528-29.

A. Court of Competent Jurisdiction

There is no dispute that the Northern District was a court of competent jurisdiction in the first action. LaFace concedes that it was subject to personal jurisdiction in the Northern District, and the federal court obviously had subject-matter jurisdiction over a suit under the federal copyright statute, see 28 U.S.C. [*7] § 1331, and supplemental jurisdiction to consider a claim for common-law copyright infringement arising out of the same facts. See 28 U.S.C. § 1367(a). Alternatively, the Northern District had subject-matter jurisdiction over the first suit because of diversity of citizenship. See 28 U.S.C. § 1332. Fantasy is a Delaware corporation with its principal place of business in Berkeley, California, and LaFace is a Georgia corporation with its principal place of business in Atlanta.

B. Judgment on the Merits

Plaintiff argues that a dismissal for failure to state a claim under Rule 12(b)(6) is not a "final judgment on the merits" because Judge Conti did not specifically state in the June 24 Order dismissing the case that the dismissal was with prejudice.

This argument is unavailing. A dismissal under Rule 12(b)(6) is a final judgment on the merits that has preclusive effect. See Federated Department Stores v. Moitie, 452 U.S. 394, 399 n.3, 101 S. Ct. 2424, 2428 n.3, 69 L. Ed. 2d 103 (1981); Angel v. Bullington, 330 U.S. 183, 190, 67 S. Ct. 657, 661, 91 L. Ed. 832 (1947). Just because the dismissal here did not specify that it was a dismissal with prejudice does [*8] not make it otherwise. See NAACP v. Hunt, 891 F.2d 1555, 1560 (11th Cir. 1990) (a dismissal under Rule 12(b)(6) has preclusive effect even where it does not specify that it is a dismissal with prejudice because "the Supreme Court has clearly stated that 'the dismissal for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) is a 'judgment on the merits.'")

The cases cited by Fantasy in its opposition are inapposite. In Costello v. United States, 365 U.S. 265, 81 S. Ct. 534, 5 L. Ed. 2d 551 (1960), the Supreme Court held that a dismissal under Rule 41(b) for failure to file an affidavit does not constitute an "adjudication on the merits," and is not entitled to preclusive effect. See Costello, 365 U.S. at 285, 81 S. Ct. at 544-45. The Court found that the government's failure to file an affidavit of good cause in a denaturalization prosecution was jurisdictional in the sense that it amounted to "failure to comply with a precondition requisite to the Court's going forward to determine the merits of the substantive claim." Id. at 285, 81 S. Ct. at 545. Thus, the Court concluded that the district court's prior order dismissing the government's prior [*9] denaturalization petition was within an exception to Rule 41(b) as a "dismissal for lack of jurisdiction." Judge Conti's order, however, cannot fairly be described as a "dismissal for lack of jurisdiction." Fantasy did not fail to comply with a precondition to the court's decision-making, and the court addressed the substance of Fantasy's claims. Costello is of no help to Fantasy.

Similarly, in In re Corey, 892 F.2d 829 (9th Cir. 1989), the Ninth Circuit held that where a plaintiff moves for a voluntary dismissal under Rule 41(a), and the court dismisses the action without specifying that the dismissal is with prejudice, the judgment is not entitled to preclusive effect. See Corey, 892 F.2d at 835. n2 Judge Conti, however, did not dismiss Fantasy's complaint in the Northern District suit because of a motion for a voluntary dismissal.

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n2 Fantasy's reliance on Deutsch v. Flannery, 823 F.2d 1361 (9th Cir. 1987) is also misplaced. In Deutsch, the trial court dismissed plaintiff's fraud claim because plaintiff had not pleaded defendant's allegedly fraudulent acts with particularity as required by Rule 9(b). Contrary to Fantasy's claims at oral argument, the Deutsch court held that even a dismissal without prejudice can give rise to issue preclusion where the issue to be precluded is "essential to the dismissal." See Deutsch, 823 F.2d at 1364. Rather than aiding Fantasy's cause, Deutsch suggests that Fantasy's complaint is precluded by the earlier judgment.

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In reaching his decision, Judge Conti weighed the merits of Fantasy's complaint and, finding that Fantasy could not maintain a claim for either federal or common-law copyright violation against any defendant, dismissed it under Rule 12(b)(6). The Supreme Court has unambiguously held that such a dismissal constitutes a final judgment on the merits entitled to preclusive effect. See Moitie, 452 U.S. at 399 n.3, 101 S. Ct. at 2428 n.3. Accordingly, the dismissal was a judgment on the merits for res judicata purposes.

C. Same Cause of Action

The Ninth Circuit has established a four-part test to determine whether a suit is based on the same cause of action as an earlier suit. The elements of the test are:

(1) whether rights or interests established in the prior judgment would be destroyed or impaired by prosecution of the second action; (2) whether substantially the same evidence is presented in the two actions; (3) whether the two suits involve infringement of the same right; and (4) whether the two suits arise out of the same transactional nucleus of facts.

In re Int'l Nutronics, Inc., 28 F.3d 965, 970 (9th Cir. 1994). "Weighing of the four factors is [*11] not a mathematical exercise, and no single factor is automatically decisive." Id. at 970 n.4 (citing Costantini v. Trans World Airlines, 681 F.2d 1199, 1202 n.7 (9th Cir. 1982)).

The first factor, whether the second suit would impair rights established in the original action, weighs in favor of preclusion. In granting LaFace's motion to dismiss, Judge Conti ruled that Fantasy could not maintain either a statutory or common-law copyright infringement suit against any defendant. Maintenance of this suit would thus impair LaFace's rights under that judgment. Although SSDP and SSDR are not directly implicated in the Northern District judgment, that judgment would at least protect them from any claim based on copyright. Moreover, these entities were entitled to expect that any claims against them would be brought in the context of that litigation.

The second factor, similarity of evidence, also suggests that the current action should be precluded. In its complaint and its opposition to defendants' motion, Fantasy has presented substantially the same evidence that it presented before Judge Conti: the September 12, 1994 letter from Diane Makowski to Fantasy, Fantasy's October 10, [*12] 1994 reply, and a February 28, 1995 letter from Fantasy to Makowski discussing revisions to the licensing agreement. Although Fantasy has presented additional evidence here -- the parties' efforts to negotiate a license for the "Mr. Big Stuff" sample -- it closely relates to the same subject as the earlier evidence. In any event, introduction of new evidence, by itself, does not bar the application of res judicata. See International Union of Operating Engineers v. Karr, 994 F.2d 1426, 1430 (9th Cir. 1993).

The third factor, identify of the right infringed, weighs in favor of preclusion. Although the first complaint only alleged violations of federal copyright law, and the complaint in the current suit alleges common-law copyright violations and contract and fraud claims, Fantasy brought both suits, to vindicate its economic right to compensation for defendants' use of the "Mr. Big Stuff" sample. Just because it has brought breach-of-contract and fraud claims rather than a federal copyright claim, however, does not mean that the underlying right is different in this suit. In Feminist Women's Health Center v. Codispoti, 63 F.3d 863 (9th Cir. 1995), plaintiffs initially brought [*13] suit for alleged deprivation of constitutional rights stemming from defendants' efforts to shut down an abortion clinic. After obtaining an injunction, plaintiffs filed a RICO claim. The Ninth Circuit held that because, in both cases, plaintiffs sought vindication of their "right to be free from [defendant's] disruptive activities," the RICO claim was barred by claim preclusion. Codispoti, 63 F.3d at 868. See also Robi v. Five Platters, Inc., 838 F.2d 318, 324 (9th Cir. 1988) (breach of contract claim "seeks to protect the same right" as earlier Lanham Act claim for trademark infringement).

Finally, the fourth factor, whether the actions arise out of the same transactional nucleus of facts, is the "most important" element of the analysis. See Costantini, 681 F.2d at 1202. The Ninth Circuit has analyzed the factual similarity of actions by asking "whether they could conveniently be tried together." Karr, 994 F.2d at 1429; Western Sys., Inc. v. Ulloa, 958 F.2d 864, 871 (9th Cir. 1992), cert. denied, 506 U.S. 1050, 113 S. Ct. 970, 122 L. Ed. 2d 125 (1993). Here, all of Fantasy's allegations concern SSDP's use, and LaFace's subsequent sale, of copyrighted material [*14] without a license. It would be most convenient to try Fantasy's contract and fraud claims against defendants together with the copyright claims. Indeed, the complaint in this action is the functional equivalent of an amended complaint in the first action, except that it is filed as a new case in a different judicial district while the first action is pending on appeal. Because all four elements of the International Nutronics test are satisfied, this suit involves the same cause of action as the earlier litigation.

D. Identity of Parties

In the first suit, Fantasy sued only LaFace; here, it has sued LaFace, SSDP and SSDR. Fantasy argues that SSDP and SSDR are not in privity with LaFace, and that these entities are not entitled to res judicata protection here. But "courts are no longer bound by rigid definitions of parties and their privies for purposes of applying ... res judicata." United States v. ITT Rayonier, Inc., 627 F.2d 996, 1003 (9th Cir. 1980). In fact, "courts have sometimes avoided the use of the term 'privity' and instead have [examined] whether the relationship between the parties is such that one party should enjoy the benefit, or suffer the burden, [*15] of a judgment for or against another." Mars Inc. v. Nippon Conlux Kabushiki-Kaisha, 58 F.3d 616, 619 (Fed. Cir. 1995). See also, e.g., Gambocz v. Yelencsics, 468 F.2d 837, 841 (3d Cir. 1972) ("res judicata may be invoked against a plaintiff who has previously asserted essentially the same claim against different defendants where there is a close or significant relationship between successive defendants"). "Another formulation of this idea is that preclusion is appropriate 'only if the new party can show good reasons why he should have been joined in the first action and the old party cannot show any good reasons to justify a second chance.'" In re San Juan Hotel Corp., 841 F.2d 6, 10 (1st Cir. 1988) (quoting Wright, Miller & Cooper, Federal Practice and Procedure § 4464 at 589 (1981)).

"It is well established that a party may not split a cause of action into separate grounds of recovery and raise the separate grounds in successive lawsuits; instead, a party must raise in a single lawsuit all the grounds of recovery arising from a single transaction or series of transactions that can be brought together." Mars, 58 F.3d at 619. The Northern District would have had [*16] jurisdiction over Fantasy's claims against the So So Def defendants because of diversity of citizenship -- like LaFace, SSDR and SSDP are Georgia corporations with their principal places of business in Atlanta. As was the case in Mars, every act underlying Fantasy's claims here "is intimately intertwined with" acts litigated in the Northern District suit. Id. at 620. Furthermore, Fantasy's complaint makes no distinction among the several defendants, treating them as a single, integrated unit for purposes of the licensing negotiations, the formation of the alleged contract, and the copyright infringement. Taking the allegations in the complaint as true on this motion to dismiss, Fantasy cannot now deny that the So So Def defendants are closely related to each other for purposes of the transactions underlying this case.

Nor has Fantasy "pointed to any special circumstances that would justify permitting it to prosecute a separate action" here. Id. It has not shown that it was unable to join SSDP and SSDR in the first action, and has offered no explanation for its decision to sue the defendants separately. Fantasy argues that its rights under the alleged contract are distinct [*17] from its rights under the federal copyright statute. But even if that were true in some metaphysical or juridical sense, as a practical matter and to preserve the justice system, these claims should be asserted together in one lawsuit.

Because all four elements of the Siegel test are satisfied, Fantasy's claims against defendants are precluded. Plaintiff's attempt to multiply the litigation, forum shop, and circumvent Judge Conti's order must be rejected. Defendants' motion to dismiss is GRANTED. The clerk of the court is directed to enter judgment accordingly.