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Record Club of America, Inc. v. United Artists Records

decided: November 20, 1989.

RECORD CLUB OF AMERICA, INCORPORATED, PLAINTIFF-APPELLEE, CROSS-APPELLANT,
v.
UNITED ARTISTS RECORDS, INCORPORATED, DEFENDANT-APPELLANT, CROSS-APPELLEE



Appeal from a judgment of the United States District Court for the Southern District of New York, William C. Conner, Judge, awarding plaintiff $3,518,865.36, including interest, as a result of defendant's anticipatory repudiation of an October 1, 1970 license agreement. See 643 F. Supp. 925 (S.D.N.Y. 1986); 696 F. Supp. 940 (S.D.N.Y. 1988); 701 F. Supp. 71 (S.D.N.Y. 1988); 80 B.R. 271 (S.D.N.Y. 1987).

Feinberg and Kearse, Circuit Judges, and John R. Bartels, District Judge.*fn*

Author: Kearse

KEARSE, Circuit Judge

Defendant United Artists Records, Inc. ("United" or "UAR"), appeals from a judgment entered in the United States District Court for the Southern District of New York pursuant to Fed.R.Civ.P. 54(b), after bench trials on liability and damages before William C. Conner, Judge, awarding plaintiff Record Club of America, Inc. ("Record Club"), $3,518,865.36, including interest and net of certain setoffs, for losses resulting from United's anticipatory repudiation of an agreement in which United licensed Record Club to sell recordings made by United or its subsidiaries. On appeal, United challenges, inter alia, the district court's calculation of damages and a number of its interlocutory decisions, including its rulings (1) that Record Club had not materially breached the licensing agreement by failing to make certain royalty payments, (2) that Record Club had adequately exercised its option to renew that agreement, and (3) that the question of whether Record Club would have been willing and able to perform the agreement in the absence of repudiation by United was immaterial. Finding merit in United's challenges to the interlocutory rulings, we vacate the judgment and remand for further proceedings.

I. BACKGROUND

The following facts do not appear to be in dispute. To the extent pertinent here, United was a corporation engaged in, inter alia, the manufacture, licensing, and sale of recordings. It operated in part through two wholly-owned subsidiaries, All Disc Records, Inc. ("All Disc"), and Liberty/UA Tape Duplicating, Inc. ("Liberty").

Record Club was engaged in the business of selling recordings through the mail. Operating as a club, Record Club acquired members through advertising and direct mail solicitation. A Record Club member, upon payment of a one-time membership fee, was entitled to receive a number of "bonus" records and gained the right to purchase additional records at discounted prices.

In October 1970, as part of the settlement of an antitrust suit brought by Record Club against United and other record companies, Record Club and United entered into the licensing agreement ("Agreement") that is at issue in the present litigation. Record Club entered into agreements with All Disc and Liberty to supply it with the necessary products.

A. The Licensing Agreement

The Agreement granted Record Club a nonexclusive license to advertise, manufacture, and distribute by mail United-licensed recordings in the form of phonograph records, tape cassettes, and eight-track cartridges (collectively "albums"). The Agreement allowed Record Club to distribute a quantity of United albums as bonuses or on any other free basis (collectively the "frees") without paying United a royalty on them.

Record Club guaranteed United certain minimum levels of royalties over the life of the Agreement, agreeing to royalty rates for each United album sold and for each "excess" free album distributed by Record Club. Excess frees were defined as the number of United albums given, rather than sold, to prospective Record Club members in excess of one half of the total number of United units distributed, whether given away or sold:

Record Club shall have the right to distribute on a bonus or free basis without payment of royalty hereunder one-half of all Licensed Albums distributed hereunder during the term hereof. All Licensed Albums which may be distributed on a bonus or free basis in excess of such amount shall be treated as "sold" for purposes of this agreement.

The Agreement required Record Club to maintain accurate records as to sales and free albums distributed and to provide United with a royalty statement within 45 days after the end of each calendar quarter:

Record Club shall maintain accurate records with respect to all Licensed Albums distributed hereunder and, within 45 days after the end of each calendar quarter, it shall furnish to Licensor a complete and accurate royalty statement with respect to such calendar quarter and shall simultaneously pay to Licensor any amount due hereunder with respect to such quarter.

These royalty statements were to set forth, with respect to each licensed United album, the list price, the royalties earned, the total number sold, and the total number otherwise distributed. The Agreement gave United the right to audit Record Club's books.

The Agreement became effective on October 1, 1970, and was to expire on September 30, 1973. Record Club was given two options to renew, each for an additional two-year period. In order to exercise a renewal option, Record Club was required to notify United in writing at least 90 days prior to the expiration of the then-current term.

B. The Controversy over Nonpayment for Excess Frees and the Purported Exercise of the Renewal Option

In the fall of 1971, United conducted an audit of Record Club's records for the period ending June 30, 1971, the close of Record Club's fiscal year. In May 1972, United wrote Record Club asserting that Record Club had breached the Agreement by failing to maintain accurate records as to inventory and distribution of records and by failing to pay royalties due on the excess frees it had distributed.

Thereafter, representatives of the two companies met and discussed their differences. United maintained that the Agreement had been breached by Record Club's failure to pay royalties on excess frees on a quarterly basis. Record Club contended that the Agreement did not require payment of royalties on excess frees until the end of the initial term of the Agreement. United suggested a renegotiation of the terms of the original Agreement. Though there followed discussions and correspondence with respect to such a renegotiation, no new agreement was reached.

In the ensuing correspondence, United reiterated its position that the original Agreement was ended on account of Record Club's breaches and stated that unless the matter were resolved, United would cease to provide production materials to Record Club. Record Club soon began removing mention of United recordings from its mail order guides and ceased its national advertising of United albums. It continued, however, to place orders with United, and United continued to fill most of them. As a result of the inventory accumulated from United's continued filling of its orders, Record Club resumed offering United products in its mail order guides and continued these promotions through the end of 1973 -- a year after the commencement of the present litigation.

In the meantime, in mid-August 1973, about six weeks prior to the expiration of the Agreement's initial term, United informed Record Club that Record Club had not given notice of exercise of its option to renew the Agreement. The Agreement permitted exercise of this renewal option at least 90 days before expiration of the initial term of the Agreement, i.e., by July 2, 1973. Record Club's vice president and general counsel George Port telephoned United's general counsel Mark Levinson to request that United accept Record Club's late exercise of its option. When Levinson refused, Port telephoned United's president Michael Stewart to request that he "reconsider on [Levinson's] position." Stewart refused. On or about September 7, 1973, Record Club sent United a letter stating Record Club's intention to exercise its option to renew the Agreement. United responded that " the purported notice contained in [the September 7] letter under reply is clearly invalid and of no effect."

C. The Decisions Below

Record Club commenced the present action in the district court in December 1972, seeking, inter alia, injunctive relief preventing United from refusing to provide Record Club with the materials necessary to manufacture albums, and a declaratory judgment that the Agreement remained in full force and effect and that Record Club was not required to pay royalties on excess frees prior to the expiration of the initial term of the Agreement. At about the same time, United filed an action in state court in California seeking, inter alia, a declaration that Record Club had breached the Agreement by failing to maintain complete and accurate books and by failing to pay royalties on excess frees on a quarterly basis. Eventually, the California action was transferred to the Southern District of New York and the two actions were consolidated.

The litigation proceeded in several stages, including early partial summary judgments, an eight-year hiatus while Record Club was in bankruptcy reorganization proceedings, and eventual bench ...


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