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RECORD CLUB OF AMERICA, INC. v. UA RECORDS

September 8, 1986

RECORD CLUB OF AMERICA, INC., Plaintiff,
v.
UNITED ARTISTS RECORDS, INC., Defendant



The opinion of the court was delivered by: CONNER

OPINION AND ORDER

CONNER, D.J.:

Plaintiff Record Club of America, Inc. ("RCOA"), a mail-order record and tape club, brought this action against United Artists Record, Inc. ("UAR"), a record company with which RCOA had entered into a licensing agreement. In its original complaint, RCOA alleged that UAR had anticipatorily repudiated and actually breached their licensing agreement. RCOA subsequently amended its complaint to add a claim that UAR had tortiously induced one of UAR's subsidiaries to breach a related agreement with RCOA, and a claim that UAR had violated the antitrust laws.

 In late 1983, UAR moved for summary judgment on the tortious interference and antitrust claims. In an Opinion and Order dated June 17, 1985, I granted UAR's motion for summary judgment on the antitrust claim but denied its motion for summary judgment on the tortious interference claim. Record Club of Am., Inc. v. United Artists Records, Inc., 611 F. Supp. 211, 217 (S.D.N.Y. 1985).

 The liability issues in the case were tried before the Court sitting without a jury in December 1985; trial of the damage issues was deferred. The parties agreed to submit posttrial memoranda, which were filed in due course. The Court has not carefully reviewed these memoranda, together with the testimony and the documentary evidence received at trial, and this Opinion and Order incorporates the Court's findings of fact and conclusions of law as required by rule 52(a), Fed. R. Civ. P. For the reasons set forth below, RCOA is entitled to judgment in its favor on its anticipatory repudiation and breach of contract claims. RCOA's tortious interference claim is dismissed.

 Background

 RCOA was founded by Sigmund Friedman in 1957 while he was a freshman at Brown University. Tr. at 3. Originally called "College Record Club," it became "Record Club of America" when it was incorporated in 1961. Id. Until it filed for bankruptcy in late 1974, RCOA was one of the largest mail-order record clubs. RCOA acquired new members through extensive national advertising and direct mail solicitation. Tr. at 4-5. RCOA also encouraged existing members to sign up new members. Tr. at 5. In return for payment of a one-time, membership fee, a new member received a number of "free" or "bonus" records, and the right to purchase additional records at substantial discounts. Tr. at 3-7.

 Approximately monthly until 1973, and periodically thereafter, RCOA distributed to its members a catalogue called the "Disk and Tape Guide" containing up-to-date listings of record albums, cassette tapes, and eight-track cartridges that were available for purchase. Tr. at 44-45. In its catalogs and advertising, RCOA promised existing and prospective members that it would process and ship their orders on the same day those orders were received. Tr. at 18-19. As a result, it was critical to RCOA that it receive advertised product promptly from its suppliers. Tr. at 17-18.

 In the early 1970's RCOA filed two actions against UAR *fn1" and other record companies alleging that they had violated the antitrust laws. Tr. at 174; Record Club, 611 F. Supp. at 213. In voluntary settlement of RCOA's claims against UAR, the parties entered into three separate but interrelated contracts, all of which took effect on October 1, 1970. Id. Initial negotiations for the contracts took place at UAR's headquarters in California; the parties then exchanged successive drafts until they settled upon the final wording of the contracts. Tr. at 16. All three agreements were to be governed by New York law. Px. 1 [P]18; Px. 2 [P]14; Px. 3 [P]14. *fn2"

 The first contract was a license agreement pursuant to which UAR granted to RCOA a renewable nonexclusive license to advertise, manufacture, and distribute by mail-order UAR licensed recordings in the form of phonograph records, tape cassettes, and eight-track cartridges. Px. 1; Tr. at 13-16. The agreement provided for an initial term of three years and could be extended for two additional two-year option periods. Px. 1 [P]4(a), (b). RCOA was to notify UAR in writing 90 days prior to the expiration of the current term that it wished to extend the agreement for an additional two-year option period. Id. [P]4(b).

 The license agreement permitted RCOA to sell UAR licensed product to its existing members and to give away UAR licensed product on an "free" or "bonus" basis to prospective members. Px. 1 [P]3. RCOA was required to pay a royalty on all licensed albums sold under the agreement and on "excess frees" given away under the agreement. Id. Excess frees are those units given away in excess of fifty percent of the total number of units distributed, whether sold or given away. *fn3" In re Record Club of Am., Inc., 30 B.R. 418, 421 & n.3 (M.D. Pa. 1983). There was no limit on the number of UAR recordings that RCOA could distribute on a free or bonus basis. Px 1; see generally Tr. at 58-61. The average total cost to RCOA of acquiring UAR licensed recordings under the license agreement was $1.20 for each album that was sold and $0.80 for each album that was given away on a free or bonus basis. *fn4" Tr. at 10-13, 74-75. The total cost of acquiring the same UAR product from regular wholesale distributors ranged from $2.90 to $5.33 per album. Tr. at 47, 165.

 Pursuant to the license agreement, Rcoa was required to maintain accurate records with respect to its distribution of UAR licensed product and to furnish UAR a royalty statement on a quarterly basis. Px. 1 [P]6. Royalties on recordings that RCOA sold were due on a quarterly basis. Id. Royalties on excess frees were not due until the end of each term. *fn5" Id. [P]3(b).

 The agreement provided for guaranteed royalties of $150,000 for the initial three-year term, $120,000 for the first two-year option period, and $140,000 for the second two-year option period. Px. 1 [P]4(a), (b). The agreement also provided for quarterly minimum aggregate royalties. Id. The quarterly minimum aggregate royalties increased by $12,500 each calendar-year quarter of the initial three-year term, by $15,000 each calendar-year quarter of the first two-year option period, and by $17,500 each calendar-year quarter of the second two-year option period. Id. If, at the beginning of a calendar-year quarter, the aggregate amount of royalties paid during the current term of the agreement was less than the minimum aggregate guaranteed royalty for that quarter, RCOA was required to make an advance against the guaranteed royalty for the term sufficient to bring its aggregate royalty payments up to the minimum for the quarter. Id. [P]4(c), (d).

 Under the license agreement, UAR was required to provide RCOA with samples of new releases. Px. 1 [P]7(a). This provision was important to RCOA because records generally have a short life cycle and new releases sell better than older recordings. Tr. at 32. RCOA needed these samples in order to decide what UAR product to include in its national advertising and catalogues. Tr. at 32-33.

 The other two agreements were requirements contracts between RCOA and All Disc Records, Inc. ("All Disc") and Liberty/UA Tape Duplicating, Inc. ("Liberty Tape"), two wholly-owned subsidiaries of UAR. Px. 2, 3; Tr. at 14. Under the All Disc contract, RCOA agreed, with two exceptions, to purchase from All Disc all UAR licensed recordings that RCOA wished to distribute in the form of phonograph records. Px. 2 [P]1; Tr. at 14. RCOA was entitled to have another record pressing company manufacture those selections that All Disc was unable to deliver within fourteen business days from receipt of RCOA's order. Px. 1 [P]2; Rx. 2 [P]9(i). In addition, RCOA was entitled to manufacture UAR licensed records itself after the end of the first contract year if it opened its own record pressing plant. Px. 2 [P]9(ii). Under the Liberty Tape contract, RCOA agreed, with similar exceptions, to purchase from Liberty Tape all UAR licensed recordings that RCOA wished to distribute in the form of cassette tapes and eight-track cartridges. Px. 3 [PP]1, 9; Tr. at 14.

 The provisions permiting RCOA to have UAR licensed product manufactured elsewhere if All Disc or Liberty Tape did not fill its orders within fourteen days were the sine qua non of RCOA's entering into the requirements contracts. Tr. at 17. Unless it could count on prompt delivery, RCOA could not be reasonable certain that it would have advertised product in stock when it received orders from its members, and the quality of RCOA's fulfillment services would suffer. *fn6" Tr. at 17-20. In order for RCOA to do its won manufacturing pursuant to the various exceptions in the requirements contracts, UAR had to supply RCOA with so-called "master" sound recordings and other forms of intermediate product from which records could be pressed and tapes could be duplicated. Px. 1 [P]2; Tr. at [number missing].

 RCOA was first entitled to make use of UAR licensed product on November 2, 1970. PX. 1 [P]1(f). RCOA included 103 UAR licensed recordings in the issue of its Disk and Tape GUide mailed to members between November 7, 1970 and November 18, 1970. Px. 72. This amounted to approximately one-quarter of the catalogue. Tr. at 21.

 From the start, UAR's performance of its contractual obligations was less than satisfactory. At the height of the 1970 Christmas season, RCOA experienced significant delays in obtaining UAR product from All Disc. Tr. at 21. RCOA wrote a number of letters to UAR in an attempt to straighten out the delays. E.g., Px. 5, 6; Tr. at 21-23. RCOA explained that it could not wait more than 14 days for the albums it ordered, and notified UAR that it could not continue to advertise UAR product as it had been doing if it could not count on having UAR records in stock when it received orders from its members. Px. 5, 6. Sigmund Friedman ("Friedman"), RCOA's president, made requests in writing and by telephone for production materials so that RCOA could manufacture the selections All Disc had failed to ship within fourteen days. Px. 6; Tr. at 20-23. Michael Lipton ("Lipton"), a UAR vice-president, told Friedman that UAR was experiencing production problems, and that UAR would do everything possible to expedite RCOA's orders. Tr. at 23. However, Lipton indicated that UAR wanted to do the record pressing itself, and did not want to provide RCOA with the master tapes necessary for RCOA to press the overdue records elsewhere. Id. On December 14, 1970, Mark Levinson ("Levinson"), UAR's general counsel, wrote Friedman to confirm the substance of the telephone conversation with Lipton. Px. 7.

 The following year, RCOA again experienced server delays in obtaining UAR product from All Disc. RCOA employees made numerous requests for production materials for those selections All Disc had failed to ship within fourteen days. Tr. at 24. On October 2, 1971, Friedman wrote to Michael Stewart ("Stewart"), UAR's president, to complain about the service RCOA was receiving. Px. 9. Friedman noted that UAR's service had "disintegrated to the point where it [could] only be classified as appalling," and that UAR had been in "serious breach of [the license] agreement on a large number of occasions." Id. Friedman also requested production materials so that RCOA could have the delayed product manufactured elsewhere. Id. Friedman followed up his letter with a telephone call to Lipton. Tr. at 26-28. Friedman reminded Lipton that Lipton had promised that RCOA's orders would be expedited, but that RCOA was experiencing the same problems that it had had the previous year. Id. When Friedman complained that RCOA was getting the "run around" with regard to obtaining production materials, Lipton exclaimed that RCOA would never get master tapes to press records. TR. at 28. Friedman notified Lipton that the next time RCOA had a major problem getting timely deliveries of UAR product, RCOA would stop advertising UAR product. Tr. at 31.

 On October 11, 1971, Levinson again wrote to Friedman. Px. 10A. Levinson noted that Stewart had given Levinson a copy of Friedman's October 2 letter and thanked Friedman for bringing to UAR's attention the problems that RCOA was experiencing. Id. Levinson promised that UAR would rectify them. Id. However, in a second letter dated the same day, Levinson notified Friedman that UAR had retained Benjamin Spector ("Spector"), a certified public accountant, to conduct an audit of RCOA's books and records pursuant to paragraph 6 of the license agreement. Px. 10B; Tr. at 31-32.

 Sometime in late October or early November 1971, Spector and an associate conducted an audit of RCOA's books and records for the period ending June 30, 1971, the end of RCOA's 1971 fiscal year. Tr. at 321; Dx. 62. On January 17, 1972, Spector forwarded his report to UAR. Dx. 62. UAR did not make the report available to RCOA for some six months. Tr. at 38-39; Deposition of George Port at 14-18 [hereinafter cited as "Port Dep."].

 Peat, Marwick, Mitchell & Co. ("PMM") was RCOA's regular auditor. Tr. at 372. PMM had viewed RCOA's inventory as of June 30, 1971, and reviewed RCOA's books and records with respect to purchases and sales. PMM had certified RCOA's financial statements with a "clean opinion" for the fiscal year ending June 30, 1970. Tr. at 340-43, 370-83.

 In February 1972, RCOA opened its own tape duplicating facility. Tr. at 95. Accordingly, RCOA was no longer required to buy from Liberty Tape those UAR licensed recordings that RCOA wished to distribute in the form of cassette tapes or eight-track cartridges. Px. 3 [P]9(ii). RCOA was entitled to order interim master tapes from UAR and to manufacture UAR cassette tapes and eight-track cartridges itself. Id.; Px. 1 [P]2; Tr. at 95.

 Throughout the latter part of 1971 and the early part of 1972, UAR was not providing RCOA with samples of new releases as required by paragraph 7(a) of the license agreement. Tr. at 32-33. As a result, RCOA frequently had to purchase samples of new UAR releases in retail stores. Tr. at 33. In February 1972, RCOA wrote to UAR to complain that it was not receiving the samples. Tr. at 32. Some three months later, UAR responded to RCOA's complaint by promising to place RCOA on a disc jockey distribution list. Tr. at 35.

 On May 18, 1972, Levinson wrote to Friedman claiming that RCOA was in breach of the license agreement. Px. 21 at 1. Levinson noted that RCOA did not maintain its books and records in an accurate manner and that as a result it was impossible to verify the accuracy of the royalty reports RCOA had submitted to UAR. In particular, Levinson complained that RCOA did not maintain a so-called "perpetual" inventory system or any records of the distribution of free records. Levinson also observed that its auditor had discovered instances of "negative inventory figures" (i.e., increases in inventory without purchases), which Levinson considered an impossibility since RCOA's "stated policy [was] to accept no returns from [its] customers." Levinson charged that RCOA had not paid royalties on excess frees on a quarterly basis as it was required to under the license agreement and that as a result RCOA owed some $65,000 in royalties on excess frees for the period ending June 30, 1971. Id. at 2. Levinson also complained that RCOA was distributing too may UAR recordings on a free or bonus basis. Levinson asserted that the license agreement provided a fifty percent limit on RCOA's distribution of free records, and that RCOA was in fact distributing approximately seventy-three percent of UAR's product on a free basis. Levinson accused RCOA of using UAR product "as a ...


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