CONFIDENTIAL SETTLEMENT COMMUNICATION — SUBJECT TO FEDERAL RULE OF EVIDENCE 408 AND CALIFORNIA EVIDENCE CODE § 1152
TERM SHEET — FOR SETTLEMENT PURPOSES ONLY
Fonseca et al. v. Crescendo Digital Media, Inc. Case No. 2:23-cv-02841-RGK-PLA United States District Court, Central District of California
August 2, 2023
PARTIES
The following Parties have reached an agreement in principle on the terms set forth in this Term Sheet:
Plaintiffs:
Marguerite D. Fonseca, an individual residing in Studio City, California;
Flor de Luna Publishing, LLC, a California limited liability company ("FDL Publishing"); and
Mariposa Sound Recordings, LLC, a California limited liability company ("Mariposa Sound")
(collectively, "Plaintiffs").
Defendant:
Crescendo Digital Media, Inc., a Delaware corporation with its principal place of business in Austin, Texas ("Defendant" or "Crescendo").
(Plaintiffs and Defendant are each referred to herein individually as a "Party" and collectively as the "Parties.")
RECITALS
WHEREAS, on April 3, 2023, Plaintiffs filed a civil action against Defendant in the United States District Court for the Central District of California, captioned Fonseca et al. v. Crescendo Digital Media, Inc., Case No. 2:23-cv-02841-RGK-PLA (the "Action"), assigned to the Honorable R. Gary Klausner, with the Honorable Paul L. Abrams serving as Magistrate Judge;
WHEREAS, the Action arises from Defendant's alleged unauthorized streaming and sublicensing, through the Crescendo Stream digital music platform, of forty-seven (47) copyrighted musical compositions owned or controlled by FDL Publishing and thirty-two (32) copyrighted sound recordings owned or controlled by Mariposa Sound (collectively, the "Works"), as more particularly identified in Exhibit A to the Complaint filed in the Action;
WHEREAS, the Parties participated in a full-day mediation on July 10, 2023, before the Honorable Gerald T. Nakashima (Ret.) of Ashgrove Equity Partners Dispute Resolution Services, LLC, in Los Angeles, California, and thereafter engaged in follow-up negotiations facilitated by Judge Nakashima;
WHEREAS, as a result of such mediation and follow-up negotiations, the Parties have reached an agreement in principle on the material terms set forth below, subject to the negotiation and execution of a definitive Settlement Agreement and Mutual Release (the "Definitive Agreement");
WHEREAS, the Parties wish to memorialize the material terms of their agreement in principle in this Term Sheet so as to reflect the Parties' mutual understanding and to establish a binding obligation to negotiate in good faith toward the Definitive Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
SECTION 1: CASH SETTLEMENT PAYMENT
1.1 Total Settlement Amount. Defendant shall pay to Plaintiffs and their counsel a total cash settlement payment of One Million Six Hundred Twenty Thousand Dollars ($1,620,000.00) (the "Settlement Amount"), allocated and payable as set forth in this Section 1 and Section 2 below. All amounts referenced in this Term Sheet are denominated in United States Dollars.
1.2 Allocation of the Settlement Amount. The Settlement Amount shall be allocated as follows:
(a) Back-Royalties — $1,425,000.00. The sum of One Million Four Hundred Twenty-Five Thousand Dollars ($1,425,000.00) shall be paid as compensation for back-royalties owed for the unauthorized streaming and sublicensing of the Works during the period at issue in the Action. This back-royalty component shall be further allocated as follows:
(i) Composition Royalties. Seven Hundred Twelve Thousand Five Hundred Dollars ($712,500.00), payable to Flor de Luna Publishing, LLC, in respect of composition royalties attributable to the forty-seven (47) copyrighted musical compositions; and
(ii) Master Recording Royalties. Seven Hundred Twelve Thousand Five Hundred Dollars ($712,500.00), payable to Mariposa Sound Recordings, LLC, in respect of master recording royalties attributable to the thirty-two (32) copyrighted sound recordings.
(b) Attorney's Fees Reimbursement — $195,000.00. The sum of One Hundred Ninety-Five Thousand Dollars ($195,000.00) shall be paid as reimbursement of attorney's fees and litigation costs incurred by Plaintiffs in connection with the Action, payable directly to Calderwood & Harkness LLP, counsel for Plaintiffs.
1.3 Tax Treatment. Each Party shall be solely responsible for the payment of any taxes, interest, or penalties assessed against it arising from or related to the payments described herein. The Parties acknowledge that the characterization of payments for tax purposes shall be further addressed in the Definitive Agreement.
SECTION 2: PAYMENT SCHEDULE
2.1 Installment Payments. The Settlement Amount shall be paid in two installments as follows:
(a) First Installment. One Million One Hundred Thousand Dollars ($1,100,000.00) shall be due and payable within thirty (30) calendar days following the date of execution of the Definitive Agreement by all Parties (the "Effective Date"). Based on the target execution date set forth in Section 8.2 below, the anticipated due date for the First Installment is on or before September 13, 2023.
(b) Second Installment. Five Hundred Twenty Thousand Dollars ($520,000.00) shall be due and payable within ninety (90) calendar days following the Effective Date. Based on the target execution date set forth in Section 8.2 below, the anticipated due date for the Second Installment is on or before November 12, 2023.
2.2 Confirmation of Total. The sum of the First Installment ($1,100,000.00) and the Second Installment ($520,000.00) equals the total Settlement Amount of $1,620,000.00.
2.3 Method of Payment. All payments required under this Term Sheet and the Definitive Agreement shall be made by wire transfer of immediately available funds to one or more bank accounts to be designated in writing by Plaintiffs (or their respective entities) and by Calderwood & Harkness LLP, as applicable. Plaintiffs and Calderwood & Harkness LLP shall provide complete wire transfer instructions to Defendant within five (5) business days of the Effective Date.
2.4 Late Payment Interest. In the event Defendant fails to make any payment required under Section 1 or Section 2 by the applicable due date, interest shall accrue on the unpaid amount at a rate to be specified in the Definitive Agreement, commencing on the date such payment was due and continuing until the date such payment is received in full. The Parties anticipate that such interest rate shall be the lesser of (i) ten percent (10%) per annum, simple interest, or (ii) the maximum rate permitted by applicable law.
2.5 Application of Payments. Defendant shall allocate each installment payment pro rata among the components identified in Section 1.2, unless Plaintiffs provide written instructions directing a different allocation at least five (5) business days prior to the applicable payment date.
SECTION 3: PROSPECTIVE LICENSE
3.1 Grant of License. Subject to Defendant's timely and complete performance of its payment obligations under Sections 1, 2, and 3 of this Term Sheet and the Definitive Agreement, Plaintiffs shall grant to Defendant a non-exclusive, non-transferable license (the "Prospective License") to continue streaming the Works through the Crescendo Stream digital music platform (the "Platform"). The Works subject to the Prospective License are the forty-seven (47) copyrighted musical compositions and thirty-two (32) copyrighted sound recordings identified in Exhibit A to the Complaint filed in the Action. A schedule of the Works shall be attached to the Definitive Agreement.
3.2 Term. The Prospective License shall commence on the Effective Date and shall continue for a period of three (3) years thereafter, unless earlier terminated in accordance with Section 3.7 below (the "License Term").
3.3 Royalty Rate. During the License Term, Defendant shall pay Plaintiffs a per-stream royalty of Three and One-Half Cents ($0.035) for each individual stream of each Work on the Platform (the "Per-Stream Royalty"). For the avoidance of doubt, each discrete playback of a Work by an end-user on the Platform that meets the minimum playback threshold established in the Definitive Agreement shall constitute one "stream" for purposes of calculating royalties hereunder.
3.4 Minimum Annual Guarantee.
(a) MAG Amount. Defendant shall pay a minimum annual guarantee of One Hundred Seventy-Five Thousand Dollars ($175,000.00) per year during each year of the License Term (the "Minimum Annual Guarantee" or "MAG"), for a total guaranteed minimum of Five Hundred Twenty-Five Thousand Dollars ($525,000.00) over the three-year License Term.
(b) Application of MAG. If actual Per-Stream Royalties earned and payable in respect of a given license year exceed the MAG for that year, no additional MAG payment shall be due for that year; Defendant shall pay the actual Per-Stream Royalties earned. If actual Per-Stream Royalties earned and payable in respect of a given license year fall below the MAG for that year, Defendant shall pay the shortfall between actual Per-Stream Royalties and the MAG (the "MAG Shortfall") in addition to any Per-Stream Royalties already paid for that year, such MAG Shortfall to be due and payable within thirty (30) days after the end of the applicable license year.
(c) Allocation of MAG. The MAG shall be allocated equally between FDL Publishing and Mariposa Sound, such that each entity is entitled to receive Eighty-Seven Thousand Five Hundred Dollars ($87,500.00) per year as its share of the MAG.
3.5 Reporting and Payment.
(a) Quarterly Reporting. During the License Term, Defendant shall provide Plaintiffs with written royalty statements on a quarterly basis, due within thirty (30) calendar days after the end of each calendar quarter (i.e., statements for the quarter ending March 31 shall be due no later than April 30, and so on for each subsequent quarter). Each royalty statement shall include, at a minimum:
(i) the total number of streams for each individual Work during the applicable quarter;
(ii) the Per-Stream Royalty payable for each Work;
(iii) the aggregate royalty amount due for the quarter;
(iv) a cumulative year-to-date comparison of actual Per-Stream Royalties against the MAG; and
(v) such other information as may be reasonably requested by Plaintiffs or their catalog administrators.
(b) Quarterly Payment. Payment of Per-Stream Royalties shall accompany each quarterly royalty statement, and such payment shall be made by wire transfer in the same manner as set forth in Section 2.3.
(c) Proration. The first and last quarters of the License Term shall be prorated based on the actual number of days within such quarter falling within the License Term.
3.6 Sublicensing.
(a) Defendant may include the Works in curated playlists that are sublicensed to Defendant's commercial clients (e.g., retail establishments, hospitality venues, and similar business-to-business licensees) as part of the Platform's existing playlist distribution services, provided that all revenue generated from such sublicensed playlists containing the Works is included in the calculation of Per-Stream Royalties and the MAG.
(b) Defendant shall not grant any standalone sublicenses of the Works separate and apart from curated playlists distributed through the Platform. For the avoidance of doubt, Defendant may not sublicense, assign, transfer, or otherwise convey any rights in or to the Works to any third party on a standalone or unbundled basis.
3.7 Automatic Termination and Takedown.
(a) Notice and Cure Period. If Defendant fails to make any payment due under Section 1, Section 2, or Section 3 of this Term Sheet or the Definitive Agreement by the applicable due date, Plaintiffs shall provide Defendant with written notice of such failure. Defendant shall have ten (10) business days following receipt of such written notice to cure the failure by making the payment in full, together with any accrued interest.
(b) Automatic Termination. If Defendant fails to cure the payment default within the ten (10) business day cure period described in subsection (a), the Prospective License shall terminate automatically and without further notice or action by Plaintiffs, effective as of the expiration of such cure period.
(c) Takedown Obligation. Upon any termination of the Prospective License pursuant to this Section 3.7, Defendant shall remove all Works from the Platform and from all sublicensed content packages, playlists, and any other medium through which the Works have been made available, within forty-eight (48) hours of such termination. Defendant's failure to comply with this takedown obligation shall constitute willful copyright infringement for purposes of any subsequent enforcement action by Plaintiffs.
3.8 Reservation of Rights. All rights in and to the Works not expressly granted to Defendant under this Section 3 are expressly reserved by Plaintiffs. Nothing in this Term Sheet or the Definitive Agreement shall be construed as a grant, assignment, or transfer of ownership of any copyright or other intellectual property right in or to the Works. The Prospective License does not confer upon Defendant any right to reproduce, distribute, publicly perform (other than by digital audio transmission via the Platform as expressly authorized herein), create derivative works of, or synchronize the Works with visual content.
SECTION 4: AUDIT RIGHTS
4.1 Right to Audit. During the License Term and for a period of one (1) year following the expiration or termination of the Prospective License, Plaintiffs, through Thornfield Music Administration, Inc. or another independent auditor designated by Plaintiffs in writing (the "Auditor"), shall have the right to audit Defendant's books, records, accounts, streaming logs, content management system records, and other documentation relating to the streaming, sublicensing, and distribution of the Works on the Platform (collectively, the "Records"), to verify the accuracy of royalty statements and payments made pursuant to Section 3.
4.2 Frequency. The audit right set forth in Section 4.1 may be exercised no more than once per calendar year.
4.3 Notice. Plaintiffs shall provide Defendant with at least thirty (30) days' prior written notice of their intent to conduct an audit, specifying the period to be audited and the identity of the Auditor.
4.4 Cooperation. Defendant shall cooperate fully and in good faith with any audit conducted pursuant to this Section 4, including without limitation by providing the Auditor with reasonable access to Defendant's offices, Records, streaming logs, revenue data, content management system records, and relevant personnel during normal business hours. Defendant shall not destroy, alter, or conceal any Records during the pendency of an audit or at any time when Defendant has reason to believe that an audit may be requested.
4.5 Discrepancies and Cost of Audit.
(a) If an audit reveals that royalties reported and paid by Defendant for the audited period were less than the royalties actually owed, Defendant shall pay the underpayment amount to Plaintiffs within thirty (30) days of receipt of the audit findings, together with interest at the rate specified in the Definitive Agreement from the date such underpayment was originally due.
(b) If an audit reveals a discrepancy exceeding five percent (5%) of the total royalties reported by Defendant for the audited period, Defendant shall bear the reasonable cost of the audit (including fees and expenses of the Auditor), in addition to paying the underpayment and accrued interest.
(c) If an audit reveals that Defendant overpaid royalties for the audited period, Defendant shall be entitled to a credit against future royalty payments in the amount of such overpayment.
4.6 Confidentiality of Audit. The Auditor shall execute a reasonable confidentiality agreement provided by Defendant prior to commencing any audit, and the audit findings shall be treated as confidential information subject to Section 6 of this Term Sheet.
SECTION 5: MUTUAL RELEASE
5.1 Scope of Release. Upon execution of the Definitive Agreement, each Party shall release and forever discharge the other Party and its respective Released Parties (as defined below) from any and all claims, demands, actions, causes of action, suits, proceedings, judgments, obligations, debts, liabilities, damages, losses, costs, and expenses of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, asserted or unasserted, accrued or unaccrued, matured or contingent, in law or in equity, arising out of or in any way related to the Works identified in Exhibit A to the Complaint, for the period from January 1, 2019 through the date of execution of the Definitive Agreement (the "Released Claims").
5.2 Plaintiffs' Released Parties. The release granted by Plaintiffs shall run in favor of Defendant and its officers, directors, employees, agents, shareholders, subsidiaries, affiliates, predecessors, successors, assigns, insurers, and attorneys (collectively, the "Defendant Released Parties").
5.3 Defendant's Released Parties. The release granted by Defendant shall run in favor of Plaintiffs and their respective heirs, executors, administrators, successors, assigns, agents, representatives, managers, members, attorneys, and catalog administrators, including without limitation Thornfield Music Administration, Inc. (collectively, the "Plaintiff Released Parties").
5.4 Waiver of Unknown Claims. The mutual release described in this Section 5 shall extend to both known and unknown claims. The Definitive Agreement shall include an express waiver of the provisions of California Civil Code Section 1542 (and any similar statute, law, or principle of any jurisdiction), which provides:
"A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party."
Each Party acknowledges that it may discover facts different from or in addition to those it now knows or believes to be true regarding the Released Claims, and agrees that the mutual release shall remain in full force and effect notwithstanding the discovery of any such facts.
5.5 Carve-Out. The mutual release shall not apply to any claims arising from a breach of the Definitive Agreement itself or the Prospective License granted thereunder, nor shall it release any obligations or covenants that survive by their express terms.
SECTION 6: CONFIDENTIALITY
6.1 Confidential Treatment. The existence and terms of this Term Sheet and the Definitive Agreement, including without limitation the Settlement Amount, the payment schedule, the royalty rate, the MAG, and all other financial and business terms set forth herein, shall be kept strictly confidential by the Parties and shall not be disclosed to any third party except as expressly permitted in Section 6.2 below (collectively, the "Confidential Terms").
6.2 Permitted Disclosures. Notwithstanding Section 6.1, the Parties may disclose the Confidential Terms in the following circumstances:
(a) to each Party's attorneys, accountants, tax advisors, and financial advisors who have a need to know such information for purposes of advising such Party, provided that such individuals are informed of and agree to abide by the confidentiality obligations set forth herein;
(b) to Plaintiffs' catalog administrators, including without limitation Thornfield Music Administration, Inc., to the extent necessary for royalty administration, reporting, and audit purposes relating to the Prospective License;
(c) as required by applicable law, regulation, governmental order, subpoena, or other compulsory legal process, provided that the disclosing Party shall provide the non-disclosing Party with prompt written notice of such requirement (to the extent legally permissible) and shall reasonably cooperate with the non-disclosing Party in seeking a protective order or other appropriate remedy limiting the scope of such disclosure;
(d) with the prior written consent of the other Party, which consent may be granted, conditioned, or withheld in such Party's sole discretion; and
(e) in connection with any proceeding to enforce the Definitive Agreement.
6.3 Non-Disparagement. Neither Party shall make, publish, or cause to be made or published any public statement, press release, social media posting, or other communication that disparages, defames, or casts in a negative light the other Party, its officers, directors, employees, products, services, or business practices, in connection with the Action, the settlement thereof, or the subject matter of the dispute. This non-disparagement obligation shall not prevent either Party from making truthful statements in response to legal process, regulatory inquiry, or as otherwise required by law.
6.4 Remedies. The Parties acknowledge that any breach of the confidentiality or non-disparagement obligations set forth in this Section 6 may cause irreparable harm for which monetary damages alone would be an inadequate remedy. Accordingly, in the event of a breach or threatened breach, the non-breaching Party shall be entitled to seek injunctive or other equitable relief, in addition to any other remedies available at law or in equity, without the necessity of posting a bond or proving actual damages.
SECTION 7: DISMISSAL
7.1 Stipulation of Dismissal. Upon execution of the Definitive Agreement and receipt by Plaintiffs of the First Installment in full, the Parties shall jointly file a Stipulation of Dismissal with Prejudice of the Action, Case No. 2:23-cv-02841-RGK-PLA, in the United States District Court for the Central District of California, in the form required by the Court's Local Rules and the Federal Rules of Civil Procedure. The Stipulation shall provide for dismissal of all claims and counterclaims, if any, with prejudice.
7.2 Costs and Attorney's Fees. Each Party shall bear its own costs and attorney's fees incurred in connection with the Action, except as otherwise expressly provided in the Definitive Agreement, including without limitation the attorney's fees reimbursement described in Section 1.2(b) hereof.
7.3 Retention of Jurisdiction. The Stipulation of Dismissal shall include a request that the Court retain jurisdiction to enforce the terms of the Definitive Agreement, pursuant to the principles established by the Supreme Court of the United States in Kokkonen v. Ridgeline Mutual Insurance, 511 U.S. 375 (1994), and the Parties' consent thereto. The Parties agree to include in the Definitive Agreement such provisions as may be necessary or appropriate to effectuate the Court's retention of jurisdiction, including an express agreement that the Definitive Agreement shall be incorporated into the Court's dismissal order.
SECTION 8: DEFINITIVE AGREEMENT
8.1 Good Faith Negotiation. The Parties shall negotiate in good faith toward the preparation, finalization, and execution of a Definitive Agreement consistent with the material terms set forth in this Term Sheet. The Definitive Agreement shall be in the form of a formal Settlement Agreement and Mutual Release, drafted in a manner consistent with customary practice for the settlement of copyright infringement actions.
8.2 Target Execution Date. The Parties shall use commercially reasonable efforts to execute the Definitive Agreement on or before August 14, 2023.
8.3 Additional Provisions. The Definitive Agreement shall contain, in addition to the terms reflected in this Term Sheet, customary representations, warranties, covenants, and general provisions, including without limitation:
(a) representations and warranties of authority and due organization;
(b) governing law (State of California);
(c) entire agreement and integration clause;
(d) severability;
(e) execution in counterparts (including electronic signatures);
(f) notices provision with designated addresses for each Party;
(g) dispute resolution provision (including the designation of a forum for post-settlement disputes);
(h) force majeure;
(i) assignment restrictions;
(j) waiver provisions; and
(k) such other terms and conditions as the Parties may mutually agree upon.
8.4 Counsel. The Parties' respective counsel shall coordinate the drafting of the Definitive Agreement. Plaintiffs' counsel, Calderwood & Harkness LLP, shall prepare the initial draft of the Definitive Agreement and circulate it to Defendant's counsel, Hargrove, Pennington & Cao LLP, within five (5) business days of the date of this Term Sheet.
SECTION 9: BINDING EFFECT AND NATURE OF TERM SHEET
9.1 Binding Obligation to Negotiate. This Term Sheet is binding upon the Parties with respect to their mutual obligation to negotiate in good faith toward the preparation, finalization, and execution of a Definitive Agreement that is consistent in all material respects with the terms set forth herein. Each Party hereby covenants and agrees that it will not unreasonably withhold, condition, or delay its agreement to any provision of the Definitive Agreement that is consistent with the terms of this Term Sheet.
9.2 Subject to Definitive Agreement. Notwithstanding Section 9.1, the specific substantive terms set forth in Sections 1 through 8 of this Term Sheet are subject to and conditioned upon the negotiation, finalization, and execution of the Definitive Agreement by all Parties. This Term Sheet does not itself constitute the Definitive Agreement.
9.3 Supersession. Upon the execution of the Definitive Agreement by all Parties, the Definitive Agreement shall supersede this Term Sheet in its entirety. In the event of any conflict between this Term Sheet and the Definitive Agreement, the Definitive Agreement shall control.
9.4 Governing Law. This Term Sheet and any disputes arising out of or relating to this Term Sheet shall be governed by and construed in accordance with the laws of the State of California, without regard to its conflict of laws principles.
9.5 Counterparts. This Term Sheet may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Electronic signatures and signatures transmitted by PDF or other electronic means shall be deemed original signatures for all purposes.
[Signature Page Follows]
SIGNATURE PAGE TO TERM SHEET — FOR SETTLEMENT PURPOSES ONLY
Fonseca et al. v. Crescendo Digital Media, Inc. Case No. 2:23-cv-02841-RGK-PLA (C.D. Cal.)
FOR PLAINTIFFS:
CALDERWOOD & HARKNESS LLP
By: ________
Name: Alan Ngo
Title: Partner
Date: August _, 2023
Calderwood & Harkness LLP 777 South Figueroa Street, 34th Floor Los Angeles, California 90017
Signing on behalf of and as duly authorized counsel for: Marguerite D. Fonseca, individually; Flor de Luna Publishing, LLC; and Mariposa Sound Recordings, LLC
FOR DEFENDANT:
HARGROVE, PENNINGTON & CAO LLP
By: ________
Name: Denise K. Whitford
Title: Partner
Date: August _, 2023
Hargrove, Pennington & Cao LLP 401 Congress Avenue, Suite 2800 Austin, Texas 78701
Signing on behalf of and as duly authorized counsel for: Crescendo Digital Media, Inc.
This Term Sheet is a confidential settlement communication made in connection with settlement negotiations and is offered pursuant to and protected by Federal Rule of Evidence 408, California Evidence Code § 1152, and any other applicable mediation confidentiality privilege. This document shall not be admissible in any legal proceeding for any purpose other than enforcement of the terms herein.