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Napster, LLC v. Rounder Records Corp

January 25, 2011

NAPSTER, LLC, PLAINTIFF,
v.
ROUNDER RECORDS CORP., DEFENDANTS.



The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge:

USDC SDNY

DOCUMENT

OPINION & ORDER

Plaintiff Napster, LLC ("Napster") brings this action against Defendant Rounder Records Corp. ("Rounder") asserting two claims for breach of contract. Napster operates an online music subscription service. For a fee, subscribers stream, conditionally download, and permanently download music through Napster's website. Rounder is a record label that specializes in American roots music, including bluegrass and old-time country. Napster entered into two contracts with Rounder, one in 2001 and the other in 2006, to provide music for sale on Napster's website. The dispute is over whether Rounder is contractually obligated to indemnify Napster for costs incurred due to copyright infringement lawsuits brought by the owners of musical compositions embodied in the sound recordings provided by Rounder. Napster contends that under both contracts, Rounder was required to procure mechanical licenses for use of the infringed musical compositions.*fn1 According to Napster, since it was Rounder's duty to obtain the licenses, Rounder is bound under the contracts to provide indemnity for the costs incurred defending and settling the claims brought by the composition owners. Rounder denies any such obligations and moves to dismiss the Second Amended Complaint for failure to state a claim under Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons that follow, Rounder's motion is granted. Napster's claim based on the 2001 contract is dismissed because the contract was rescinded, thereby extinguishing any claim Napster might have had for its breach. Napster's claim based on the 2006 contract is dismissed for failure to comply with its advance consent provision and it was not Rounder's responsibility to procure mechanical licenses for the infringing compositions.

I. Facts*fn2

In August, 2001, Napster's predecessor entered into a Content Distribution and Integration Agreement ("2001 Agreement") with Rounder. (Second Amended Complaint ("SAC") ¶ 7; Ex. A (2001 Agreement)). In the 2001 Agreement, Rounder agreed to provide Napster with "Company Content" (defined to include sound recordings owned or controlled by Rounder) for use in connection with Napster's subscription service. (2001 Agreement §§ 2-3). The license granted by Rounder applied to conditional downloads and streams, but not to permanent downloads. (Id. § 2.1).*fn3

Section 2.3 of the 2001 Agreement sets forth the parties' respective obligations to obtain the necessary licenses from third parties, providing broad responsibility for Rounder to obtain mechanical licenses. Section 11, "Indemnification," sets forth the parties' respective indemnity obligations. Rounder agreed to indemnify Napster for all costs arising out of any breach of the agreement or any claim that use of the Company Content infringes a third party's rights.

On December 16, 2005, Napster was sued for copyright infringement by, among others, MSC Music America, Inc. ("MSC Music"), a copyright administration company, and the owners of various copyrighted musical compositions (collectively, "MSC Music Parties") in the United States District Court for the Middle District of Tennessee ("First Infringement Action"). (SAC ¶ 9); see Docket in MSC Music Am., Inc. v. Napster, Inc., No. 3:05-cv-01053 (M.D. Tenn.).*fn4 The MSC Parties claimed that Napster made their copyrighted compositions available without obtaining the necessary mechanical licenses. (Complaint in First Infringement Action ("First Infringement Complaint") ¶¶ 33-46, Declaration of David Baum ("Baum Decl."), Ex. D).*fn5 Of the 800 copyrighted musical compositions at issue, 17 were allegedly embodied in sound recordings provided by Rounder to Napster. (SAC ¶ 10).

During discovery in the First Infringement Action, the MSC Music Parties realized that they could not maintain an infringement action based on a number of the works at issue. (SAC ¶ 10). The action was accordingly dismissed without prejudice on November 8, 2006. (Id.). In defending the lawsuit prior to dismissal, however, Napster incurred approximately $571,111.40 in costs and attorneys' fees. (Id.).

On April 1, 2006, while the First Infringement Action was still pending, Napster and Rounder entered into a Content Agreement ("2006 Agreement"). (SAC ¶ 19; 2006 Agreement, SAC, Ex. B). The 2006 Agreement expresses the parties' intent to terminate the 2001 Agreement. The second "whereas" clause states: "WHEREAS, Company and Napster have previously entered into a certain Content Agreement dated as of August, 2001 (the 'Prior Agreement'), which the parties wish to hereby terminate and supersede." (2006 Agreement at 1). The 2006 Agreement also contains a merger clause, which provides, "[t]his Agreement will constitute the entire agreement between the parties with respect to the subject matter hereof and will supersede all previous commitments with respect hereto." (Id. § 13).

In the 2006 Agreement, as in the 2001 Agreement, Rounder agreed to provide Napster with "Company Content" for use in connection with its online subscription service. "Company Content" includes "Company Masters," which are defined as "the Recordings owned and/or controlled by the Company . . . [or an affiliate] that are intended for general public release (whether commercial or promotional)." (Id. at 7). Unlike the 2001 Agreement, however, the 2006 Agreement pertains to permanent downloads in addition to conditional downloads and streams. The first part of the 2006 Agreement governs permanent downloads and the Additional Rights Addendum ("ARA") governs conditional downloads and streams.

Under the 2006 Agreement, Rounder's responsibility for obtaining mechanical licenses was more circumscribed. Section 2.2.1 of the ARA makes Napster responsible for applying for mechanical licenses for Streaming and Conditional Downloading, (2006 Agreement § 2.2.1(a)(ii)), with the following exception: In turn, Section 2.2.1(a)(iii) provides: "If the Company is not a Harry Fox Agency ("HFA") publisher principal or has elected not to 'opt in' to the voluntary blanket license agreed to by HFA with respect to mechanical licenses for digital rights ('the HFA Deal'), the Company will obtain any pay for mechanical licenses for use by Napster of compositions embodied in Controlled Masters, if any." (Id. 2.2.1(a)(iii).) With respect to permanent downloads, the 2006 Agreement provides that, "[u]pon delivery of Company Content to Napster, Company will notify Napster of any Company content to which it or its affiliates control the publishing rights ('Controlled Masters') or which, to its knowledge, is considered to be 'in the public domain' with respect to music publishing rights." (Id. § 2.2(c)).*fn6

Like the 2001 Agreement, the 2006 Agreement provides for reciprocal indemnity obligations. (Id. § 10). Rounder must indemnify Napster for any breach of the agreement or any claim that Napster's use of the Company Content infringes the rights of any third party. The 2006 Agreement, however, requires the indemnitee obtain the written consent of the indemnitor prior to incurring any indemnifiable costs. (Id. §§ 10.1, 10.2 ("[N]o payments shall be made nor costs incurred in connection with any such claim without the prior written consent of [the other party], such consent not to be unreasonably withheld.").

On December 15, 2006, approximately eight months after the 2006 Agreement took effect, the MCS Parties filed another copyright infringement action against Napster in the Middle District of Tennessee ("Second Infringement Action"). (SAC ¶ 11); see Docket in MCS Music Am., Inc. v. Napster, Inc., No 3:06-cv-01197 (M.D. Tenn.). Once again, the MCS Parties claimed that Napster made their copyrighted musical compositions available for streaming and conditional downloads without obtaining the necessary mechanical licenses. (SAC ¶ 11; Complaint in Second Infringement Action ("Second Infringement Complaint") ¶¶ 21-101, Baum Decl., Ex. E). In the Second Infringement Action, ...


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