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Friday, November 19, 2004

A Tale of Two Apples

Rachel_1The battle between Apple Corps, the Beatles' record label, and computer-maker Apple Corp., is a cautionary tale about how changes in technology can undo the most carefully crafted agreements.

In her Contracts in Popular Culture column in the forthcoming issue of the AALS Contracts Newsletter, Rachel Arnow-Richman (Denver) takes a look at the clash of icons.  Click on the link below for the full story.

BEATLES SEEK THIRD
BITE AT THE APPLE

by Rachel Arnow-Richman
University of Denver School of Law

Apple Corps Ltd., the Beatles’ record label, is suing Apple Computer, the Silicon Valley computer company, alleging breach of a 1991 contract settling trademark disputes over the companies’ shared name. In a complaint filed last year in a London court, Apple Corps claims that iTunes Music Store ("iTMS"), Apple Computer’s online venue for downloading songs, violates the parties’ agreement that the record company would have exclusive use of the word "Apple" for the making and marketing of music.

This is the third battle in an aging war between the two Apples that spans two decades, two settlement agreements, and now, two rounds of litigation in the British courts. The first scuffle culminated in a 1981 "trademark coexistence agreement" under which the Macintosh maker coughed up $80,000 for the record label’s permission to use the name "Apple" on computer equipment. As part of the understanding, Apple Computer agreed not to place its name or logo on any products used for the "recording or reproduction of music" or "intended for synthesizing music."

That commitment proved ill-chosen. When computers developed sound capabilities in the mid-1980's, Apple Computer introduced Macs with "Musical Digital Interface," a product that enabled users to input and edit music. Litigation followed. In 1991, Apple Computer settled out of court to the tune of $26.5 million.

The latest hoopla concerns Apple Computer’s launch of iTMS, through which users can purchase individual licensed tracks for $.99 a pop. That move prompted Apple Corps’ second suit against the computer manufacturer, this time alleging breach of the 1991 settlement agreement.

The record label recently emerged victorious from a jurisdictional showdown in London’s Royal Court of Justice. Apparently unable to come to agreement on the point, Apple Corps and Apple Computer did not include a choice of law or choice of forum clause in their 1991 contract. Indeed, lawyers for the parties rigged an elaborate closing procedure—the payoff amount sat in escrow while company principals executed documents simultaneously on both sides of the pond—calculated to avoid contract formation in one country over the other. As Justice Mann put it, in ruling on Apple Computer’s jurisdictional challenge, "If their intention . . .was to create obscurity and difficulty for lawyers to debate in future years, they have succeeded handsomely."

That did not stop the Justice from finding England the appropriate forum and source of law for the litigation, and lawyers for Apple Computer can expect many a hard day’s night in a London hotel should the case go to trial. While the court was unmoved by the alleged inconvenience to Apple Computer of litigating abroad, it seemed persuaded that efficiency and judicial economy favored keeping the case in England. Justice Mann noted that a California proceeding would be far lengthier than a British one, owing to the American state’s famously permissive parol evidence rule.

All the same, the court might have no choice but to consider oral discussions as the case moves forward. The parties’ 1991 agreement is arguably ambiguous on the issue of Apple Computer’s ability to sell musical content. After carving out exclusive "Fields of Use" for Apple Computer and Apple Corps (computers and music, respectively), the contract recognizes that "certain goods and services within the Apple Computer Field of Use are capable of delivering content within the Apple Corps Field of Use." Paragraph 4.3 of the agreement provides that in such instances Apple Computer may use its marks

in connection with goods and services . . . (such as software, hardware, or broadcasting services) used to reproduce, run, play or otherwise deliver such content provided it shall not use [its marks] on or in connection with any physical media delivering pre-recorded content. . . (such as a compact disc of the Rolling Stones music.)

Presumably Apple Computer’s position is that iTMS offers only electronic files and consequently does not run afoul of the prohibition on branding "physical" media. It will say that the word "physical" was chosen with precision, that Apple Corps bargained badly, and the record label should just let it be. But that argument takes an exceedingly narrow view of the agreement. Elsewhere the contract makes clear that the exceptions enumerated in Paragraph 4.3 are the only instances in which the parties can use their trademarks in connection with goods or services falling within the opposing party’s "Field of Use." The list of permissible music-related uses of Apple Computer trademarks does not include the sale of commercially recorded music. If Apple Computer had opened a real brick-and-mortar record store, it is hard to see how they could defend themselves against an action for breach of contract. iTMS is simply an Internet version of the same thing.

Apple v. Apple stands as yet another example of technology outpacing the law. The iTMS product is arguably a "new use" not contemplated by an agreement drafted a decade before the Napster revolution, and the court may need to examine extrinsic evidence to determine the parties’ intent. Neither side has discussed its position publicly, but it seems clear Apple Computer thought it was buying something big when it forked over nearly $27 million to a record label that, at the time, had produced no new material since 1976. That said, if either party was in a position to anticipate the digital music craze and clarify its rights accordingly, it was the computer maker.

For this reason, no one will be surprised if ultimately Apple Computer takes another stroll down Penny Lane. And it won’t be for small change. Apple Computer has sold more than 125 million songs since iTMS’s April 2003 debut and the company should be more than willing to pay the Tax Man to maintain its share of the music download market. Of great interest to fans of both Macintosh and the Beatles will be whether an agreement between the companies will give Apple Computer access to the Beatles’ catalogue. While the Beatles are perhaps the most famous rock band of all time, their music has yet to be made available through any licensed online music provider.

On the other hand, this may be the one fight worth Apple Computer’s time to defend. Despite its jurisdictional protests, the company appears to have landed in the right court. The trial judge admitted during hearings that he owns an iPod.

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