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POINT PRODUCTIONS v. SONY MUSIC ENTERTAINMENT

July 29, 2002

POINT PRODUCTIONS A.G., PLAINTIFF,
V.
SONY MUSIC ENTERTAINMENT, INC., DEFENDANT-COUNTERCLAIMANT, V. PHONOMATIC GROUP, A.G. AND WILHELM F. MITTRICH, ADDITIONAL DEFENDANTS ON THE COUNTERCLAIMS.



The opinion of the court was delivered by: Buchwald, District Judge.

  MEMORANDUM AND ORDER

Plaintiff Point Productions A.G. ("Point" or "plaintiff") has brought this action for breach of contract against defendant Sony Music Entertainment, Inc. ("Sony" or "defendant"), claiming that, on January 21, 1993, defendant wrongfully terminated a licensing agreement the parties entered into on August 28, 1991 (the "Agreement"), because Sony failed to give Point notice of and an opportunity to cure alleged breaches. In an Opinion and Order dated July 20, 2000, we granted plaintiffs motion for summary judgment on liability, ruling that Sony had improperly terminated the Agreement in January 1993. Point Prods. A.G. v. Sony Music Entertainment, 2000 WL 1006236 (S.D.N.Y. 2000). Discovery having been concluded, Sony has now moved in limine to limit evidence of plaintiffs damages at trial to the period before plaintiff declared bankruptcy on August 30, 1995, and to exclude the testimony of one of plaintiffs proposed damages experts, Graham Churchill. For the reasons discussed below, defendant's motion to limit evidence of the plaintiffs lost profits damages is granted, and therefore we need not reach defendant's motion to preclude.

BACKGROUND*fn1

The facts surrounding the formation and termination of the Agreement are set out in our Opinion and Order of July 20, 2000. More relevant to the present motions is that, after signing the Agreement with Sony in August 1991, the affiliated companies of the Phonomatic Group A.G., including Point, suffered a series of financial setbacks and that Point itself ultimately declared bankruptcy in 1995.

Point was part of the Phonomatic Group, which consisted of a series of intricately connected companies, from several countries, at all levels of the production and distribution chains of the music industry. Plaintiff was a Swiss company that obtained licenses, such as the one at issue in this case, to reproduce and sell music.*fn2 Its sister companies, which carried out similar functions within the Phonomatic Group, included a Dutch company, Point Productions B.V., an American company, Point Productions, Inc., and Point Classics ("Point affiliates").

Other Phonomatic companies handled the distribution and sales of the music licensed by the Point affiliates. Point Logistics was the "central warehousing and physical distribution company for the Phonomatic Group." Id. at 74:3-5. The Phonomatic Group also had its own sales affiliates. For example, plaintiffs predecessor, MCR, made 75% of its sales to Phonomatic affiliates, known as Sound Solutions. The other 25% of its sales were in countries where Phonomatic did not have a distribution company. Id. at 88:25-89:16.

The Phonomatic companies also shared common ownership. The multiple layers of ownership enabled the affiliated companies to set off profits and losses under Dutch law, reducing their tax liability. Id. at 84:6-16. For example, Point was 100% owned by Phonomatic Group A.G. Id. at 83:2-5. Point Productions B.V. was 100% owned by Laser Records B.V., which was 100% owned by Blazer Records, which, in turn, was 100% owned by Phonomatic. Id. at 83:6-15. Point Classics was 75% owned by Phonomatic. Id. at 81:10-14. Point Productions, Inc. was wholly owned by Phonomatic and its American subsidiary. Id. at 83:16-84:5. In sum, the Phonomatic Group consisted of closely-associated companies with overlapping ownership. The entire group was controlled by Wilhelm Mittrich, plaintiffs former general manager, who owned approximately 50-60% of the shares of Phonomatic in 1992. Mittrich Depo. at 82:20-22.

Point's financial troubles began in November 1992, when STEMRA terminated Sonortape's mechanical copyright license over disputed royalty payments. STEMRA applied this termination to all Phonomatic companies, including Merit, thus preventing Point from making any legal music reproductions. Sony relied on STEMRA's action to terminate the Agreement with Point, which obligated Point, under § 3.04, to maintain a valid mechanical copyright license. On October 14, 1994, Sonortape apparently won its appeal to the Dutch Supreme Court, which held that STEMRA wrongfully terminated the license, although the parties dispute the actual significance of that decision. See Point Prods., 2000 WL 1006236, at *2 n. 7. Regardless of the ultimate outcome, the initial termination required Point to obtain a new mechanical license in order to continue operations. Moreover, shortly after STEMRA's termination of the Sonortape license, in January 1993, Point was expelled from MIDEM, an annual music industry trade show attended by 8,000 to 10,000 participants from all over the world, amid allegations of copyright violations. According to Mittrich, the MIDEM trade show is very important for proper product marketing. Consequently, the MIDEM expulsion adversely affected Point's ability to market its products. Mittrich Depo. at 805:24-807:3.

Amidst Point's troubles with obtaining a copyright license and its MIDEM expulsion, many of Point's affiliates within the Phonomatic Group were in severe financial difficulties. Merit, the manufacturer for Point, entered bankruptcy in November 1993. As noted earlier, Merit was the most profitable company of the Phonomatic Group and generated working capital upon which its affiliates depended. Phonomatic itself, plaintiffs parent company, went bankrupt in December 1993. As of June 30, 1992, Phonomatic owed Point 6.5 million Swiss Francs.*fn3 Also in December 1993, Point Logistics, plaintiffs warehouse and distribution affiliate, went bankrupt, and its creditors seized "a couple of million CDs and tapes" that were held by Point Logistics for plaintiff. Mittrich Depo. at 75:7. As a result, plaintiff was unable to sell the inventory that had been in Point Logistics' warehouses. In early 1994, Phonomatic's bankruptcy resulted in Point's placement into receivership. Point ceased operations in October 1994. Mittrich Aff. ¶ 3. Finally, in August 1995, Point itself filed for bankruptcy in Switzerland.

In the Swiss bankruptcy court, Point's legal representative, Walter Studer, identified the collapse of the Phonomatic companies as having a "negative influence" on Point. Affidavit of Walter Studer ¶ 6. Indeed, this was the only reason listed on the bankruptcy report of the Swiss Court. Rossi Decl. Ex. C.

We granted plaintiffs motion for summary judgment on liability on the grounds that Sony's termination of the Agreement constituted a breach of contract because Sony failed to provide Point with notice and an opportunity to cure. Point Prods., 2000 WL 1006236, at *5. After that ruling, the parties completed discovery. On February 15, 2002, Sony filed two motions in limine: the first seeks to exclude any evidence of lost profit damages claimed for the period after plaintiff declared bankruptcy; the second seeks to preclude ...


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