The opinion of the court was delivered by: Denise Cote, District Judge
Plaintiffs Amy Axelrod ("Axelrod"), an author of children's books, and Amy Axelrod, Inc. ("AAI"), the educational literature company of which Axelrod is president and principal shareholder, bring the instant action against Simon & Schuster, Inc. ("S&S") for breach of contract, breach of covenant of good faith and fair dealing, fraud, copyright infringement, contributory or vicarious copyright infringement, and mischaracterizing special sales. Plaintiffs are citizens of New York and signatories, parties in interest, and/or third party beneficiaries to six publishing contracts with S&S, a New York corporation, and its predecessor in interest for the publication of a series of books that teach children mathematics and feature whimsical pig characters (the "Pigs Series").*fn1 Defendant has moved to dismiss the plaintiffs' amended complaint pursuant to Rule 12(b)(6), Fed. R. Civ. P., for failure to state claims of copyright infringement, contributory infringement or vicarious liability, and fraud. It moves to dismiss plaintiffs' remaining state law claims pursuant to Rule 12(b)(1), Fed. R. Civ. P., for lack of subject matter jurisdiction. Plaintiffs have cross-moved for leave to file a second amended complaint adding a claim for breach of fiduciary duty. For the reasons explained below, the defendant's motion is granted only with respect to plaintiffs' fraud claim. Plaintiff's motion to amend is denied.
The following facts are drawn from the amended complaint and the six publishing agreements, which are integral to the amended complaint. Plaintiffs are "recognized leaders in the field of integration of children's literature and mathematics." Axelrod has six publishing contracts with S&S pursuant to which the defendant has published in hardcover and paperback versions the eight Pigs Series' titles she has authored.*fn2 Each of these titles "are subject to federal copyright registrations in the name of Plaintiff Amy Axelrod." Despite the "continuing and demonstrable market demand" for the Pigs Series, recent years have witnessed a sharp decline in their sales and the accompanying royalties due to Axelrod.
Under the publishing agreements between Axelrod and S&S, the plaintiff granted the defendant the sole and exclusive right to print, publish, distribute and/or sell her work. Each of the agreements set forth a schedule for royalty payments to be made by S&S to Axelrod, and permit the defendant to sell the titles at "remainder" prices under specified circumstances. The first two publishing agreements provide that
[i]f at any time after two year(s) from publication of the Work, [S&S] has copies on hand which, in its judgment, cannot be sold through usual marketing channels, [S&S] may sell such copies at a "remainder price", that is, at a special discount of sixty percent (60%) or more from the retail list price. All copies sold at a remainder price shall be accounted for separately and not included in sales totals, and the royalty on each copy sold shall be five percent (5%) of the net amount received by [S&S] reduced by the manufacturing cost. [S&S] will not pay any royalties on copies sold at or below manufacturing cost. (Emphasis in original.)*fn3 The other four agreements provide that
[i]f, in the opinion of [S&S], any edition of the Work shall have ceased to have a remunerative sale, [S&S] shall be at liberty to dispose of all or part of the existing stock thereof and will pay to [Axelrod] a royalty of two and one-half percent (2.5%) of the amount received by [S&S], except that no royalty shall be payable on any copies sold at or below the cost of manufacture. In any event, copies sold at a discount of eighty-five percent (85%) or more from the suggested catalog retail price shall be deemed sales upon which no royalty shall be due. [S&S] shall make no remainder sale without first offering copies to [Axelrod] at the estimated remainder price. Inadvertent failure to offer such copies to [Axelrod] shall not be deemed a breach of this Agreement.
Plaintiffs claim that S&S discontinued carrying the Pig Series books and secretly sold paperback editions at remainder or otherwise deeply discounted prices to third parties who allegedly rebound them and sold them as hardcover editions (the "rogue rebinders"). These rebinders purportedly "acquire deeply discounted versions of the Titles and rebind them with specialized and altered hardcovers . . . ." The rogue rebinders remove S&S's logos off of the book covers and replace the original International Standard Book Numbers (ISBN) with new ISBN numbers specific to the illegitimate editions. While plaintiffs receive either a "heavily reduced 'special sale' softcover royalty or no royalty from Defendant's sale of a deeply discounted or remaindered softcover stock to the rogue rebinder," the rogue rebinders sell their versions of the titles at the full hardcover price.
According to plaintiffs, S&S failed to disclose that the titles were out of print, did not inform plaintiffs of its decision to discontinue the books, and prevented them from demanding a reversion of their rights or seeking a different publisher. They also contend that the defendant failed to disclose the disposition of thousands of copies of the titles that were sold as remaindered stock to rogue rebinders and off-price bookstores, and provided fraudulent and incorrect information to plaintiffs' auditor in the course of a 2005 audit of the defendant's books. According to plaintiffs, the defendant allegedly "engineered the demise of Plaintiffs' publishing career" by "surreptitiously" withdrawing Axelrod's books from the general market, using the rogue rebinders to meet market demand for hardcover copies. In the process, it generated cash for itself and avoided paying Axelrod the royalties owed to her.
Plaintiffs filed the complaint on March 1, 2006 in the Northern District of New York seeking damages and the reversion of all rights to books published pursuant to the publishing agreements with S&S. The defendant moved to dismiss on April 17 for lack of subject matter jurisdiction and/or improper venue, pursuant to Rules 12(b)(1) and 12(b)(3), Fed. R. Civ. P., and for discretionary transfer of the action to this Court pursuant to 28 U.S.C. § 1404(a). On February 1, 2007, the motion to dismiss was denied, the claims arising from the first two publishing agreements were transferred to this Court pursuant to 28 U.S.C. § 1406(a), and the remaining claims were transferred pursuant to Id. § 1404(a). Axelrod v. Simon & Schuster, Inc., No. 06 Civ. 266 (LEK/RFT) (N.D.N.Y. Feb. 1, 2007) (order denying motion to dismiss and transferring case). The action was transferred to this Court's docket on February 6.
Plaintiffs filed an amended complaint on April 4, alleging that S&S 1) breached the publishing agreements, 2) violated the covenant of good faith and fair dealing, 3) engaged in fraud, 4) infringed Axelrod's copyright by exceeding the terms of the publishing agreements, which are "licenses by which the Defendants [sic] have certain limited rights to exploit the Plaintiffs' copyrights," 5) contributed to the rogue rebinders' infringements of Axelrod's copyrights, and 6) mischaracterized special sales. The defendant moved to dismiss the amended complaint pursuant to Rules 12(b)(6) and 12(b)(1) on April 25. The plaintiffs opposed this motion and cross-moved to amend the complaint on June 1. Both motions were fully briefed on June 21.*fn4
S&S seeks dismissal of the plaintiffs' copyright infringement and fraud claims for failure to state a claim. It also moves to dismiss plaintiffs' remaining claims for breach of contract, breach of covenant of good faith and fair dealing, and mischaracterization of special sales for lack of subject matter jurisdiction on the ground that the parties are not diverse. The ...