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24/7 Records, Inc. v. Sony Music Entertainment

July 17, 2008


The opinion of the court was delivered by: Cedarbaum, J.


24/7 Records, Inc. ("24/7"), a start-up record production company, sues Sheridan Square Entertainment, LLC, d/b/a Artemis Records ("Artemis") (now known as Sheridan Square Entertainment, Inc.), a record distributor, for breach of contract arising from Artemis's termination of a record distribution agreement and other miscellaneous breaches of that agreement. 24/7 also sues Sony Music Entertainment, Inc. ("Sony") (now known as Sony BMG Music Entertainment, Inc.) for tortious interference with contract and unfair competition arising from Sony's alleged role in procuring Artemis's breach of the distribution agreement.

Defendants move for summary judgment on all claims on the following grounds: 1) 24/7's administrative dissolution negates its standing to bring these claims and provides cause for Artemis's termination of the agreement, 2) 24/7 failed to provide Artemis with notice and an opportunity to cure the alleged termination, 3) 24/7 cannot prove compensatory or punitive damages for its claims, 4) 24/7 cannot maintain its claims against Sony for tortious interference with contract and unfair competition, and 5) various arguments regarding the miscellaneous breach of contract claims. For the following reasons, the motion is granted in part and denied in part.


Unless otherwise noted, the following facts are undisputed. 24/7 was incorporated under the laws of Florida in April of 2001 by Louis Pace. 24/7 and Artemis entered into a record distribution agreement on June 18, 2001, under which Artemis became the exclusive distributor of 24/7's records in the United States for an initial period of three years. The agreement contemplated that a Sony subsidiary, RED Distribution, Inc. ("RED"), would perform certain distribution tasks for Artemis.

The agreement provides that New York law governs its validity, interpretation, and legal effect.

On June 20, 2001, Pace formed 24/7 Records, LLC ("24/7 LLC" or "the LLC"). According to Pace's deposition testimony, the LLC was formed because, as compared to the corporate form, the LLC form "provided a better methodology for foreign investors to be involved." The foreign investor involved here was Egon Putzi, an Austrian national who invested substantial sums of money in 24/7 LLC. Robert W. Cinque, Esq., counsel for 24/7, confirmed at oral argument on March 19, 2008 that "the reason for the LLC was that[,] after they formed [24/7], they realized that Putzi is a non-U.S. citizen and that would destroy the subchapter S tax benefits." Pace further testified that once the LLC was formed, "the Inc. company was put aside and we did business as the LLC."

24/7 LLC conducted all of the business for the record label and filed tax returns. No tax returns were filed for 24/7, which was administratively dissolved on October 4, 2002 for failure to file an annual report. 24/7 was reinstated on March 6, 2008.

This dispute was sparked by 24/7's production of a CD single of a cover version of "The Ketchup Song (Heh Hah)." In the summer of 2002, a group named "Las Ketchup" recorded "Aserejé," later renamed "The Ketchup Song (Heh Hah)," which was popular outside of the United States. Columbia Records, a Sony affiliate, distributed the original song as a single and as part of a full-length album. 24/7's version of the Ketchup Song was performed by a group named "The Hines Girls," and the cover of the CD jacket featured a ketchup bottle with the words "Hines Girls" and "The Ketchup Song" on the bottle's label.

Shortly after 24/7 released its version of the Ketchup Song, Artemis pulled the record from distribution after receiving complaints from Sony officials. In a letter to 24/7 dated November 7, 2002 ("November 7 letter"), Artemis informed 24/7 that continued distribution of the Ketchup Song "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." The letter went on to state that, for other reasons, Artemis "agrees that it would be best to terminate this relationship immediately," and that Artemis will "be sending to retail outlets notice advising them that Artemis will not be distributing further product." As of November of 2002, 24/7 had eleven recordings in distribution, with three others in preparation for distribution, including the Ketchup Song.

The parties disagree as to how or when the distribution agreement was terminated. 24/7 argues that Artemis unilaterally terminated the agreement through the November 7 letter. Artemis argues that 24/7 abandoned its business as of November 7, and that 24/7's response letter dated November 14, 2002 failed to provide Artemis with notice and an opportunity to cure the alleged breach of the agreement. However, it is undisputed that as of November 7, 2002, 24/7 ceased doing business.

During its one and one-half years in business, 24/7 never made a profit. On its 2001 and 2002 tax returns, the LLC reported losses of $337,519 and $811,558, respectively. From June of 2001 to November of 2002, the LLC received capital contributions totaling approximately $1,230,000. 24/7 contends that the total amount invested in the venture was $1,826,250, which includes the capital contributions, money used for personal expenditures by Pace and Putzi, a letter of credit issued to Artemis by Putzi and Susan F. Jones, and other non-cash assets.

By the end of June of 2002, the LLC had only $19,384 in its account at Salomon Smith Barney, which was held in the name of "24/7 Records." Putzi testified at his deposition that, upon starting the business, he thought that he might have to invest up to $5,000,000 in the company. On July 19, 2002, Putzi made his last contribution to the LLC, $300,000. Following that investment, the LLC had $279,870 in its account at the end of July of 2002, $225,254 at the end of August, $75,090 at the end of September, $33,668 at the end of October, and roughly $12,500 on the eve of the alleged termination. By the end of November of 2002, the LLC had $1,432 in its account, and Artemis was holding an additional $95,106 of credit in reserve to cover future returns of 24/7's records.

The Ketchup Song claim was dismissed on summary judgment because 24/7 failed to obtain a copyright license from Sony before distributing the song, a condition for distribution contained in the agreement. 24/7 Records, Inc. v. Sony Music Entm't, Inc., 429 F.3d 39, 41-43 (2d Cir. 2005), aff'g in part No. 03-3204, 2004 U.S. Dist. LEXIS 18702, *10-16 (S.D.N.Y. 2004). While 24/7's breach of contract claim focused primarily on Artemis's decision not to distribute the Ketchup Song, it also included claims arising from the general termination of the agreement and other miscellaneous breaches of the agreement. 429 F.3d at 41, 43-46. The Second Circuit remanded those contract claims against Artemis, as well as 24/7's claims against Sony for tortious interference with contract and unfair competition, for further proceedings. Id. at 47-48. Defendants now move for summary judgment on those remaining claims.


Summary judgment should be granted "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law."

Fed. R. Civ. P. 56(c). A genuine issue of material fact exists when the evidence is "such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding whether a genuine issue of fact exists, the court must "construe the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable inferences against the movant." Dallas Aero., Inc. v. CIS Air Corp., 352 F.3d 775, 780 (2d Cir. 2003). Summary judgment is appropriate when "the nonmoving party [fails] to make a sufficient showing on an essential element of [its] case with respect to which [it] has the burden of proof." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).

I. Administrative Dissolution

Defendants argue that 24/7 was administratively dissolved as a Florida corporation on October 4, 2002, and that under Florida corporation law, it cannot maintain this suit. Even if it could maintain this suit, defendants argue that 24/7's dissolution is a proper cause for termination under the distribution agreement, which provides in ¶ 9.01(a) that "[i]n the event of ... (2) your dissolution ... Distributor shall have the right and option to terminate the Term hereof upon notice to you." 24/7 argues that New York corporation law should apply, that this action is part of 24/7's winding up of its affairs, and that 24/7 has been reinstated as a Florida corporation.

A corporation's capacity to sue or be sued is determined by the law under which it was organized. Fed. R. Civ. P. 17(b)(2). 24/7 is a Florida corporation, to which Florida law applies.

Since 24/7 was successfully reinstated, the standing argument is moot. "[A] corporation administratively dissolved for technical reasons may reinstate itself by filing a satisfactory current annual report." Allied Roofing Indus. v. Venegas, 862 So. 2d 6, 8 (Fla. 3d Dist. Ct. App. 2003). "When the reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred." Fla. Stat. § 607.1422(3) (2008).

The argument that 24/7's administrative dissolution was just cause for termination of the distribution agreement is meritless. Although 24/7 failed to respond directly to this argument in its opposition papers, Artemis never provided notice that it was terminating the agreement on that basis. Paragraph 9.01(a) requires that notice be given, and ¶ 14.03, the notice and cure provision, provides that

Neither party to this Agreement shall be deemed to be in breach of any of its obligations hereunder unless and until the other party shall have given such party specific written notice of such default and the alleged breaching party shall have failed to cure such default within thirty (30) days after receipt of such notice.

II. Notice and Opportunity to Cure

The parties disagree about how the distribution agreement was terminated. 24/7 argues that Artemis unilaterally terminated the agreement by the November 7 letter. Artemis contends that the letter did not terminate the agreement and that 24/7 simply ceased its business as of that date in response to the letter. Whether the November 7 letter unilaterally terminated the agreement is clearly disputed. However, defendants argue that 24/7 failed to provide Artemis with notice and opportunity to cure the alleged breach, and that this failure undermines 24/7's breach of contract claim. 24/7 contends that invoking the notice and cure provision would have been futile because Artemis unilaterally terminated the agreement on November 7.

Defendants cite a number of cases that stand for the proposition that the terms of a contract regarding termination must be complied with before a breach of contract claim can be asserted. E.g., Bausch & Lomb Inc. v. Bressler, 977 F.2d 720, 727 (2d Cir. 1992) ("'Under New York law, ... where the Agreement specifies conditions precedent to the right of cancellation, the conditions must be complied with.'" (quoting Consumers Power Co. v. Nuclear Fuel Servs., Inc., 509 F. Supp. 201, 211 (W.D.N.Y. 1981))). Here, the question of who terminated the agreement is in dispute. Assuming that Artemis terminated the agreement with the November 7 letter, under these decisions, Artemis failed to provide 24/7 with the required notice and cure opportunity, not vice versa.

Moreover, defendants' arguments run counter to the longstanding principle of New York law that "[o]nce it becomes clear that one party will not live up to the contract, the aggrieved party is relieved from the performance of futile acts, such as conditions precedent." Allbrand Discount Liquors, Inc. v. Times Square Stores Corp., 60 A.D.2d 568, 568 (2d Dep't 1977) (citing Kooleraire Serv. & Installation Corp. v. Bd. of Educ., 28 N.Y.2d 101, 106 (1971)). See also J. Petrocelli Constr., Inc. v. Realm Elec. Contrs., Inc., 15 A.D.3d 444, 446 (2d Dep't 2005) (rejecting motion for judgment as a matter of law because of factual dispute over party's repudiation of the contract). Defendants' primary authority, Bausch & Lomb Inc. v. Bressler, notes that when a "repudiating party expressly disavowed any further duties under the contract at issue, in effect declaring the contract at an end[,] ... it would have been futile for the aggrieved part[y] ... to provide the breaching part[y] with opportunities to cure [its] repudiation[]." 977 F.2d at 728 (citing Allbrand, 60 A.D.2d at 568). Thus, the material fact at issue here, whether Artemis's November 7 letter constituted unilateral termination of the agreement, precludes summary judgment for defendants on the issue of notice and cure.

Artemis also asserts that it continued to perform its duties under the agreement, and that by doing so it effectively cured any possible breach that the November 7 letter may have caused. However, there is a factual dispute as to whether Artemis complied with its obligations under the agreement after November 7.

III. Compensatory Damages

24/7 has proffered a number of damages theories for its breach of contract claim, and changed those theories a number of times. Those damages theories include lost profits, destruction of its business, reliance damages, and loss of an income-producing asset. Defendants argue that the corporation 24/7, the only party to the distribution agreement, cannot show any damages because 24/7 LLC conducted all of the business and received all of the capital invested ...

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