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APOLLO THEATER FOUNDATION, INC v. WESTERN INT'L SYNDICATION

May 5, 2005.

THE APOLLO THEATER FOUNDATION, INC., Plaintiff,
v.
WESTERN INTERNATIONAL SYNDICATION and INNER CITY THEATRE GROUP, INC., Defendants.



The opinion of the court was delivered by: DENISE COTE, District Judge

OPINION AND ORDER

This case concerns an allegation by Apollo Theater Foundation, Inc. ("Apollo") that the former licensed distributor and producer of the television program "It's Showtime at the Apollo," Western International Syndication Corp. ("Western") and Inner City Theatre Group, Inc. ("ICTG"), infringed Apollo's rights in its federally-registered trademark bearing the program's name by producing and distributing a similar urban-themed variety show entitled "Showtime in Harlem" or "Showtime" following a breakdown in negotiations for renewal of the production and distribution licenses in 2002. ICTG has settled with Apollo and is no longer a defendant in this case. Following the completion of discovery, Apollo and Western both filed motions for partial summary judgment, and Apollo filed a motion for leave to file a second amended complaint. For the following reasons, Apollo's partial summary judgment motion is granted, Western's partial summary judgment motion is granted in part, and Apollo's motion for leave to file a second amended complaint is denied.

  BACKGROUND

  The following facts are undisputed, or viewed in the light most favorable to the party resisting summary judgment, unless otherwise noted.

  Apollo and the Apollo Show

  Apollo is a non-profit foundation that operates the Apollo Theater ("Theater"), a well-known performance venue in Harlem that has operated since 1913 and that has offered entertainment targeted principally at the African-American community. Since the 1930s, the Theater has hosted "Amateur Night" showcase performances that have helped launch the careers of many famed African-American artists, including Billie Holliday, Ella Fitzgerald, James Brown, and Ray Charles. These performances were eventually televised, and from 1987 until 2002, this television show (the "Apollo Show") was advertised and promoted under the name "It's Showtime at the Apollo" ("Trademark"). That name became a registered trademark in March 1989 in connection with "entertainment services in the nature of a live variety program and syndication of a television variety program." The Trademark was originally owned by the Apollo Theatre Investors Group ("ATIG"), the former operators of the Theater. ATIG sold substantially all of its business assets, including the Trademark, to Apollo in 1992, when Apollo was formed.

  Features of the Apollo Show include the phrase, "Where Stars Are Born and Legends Made," a reference to a sign that has hung above the doors of the Theater since 1943, and a phrase that has been used by Apollo in advertising and promotions for the Show and the Theater. The Apollo Show also incorporates the so-called "Tree of Hope," which is a piece of a tree that was originally located outside the Harlem Lafayette Theatre, and that held symbolic value for performing artists. The Tree of Hope is located stage right in the Theater, and amateur performers often rub the tree for good luck immediately prior to performing in the Apollo Show. Other features include an "executioner" who removes from the stage performers who meet with audience disapproval, and an "Amateur Night" sign. Western

  Western is a national producer and distributor of television programs. Western began distributing the Apollo Show in 1989 pursuant to an agreement with ATIG. When ATIG sold its assets to Apollo in 1992, its successor-in-interest concluded an agreement granting ICTG a license to use the Trademark in connection with the production, promotion, and distribution of the Apollo Show. Western continued to have exclusive distribution rights pursuant to its 1989 agreement with ATIG, followed by a 1995 distribution agreement with ICTG. There is no dispute that Western owns the copyright for the recorded broadcasts of the Apollo Show for the time that it distributed the Show.

  A distributor of television programs may engage in "domestic syndication," whereby programs are distributed to local television stations across the United States. Distributors market their programs to stations in an attempt to obtain commitments from them called "clearances" to run their programs for the upcoming season. Television seasons run for one year beginning each September. The peak time for marketing and obtaining clearances is in January, approximately nine months before the new season begins, coinciding with a national convention that facilitates distributors' marketing to local television stations. Western was responsible for domestically syndicating the Apollo Show. Trademark Licensing Agreements and Associated Contracts

  On September 22, 1998, Apollo entered into a license agreement ("License Agreement") with Western and ICTG, granting them the exclusive worldwide right and license to use the Trademark "solely . . . in connection with the production, marketing, syndication, distribution and broadcasting of [an] ICTG/Western-produced television program entitled `It's Showtime at the Apollo' and consisting of a one-hour amateur contest, hosted by a celebrity." The License Agreement was renewed and modified by a separate license renewal agreement on August 1, 1999 ("License Renewal"). The License Renewal extended the period of the Trademark license to Western and ICTG through September 22, 2002, and provided for a good faith negotiation process should Western or ICTG wish to extend the license for an additional period:
On or before April 1, 2002, Western and ICTG shall have the right by notice in writing to the Foundation to cause the parties to enter into a two (2) week period of good-faith negotiations for further renewal of the License Agreement for an additional period of two (2) years to commence upon expiration of the renewal. . . .
Western notified Apollo on April 1, 2002 that it intended to enter into such negotiations.

  Apollo states that by the time Western indicated its intent to enter into license renewal negotiations, Western had already obtained clearances from television stations for the Apollo Show for the upcoming season. Apollo points out that a number of the clearance contracts that Western negotiated for the Apollo Show for the 2002/2003 broadcast season contained clauses stating that Western reserved the right "to offer the show under a different title so long as the show format and creative elements do not vary significantly from its current form, function and elements as outlined above." One such contract was executed by a television station program director in St. Louis on April 4, 2002. A number of those contracts were concluded in August 2002, by which point, according to at least one witness's deposition, Western knew that it would not be receiving a license renewal.

  On August 15, 2002, Apollo concluded a Production, Distribution and Advertising Sales Agreement ("Heritage Agreement") with Heritage Networks, LLC, Heritage 215 Entertainment, LLC, and Heritage/Baruch Television Distribution, LLC (collectively, "Heritage"), that licensed the use of the Trademark and the Theater to Heritage for the 2002/2003 season and provided that Heritage would distribute the Apollo Show for that season. The Heritage Agreement provided for a third party producer, dePasse Entertainment. Among the provisions of the Heritage Agreement was a clause stating that "[t]he budget for production of the Series shall be not less than $3.5 million nor more than $4.5 million (including all fees to the Producer and Executive Producer fee . . .) and shall be set forth . . . with such changes as the Foundation, Heritage and the Producer shall mutually agree. . . ." The actual budget for the Apollo Show in the 2002/2003 season was $5,372,961. The Heritage Agreement also provided that "Distribution Expenses shall not include any interest or financing charges or any overhead or general administration expenses,"*fn1 and that Heritage would pay Apollo a fee of $1.6 million for the license to use the Trademark. Heritage's obligation to pay this license fee was "absolute and unconditional." Heritage's obligation to pay the license fee would be secured by delivering to Apollo an irrevocable letter of credit issued by Comerica Bank ("Comerica") for the fee amount.

  On January 3, 2003, Heritage entered into a Loan and Security Agreement ("Loan Agreement") with Comerica in order to finance its production and distribution costs. The Loan Agreement provides that Heritage would borrow up to $6,147,961 from Comerica. The Loan Agreement also grants Comerica an unconditional lien on all of Heritage's revenue from the Apollo Show as security for "the absolute, indefeasible, irrevocable, proper, timely and unconditional payment, performance and discharge of all of the Obligations." The "Obligations" contained in the Loan Agreement include:
all present and future loans, advances, liabilities, obligations, covenants, duties, and indebtedness owing by: (a) any Borrower to the Bank; . . . (c) any Guarantor to the Bank; . . . including, without limitation, all principal, interest, charges, expenses, fees, attorneys' fees, filing fees and any other sums chargeable to any such Person hereunder. . . . (Emphasis supplied.)
  Apollo entered into an Accommodation Security Agreement ("ASA") with Comerica in order to provide the security necessary for Comerica to provide the loan to Heritage for its production and distribution costs. The ASA defines the "Borrowers" as Heritage, the "Bank" as Comerica, the "Accommodation Party" as Apollo, and the "Foundation Agreement" as the Heritage Agreement. The ASA notes that under the Loan Agreement, "the Borrowers granted to the Bank a continuing first priority security interest in and to, and lien upon, the Collateral," which includes "all right, title and interest of the Borrowers in and in connection with the Foundation Agreement, the Series and the proceeds thereof." The ASA grants Comerica an unconditional lien on all of Apollo's rights to the "Adjusted Gross Proceeds" from the Apollo Show as security for "the absolute, indefeasible, irrevocable and unconditional payment, performance and discharge of the [Borrower] Obligations and the Accommodation Party Obligations in full." "Adjusted Gross Proceeds" are defined as the sum of "all gross monies and other consideration received by or credited to the account of Heritage . . . from all sources for the broadcasting, distribution, exhibition and exploitation of the Series and all rights therein, after deduction of agency commissions." The ASA collectively describes the items belonging to Apollo in which Comerica retains an interest as the "Accommodation Party Collateral." The ASA continues as follows:
 
The amounts recoupable by the Borrowers from Adjusted Gross Receipts include the "License Fee," the "Distribution Expenses" and the "Production Expenses" (as each such term is defined in the Foundation Agreement) as well as all fees, costs, expenses, interest, and other charges of the Bank under, arising out of or in connection with the Loan Agreement and other Loan Documents in any way related to the Series and are included as part of the Collateral and the Accommodation Party Collateral.
Finally, the ASA provides that
 
[a]s between the Accommodation Party and the Bank, all consents and approvals required to be given by Accommodation Party under or in connection with the Foundation Agreement irrevocably and unconditionally have been given or waived by Accommodation Party including, without limitation, approval of: . . . (v) the "Distribution Expenses" . . . and the budget therefore; (vi) the "Production Expenses" . . . and the budget therefore; and (vii) the Loan Agreement.
The 2002/2003 Negotiations and Television Season

  The two-week negotiation period started with Western's April 1, 2002 notification to Apollo that it intended to enter into license renewal negotiations and did not generate a license renewal agreement.*fn2 Before and during this time, Western was already contracting with television stations to distribute the Apollo Show for the upcoming season. Western did not provide an initial proposal for the terms of a license renewal until April 22, which was after the conclusion of the two-week period. Apollo made a counter-proposal on or about June 13, and Western responded on July 17 with a further counter-proposal for a seven year license extension. In the July 17 counter-offer, Western asserted that Western owned the rights to the format of the Apollo Show, and stated that an important reason for Apollo to choose to continue to work with Western as opposed to another distributor was that Western "would provide its station contracts and time slots, which obviously are very valuable, and a key ingredient to actually airing the Series." Western's counter-proposal continued: "[T]he Foundation should be aware that these slots are extraordinarily difficult to obtain (and [Western] is contractually permitted to place other shows into these slots) and these slots are of significant value to any producer of the Series."

  A letter dated July 31, 2002 from Apollo's counsel to Western's counsel indicates that on July 25, Apollo rejected the July 17 Western counter-proposal and proposed a one-year license extension on terms similar to its June proposal. The letter notes that Apollo set a deadline of July 31, that Western had not responded to repeated contact attempts, and that Apollo was therefore assuming that the license would not be renewed. Western admits that it was aware by July 31 that the license would not be renewed. A clearance contract from Western offering the Apollo Show was executed by the President of a Pennsylvania television station and the National Sales Manager of Western on August 7, and includes a handwritten note stating: "WGAL will begin airing Showtime at the Apollo the week of September 30, 2002." According to an Apollo expert report, the last known Western clearance contract offering the Apollo Show was signed by Western and a Portland, Oregon television station on August 14.

  Western issued a press release on August 13 entitled "Western International Syndication and Inner City Theater Group Hits the Road with Showtime Live." Western and ICTG developed a competing program to fill the clearances Western had obtained for the Apollo Show. The title of the competing program was different in various promotional materials, but it was commonly referred to as either "Showtime," or "Showtime in Harlem." Showtime in Harlem was also an urban-themed variety show, although it was not filmed in Harlem. It incorporated features such as a piece of a tree located stage right that performers would rub immediately prior to performing, an "executioner" who removed from the stage performers who met with audience disapproval, and an "Amateur Night" sign. Materials used to promote Showtime in Harlem to television stations and advertisers used phrases such as: "Showtime — Where Dreams Are Born and Legends Are Made," "Harlem's Original Amateur Night," and "In its 16th season, Showtime remains . . . a mainstay in African-American entertainment." The website for Showtime in Harlem featured a large-font title reading: "It's Showtime at the Apollo!" This sentence would then appear to explode, and would be replaced by "Showtime in Harlem." An Apollo expert report quotes an August 19 letter from Christopher Lancey, Western's CEO, to Michael Auerbach of King World Media Sales ("King World"), a prominent media sales company that Western had retained since 1989 to sell thirty-second national commercials to run during the Apollo Show, which stated:
Pursuant to our conversation of August 14, 2002, we agree to amend our May 8, 1989 Barter Sales Agreement by replacing the trade name "It's Showtime at the Apollo" with the prospective working titles inclusive of "Showtime Live" or "It's Showtime in Harlem". As we previously stated, the title and venue change, however, is the ONLY difference. Viewers will continue to enjoy the exact same show they have come to expect for the past 15 years. . . .
  The Apollo Show continued after the Trademark and permission to use the Theater had been licensed to Heritage. The financial impact that the late licensing of the Apollo Show had on its revenues for the 2002/2003 season is discussed in the context of Apollo's profits below.

  Western's Profits

  Western contends that it lost over $1,600,000 in connection with "Showtime in Harlem," because its costs exceeded $6,800,000 and its revenue was $5,177,104. Western supports this claim with documentation indicating that its revenue derived from two sources: King World, and Creative Television Marketing ("Creative"), another media sales company that Western retained to sell ten-second promotional spots to run during the program. The revenue derived from King World was $4,960,858, and the revenue derived from Creative was $216,246, for a total revenue of $5,177,104. Western documents its costs as expenses for the physical production of the program of $4,051,159, residuals to performers who appeared on episodes broadcast during the 2002/2003 season of $487,972, fees to the production guarantor of $81,000, costs for publicity, promotions, and advertisements of $129,199, marketing costs of $105,719, fees to viewer rating companies such as Neilsen Media Research of $150,048, expenses for physical distribution of episodes, such as satellite or video tape delivery, of $126,722, a loan origination fee for a loan to finance production and distribution of $128,000, interest on its loan of $295,082, legal fees of $15,000 in securing the loan, and television station compensation fees of approximately $1,100,000, for a total of $6,669,901. Western also seeks to include in its cost figure a loan renewal fee of $72,530 for its failure to repay the financing in full prior to the maturity date.*fn3

  Apollo's Profits

  Apollo presents two expert reports to attempt to quantify the effect that Western's purported trademark infringement had on Apollo's profits. A report by David Bivens, a media consultant, considers the advertising and viewer market for the Apollo Show and estimates the negative effect that Western's launching of a competing program and its methods of marketing that program would have had on Apollo's ability to secure station clearances for the Apollo Show, obtain advertisers, reach Apollo's desired audience, and ultimately, receive revenue. The factors considered in the Bivens Report include the fact that Heritage, and consequently Apollo, missed the "upfront" market for obtaining clearances and advertising because they were unable to attempt to secure such commitments until just before the 2002/2003 television season began in September. Other factors included Western's moves to block Apollo's access to clearances and advertisers by obfuscating the pedigree of Showtime in Harlem, and by notifying former Apollo Show stations that Western would enforce the clause permitting it to replace the Apollo Show with a different show and in any event would not release them from the contracts. The Bivens Report quotes an August 19 draft letter to the "TV Station Contact List" stating that Western "will be providing to your station the television program `Showtime' for airing in the time slots provided in [your] contract."

  The Bivens Report compares various costs for the Apollo Show in the 2002/2003 season to previous seasons to illustrate important differences. For example, station compensation costs for the Apollo Show in the 1999/2000 and 2000/2001 seasons were approximately $240,000, and were reduced to approximately $100,000 in the 2001/2002 season. In the 2002/2003 season, however, these costs soared to $1,492,000, representing "strenuous efforts to secure key-market clearance and adequate total U.S. coverage," mostly for "secondary clearances due to Showtime's retention of the primary clearances." The Bivens Report also evaluates previous advertising revenue trends for the Apollo Show, concluding that the Apollo Show's projected advertising revenues of $10.2 million for the 2002/2003 season represented a reasonable projection assuming the Apollo Show would be without a competing Western-distributed program. Nevertheless, the Apollo Show's actual gross advertising revenues for the 2002/2003 season were approximately $7.9 million. The Bivens Report attributes this shortfall to "[i]mpaired or infringed station clearances," "[i]mpaired ratings due to an infringing program, infringing promotion of that program, and audience confusion," and "[i]mpaired or infringed access to Apollo's upfront advertisers that were pre-sold by KingWorld [sic] and transferred to Showtime."

  The Bivens Report generates five hypothetical "scenarios" that estimate the negative impact of Western's competing program under different sets of assumptions and conditions. The variables these scenarios adjust are whether or not a competing show distributed by Western exists, whether or not that show infringes the Trademark, whether or not Western retains its primary station clearances for its show, and whether or not Western obstructs Apollo's access to up-front advertisers.*fn4 These scenarios estimate what the Apollo Show's household market share ratings would be under these varying conditions, as well as what advertising revenue Apollo could have grossed. In each of the five scenarios, production costs are assumed to be $4.5 million pursuant to the terms of the Heritage Agreement. Distribution costs increase depending on the level of competition and infringement by Western. Thus, Scenario One assumes Western has not generated a competing show, and Apollo generates a total revenue of $11 million. Scenario Two assumes Western has fairly produced a non-infringing show, and has not attempted to retain its primary station clearances or up-front advertisers. Scenario Three assumes Western has fairly produced a non-infringing show, but has retained its primary clearances. Scenario Four assumes Western has unfairly produced an infringing show, and has retained its primary clearances, but has not retained its up-front advertisers. Scenario Five assumes Western has unfairly produced an infringing show, and has retained both its primary clearances, and its up-front advertisers. Scenario Five generates financial results for Apollo that mirror Apollo's actual revenues during the 2002/2003 season.

  A report by Justin McLean, an economic consultant, utilizes the figures generated by the Bivens Report, as well as financial statements, depositions, and other documents, to attempt to calculate the profits Apollo would have generated were it not for Western's creation and distribution of Showtime in Harlem, as well as to determine the value of a license fee that would have resulted from hypothetical negotiations between Apollo and Western during September 2002. The McLean Report includes a chart that utilizes figures derived from the Bivens Report's five scenarios, and generates an estimated Apollo profit for each scenario. This chart is almost identical to the chart at the conclusion of the Bivens Report, except that it includes as a fixed cost the $1.6 million license fee paid to Apollo because that fee was secured as collateral in the ASA and would eventually require repayment to Comerica. Thus, for each scenario, the McLean Report takes the estimated gross sales revenues, subtracts the advertising agency and Heritage commissions, and then subtracts production costs fixed at $4.5 million, station compensation costs, tape distribution, rating research, promotion and marketing, bonus payments to Heritage, if any, and the license fee. The McLean Report thus concludes that in Scenario One, if Western had not produced a competing show, Apollo would have turned a profit of $718,250, but that in Scenario Five, assuming Western unfairly produced an infringing show, and retained both its primary clearances, and its up-front advertisers, Apollo would not have made a profit, but rather would have lost $2,684,600. The Bivens Report includes an attachment stating that during the 2002/2003 season, the Apollo Show actually earned $7,944,255 in gross sales and $6,752,617 in adjusted gross sales after deducting the advertising agency commission. This attachment does not calculate the actual net profits of the Apollo Show for that season.

  The McLean Report also attempts to calculate the value of a license fee that would have resulted from hypothetical negotiations between Apollo and Western during September 2002. This calculation assumes a willing licensor (Apollo) and licensee (Western) negotiating a one-year non-exclusive Trademark license with no provisions for sharing of creative control.*fn5 The McLean Report considers prior exclusive Trademark license fees ranging from $650,000 to $1.6 million, as well as two Apollo offers, and one Western offer, that were part of the unsuccessful license renewal process in the spring and summer of 2002, which ranged from $750,000 to $1 million. Based on these figures, the McLean Report concludes that $750,000 to $1 million should be the "starting range" for the negotiation.*fn6 The Report then adjusts these figures up and down using fifteen evidentiary factors used to determine reasonable royalty rates in patent disputes, known as the "Georgia Pacific Factors." See Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). After applying these factors, the McLean Report concludes that the hypothetical negotiation for a license would produce a fee of $750,000.

  Plaintiff's Claims and Supplemental Disclosures

  Apollo seeks damages under eight causes of action. First, it brings a claim of infringement of federally registered trademarks under the Lanham Act, 15 U.S.C. § 1114(1). Second, Apollo claims false designation of origin and unfair competition pursuant to the Lanham Act, 15 U.S.C. § 1125(a). Third, Apollo claims dilution of a famous trademark pursuant to the Lanham Act, 15 U.S.C. § 1125(c). Fourth, Apollo alleges that Western engaged in deceptive acts and practices under New York statutory law, N.Y.G.B.L. § 349. Fifth, Apollo claims trademark dilution under New York statutory law, N.Y.G.B.L. § 360-1. Sixth, Apollo claims trademark infringement under New York common law. Seventh, Apollo claims unfair competition under New York common law. Eighth, Apollo alleges a breach of the duty of good faith and fair dealing.

  In an undated supplemental disclosure pursuant to Rule 26(a)(1)(C), Fed.R.Civ.P. ("Disclosure"), Apollo stated that the damages it suffered from Western's infringement "include, inter alia, in addition to the Apollo Foundation's claim for injunctive relief, compensatory, exemplary and punitive damages and attorneys' fees and costs." The Disclosure states that the computation of damages is detailed in the two expert reports, and that those reports are based on four computations: (1) revenues received by Western as a result of its infringement; (2) other benefits gained by Western; (3) profits lost by Apollo; and (4) the outcome of a hypothetical license negotiation between Apollo and Western to ...


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