Case 1:09-cv-06557-KBF-JCF Document 71 Filed 09/30/10 Page 1 of 12
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`UNITED STATES DISTRICT COURT
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`SOUTHERN DISTRICT OF NEW YORK
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`NORBERT WU, individually and on behalf of all
`others similarly situated,
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`Plaintiff,
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`09 Civ. 6557 (RJH)
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`MEMORANDUM OPINION AND
`ORDER
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`- against -
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`PEARSON EDUCATION, INC.,
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`Defendant.
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`Richard J. Holwell, District Judge:
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`This case concerns a copyright dispute between Norbert Wu (“Wu”), a photographer, and
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`Pearson Education, Inc. (“Pearson”), a textbook publisher. Wu, through three photo bureau
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`intermediaries, Minden Pictures (“Minden”), Peter Arnold, Inc. (“Arnold”), and Animals
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`Animals (“AA”), licensed Pearson to use his photographs in its textbooks. Wu argues that
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`Pearson exceeded those licenses and sues for copyright infringement, asserting as well a variety
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`of state law claims. Pearson moves to dismiss or stay this case pending arbitration, or, in the
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`alternative, to dismiss the complaint for various pleading deficiencies. It also moves to strike
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`portions of the complaint pursuant to Rule 408 of the Federal Rules of Evidence because the
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`information involved was obtained through settlement negotiations. During the pendency of this
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`action, however, Pearson has admitted through interrogatories the same information it moves to
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`strike from the complaint. Thus, while the Court does not condone skirting F.R.E. 408, this
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`aspect of the motion has been rendered moot. For the reasons discussed below, the remainder of
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`the motion is granted in part and denied in part.
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`BACKGROUND
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`The following information is drawn from the complaint. It does not constitute a finding
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`of fact by the Court. Wu is a professional photographer. (Am. Compl. ¶ 9.) Pearson is a
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`publisher of textbooks and other related educational materials. (Am. Compl. ¶ 10.) Pearson has
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`included Wu’s photographs in its publications (Am. Compl. ¶12). When it uses Wu’s
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`photographs, Pearson enters into licensing agreements with various photo bureaus, including
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`Minden (e.g., Am Compl. ¶ 47), Arnold (e.g., Am. Compl. ¶ 102), and AA (Am. Compl. ¶ 43).
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`Although Pearson contracted with the photo bureaus, Wu retains the registered copyright for all
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`of his photographs that Pearson printed. (Am. Compl. ¶ 180.) These license agreements
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`typically provide for the number of copies of the photograph Pearson may print, a number which
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`is referred to as the “print run.” (Am. Compl. ¶ 13.) Wu alleges that on numerous occasions
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`Pearson exceeded the allowed print run without first seeking prior authorization or paying an
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`additional licensing fee. (Am. Compl. ¶¶ 17-19.) He also alleges that Pearson knew at the time
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`of contracting that it would likely print more than the print run it licensed and concealed its
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`intentions to exceed the licensing agreement in order to get a better price on the licenses. (Am.
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`Compl. ¶¶ 20-21.) In some cases, Pearson obtained additional licenses after it had already
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`exceeded the initial print run without first disclosing its overruns. (Am. Compl. ¶¶ 155-56.)
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`Pearson has provided the licensing agreements covering the photographs it licensed
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`through Minden and Arnold. (DX A-M.) The front of each licensing agreement contains a list
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`of pictures that Pearson is licensing, the name of the photographer for each photograph, a price
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`for each picture, the name of the book in which the pictures will be printed, and a print run. The
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`back of each licensing agreement contains a form contract. Although the contractual terms used
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`by Minden and Arnold differ from each other, each photo bureau uses the same form contract for
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`each of its licensing agreements. The form contracts both contain similarly worded arbitration
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`clauses which are set forth below. Neither party has produced a licensing agreement for the one
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`picture allegedly obtained through AA. Wu’s complaint alleges nine causes of action: copyright
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`infringement (Count 1), breach of contract (Count 2), unjust enrichment (Count 3), fraud (Count
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`4), fraudulent concealment (Count 5), fraudulent inducement (Count 6), breach of the duties of
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`good faith and fair dealing (Count 7), and two requests for declaratory judgment (Counts 8-9).
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`STANDARD OF REVIEW
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`On a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the Court accepts
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`as true all factual allegations in the complaint and draws all reasonable inferences in the
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`plaintiff’s favor. In re DDAVP Direct Purchaser Antitrust Litigation, 585 F.3d 677, 692 (2d Cir.
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`2009). The complaint’s allegations, however, “must be enough to raise a right of relief above the
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`speculative level.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Only a “plausible
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`claim for relief survives a motion to dismiss.” LaFaro v. New York Cardiothoracic Group,
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`PLLC, 570 F.3d 471, 476 (2d Cir. 2009). Thus courts are “not bound to accept as true a legal
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`conclusion couched as a factual allegation,” and “[t]hreadbare recitals of the elements of a cause
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`of action, supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 129 S.Ct.
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`1937, 1949–50 (2009) (internal quotation marks omitted).
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`DISCUSSION
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`Pearson argues first that Wu’s state law claims arising from Pearson’s agreements with
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`Minden and Arnold are subject to an arbitration agreement. Pearson asks the Court to stay Wu’s
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`remaining federal copyright claims pending arbitration of Wu’s state claims. In the alternative, it
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`moves to dismiss all claims under Rule 12(b)(6) for failure to state a claim upon which relief can
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`be granted, and under Rule 9(b) for failure to plead fraud with particularity.
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`I.
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`Plaintiff’s State Claims are Subject to an Arbitration Provision
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`Both of the form licensing agreements Pearson has submitted to the Court contain
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`provisions governing how disputes that arise from the agreements are to be resolved. Under the
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`terms of both licensing agreements, all non-copyright claims are to be resolved through
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`arbitration.1 Paragraph 11 of the standard Arnold licensing agreement reads as follows:
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`11. Arbitration: A material part of this Contract is this agreement to arbitrate
`any disputes. Any and all disputes relating to this Contract, with the exception of
`copyright, including its validity, interpretation, performance, breach or other
`matter shall be settled by arbitration in New York City pursuant to the rules of the
`American Arbitration Association. Judgment upon any award rendered may be
`entered in the highest court having jurisdiction. The Laws of the State of New
`York shall govern the interpretation of this Contract. You agree the arbitrators
`have full authority to award costs of the arbitration, including legal fees, plus
`legal interest on any award. (DX-G, 2) (emphasis added).
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`The standard licensing agreement between Minden and Pearson contains a similar arbitration
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`clause:
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`18. Any and all disputes, with the exception of copyright claims, arising out of,
`under or in connection with the agreement, including without limitation the
`validity, interpretation, performance and breadth hereof, shall be settled by
`arbitration in Santa Cruz County, California, pursuant to the rules of the American
`Arbitration Association. Judgement [sic] upon the award may be rendered in the
`highest court of the forum, State or Federal, having jurisdiction. This agreement,
`its validity and effect, shall be interpreted under and governed by the laws of
`California. (DX-A, 2) (emphasis added).
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`1 As noted, neither side has submitted a licensing agreement covering the Animals Animals
`claim.
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`As a general rule, federal courts strongly prefer to honor private arbitration agreements. Indeed,
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`as the Second Circuit has observed, “it is difficult to overstate the strong federal policy in favor
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`of arbitration, and it is a policy we have often and emphatically applied.” Ragone v. Atl. Video at
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`Manhattan Center, 595 F.3d 115, 121 (2d Cir. 2010). Under the Federal Arbitration Agreement
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`(“FAA”), 9 U.S.C. § 1, et seq., all arbitration agreements “shall be valid, irrevocable, and
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`enforceable, save upon such grounds as exist at law or in equity for the revocation of any
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`contract.” 9 U.S.C. § 2.
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`The plain language of the arbitration clauses require that all claims are subject to
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`arbitration with the notable exception of copyright infringement claims. Neither party suggests
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`otherwise. (Def. Mem. at 3-5, Pl. Opp’n at 5-6.) Wu, however, contends that he is not bound by
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`these clauses because Pearson denies that he was a party to the agreements. (Pl. Opp’n at 5.)
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`This argument is unavailing. An obligation to arbitrate generally arises from parties’ explicit
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`contractual agreement, but third parties may be bound by arbitration agreements to which they
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`are not a signatory in five situations: “(1) incorporation by reference; (2) assumption; (3) agency;
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`(4) veil-piercing/alter ego; and (5) estoppel.” American Bureau of Shipping v. Tencara Shipyard
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`S.P.A., 170 F.3d 349, 352 (2d Cir. 1999). Here, estoppel applies. “A party is estopped from
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`denying its obligation to arbitrate when it receives a ‘direct benefit’ from a contract containing
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`an arbitration clause.” Id. at 353. A benefit is direct where it “flow[s] directly from the
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`agreement.” MAG Portfolio Consult, GMBH v. Merlin Biomed Group, LLC, 268 F.3d 58, 61 (2d
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`Cir. 2001). Wu concedes that when Pearson signs a licensing agreement with the photo bureaus,
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`he receives a portion of the licensing fee. He thus receives a direct benefit from the contract.
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`Wu may not pick and choose among the terms of the licensing agreements. Because he received
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`a direct benefit from the agreements, he is estopped from arguing that he is not bound by the
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`arbitration clauses.
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`Wu next argues that Pearson has waived arbitration. “There is a strong presumption in
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`favor of arbitration, and waiver of the right to arbitration is not to be lightly inferred.”
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`Thyssen, Inc. v. Calypso Shipping Corp., S.A., 310 F.3d 102, 104-105 (2d Cir. 2002) (quoting
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`Coca-Cola Bottling Co. v. Soft Drink and Brewery Workers Union Local 812, 242 F.3d 52, 57
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`(2d Cir. 2001)). “[W]aiver is more likely to be found the longer the litigation goes on, the more
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`a party avails itself of the opportunity to litigate, and the more that party's litigation results in
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`prejudice to the opposing party.” Id. at 105. Wu claims prejudice because Pearson waited until
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`after he filed an amended complaint to file its motion to dismiss or stay, and has been
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`participating in discovery. (Pl. Opp’n at 4.) Pearson counters that it waited until Wu filed an
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`amended complaint because Wu’s original complaint neither identified which works were at
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`issue nor appended the relevant licensing agreements. (Def. Rep. at 2.) Pearson argues that it
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`filed its motion at the earliest possible juncture.
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`Pearson has the better of the argument. Pearson was not dilatory in filing its motion, and
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`Wu has not suffered significant prejudice. See Coca-Cola Bottling Co., 242 F.3d at 57 (no
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`waiver by “by failing for four months to press its arbitration claim and, during that time,
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`answering Coca-Cola 's complaint, claiming a violation of the TRO, entering into a protective
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`order and stipulation for discovery, and obtaining substantial discovery”); Jung v. Skadden, Arps,
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`Slate, Meagher & Flom, LLP, 434 F. Supp. 2d 211, 216-18 (S.D.N.Y. 2006) (no waiver where
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`party waited until after a court refused to grant a motion to dismiss pursuant to Rule 12(b)(6) to
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`move to compel arbitration). Accordingly, Pearson has not waived its right to arbitrate Wu’s
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`state law claims.
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`II.
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`A Stay of Plaintiff’s State Law Claims Is Appropriate
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`Wu argues that it would be procedurally improper for the court to grant a motion to stay
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`his state law claims when no arbitration proceeding is currently pending. Wu cites no applicable
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`case law in support of this proposition.2 His argument instead depends upon a strained reading
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`of the FAA. He argues that because the text of the statute refers to “such arbitration,” courts may
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`stay pending arbitration only when defendants have already initiated a specific arbitration
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`proceeding. An examination of the full text of the statute reveals no such limitation upon the
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`courts. Section 3 of the FAA provides:
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`If any suit or proceeding be brought in any of the courts of the United States upon
`any issue referable to arbitration under an agreement in writing for such
`arbitration, the court in which such suit is pending, upon being satisfied that the
`issue involved in such suit or proceeding is referable to arbitration under such an
`agreement, shall on application of one of the parties stay the trial of the action
`until such arbitration has been had in accordance with the terms of the agreement,
`providing the applicant for the stay is not in default in proceeding with such
`arbitration. 9 U.S.C. § 3.
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`The statute references “such arbitration” in describing when courts will lift the stay and in
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`describing when the parties may be in default. It does not require, as Wu claims, that courts may
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`stay only after arbitration proceedings have been initiated. Wu’s strained reading of Section 3
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`ignores established case law rejecting this argument. Tenneco Resins, Inc. v. Davy Int’l, AG, 770
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`F.2d 416, 419-20 (5th Cir. 1985); Shanferoke Coal & Supply Corp. v. Westchester Service Corp.,
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`70 F.2d 297, 299 (2d Cir. 1934) (“True, [defendant] has not named its arbitrator, but in its
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`2 The cases Wu cites in support of this proposition are inapposite. In AT&T Tech. Inc v.
`Commc’n Workers of America, 475 U.S. 643 (1986), the Supreme Court merely held that courts,
`not arbitrators, interpret the applicability of arbitration agreements. In Nico Constr. Co., Inc. v.
`Installux Co., 1989 WL 146779, at *2 (S.D.N.Y. November 30, 1989), the court held that it was
`premature to compel arbitration before the other party had refused to participate in an arbitration
`proceeding.
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`answer and moving affidavits has merely expressed its willingness to submit to arbitration. This
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`appears to us enough.”) (Hand, J.).
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`III. Whether to Stay the Non-Arbitrable Copyright Claims
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`When cases contain claims that are both arbitrable and nonarbitrable, district courts may
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`stay the non-arbitrable claims pending the outcome of arbitration “pursuant to the power inherent
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`in every court to control the disposition of the causes on its docket with economy of time and
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`effort for itself, for counsel, and for litigants.” WorldCrisa Corp. v. Armstrong, 129 F.3d 71, 76
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`(2d Cir. 1997) (quoting Nederlandse Erts-Tankersmaatschappij, N.V. v. Isbrandtsen Co., 339
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`F.2d 440, 441 (2d Cir. 1964)). “Broad stay orders are particularly appropriate if the arbitrable
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`claims predominate the lawsuit and the nonarbitrable claims are of questionable merit.”
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`Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840, 856 (2d Cir. 1987).
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`Pearson argues that the Court should stay Wu’s copyright claims because they are
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`inextricably linked with Wu’s breach of contract claim and it would be inadvisable for the Court
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`to hear the copyright claims before the an arbitrator has resolved the contract claims. While the
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`majority of Wu’s claims are subject to arbitration, the core of Wu’s complaint seems to be his
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`underlying copyright claims. Furthermore, both arbitration agreements contain specific carve-
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`outs for copyright claims, evincing a clear intent that these claims be resolved in federal court
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`independent of an arbitration proceeding. It would be a disservice to the parties’ agreement if
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`the resolution of these issues were delayed. The Court also notes that the parties in this dispute
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`have another case before the Court, Wu v. Pearson, 10 Civ. 6537, in which Wu alleges that
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`Pearson improperly published his photographs in its textbooks and entered into licensing
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`agreements only after the fact. None of the claims raised in the second action appear arbitrable
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`and therefore will progress in the normal course towards trial. While the claims in these two
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`actions are distinct, they are similar enough for the Court to conclude that—despite the risk of
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`parallel arbitration proceedings—it would be more efficient to allow both litigations to proceed
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`simultaneously. As such, the Court declines to stay this case pending the outcome of arbitration.
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`IV. Motion to Dismiss the Copyright Claims
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`In order to survive a motion to dismiss in a copyright infringement case, a plaintiff must
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`plead with sufficient specificity: “1) which specific original works are the subject of the
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`copyright claim, 2) that plaintiff owns the copyrights in those works, 3) that the copyrights have
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`been registered in accordance with the statute, and 4) by what acts during what time the
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`defendant infringed the copyright.” Arma v. Buyseasons, Inc., 591 F. Supp. 2d 637, 643-644
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`(S.D.N.Y. 2008) (quoting Kelly v. L.L. Cool J., 145 F.R.D. 32, 36 (S.D.N.Y. 1992)).
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`A. Copyright Claims Arising from the Arnold Agreements
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`The Arnold licensing agreements contain a provision that describes how copyright claims
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`are to be resolved. Paragraph 2 of agreements provide as follows:
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`2. Unauthorized Use: Peter Arnold Inc will calculate a usage fee for images
`relying in good faith on the information you provide and will issue an invoice
`granting reproduction rights and detailing the usage granted. Since it is difficult
`to determine damages resulting from unauthorized usage, in the event you utilize
`an image other than for the usage indicated in our invoice, including but not
`limited to the number of uses, the publications utilized, or the size of the
`reproduction, we agree to forego our right to sue you for copyright infringement
`and you agree to pay, as liquidated damages, a sum equal to four (4) times the
`normal price we would have charged for such unauthorized use within ten (10)
`days of our billing such fee. If you refuse to fail to timely make such payment,
`this liquidated damage provision shall be void and we shall have the right to sue
`for copyright infringement, for which we shall not accept less than ten (10) times
`the normal license plus attorney’s fees and all associated costs. (DX-G, 2)
`(emphasis added).
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`Wu admits that he is a third-party beneficiary to their contracts. (Pl. Opp’n at 15-16.) Under
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`New York State law, third-party beneficiaries “possess[] no greater right to enforce a contract
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`than the actual parties to the contract.” BAII Banking Corp. v. UPG, Inc., 985 F.2d 685, 697 (2d
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`Cir. 1993) (citing Wasserman v. Weisner, 36 Misc.2d 916, 917 (Sup. Ct. New York County
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`1962). The contractual provision clearly states that Arnold forgoes its right to sue for copyright
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`infringement until Pearson has been invoiced for the unauthorized usage and failed to pay that
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`amount within ten days of being billed. There are no allegations in the amended complaint that
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`these events have occurred. Wu may not file a complaint until this condition precedent has been
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`satisfied. Restatement (Second) of Contracts § 309(b). As such, Wu has not stated a claim upon
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`which relief may be granted with respect to his copyright claims arising from the Arnold
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`agreements.
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`B. Copyright Claims Arising from Minden and AA Agreements
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`Pearson moves to dismiss Wu’s remaining copyright claims pursuant to Fed. R. Civ. P.
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`12(b)(6). The thrust of Pearson’s argument is that once the Court strikes certain factual
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`allegations under F.R.E. 408, the remainder of the complaint is insufficient to meet the pleading
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`requirements of Fed. R. Civ. P. 8(a)(2). Because Pearson’s motion to strike has been dismissed
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`as moot, this argument loses its persuasiveness. Pearson gamely contends that Wu’s complaint
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`should be dismissed nonetheless because it is too tentative in nature to be plausible on its face.
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`(Def. Mem. at 9-10.) Wu’s complaint is rife with qualifiers, such as “[u]pon information and
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`belief, and as best Plaintiff can determine” (e.g., Compl. ¶¶ 55) and “may have exceeded the
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`print run,” (e.g., Compl. ¶ 77). Pursuant to Rule 11(b) of the Federal Rules of Civil Procedure,
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`however, plaintiffs may plead the allegations in complaints upon information and belief, and
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`many of these qualifiers are roughly equivalent to so pleading. Although the number of
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`qualifiers is at times excessive, Wu’s style of writing does not impede the reader’s ability to
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`understand the allegations made or how those allegations satisfy the elements of a copyright
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`claim. Pearson cites no case in which a court dismissed a complaint for overuse of qualifiers,
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`and the Court is aware of no such case. Pearson cites Elan Microelectrics Corp. v. Apple, Inc.,
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`2009 WL 2972374 (N.D. Cal. Sept. 14, 2009), but the court there dismissed Apple’s
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`counterclaims not because they were excessively qualified, but rather because Apple failed to
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`allege sufficient facts to make the complaint plausible on its face. Id. at *4. Wu’s complaint
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`read as a whole suffers no such flaw.
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`V.
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`Motion to Dismiss State Law Claims Arising from the AA Agreement
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`Pearson moves to dismiss Wu’s state law claims that relate to the one photo arising out of
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`the AA licensing agreement. Neither party has presented this agreement to the Court, and the
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`agreement figures heavily both in Wu’s pleading of his claims and in Pearson’s argument that
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`they should be dismissed. This agreement, when it surfaces, may very well contain an arbitration
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`clause similar to those in the standard form agreements employed by Minden and Arnold,
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`meaning that the Court would be intruding on the domain of the arbitrator to hear these claims at
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`all. Given the circumstances, it would be imprudent for the Court to rule on Pearson’s arguments
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`at this time. Pearson’s motion to dismiss these claims is denied without prejudice.
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`CONCLUSION
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`For the foregoing reasons, defendant’s motion to dismiss [23] is granted in part and
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`denied in part. Defendant’s motion to stay all state law claims arising from the Minden and
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`Arnold agreements pending arbitration is GRANTED. Defendant’s motion to stay the remaining
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`claims is DENIED. Defendant’s motion to strike is DENIED as moot. Defendant’s motion to
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`dismiss the copyright claims stemming from the Arnold agreement is GRANTED. Defendant’s
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`Case 1:09-cv-06557-KBF-JCF Document 71 Filed 09/30/10 Page 12 of 12
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`motion to dismiss all other copyright claims is DENIED. Defendant's motion to dismiss Counts
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`II-IX of the complaint as they pertain to the AA photograph is DENIED without prejudice.
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`SO ORDERED.
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`Dated: New York, New York
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`September~ 2010
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`\l:2->\ \~l L-u,
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`Richard J. Holwel1
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`United States District Judge
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`12