holding that a distribution contract became “a bargain to commit an illegal act” where plaintiff did not and was not able to secure a valid license in the underlying recordingSummary of this case from Rock River Communications, Inc. v. Universal Music Group, Inc.
03 Civ. 3204 (MGC).
September 20, 2004
Cinque Cinque, P.C., New York, NY, By: Robert W. Cinque, James P. Cinque, Attorneys for Plaintiff 24/7 Records, Inc.
Manatt, Phelps Phillips, LLP, New York, NY, By: Steven M. Hayes, Gregory A. Clarick, Attorneys for Defendants Sony Music Entertainment, Inc. and Sheridan Square Entertainment, LLC d/b/a Artemis Records.
This diversity action arises out of the alleged breach of a record distribution contract between plaintiff 24/7 Records, Inc. ("24/7") and defendant Sheridan Square Entertainment, LLC d/b/a Artemis Records ("Artemis"). 24/7 has also asserted claims of tortious interference with contract and unfair competition against defendant Sony Music Entertainment, Inc. ("Sony"). Defendants have moved for summary judgment. Because plaintiff cannot show that it secured a license from the copyright owner to use the composition at issue, the motion is granted.
The following facts are undisputed, except where specifically noted. 24/7 entered into an exclusive distribution agreement with Artemis in June 2001, which made Artemis the sole distributor of all 24/7 recordings released throughout the United States. As permitted by the agreement, Artemis assigned some of its distribution responsibilities to RED Distribution, Inc. ("RED"). RED is a subsidiary of Sony. The agreement requires that 24/7 secure all necessary licenses prior to a recording's distribution.
This dispute is over the distribution of 24/7's CD single version of "The Ketchup Song." During the summer of 2002, a Spanish recording group named "Las Ketchup" recorded a song originally entitled "Aserejé" and later renamed "The Ketchup Song (Heh Hah)." The song was very popular outside of the United States where a Sony affiliate, Columbia Records, distributed it both on a full-length album and as a single. Columbia Records also released the song in the United States, but only as part of an album, not as a single.
Within just a few weeks of the original song's success, 24/7 recorded a "cover" version of the song. A "cover" is a recording of the underlying musical composition by a different artist. With Artemis' assistance, 24/7's single CD cover record, entitled "The Ketchup Song," sung by a musical group called "The Hines Girls," was ready for distribution by September 2002. The single's jacket features the title of the song and a red and green ketchup bottle, which is labeled with the words "Hines Girls" and "The Ketchup Song." Distribution of the single began sometime during the last week of October or first week of November 2002, but certainly by November 5, 2002.
On November 6, 2002, with the single in release for only a short time, several Sony executives called the CEO of Artemis, Danny Goldberg, and expressed displeasure over the release of 24/7's Ketchup Song single, which would compete with Sony's full-length CD version of the song. Goldberg spoke with Don Ienner, the then-president of Columbia Records, who made clear that he was unhappy about the 24/7 single and that he was hoping Artemis would withdraw it. Goldberg informed Ienner that he would see if there were a basis on which the single could be withdrawn. Similarly, Ienner spoke with Ken Antonelli of RED and stated that he did not understand why RED would be competing against Sony with a cover of a song which Sony already had in distribution. Although Artemis and Sony have no formal business relationship, 24/7's position is that Sony and RED dominate Artemis economically.
After these conversations, Goldberg instructed Artemis' chief financial officer Ken Walsh that there was an issue with the single and directed him to discuss the single with Artemis' legal officer Adrian White. White testified in her deposition that upon seeing the jacket for the first time, she became concerned that the ketchup bottle and writing might subject Artemis to a dispute with Heinz Ketchup. White testified that she decided to pull the single from the market because she feared that without a license from Heinz, the single's jacket would infringe Heinz's trademarks.
On November 7, 2002 White sent a letter to 24/7 which stated:
Let me first formally advise you that [Artemis] intends to immediately cease distributing the Single titled "The Ketchup Song" performed by your recording artist the "Hines Girls" . . . [Artemis] believes continued exploitation of this Single might infringe rights owned by the distributor of the original version of this song and might also lead to a trademark dispute with the owner of the Heinz Ketchup trademark. [Artemis] would prefer not to be embroiled in any controversy or dispute which may arise from either such third party and paragraph 2.02 of the Agreement allows Distributor to cease distributing a Record which it believes may infringe upon rights of a third party.
24/7 alleges that Artemis breached the distribution agreement by failing to distribute its records in good faith, failing to pay 24/7 royalties and wrongfully charging or overcharging 24/7 for certain items. 24/7 further alleges that Sony tortiously interfered with the distribution contract and engaged in unfair competition by causing Artemis to breach the contract.
Defendants initially moved for summary judgment on the grounds that: 1) the contract was unenforceable because the single's jacket, in fact, violated Heinz's trademark rights, which made its distribution illegal and 2) regardless of whether Heinz's rights were actually violated, Artemis made a good faith determination that they might have been and was within its own rights to cease distribution.
However, at oral argument, defendants highlighted a different position which was only cursorily mentioned in their original briefs. Defendants argue that 24/7's claims cannot survive summary judgment because 24/7 never secured a license to use the copyrighted Ketchup Song composition, which made the single's distribution unlawful. 24/7 disputes this and maintains that it properly obtained a compulsory license. The parties were given a chance to brief and submit evidence on the license issue.
A motion for summary judgment shall be granted if the court "determines that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56. See also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A genuine issue of material fact exists when the evidence is such that a reasonable finder of fact could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, 477 U.S. 242, 250 (1986); Richardson v. Coughlin, 763 F. Supp. 1228, 1234 (S.D.N.Y. 1991). In deciding whether a genuine issue exists, the court must "examine the evidence in the light most favorable to the party opposing the motion, and resolve ambiguities and draw reasonable inferences against the moving party." In re Chateaugay Corp., 10 F.3d 944, 957 (2d Cir. 1993). But "Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which the party will bear the burden of proof at trial." Celotex, 477 U.S. at 322.
I. Breach of Contract: Claim Against Artemis
To recover on a breach of contract claim under New York law, a plaintiff must establish the following four elements: (1) the existence of an enforceable contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages. Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 525 (2d Cir. 1994) (citing Bank Itec NV v. J. Henry Schroder Bank Trust Co., 612 F. Supp. 134, 137-38 (S.D.N.Y. 1985)). At trial, 24/7 will have to present evidence of every element of its breach of contract claim. In order to show that it fulfilled its obligations under the contract, 24/7 must prove that it secured a license to use the copyrighted composition.
Generally, a copyright owner has the exclusive right to reproduce the copyrighted work. 17 U.S.C. § 106. "Absent a license from the copyright owner, which the owner is free to grant or deny, reproduction of the work by another constitutes copyright infringement." Cherry River Music Co. v. Simitar Entm't, Inc., 38 F. Supp. 2d 310, 311 (S.D.N.Y. 1999). However, the Copyright Act provides that one who wishes to record a copyrighted nondramatic musical work can do so without the copyright owner's consent if it files a notice of intent to use the work and pays a statutory royalty. 17 U.S.C. § 115. But, in order to receive this compulsory license, the applicant must comply with strict time limits. Id.; Cherry River, 38 F. Supp. 2d at 312. The Act provides that:
[a]ny person who wishes to obtain a compulsory license under this section shall, before or within thirty days after making, and before distributing any phonorecords of the work, serve notice of intention to do so on the copyright owner. If the registration or other public records of the Copyright Office do not identify the copyright owner and include an address at which notice can be served, it shall be sufficient to file the notice of intention in the Copyright Office. 17 U.S.C. § 115(b)(1).
If these instructions are not followed, the consequences are severe. "Failure to serve or file the notice required by clause (1) forecloses the possibility of a compulsory license and, in the absence of a negotiated license, renders the making and distribution of phonorecords actionable as acts of infringement . . ." Id. § 115(b)(2). "In other words, the failure to serve the notice of intention before distributing phonorecords, a term that includes compact disks, . . . before the start of distribution precludes the creation of a compulsory license, and it does so both as to copies distributed prior to service and as to copies distributed thereafter." Cherry River, 38 F. Supp. 2d at 312.
The distribution agreement explicitly states:
[24/7] solely shall be responsible for, and shall pay all costs in connection with, each of the following:
. . .
The securing, in writing, of all necessary licenses, consents and permissions required for the distribution of Records hereunder, including, without limitation, from recording artists, producers, other performers, music publishers, unions and guilds, and other Persons rendering services or granting rights in connection with the Recordings and the Records. § 4.01(b).
More specifically, the contract contains the following condition:
[24/7] [has], or prior to release hereunder shall have, and shall at all times thereafter continue to have in effect a valid and enforceable grant of rights or license . . . with respect to each Recording, each musical composition and all other copyrightable materials embodied in or on the Records (including, without limitation, mechanical licenses for all musical compositions and licenses for so-called "samples"). § 10.01 (e).
"Compulsory licenses for the use of musical compositions are often referred to as `mechanical licenses' because 17 U.S.C. § 115 allows the act of `mechanically' recording a song on fixed media." The Rogers and Hammerstein Org. v. UMG Records, Inc., No. 00 Civ. 9322, 2001 WL 1135811, *1 n. 2 (S.D.N.Y. Sept. 26, 2001).
It is undisputed that 24/7 did not have a negotiated license to use "The Ketchup Song" composition and that it was 24/7's obligation to secure a compulsory license prior to distribution. According to the statute, in order to obtain a compulsory license, the notice of intention was required to be filed before November 5, 2002, the date of distribution. Because 24/7 did not find a copyright owner's name in the public records, it filed its notice of intention in the Copyright Office. 17 U.S.C. § 115(b)(1). The date of filing is "the date when a proper [n]otice and fee are both received in the Copyright Office." 37 C.F.R. § 201.18(e)(1) (2003). The notice of intention 24/7 submitted was received by the Copyright Office on November 14th. Because 24/7 did not file its notice of intention until nine days after distribution began, it is foreclosed from obtaining a compulsory license.
Nevertheless, 24/7 argues that the filing of its notice of intention was timely. 24/7 incorrectly surmises from a circular published by the Copyright Office that the timing rules for notices of intention served on the Copyright Office are different from those filed on the copyright owner. 24/7 argues that, according to its reading of the circular, only a notice of intention served on an owner found in the public records must be served "before or within thirty days of making" the record, but that there are no such time restrictions for notices served on the Copyright Office. In fact, as the statute clearly states, the notices are governed by the same time limits, whether filed on the owner or in the Copyright Office. 17 U.S.C. § 115(b)(1) ("The notice shall comply, in form, content, and manner of service, with requirements that the Register of Copyrights shall prescribe by regulation."). More importantly however, the thirty-day provision is not at issue. 24/7 is precluded from obtaining a compulsory license because it did not serve a notice of intention "before distributing any phonorecords." 17 U.S.C. § 115(b)(1) (emphasis added).
24/7's additional arguments are without merit. First, Artemis was not required to give 24/7 time to cure the license defect before ceasing distribution, because any such attempt to cure would have been futile. 24/7 was precluded from obtaining a compulsory license as of November 5th. As for a negotiated license, 24/7 discovered that a Sony affiliate named Sony/ATV Publishing LLC ("Sony/ATV"), "administered or published" the copyright to the song. On November 14th and again on November 26th, after distribution had begun and had ceased, 24/7 requested a negotiated license from Sony/ATV. However, one was not granted. 24/7 asserted at oral argument that this Sony-related entity should be estopped from denying it a negotiated license. However, 24/7 provides no explanation of why Sony/ATV, which is not a party to the distribution agreement and whose affiliate is distributing a competing version of the song, should be required to grant such a license. Therefore, there is no genuine issue of disputed fact with respect to 24/7's inability to cure.
Second, despite its argument to the contrary, 24/7 did not obtain a compulsory license by sending a copy of the untimely notice it filed in the Copyright Office to Sony/ATV. Sony/ATV received this on November 8, 2002. Six months after Artemis cancelled the distribution contract and approximately three weeks before 24/7 filed suit, 24/7 sent Sony/ATV what it asserts is a $251.60 royalty payment under a purported compulsory license. 24/7 makes much of Sony/ATV's deposit of the payment, but the significance of this is not apparent. The issue is whether 24/7 can show that it fulfilled the license condition such that Artemis was obligated to distribute the single in November of 2002. An April 2003 payment to Sony/ATV cannot revive an untimely and ineffective notice of intention served on the Copyright Office the previous November.
"[A] contracting party's failure to fulfill a condition excuses performance by the other party whose performance is so conditioned . . ." See, e.g., Merritt Hill Vineyards, Inc. v. Windy Heights Vineyard, Inc., 460 N.E.2d 1077, 1081-82 (N.Y. 1984). Because 24/7 did not secure a license and was foreclosed from curing that failure, Artemis' obligation to distribute the record was excused.
Artemis did initially distribute the record although 24/7 did not have a copyright license. A condition precedent in favor of one party may be waived by that party. See, e.g., Walter E. Heller Co., Inc. v. American Flyers Airline Corp., 459 F.2d 896, 901 (2d Cir. 1972); 13 Williston on Contracts § 39:14 (4th ed. 1997); Restatement (Second) of Contracts § 84 (1981). However, the Copyright Act makes clear that the distribution of "The Ketchup Song" single without a license necessarily infringed the rights of the owner of the copyright in the composition. 17 U.S.C. § 115(b)(2). Because 24/7's incurable failure to secure a license made distribution of the recording illegal, the condition cannot be waived. Although the contract as written was not unenforceable on grounds of illegality, once a license could no longer be obtained, in essence, the contract became a bargain to commit an illegal act. It is well settled that a court will not enforce a contract to commit an unlawful act. Anabas Exp. Ltd. v. Alper Indus. Inc., 603 F. Supp. 1275, 1276 (S.D.N.Y. 1985) (holding that a contract to distribute items bearing the likeness of an individual without the individual's permission, in violation of a New York statute, was unenforceable on grounds of illegality); 7 Williston on Contracts § 16:14 (4th ed. 1997) ("In general, a bargain which contemplates a wrong to a third person . . . is illegal."); Nichols v. Ruggles, 3 Day 145, 1808 WL 94 (Conn. 1808) (holding that a bargain to print a book in violation of another's copyright is illegal).
Regardless of whether Artemis was otherwise motivated to cease distribution, 24/7 cannot prove that it performed its obligation to secure a license under the agreement, which is an essential element of its breach of contract claim.
II. Tortious Interference with Contract and Unfair Competition: Claims Against Sony
"An action for tortious interference with contractual relations requires `proof of the existence of a valid contract between plaintiff and a third party; the defendant's knowledge of that contract; the defendant's intentional procurement of a breach of that contract by the third party without justification; an actual breach of the contract and damages caused by the breach.'"Miller v. Quik Park Columbia Garage Corp., No. 93 Civ. 4730, 1995 WL 238951, *5 (S.D.N.Y. April 25, 1995) (quoting Gianelli v. St. Vincent's Hospital and Medical Ctr., 553 N.Y.S.2d 677, 681 (N.Y.App.Div. 1990)). 24/7 has alleged that Sony tortiously interfered with the distribution contract by causing Artemis to breach the contract. However, because 24/7 cannot prove an actual breach of the contract, Sony is entitled to summary judgment on the tortious interference claim against it.
24/7 also alleges that Sony engaged in unfair competition by contacting Artemis about its single. To state a claim for unfair competition, a party must allege: "1) acts or omissions by defendants that proximately caused a misappropriation; and 2) the property or benefit misappropriated." Volvo N. Am. Corp. v. Men's Int'l Prof'l Tennis Council, 857 F.2d 55, 75 (2d Cir. 1988). "An unfair competition claim cannot rest merely upon an allegation that another's actions were unfair or that those actions caused injury; there must be some property or benefit misappropriated." Minn. Mining and Mfg. Co. v. Graham-Field, Inc., No. 96 Civ. 3839, 1997 WL 166497, * 6 (S.D.N.Y. April 9, 1997) (citing Saratoga Vichy Spring Co., Inc. v. Lehman, 625 F.2d 1037, 1044 (2d Cir. 1980)). 24/7 has not shown what property or benefit Sony misappropriated. Moreover, "[t]hough New York courts have broadly applied the tort of unfair competition, the Second Circuit has warned that the `amorphous cause of action is capable of mischievous application.'" Michele Pommier Models, Inc. v. Men Women N.Y. Model Mgmt., Inc., 14 F. Supp. 2d 331, 337-38 (S.D.N.Y. 1998) (quoting H.L. Hayden Co. of N.Y., Inc. v. Siemens Medical Sys., Inc., 879 F.2d 1005, 1025 (2d Cir. 1989)). One mischievous application is to assert a claim of unfair competition in order to "resuscitate a failed tortious interference claim." Michele Pommier, 14 F. Supp. 2d at 338 (noting that "it would be improper to supplant the doctrine of tortious interference with contract by further extension of the tort of unfair competition").
For the foregoing reasons, defendants' motion for summary judgment is granted. Plaintiff's motion for sanctions is denied.