The opinion of the court was delivered by: LUMBARD
J. EDWARD LUMBARD, United States Circuit Judge:*
The lyric "For All You Do, This Bud's For You" and the accompanying music is a familiar refrain to the American public through myriad Budweiser beer television and radio commercials. Steve Karmen, a renowned jingle-writer, composed the original Budweiser music, for different lyrics, in 1970 and, later that year, Karmen's corporation, Elsmere Music, Inc. ("Elsmere") entered into an agreement with Anheuser-Busch's advertising agency, D'Arcy, Masius Benton & Bowles, Inc. ("D'Arcy") licensing the use of the Karmen jingle in Budweiser advertising. The agreement contains a lucrative residuals clause, unprecedented at the time of the contract's execution, which entitles Elsmere to compensation whenever Anheuser and D'Arcy use "arrangements" of Karmen's music in Budweiser commercials.
Anheuser paid Elsmere over two million dollars
under this clause, but stopped payments in late 1985 when it began airing a new jingle written by another composer. When Karmen demanded residuals based on alleged similarities between the new jingle and his work, Anheuser commenced this action for a declaratory judgment that its new Budweiser jingle is not an "arrangement" of the Karmen jingle and that therefore Karmen is not entitled to residuals for the new jingle's use. Karmen and Elsmere counterclaim against against Anheuser and D'Arcy for a declaratory judgment that Elsmere is entitled to residuals under the 1970 Agreement and, alternatively, for damages from Anheuser on a quasi-contractual theory of unjust enrichment.
For reasons which follow, the court grants a declaratory judgment for Anheuser.
Subject matter jurisdiction is based on diversity of citizenship. Anheuser is a Missouri corporation with St. Louis as its principal place of business and Steve Karmen, a citizen of New York, is the sole shareholder of Elsmere Music, a New York corporation with New York as its principal place of business. Subject matter jurisdiction over defendants' counterclaim against Anheuser and D'Arcy is based on ancillary jurisdiction. Although the record fails to show D'Arcy's principal place of business for diversity purposes, the court has ancillary jurisdiction over such "compulsory" counterclaims which extends to parties, such as D'Arcy, who meet the joinder requirements of Fed. R. Civ. P. 19 or 20. See Fed. R. Civ. P. 13(h); Newberger, Loeb & Co. v. Gross, 563 F.2d 1057, 1070-71 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 54 L. Ed. 2d 782, 98 S. Ct. 769 (1978). Declaratory relief is appropriate because it will terminate an actual controversy among the parties. See Fed. R. Civ. P. 57; 28 U.S.C. § 2201 (1982).
In early 1970 D'Arcy solicited a number of music houses to compose music and lyrics for a Budweiser beer ad campaign. D'Arcy instructed that all submissions end with the slogan "When You Say Budweiser, You've Said It All." Steve Karmen's jingle -- consisting of music and original lyrics except for the Budweiser slogan -- won the competition and on September 10, 1970, Karmen obtained a copyright for his jingle entitled "Budweiser/You've Said It All" ("the Karmen jingle").
On September 14, 1970, D'Arcy and Elsmere entered into a letter agreement in New York ("the 1970 Agreement") pertaining to Anheuser's use of the Karmen jingle in advertising Budweiser beer. Paragraph 6 provides that, in addition to an initial lump sum payment for Anheuser's and D'Arcy's right to use the Karmen jingle, Elsmere is entitled to compensation "for the use of arrangements of the work in radio or television, whether or not the arrangements were furnished by [Elsmere or Karmen]" (the "residuals clause").
D'Arcy and Anheuser used the Karmen jingle extensively in Budweiser advertising from 1970 to 1977. Karmen composed most of the arrangements of his original Budweiser jingle during this period, approximately 100 in all. Also during this period Karmen composed jingles for use in advertising other Anheuser-Busch beers. The contracts for the use of these jingles were identical in all material respects to the 1970 Agreement.
In 1978, Anheuser and D'Arcy changed the focus of the Budweiser ad campaign and adopted the slogan "For All You Do, This Bud's For You." The new campaign, dubbed the "Worker Salute", continued to use Karmen's music, but with new lyrics, including the new slogan, not written by Karmen. D'Arcy modified the Karmen music in the transition. For example, the original copyrighted Karmen music accompanying the final "When You Say Budweiser" proceeded in an "ascending phrase" of 6 notes, numerically represented in the key of C major as 3-4-5-6-6-5, and the accompaniment for "You Said It All" proceeded in a "descending phrase" of 4 notes, 6-4-2-1. By contrast, in early Worker Salute commercials the last 2 notes (6-5) of Karmen's ascending phrase were dropped in the accompaniment for "For All You Do", the words "This Bud's For You" were spoken, after which Karmen's four note descending phrase was played instrumentally. Later in the campaign, the words "This Bud's For You" were sung with the descending phrase, but D'Arcy's creative staff modified the rhythm of these last 4 notes to accommodate the change in lyrics from "You've Said It All."
After 1978, Karmen did not compose any new versions of his original jingle and he did not compose any of the versions used in the Worker Salute campaign. However, it was D'Arcy's policy to inject portions of Karmen's original music into the new commercials in order to provide continuity between the old and new ad campaigns. During the period 1978-1985, D'Arcy produced hundreds of different versions of the Worker Salute jingle, including jazz, rhythm and blues, soul and rock, targeted at special audiences such as "contemporary adults" and Hispanics and Blacks. Elsmere continued to receive residual payments under Paragraph 6 of the 1970 Agreement for the use of portions of Karmen's music in the Worker Salute jingles.
In 1984, Anheuser and D'Arcy decided to make another change in the Budweiser advertising campaign. To this end, D'Arcy, in December, 1984, invited approximately 20 music houses, including Elsmere, to submit new jingles. D'Arcy requested that each music house compose two types of jingles. The first assignment instructed participants to combine new music with the old Budweiser (Karmen) music, specifically keeping the first few notes of Karmen's music ("the Karmen fanfare") and the final melody to accompany the slogan "For All You Do, This Bud's For You." The second assignment instructed participants to create "totally new" music and lyrics with "no ties to the past" except for the lyric "This Bud's For You." D'Arcy wanted the new melody to track against the sub-theme "You Make America Work." Each music house received from D'Arcy sheet music of the original Karmen jingle and a cassette tape of a current Budweiser commercial containing Karmen music.
Fifteen music houses submitted compositions to D'Arcy. Although Karmen had been asked to participate, he had declined. In January, 1985, D'Arcy selected one of the compositions submitted by Tom Anthony Music under the category of "totally new" music, entitled "You Make America Work" ("the Anthony jingle"). Tom Anthony wrote the lyrics and his associate, Gavin Spencer, composed the music. Anheuser liked the Anthony jingle, but instructed D'Arcy to give Karmen another chance to compete. Karmen then submitted a new jingle which D'Arcy and Anheuser rejected.
Karmen complained to D'Arcy and Anheuser that the Anthony jingle was not "totally new", but contained a 4-note ending virtually the same as the ending in his Budweiser jingle. The last measure of the copyrighted version of Karmen's jingle contains a 1/4 rest followed by a consistently descending phrase of notes: 6-4-2-1. The last measure of the copyrighted version of the Anthony jingle contains a 1/4 rest followed by a consistently descending phrase of notes, 4-3-2-1, the last two notes being identical to Karmen's notes. The rhythm in which these notes are played is different in the two copyrighted versions; however, the Anthony rhythm is identical to the rhythm of post-1978 versions of the Karmen jingle as modified by D'Arcy. Aside from the similarities in the last measure, the two works are wholly dissimilar.
From January to June, 1985, Karmen spoke with Don Sager, D'Arcy vice president and manager of broadcast business affairs, repeating his position regarding the similarities between the 4-note endings and demanding that residual payments be made pursuant to Paragraph 6 of the 1970 Agreement if the Anthony jingle was broadcast. Anheuser and D'Arcy considered changing the Anthony jingle's ending to avoid any possible Karmen objections; however, they ultimately rejected alternative endings provided by Anthony and, in October, 1985, informed Karmen that they would begin broadcasting the original Anthony jingle on November 1, 1985.
One week prior to the scheduled start of the new broadcasts, Karmen's counsel informed Anheuser and D'Arcy that Karmen would seek injunctive relief against the airing of the commercials if they refused to make residual payments under the 1970 Agreement. Anheuser got to the courthouse first and commenced this suit for a declaratory judgment on October 28, 1985. Karmen cross-moved for a preliminary injunction, but ...