FILED: NEW YORK COUNTY CLERK 01/11/2013 INDEX NO /2013 NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 01/11/2013

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1 FILED: NEW YORK COUNTY CLERK 01/11/2013 INDEX NO /2013 NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 01/11/2013

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3 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK X MARC GEORGE GERSHWIN, individually, and as : Trustee of THE ARTHUR GERSHWIN : TESTAMENTARY TRUST; NADIA NATALI; MARY : MILTON and MARTIN ALBERT as Executors of THE : ESTATE OF LEOPOLD GODOWSKY III; GEORGIA : KEIDAN; ALEXIS GERSHWIN; and JONATHAN : KEIDAN as Trustee of THE FRANCES GERSHWIN : GODOWSKY REVOCABLE TRUST U/A DATED : AUGUST 29, 1983, : : Plaintiffs, : : -against- : : WB MUSIC CORP. and WARNER/CHAPPELL MUSIC, : INC., : : Defendants X Index No. COMPLAINT Plaintiffs, Marc George Gershwin, individually and as Trustee of The Arthur Gershwin Testamentary Trust, Nadia Natali, Mary Milton and Martin Albert, as Executors of The Estate of Leopold Godowsky III, Georgia Keidan, Alexis Gershwin, and Jonathan Keidan, as Trustee of The Frances Gershwin Godowsky Revocable Trust U/A Dated August 29, 1983, by and through their attorneys, Caplan & Ross, LLP, as and for their Complaint against Defendants, allege as follows: NATURE OF CLAIMS 1. This action is brought by the successors in interest to the rights and copyrights of George Gershwin, the iconic composer of Twentieth Century American popular music (including such classic musical works as Rhapsody in Blue and An American in Paris, and the folk opera Porgy and Bess), to redress the blatant breaches of contract and fiduciary duties arising from the

4 Defendants failure to pay substantial sums of money in music publishing royalties and other amounts due to the Plaintiffs, and the Defendants neglect of their responsibilities to protect and preserve George Gershwin s copyright interests both domestically and abroad. Specifically, the claims at issue in this action are related to: The rental of George Gershwin s music and orchestrations in the world outside of the United States and Canada ( Foreign Rentals ); The worldwide licensing of ballets ( Ballet Licensing ); The worldwide licensing of concert grand rights ( Concert Grand Rights Licensing ); and, Defendants failure to register copyrights in arrangements of George Gershwin musical compositions with performing rights organizations in a timely manner ( PRO Registrations ). 2. From the outset of his career, George Gershwin established a relationship with Warner/Chappell Music, Inc., through its predecessors-in-interest and prior corporate entities, concerning the licensing and exploitation of the individual musical compositions he wrote, in whole or in part (the Compositions ), a relationship that has continuously endured through a series of agreements for more than 75 years. 3. Unlike typical publisher-songwriter agreements, the Gershwin-Warner/Chappell relationship has long been based upon a working partnership, with Gershwin and his successorsin-interest having ownership interests in some of the corporate and other vehicles through which the Compositions were exploited. Some of those agreements include express provisions placing fiduciary responsibilities on the Defendants in carrying out their duties as the administrators of the rights in the Compositions. 4. Thus, in addition to their contractual obligations under the various agreements, the Defendants owed Plaintiffs fiduciary duties to act in the interests of the ongoing working partnership and in the interest of the Plaintiffs, and not the Defendants own self-interests in 2

5 connection with the exploitation of the Compositions, due to the long term and unique relationship of the parties and the express terms of their agreements. 5. In or about 2007, the Plaintiffs exercised their contractual rights to review the books and records of the Defendants, including a review of certain books and records supplied by the Defendants concerning the rental of music and orchestrations of the Compositions in the United States and Canada, Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing and PRO Registrations. This review revealed significant non-payments and/or underpayments of royalties and other amounts, and other contractual breaches by the Defendants. Moreover, the review revealed that the Defendants breached their fiduciary duties to Plaintiffs by, among other things, permitting their affiliated foreign companies to retain excessive and unnecessary fees and in some cases authorizing non-affiliated agents to rent music and orchestrations of the Compositions and take/deduct excessive fees well beyond the fees permitted under the terms of the parties written agreements governing the exploitation of the Compositions in numerous foreign territories. Although such sub-licensing arrangements were financially beneficial to the Defendants and their affiliated companies, the ultimate royalties and profits paid over to Plaintiffs were significantly diluted by such practice. 6. Following the submission of reports based upon the Plaintiffs review, the parties have not been able to resolve the underpayments and other breaches disclosed in the review as it related to the Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing and PRO Registrations. Consequently, this action has been commenced. 7. This Complaint only concerns the Plaintiffs interests in the underpayments and other breaches related to Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing, and PRO Registrations, and does not concern the interests of any other parties, including but not 3

6 limited to those of George Gershwin s co-writers (including Ira Gershwin and DuBose Heyward). 8. Plaintiffs are independently conducting two separate examinations of the books and records of Defendants relating to other worldwide and traditional income issues, which issues are not the subject of this Complaint. 9. Plaintiffs expressly reserve their respective rights to amend this Complaint and/or commence separate litigation concerning issues other than Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing and PRO Registrations. PARTIES 10. Plaintiff Marc George Gershwin is a resident and citizen of the State of New York. He is the son of Arthur Gershwin (the brother of George Gershwin and Ira Gershwin), the nephew of the renowned songwriters George Gershwin and Ira Gershwin, and a Trustee of The Arthur Gershwin Testamentary Trust, a New York trust created upon the death of Arthur Gershwin. 11. Plaintiff Nadia Natali is a resident and citizen of the State of California and is a daughter of Frances Godowsky (the sister of George Gershwin and Ira Gershwin), and a niece of George and Ira Gershwin. 12. Plaintiff Mary Milton is a resident and citizen of the State of New York, and is, along with Martin Albert, one of the two Executors of The Estate of Leopold Godowsky III, the deceased son of Frances Godowsky and a nephew of George and Ira Gershwin. 13. Plaintiff Martin Albert is a resident and citizen of the State of Connecticut, and is along with Ms. Milton, one of the two Executors of The Estate of Leopold Godowsky III, the deceased son of Frances Godowsky and a nephew of George and Ira Gershwin. 4

7 14. Plaintiff Georgia Keidan is a resident and citizen of the State of New York and is a daughter of Frances Godowsky and a niece of George and Ira Gershwin. 15. Plaintiff Alexis Gershwin is a resident and citizen of the State of California and is a daughter of Frances Godowsky and a niece of George and Ira Gershwin. 16. Plaintiff Jonathan Keidan is a resident and citizen of the State of New York and is the Trustee of The Frances Gershwin Godowsky Revocable Trust U/A Dated August 29, 1983, a Connecticut trust established during the lifetime of Frances Godowsky, the sister of George Gershwin and Ira Gershwin. Mrs. Godowsky passed away in Collectively, Plaintiffs are the successors-in-interest to all rights and interests concerning the Compositions that are at issue in this action, including the rights and interests of the George Gershwin Family Trust ( GGFT ), and are hereinafter sometimes collectively referred to as the GG Parties. 18. Upon information and belief, Defendant WB Music Corp. ( WB Music ) is a California corporation with its principal place of business in California. WB Music is a music publisher engaged in the business of licensing, administering and exploiting musical compositions, and has regularly and systematically conducted business in the City, County and State of New York. 19. Upon information and belief, Defendant Warner/Chappell Music, Inc. ( Warner/Chappell ) is a Delaware corporation with its principal place of business in California. Warner/Chappell is a music publisher engaged in the business of licensing, administering and exploiting musical compositions, and has regularly and systematically conducted business in the City, County and State of New York. 5

8 20. Upon information and belief, Warner/Chappell is the successor in interest to the music publishing interests of Warner Bros, Inc. ( Warner Bros ) and Chappell & Co., Inc. ( Chappell ). 21. Upon information and belief, WB Music and Warner/Chappell are affiliated entities. 22. Pursuant to several of the agreements relevant to the claims at issue in this action, the Defendants have consented to the personal jurisdiction of this Court over this action. BACKGROUND The Parties Relationship 23. George Gershwin, one of America s greatest composers, composed over 900 musical compositions during his prolific career, including such internationally acclaimed works as Rhapsody in Blue, An American in Paris and the folk opera Porgy and Bess. Many of the Compositions were co-written by his brother Ira Gershwin. 24. George Gershwin died in 1937, and the GG Parties have succeeded to all of George Gershwin s rights and interests in the Compositions, including all related rights under various agreements entered into with the Defendants and their predecessors-in-interest. 25. Over the course of at least the last 75 years, the Defendants, and/or their affiliated predecessor companies, have acquired and maintained rights and obligations with respect to the worldwide exploitation of the Compositions. 26. Compositions written by George Gershwin before 1935 were generally first acquired by the Defendants through Warner Bros, or its predecessor or affiliated entities, and are sometimes hereinafter referred to as the Warner Catalog. 6

9 27. Compositions written by George Gershwin in 1935 and thereafter were generally first acquired by the Defendants through Chappell, or its predecessor or affiliated entities, and are sometimes hereinafter referred to as the Chappell Catalog. 28. The parties long-standing and enduring relationship has included the creation of several jointly-owned corporate entities and partnerships intended to maximize profits, for all parties, arising from the exploitation of the Compositions. 29. For example, in 1935 George Gershwin and Chappell formed the Gershwin Publishing Corporation ( GPC ), with Chappell owning 60% of the company s stock, George Gershwin 30% of the company s stock, and Ira Gershwin 10% of the company s stock. In conjunction with the formation of GPC, George Gershwin entered into a publishing agreement with GPC through which GPC obtained certain exclusive rights to certain of the Compositions. 30. Additional co-owned entities formed over the years to exploit the Compositions include New World Music Corporation formed in 1927, and most recently New World Music Company (Ltd.), a limited partnership created in The Defendants and their predecessor entities have always been the controlling shareholder or general partner in these jointly-owned entities, and have always controlled the day-to-day affairs of each of these companies. 31. The agreements, as amended and supplemented, between the GG Parties and the Defendants (collectively, the Agreements ) that relate to Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing and PRO Registrations, include the following: (a) (b) A December 29, 1986 agreement among Warner Bros Music, the GG Parties, and Leonore S. Gershwin ( LG ) (the successor in interests to Ira Gershwin s rights and interests in the Compositions) establishing New World Music Company (Ltd.) ( NWMC ) as a limited partnership to exploit certain of the Compositions (the Partnership Agreement ); A December 29, 1986 administration agreement between NWMC and Defendant WB Music, providing WB Music with certain rights and 7

10 obligations in connection with the exploitation of certain of the Compositions (the Administration Agreement ); (c) (d) (e) (f) (g) (h) (i) (j) '''' '''''''''''''''''''''' ''''' '''''''''''' '''''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''' '''''''' ''''''''' ''''''' '''''''' '''''''''''''''' ''''''''''''''''''''''''''' '' ''''''''''''''' ''''''''''''''''''''''''''''' ''''' ''''''' '''''''''''''''''''''' ''''''''''''''''''' ''''''''' ''''''''''''''' '''''''''''''' ''''''''''''''''''''''' '''''''''''''''''''''''''''; 1 A December 4, 1987 Agreement among Warner/Chappell, LG, and the GG Parties concerning the worldwide protection of the copyrights in the Chappell Catalog (the 1987 Protection Agreement ); A January 1, 1989 Agreement among Warner/Chappell, LG, and the GG Parties concerning Ballet Licensing and Concert Grand Rights Licensing (the 1989 Agreement ); A December 23, 1991 Agreement among the Defendants, the GG Parties, the Leonore S. Gershwin 1987 Trust (as successor to LG s interests), and the GGFT, supplementing and amending the parties rights and obligations with respect to the Compositions (the 1991 Agreement ); A May 19, 1992 Agreement among the Defendants, the GG Parties, the Leonore S. Gershwin 1987 Trust, and the GGFT, further clarifying and amending the parties rights and obligations with respect to the Compositions (the 1992 Agreement ); A January 1, 2005 Agreement among the Defendants and the GG Parties concerning the exploitation of the GG Parties interests in respect of the Compositions (the 2005 Agreement ); A May 10, 2006 agreement among the Defendants, NWMC, the GG Parties, and the Leonore S. Gershwin 1987 Trust, amending and ratifying certain prior agreements between the parties (the 2006 Agreement ); and, A January 22, 2008 Termination Notice from Michael F. Sukin, Esq., on behalf of the GG Parties, concerning certain rights in the Compositions (the 2008 Termination Notice ). 32. Upon information and belief, Warner/Chappell is the successor in interest to all of the rights and obligations of Warner Bros and Chappell & Co. under the Partnership Agreement, the Administration Agreement, and all of the other Agreements. 1 Paragraphs 31(c), 46, 47, 48 and 49 herein are redacted by reason of an existing confidentiality agreement and the confidential nature of the information contained therein. 8

11 33. NWMC was formed in 1986 as a Delaware partnership in which Warner Bros. Music, a division of Warner Bros, is the general partner with a 50% ownership share, with the remaining 50% ownership interests in NWMC divided among the GG Parties and LG. 34. Paragraph 4.1 of the Partnership Agreement provides in pertinent part, as follows: Except as otherwise expressly stated in this Agreement or as provided by law, the General Partner [Warner Bros] shall have full and exclusive authority, subject to its fiduciary obligations including without limitation those set forth in Section 4.6 hereof, to manage and conduct the Partnership business 35. Paragraph 4.5 of the Partnership Agreement provides in pertinent part, as follows: The General Partner shall conduct the Partnership business as it deems to be in the best interests of the Partnership, subject to the limitations set forth in this Agreement and subject to its fiduciary responsibilities imposed by law. Inasmuch as WBM [Warner Bros] will be dealing with its own affiliates in the exercise of its responsibilities as General Partner and all of the Partners acknowledge that conflicts of interest are inherent in such a position, WBM covenants that it shall at all times conduct the business of the Partnership in the best interests of the Partnership. 36. Paragraph 4.6 of the Partnership Agreement provides in pertinent part, as follows: The Partners hereby approve the appointment of WB Music Corp., an affiliate of WBM, as the administrator of the Partnership Property pursuant to the terms of the Administration Agreement attached hereto as Exhibit A. Such approval shall not reduce or alter WBM s fiduciary responsibilities to the Partnership as General Partner, and such responsibilities shall include causing full and faithful performance by the Administrator of its obligations to the Partnership under the Administration Agreement. 37. Paragraph 7.3 of the Partnership Agreement provides in pertinent part as follows: (a) [T]he General Partner shall promptly deliver to all Partners such reports, data and information as are furnished to the Partnership by the Administrator of the Partnership Property pursuant to the Administration Agreement referred to in Section 4.6 hereof. The General Partner shall also provide information pertaining to the Partnership business on a reasonable and timely basis, to any Partner who requests such information from time to time. 9

12 38. Paragraph 14.8 of the Partnership Agreement further provides that the prevailing party in any action or proceeding to interpret or enforce its provisions shall be entitled to recover all costs and expenses, including reasonable attorneys fees. 39. In conjunction with the formation of NWMC, NWMC entered into the Administration Agreement with Defendant WB Music, whereby WB Music obtained certain administration and accounting obligations with respect to certain of the Compositions. follows: follows: 40. Paragraph 2 of the Administration Agreement provides in pertinent part as 2(a). Subject to the requirements and/or restrictions contained in paragraph 2(b), below, Publisher [the Partnership NWMC] hereby employs Administrator [WB Music] to administer and exploit each Composition for the Applicable Licensed Territory, and Administrator hereby accepts the rights, obligations and responsibilities set forth below (i) To exploit and administer all rights of every kind, nature and description in and to the Composition, together with the duty to employ best efforts in Administrator s reasonable business judgment to protect Publisher s rights in the Composition and to maximize the income therefrom. 2(d)(i). In exercising its rights hereunder, and in discharging its obligations and responsibilities hereunder, Administrator shall use its best endeavors to administer the Compositions in accordance with the highest standards, and with the greatest degree of care, prevailing among the leading music publishers in each country of the Applicable Licensed Territory, to prepare and issue licenses for the use of the Compositions consistent with Administrator s rights under this Agreement and in particular to license the Compositions in the manner and (where required) with the direction of Publisher on the best commercial terms reasonably available. 2(e). Administrator shall, in addition to its regular reporting requirements, provide information on a reasonable and timely basis to Publisher, as Publisher may request from time to time. 41. Paragraph 3 of the Administration Agreement provides in pertinent part as 10

13 follows: 3(a)(i). Administrator will prepare and file, in the name of Publisher, all copyright forms and other documents required to be filed in each country of the Applicable Licensed Territory to confirm Publisher s ownership of Compositions and will file with the appropriate performing rights societies all documents required to be filed with said societies. 42. Paragraph 8 of the Administration Agreement provides in pertinent part as 8(a). Administrator shall pay to Publisher one hundred percent (100%) of the Net Income derived by Administrator from the Compositions. Administrator shall exercise the greatest degree of care as a fiduciary of Publisher s affairs in administering the income from the Compositions in accordance with its obligations under this Agreement (and in accordance with the standards prescribed in this Agreement with respect to the manner in which such obligations are to be discharged) so as to maximize Publisher s income from the Compositions. Net Income is defined as: * * * (ii) With respect to Gross Receipts earned by the Foreign Copyrights: The Gross Receipts from the rest of the world less an administration fee of fifteen percent (15%) of such Gross Receipts, which shall be paid to Administrator by Publisher * * * 8(b)(i)(aa). Administrator agrees that all Gross Receipts shall be calculated as equal to the amount(s) collected by Administrator s foreign subpublishers at the source, i.e., as paid by the foreign society, record company (under a direct license) or other licensee to the local subpublisher, less third-party out-of-pocket collection costs and any payments pursuant to subparagraph 8(b)(ii), below, but without reduction due to any sub-license or other form of intermediate distribution as a result of any permitted agreement, sublicense or delegation contemplated by paragraph 18(a) of this Agreement and less an administration fee to the local subpublisher of ten percent (10%) (except for France, as to which the administration fees shall be fifteen percent [15%] for the period from January 1, 1987 through December 31, 1991, and ten percent [10%] thereafter) of the remaining amount effective as of January 1, (b)(i)(bb). Subject to subparagraph 9(a)(iv), below, Gross Receipts from Administrator s foreign music publishing subsidiaries shall be deemed to have been received by Administrator no later than the end of the semi- 11

14 annual accounting period next following the semi-annual accounting period during which the same are collected by (or could with due diligence have been collected in the ordinary course by) such subsidiaries. 43. Accordingly, the Administration Agreement (as thereafter amended and supplemented as set forth below) established a fixed allowable subpublisher fee to be deducted from At Source revenues actually paid for the use of the Compositions in determining Gross Receipts for purposes of calculating monies due to the GG Parties. 44. Paragraph 19 of the Administration Agreement further provides that, in the event of litigation or any other action, suit or proceeding between the parties with respect to the interpretation and/or enforcement of the Administration Agreement, the prevailing party shall be entitled to recover its court costs and reasonable attorneys fees. 45. By sub-joinder executed on Page 23 of the Administration Agreement, Warner Bros agreed to guarantee the performance of WB Music, as follows: WARNER BROS. MUSIC ( WBM ), a Division of WARNER BROS. INC., hereby guarantees the performance of WB MUSIC CORP. (and that of its subsidiaries and affiliates) as required pursuant to the terms and conditions of the foregoing Agreement. In the event of any default in such performance (not cured in the manner prescribed in said Agreement), recourse may be had directly and immediately against WBM, without the need of prior resort to any remedy against WB MUSIC CORP. and/or any subsidiary or affiliate. 46. ''''''' ''''' '''''''''''' ''''''''''''''''''''' '''' ''''''''''''' '''''''''''''''''''''''''''''''''''''''''' '''''''' '''''''' ''''''''''''''''' ''''''''' ''''''''' '''''''''''''''' ''''''''' ''''''' '''''''''' ''''''''''''' '''''''''''''''''''''' ''''''''''''''''''''''''''. 47. '''''''''''' '''''''''''''''' ''''' '''''' ''''''''''''''''''''' ''''' ''''''''''''''''' ''''''''''''''''''''' ''''' ''' ''''''''''''''''''' '''''''''''''''''''''''''''' ''''' '''''''' ''''''''''''''''''''' '''''''''''''''''''' ''' ''' ''''' ''''''' '''''''''''' '''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''''' ''''''''''''''''''''' '''''' '''''''''''''''''': ''''''''''''''' '''''''''''''''''''''''''''''''''''''''''''' '''''''''''''''' '''''''''''' '''''''''''' ''''''''''''''''' ''''''''' '''''' ''''''''''''''''''''''''' ''''' '''''''''''''' ''''''' ''''''''''''''''' ''''''''''''''' '''''''' ''''''''' '''''''''' '''' '''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''' ''''''' ''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''''' '''''' ''''''''''''''''''''''' '''''''''''''''''''''''' ''''' '''''''''''''''''' ''''''''''''''''''''' ''''''' 12

15 ''''''''''''''''''''' ''''' '''''''''''''''''''''''''''' ''''''''' ''''''''''''''''''' ''''' '''''''''''''' '''''''''''''' ''''''''''' '''''''''''''''' '''''''''' ''''''''''''' '''''''' ''''' '''''''''''''''''''' '''''''''''''' '''' ''''''''''''''''''' ''''' ''''''''''''''' ''''' '''''''' '''''''''''' '''''' '''''''''''''''''''' ''''''''''''''''''' '''''''''''''' '''''''' '''''''' '''''''''''''''''''''' ''''''''''''''''''''' ''''''''''' '''''' '''''''''''''''''''''' '''''''''''''' '''''''''''''' '''' ''' '''''''' ''''''' '''''''''' '''''''' ''''''''''''''''''''' ''''''''''' '''''''' '''''''''' '''''''''''''''''''' '''' '''''''''''''' 48. ''''''''''''''''''''''''''' ''''' '''''''''' ''''''' ''''''''''''''''''''''''''''''''' '''''''''''''''''''''''' '''''''' ''''''''''''' ''''''''''''' '''''''''''''''''''''''''' '''''''''''''''''''''''' '''''' '''''''''''''''''''' '''''''''''''''''''''' ''''''''' ''''''''''''''''''''''''''''''' '''''' '''''''' '''''''''''''''''' ''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''''''''''''''''''''''''''' ''' '''''''''''' ''''''''''''''''''''' '''''''''''''''''''''''''' '''''''' '''' ''''' '''''''''''''''''' ''''''''''' '''''''' '''''''''''''''''' ''''''''''''''''''''' ''''''''''''''''''' ''''''''''' ''''''' '''''''' ''''''' '''''' '''''''' ''''''''''''''''''''''''''''''' ''''' '''''''''''''''''''''''''''' ''''''''''''''' '''''''''''''''''' '''''' '''''''''''''''''''' ''''' '''''''''''''''''''''' '''''''''''''''' '''''''' ''''' '''''' ''''''''' '''''''''''''''. 49. ''''''''''''''''''''''' ''' ''''' ''''''' ''''''''''' '''''''''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''' '''''''''''''''' ''''''''''' ''''''' ''''''''''''''' '''''''''''''''''''''' ''''' '''''''''''''''''' ''''''''''''''''''' '''''' '''''''' ''''''''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''''''''''' '''''''' '''''''''''''''''''': ''''''''''''''''' ''''''''''''' ''''''''''''''' '''''''''' ''''''''' '''''''''''''' ''''''''''''' ''''''''''''''''' ''''' '''''''''''''' '''''''''''''''''' ''''''''''''''''''''' ''''' '''''''' ''''' ''''' ''''''''''''''''''''' ''''''''''''''''''''''''' ''''''''' ''''''''''''''''''' '''''''''''''' '''''''' ''''''''''''''''''''''''' '''''''''''''''''''''''' ''''''''''''''' '''''''''' ''''' '''''''''''''''''''' '''''' '''''''' ''''''''' '''''' '''''''''' ''''''''''' ''''''' ''''''''''''''' ''''' ''''''''''''''''''' '''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''' ''''' ''''''' ''''''''''''''''''''' ''''''''''''''''''' '''''''''''''''''' '''''' ''''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''' ''''''''''' '''''''''''''''''''''''''' '''''''''''''' ''''' ''''''''''''''' ''''''''' ''''''''''''''' '''''''''' '''''''''''' '''''''''' ''''''''''''''''''''''. 50. On or about December 4, 1987, Warner/Chappell, the GG Parties and LG also entered into the 1987 Protection Agreement, whereby the parties agreed to co-operate with regard to the future copyright protection of the works written in whole or in part by George Gershwin. follows: 51. Paragraph 1 of the 1987 Protection Agreement provides in pertinent part as (1). The Gershwin Interests and Warner/Chappell Music Inc and its subsidiaries (collectively WCM ) shall actively pursue a joint policy of insisting that such copyright protection continues extant. In furtherance of such policy WCM shall 13

16 (a) actively maintain such position with mechanical and performing right societies and other collection agencies and with licensees of the right to record or otherwise to exploit the Works; 52. Paragraph 8 of the 1987 Protection Agreement further provides that the parties submit to the exclusive jurisdiction of the Federal or State Courts of the State of New York in connection with any litigation arising from it. 53. On or about January 1, 1989, Warner/Chappell and the GG Parties entered into the 1989 Agreement, whereby Warner/Chappell is engaged, for a term of two years, as a nonexclusive agent to license certain grand rights in the Compositions in connection with ballet and concert versions on a worldwide basis. 54. Paragraph 3 of the 1989 Agreement requires Warner/Chappell to obtain prior, express, written approval for any license of grand rights: You shall not issue any license of grand rights under this agreement without in each instance obtaining the prior express approval, in writing, of the designated representative [of the GG Parties]. 55. Paragraph 8 of the 1989 Agreement then provides for Warner/Chappell to retain a commission of 10% of the gross receipts received by Warner/Chappell from Ballet Licensing and Concert Grand Rights Licensing during the term of the 1989 Agreement. 56. On or about December 23, 1991, the parties entered into the 1991 Agreement, which supplemented and amended the parties rights and obligations in connection with the Compositions in both the Warner Catalog and the Chappell Catalog. 57. With respect to Ballet Licensing and Concert Grand Rights Licensing, Paragraph 3 of the 1991 Agreement provides, in pertinent part, as follows: 3.1(A) From and after the Effective Date, and on an exclusive, worldwide, life of copyright basis, we [the Defendants] shall be the licensing agent for ballet and concert grand right uses (other than the 14

17 complete performance of musical shows, whether staged or not) upon the terms and conditions of the agreement dated As of January 1, 1989, the terms and conditions of which (except for 1) are incorporated by reference as though set forth at length herein. (B) Since we recognize that you [the George and Ira Gershwin interests] monitor such licenses closely in order to assure yourselves that they do not conflict with existing licenses, it is understood and agreed that all such licenses shall be subject to your prior written consent in each instance. 3.2 Our administration fee in respect of ballet and concert uses shall be 10% of Gross Receipts collected subsequent to the Effective Date. 58. With respect to rentals of musical show orchestrations, Paragraphs 4 and 5 of the 1991 Agreement provide, in pertinent part, as follows: 4.1. You [the George and Ira Gershwin interests] shall have the right to authorize your licensing agent(s) to rent orchestrations of excerpts from Gershwin musical shows and/or Grand Works (as defined below) for small rights concert performances. You shall have the right to rent orchestrations in connection with the licensing of such rights for a commission to the agent(s) to be negotiated by you, with the balance to be paid over to us for distribution to you after deduction by us of a 15% commission of the amounts received by us from the rental agent 4.2(A) We [the Defendants] shall have the non-exclusive right to rent orchestrations for individual compositions for inclusion in mixed Pops -type performances, not to exceed 3 compositions in any specific performance. Our administration fee in respect of such rentals shall be 20% of Gross Receipts (inclusive of any agent s fees). * * * 4.3. Porgy & Bess: We shall deliver the ownership and control of the complete orchestrations for Porgy & Bess to you or your designee(s) You [the George and Ira Gershwin interests] shall engage one or more (or use existing) grand rights licensing agents to engage in renting such orchestrations or any excerpts thereof to third parties for any use, at commissions to be established by you, and you shall direct your grand rights licensing agent(s) to account to us for, and to pay us, the rental income therefrom (less agents commissions), and we shall distribute the same (after retaining an administration 15

18 fee of 15% of the amounts received by us) to the appropriate royalty participants. * * * 5.2.3(A) No licenses shall be granted from and after the Effective Date with respect to any of the following Grand Works and Porgy & Bess (as well as individual works contained in any of the foregoing) without your prior written consent, which may be withheld in your absolute discretion 59. Paragraph of the 1991 Agreement further provides that the Defendants agree to pay the GG Parties, on certain compositions in certain territories, the GG Parties song interest share of an additional 7.5% of the so-called Net Publishers Share, as defined in the 1991 Agreement, and as later amended by the 2005 Agreement. 60. Finally, Paragraph 8.3 of the 1991 Agreement provides that payments shall be made in accordance with the procedures set forth in the Administration Agreement. 61. On or about May 19, 1992, the parties entered into the 1992 Agreement clarifying certain provisions of the 1991 Agreement, including, but not limited to the following: Notwithstanding anything to the contrary in [the 1991 Agreement], you and we agree that you [WB Music and Warner/Chappell] do not and will not have the right to license any grand right performance of a musical show incorporating any Compositions (including Porgy & Bess ), whether staged or not, nor the right to rent orchestrations for such performances. You are not and will not be entitled to any share in the rental fees collected by our rental agent(s) for such uses, except for rental fees collected for Porgy & Bess under paragraph [of the 1991 Agreement]. 62. On or about January 1, 2005, the parties entered into the 2005 Agreement, which again amended the parties rights and obligations. 63. With respect to rentals of musical show orchestrations, Paragraphs 7(b) of the 2005 Agreement provides, in pertinent part, as follows: 7(b) Effective as of the date hereof, the Warner Parties waive their right to share in income from the licensing of certain orchestrations of excerpts from Gershwin musical shows, Porgy and Bess and the 16

19 Grand Works, as such right are set forth in paragraphs 4.1 and 4.3 of the Chappell Administration Agreement [the 1991 Agreement]. 64. With respect to the protection of copyright interests in the Compositions, Paragraph 9 of the 2005 Agreement provides, in pertinent part as follows: Copyright Protection: (The provisions of this paragraph 9 shall apply with respect to George Gershwin works then owned or administered by the Warner Parties.) The Warner Parties agree to continue their copyright protection activities, both financially and otherwise, during the life of worldwide copyrights in the George Gershwin works. 65. Paragraph 15 of the 2005 Agreement further provides: This Agreement shall be construed, enforced and performed in accordance with the laws of the State of New York. The jurisdiction and venue for any litigation which may proceed from the construction, execution or interpretation of this Agreement, or, as of the date hereof, of the Prior Agreements, shall exclusively be the State court or Federal District Court for the Southern District of New York. 66. On or about May 10, 2006, the parties entered into the 2006 Agreement. 67. Paragraph 3(b) of the 2006 Agreement reduced from 10% to 7.5%, effective as of January 1, 2005, the fixed local sub-publisher fee (as contained in Paragraph 8(b)(i)(aa) of the Administration Agreement) permitted to be deducted from At Source Gross Receipts in calculating monies owed to the GG Parties, to the extent that the Administration Agreement is applicable to a particular use of a Composition. The 2006 Agreement thus confirmed that at source revenues are the basis upon which to calculate monies owed to the GG Parties. 68. On or about January 22, 2008, the GG Parties served upon the Defendants the 2008 Termination Notice, thereby terminating the Defendants authority, as the GG Parties agent, to rent the Compositions. 69. By reason of the parties long-standing relationship and the above provisions contained in the various agreements between them, the Defendants owed Plaintiffs the highest 17

20 duties of care, loyalty and good faith, and were obligated to use their best efforts consistent with their obligations as a fiduciary to maximize the income received from exploitation of the Compositions for both the Defendants and the GG Parties, and to act for the benefit of all parties and not for their own personal benefit in connection with the exploitation of the Compositions. The Royalty Review 70. On or about April 18, 2007, the GG Parties gave notice to the Defendants of their intention to conduct a review of their books and records for the accounting periods commencing on July 1, 2001 forward. 71. In connection with such royalty review, the GG Parties and the Defendants entered into tolling agreements, which, as amended, tolled all time limitations, contractual, statutory or otherwise, effective as of January 1, 2007 (thus preserving all claims that accrued as of January 1, 2001). 72. In or about September 2008, the parties further agreed that the royalty review would be divided into separate components, which would be the subject of separate mutually exclusive examinations and reports to be prepared by parties engaged by the GG Parties. Specifically, the parties agreed that separate examinations would be conducted and separate reports would be rendered in connection with (i) domestic rentals and Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing and PRO Registrations, and (ii) all other areas of exploitation of the Compositions by the Defendants. 73. The parties further agreed that the negotiation and resolution of any one component would not encumber, preclude or otherwise bar the GG Parties from conducting and completing the other, separate components of the royalty examinations. Plaintiffs expressly 18

21 reserve their respective rights to amend this Complaint and/or commence separate litigation concerning the other components of the royalty examinations. 74. On or about October 10, 2008, Premiere Media, LLC ( Premiere ), as successor in interest to Clutch Media, LLC, a music management firm engaged by the GG Parties, issued its initial report concerning worldwide rentals, ballet licensing and concert grand rights licensing (the Initial Report ). The Initial Report set forth numerous areas of underpayment, nonpayment, and non-compliance by the Defendants with respect to their obligations and duties under the agreements that governed the Defendants exploitation of the Compositions, both in the United States and around the world, regarding domestic rentals, Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing and PRO Registrations. In many cases the Initial Report was based upon assumptions and extrapolations necessitated by the Defendants continued failure to supply all of the required information for Premiere s review, notwithstanding numerous requests for same and notwithstanding the Defendants fiduciary and contractual obligations with regard thereto. 75. On or about July 7, 2009, Premiere submitted supplemental clarifications and revisions to the Initial Report addressing certain inquiries made by the Defendants concerning domestic portions of the Initial Report and additional documentation provided, and on or about January 30, 2010, Premiere submitted a supplemental report in response to numerous inquiries made by the Defendants in connection with Premiere s Initial Report in connection with the Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing and PRO Registrations. 76. On or about October 4, 2010, after approximately three years of continued requests by Premiere, the GG Plaintiffs and their other representatives, the Defendants provided Premiere with detailed analyses of some, but not all, of its and its affiliates activities in Foreign 19

22 Rentals, Ballet Licensing and Concert Grand Rights Licensing, which it had undertook as the result of the estimates and extrapolations in Premiere s Initial Report. However, although continuously requested in writing and in person by Premiere for numerous years, those documents provided by the Defendants in October, 2010, were still completely devoid of any actual third-party source agents rental documentation and completely devoid of information requested relating to the PRO Registrations, notwithstanding the Defendants contentions, as set forth in s dated March 11, 2011 and November 7, 2011, that all PRO registrations were properly and timely filed. To date, the Defendants have failed to provide any source documentation supporting this blanket assertion. 77. On or about April 23, 2012, Premiere submitted a revised report based upon the analyses provided by the Defendants identifying various deficiencies in the reporting and payment of amounts due from Foreign Rentals, Ballet Licensing, Concert Grand Rights Licensing, and PRO Registrations (the April 23, 2012 Report ). To date, much of the requested source documentation has still not been provided to Premiere. 78. The April 23, 2012 Report sets forth significant remaining royalty underpayments and other damages arising from the Defendants underpayment, non-payment, and noncompliance with the terms of the various agreements governing the parties relationship. A copy of the April 23, 2012 Report is annexed hereto as Exhibit 1 and is incorporated by reference herein. 79. As set forth in the April 23, 2012 Report, the Defendants breaches of the Agreements, and breaches of their fiduciary duties owed to Plaintiffs, include the following: A. The failure to account for all rentals of orchestrations and parts for the Compositions in numerous foreign territories; B. The failure to account for all Ballet Licensing and Concert Grand Rights Licensing in the U.S. and in foreign territories; 20

23 C. The improper deduction of administration fees by the Defendants and/or their foreign affiliates in excess of the administration fees permitted under the Agreements; D. The improper deduction of sub-licensing and sub-agent fees from Gross Receipts reported to the GG Parties; E. The allowance of excessive commissions by third-party sub-agents of both the Defendants, and their affiliates and agents; F. The failure to obtain prior written authorization or approval for rentals of the individual Compositions in Porgy and Bess and for licenses of certain other Compositions which required prior written approval of Plaintiffs; G. The improper and unauthorized rental of more than 3 orchestrations of Compositions for one performance; H. The unauthorized rental of Compositions after March 31, 2008 following the termination of the Defendants rental rights and the failure to properly account for such income; I. The failure to register numerous arrangements of the Compositions in a timely manner with foreign performance rights organizations; and J. Various additional areas of underpayment. 80. The April 23, 2012 Report determined that no less than $4,469,612.07, in royalties and interest (calculated through April 2012) was owed to the Plaintiffs by the Defendants as of April Interest continues to accrue on these defaults in payment under the Agreements. 81. As noted above, the review of the Defendants books and records revealed that the Defendants have improperly permitted their own affiliated companies, and those of their agents, in foreign territories to retain excessive and unnecessary sub-publishing and/or third-party subagent fees in connection with the exploitation of the Compositions in foreign territories. 82. For example, with respect to reported rentals of Concerto in F in Italy during 2003, the royalty review revealed that the Defendants permitted and/or authorized (and then deducted from Gross Receipts in calculating royalties paid to the GG Parties), the following 21

24 excessive and unnecessary chain of fees and commissions: First, on the $1, of gross revenue actually paid for the rentals by the end user, a 25% commission was taken by Ricordi Music Publishing SPA, the local rental third-party sub-agent in the territory of Italy, before it remitted the net revenue to Warner/Chappell Italy, the Defendants affiliated entity in Italy; Second, a 15% commission on this net amount was then taken by Warner/Chappell-Italy before it remitted the net revenue to Warner/Chappell US; and Third, a 15% commission was then taken on this net amount by Warner/Chappell-US before remitting the remaining net revenue sum of $ to the GG Parties. Making matters worse, the GG Parties received this sum as part of the accountings rendered by the Defendants in the third quarter of approximately 4 years after the actual payments for the rentals were received by Ricordi. 83. Accordingly, for each dollar actually paid for the rental of Concerto in F in Italy in 2003 only approximately 52 cents was ultimately remitted to the GG Parties, with an aggregate commission of approximately 47% of the At-Source Gross Receipts retained by the Defendants and their foreign affiliates and sub-agents. 84. Upon information and belief, even larger aggregate commissions were permitted to be taken by the Defendants related to Foreign Rentals in other territories, including an astounding 60% commission permitted to be taken by Leduc, the Defendants sub-agent for the territory of France, before any revenues are remitted to the Defendants various European affiliates for eventual transmittal to the Defendants in the United States, and then the GG Parties. Thus, after Leduc s commission and the various subsequent commissions taken by the Defendants and their affiliates along the way, the GG Parties ultimately received a miniscule portion of the actual At-Source Gross Receipts generated from rentals of the Compositions in France. For example, only approximately 30.6% of the actual at-source payments made for 22

25 rentals of Concerto in F in France in 2006 was ultimately paid to the GG Parties, with Leduc retaining 60% of the actual rental fees; Warner/Chappell-France retaining 15% of the amount remitted to it by Leduc; and the Defendants then retaining 10% of the amount remitted to them by Warner/Chappell-France. 85. The Defendants authorized and permitted such excessive and unnecessary commissions notwithstanding: (i) the Defendants contractual obligation to remit a sum equal to 80% of all At-Source Foreign Rental revenues to the GG Parties under the 1991 Agreement, which solely authorized a commission, inclusive of any agent s fees, of 20% of Gross Receipts pursuant to 4.2(A) of the 1991 Agreement; and (ii) their fiduciary obligations to, among other things, maximize the income received by the GG Parties from the exploitation of the Compositions. 86. By permitting and authorizing such arrangements, the Defendants have not only breached their contractual obligations to the GG Parties, but also placed their own self-interest ahead of the interests of the GG Parties, in contravention of their fiduciary duties owed to the GG Parties. 87. Moreover, and as set forth in the April 23, 2012, Report, notwithstanding their contractual and fiduciary obligations to provide relevant documentation to Plaintiffs regarding the claims set forth in the April 23, 2012, Report, the Defendants have failed and refused to fully provide numerous categories of requested documentation to Plaintiffs, including but not limited to, all copies of licenses issued by the Defendants, all copies of requests for authorization to issue licenses for Foreign Rentals, Ballet Licensing and Concert Grand Rights Licensing and any and all approvals of same, all source documents the Defendants have received from their sub-agents and licensees, and documentation relating to the PRO Registrations. 23

26 88. The April 23, 2012, Report also identifies additional breaches of the Agreements, for which the amount of damages could not be ascertained with specificity given the Defendants failure and refusal to provide necessary documentation. Such additional claims include, but are not limited to, interest owed on late payments, the Defendants failure to account for additional foreign uses of the Compositions, and the Defendants failure to comply with most favored nations provisions contained in the Agreements. 89. Moreover, the review revealed several other breaches by the Defendants of their fiduciary duties owed to the GG Parties, including: (a) (b) (c) (d) The failure to maintain accurate and complete copies of the books and records related to their exploitation of the Compositions, including copies of their agreements with sub-agents, and source documents related to the exploitation of the Compositions in foreign territories; The use of misleading royalty statements provided to the GG Parties on a quarterly basis purporting to reflect at source revenues when in fact the revenue amounts shown were not the amounts actually received at source ; The failure to obtain the best commercial terms reasonably available from its affiliates and sub-agents; The failure to oversee and monitor the activities of their affiliates and sub-agents, including the failure to insure compliance with the contractual terms of both the Agreements between the Defendants and the GG Parties, and the agreements between the Defendants and their affiliates and sub-agents; and, (e) The abandonment of numerous markets and territories around the world, including Australia and Asia. 90. Despite receiving the April 23, 2012, Report, as of July 25, 2012, the Defendants had still not provided any substantive response to the claims set forth therein. 91. Accordingly, by letter dated July 25, 2012, the GG Parties, through counsel, provided notice to the Defendants of their defaults under the Agreements as set forth in the April 23, 2012, Report and demanded that the Defendants provide a substantive response to the April 24