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NEW YORK � The Beatles have reunited, though only to sue their record companies. A lawsuit filed by the Beatles, their representatives and their recording label Apple Records against Capitol Records and EMI Records will go forward following a Manhattan judge’s denial of a motion to dismiss. Capitol and its affiliate EMI concealed their use of the band’s recordings “in an effort to pocket millions of dollars” in royalties, according to the complaint. The plaintiffs are seeking at least $25 million, asserting causes of action for fraud, breach of contract and — in a difficult and unusual claim against a record company — breach of fiduciary duty. The defense moved to dismiss the causes of action for fraud and breach of fiduciary duty, as well as the plaintiffs’ requests for punitive damages and to reclaim the rights to their recordings, perhaps the most valuable catalog of music in existence. Manhattan Supreme Court Justice Karla Moskowitz last week denied the defense’s motion in its entirety. Most significantly, because the fiduciary duty claim survived the motion, the defendants may be subject to tort liability’s broader damages, additional causes of action and additional remedies. The dispute dates back nearly 30 years, to a similar suit initiated by the Beatles against Capitol/ EMI, Apple Records, Inc. v. Capitol Records, Inc., 137 AD2d 50. Filed in 1979, Apple I, as the present decision refers to it, alleged that Capitol/EMI underpaid the Beatles more than $20 million, which the record companies hid through improper accounting practices. That case resulted in an Appellate Division, 1st Department, decision allowing the breach-of-fiduciary claim to go forward and, in 1989, the parties reached a settlement agreement. “The business dealings between Capitol Records and the Beatles date back to 1962,” the First Department noted in Apple I. “It is alleged that this relationship proved so profitable to defendant that at one point the Beatles constituted 20 to 30 percent of its business.� It can be said that from such a long enduring relation was born a special relationship of trust and confidence.” The settlement agreement that followed that decision granted the Beatles and Apple increased royalty rates and required Capitol/EMI to abide by more stringent auditing and reporting requirements. A second charge of underreporting led to another settlement agreement in 1995, as well as a $35 million payment to the Beatles and Apple and an additional increase in royalty rates. Pursuant to that agreement, the plaintiffs conducted an examination of Capitol/EMI’s books, which allegedly once again uncovered fraud and, in turn, spawned the present lawsuit. The plaintiffs — the surviving Beatles Richard “Ringo Starr” Starkey and Sir James Paul McCartney; Yoko Ono Lennon; George Harrison’s estate; Apple Corps and Apple Records; and McCartney’s company MPL Communications — claimed that Capitol/EMI underreported sales, concealed “lucrative” music-video deals and conducted “secret” transactions with record clubs, among other misdeeds. As in Apple I, a primary accusation was that the record company designated millions of dollars of merchandise as discardable “scrap,” then resold the items without forwarding royalties. LACK OF TRUST Capitol/EMI moved to dismiss the breach of fiduciary claim, arguing that after a decade of litigation and a long history of distrust, the plaintiffs could hardly claim a relationship of trust and confidence. The 1st Department’s original finding of a potential fiduciary relationship between the parties does not apply to “the time in question here,” the defendants contended. Indeed, since Apple I the First Department has repeatedly rejected claims of fiduciary duty by artists against record companies, they noted in their memo in support of the motion. Moskowitz nonetheless found for the plaintiffs. “Because of the allegation plaintiffs make here and the Apple I decision, I cannot hold, as a matter of law, that the parties no longer have a fiduciary relationship,” Moskowitz ruled. “[P]laintiff has pled a viable, continuing fiduciary relationship. Whether or not the level of contentiousness and distrust was so great as to destroy the fiduciary relationship the parties had is an issue that must await development of the factual record.” On similar grounds, the court allowed the fraud claim to go forward as well. “The First Department, in Apple I, on virtually identical facts, already held that plaintiffs adequately stated a valid cause of action for fraud and that the conduct plaintiff pleaded was collateral to the contract,” Moskowitz wrote. She also allowed the plaintiffs’ request for an order terminating Capitol/EMI’s rights to the plaintiffs’ recordings, dismissing the companies’ argument that the plaintiffs were making an impermissible demand for partial recision. “[P]laintiffs�do not seek partial recision, but rather seek to exercise their right to terminate the parties’ agreements based on EMI/Capitol’s alleged breach of contract, breach of fiduciary duties and fraud.” Paul LiCalsi, Howard Weller and Joshua Akbar of Sonnenschein Nath & Rosenthal represented the plaintiffs. “The attempt to knock this claim out at the pleading stages was significant because of how conservative New York law is regarding fiduciary duties,” LiCalsi said. “In New York, unless you fit into the traditional fiduciary relationships, like attorney-client or trustee-beneficiary or doctor-patient, the law is very reluctant to find that a fiduciary relationship arises in commercial transactions. It has to be very unique circumstances for that.” EMI spokeswoman Jeanne Meyer said the defense will likely appeal. “Artists do from time to time request an audit of record labels’ accounts,” she said. “It’s not unusual. We don’t have a problem with it. But sometimes there are differences of opinion, particularly when you are dealing with a contract that is complex.” Mark Fass is a reporter with the New York Law Journal, a Recorder affiliate.

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