Between 1993 and 1999, Intersound allegedly received at least $110,000 in royalties from
DYNA, which were paid in part for plaintiffs works that were sold in the Philippimes. According
to the fourth amended complaint, Intersound realized pure profit from these royalties, which were
neither accounted for nor properly paid out.

Plaintiff alleges that Johnson participated and/or acquiesced in the active concealment of
the sales by DYNA and the receipt of money in the United States from DYNA for those sales.
Moreover, Olsen denied plaintiff's request to conduct an audit of Intersound’s books and records
in 1997 - which included a request to furnish plaintiff with a list of all companies that
manufactured audio compact disc (“CDs”) and cassettes for Intersound during the period July 1,
1995, through September 30, 1997 - contending that plaintiff's requests were “beyond the scope
of the rights” granted by the licensing agreement.”

Plaintiff alleges on information and belief thal Intersound was a subchapter S corporation.
As such, its profits derived from unreported DYNA royalties allegedly flowed directly through to
its shareholders, including Johnson (allegedly the majority sharcholder) and Olsen.’

On July 26, 2000, Platinum filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code, and an amended plan of reorganization became effective on October 10, 2001.

Thereafter, Platinum changed its name to Compendia Media Group (“Compendia”). Plaintiff

°The relevant section of the licensing agreement, Section 5(D), provides that “T.icensor
shall have the right... to cxamine Intersound’s books of account relating to the subject matter of
[the licensing agrecment]. Intersound agrees that it will, at reasonable times, permit persons so
designated by Licensor, in writing, to examine such books of account and manufacturing records
at Licensor’s expense.”

*Plaintiff notes that if Intersound was a “C” corporation, the profits would be distributed
to shareholders as a dividend.



the statute of limitations is deemed unaflected by the filing of the suit, so that if the statute of

limitations has run the dismissal is cffectively with prejudice.” Id. at 1011. The Elmore holding

is inapposite, however, because the instant suit has never been dismissed, with or without
prejudice.

For these reasons, the court concludes that plaintiff's fourth amended complaint was
timely filed. Defendants’ motion to dismiss the fourth amended complaint on statute of
limitations grounds is therefore denied.

2. Direct Financial Interest

In Seals T, the court dismissed plaintiff's claims of vicarious infringement with prejudice
because plaintiff “failed to articulate any specific facts regarding cither, (1) the individual
defendants’ rights and abilities to supervise infringing conduct, or (2) their obvious and direct
financial interests in the exploitation of copyrighted materials.” In an oral ruling on April 17,
2003, the court granted plaintiff's motion to reconsider its dismissal of plaintiff's claims against

the individual defendants in Seals | and granted him leave to file a fourth amended complaint. In

granting that motion, however, the court noted:

I’m conditioning [this decision] on the understanding of two things. Number one,
if T grant another motion by these [individual] defendants to dismiss, it will be
with prejudice, no questions asked... Number two, if | grant that motion in the
face of these papers that ] have reviewed in connection with my ruling today, T
will award attorney’s fees against the plaintiff and in favor of the individual
defendants, and we'll deal with the extent of those fees should that be the case.

Defendants maintain that plaintiff's fourth amended complaint has not sufficiently
alleged that Johnson and Olsen had a “direct financial interest” in the alleged infringement, and

that they are therefore entitled to their attorneys’ fees. ‘The court disagrees.



any exhibits attached thereto, and supporting briefs. Thompson v. Illinois Department of
Professional Regulation, 300 F.3d 750, 753 (7" Cir. 2002).
1. Statute of Limitations

Defendants argue that plaintiffs fourth amended complaint, filed on May 5, 2003, is
time-barred because plaintiff's claims against them accrued in 1995. Plaintiff maintains that:
(1) defendants waived their statute of limitations defense by not raising it in their previous
motion to dismiss; (2) because of defendants’ active concealment of their conduct, plaintiff did
not learn of the alleged infringement until May 2000, and then timely filed his first complaint
within the applicable statute of limitations; and (3) plaintiff's earlicr-filed complaints served to
toll the statute of limitations.

To begin, the court notes that defendants did not waive their statute of limitations
defense. As the Seventh Circuit noted in Perry v. Sullivan, 207 I'.3d 379 (7" Cir. 2000), there is
no requirement under Rule 12 to affirmatively raise the statute of limitations defense by motion.
Rather, Fed. R. Civ. P. 8(c) provides that a statute of limitations defense may be raised ina
responsive pleading. Id. Tn the instant case, as in Perry, the individual defendants have not yet
filed an answer, and therefore did not have the opportunity to raise their affirmative defenses
under Rule 8(c). Accordingly, the court will entertain defendants’ statute of limitations
arguments.

Having said that, for the reasons stated below, the court concludes that defendants’ statute
of limitations defense is without merit. The Copyright Act provides for a three-year statute of
limitations. 17 U.S.C. § 507 (b). In ‘Taylor v. Meirick, 712 F.2d 1112, 1117-1118 (7" Cir,

1983), the Seventh Circuit held that the statute of limitations in a copyright action is tolled “until



alleges that DYNA continued to sell his copyrighted works after October 10, 2001, and that
Compendia continues to receive payments from D'YNA in connection with the unauthorized
reproduction, distribution and sales of those works.

In Count I of his fourth amended complaint, plaintiff alleges that Intersound infringed,
and Compendia continues to infringe and contributorily infringe, his exclusive rights in his
copyrighted works in violation of 17 U.S.C. §§ 106(1)-106(6). In Counts II and IV, plaintiff
alleges that Johnson and Olsen are liable for willful contributory infringement by copying
plaintiffs works and then providing those works to DYNA for reproduction and distribution. In
Counts IL and V, plaintiff alleges that Johnson and Olsen are vicariously liable for the infringing
activity of Intersound, Platinum, Compendia and DYNA.

Johnson and Olsen have moved to dismiss Counts IT through V on statute of limitations
grounds. In addition, they maintain that Counts TIT and V should be dismissed because plaintiff
has not adequately pled the “direct financial interest” element of his vicarious infringement
claims.

DISCUSSION

Defendants have moved to dismiss Counts II through V for failure to state a claim
pursuant to Fed. R. Civ. P. 12(b)(6). The purpose of a motion to dismiss under this Rule is to
test the sufficiency of the complaint, not to rule on its merits. Gibson v. City of Chicago, 910
F.2d 1510, 1520 (7" Cir. 1990). When considering the motion, the court accepts the factual
allegations as true and draws all reasonable inferences favorable to plainuff, Travel All Over the

World, Inc. v. Kingdom of Saudi Arabia, 73 F.3d 1423, 1428 (7" Cir. 1996). ‘The consideration

of a Rule 12(b)(6) motion is generally restricted to the pleadings, which include the complaint,



comply with plaintiff's request. Moreover, the fourth amended complaint alleges that defendants
received royalties from DYNA stemming from sales of Seals’ work in the Philippines, as well as
quarterly reporis of those sales, and then failed to account for or report any of those sales to
Seals when paying royalties due under the agreement. Drawing all reasonable inferences in
plaintiff's favor, these allegations are more than adequate to establish that defendants’ active
concealment of their sales of plaintiffs works in the Philippines prevented plaintiff from learning
of their infringing conduct prior to May 2000.

Plaintiff filed his original complaint in the instant case in February 2002, well within the
three-year statute of limitations that began running in May 2000.‘ Contrary to defendants’
argument, the fact that this court subsequently dismissed plaintiff's first, second, and third
complaints docs not render the fourth amended complaint, filed on May 5, 2003, untimely. Fed.
R. Civ. P. 15(c)(2) provides that an amendment of a pleading relates back to the date of the
original pleading when “the claim or delense asserted in the amended pleading arose out of the
conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading.”
Defendants do not dispute that plaintiff's fourth amended complaint arose out of the same
conduct dealt with in plaintiffs original complaint. ‘Thus, plaintifi”s fourth amended complaint
relates back to February 2002, when his original complaint was timely filed.

Elmore v. Henderson, 227 1'.3d 1009 (7" Cir. 2000), does not compel a contrary

conclusion, In Elmore, the Seventh Circuit held that “when a suit is dismissed without prejudice,

‘In their supplemental memorandum, defendants point to plaintiff's responses to their
interrogatories as cvidence that plaintiff knew that copics of In a Quiet Room were being sold in
the Philippines as early as October 1999, Even assuming arguendo that the three-year statute of
limitations began to run in October 1999, rather than May 2000, plaintiff's first complaint, filed
in February 2002, would still be timely filed.



Minute ner Eure (4097)

United States District Court, Northern District of Minois

‘Name of Assigned Judge Sitting Judge if Other
we Magieerate Jude Robert W. Gettleman than Assigned Judge
CASE NUMBER 02 C 920 DATE November 10, 2003
CASE Dan Seals v Compendia Media Group
TITLE
[In the following box (a) indicate the party Gling the motion, e.g,, plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: vf the motion being presented]
DOCKET ENTRY;
a) oO Filed motion of [ use listing in “Motion” box above.]
(2) GB Brief in support of motion duc
(3) Oo Answer brief to motion duc. _- Reply to answer brief duc :
(4) Oo Hearing
(5) a Status hearing set for 11/19/03, at 9:00 a.m.
(6) oOo Pretrial conference[held/continued to] [set for/re-set for] on set for at .
(7) o ‘Trial[set for/re-set for]on___at _
(8) im [Bench/Jury trial] [Hearing] held/continued to _ at
(9) Oo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
COFRCP4(m) OO General Rule2l1 OO FRCP41(a)(1) 0 FRCP41(a)(2).
(10) WM [Otherdocker entry] Memorandum opinion and order entered.
Defendants’ motion to dismiss is denied.
(683) ® [For further detail see order attached to the original minute order.)
No notices required, advised in open court, Document
No notices required. ruunber af notices Numb
X | Notices mailed fy judge’s staff.
Notified counsel by telephune,
Docketing to mail notices. of
Mail AO 450 form . fp 07
Copy to judge/mugistrate jndge vont ‘
ate ied notice
courtroom Loa
GDS deputy's rad ve
initials ~
Date/time reccived.in: }\-?
+ scontral Clerk's Office aiviling deputy ina



infringement. Defendants attempt to distinguish Luft by arguing that “in Luft... |the individual
defendant] directly supervised the manufacture, distribution and sale of the infringing recordings.
No such facts are alleged as to the individual defendants in this case.” While the court
acknowledges that the facts of the instant case are distinguishable from Luft in certain respects,
these differences do not merit granting defendants’ motion to dismiss.

Although plaintiff in the instant case does not allege that defendants directly supervised
the distribution of plaintiffs copyrighted works, the fourth amended complaint does allege that
defendants supervised and directed the copying of plaintiff's works and delivered those copies to
DYNA in the Philippines, essentially setting the alleged infringement in motion. Taken together
with plaintiff's allegations that the individual defendants knowingly concealed royalties derived
from subsequent sales of plaintiff's copyrighted works in the Philippines for several years, and
then, as shareholders, profited from thesc royaltics, the court concludes that plaintiff's allegations
are sufficicnt to state a claim for vicarious copyright infringement.

Sofitel, Inc, v. Dragon Med. and Scicntific Communications, Inc., 118 F. 3d 955 (2d Cir.
1997), docs not compel a different result. In Sofitel, the Second Circuit affirmed the dismissal of
an individual defendant at the close of plaintiff's case because the evidence that the defendant
was president and shareholder of five-employee company was “too attenuated to establish a
sufficiently ‘direct’ financial interest in the exploitation of copyrighted materials.” 1d. at 971.
‘The instant case, in contrast, remains at the pleading stage, and the court finds that dismissal of
plaintiff's claims of vicarious infringement would be premature. Of course, it remains to be seen
whether, with the benefit of discovery, plaintiff will be able to demonstrate the extent, if any, of

the “direct” benefit received by the individual defendants.

1]



According to the fourth amended complaint, Johnson and Olsen supervised and/or

directed the allegedly unlawful copying of plaintiff's works in 1995, and both Johnson and Olsen
actively concealed the subsequent sales of those works in the Philippines by failing and refusing
to account for and pay royalties owed to plaintiff under the agreement. Plaintiff has further
alleged that Johnson and Olsen were both sharcholders and officers of Intersound, and that the
profits derived from the allegedly infringing sales in the Philippines passed through to them.
Thesc allegations are adequate to state a claim for vicarious infringement.

In Broadcast Music. Inc. .v. Hartmarx Corp., 9 U.S.P.Q.2d 1561, 1562-63 (N.D.ILL. 1988),
for example, the plaintiff alleged that the defendant was vicariously liable (or allegedly infringing
public performances of copyrighted musical compositions at two subsidiary stores that were
100%- and 92%-owned by defendant. In that case, Judge Plunkett held that the defendant parent
company had a direct and obvious financial interest in the alleged exploitation of copyrighted
materials by its subsidiaries. Tn reaching that conclusion, the court reasoned that the two
subsidiaries presumably played the infringing music to create a more attractive environment for
their customers and make greater profits, which would flow to the defendant. Id

Similarly, in Luft v. Crown Publishers, Inc., 772 F. Supp. 1378, 1379-80 (S.D.N.Y.

1991), the court held that an individual defendant, who was president of and had a 65%

ownership interest in a corporation, was vicariously liable for that corporation’s copyright

‘Contrary to defendants’ representation to the court, Goes Lithography Co. v. Banta
Corp., 26 F. Supp. 2d 1042 (N.D.IIl. 1998), did not reject the Hartmax court’s analysis of the
direct financial benefit prong of the vicarious liability test. Rather, Goes Lithography Co.
declined to adopt the Hartmax court’s holding that a parent company’s power to supervise and
control infringing conduct of a subsidiary may be inferred solely from the parent-subsidiary
relationship. Goes Lithography Co., 26 F. Supp. 2d at 1045.

10


the plaintiff learned or by reasonable diligence could have Icarned that he had a cause of action.”
Moreover, the court added that “there is no doubt that the copyright statute of limitations is tolled
by fraudulent concealment of the infringement.” Id. (internal quotations and citations omitted).

According to plaintiffs fourth amended complaint:

In or about May 2000, plaintiff, through his agent, was advised by officials at

Platinum that its predecessor in interest, Intersound, had licensed the right to

reproduce, sell and authorize broadcasts and public performances of plaintiff's

copyrighted works in the Philippines; that officials at Intersound, and/or their

employees under the direction and control of officers Johnson and Olsen had

copied plaintiffs works and delivered those copies to DYNA; and that Intersound

and Platinum had received money in the United States from the Philippine

licensee, DYNA for royalty payments under the license.

As defendants point out, plaintiff did not explicitly allege that May 2000 was the “first
time” that he learned of the alleged infringing conduct. Nonetheless, the court concludes that this
allegation is sufficient to establish, for the purposes of defendants’ motion to dismiss, that
plaintiff had not known of the infringing conduct earlier. Defendants’ argument that this is not a
“fair reading” of plaintiff's fourth amended complaint ignores the court’s obligation to draw all
reasonable inferences in plaintiff's favor in evaluating the instant motion.

Defendants next argue that plaintiff has failed to allege any nexus between his alleged
failure to receive royalty statements and his inability to learn of the allegedly infringing conduct
prior to May 2000, and that, in any event, the alleged failure to provide information does not
amount to “active concealment.” The court disagrees. Plaintiff's fourth amended complaint

alleges that, as carly as 1997, he requested an audit of Intersound’s books and records, including

a request to furnish plaintiff with a list of all companies which manufactured CDs and cassettes

for Intersound during the period July 1, 1995, through September 30, 1997. Olsen refused to



work, use right, artist name and Jikeness or underlying right of the musical works therein, outside
the United States and Canada.

According to the fourth amended complaint, in or about May 2000 plaintiff learned
through his agent that: (1) Intersound had licensed DYNA Products, Inc. (“DYNA”) the night to
reproduce, sell and authorize broadcasts and public performances of plaintiff's copyrighted
works in the Philippines; (2) officials at Intersound, and/or their employees under the direction
and control of officers Johnson and Olsen, had copied plaintiff's works and delivered those
copies to DYNA; and (3) Intersound and Platinum Entertainment, Inc. (which acquired
Intersound in 1997) had received money in the United States from DYNA for royalty payments
under the license. Plaintiff alleges that the unauthorized copies of his works were made in the
fall of 1995 in Intersound’s offices in Roswell, Georgia, and then transmitted to DYNA in the
Philippines.

According to plaintiff, as early as November 1995 and continuing each quarter through
August 1997, Johnson reccived quarterly sales reports and royalty statements from TYYNA.
Thereafter, Johnson allegedly assigned Olsen to receive royalty communications from DYNA.
According to these reports, several of which were attached to the fourth amended complaint,
Seals’ In a Quiet Room was the number onc best seller in the first and second quarters in 1996,
as well as the fourth quarter of 1999. Moreover, the market survey section of the first quarter
report from 1996 noted:

The popularity of ‘England Dan and John Ford Coley’ in the 70's has snowballed

to the advantage of ‘Dan Seals’ in the 90s, Familiar tunes have made the album a

regular staple in radio - even bringing “I'd Really Love to See You Tonight” to

number one in several stations. Songs from the album have also triggered a
revival not only in radio, but also in music bars and loungts [sic] and television.



plaintiff's claims of vicarious and contributory infringement against them are barred by the
applicable three-year statute of limitations under the Copyright Act, 17 U.S.C. § 507(b), and (2)
plaintiff has failed to adequately allege the “direct financial interest” element of his vicarious
infringement claims against them. For the reasons stated herein, the court denies the individual
defendants’ motion to dismiss in its entirety.
FACTS

According to his fourth amended complaint, plaintiff owns or co-owns all right, title and
interest in and to the copyrights in the sound recording and musical compositions for “In a Quiet
Room,” “Big Wheels in the Moonlight,” “Everything that Glitters (Is Not Gold),” “One Friend,”
“You Still Love Me,” “They Rage On,” and “Don’t Believe F'Il Fall in Love Again” (the
“original works”). On July 11, 1995, plaintiff entered into an exclusive license agreement (the
“license agreement”) with Intersound, Inc., granting Intersound the right to manufacture,
distribute, license and sell in every way, several of plaintiff's works, including the original
works, in the territories of the United States and Canada. Johnson, then President and Chief
Operating Officer of Intersound, negotiated and executed the license agreement with the aid,
assistance, and counsel of Michael Olsen, Intersound’s Vice-President and General Counsel.

Section 1(E) of the license agreement, which was attached as an exhibit to the fourth
amended complaint, further provided that “Intersound shall have the right, with the Licensor’s
prior written permission, to distribute the album in countrics other than the United States and

Canada,” Plaintiff alleges that he never granted permission for Intersound or its successors to

copy, distribute, sell, offer to sell, perform or license plaintiff's copyrighted works, any master



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

DAN SEALS, a/k/a Danny W. Seals, individually,
and d/b/a Pink Pig Music and TOUR DATA
CORP.,

Plaintiffs,

No. 0200920

Judge Robert W. Gettleman
COMPENDIA MEDIA GROUP, f/k/a Platinum

Entertainment, Inc., successor in interest to

Intersound, Inc.; DONALD R. JOHNSON and
MICHAEL W. OLSEN,

)
)
)
)
)
)
Vv. )
)
)
)
)
)
)
Defendants. )
MEMORANDUM OPINION AND ORDER
On May 5, 2003, plaintiff Dan Seals filed his fourth amended complaint! for copyright
infringement arising {rom allegedly unauthorized copying and distribution of his album Ina
Quiet Room. Specifically, plaintiff asserts a claim of copyright inftingement and contributory
copyright infringement against Compendia Media Group (“Compendia”), formerly known as
Platinum Entertainment, Inc., successor in interest to Intersound, Inc, (Count I), as well as claims
of contributory infringement and vicarious infringement against individual defendants Donald

Johnson (Counts II and IIT) and Michael Olsen (Counts TV and V), Johnson and Olsen have

moved pursuant to Fed, R. Civ. P. 12(b)(6) to dismiss Counts II, Il, TV, and V, arguing that, (1)

‘In a memorandum opinion dated February 27, 2003, the court granted the motion of six
individual defendants to dismiss with prejudice plaintiff's claims of contributory and vicarious
copyright infringement against them, noting that plaintiff had failed to allege the individual
defendants’ knowledge of, as well as abilily to control, the infringing conduct. Seals v.
Compendia Media Group, 2003 WL 731369, at *6 (N.D.IIl. February 27, 2003) (“Seals I”), On
April 17, 2003, in response to plaintiffs motion to reconsider that ruling, the court orally granted
plaintiff leave to file a fourth amended complaint to rectify these pleading deficiencies.


The court thus denies defendants’ motion to dismiss Counts III and V, as well as
defendants’ request for attorneys’ fees.
CONCLUSION
For the rcasons stated herein, defendants’ motion to dismiss is denied, The parties are

directed to appear for a status report on November 19, 2003, at 9:00 a.m,

ENTER: — November 10, 2003 op a
cigs ) Armee

Robert W. Gettleman
United States District Judge