Paul M. Ellington, Appellant,v.EMI Music, Inc., et al., Defendants, EMI Mills Music, Inc., Respondent.

Brief

N.Y.Sep 11, 2014

APL-2013-00260 New York County Clerk’s Index No. 651558/10 Court of Appeals STATE OF NEW YORK PAUL M. ELLINGTON, Plaintiff-Appellant, against EMI MUSIC INC., EMI MUSIC PUBLISHING, EMI MUSIC PUBLISHING NORTH AMERICA, Defendants, and EMI MILLS MUSIC, INC., Defendant-Respondent. >> >> BRIEF FOR PLAINTIFF-APPELLANT SCAROLA MALONE & ZUBATOV LLP Attorneys for Plaintiff-Appellant 1700 Broadway, 41st Floor New York, New York 10019 212-757-0007 Of Counsel: Richard J.J. Scarola Date Completed: November 13, 2013 To Be Argued By: Richard J.J. Scarola Time Requested: 15 Minutes TABLE OF CONTENTS TABLE OF AUTHORITIES ................................................................................... iii STATEMENT OF JURISDICTION.......................................................................... 2 QUESTIONS PRESENTED ..................................................................................... 3 PRELIMINARY STATEMENT AND SUMMARY OF ARGUMENT ................ 10 STATEMENT OF FACTS ...................................................................................... 20 A. The Parties ................................................................................................ 20 B. The Agreement .......................................................................................... 22 C. The Music Publisher’s Failure to Pay Plaintiff His Contractual Share of Foreign Publication Royalties ................................................................ 23 D. EMI’s Misleading Royalty Statements ..................................................... 26 E. EMI’s Conduct Extending to Other Class Members ................................ 27 F. The Complaint’s Allegations..................................................................... 28 G. The Decision of the Trial Court ................................................................ 29 H. The Decision of the Appellate Division, First Department ..................... 31 ARGUMENT ........................................................................................................... 33 I. EMI’S HIRING AND PAYING ITS OWN WHOLLY-OWNED AFFILIATES TO ENGAGE IN FOREIGN ROYALTY COLLECTION IS A BREACH OF CONTRACT ........................................................... 35 A. Authoritative Commentators Have Recognized, Described and Condemned the Unscrupulous Double-Dipping Practice in Which this Music Publisher Is Engaged .......................................................... 41 ii B. Caselaw Supports the Conclusion that Permitting Double-Dipping in Royalty Streams Was Never the Intention of “Net Receipts” Deals and Should Not Be Tolerated .............................................. 45 C. Well-Established Canons of Contractual Interpretation Favor Plaintiff’s Position ........................................................................ 48 II. AT BEST FOR EMI, THE AGREEMENT’S LANGUAGE IS AMBIGUOUS AND CANNOT BE RESOLVED IN ITS FAVOR ON A MOTION TO DISMISS .................................................................. 51 III. EMI’S NON-MARKET RATE DEALS WITH ITS OWN WHOLLY- OWNED AFFILIATES, DILUTING PLAINTIFF’S NEGOTIATED 50% SHARE OF ROYALTIES WHILE INCREASING ITS OWN, VIOLATES THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING ................................................................................. 53 IV. EMI’S MOTION SHOULD NOT HAVE BEEN GRANTED IN THE ABSENCE OF DISCOVERY ............................................................. 56 V. THE “AFFILIATES” LANGUAGE IN THE AGREEMENT’S PREAMBLE PRESENTS YET ANOTHER BASIS ON WHICH THIS ACTION SHOULD BE PERMITTED TO GO FORWARD ... 60 CONCLUSION ........................................................................................................ 64 iii TABLE OF AUTHORITIES Cases 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144 (2002) .............................................................................................. 54 Ackerman v. 305 East 40th Owners Corp., 189 A.D.2d 665, 592 N.Y.S.2d 365, 366 (1st Dep’t 1993) ...................................... 56 Bd. of Regents of University of Nebraska v. BASF Corp., No. 4:04CV3356, 2007 WL 3342406 (D. Neb. Nov. 6, 2007) ............................... 62 Budget Rent A Car Sys. v. K&T, Inc., Civ. A. No. 2:05-CV-3655, 2008 WL 4416453 (D. N.J. Sept. 23, 2008 ......... 61, 62 Croce v. Kurnit, 737 F.2d 229 (2nd Cir. 1984) ................................................................. 31, 45, 46, 47 Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389, 663 N.E.2d 291 (1995) ........................................................... 56 Goshen v. Mutual Life Ins. Co. of New York, 98 N.Y.2d 314, 746 N.Y.S.2d 858 (2002) ............................................................... 57 Granite Partners, L.P. v. Bear, Stearns & Co. Inc., 17 F. Supp. 2d 275 (Bankr. S.D.N.Y. 1998) ............................................................ 52 GTE Mobilnet Svc. Corp. v. Cellexis Intern., Inc., No. Civ.A01-10793-RWZ, 2004 WL 848172 (D. Mass. Apr. 20, 2004) ................ 63 GTE Wireless, Inc. v. Cellexis Int’l, Inc., 341 F.3d 1 (1st Cir. 2003) ................................................................................. 62, 63 Leon v. Martinez, 84 N.Y.2d 83, 614 N.Y.S.2d 972 (1994) ................................................................. 55 Nolan v. Sam Fox Publishing Co., 499 F.2d 1394 (2nd Cir. 1974) ..................................................................... 45, 46, 47 iv Reape v. New York News, Inc., 122 A.D.2d 29, 504 N.Y.S.2d 469 (2d Dep’t 1986) ................................................ 49 River View Assocs. v. Sheraton Corp. of Am., 33 A.D.2d 187, 306 N.Y.S.2d 153 (1st Dep’t 1969) ................................................ 50 Skillgames, LLC v. Brody, 1 A.D.3d 247 (1st Dep’t 2003) ................................................................................. 54 Sorensen v. Bridge Capital Corp., 52 A.D.3d 265 (1st Dep’t 2008) ............................................................................... 54 Steiner v. American Broadcasting Co., 248 Fed. Appx. 780, 2007 WL 2460326 (9th Cir. Aug. 27, 2007) .......................... 21 Sutton v. East River Sav. Bank, 55 N.Y.2d 550, 435 N.E.2d 1075 (1982) ................................................................. 49 Tougher Heating & Plumbing Co. v. State, 73 A.D.2d 732, 423 N.Y.S.2d 289 (3d Dep’t 1979) ................................................ 50 Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., 487 F.3d 89 (2d Cir. 2007) ....................................................................................... 55 Weatherly v. Universal Music Publishing Group, 125 Cal. App. 4th 913, 23 Cal. Rptr. 3d 157 (2nd Dist., Div. 8 2004) ...................... 25 VKK Corp. v. National Football League, 244 F.3d 114 (2d Cir. 2001) .............................................................................. 61, 62 Statutes CPLR 3211(a)(1) & (a)(7) ....................................................................................... 56 CPLR 5602 ................................................................................................................. 4 2 BRIEF ON APPEAL FOR PLAINTIFF-APPELLANT PAUL M. ELLINGTON Plaintiff-appellant (“plaintiff”) Paul M. Ellington, by his attorneys, Scarola Malone & Zubatov LLP, submits this Memorandum in support of his appeal of the decision of the Appellate Division, First Department, dated May 2, 2013, Decision and Order, Slip Op. 9028, No. 651668/10 [R.599], affirming the earlier decision of the trial court (Supreme Court, New York County (Fried, J.)), dated October 5, 2011 [R.12], which granted the pre-discovery motion of defendant-respondent EMI Mills Music, Inc. (“EMI Mills,” and, together with all EMI parties, “EMI”), to dismiss plaintiff’s Amended Complaint, dated December 2, 2010 (the “Complaint” [R.65]).1 Statement of Jurisdiction This Court has jurisdiction over this appeal pursuant to CPLR 5602(a)(1)(i), because the Decision and Order of the Appellate Division, First 1 The trial court, as affirmed by the Appellate Division, First Department, dismissed the first and second causes of action seeking the core monetary and injunctive relief at issue in this action. It did not rule independently on the fraudulent concealment allegations contained in the third and fourth causes of action but dismissed those as dependent on the same factual premises articulated in the first and second causes of action. It also dismissed, on this ground, the Complaint’s class action allegations and the allegations against two other defendants, EMI Music Publishing and EMI Music Publishing North America, both of which did not move or answer. (EMI Mills’ counsel asserted those entities did not exist despite abundant evidence to the contrary both online and in court files, which reflect at least one of these entities having been both a defendant and a plaintiff in other actions). 3 Department, from which plaintiff seeks to appeal, finally determines the entire action. Questions Presented 1. Does a common term present in many older music publishing agreements between music publishers and artists, which provides for payment to the artist of 50% of the publisher’s actual net receipts in foreign countries from the artist’s works, permit the publisher, at its sole and absolute discretion, to perpetrate a scam recognized by authoritative music publishing treatises by diluting the artist’s percentage and increasing its own by having its own subsidiaries operating at unilaterally fixed rates (rather than arms’-length “foreign subpublishers” operating at negotiated and market rates) skim 50% off the top, so that only half of the total pie ostensibly remains to be divided between the music publisher and the artist, thereby effectively altering the agreed-upon 50/50 split and increasing the publisher’s total royalty share to 75% or more while decreasing the artist’s total royalty share to 25% or less? Plaintiff contends this term in the agreements at issue is not intended to permit and does not permit the interpretation given to it by music publishers, which is challenged in this case — allowing the publisher to, in substance, hire itself in recent years, as the music industry has consolidated, to collect in foreign markets, pay itself 50% of the collections off the top and then split 4 only the remainder with the artist. This question was expressly raised and preserved. [R.603] The provision in plaintiff’s agreement that is the subject of this litigation is substantially identical to provisions in the agreements of legions of older musical artists. The music publisher in this case has distorted the plain meaning of that payment provision as to plaintiff and his predecessor and apparently has done the same in its conduct as to those other artists. Indeed, extensive literature and treatises in the field of music publishing indicate that other music publishers misuse similar contractual provisions in an identical manner. For these reasons, this case also contains class action allegations and implications, that have not been reached because the core claims were dismissed at the pleadings stage, before discovery commenced and before class certification issues were considered. The decisions of the courts below effect a substantial injustice by permitting music publishers to get away with a known scam. 2. Where plaintiff has alleged, citing authoritative treatises, that the market rate independently owned, arms’-length foreign music subpublishers would collect as administration costs is 15%-25% of publishing royalties collected in foreign markets, is it permissible to have the music publisher’s own affiliated subpublishers collect a non-market rate of 50% prior to having the music publisher divide only the remainder, viz., 50%, between itself and the artist? 5 Plaintiff contends that the pre-discovery dismissal of this case in the court below effectively renders meaningless the core provision of music publishing agreements that governs how royalties will be divided by allowing the publisher to pay itself 50% of the collection off the top and then split only the remaining 50% with the artist. Though it is not established on this record whether or why a music publisher would operate through subsidiaries, much less wholly-owned subsidiaries, in foreign markets, it is evident that no law or regulation precludes the publisher from collecting abroad directly, without any subpublisher, and clear in any event that if arms’-length foreign subpublishers are used at all, market rates for foreign collection agents are substantially less than the 50% off the top this publisher gives its own foreign affiliates. The court below appears not to have recognized or addressed this issue, though it was clearly raised by plaintiff. See Pl.’s App. Div. Br. at 2. While this is an issue of first impression for New York State courts, the determination of the court below is in conflict with relevant New York federal court jurisprudence. 3. Where plaintiff has shown good reason to conclude that discovery would show that the type of music publishing agreement at issue initially entailed music publishers dealing at arms’ length with independent foreign subpublishers, which generally charge a market rate of 15%-25% of royalty receipts for their collection efforts, and only later, as time went on, found 6 music publishers buying up those previously independent foreign entities and then paying themselves an across-the-board, non-market 50% foreign subpublishing percentage, was it proper to hold on a pre-discovery motion to dismiss that such dilution was the intention of the parties to these agreements? Plaintiff contends that there is no basis to so hold on a pre-discovery motion to dismiss. The court below appears not to have recognized or expressly addressed this issue, yet its holding in the music publisher’s favor necessarily entails such a conclusion that this issue could be decided pre- discovery, at the pleadings stage. This issue was raised and, therefore, preserved by plaintiff. See Pl.’s App. Div. Br. at 2. While this is an issue of first impression for New York State courts, the determination of the court below is in conflict with relevant New York federal court jurisprudence. 4. Where authoritative music publishing treatises have recognized that the same practices challenged here, which publishers have adopted in recent years, are a “scam” intended to bilk artists out of royalties, could that implementation have been the intended result of the parties to the contract, and should New York courts tolerate such practices, particularly without considering a more complete record that would have been developed in discovery? 7 Plaintiff contends that New York courts should not permit what has been recognized as a scam by respected treatises, especially where the challenged conduct is not supported by the contract language or sound reason. The court below implicitly lent its imprimatur to the practice by dismissing plaintiff’s claims. This issue was raised and, therefore, preserved by plaintiff. See Pl.’s App. Div. Br. at 3. While this is an issue of first impression for New York State courts, the determination of the court below is in conflict with relevant New York federal court jurisprudence. 5. Is contractual language entitling a musical artist to 50% of the publisher’s “net revenue actually received” from foreign royalty collection, at the very best for the publisher, ambiguous as to whether or not it permits the publisher to dilute that negotiated 50% entitlement by funneling royalty revenue through its own wholly-owned affiliates, and therefore, not amenable to definitive resolution on this pre-discovery motion to dismiss? Plaintiff contends the language can be read in plaintiff’s favor to avoid the absurd interpretation of the parties’ agreement advanced by the publishers but, at best for the publisher, should have been held ambiguous, and therefore, allowed to proceed to discovery as to possible parol evidence, followed by ultimate resolution of the ambiguity by a finder of fact at trial. The court below mistakenly considered only whether or not the term “foreign publication” was ambiguous, but did not consider the ambiguity 8 argument as to the core payment provision at issue. This issue was raised and, therefore, preserved on appeal. See Pl.’s App. Div. Br. at 31-32. 6. Where the publisher has conceded that it would be a violation of the implied covenant of good faith and fair dealing implicit in every contract under N.Y. law to permit it to use its own wholly-owned affiliates to charge an above- market rate of 75% or 90% of royalties earned as a foreign royalty collection fee prior to remitting the remainder to be split 50/50 with plaintiff, would it not be, by that same token, a violation of the implied covenant of good faith and fair dealing for the publisher’s affiliates to charge the above-market rate of 50% royalties earned, as it actually does, for that same service? Plaintiff contends that there is no principled distinction between the hypothetical scenario the publisher concedes would violate the implied covenant of good faith and fair dealing and the real scenario alleged, so that the publisher’s conduct, at a minimum, violates that covenant. The court below failed to consider this issue despite the fact that it was raised — including being specifically offered as a valid claim by the publisher itself — and, therefore, preserved on appeal. See Pl.’s App. Div. Br. at 21, Def.’s App. Div. Br. at 48-49, Pl.’s App. Div. Reply Br. at 16-17. 7. Can a court accept, on a pre-discovery motion to dismiss, a statement of purported fact on a defendant’s part that squarely contradicts the allegation of a plaintiff’s complaint that the music publisher defendant has, over the 9 years, changed the percentage of foreign royalties that it remits to the musical artist? Plaintiff contends that it is hornbook law that a complaint allegation should have been credited over a defendant’s countervailing claim on a pre- discovery motion to dismiss. The court below ignored the allegations of the plaintiff’s complaint and credited the defendant’s assertion. This issue was raised and, therefore, preserved on appeal. See Pl.’s App. Div. Br. at 31-32. 8. Where an agreement providing for a 50/50 split of music publishing royalties between a music publisher and a musical artist states that the agreement is being made with a party and its affiliates, should royalty revenue received by those wholly-owned affiliates be included within the total royalty pool to be split 50/50? Plaintiff contends that, per the agreement’s express terms, such royalty revenue received by those affiliates must be included in the royalty pool to be split 50/50. The court below resolved this issue in defendant’s favor without considering plaintiff’s arguments. [R.603] This issue was raised and, therefore, preserved on appeal. See Pl.’s App. Div. Br. at 18, n.7 & Pl.’s App. Div. Reply Br. at 23-27. 9. Where an agreement states that it is being made with a party and its affiliates, without including any qualification narrowing the meaning of the term “affiliates,” is it proper, on a pre-discovery motion to dismiss, to hold 10 that the language refers only to affiliates in existence at the time of the contract’s execution? Plaintiff contends such a conclusion cannot be drawn on a pre-discovery motion to dismiss, especially where, as here, that reading is unsupported by caselaw and would result in an absurdity where the contract itself would be abrogated. The court below resolved this issue in the defendant’s favor without addressing plaintiff’s arguments. [R.603] This issue was raised and, therefore, preserved on appeal. See Pl.’s App. Div. Br. at 18, n.7 & Pl.’s App. Div. Reply Br. at 23-27. Preliminary Statement and Summary of Argument2 The precedential impact of this litigation, presenting an issue of first impression, will reach far beyond the parties to this case, who and which are, on the one hand, one of the heirs of the legendary American jazz composer Duke Ellington (plaintiff) and, on the other hand, the worldwide music publishing conglomerate, EMI (defendant). That will be so even if the issue is not addressed in the context of a class action that plaintiff believes ultimately should be certified. Specifically, this Court’s decision will affect legions of older artists and their heirs who have in their music publishing contracts a simple provision that was once 2 Any facts or factual allegations described in this preliminary section are cited to the Record in the Statement of Facts below. 11 industry-standard, requiring the music publisher to remit to the artist 50% of any royalties it receives from foreign publication of musical works, net of what the publisher might pay to a collection agent (the “subpublisher”) in foreign countries as payment for such foreign royalty collection. This common contract term, known as a “net receipts” provision, was, plaintiff contends, intended to permit the music publisher to avoid absorbing legitimate, though limited, costs of foreign royalty collection prior to splitting the music publishing receipts 50/50 between itself and the artist. (Significantly, no law or contract requires use of a foreign subpublisher; EMI may act abroad to collect directly, but the contract affords the limited right to use subpublishers as an administrative convenience. EMI has not argued otherwise below.) The publisher could, accordingly, make an arms’-length deal with a foreign collection agent operating in another country, pay that agent a market rate for collection in that country, and then split the remainder with the artist. The parties’ 1961 contract in this case (the “Agreement”) contains such a provision. It provides for EMI to pay plaintiff “a sum equal to fifty (50%) percent of the net revenue actually received by [EMI] from … foreign publication” of the Ellington works. [R.370 (emphasis added)] Thus, if EMI contracts at arms’ length with independent foreign subpublishers for them to engage in foreign collection efforts, EMI is permitted to split 50/50 with plaintiff only the revenue it receives net of what it must pay to those subpublishers. 12 This case arises because of a misuse and abuse of this provision that has developed over the decades. Cloaking itself in this “actually received” language, EMI now substitutes itself (through its own corporate subsidiaries or corporate affiliates) for such independent foreign subpublishers. As discussed below and alleged in the Complaint, EMI today charges itself a far-above-market rate to serve as its own subpublisher in most countries around the world, thereby diluting the artist’s royalty share from 50% to 25%. Plaintiff contends, first, among other arguments, that this is a breach of contract. Per the plain terms of the Agreement (and as the Complaint alleges), EMI is “actually receiv[ing]” all the revenue, and it must, therefore, split it all equally with plaintiff. It cannot pay other EMI-owned foreign entities for foreign collection efforts and pretend that it “actually received” only what it unilaterally chose to remit to the domestic EMI entity with which plaintiff must deal, when, in reality, it “actually received” all the collection revenue. To allow EMI this practice is to give the fox the keys to the chicken coop in a manner that was clearly not the intent of the parties to the Agreement (who, it should be remembered, were contracting at a time when there were no EMI subsidiaries or affiliates operating directly in foreign markets) and, thus, EMI’s conduct represents a breach of this crucial contractual payment term. Alternatively, at best for EMI, the meaning of this payment term is ambiguous. As such, under governing caselaw, it was error for the courts below to dismiss the Complaint on a motion addressed to the pleadings, thereby tacitly 13 sanctioning an absurd and inequitable outcome that the parties to the Agreement could not have anticipated and, per which, a provision meant to allow a music publisher to defray its legitimate, arms’-length foreign collection costs is now used by EMI to pay itself. Any further questions as to the correct construction of this payment term presents a question of fact for a trier of fact. Thus, this Complaint could not have been properly dismissed at this stage. As noted above, no law or regulation precludes EMI from acting directly in foreign countries to perform its contractual collection duties. Nonetheless, with time, as the industry consolidated, large music publishers such as the EMI defendant in this case began to use this provision as an artifice to hire themselves, through affiliated entities, in foreign markets at the above-market rate of 50% off the top abroad, before the parent publisher would then split the remaining 50%, again, 50/50 with the artist. Often, though not always, the publisher did this through acquiring previously independent foreign subpublishers. In other instances and in other jurisdictions, the publisher would create its own subsidiary entities to engage in royalty collection in those foreign markets. Thus, instead of operating directly, as it surely could, or at arms’ length through independent entities with which the music publisher previously dealt, the publisher was now operating in foreign markets through its own wholly-owned subsidiaries, e.g., EMI-Japan, EMI-Canada, EMI-Norway, etc. And the result was that the most 14 basic payment terms of the contract between the music publisher and musical artists were fundamentally (and unilaterally) altered. The music publisher began having its foreign subsidiaries withhold much-higher-than-market percentages in foreign territories as ostensible arms’- length subpublishing counterparties prior to remitting the rest to be split; specifically, this music publisher — like other publishers perpetrating this same scam — has had those foreign subsidiaries retaining 50% of royalties instead of the going market rate of 15%-25%.3 The impact of this change upon the bottom-line royalty split between the music publisher and the artist was (and is), of course, dramatic. The illustration below — based on real-world numbers that will be proven if this case is permitted to proceed to discovery — demonstrates that impact: 3 That this is the market rate is stated in authoritative music publishing treatises. [R.452] Plaintiff would establish this in discovery, of which, as discussed below, there has been none. EMI has at no point denied that it charges a 50% rate for its foreign collection services, or that the arms’-length market rate is 15%-25%. 15 Country & Type of Subpublisher Country A: Independent Foreign Subpublisher Country B: EMI Subsidiary Royalty Collection Regime Market-Rate Contract EMI-Dictated Arrangement % of Royalties Retained by Foreign Subpublisher 20%4 50% Remaining % of Royalties Available to Split 80% 50% % of Royalties Left for EMI, the Parent Entity 40% 25% % of Royalties EMI remits to artist 40% 25% Total % of Royalties Retained by EMI 40% 75%5 Thus, EMI has unilaterally turned what was originally a contract term intended to split music publishing royalties 50/50 between itself and the musical artist, with a limited right to engage foreign collecting agents for administrative convenience, into one that results in a 75/25 split in EMI’s favor. It has done this while insisting that it has continued splitting everything 50/50 as the contract requires by maintaining the fiction that its wholly-owned foreign subsidiaries to which it pays a (non-market) collection fee are no different from arms’-length 4 In this example, 20% is used because it is the midpoint in the 15%-25% market rate foreign collection rate range described in music publishing treatises and, thus, serves as a fair illustration. 5 This is, of course, the total obtained by adding the percentage kept by EMI in the foreign nation at issue (50%) to the total kept by EMI domestically (25%). 16 foreign subpublishers. EMI has, in short, plainly altered the critical payment term of the contract through a device described by mainstream music publishing treatises as a “scam.” The result of these machinations by EMI and other music publishers have has been a gradual shift since around 1980 to music publishing agreements that clarified the issue in favor of artists represented by counsel well-informed as to the emergence of these double-dipping practices. In the face of these new, post- consolidation scams, new contracts often expressly require music publishers to split the publishing receipts total between publisher and artist 50/50 “at source” (in other words, with the music publisher bearing any subpublishing cost), rather than net of foreign subpublishing receipts (as described above, known as “net receipts”). In that way, the previously standard contract language was clarified to preclude music publishers from misreading and misusing their own contracts to engage in the emerging scam practices here at issue. Many artists such as Duke Ellington, however — whose agreements were made before the inception of the practice of music publishers hiring themselves (i.e., their wholly-owned subsidiaries) — entered into contracts in or around the 1960s containing the older standard “net receipts” language, when the scam to which they are now subject had not even been conceived. They had no reason or forum at that time to negotiate away the language which music publishers now deliberately misused to engage in their double-dipping scheme. Indeed, until recently, royalty statements would not even 17 have allowed them to discover the practice. But this does not mean, and certainly should not mean, that music publishers should be permitted to misread these older agreements, such as the one here at issue, to engage in a pocket-lining charade for which no one bargained and to which no one would have agreed. To be clear, contrary to the specious suggestion offered by EMI to the courts below, plaintiff’s position that “net receipts” provisions do not permit EMI to pretend that it has not “actually received” revenue it funnels through its own wholly-owned affiliates would not turn the “net receipts” deal into an “at source” deal. If EMI were to enter into arms’-length deals with independent foreign subpublishers (at market rates), it would unquestionably be permitted to deduct that cost before splitting the remainder 50/50 with the artist (which it would not be allowed to do were this an “at source” agreement). What EMI certainly cannot do, however, is what it has done here: charge an above-market collection rate for its own — its own wholly-owned foreign subpublisher affiliates’ — collection efforts and then maintain the fiction that it is abiding by the Agreement’s terms when it splits what remains with artists such as plaintiff. Worse, the scam EMI began to perpetrate was fraudulently concealed by EMI insofar as, until recently, it had made its royalty statements deliberately inscrutable to make it difficult to understand what it had been doing. New York courts should not give their imprimatur to such practices. 18 Further, as also discussed below, precedential authority, including from New York federal courts, including the Second Circuit, support plaintiff’s reading of this contract. Below, however, neither court came to grips in its decision with this essential fact alleged by plaintiff: despite the publisher’s protestations that it is still formally paying the artist a 50% share, it is clear, in the real world, that, contrary to its contractual duty to split royalties 50/50 with the artist, the music publisher is double-dipping in royalties, hiring itself as an unnecessary collection agent and paying itself a grossly above-market price — thus, fundamentally altering the basic terms of the parties’ bargain. The facts presented also tend to show, as EMI itself has tacitly acknowledged, that EMI’s double-dipping conduct breaches the implied covenant of good faith and fair dealing. As EMI has urged the Agreement should be construed, it may hire and pay itself — whether directly or through its own wholly- owned affiliates — whatever rate it unilaterally selects to engage in foreign royalty collection. This construction would permit the publisher, at its sole discretion, to syphon off any amount of the royalty revenue as ostensible foreign subpublishing fees (even 90% to the foreign affiliate) before splitting what would be a paltry remainder between itself and the artist; and all the while, EMI would insist it is still abiding by the parties’ 50/50 bargain. It is plain this absurdity was not the intention of the parties to the Agreement. In its opposition brief on appeal to the 19 Appellate Division, EMI, in fact, expressly pointed out that musical artists such as plaintiff would be protected from such further unilateral action on a publisher’s part to increase, for example, the ostensible “cost” of foreign royalty collection from the current far-above-market 50% rate to a hypothetical even-more-above- market 90% rate because, EMI suggests, such an increase would violate the implied covenant of good faith and fair dealing implicit in every contract under New York law. EMI App. Div. Br. at 49. EMI is, in that regard, correct. But if a hypothetical decision on the music publisher’s part to have its wholly-owned subsidiaries take 90% of foreign royalty revenue prior to splitting the remainder 50/50 would violate the implied covenant of good faith and fair dealing, there is no reason why the music publisher’s actual decision to have its wholly-owned subsidiaries take 50% of foreign royalty revenue (instead of the market-rate 15%- 25%, if they were allowed to withhold anything at all when the foreign subpublishers are their own wholly-owned subsidiaries) does not, by that same rationale expressed by EMI itself, breach the implied covenant of good faith and fair dealing. As such, it appears EMI has essentially conceded its conduct was in violation of the contract. At a minimum, this demonstrates that EMI’s conduct should be examined in discovery and assessed at a trial. Finally, the parties’ contract clearly states in its preamble that it is being entered into not only with one particular publisher, but rather, with that publisher and its affiliates. This necessarily means that when the Agreement 20 requires payment of 50% of royalty revenue on EMI’s part, the 50% must be applied to royalties received by any of the EMI affiliates. For this separate and distinct reason, EMI cannot claim that the revenue received by wholly-owned foreign subpublisher affiliates is not its own. These arguments, separately and taken as a whole, also show that it was error for the courts below to dismiss at the pleadings stage, and without the benefit of discovery or a full record. For example, while plaintiff believes the Agreement should be construed as he contends, based on its plain language, if it is not, he also contends the Agreement cannot be construed as a matter of law as EMI would urge, and, as such, there must be discovery and a trial. Similarly, plaintiff has pointed to EMI’s tacit concession — if not a virtual admission — that EMI’s conduct may violate the implied covenant of good faith and fair dealing. Again, that is an issue for discovery and trial. All other issues aside, for these reasons, the Complaint was not amenable to dismissal on the face of the pleadings. For each of these reasons, plaintiff asks this Court to reverse the decisions below. Statement of Facts A. The Parties Plaintiff Paul M. Ellington is the grandson and heir of the famous and prolific jazz composer and performer Edward Kennedy “Duke” Ellington (“Duke Ellington”). [R.396, ¶3] A musician and artist in his own right, plaintiff has, for 21 years, among other things, directed, conducted and toured with the famed Duke Ellington Orchestra, actively promoting the very Duke Ellington catalogue from which defendants themselves have earned millions of dollars in mainly passive revenue. [Id.] Defendant EMI Mills is a music publishing entity. [R.397, ¶4] Defendants EMI Music Publishing and EMI Music Publishing North America are likewise music publishing entities affiliated with EMI Mills and all commonly owned.6 [Id.] The music publisher’s role is essentially passive in the sense of the common understanding of “publisher” in literary and other fields. EMI serves as a collection agent and earns substantial revenue off of the musical work of creative artists such as Duke Ellington. [R.396, ¶3] The music publisher and its foreign subpublishers are mainly significant in speeding up the rate at which royalties 6 As per an e-mail sent to defendant’s counsel Donald Zakarin by plaintiff’s counsel on December 24, 2010 [R.447], plaintiff agreed to accept Mr. Zakarin’s representation that EMI Music Inc. is a record company with no involvement in the claims in this case and to drop that defendant from the case. It is noted that although defendant’s motion papers and accompanying affidavits in the trial court went to great lengths to deny the existence of the other two non- moving defendants (viz., EMI Music Publishing and EMI Music Publishing North America), the relevant facts tell a different story, and show that these defendants appear on plaintiff’s royalty statements, have been parties in cases (including EMI Music Publishing appearing as a plaintiff in a case) and are otherwise publicly held out as entities by EMI. [R.417-20]; see also Steiner v. American Broadcasting Co., 248 Fed. Appx. 780, 2007 WL 2460326 (9th Cir. Aug. 27, 2007) (listing EMI Music Publishing as a plaintiff). Notably defendant did not offer to correct these party names or suggest what entity that, in its view, actually exists may have been incorrectly sued. Because neither of the courts below made any ruling on these matters, but rather, simply dismissed the claims at issue here based on their misreading of the applicable contract, whether these parties exist or not is an issue to be addressed below if the case proceeds on the merits. 22 would otherwise be remitted. [R.452] In return for furnishing these and similarly passive administrative services, the music publisher is, per the Agreement (as described further below), entitled to a negotiated and precisely specified percentage of royalties earned off of the creative works at issue. B. The Agreement The relevant contract, dated December 17, 1961, between members of the Ellington family and their heirs (the “Ellington Parties”), on the one hand, and these EMI defendants, on the other hand, appears at R.367. The preamble to the Agreement states that it is made between Duke Ellington and certain members of his family, on the one hand, and Mills Music, Inc., and, inter alia, “any other affiliate of Mills Music, Inc., hereinafter designated as ‘Second Party’ (which term, as hereinafter used, shall apply to all or any of them) [“Mills”].” [R.367] Per the terms of the Agreement, the Ellington Parties transferred to the “Second Party” (Mills, later purchased by EMI), numerous works by Duke Ellington (the “Ellington Compositions”) in exchange for, inter alia, cash payments and royalties. The key paragraph for purposes of this case addresses royalty payments from foreign publication and reads as follows: “3. The Second Party agrees to pay or cause to be paid to the [Ellington] Parties the following royalties: (a) On all copies published, sold and paid for to the Second Party in the United States of America and Canada of the musical compositions covered by this agreement during the term of the respective copyright in the United States, a royalty of four (4¢) cents for 23 each pianoforte copy sold in the United States and Canada and paid for, and ten (10%) percent of the wholesale selling price after trade discounts for each orchestra arrangement sold in the United States and Canada and paid for, and a sum equal to fifty (50%) percent of the net revenue actually received by the Second Party from synchronization, background, electrical transcription, foreign publication or other exploitation, the use of said compositions by mechanical instruments, such as phonographs, music rolls, the use of the titles, dramatization and literary uses.” [R.370 (emphasis added)] It is this italicized language subjecting certain royalties received by EMI to a 50% split to which this case pertains. EMI apparently acquired Mills Music, Inc. in 1990, and EMI then renamed “Mills Music, Inc.” as “EMI Mills Music, Inc.” [R.113, ¶14] Plaintiff has alleged on information and belief that EMI Mills is commonly owned with and affiliated with the other EMI defendants named in the Complaint, i.e., EMI Music Publishing North America and the ultimate parent entity, EMI Music Publishing (which fact defendant has not disputed below). Among other things, as such, pursuant to the definition of the “Second Party” in the Agreement’s preamble, these defendants are parties to the Agreement. [R.402, ¶14 & R.367] C. The Music Publisher’s Failure to Pay Plaintiff His Contractual Share of Foreign Publication Royalties During an audit of EMI conducted on behalf of plaintiff and others pursuant to limited audit rights allowed by contract, plaintiff discovered that instead of paying plaintiff based on the 50% of net revenue actually received by EMI, as specified in the Agreement, the music publisher has for some years 24 engaged in the practice described above — unilaterally cutting plaintiff’s agreed- upon share of royalties in half by first remitting 50% of such royalties to its own commonly owned foreign subpublishing subsidiaries, with the remainder split between the Ellington Parties and EMI, so that the publisher, in practice, would actually receive 75% of royalties, while the Ellington Parties would receive a mere 25%. [R.402, ¶14] EMI, in its papers filed in the trial court and in the Appellate Division, First Department, did not deny this core fact on which plaintiff’s Complaint is premised. EMI, without any factual support — which, even if it existed, should have not been considered on EMI’s pre-discovery motion to dismiss based on the pleadings — speculated in an evasively phrased footnote in its moving brief in the trial court that “there is no reason to doubt that [paying 50% to its foreign subsidiaries] is precisely how Mills Music, Inc. accounted and paid since 1961” (i.e., before it was acquired by EMI in 1990). Def.’s Trial Ct. Br. at 5. There is, in fact, every reason to doubt this was the case. First, Mills, unlike EMI, was not a multinational conglomerate with subsidiaries in every significant foreign market. There is every reason to believe, especially in the absence of discovery, that Mills was dealing at arms’ length with genuine third-party subpublishers, not with its own subsidiaries, in instances where it used a subpublisher to collect foreign royalties. In fact, defendant admitted in one of the affidavits submitted with its motion papers in the trial court that in many 25 cases “local territorial EMI publisher[s] … succeeded to the subpublishing rights previously held by … other companies.” [R.361, ¶24] In other words, EMI acquired not only Mills but subpublishers with which Mills could have contracted. But there is no reason on this record to conclude that the subpublishers available to Mills all operated at a 50% rate as a result of arms’-length bargains. Second, and more telling, the 50% cut EMI has been generously bestowing upon its own foreign subsidiaries for passively collecting revenue earned off of the creative work of musical artists such as Duke Ellington is widely described in relevant literature as not reflective of the prevailing market rate EMI (or Mills before it) would have paid in an arms’-length agreement with a third- party foreign subpublisher. According to Donald S. Passman’s respected treatise, All You Need to Know About the Music Business (Free Press) (7th ed. 2009),7 the “vast majority of [such] deals [range] from 15% to 25%.” [R.452] In fact, even for a publisher dealing with its own foreign subsidiaries with an opportunity for unilateral price-setting, a 50% cut is high. For example, in Weatherly v. Universal Music Publishing Group, 125 Cal. App. 4th 913, 23 Cal. Rptr. 3d 157 (2nd Dist., Div. 8 2004), a case involving a claim similar to the one at issue here, the domestic publisher’s “foreign affiliates were taking 25 percent off the top,” id. at 917, 23 Cal. Rptr. at 160. 7 Indeed, EMI’s own website holds Mr. Passman out as an authority in this area. [R.424] Mr. Passman is a Harvard Law School-educated attorney who has specialized intensively in the music business for decades and is, in fact, one of the most influential and respected authorities in the entertainment industry. [Id.] 26 Factual development of the record — not permitted as a result of the decisions below — would be needed for resolution of issues pertaining to what was and is an arms’-length rate. But, to be sure, the reputable sources indicate EMI is just flat wrong in its assertions that 50% taken off the top is or ever was a common, arms’-length standard. D. EMI’s Misleading Royalty Statements While EMI contended in the trial court that its duplicitous double- dipping in plaintiff’s royalty stream was, or should have been, transparent to plaintiff, its royalty statements tell a different story, and show that it would have been impossible for anyone not independently knowledgeable of the double- dipping scam to have used the royalty statements to ascertain what EMI was doing until EMI very recently clarified those statements. While this argument is laid out in detail in plaintiff’s opposition brief in the trial court (at Statement of Facts §E and Argument §II), because the trial court never reached this issue (which issue is relevant to how far back plaintiff may go in pressing his claim, because the fraudulent concealment would toll the statute of limitations8), but simply dismissed the core claim, it is not an issue to be resolved on this appeal. 8 As noted above, even without this claim, plaintiff would certainly be entitled to a six-year contractual look-back and prospective relief. 27 E. EMI’s Conduct Extending to Other Class Members EMI’s motion to dismiss in the trial court also prematurely sought dismissal of the Complaint’s class action allegations. Because the trial court dismissed plaintiff’s core claim, neither it nor the Appellate Division, First Department, had any occasion to consider or address the class action allegations, and plaintiff does not brief those issues here. As discussed (and based on authorities cited at Statement of Facts §F and Argument §VI of plaintiff’s brief in opposition to defendant’s motion in the trial court), however, and as further detailed below, it is well-established and clearly apparent that EMI’s practice with respect to plaintiff was far from an isolated instance, but rather, reflected a general “scam” that has been described in authoritative treatises and, thus, may be ideal for class action adjudication. (Indeed, for all but the most successful and prolific artists, the losses they have suffered, while material, are in many, if not most, cases not sufficient to warrant or allow individual litigation over this issue.) While Duke Ellington’s body of work reflects one of the largest and most notable bodies of copyrighted work implicated in this music publishing scam, the kind of “net receipts” deal reflected in the agreement at issue in this case, as noted above, was once industry standard, such that innumerable artists of this same period (i.e., prior to the advent of “at source” deals starting in the early 1980s) — both artists with significant catalogues such as Duke Ellington and those who are far less notable — likely faced, as the industry changed, this exact same treatment 28 emerging over time and now considered for the first time in New York State courts through this plaintiff’s claims. Thus, regardless of whether a class were to be certified in this case, this is an issue of first impression for New York State courts and will have enormous precedential impact for all the many other music artists and their heirs with similar or identical contracts and now facing similar treatment. F. The Complaint’s Allegations Based on the conduct described above, plaintiff’s Complaint alleges, on behalf of himself and similarly situated others,9 a breach of contract stemming from the music publisher’s double-dipping in artists’ royalties through foreign subsidiaries. [R.71-72, ¶¶25-27] Plaintiff, in substance, alleges that EMI breached the Agreement’s core payment provision by failing to remit to plaintiff his full 50% share of the foreign royalties EMI “actually received,” but instead diverted 50% of that revenue to its own wholly-owned foreign subsidiaries before keeping another 50% for itself, thereby increasing its own share to 75%, while diluting plaintiff’s share to 25%. [R.70, ¶18] 9 The plaintiff class is defined as consisting of: “All music artists (including heirs standing in the shoes of deceased artists) who have in place music publishing agreements with EMI whereby EMI is obligated to render to the Class members a contractually specified percentage of earned foreign publishing royalties and to whom EMI has remitted less than that contractual percentage share by first paying a percentage of such foreign royalties to its own foreign affiliates prior to remitting to the Class members the contractual percentage of the lesser amount remaining.” [R.68, ¶7] 29 The Complaint also seeks declaratory and injunctive relief based on the same claims and conduct, to have, respectively, the practice at issue declared a breach of contract and to order the music publisher, henceforth, to pay all class members their entire bargained-for percentage of royalties, without diverting any portion of such revenue to its own foreign subsidiaries. [R.71-74, ¶¶21-24] There is also a separate cause of action alleging EMI’s fraudulent concealment of its practice of double-dipping in royalty streams through the use of royalty statements that deliberately obscured that practice. [R.72, ¶¶28-31] This cause of action would, if successful, permit plaintiff and others to toll the statutory period and reach back further to recapture more of the fruits of EMI’s misconduct. G. The Decision of the Trial Court In dismissing the Complaint in this action, the trial court seems to have misapprehended plaintiff’s claim. Noting the distinction between “net receipts” deals common in the music industry at the time plaintiff and EMI entered into the Agreement and the “at source” deals that became common in the 1980s, after music publishers started to buy up or establish foreign subpublishers, the court below erroneously suggested that plaintiff was arguing the 1961 contract terms are, themselves, “a scam” [R.17], and that plaintiff’s position was, in essence, that those terms should be changed into an “at source” agreement. [R.20] Plaintiff, of course, was arguing — consistent with the treatment of music 30 publishing treatises — that the recent implementation of the terms, after industry consolidation, rather than the terms themselves, were “a scam,” and that the Agreement — calling for the publisher to remit “a sum equal to fifty (50%) percent of the net revenue actually received by [EMI]” [R.370, ¶3 (emphasis added)] — requires the publisher to pay plaintiff 50% of what it actually, i.e., really, gets.10 Operating, apparently, on this erroneous reading of plaintiff’s claims, however, the trial court went on to state that plaintiff “contends that the parties must have intended the 1961 contract to require payment of a percentage of the royalties earned at source” [R.20]; but, again, that is not at all what plaintiff had argued.11 Continuing to build upon its error in understanding plaintiff’s position, the trial court (correctly, but irrelevantly) concluded that “net receipts provisions were standard practice in the music publishing industry at the time that the 1961 contract was executed” and, therefore (on the mistaken assumption that 10 The trial court also suggested that it would be improper to read a distinction between affiliated and unaffiliated foreign subpublishers into the Agreement because the Agreement contains no such express distinction. [R.19] As discussed at Argument §V below, such a reading of the Agreement is unsupported by the express language (which does make specific mention of affiliates) and purpose of the Agreement, by the relevant history (which, of course, would have to be developed on a full record) and by controlling caselaw. 11 As discussed in greater detail above and further at Argument §I below, a true “at source” deal would preclude EMI even from deducting from the foreign publishing royalties total to be split 50/50 with plaintiff collection costs EMI might pay in real, market-rate, arms’-length deals with foreign subpublishers. Plaintiff never suggested the parties’ contract was such an at source deal, but rather, merely that EMI could not substitute for those real, arms’-length, market-rate foreign subpublishing costs its own (or its wholly-owned affiliates’) foreign subpublishing costs. 31 plaintiff wanted to turn a “net receipts” deal into an “at source” deal), that “[t]he mere fact that such agreements are no longer common is simply not a valid reason to rewrite a clear and unambiguous contract.”12 [Id.] H. The Decision of the Appellate Division, First Department Stating that “[a] court’s ‘role in interpreting a contract is to ascertain the intention of the parties at the time they entered into the contract’” [R.603 (emphasis in original)], the Appellate Division’s May 2, 2013 decision affirmed the decision of the trial court, ignoring plaintiff’s principal arguments and simply concluding that “the complaint contains no allegation of any change in the basis for payment of royalties, i.e., 50% of the net revenue derived from foreign 12 It is noted that on October 21, 2011, about two weeks after the decision of the trial court in this case, a different Justice resolved a similar case brought against EMI Mills by certain of plaintiff’s siblings, who were represented by different counsel in Edward Ellington et al. v. EMI Mills Music, Inc., Index No. 112368/10. While EMI has attempted to marshal this decision as an independent triumph with independent precedential value, this second decision was rendered after EMI’s counsel (the same in both cases) forwarded a copy of this trial court’s decision in this case to the Justice presiding over the second case. Even a cursory comparison of the two decisions will make clear that the second decision adopted much of this trial court’s decision almost verbatim. For example, if one looks at the paragraphs reflecting the key holdings, the language is essentially identical. [Compare R.20 (“However … net receipts provisions were standard practice in the music publishing industry at the time the 1961 contract was executed. The mere fact that such agreements are no longer common is simply not a valid reason to rewrite a clear and unambiguous contract. ‘Evidence of industry practice may not be used to vary the terms of a contract that clearly sets forth the rights and obligations of the parties’ (Croce v. Kurnit, 737 F 2d at 238)” with the second decision at 5 (“However, net receipts provisions were standard practice in the music publishing industry at the time that the Agreement was executed …. That such agreements may no longer be considered common industry practice is simply not a valid reason to rewrite a clear and unambiguous contract. Croce, 737 F 2d at 238 (‘evidence of industry practice may not be used to vary the terms of a contract that clearly sets forth the rights and obligations of the parties’)” (internal citations omitted)]. The decision in this second case, for all of these reasons, should not be treated as giving different or independent support to EMI’s position. 32 publication.” Id. The court’s role, of course, is not to sit as a fact-finder as to such intention, especially where that intention is plainly not what the court would hold it to be, but that is apparently what the Appellate Division did — making an impermissible fact finding as to the parties’ intent. The Appellate Division, moreover, simply ignored the core issue raised in the Complaint — whether and, if at all, to what extent, EMI could pay itself for foreign royalty collection at rates picked unilaterally, which plaintiff alleges are double or more than double market rates. Clearly, in stating “the complaint contains no allegation of any change in the basis for payment of royalties,” the Appellate Division, for whatever reason, simply missed or ignored those core allegations by plaintiff, and also ignored especially paragraph 18 of the Complaint, which reads as follows: “Instead of paying plaintiff and his siblings their full 50% share of earned foreign publishing royalties, EMI diluted that share by having its own affiliates in multiple countries retain 50% of ‘revenue actually received,’ while paying plaintiff and his siblings their 50% only on the 50% remaining, so that EMI and its affiliates, all under common ownership, in reality pocketed 75% of what was actually received, remitting only 25%, rather than 50%, to plaintiff.” [R.70, ¶18] The Appellate Division also concluded that “the complaint sets forth no basis for plaintiff’s apparent premise that subpublishers owned by EMI Mills should render their services for free although independent subpublishers were presumably compensated for rendering identical services.” [R.603] But here, again, as discussed further in the Argument below, the Appellate Division did not 33 address the actual language of the Agreement, the allegations of the Complaint or plaintiff’s arguments that EMI should either not have been permitted to charge at all for its own services abroad or, at a minimum, could not permissibly charge the far-above-market rate for those services it had come over the years to set unilaterally. Argument THE STANDARD “NET RECEIPTS” PROVISION TO BE CONSTRUED HERE WAS MISINTERPRETED BY THE COURTS BELOW ON A PRE- DISCOVERY MOTION TO DISMISS TO DEFEAT THE PARTIES’ INTENTIONS AND PERMIT THE MUSIC PUBLISHER TO GET AWAY WITH A KNOWN SCAM AND A SUBSTANTIAL INJUSTICE BY DOUBLE-DIPPING IN ROYALTY STREAMS This, as described above, is a case in which, in the absence of any discovery, the courts below read the typical “net receipts” provision appearing in plaintiff’s Agreement with EMI — a “standard term” in older music publishing agreements [R.20, 601] — to permit EMI to effect a fundamental change in the most basic terms of the parties’ bargain by altering the agreed-upon 50/50 music publishing royalty split to 75/25 in EMI’s favor by hiring and paying itself, through its own wholly-owned foreign affiliates, to perform the task of foreign royalty collection, and then funneling a non-market rate 50% of such royalties to those affiliated subpublishers prior to splitting the 50% that remains between itself 34 and the artist.13 This allegation was clearly set forth in plaintiff’s Complaint. [R.70, ¶18] But although EMI could not deny and has, in fact, admitted that over time, it established its own wholly-owned operations in the significant foreign markets (including by buying up previously independent foreign subpublishers) [R.361, ¶24], it then used its affiliates to collect foreign royalties not at arms’- length market rates, but based on unilateral internal decisions on EMI’s part to render non-market rate revenue to itself through its own affiliates. The courts below dismissed the case without even permitting plaintiff discovery to substantiate allegations that are wholly consistent with music industry realities borne out by plaintiff’s own experience and described by numerous authoritative treatises and commentators. The outcome in the courts below, potentially affecting legions of artists in plaintiff’s position, should be reversed. It is (i) a plain breach of the parties’ contract and, (ii) at best for EMI, ambiguous and therefore not resolvable on this motion to dismiss; alternatively, as EMI itself has offered, it is (iii) a breach of the implied covenant of good faith and fair dealing implicit in every contract under New York law. In all events, it is (iv) an issue that should never have been resolved in EMI’s favor on a pre-discovery motion to dismiss where, as here, 13 As noted above and discussed in detail at subsection B. of the Argument below, there are federal cases from the Second Circuit that make clear, in highly analogous circumstances, that such arrangements should not be permitted. Although plaintiff cited such caselaw in its brief on appeal in the court below, the court simply failed to address that precedent. 35 EMI’s position relied upon contested factual assertions about what the market-rate for royalty collection was and is, which assertions are flatly contradicted by plaintiff’s allegations and authoritative music publishing literature. Finally, (v) the express “affiliates” language in the Agreement’s preamble renders EMI’s foreign affiliates parties to the Agreement, thereby establishing as a matter of law — even on this pre-discovery motion, and even if such a reading of the Agreement were not, in any event, favored by the context and purpose of the Agreement as a whole — that any royalty revenue such affiliates receive must be considered part of EMI’s royalty revenue and, therefore, part of the pool of royalties to be split 50/50 between EMI and plaintiff per the Agreement’s express payment terms. I. EMI’S HIRING AND PAYING ITS OWN WHOLLY-OWNED AFFILIATES TO ENGAGE IN FOREIGN ROYALTY COLLECTION IS A BREACH OF CONTRACT The Agreement’s language, entitling plaintiff to 50% of foreign publication royalty “net revenue actually received” by EMI [R.370] cannot be construed, on this pre-discovery motion to dismiss, to allow EMI to use its own wholly-owned affiliates in lieu of arms’-length foreign subpublishers and then proceed to pay those affiliates an above-market rate for foreign collection efforts, thereby increasing its own share of royalties at plaintiff’s expense by claiming that its “net revenue” is only what it gets after it first pays itself through those wholly- 36 owned affiliates. As discussed above and further below, the purpose of this kind of “net receipts” deal was to permit the publisher to avoid absorbing legitimate arms’- length costs of foreign royalty collection in a marketplace where it was understood that such collection was commonly undertaken by independent foreign subpublishers. In today’s marketplace, where EMI has bought up those previously independent foreign entities or created its own entities in foreign markets, it cannot deduct royalty revenue it takes out of the pool of foreign royalties and split with plaintiff only what is left after it pays itself (through those affiliates) what it chooses. And, certainly, it cannot, consistent with its contractual duty to collect royalties and remit them to plaintiff, pay its own affiliates a far-above-market rate for such collection efforts. It is clear that the original purpose and intent of the Agreement’s reference to “net revenue actually received” by EMI is utterly undermined by EMI’s current practices, which render the negotiated 50/50 deal meaningless. As such, EMI’s current practice is a breach of the parties’ contract. In any business agreement, few if any terms are more paramount than the term setting forth how the profits will be divided, and any unilateral attempt to alter the profit split would obviously fundamentally alter the bargain. If, for instance, in an agreement between a widget manufacturer and a widget distributor, net profits are to be split 50/50, and the manufacturer proceeds to buy up all the widget component suppliers, “sell” those components to itself at an inflated, non- 37 market price and then contend that such “costs” should not be included in the profits that are to be divided 50/50 per the agreement, it would clearly be changing the fundamental terms of the bargain. The distributor would surely be up in arms, and one would be hard-pressed to imagine any court that would not agree. That hypothetical situation is indistinguishable for all relevant purposes from the present case. Thus, in order to prevail in this case, the music publisher would have had to convince the courts below, on this pre-discovery motion, of the following absurd proposition: given the premise that a court’s role in interpreting a contract is to give effect to the intention of the parties, if it can be ascertained on the face of the agreement, it was unambiguously and unequivocally the intention of musical artists such as plaintiff in agreeing (per a “net receipts” deal standard at the time of this Agreement [R.20]) to a 50% cut of the music publisher’s actual net receipts, to give the music publisher an absolute, unilateral right to decide, effectively, what percentage of earnings to remit to the artist — with the music publisher having an unfettered right to pay significantly less than 50% of actual net receipts by setting up subsidiary entities as intermediaries between itself and the source of the music publishing revenue, permitting those entities to collect and retain any percentage, even 99%, of music publishing revenue off the top (as the publisher would unilaterally decide), and then splitting whatever remains. If, for instance, the 38 music publisher had decided that its own foreign subsidiaries should skim not 50% but 90% of plaintiff’s foreign publishing royalties off the top, remitting the remaining 10% to the music publisher to split 50/50 between itself and plaintiff (with the result that the music publisher would receive 95% of foreign royalties and turn only 5% over to plaintiff), this would be okay under EMI’s argument and the decisions below, because the music publisher would, just as now, be claiming with a straight face that it is still splitting its net receipts 50/50.14 That this is nonsense is obvious enough — it was error for the courts below to hold, in effect, that the Agreement must, as a matter of law, be construed as unambiguously calling for that absurd result. No one would bargain for or agree to an arrangement of this sort, the Agreement does not permit it and what the music publisher has done in this case is, to say it colloquially, pulled a fast one and (to this point) gotten away with it. Plaintiff submits that the royalty payment regime intended at the time the Agreement was executed is not at all the one EMI has now created over a period of years. The music publisher has turned what was plainly meant as a way for it to subtract, from what was to be divided 50/50, its real, legitimate costs of collecting music publishing revenue in foreign markets, 14 As noted above and discussed at §III below, the music publisher had suggested on appeal to the Appellate Division that the implied covenant of good faith and fair dealing implicit in every contract under New York law would protect plaintiff and others in plaintiff’s position from a 90% rate the publisher could decide to charge for foreign royalty collection, but there is nothing in principle distinguishing that far-above-market hypothetical 90% rate and the far- above-market real 50% rate EMI already does charge for such service. Those protections EMI states would be there in other situations are applicable with equal force to protect plaintiff here. 39 i.e., what it would have had to pay independent foreign entities if it chose to use them (which range from about 15%-25% of receipts in a market deal [R.452]), into a brazen scheme to enrich itself at artists’ expense. Plaintiff suggests, in the first instance, that the “net receipts” provision at issue was obviously intended to allow the publisher to deduct legitimate foreign collection costs paid to independent foreign subpublishers, not to pay its own subsidiaries. But even if a court were to ignore the language of the parties’ Agreement and come to the conclusion on this pre-discovery motion to dismiss — as the Appellate Division did — that there is “no basis for plaintiff’s apparent premise that subpublishers owned by EMI Mills should render their services for free although independent subpublishers were presumably compensated for rendering identical services” [R.603] — such a court would still have to grapple with the glaring fact noted above, viz., that independent subpublishers charge a market rate of 15%-25% for their efforts, while the publisher’s own subsidiaries have seen fit to increase this to a non-market 50% rate, thereby turning a 50/50 deal into one that is 75/25 in the publisher’s favor. Even if, as the Appellate Division reasoned, there were no basis to “read into the royalty payment terms any distinction between affiliated and unaffiliated foreign subpublishers” [R.601], surely this would imply that the music publisher cannot have its foreign subsidiaries charging more than double the market rate for their collection services. 40 Despite the fact that plaintiff repeatedly made reference to this fact in his brief on appeal, see Pl.’s App. Div. Br. at 2, 4, 8, 14 & 22, the Appellate Division simply ignored the problem and the issue entirely. Moreover, while the trial court suggested that reading the Agreement the way plaintiff proposes would turn a “net receipts” deal into an “at source” deal, that is simply not correct. “Net receipts” means, just as the Agreement says, that the publisher has to give plaintiff 50% of its “net revenue actually received.” [R.16 (emphasis added)] If its own subsidiary entities are getting that revenue, then it is actually receiving that revenue. If, on the other hand, revenue is being paid to independent entities as true arms’-length costs of royalty collection in foreign markets, i.e., as was originally contemplated in the “net receipts” arrangement, then the publisher is actually receiving only what remains. An “at source” deal, by way of contrast, would require the publisher to give the artist half of the grand total of earned music publishing revenue, with all costs of collection having to be absorbed by the publisher. No court has ever squarely faced this issue and held that a net receipts arrangement permits the music publisher to double-dip in the royalty stream through its own foreign subsidiaries. In fact, as detailed below, to the extent courts have contended with similar issues, they have arrived at results that clearly support the exact opposite conclusion and support plaintiff’s argument here. (For reasons 41 not apparent, the Appellate Division ignored this authority and does not so much as discuss it in its decision.) All told, there is simply no way that this issue involving the proper interpretation of a critical royalty payment provision in a “net receipts” deal that scores of musical artists have in place in their contracts could be resolved on a motion to dismiss, especially when the publisher here has urged upon the courts below a reading of the Agreement that would condone a deceptive, unscrupulous practice and a result no one would have expected at the time such an agreement was signed. This Court should, for reasons further detailed below, reverse the unsupported and substantially unjust conclusion reached by the courts below and allow this case to proceed to discovery. A. Authoritative Commentators Have Recognized, Described and Condemned the Unscrupulous Double-Dipping Practice in Which this Music Publisher Is Engaged. While the publisher has suggested its double-dipping through foreign subsidiaries is a standard practice, authoritative commentators such as Passman have, as noted above, described that very practice as a “scam,” and other commentators have taken a similar view, characterizing the practice as an “unscrupulous” one. Their recognition of and concern about this shady practice necessarily imply this is an issue of public importance potentially affecting many parties beyond those at bar. 42 The relevant passage from Donald S. Passman’s All You Need to Know About the Music Business (7th ed. 2009)15 states: “If your subpublishing deal isn’t directly with the publisher in a particular territory (for example, you make a deal with a major U.S. publisher for all of Europe), one of the most important points to have in your subpublishing agreement is a requirement that all monies be computed ‘at source.’ This means the percentage remitted to you must be based on the earnings in the country where earned, which is the source. So if you have an 85/15 deal at source in Germany, and $1 is earned there, you get 85¢. If you don’t require this, you’ll pay 15% to the local subpublisher in Germany, then another percentage to your U.S. publisher. “An extreme example of why your deal would be ‘at source’ is this scam, which has been around for many years. A subpublisher in the United Kingdom makes a 75/25 deal with a U.S. publisher for all the territories of Europe. The subpublisher in Germany (owned by the U.K. publisher) collects a dollar, keeps 50¢ as its collection fee, then pays 50¢ to the U.K. publisher. The 50¢ received in the United Kingdom is then split between the U.S. publisher and the U.K. publisher…. It doesn’t take a genius to see that the $1 earned at source (in this case, Germany, where the actual earnings were generated) gets dwindled radically before it finds its way into your pocket. And the 75% deal you thought you had becomes 35.5% (you only got 37.5¢ out of the $1 earned in Germany). “This scam is no longer played in the shadows, but right up front. If you don’t say the deal is ‘at source,’ the publisher will take both the local share and its share.” [R.454-55 (emphasis in original)] This excerpt makes several points that are noteworthy. First, just as Passman described, the scam used to be “played in the shadows” but now happens “right up front,” which is entirely consistent with plaintiff’s claim that the music 15 Ironically, the FAQ on EMI’s own website recommends Mr. Passman’s treatise as one of two authoritative treatises in the music publishing area. It is listed in answer to the query, “What books can I read that specialize in music publishing and the music business?” [R.424] 43 publisher’s royalty statements, until recently, concealed the practice, while now the music publisher hopes to prevail by having its duplicitous dealings grandfathered in as if “net receipts” deals simply always openly worked this way, as if this, in other words, is exactly what plaintiff and other musical artists in plaintiff’s situation bargained for. Second, as noted above, the excerpt makes perfectly clear that the practice at issue is nothing less than “a scam” meant to trick artists and deprive them of the earnings they thought they were getting in the “deal [they] thought [they] had.” Id. There is absolutely no reason for New York courts to give their imprimatur to such a practice. While the “at source” language in newer agreements was meant to add a layer of protection to prevent music publishers like EMI from playing the kinds of games this case entails, regardless of whether a deal is “net receipts” or “at source,” double-dipping in an artist’s royalties through the use of wholly-owned subsidiaries in foreign markets — which came to be established by and wholly- owned by EMI only long after the Agreement was executed — is inconsistent with the clear intention behind the deal. Another respected treatise, Kohn on Music Licensing (4th ed. 2009), offers this description of the same issue: “Nearly all modern subpublishing agreements will contain a provision making certain that publishing income be computed ‘at the source.’ The provision may look like this: ‘(j) Notwithstanding anything to the contrary herein contained, all royalties or other monies payable to Owner hereunder are to be 44 computed at the source from which the payments giving rise to such royalties or other monies are originally made, less only the actual commissions or collection fees (if any) retained by the performing rights society or agency and the mechanical royalty collection society or agency in the Territory.’ Such a provision is intended to prevent the unscrupulous practice of using multiple layers of subpublishing companies, owned or closely affiliated with the subpublisher, solely for the purpose of reducing the original publisher’s royalties from international publishing revenue …. Though this practice of layering subpublishing deals to reduce royalties remitted to the original publishers is no longer common, including the ‘at source’ provision in a subpublishing agreement with a major U.S. publisher (i.e., acting as a worldwide subpublisher) will assure that intercompany agreements between the U.S. publisher and its international subsidiaries and affiliates may not be used to reduce the royalties of the original publisher. This is not to suggest that major U.S. companies engage in this practice, but intercompany agreements among subsidiaries and affiliated companies of a multinational firm are often modified for international tax reasons, and that at source provision will assure that such changes will not adversely affect the original publisher.” Id. at 341-42 (emphasis added). This, again, makes clear that, while an “at source” provision is intended to protect the artist from a publisher double-dipping through foreign subsidiaries, that practice, even with a “net receipts” provision in place, was never intended or permitted in the first instance. The “unscrupulous practice” and deceptive “scam” to which reference is made is the perversion by EMI and other music publishers of the “net receipts” provision to be used as a cover, false though it may be, for double-dipping. In fact, that provision as written long ago contemplated then- prevailing arms’-length market deals with independent foreign subpublishers. As such, the decisions of the courts below would read the standard “net receipts” 45 provision in plaintiff’s agreement to permit a known scam to go forward unabated, thereby effecting a substantial injustice in addition to defeating the plain intention of the parties’ agreement to create a 50/50 royalty split, as further described at subsection C. below. B. Caselaw Supports the Conclusion that Permitting Double-Dipping in Royalty Streams Was Never the Intention of “Net Receipts” Deals and Should Not Be Tolerated. This same proposition advanced by these treatises has been given ample support by caselaw, including the Second Circuit’s decisions in Croce v. Kurnit, 737 F.2d 229 (2nd Cir. 1984), and Nolan v. Sam Fox Publishing Co., 499 F.2d 1394 (2nd Cir. 1974), neither of which were so much as mentioned by the Appellate Division, despite being prominently discussed in plaintiff’s brief on appeal. See Pl.’s App. Div. Br. at 26-28. Croce involved a “net receipts” provision in which the singer/songwriter Jim Croce had a “50% of the net sums actually received”-deal with publisher Blendingwell. 737 F.2d at 231. Later, Blendingwell entered into an agreement with ABC Records, Inc. to give ABC a license to manufacture, distribute and sell Croce’s recordings, with ABC retaining some portion of the royalties and remitting the rest to Blendingwell. See id. at 232. At some point thereafter, Blendingwell, after permitting ABC to take its 25% share as payment for its services, began to remit to Croce only 50% of the total remaining after ABC’s share was deducted, thereby giving Croce only 50% of the 75% 46 Blendingwell would receive. See id. The Second Circuit, considering these facts, affirmed the ruling of the court below that the “net receipts” provision entitled Croce to 50% of the total net receipts and that Blendingwell could not remit to Croce only 50% of what remained after ABC first took 25% off the top: “The [district] court ruled that the term ‘net sums actually received by Blendingwell’ must be construed to include also sums that Blendingwell constructively received. Implicit in this ruling was the view that the contract term was not umabiguously limited to amounts ‘physically received,’ or received in cash. We see no error in that view. No publisher wishes to pay royalties on items it sells but for which it is unable to collect payment. The phrase ‘sums actually received’ thus could easily have been intended to mean ‘sums realized,’ thereby relieving the publisher of any obligation to pay royalties on amounts that were owing but uncollected. Since a seller need not physically receive a cash payment in order to collect compensation for items sold, the court was justified in concluding that the phrase ‘net sums actually received’ was not clearly limited, as Blendingwell contended, to sums physically received or received in cash.” Id. at 234-35. The court went on, citing Nolan, to reject decisively the same proposition the music publisher has advanced in this case: “Nor do we view Blendingwell’s present construction of its agreement to pay half of its share of royalties to [ABC] as significantly different in effect from the construction unsuccessfully advanced with respect to a similar provision by the publisher in Nolan v. Sam Fox Publishing Co., 499 F.2d 1394 (2d Cir. 1974), aff’g 300 F. Supp. 1311 (S.D.N.Y. 1969). In Nolan, the publisher (‘Fox’) had agreed to pay Nolan 1/3 ‘of all royalties received by the “Publisher”‘ for Nolan’s song ‘Tumbling Tumbleweeds.’ The publisher assigned its interests in the song to Williamson Music, Inc. (’Williamson’), in return for Williamson’s agreement to pay the publisher royalties in amounts varying between one-half and two-thirds of Williamson’s gross receipts. 300 F. Supp. at 1314. Nolan sought an accounting of sums received by both the publisher and Williamson, and his claim was upheld in the district court 47 and on appeal. We noted that ‘under the interpretation of the contract suggested by Fox, the continual dilution of earnings payable to Nolan could be achieved through successive assignments,’ 499 F.2d at 1399, and we considered it unlikely that the parties had intended to make the composer vulnerable to such a dilution. Id. Similarly, under Blendingwell’s interpretation of the Songwriting Agreement, Blendingwell could have instructed ABC to pay part of the gross royalties to any of Blendingwell’s creditors, or indeed to any other payee selected by Blendingwell, and claimed to owe Croce only 50% of the sums sent by ABC to Blendingwell in cash. We do not believe such an intention could rationally be imputed to the parties.” Id. at 236 (emphasis added); see also Nolan, 499 F.2d at 1396, 1399. Plaintiff submits these holdings explode and vitiate the basic rationale of EMI’s position in this case. Croce and Nolan clearly establish what is, in any event, common sense: the “net receipts” language was never intended to be used, and cannot be allowed to be used, the way the music publisher here and others like it would use it. As the Croce court emphasized, no rational party would ever agree to a deal whereby the counterparty could take an indeterminate percentage off the top through its subsidiary before paying the negotiated 50% — now, far less than 50% — to the artist. The music publisher’s construction of the clause would make the negotiated 50% deal meaningless and leave the artist entirely at the music publisher’s mercy. Both Croce and Nolan, moreover, involved publishing entities dealing, ostensibly, at arms’ length with one another, so that the practice of funneling money through foreign subsidiaries that is raised in the present litigation would present an even more glaring case where the “net receipts” language is 48 being subverted for the transparent purpose of increasing the publisher’s royalties and decreasing the royalties of the artist. C. Well-Established Canons of Contractual Interpretation Favor Plaintiff’s Position. The interpretation of the “net receipts” language favored by the music publisher and adopted by the court below entails, as described above, giving music publishers complete and unilateral discretion over the actual percentage of royalties they might choose to remit to artists, thereby utterly frustrating the core purpose of their deals, which specified a precise percentage — 50% — that presumably reflected the respective bargaining power of the parties and the terms of the deal they reached. It is ironic in this light that the Appellate Division prominently stated in its decision that “[a] court’s ‘role in interpreting a contract is to ascertain the intention of the parties at the time they entered into the contract.’” [R.603] As described above, the interpretation of the music publisher and the Appellate Division would allow the music publisher simply to increase the non- market payment it makes to its own foreign subsidiaries to any percentage whatsoever, thereby turning the negotiated 50% deal into a 25% deal (which is the reality plaintiff and many other artists in his position have been subjected to), or to an even lower percentage. Indeed, music publishers in the future, emboldened by the decision of the Appellate Division, may decide to enrich themselves still 49 further at artists’ expense in that way. This would render the negotiated contractual percentage still more meaningless. Unsurprisingly, well-established and sound principles of contract interpretation disfavoring absurd readings of contracts that are not in accord with the parties’ intentions — principles simply ignored by the Appellate Division despite its statement of its need to ascertain the intention of the parties in interpreting a contract — militate strongly against such a result. It is axiomatic that “where a particular interpretation [of an agreement] would lead to an absurd result, the courts can reject such a construction in favor of one which would better accord with the reasonable expectations of the parties.” Reape v. New York News, Inc., 122 A.D.2d 29, 30, 504 N.Y.S.2d 469, 470 (2d Dep’t 1986). This Court has expanded upon this uncontroversial legal principle: “‘[I]n searching for the probable intent of the parties, lest form swallow substance, our goal must be to accord the words of the contract their “fair and reasonable meaning.” Put another way, “the aim is a practical interpretation of the expressions of the parties to the end that there be a realization of [their] reasonable expectations.”’ Concordantly, as previously indicated, not merely literal language, but whatever may be reasonably implied therefrom must be taken into account.” Sutton v. East River Sav. Bank, 55 N.Y.2d 550, 555, 435 N.E.2d 1075, 1078 (1982) (quoting Corbin Contracts, §1 and 4 Williston, Contracts [3d ed.], §600, pp. 284– 285; other internal citations omitted); see also Tougher Heating & Plumbing Co. v. 50 State, 73 A.D.2d 732, 733-34, 423 N.Y.S.2d 289, 291 (3d Dep’t 1979) (“Where, as here, a literal construction defeats and contravenes the purpose of the agreement, it should not be so construed. Due consideration must be given to the purposes of the parties in making the contract, and a fair and reasonable interpretation consistent with that purpose must guide the courts in enforcing the agreement” (internal citation omitted)); River View Assocs. v. Sheraton Corp. of Am., 33 A.D.2d 187, 190, 306 N.Y.S.2d 153, 156 (1st Dep’t 1969) (“parties to an agreement are presumed to act sensibly in regard to it and an interpretation that produces an absurdly harsh result is to be avoided”). Plaintiff could, of course, cite pages of cases making essentially this same point. And, in this particular context, it cannot be gainsaid that an interpretation of the Agreement that allows music publishers to reduce the negotiated royalty percentage at their sole discretion would work an absurdity and completely frustrate the most basic purpose of the contract. That interpretation should be rejected. The key contractual language (“fifty (50%) percent of the net revenue actually received by the Second Party”) should clearly be construed to include such net revenue “actually received” by the music publisher in any form, whether through the particular subsidiary with which plaintiff contracted (i.e., “EMI Mills”) or through its other subsidiaries, which is, in this case, a distinction without a difference. And the agreed-upon 50% number must actually mean 51 something, which would not be the case if the music publisher could, at its sole discretion, alter the real royalty split by diverting some substantial amount of the royalty revenue to its own affiliates. Thus, at the very least, the contractual language cannot be construed to permit the publisher to have those affiliates skimming an above-market rate off the top for their collection efforts while permitting the publisher to claim that it is still sticking to the “net receipts” deal by splitting what little remains 50/50. II. AT BEST FOR EMI, THE AGREEMENT’S LANGUAGE IS AMBIGUOUS AND CANNOT BE RESOLVED IN ITS FAVOR ON A MOTION TO DISMISS The plain language of the Agreement does not allow the decision made below as a matter of law. It does not unambiguously mean what the courts below held it does. As discussed at §I above, plaintiff argues no one entering into the Agreement in 1961 — at a time when foreign subpublishers were understood to be independent entities with which the domestic publisher had arms’-length royalty collection agreements in place — contemplated or intended that EMI would later construe the “net receipts” language to permit it to hire and pay itself rather than such independent entities, and that an interpretation giving EMI such unfettered 52 discretion to control how much revenue it remits to plaintiff is purely absurd and utterly defeats the negotiated 50% deal. But, even without looking to that analysis, just based on the contract’s language, the decisions below must be reversed, because, at best for the music publisher here, there is an ambiguity in the Agreement as to whether the 50% of “net revenue actually received” language in the Agreement was intended to permit EMI (i) to pay itself whether directly or, as here, through its own wholly-owned subsidiaries; and (ii) if it is allowed to pay itself at all, whether it may do so at above-market rates. Any such ambiguity clearly cannot be resolved in EMI’s favor on this pre-discovery motion to dismiss, and it was error for the courts below to do so. Where a contract “does not contain an unequivocal expression of intent,” but rather, where terms are “ambiguous, unclear or conflicting” and the “intended meaning and operation of the contract cannot reasonably be derived from the ‘four corners of the writing,’ courts allow the ‘introduction and examination of extrinsic evidence of intent as an aid in interpretation.’” Granite Partners, L.P. v. Bear, Stearns & Co. Inc., 17 F. Supp. 2d 275, 304 (Bankr. S.D.N.Y. 1998). In such circumstances, “[c]onsideration of extrinsic evidence of the parties’ intent is properly left to a later time, with the benefit of a fully- 53 developed factual record.” Id.16 It is obvious, as discussed further at §IV below, that such consideration of extrinsic evidence cannot occur at this pre-discovery- motion-to-dismiss stage of this case. III. EMI’S NON-MARKET-RATE DEALS WITH ITS OWN WHOLLY-OWNED AFFILIATES, DILUTING PLAINTIFF’S NEGOTIATED 50% SHARE OF ROYALTIES WHILE INCREASING ITS OWN, VIOLATES THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING It was error for the courts below to dismiss because the question of whether EMI’s conduct breaches the implied covenant of good faith and fair dealing in the contract could not be resolved without discovery (and, in all likelihood) a trial. EMI has essentially conceded this point. As noted above, in responding to plaintiff’s argument in the Appellate Division on the slippery slope inherent in EMI’s construction of the Agreement — viz., that if a court were to accept EMI’s view that the Agreement permits it to decide to pay its wholly-owned affiliates a non-market 50% of royalties off the top for foreign collection, nothing would stop EMI from further increasing that percentage to 75% or 90%, thereby diluting plaintiff’s agreed-upon 50% share still further (to virtually nothing) — 16 In this connection, the Passman treatise’s express statement, quoted at Argument §I.A above, that the scam perpetrated by music publishers such as EMI deprived artists of the earnings they thought they were getting in the “deal [they] thought [they] had” [R.455] is relevant to any factual determination of intent. 54 EMI itself stated that plaintiff would be protected from this further dilution through the covenant of good faith and fair dealing implicit in every contract under New York law. See EMI App. Div. Br. at 48-49 (stating that “[w]ith respect to Ellington’s contention that there is nothing to stop the supposedly diabolical EMI Mills from further increasing the foreign subpublisher fee to 75% or even 90% …, Ellington would have a readily available remedy were EMI to do such a thing” and then explaining that this remedy would be “asserting breach of the covenant of good faith and fair dealing, which is implicit in every contract under New York law,” citing 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 153 (2002); Sorensen v. Bridge Capital Corp., 52 A.D.3d 265, 267 (1st Dep’t 2008); Skillgames, LLC v. Brody, 1 A.D.3d 247, 252 (1st Dep’t 2003)). This concession on EMI’s part should have been and should be fatal to EMI’s motion to dismiss. Given plaintiff’s undisputed allegation (supported by treatises), as above, that the current market rate for foreign subpublishing is 15%- 25%, there is no principled difference whatsoever between EMI’s hypothetical decision to have its own affiliates’ charge a subpublishing fee of a far-above- market 75% or 90% and EMI’s real decision to have its own affiliates’ charge a subpublishing fee of a far-above-market 50%. Thus, by EMI’s own concession, its conduct, at an absolute minimum, is a breach of contract through a breach of the implied covenant of good faith and fair dealing, so that plaintiff’s claims cannot be 55 dismissed on EMI’s pre-discovery motion.17 See, e.g., Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., 487 F.3d 89, 98 (2d Cir. 2007) (“‘In determining whether a party has breached the obligation or covenant of good faith and fair dealing, a court must examine not only the express language of the parties' contract, but also any course of performance or course of dealing that may exist between the parties.’ ‘Thus, whether particular conduct violates or is consistent with the duty of good faith and fair dealing necessarily depends upon the facts of the particular case, and is ordinarily a question of fact to be determined by the jury or other finder of fact’” (internal citations omitted)). Again, if a widget manufacturer and distributor contracted to split profits from widget sales evenly and the manufacturer then proceeded to buy up the suppliers of widget components, “sell” those components to itself at an inflated price and then claim that what it pays the component suppliers are legitimate costs to be deducted from the profits to be split, this — if not an outright breach of contract — would, at the very least, be a violation of the implied covenant of good 17 Although plaintiff’s Complaint in this case did not separately assert an implied covenant claim because, as plaintiff believes, EMI’s conduct is a clear and plain breach of contract (with the covenant of good faith and fair dealing being implicit in every contract under New York law), it is beyond dispute that, in ruling upon a pre-discovery motion to dismiss, the court’s function is to “determine only whether the facts as alleged fit within any cognizable legal theory,” with “the criterion [being] whether the proponent of the pleading has a cause of action, not whether he has stated one.” Leon v. Martinez, 84 N.Y.2d 83, 87-88, 614 N.Y.S.2d 972 (1994). At the very least, EMI’s admission makes manifest that the conceded breach of the implied covenant could be asserted as an alternative to a breach of contract claim in this or an amended pleading. 56 faith and fair dealing. That situation is, for all practical purposes, indistinguishable from what EMI has done in this case, which clearly “ha[s] the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” Dalton v. Educational Testing Serv., 87 N.Y.2d 384, 389, 663 N.E.2d 291 (1995) (holding, in addition, that the implied covenant of good faith and fair dealing includes “any promises which a reasonable person in the position of the promise would be justified in understanding were included”). IV. EMI’S MOTION SHOULD NOT HAVE BEEN GRANTED IN THE ABSENCE OF DISCOVERY The dismissal was error for the further reason plaintiff is entitled to discovery as to parol evidence bearing upon the Agreement’s construction if it is deemed ambiguous and upon issues of true arms’-length market rates that are relevant to plaintiff’s breach of contract/breach of the implied covenant of good faith claim. In ruling upon the music publisher’s motion to dismiss made under CPLR 3211(a)(1) and (a)(7), it was incumbent upon the courts below to assume “the truth of the complaint’s material allegations and whatever can be reasonably inferred therefrom.” Ackerman v. 305 East 40th Owners Corp., 189 A.D.2d 665, 666, 592 N.Y.S.2d 365, 366 (1st Dep’t 1993). The motion should have been denied 57 if “from [the pleading’s] four corners factual allegations are discerned which taken together manifest any cause of action cognizable at law,” id. (citation omitted), and plaintiff was entitled to “the benefit of every favorable inference.” Goshen v. Mutual Life Ins. Co. of New York, 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 865 (2002). A motion to dismiss under CPLR 3211(a)(1) “may be appropriately granted only where the documentary evidence utterly refutes plaintiff’s factual allegations, conclusively establishing a defense as a matter of law.” Id. at 326, 746 N.Y.S.2d at 865. Significantly, further illustrating the need for discovery, EMI, in arguing its motion to the courts below, EMI relied heavily upon a denial of plaintiff’s plainly stated allegation — in paragraph 18 of the Complaint — that EMI had altered the payment arrangement from a 50/50 split to 75/25 in its favor. [R.70, ¶18] EMI, in its brief filed in the Appellate Division, for instance, repeatedly made disingenuous and evasively phrased assertions to the effect that “there is no reason to doubt that [paying foreign subpublishers 50% of royalties] is precisely how Mills Music, Inc. accounted and paid since 1961,” see EMI App. Div. Br. at 17, n.10 (emphasis added; see also id. at 2, 4-5, 7, 15-17, 48). In fact, EMI quite flagrantly asserts in the very first paragraph of the Preliminary Statement of its Appellate Division brief that “[t]he actual Record establishes that EMI Mills has not altered, one iota, the manner in which Ellington (and his father 58 and grandfather before him) were accounted to and paid since 1961.” Id. at 7. This assertion, of course, is, again, flatly contradicted by Complaint, ¶18, the truth of which must be assumed for purposes of this pre-discovery motion: “Instead of paying plaintiff and his siblings their full 50% share of earned foreign publishing royalties, EMI diluted that share by having its own foreign affiliates in multiple countries retain 50% of ‘revenue actually received,’ while paying plaintiff and his siblings their 50% only on the 50% remaining, so that EMI and its affiliates, all under common ownership, in reality pocketed 75% of what was actually received, remitting only 25%, rather than 50% to plaintiff.” [R.70, ¶18]18 But instead of crediting the allegations of plaintiff’s Complaint rather than EMI’s self-serving version of the facts on this pre-discovery motion to dismiss, the Appellate Division simply ignored the Complaint’s actual allegations, and based its dismissal of the Complaint on crediting EMI’s assertion while holding, erroneously, that “the complaint contains no allegation of any change in 18 Although the fact that EMI’s assertion contradicts what is alleged in the Complaint should be sufficient in itself to deny EMI’s motion to dismiss, which depends upon that assertion, this Court should, in all events, be assured that plaintiff’s claim that EMI has changed the manner in which it accounts to him is not fantasy but reality, based not only upon an actual diminution in the amount of royalties he receives but also, as described above, on the clear assertion in authoritative treatises that the arms’-length market rate of foreign subpublishing is 15%-25%, not anywhere near the 50% EMI now has its own affiliates charge for those services. [R.452] In addition, it should be noted that EMI’s statement that it has always given its foreign subpublishers 50% of royalties off the top is supported by nothing other EMI’s own employee’s affidavit, which, in turn, cherry-picks a few samples of older agreements between Mills and foreign subpublishers and concludes, on the basis of this very small sample, that paying subpublishers 50% was what Mills did from the very beginning “in most instances.” [R.119, ¶19; emphasis added] Obviously, that evasive and hedged assertion is one that will need to be tested in discovery, not one that can possibly be credited on this motion to dismiss. 59 the basis for payment of royalties, i.e., 50% of the net revenue derived from foreign publication.” [R.603] Indeed, the fact that EMI changed the way it accounts to plaintiff for foreign royalties was always and is the very essence of plaintiff’s case. This core holding on which the Appellate Division’s entire decision hinges is, thus, plainly wrong. Furthermore, as noted above, it is clear that discovery would shed significant light upon such relevant questions as what the parties to the 1961 Agreement intended in negotiating the 50% of “net revenue actually received” language (especially in light of foreign subpublishing practices in existence at that time), the true arms’-length market rates for Mills and in the market as a whole, and, as per §V. below, what the term “affiliates” in the Agreement’s preamble might have meant in the context of the negotiated arrangement. These are questions that cannot be resolved in EMI’s favor without such discovery. As such, it was and would be clear error to dismiss this action without giving plaintiff the opportunity to explore his allegations in discovery. Plaintiff’s claims, which would affect scores of musical artists with “net receipts” provisions in place, should, as such, never have been dismissed on this pre-discovery motion. 60 V. THE “AFFILIATES” LANGUAGE IN THE AGREEMENT’S PREAMBLE PRESENTS YET ANOTHER BASIS ON WHICH THIS ACTION SHOULD BE PERMITTED TO GO FORWARD Even if it were not otherwise clear that EMI’s interpretation of the Agreement’s language cannot be credited because it would result in giving EMI unfettered discretion to reduce by howsoever much it wishes plaintiff’s negotiated 50% share of foreign royalties, thereby rendering that negotiated 50% number meaningless, there is yet another, express reason that EMI’s interpretation of the agreement has to be wrong: the Agreement begins, on its very first page, by stating that the deal is between plaintiff and “Mills Music, Inc. and any other affiliate of Mills Music, Inc.” [R.367 (emphasis added)]19 This means that if any such foreign affiliate receives royalty revenue, the Agreement establishes definitively that this is exactly the same as EMI itself receiving that revenue, so that if EMI uses its own affiliates to engage in royalty collection (as opposed to independent subpublishers), it must account to plaintiff for 50% of all the revenue 19 To be clear, this argument concerning the “affiliates” language is an additional argument in the alternative; it is not, as EMI has at times suggested, essential to the success of plaintiff’s case on this appeal. In fact, even in the absence of this argument, it would still be the case, as explained in detail above, that reading plaintiff’s contractual entitlement to 50% of “net revenue actually received” in foreign royalties to permit EMI to syphon whatever percentage it wishes off the top to pay its own entities and then pay itself a second time when it splits the remaining balance 50/50 with plaintiff would impermissibly render the negotiated 50% number meaningless. 61 it or its affiliates get, not just the portion it decides to have its affiliates remit to the domestic EMI entity. EMI’s response in the courts below to this simple point has been that, on this pre-discovery motion, these courts should decide that “affiliates” has to mean only those affiliates existing back in 1961, when the Agreement was executed, even though such an interpretation is entirely unsupported by the Agreement’s language (i.e., if the Agreement had intended to circumscribe the meaning of the term “affiliates” narrowly in that fashion, the text could have easily said “affiliates currently in existence” or words to that effect). EMI cites for its untenable suggestion two wholly inapposite cases, VKK Corp. v. National Football League, 244 F.3d 114 (2d Cir. 2001), and Budget Rent A Car Sys. v. K&T, Inc., Civ. A. No. 2:05-CV-3655, 2008 WL 4416453 (D. N.J. Sept. 23, 2008). VKK Corp. had considered the meaning of the term “affiliates” in the context of a release, which, in marked contrast to a forward-looking music publishing contract, is a document that aims to address conduct that has already taken place; permitting “affiliates” to refer to future affiliates in that context would have turned the release into an open-ended disclaimer of future antitrust liability, id. at 130, whereas in this case reading the “affiliates” language as forward-looking would simply serve to further the general purposes of the Agreement in permitting Mills or whatever EMI entities or affiliates should take its place to collect royalties (and remit to 62 plaintiff his appropriate share). Moreover, VKK Corp. was a summary judgment decision, so that the court was, unlike here, ruling upon the issue after discovery. Id. at 118. The Budget Rent A Car Sys. case cited by EMI is even further afield, as there was simply no indication in that case (which, again, is a summary judgment decision) that the definition of the party in the agreement at issue included language about affiliates, whether present or future affiliates, at all. See id. at *4. Thus, there is no actual authority in EMI’s favor on this issue. On the other hand, plaintiff can cite real authority in its favor. Multiple courts have held that whether or not the word “affiliate” should be limited to then-existing entities is a question of fact to be resolved by a finder of fact and certainly not to be definitely ruled upon on a motion to dismiss, without anything other than the bare text of an agreement to inform the court’s view. See, e.g., Bd. of Regents of University of Nebraska v. BASF Corp., No. 4:04CV3356, 2007 WL 3342406 (D. Neb. Nov. 6, 2007) (“The evidence presented by the parties … creates a genuine issue of fact as to whether the parties intended “[a]ffiliated companies” to encompass current, future, or current and future affiliates of Sandoz Agro. Under such circumstances, summary judgment is not appropriate” (emphasis in original; footnote omitted)); GTE Wireless, Inc. v. Cellexis Int’l, Inc., 341 F.3d 1 (1st Cir. 2003) (fact issue existed as to whether settlement agreement reached entities that became affiliates of plaintiff after execution of agreement); GTE 63 Mobilnet Svc. Corp. v. Cellexis Intern., Inc., No. Civ.A01-10793-RWZ, 2004 WL 848172, at *1 (D. Mass. Apr. 20, 2004) (noting that question of whether parties intended term “affiliates” to mean entities that were such at time agreement was executed or whether term included future affiliates was question for fact-finder, and that jury resolved that question in favor of the interpretation that inclusion of future affiliates was intended). One of the factors noted by the First Circuit in GTE Wireless in finding the term “affiliates” ambiguous was that the composition of entities in the industry in question was constantly changing, see id., 341 F.3d at 6 (finding fact issue as to whether the term affiliates in a release refers to future affiliates where “[t]he imprecise contract language defining GTE in Paragraph 1.3 is reasonably susceptible to GTE’s interpretation that the parties intended the Settlement Agreement to cover future affiliates. A perusal of the recitation of facts in this case supports the assertion that the composition of companies in this industry is constantly changing”); as discovery will inevitably show, and as this Court may itself conclude from this record and the information in the public domain, this is, likewise, the case in the music industry. Indeed, even Mills, plaintiff’s original counterparty, no longer exists as such and is, rather, itself now part of EMI. Taking EMI’s argument that the definition of the publisher necessarily refers only to presently existing entities, the Agreement — which specifically says it is with “Mills Music, Inc.,” and mentions predecessors in interest but not successors — would be abrogated, since EMI 64 bought Mills and transformed that entity into a new EMI affiliate denominated EMI Mills in 1990. [R.113, ¶14] In reality, of course, just as Mills could be succeeded by EMI, so its then-existing affiliates could be succeeded by EMI’s current affiliates. Thus, EMI’s position does not withstand scrutiny. The definition of the publisher in the Agreement’s preamble to include EMI’s affiliates is, therefore, yet another basis for reinstating plaintiff’s claims. There is, in any event, every reason to conclude that this is, at best for EMI, a fact issue not amenable to any simple resolution at the pleadings stage of this case. Conclusion For the foregoing reasons, this Court should reverse the decisions of the courts below that completely failed to honor the intentions of the parties to the contract at issue by interpreting a common contractual provision in music publishing agreements to permit a massive wealth transfer from musical artists to music publishers. Dated: November 13, 2013 SCAROLA MALONE & ZUBATOV LLP By _______________________________ Richard J.J. Scarola Alexander Zubatov Attorneys for Plaintiff-Appellant 1700 Broadway 41st Floor New York, NY 10019 Tel.: (212) 757-0007