State regulators recently issued long-awaited draft permanent regulations for California’s cannabis industry, including some changes that could have an immediate impact on license-seekers and others that will shape the industry for many years to come.

Once the draft permanent regulations become law, they will replace the “emergency” rules that have governed the state’s cannabis industry since November 2017. A 45-day comment period kicked off Friday, during which the three state agencies overseeing legalized cannabis will consider public input and possible modifications before endorsing final rules.

While some recently-revealed changes to the draft permanent regulations are merely refinements of earlier provisions, others are new. For instance, the state will end the practice of  issuing 90-day temporary cannabis licenses on December 31, 2018, placing a hard deadline on many operators who still are far from obtaining their standard licenses. This means that all temporary licenses will expire by the end of March 2019 and businesses without a standard licensed will have to shut down.

A short list of other highlights is as follows:

• License transfer through ownership change: As part of a 100% business ownership change, the Bureau of Cannabis Control (regulating distributors, testing labs, and microbusinesses), will prohibit a purchaser from operating the company it buys until a new license application has been approved by the Bureau. This rule could cause business interruption as the new owner awaits the Bureau’s application review. The Dept. of Food and Agriculture (cultivation) and the Dept. of Public Health (manufacturing) each have separate and somewhat less onerous rules on this issue.
• Expanded delivery services: Previous drafts stated that cities could not stop delivery services from using public roads. The permanent regulations clarify that “a delivery employee may deliver to any jurisdiction within the State of California.” This modification addresses the interpretation by some city attorneys that cities could ban deliveries within their limits, and at the same time, not impede the use of public roads.
• CEQA: All of the relevant state regulatory agencies clarified that they will require applicants to provide evidence that their operations comply with the California Environmental Quality Act or that they are exempt from the Act. If neither can be shown, the applicant must provide information to enable an agency to determine the appropriate level of environmental review. This could trigger expensive and time consuming studies about an operator’s environmental impacts and mitigations.
• Still no one-acre cap per grower: A much-touted restriction to protect small cultivators was removed in the drafting of emergency regulations back in 2017, generating a hue and cry from small farmers and a lawsuit by the California Growers Association. But, to no avail thus far. The draft permanent regulations do not reinstate the one-acre cap.

Other important changes can be found in the draft regulations, including the Bureau’s 136 pages of rules, the Department of Health’s 111-page draft and the Department of Food and Agriculture’s 68-page document. They, no doubt, will make for interesting discussions at public hearings over the next six weeks at ten locations across the state.

On May 11, 2018, the California Department of Tax and Fee Administration (CDTFA) released its cannabis tax revenue numbers for the first quarter of 2018. These numbers fall short of the high expectations of industry analysts and the state. The CDTFA reports that it has collected a total of $60.9 million from licensed cannabis operators in Q1. This amount includes the state’s cultivation, excise and sales taxes, but does not include local tax revenue collected by cities or counties. Breaking it down a bit further, the excise tax generated $32 million, the cultivation tax brought in a mere $1.6 million, and the sales tax generated $27.3 million. Medicinal cannabis sales are exempt from sales tax if the purchaser holds a valid Medical Marijuana Identification card.

In addition to regulation and the elimination of the black market, the promise of tax revenues  was a major force behind the passage of Prop 64 back in 2016. The governor’s budget proposal had predicted $175 million in revenue in the first six months of 2018, which has proven to be optimistic based on the first quarter results. Two prime culprits for the tax shortfall may be suppressed sales volumes due to competition from healthy gray and black markets and fewer tax paying operators due to widespread local government bans on commercial cannabis activity and major delays in those jurisdictions that are allowing commercial cannabis.

In addition to competing with leaner gray and black market competitors, compliant operators face strict zoning requirements, slow and reticent local permitting bodies, and moratoriums on commercial cannabis activity. These obstacles result in fewer regulated operators, fewer sales, and fewer tax dollars. The expected tax revenue will only come if the cannabis industry is able to launch at scale and thrive. Imposing high taxes on a fledgling industry, much of it still emerging from the gray and black markets, is not an ideal way to encourage transitioning and new operators to jump through the numerous hoops set up by state and local governments. Local prohibitions on commercial cannabis exist in 70-80% of local jurisdictions. This means that operators are flooding those few jurisdictions that are permitting commercial cannabis activity with applications, resulting in delays.

The CDTFA’s report may have already put a damper on AB 3157, a bill  currently in committee that, if passed, would reduce the excise tax to 11% and eliminate the cultivation tax until June 2021. A recent addition to the bill allows the Legislature to restore the excise tax rate to 15% if the revenues collected from the excise tax are “insufficient to adequately fund the reasonable regulatory costs” outlined in the Revenue and Taxation Code. This language seriously weakens AB 3157 and puts a significant amount of pressure on a brand new industry.

Beginning on January 1, 2018, numerous California cities will begin issuing licenses for recreational marijuana businesses.  To help you better understand the application process for the City of San Francisco, we set forth the following update from San Francisco’s Office of Cannabis.  If you have any questions, please do not hesitate to contact the experienced attorneys at Wendel Rosen who can help you navigate the application process.

Non-MCD cannabis businesses operating in San Francisco must register by November 30, 2017, to be able to apply for 2018 permits.

Medical cannabis dispensaries (MCDs) with an Article 33 permit do not need to register now. But any cultivators, distributors and manufacturers who work with permitted MCDs must register.

Most cannabis businesses who miss the November 30 deadline will have to stop operating and wait until 2019 to apply again.

We know many cannabis businesses are changing right now. In most cases, business registering with the Office of Cannabis will have a chance to update business name, management structure and address after this initial registration period.

If you have already registered, pass this email on to other cannabis businesses. 

Help us spread the word. Ask your contacts in the industry to register by November 30, 2017.

In the last week of June, California Governor Jerry Brown signed a bill that consolidates state medical and recreational cannabis regulations into one governing law, the Medicinal and Adult-Use Cannabis Regulation and Safety Act (SB 94), which lifts constraints on vertical integration, eliminates a state residency requirement for cannabis company owners, and in most cases, allows cannabis companies to distribute their own products, rather than requiring third-party distribution.

Other than the residency requirement change, most modifications were made to the State’s former medical cannabis regulations, which were never formally implemented. In many instances, those rules handcuffed companies wanting to own and operate businesses in multiple sectors of medical cannabis production. For example, distributors were prohibited from cultivating or manufacturing cannabis, and dispensary owners could only run three retail operations statewide if they wanted to hold cultivation licenses.

It’s important to note that the new, consolidated law preserves a dual, local-state licensing structure and does not strip cities and counties of their authority to control local zoning or to limit the categories and number of permits they will issue. In other words, obtaining a state license still requires complying with local law.

The 102-page SB 94 is a hefty document, chalk full of interesting information, so I’d recommend that anyone involved in the cannabis industry read it closely. In the interest of time and space, here is my top 7 list:

• Distribution: The former medical law required third-party distribution. The consolidated law only prohibits “large” cultivation licensees from obtaining a distributor license. The large cultivation licenses will not be available until 2023. They allow outdoor farms in excess of one acre and indoor grows larger than 22,000 square feet per premises.

• Residency Requirement Repealed: The Adult Use of Marijuana Act (recreational law), prohibited non-California residents from obtaining licenses until December 31, 2019. This provision likely would have been successfully challenged because it violated both the Commerce Clause and the Privileges and Immunities Clause of the U.S. Constitution.

• “Premises” Defined: The new law requires that each permit be associated with a separate premises and defines premises as follows: “The designated structure or structures and land specified in the application that is owned, leased, or otherwise held under the control of the applicant or licensee where the commercial cannabis activity will be or is conducted. The premises shall be a contiguous area and shall only be occupied by one licensee.” This rule allows for more than one license to be associated with a given address or parcel because parcels may include multiple premises.

• Excise Tax: The 15 percent excise tax imposed on cannabis purchases will be measured by the average market price of retail sales as opposed to the gross of receipts of retail sales.

• Water Use Reporting: Cultivators diverting surface water for cannabis cultivation must file an initial statement of diversion and use with the State Division of Water Rights prior to July 1, 2017. Based on water source and use, additional regulations will apply.

• Organics Certification: No later than January 1, 2021, the State Department of Food and Agriculture will establish a program for cannabis comparable to the federal National Organic Program and the California Organic Food and Farming Act.

• Establishing Appellations: By January 2021, the State will create a process whereby licensed cultivators may establish appellations of standards, practices and varietals applicable to cannabis grown in a specific geographical regions. Just as Napa vineyards can identify their wine is from Napa, there will be standards for Humboldt growers to similarly identify their cannabis.

I’m interested to hear which provisions others find most interesting and invite you to submit your thoughts in the comments section below.

In 1996, Californians passed Proposition 215, the first medical marijuana initiative in the United States.  Since then, the California Legislature has enacted various laws relating to the medical marijuana industry, but there hasn’t been a comprehensive regulatory system. Until now.

Last week three California agencies issued a tangled web of proposed regulations regarding medical marijuana. The California Department of Food and Agriculture (CDFA), the California Department of Public Health (CDPH) and the California Bureau of Medical Cannabis Regulation (BMCR) each released proposed regulations. The agencies have scheduled public hearings and are inviting public comment on the proposed regulations.

The CDFA explains: “Because regulations are intended to transition California cannabis cultivation to a legitimate industry, cultivators will be provided the opportunity to operate in compliance with state laws and regulations applicable specifically to cannabis and California business requirements in general.”

The regulations cover everything from an annual license fees ($560 to $38,350), mandatory video surveillance systems, hours of operation (6:00 a.m. to 9:00 pm.) to the maximum quantity of THC per cannabis edible serving (10 milligrams).

The CDFA regulations require that applicants and licensees waive their privacy rights in effect, agreeing to immediately turn over any requested records and allow site inspections. The CDFA further mandates a “track-and-trace” system, which will allow the agency to monitor all plants and non-manufactured cannabis products.

The BMCR regulations require that delivery employees carry no more than $3,000 worth of cannabis goods at a time and also describe the logistics for BMCR’s quality assurance testing. Bringing a new definition to the term “drug testing.”

The CDPH regulations dictate packaging and labeling requirements, as well as manufacturing practices that are “substantially similar to the [Federal] Sherman Food and Drug Act and FDA requirements.”

Altogether, the three sets of regulations total over 200 pages of pretty dense reading, but various cannabis trade groups and stake holders have already drilled down into the regulations and begun weighing in on some of the pros and cons. It will  be interesting to see what kind of feedback the agencies receive and to what extent the agencies are willing to listen and actually make significant changes to the proposed regulations.

In November, Californians passed Proposition 64, allowing for recreational marijuana use. The state will begin issuing cultivation and dispensary licenses in January 2018. In January Governor Brown proposed a Budget Trailer Bill, seeking to “preserve the integrity and separation of the medicinal and adult use industry by maintaining these as two separate categories of license types with the same regulatory requirements for each.”

Many believe the recently proposed medical marijuana regulations will provide a blue print  for recreational marijuana regulations.

The City of Oakland recently finalized cannabis permitting regulations that are unique in California because they focus on “equity,” making entry into the cannabis industry easier for low-income individuals of color who generally have suffered much higher incarceration rates for marijuana crimes.

Unfortunately, along with giving needed assistance to equity cannabis permit applicants, Oakland attempted to protect those same applicants from competition by practicing a different form of discrimination, including delaying permits for non-equity applicants.

Oakland’s cannabis regulations were nearly far worse. In March, the City Council approved an unconstitutional prohibition on cannabis permits for anyone who did not reside in Oakland. Under pressure from Wendel Rosen [letter: Cannabis Permitting Amendments are Unconstitutional] and many others, the Council removed the residency rule, but the permit process remains fraught with likely delays and other questions as the January 2018 deadline for State licenses looms.

Local cannabis operators need both a local permit and State license to conduct business. Oakland announced that, aside from storefront dispensaries, all cannabis applications would be available “some time” in May. There is no date for the dispensaries. Adding to the unknowns is a requirement that 50 percent of all permits must be issued to equity applicants for an indefinite period of time. Given the narrow equity criteria (including (a) low income, (b) residence of specific Oakland neighborhoods, or (c) conviction of a cannabis crime in Oakland) a permitting bottleneck is expected as the equity applications trickle in compared to the general applications.

The “50%” phase ends when the City accumulates $3.4 million in tax revenue from cannabis businesses to fund an Equity Assistance Program, which will include no-interest business startup loans, fee waivers, and technical assistance.

The City explained the need for the 50% phase as follows:  “If the City initiates an unrestricted permitting process before an Equity Assistance Program is in place, well-positioned operators will only move further ahead as historically marginalized operators fall further behind due to lack of capital and real estate.”

There are several fundamental flaws with the City’s rationale:  1) It assumes that Oakland is a closed market and that local equity operators will not be competing against others in cities across the state; 2) It is self-defeating because it constrains revenue available to the Equity Assistance Program by stalling permits for business that would otherwise pay taxes; and 3) It ignores the fact that businesses wanting a local permit so they can get a State license in January 2018 may go elsewhere, further reducing revenue.

There’s more. Oakland has a solution for some general permit applicants:  A general applicant can move up in the permit application line by serving as an “Equity Incubator,” which consists of providing three-years of free real estate or rent to an equity permit holder.

This is where the City tries to undo racial and social discrimination by employing economic discrimination. Clearly the only general applicants who can serve as incubators have more resources than those who don’t. In exchange for those resources, incubator sponsors receive preferential City treatment.

Equally hypocritical is the fact that the City has never taken responsibility for contributing to disproportionate focus of marijuana law enforcement on lower-income communities of color. Remember, the City Council approved legislation in 2004 legalizing dispensaries in commercial and industrial areas of the City. The Oakland Police Department did not arrest cannabis users on their way out of dispensaries. Instead, they targeted street sales.

For a variety of reasons, many cannabis businesses will decide to stick with Oakland. They include the fact that some operators already are locked into leases; Oakland is one of a handful of cities that permits volatile manufacturing; and the City is situated in the middle of transportation corridor, making it a good distribution location.

It’s also important to remember that big parts of Oakland’s Equity Assistance Program will likely serve as models for other areas of the State, where there has been a lot of talk about making the cannabis industry inclusive, but little action. Oakland’s equity applicants will have financial and technical assistance unavailable elsewhere in California. Going forward, hopefully the City can find ways to advance equity while not also hobbling its own cannabis industry.

California’s recent recreational pot legalization brings into question the relevance of medical cannabis in a state that led the legal marijuana movement with a 1996 voter initiative giving patients the right to possess and grow cannabis reasonably related to their medical needs.

Will medical marijuana continue to matter? The answer is absolutely yes, and in many instances, it will be a preferable choice for both consumers and cannabis business operators after Prop 64’s recreational marijuana laws are implemented and applications for state business licenses are issued in early 2018.

A fundamental reason medical cannabis will continue to thrive is a growing consumer demand for cannabis products that do not provide a psychological “high.” Tetrahydrocannabinol (THC) is the psychoactive cannabis element in pot. But there is a long list of popular medical cannabis products that have only trace amounts of THC and can be used to treat pain associated with ailments such as arthritis and nerve damage. The predominant active ingredient in those products is Cannabidiol, or CBD, which is known to reduce pain, but is not psychoactive.

Business owners may have added incentive to produce medical cannabis as recreational suppliers and users enter the market. Some states have seen recreational pot prices drop significantly due to oversupply, whereas medical pot inventory and prices have generally remained steady because suppliers have not aggressively entered the more specialized medical market.

The experiences of states such as Colorado and Washington suggest that medical cannabis demand may even increase as the recreational pot market kicks into gear. That’s likely because, as cannabis generally becomes more accepted and legal, customers with medical needs who have been hesitant to purchase pot are less reluctant to seek it out.

In addition to commercial medical cannabis, home-based medical marijuana cultivators are expected to continue to grow their own plants. Prop 64 does not change the fact that individual cultivators and cooperatives are still legal under California’s 1996 Compassionate Use Act (Prop 215) and related legislation and can grow an amount of marijuana reasonably related to their medicinal needs.

In addition to a continued demand for medical cannabis products and their stable prices, local regulations and lesser-known provisions in Prop 64 that are supportive of medical cannabis will mean that medical cannabis remains relevant in California. See a few highlights below.

• Local Jurisdictions May Restrict or Ban Recreational Permits: Prop 64 and related state cannabis laws give local governments the authority to place zoning restrictions and other limitations on their cannabis industries, including banning sales altogether. Some cities may ban recreational sales, but allow for medical cannabis commerce.

• Sales Tax Exemption for Medical Cannabis Buyers With State ID: Prop 64 eliminates a 7.5 percent sales tax for medical cannabis buyers with a state-issued medical marijuana identification card. Once business licenses are issued under Prop 64, all cannabis operations – recreational and medical – will pay a 15 percent excise tax. Recreational purchasers will still have to pay the additional 7.5 sales tax. But, ID card-holding medical purchasers will continue to be exempt.

• Prop 64 Makes it Easier and Safer to Obtain a State-Issued Medical Marijuana Identification Card and Related Tax Break: Prop 64 caps ID card fees at $100. Many counties now charge $150 to $175. Prop 64 also protects patients’ card data privacy through the state’s Confidentiality of Medical Information Act.

• Prop 64 Parental Protections: Prop 64 states that it is illegal to “restrict or abridge custodial or parental rights to minor children in any action or proceeding under the jurisdiction of family or juvenile court,” as long as a patient is complying with the Compassionate Use Act. This means, for instance, the presence of pot in a household reasonably related to a parent’s medical needs would not be grounds for child protective services to remove the parent’s children.

To be clear, in order to realize the sales tax exemption described above, a medical cannabis patient must obtain a state-issued patient ID card. The state card application requires a patient’s primary doctor’s recommendation, proof of residency and related paperwork. The state process generally requires more effort than for cards issued by private cannabis card outlets, which have doctors on site to review and approve all patients’ applications. Only about 6,000 Californians currently possess the state ID cards needed for the Prop 64 sales tax exemption, but until now there has been little incentive to obtain the state card.

There’s no doubt that some consumers will conclude that the benefits of obtaining a state patient ID card are not worth the hassle involved. But, recent history shows that medical cannabis is viable even without a tax exemption. In Colorado, where a medical tax break is available only in limited circumstances, medical cannabis accounted for approximately 30 percent of the state’s $1.1 billion 2016 cannabis sales. Until 2015, when the State of Washington merged its medical and recreational cannabis regulations, medical cannabis represented one-third of the state’s market.

Cannabis operators looking to enter or expand in California will be influenced by a number of factors, including state laws incentivizing medical cannabis patients, the relative demand for medical products, and local permitting, which may restrict or ban recreational cannabis sales in areas where companies might generally prefer to locate. The California cannabis industry is growing and changing rapidly in light of new regulations, but medical cannabis is likely to be around for the long haul.

The California Legislature’s approval of the Medical Marijuana Regulation and Safety Act opened the door for cannabis operators to obtain state medical cannabis business licenses for everything from testing to distributing cannabis, and voter passage of Prop. 64 did the same for recreational pot. But, the most calls I receive are from cannabis entrepreneurs interested in commercial cultivation and manufacturing.

Meanwhile, in order to be licensed by the state, an operator must first acquire a local permit. And, a survey of cities across California shows that surprisingly few allow both commercial cultivation and manufacturing. In the Bay Area, just Richmond, Santa Rosa and Oakland have approved cannabis laws for both cultivation and manufacturing. Oakland’s laws come with a big asterisk, because the City has not started issuing permits. I’ll get back to this issue below.

In this overview, I summarize the three cities’ permitting distinctions, fees and quirks. An important caveat: As cities learn from experience and adjust to market conditions, regulations are expected to change. The rules listed below are not static and additional cities are expected to craft rules in the coming months for cultivation and/or manufacturing. I will review other regions of the state in future entries.

The Bay Area’s Big Two (Plus One)

For now, Richmond and Santa Rosa are it if you’re interested in applying for permits to cultivate and manufacture cannabis. In January 2017 the Oakland City Council will review amendments to cannabis legislation approved in May 2016, and permit applications should be released in the following months. The expectation is that both cultivation and manufacturing will still be allowed. Other Bay Area cities are starting to discuss cultivation and manufacturing, but have a ways to go.

Richmond and Oakland charge a five percent gross receipts tax on cannabis businesses. Santa Rosa applies tax rates to cannabis businesses based on existing industry categories, up to $3,000 annually, but is considering a 10% tax specifically for its cannabis industry. The three cities’ application and permitting fees vary widely. Each city defines cultivation and manufacturing differently and handles permitting through a distinct agency. See the highlights below.

RICHMOND

Summary:  Richmond’s medical cannabis permits are issued through the city’s Police Department and require a conditional use permit approved by the Planning Commission and the City Council. Cultivation is limited to two commercial zoning districts, and non-volatile manufacturing is restricted to industrial/office flex, and light industrial zoning. Volatile manufacturing is prohibited (volatile manufacturing is producing cannabis extracts through the use of solvents, such as butane).

Fees:

• Application Completeness Review: $2,312
• Complete Application Review: $18,178
• Annual Regulation and Inspection: $16,989/Quarter

SANTA ROSA

Summary:  Santa Rosa’s medical cannabis permits are handled through the city’s Planning Department and require a conditional use permit approved by the Planning Commission. Cultivation is permitted in three industrial zones and the city allows non-volatile manufacturing in two industrial zones and a business park zone. Volatile manufacturing is prohibited.

Fees:  The fees listed below are valid through December 2016 and total fee amounts depend of the scope of related environmental review.

• Minor Conditional Use Permit: $2,511
• Major Conditional Use Permit: $10,964
• Commission Public Hearing: $1,889

OAKLAND

Summary:  Permitting for Oakland’s medical cannabis industry will be handled through the City Administrator’s Office and operators will be required to obtain special business permits. The City has not issued permit applications because the City Council is debating economic, social and racial “equity” amendments to laws approved in May. The next Council meeting is scheduled for January 17, 2017. Permit applications are expected to be issued in the following months.

Once applications are issued, an important step in the approval process will be inspections by the Planning and Building Departments, but there will be no Planning Commission review. Based on the laws approved in May, cultivation will be permitted as of right in “light manufacturing industrial” and “research and development” zones or their equivalents. Non-volatile manufacturing will be allowed as of right in “custom manufacturing industrial” zoning or its equivalent, and volatile manufacturing will be allowed as of right in “general manufacturing industrial” or its equivalent.

Fees: 

• Application, Non-Dispensary Facility: $2,474
• Annual Regulatory Fee
• Gross Sales >$150,000: $11,173
• Gross Sales $50,000-$150,000: $5,586
• Gross Sales <$50,000: $2,790

Two years ago, a federal judge rocked the music industry in holding that pre-1972 recordings may be protected under state copyright laws and are protected by California copyright law.  This holding, in a case brought against SiriusXM, had vast potential ramifications, as it would mean that radio and internet radio stations playing such recordings would have to pay out millions of dollars in royalties that they had never anticipated paying. CBS Radio, however, just scored a legal victory that, if it stands up, would effectively eliminate any artist’s ability to recover royalties for pre-1972 recordings.

Seeking a way to shift the paradigm of the SiriusXM case and the string of similar suits that preceded and followed it, when ABS  Entertainment, which owns the pre-1972 recordings of Al Green and others, sued CBS, iHeartMedia, and Cumulus, CBS decided to throw something of a legal “Hair Mary.”  It argued that “CBS does not play vinyl sound recordings.”  Rather, it plays only re-issued or remastered versions of pre-1972 recordings.

United States District Judge Percy Anderson grabbed CBS’s Hail Mary in the end zone, finding that the sound engineering process in remastering an album constitutes “copyrightable originality.”  As such, CBS was permitted to treat the recordings as post-1972 recordings.

Judge Anderson’s ruling comes despite ABS’s warning that accepting CBS’s remastering argument would result in the owners of sound recordings trumping artists’ rights over their works in all cases.  The judge addressed this point in a footnote, distinguishing the “original expression added by a sound engineer during the remastering process” from the naked conversion between formats (i.e., vinyl to MP3).

The reason that this issue exists is that, on February 15, 1972, Congress brought sound recordings under federal copyright law, but not retroactively. Prior to 1972, musical recordings were protected only be state copyright laws, many of which are based in common law, court-made rules that are not codified in statutes and, at least in many instances, do not require registration in order to protect recorded material.  Works that are copyright protected by state common law are harder to track than those protected by a registered federal copyright.

[This post was written by Jason Horst.]

Michelle Phan is a YouTube celebrity and beauty guru and has garnered over 7 million subscribers and one billion lifetime views. However, not everyone is a fan of Ms. Phan. On July 16, 2014, Ultra International Music Publishing, LLC and Ultra Records, LLC (collectively, “Ultra”) sued Ms. Phan for copyright infringement for allegedly using their songs without a license. A licensing agreement is a legal contract between two parties, known as the licensor and the licensee. Here, Ultra (the licensor) would have granted Ms. Phan (the licensee) the right to Ultra’s copyrighted music. However, Ultra claims that Ms. Phan had illegally used forty-five (45) different songs, including sole works of Kaskade or a collaboration between Kaskade and other artists, in her YouTube videos and is seeking up to $150,000.00 in damages per infringement.

Although Kaskade declared his support for Ms. Phan by tweeting, “Summary: I’m not suing @MichellePhan + @ultrarecords isn’t my lapdog. I can’t do much about the lawsuit except voice support for her.” Ultra issued an official statement that reads, “When a music artist or songwriter signs to Ultra, it is our responsibility to protect what they have created. Enforcing copyrights is fundamental to the survival of artists, writers and producers, and to Ultra’s ability to continue to invest in and support them, so that they can continue to bring great music to music fans around the world. Whatever Ultra collects enforcing these important rights is shared with its artists according to their agreements.”

Armed with strong ammunition, Ms. Phan went on the defense and filed her counterclaim against Ultra on September 18, 2014 for Declaratory Relief, Violation of Section 512(f) of Digital Millennium Copyright Act, and Intentional Interference with Contract. In particular, Ms. Phan claims that in 2009 she contacted Ultra’s Senior New Media Manager to negotiate an agreement whereby she would be granted permission to use any of Ultra’s music in exchange for her including credit to the artist and an iTunes link in her YouTube videos. For the next four years, Ms. Phan and Ultra worked cooperatively pursuant to the aforementioned agreement. Ms. Phan alleges that Ultra’s representatives even offered suggestions to particular tracks by its artists that could be used as background music in her YouTube videos. However, on March 18, 2014, Ultra demanded that Ms. Phan cease and desist from using any of Ultra’s music. Ultra also sent takedown notices to YouTube for 12 of her videos. Ms. Phan is now seeking damages for Ultra’s takedown notices, which she claims were sent in bad faith, and for knowingly materially misrepresenting her infringing use of the music. She is also seeking damages for Ultra’s bad faith actions in attempting to disrupt her contractual relationship with YouTube.

It is unclear whether the negotiated terms of the agreement between Ms. Phan and Ultra was finalized in a written license agreement. However, it does not seem to be the case given that neither of parties attached any agreement to their respective complaint or counterclaim. If this is the case, the obvious take away message is to “get it in writing.” Although some licensing agreements can get lengthy and complicated, most agreements include terms such as the grant/scope of the license, royalty rates, how royalties are calculated, length of the license, and renewal options. A finalized license agreement probably could have saved each party time and money because now each side will have the additional “joy” of arguing whether a license agreement (if any) was formed via those emails between Ms. Phan and Ultra’s Senior New Media Manager and what were the terms of that agreement.