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MUZE, INC. v. DIGITAL ON-DEMAND

November 20, 2000

MUZE, INC., PLAINTIFF,
V.
DIGITAL ON-DEMAND, INC., DEFENDANT.



The opinion of the court was delivered by: Swain, District Judge.

  OPINION

This matter concerns rights to use bibliographic information relating to vast amounts of the canon of recorded music and digitally-recorded samples of such music. Plaintiff Muze, Inc. ("Muze"), a New York corporation with its principal place of business in New York, owns the material in question. Defendant Digital On-Demand, Inc. ("DOD") is a licensee of the bibliographic and music databases. The case comes before the Court on Muze's motion for a preliminary injunction precluding DOD from continuing to utilize the licensed databases for any purpose; the motion is predicated on Muze's allegation that DOD has breached the licensing agreement.

The Court has jurisdiction of this case pursuant to 28 U.S.C. § 1332(a), the parties allegedly being citizens of different states*fn1 and the amount in controversy in the litigation exceeding $75,000. Venue is proper pursuant to 28 U.S.C. § 1391(a)(2).

This motion came on pursuant to an order to show cause, signed on October 27, 2000. DOD's opposition papers were served and filed on November 3, 2000; Muze's reply papers were served and filed, and oral argument on the motion heard in open court, on November 6, 2000. In accordance with a schedule set at the hearing, DOD and Muze filed and served supplemental affidavits on November 8, 2000, and November 9, 2000. The Court requested further evidentiary submissions by order dated November 8, 2000. The parties filed additional affidavits on November 9, 2000, in response to that order. The parties have stipulated to the Court's resolution of all relevant factual issues based on their affidavits and documentary submissions; neither party has objected to the Court's consideration of any of the evidence so proffered. The Court has considered thoroughly the parties' submissions, arguments and proffers, including the "Declaration [of Gary Geller] in Support of Order to Show Cause for Preliminary Injunction," "Plaintiff's Memorandum in Support of its Order to Show Cause for a Preliminary Injunction," "Declaration of Scott Smith," "Declaration of Robert McCray," "Declaration of Charles Gorman," "Defendant's Memorandum of Law in Opposition to Plaintiff's Motion for Preliminary Injunction," "Reply Declaration [of Paul Zullo] in Support of Motion for Preliminary Injunction," "Supplemental Declaration of Charles Gorman," "Supplemental Declaration of Robert McCray," "Supplemental Declaration [of Gary Geller] in Support of Motion for Preliminary Injunction" and all accompanying exhibits. This Opinion constitutes the Court's findings of fact and conclusions of law for purposes of Rule 52 of the Federal Rules of Civil Procedure. For the reasons set forth below, Muze's motion is granted to the extent it seeks to preclude DOD's utilization of the bibliographic and music databases in question.

FINDINGS OF FACT*fn2

Background

The material facts are undisputed.

Muze owns a proprietary database containing bibliographic information (the "Bibliographic Database") on more than 1.5 million pieces of recorded music. The Bibliographic Database, which is searchable by song, album, title, artist and keyword, among other categories, is updated weekly by a staff of more than 200 people. (Declaration of Gary Geller, dated October 26, 2000 ("Geller Declaration 1") at ¶ 2). Muze also owns a database of digitized 30-second audio samples (the "Clips" and, together with the "Bibliographic Database," the "Database") from more than 1.5 million pieces of music. The Clips are linked to entries in the Bibliographic Database, permitting a listener or other user to retrieve information about the recording. (Id. at ¶ 3). One of Muze's principal lines of business is the marketing and maintenance of "listening systems" in retail music stores. Muze's listening system, the "MSD," permits retail store customers to listen, through headphones placed strategically throughout the recorded music sections of the stores, to clips from compact discs ("CDs") that they may wish to buy. Muze also offers retailers "kiosks" for placement in the music departments. The kiosks, featuring video screens and keyboards, permit store customers to research the Bibliographic Database. (Geller Declaration 1 at ¶¶ 4-5). The MSD systems are sold to the retail stores for over $50,000; Muze maintains them and updates the available music, and receives additional revenues, pursuant to licensing and maintenance agreements. The kiosks are sold to the stores for approximately $4,300. (Reply Declaration of Paul Zullo, dated November 6, 2000 ("Zullo Declaration") at ¶ 6 and Exhibit B). Muze currently has MSD systems and/or kiosks installed in the music departments of approximately 250 Barnes & Noble retail stores. For a number of years, Barnes & Noble has ordered MSD systems for its stores as they open, notifying Muze of the plan to open each store with a music department and placing formal purchase orders for installation of the relevant equipment. (Geller Declaration 1 at ¶ 6).

Muze and DOD entered into a licensing agreement in 1999. The first two portions of the agreement, consisting of a document captioned "Muze Database License" (the "DB License") and an "Appendix 1" thereto (the "Appendix"), became effective July 26, 1999. The agreement's stated term was through July 25, 2000; it covered use of the Bibliographic Database as well as Muze's proprietary software enabling display of the Bibliographic Database on the video screens of computer terminals. The parties entered into a "Clips Addendum" to the agreement (the "Addendum" and, together with the DB License and the Addendum, the "Licensing Agreement") on October 6, 2000. (Exhibits A and B to Declaration of Scott Smith, dated November 2, 2000 ("Smith Declaration")). For purposes of this motion, the parties have stipulated that the Licensing Agreement, including the Addendum, was extended in October 1999 for a two-year period ending October 27, 2001.

At the time the parties originally entered into the Licensing Agreement, the focus of DOD's business operations was its "Digital Distribution Network" (the "DDN"), a system designed to utilize high-speed data transmission through DOD's "RedDotNet" to deliver recorded music and other digitized entertainment content to retail terminals located in music stores. Store customers could use the terminals to select music for "burning" into custom CDs and/or "special order" CDs not available in the store's physical inventory. (Smith Declaration at ¶ 3; Geller Declaration 1 at ¶ 9; Declaration of Robert McCray, dated November 2, 2000 ("McCray Declaration 1") at ¶¶ 3-4). The DDN thus provided the retailers with a "virtual inventory" potentially much broader than their physical inventories. The DDN also included equipment that would "burn" CDs and print liner notes and graphics onsite, (Exhibit D to Smith Declaration at 2), enabling the retailer to sell on demand from the virtual inventory.

The July 26, 1999 DB License and Appendix gave DOD the right to utilize the Bibliographic Database in its DDN, thus enabling DOD to offer store customers using DDN terminals the ability to research and view information concerning their desired music on the DDN terminals. The DDN terminals were also set up to permit customers to buy custom-"burned" CDs or place special orders for prerecorded music not in the store's physical inventory, again utilizing the Bibliographic Database and Muze's software interface to specify the desired music. The October 1999 Addendum permitted DOD to add an audio feature to the DDN terminals — a customer standing at the terminal could now use headphones to listen to a 30-second "clip" of the desired music, rather than make a purchase decision based on visual information only.

In October 1999, DOD entered into a letter of intent with of Alliance Entertainment Corp. ("AEC"), one of the leading providers of data and prerecorded music and video products to the entertainment industry. DOD subsequently became a wholly-owned subsidiary of AEC. (McCray Declaration 1 at ¶¶ 2, 10; Smith Declaration at ¶ 2).

In or about September 2000, DOD unveiled a new incarnation of the DDN. This new version of the DDN separates the music-ordering function from the listening function. Thus, DDN now offers a "listening-only" system similar to Muze's MSD. The listening-only DDN system, like the MSD, involves strategic placement of headphones throughout the retail music area. Customers can listen to samples of the available music as they peruse the physical inventory. Like the MSD, it serves as a promotional tool for the retailer's physical inventory (indeed, DOD's counsel acknowledged at oral argument that DOD's new system promotes the prerecorded entertainment products supplied to retailers by DOD's new parent company, AEC, and that this cross-marketing enables DOD to provide the systems to retail stores free of charge). It features a major technological improvement over the MSD, namely an interface that permits the customer to cue up Clips for listening merely by scanning the bar code of a CD. Most of the listening stations utilized in the new DDN system do not feature video screens, utilizing instead a two-digit LED display that shows the number of the track being played; the customer can change tracks by turning a knob. DOD also provides two other types of listening stations for use with the new system. Both have video display screens that contain text and written images. Customers use knobs and/or a touch screen to view information and hear music after scanning the bar code of the CD they wish to explore. (Supplemental Declaration of Robert McCray, dated November 8, 2000 ("McCray Declaration 2") at ¶¶ 4-6). The written information displayed on these units' video screens includes the title of the album, the name(s) of the performer(s), the name of each song or track, the year the album was released, and the price of the recording. The units do not have an ordering function. (Id. at ¶¶ 6-8).

Of the approximately 58 pieces of DDN equipment installed in the music department of the Union Square store, approximately 52 are "listen-only" posts scattered throughout the department that permit customers to listen to music by scanning the bar code of a CD and manually turning a dial to select a particular Clip from the CD. (Declaration of Gary Geller, dated November 9, 2000 ("Geller Declaration 2") at ¶¶ 2-3, 6; McCray Declaration 2 at ¶ 9). The only visual displays on these units consist of a printed banner reading "Listen to any CD," a two-digit LED readout of the track number, and a fine-print sticker displaying Muze's copyright information. (Exhibits A, B, D to Geller Declaration 2). The remaining units have video displays as well as Clip-playing capability. (Geller Declaration 2 at ¶ 5). According to the supplemental affidavit submitted by DOD, none of the models in place at the Union Square store has ordering capability, and none contains "hyperlink technology whereby a retail customer can link to the World Wide Web or the Internet." (McCray Declaration 2 at ¶¶ 2-3).

On September 15, 2000, Muze's counsel wrote to the general counsel of AEC, DOD's parent corporation, describing the new DDN system installed at Barnes & Noble, asserting that the use of the Muze Database and Clips in connection therewith was not "contemplated or authorized by the [Database License] Agreement and Addendum," that "the Muze copyright and trademark notices are not displayed by the DOD listening system in breach of the Agreement . . . [and that] the listening system display screen promotes the AMG database."*fn3 (Exhibit C to Geller Declaration 1 at 1) (emphasis in original). Muze's counsel demanded immediate cessation of the use of the Database and Clips. By letter dated September 19, 2000, AEC asserted, among other things, that use of the Database and Clips comported with the "DDN use" and "display use" provisions of paragraph 2.a. of the DB License, (see infra), and indicated that DOD had undertaken to correct its "oversight" concerning compliance with the provision of the Licensing Agreement requiring the display of certain information regarding Muze and Muze's copyrights on DDN terminals accessing the Database. (Exhibit D to Geller Declaration 1 at ¶¶ 1, 5). Charap again wrote to Lewis on September 21, 2000, asserting breaches of paragraphs "2a, 3c and 3e" of the DB License, and giving notice of Muze's intent to terminate the Licensing Agreement if the alleged breaches were not timely cured, and also notifying DOD of Muze's intent to terminate the Licensing Agreement in any event pursuant to a provision permitting termination on 90 days' notice in the event DOD is acquired by a competitor of Muze.*fn4 DOD continued to operate the new DDN system. Muze delivered a further termination notice, dated October 24, 2000, and purporting to terminate the agreement effective as of that same date, pursuant to paragraph 2.b. of the DB License. The letter further demanded the return of all copies of the Database and Clips in accordance with paragraph 2.c. of the DB License. (Exhibit F to Geller Declaration 1). DOD has nonetheless continued to use the Database and Clips in its new DDN system.

Muze commenced this litigation on October 25, 2000, with the filing of its complaint and the submission of a proposed order to show cause seeking preliminary injunctive relief requiring DOD's cessation of its use of the Database and Clips, and the return of all copies of the material.

The Agreements

The Licensing Agreement provisions that are pertinent to the issues raised in this motion are as follows:

July 26, 1999 Muze Database License

As noted above, the DB License, with its Appendix, was entered into first, and at the time covered only the use of the bibliographic portion of the Database. The "Grant of License" provision of this agreement reads as follows:

Muze grants Licensee a limited, nonexclusive, non-transferable right to use the Database during the Term [of the agreement] (i) in conjunction with the Licensee's DDN and the sale of Products, (ii) for internal use, (iii) for display on Terminals, and (iv) on a single database server (or multiple ...

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