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Toto, Inc. v. Sony Music Entertainment

United States District Court, S.D. New York

October 8, 2014

TOTO, INC., Plaintiff,

Decided September 29, 2014

Page 408

For Plaintiff: Richard S. Busch of King & Ballow, Nashville, TN; Kenneth E. Gordon of Gordon, Gordon & Schnapp, P.C., New York, NY.

For Defendant: Jonathan M. Sperling and Douglas S. Curran of Covington & Burling LLP, New York, NY; Jennifer H. Saperstein of Covington & Burling LLP, Washington, DC.

Page 409

Opinion and Order

RICHARD J. SULLIVAN, United States District Judge.

Plaintiff Toto, Inc. (" Toto" ), an iconic Eighties rock band that topped the pop charts with hits like " Rosanna" and " Africa," brings this action against Defendant Sony Music Entertainment (" SME" ) for breach of contract relating to royalties owed on the band's recordings. SME in turn asserts counterclaims against Toto for breach of contract, unjust enrichment, and declaratory relief. Now before the Court are the parties' cross-motions for summary judgment on Toto's breach of contract claim and SME's declaratory judgment counterclaim. For the reasons set forth below, the Court grants SME's cross-motion with respect to the breach of contract claim, but grants Toto's motion with respect to the declaratory judgment counterclaim.

I. Background

A. Facts

This case arises out of a contractual dispute between Toto and SME about the payment of royalties for musical recordings.[1] Toto entered into recording agreements with SME's predecessor-in-interest, CBS Records,[2] in 1977 and 1983. (Toto 56.1 Stmt. ¶ 1; SME 56.1 Stmt. ¶ ¶ 31-35; Declaration of Gina Merrill, dated March 22, 2012, Doc. No. 5 (" Merrill Decl." ), Ex. 1 (" 1977 Agmt." ) and Ex. 2 (" 1983 Agmt." ) (collectively, " Recording Agreements" or " Rec. Agmts." ).)[3] Under the Recording Agreements, Toto agreed to produce and deliver to SME recordings of musical performances, which SME would commercially

Page 410

exploit in various forms, including through the direct sale of records consisting wholly or in part of Toto recordings.[4] (Toto 56.1 Stmt. ¶ 2; SME 56.1 Stmt. ¶ ¶ 31-35; see generally Rec. Agmts.) In turn, SME agreed to advance funds to Toto and to pay Toto royalties on the revenues generated from exploitation of the recordings. (Rec. Agmts. ¶ ¶ 6.01-6.04., 9.01-9.07.)

Several provisions of the Recording Agreements are particularly relevant to this case. Paragraph 9.01(a) of the Recording Agreements (the " Basic Provision" ) sets the applicable royalty rate for " Net Sales of Phonograph Records consisting entirely of Master Recordings performed by [Toto] and recorded hereunder and sold by [SME] or its Licensee Through Normal Retail Channels for distribution in the United States." (Rec. Agmts. ¶ 9.01(a)(1).) Paragraph 9.06 (the " Foreign Sales Provision" ) sets the applicable royalty rate for " Phonograph Records sold by [SME] or its Licensees for distribution outside of the United States of America." ( Id. ¶ 9.06.) Finally, paragraph 9.03 (the " Lease Provision" ) provides that " [i]n respect of any Master Recording leased by [SME] to others for their distribution of Phonograph Records in the United States, [SME] will pay [Toto] 50% of [SME's] net receipts therefrom after deduction of [various expenses]." ( Id. ¶ 9.03.)

SME has paid Toto royalties under the rates set forth in the Basic Provision or the Foreign Sales Provision for all sales of SME products containing Toto's recordings, regardless of whether these products were manufactured by SME, a corporate affiliate, or an unaffiliated licensee. (SME 56.1 Stmt. ¶ 72.) SME has paid Toto royalties under the Lease Provision for any revenue generated from licensing Toto's recordings for incorporation into third-party products, such as compilation albums. (Toto 56.1 Stmt. ¶ 9; SME 56.1 Stmt. ¶ ¶ 77-80.)

In 1986 and 2002, the parties amended the Recording Agreements to reflect the growing digitization of music. (Toto 56.1 Stmt. ¶ 3; SME 56.1 Stmt. ¶ ¶ 82, 93; Merrill Decl., Ex. 3 (" 1986 Amend." ); Merrill Decl., Ex. 4 (" 2002 Amend." ).) The 1986 amendment modified the 1983 recording agreement to include a provision (the " Audiophile Provision" ) setting a royalty rate for " Audiophile records," defined to include " all Records made for digital playback." (1986 Amend, ¶ 3(b).) The 2002 amendment increased the royalty rate applicable to Audiophile records and extended the Audiophile Provision to cover records created under the 1977 recording agreement. (2002 Amend.) Following these amendments, with the exception of the period from 2006 to 2012, SME has paid Toto for sales of compact discs released by SME containing Toto's recordings at the royalty rate set forth in the Audiophile Provision, which is defined as a percentage of the Basic Provision rate and is generally lower than the Lease Provision rate. (SME 56.1 Stmt. ¶ 137.) From 2006 to about 2012, SME unintentionally paid Toto at a higher rate, due to a (now remedied) error that occurred when SME switched accounting software. ( Id. ¶ ¶ 144-48.)

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In 2003, SME began distributing Toto's recordings as permanent digital downloads, master tones, and ringtones (collectively, " digital downloads" ) through companies such as Apple, Inc. and, Inc. (the " Digital Retailers" ). (SME 56.1 Stmt. ¶ ¶ 104-06.) That year, it also entered into a licensing agreement with Apple to distribute SME records digitally through Apple's iTunes online music store. ( Id. ¶ ¶ 109-10; Toto Mem., Ex. 10 (" 2003 SME-Apple Agmt." ).) SME and Apple amended their agreement in 2006 and again in 2011. (Toto Mem., Ex. 11 (" 2006 Apple-SME Agmt." ); Toto Mem., Ex. 12 (" 2011 Apple-SME Agmt." ).) Under the 2011 agreement, SME licenses its recordings to Apple so Apple can manufacture digital versions called " eMasters." (2011 Apple-SME Agmt. ¶ 2(a).) At the conclusion of the manufacturing process, Apple purchases from SME, and takes title to, the eMasters, which it then resells to end users. ( Id.) In 2007, Sony Music Entertainment Downloads LLC (" SMED" ), a wholly owned subsidiary of SME that is licensed to sell SME's records, entered into a digital distribution agreement with Amazon. (SME 56.1 Stmt. ¶ ¶ 122-24.) Under that agreement, SMED sells digital downloads of SME records directly through Amazon's website, and Amazon charges a fee to act as SMED's sales agent. ( Id. ¶ ¶ 125-27.)

Starting in 2004, SME began paying Toto royalties for revenue generated through the sale of permanent digital downloads. (SME 56.1 Stmt. ¶ ¶ 139-40.) Since that time, SME has paid royalties to Toto for digital downloads under the royalty rate set forth in the Audiophile Provision (with the exception of the period from 2006 to 2012 due to the previously discussed accounting error). ( Id. ¶ ¶ 139-48.) In addition to distributing permanent digital downloads, SME has licensed Toto's recordings to third parties for distribution as " streams" that are temporarily available, but not sold, to end users. (Toto 56.1 Stmt. ¶ ¶ 17-20; SME 56.1 Stmt. ¶ ¶ 155-58.) SME has paid Toto fifty percent of its net receipts for such " streams." (Toto 56.1 Stmt. ¶ 21; SME 56.1 Stmt. ¶ ¶ 158-59.)

In 2008, Toto audited SME's records for the royalty period from June 2006 to June 2008. (SME 56.1 Stmt. ¶ ¶ 163-67.) In March 2010, the auditor, Haber Corp. (" Haber" ), issued a report contending that royalties on digital downloads should be " 50% net receipts," pursuant to the Lease Provision. ( Id. ¶ 167; Declaration of Douglas Curran, dated February 27, 2014, Doc. No. 97 (" Curran Decl." ), Ex. M.) SME disagreed with Toto' s position on the royalty rate, contending that it had correctly been applying the Audiophile Provision, which calculated rates as a percentage of the Basic Provision rate. This suit followed.

In 2012, following the commencement of this lawsuit, SME advised Toto that it was considering ceasing the distribution of Toto's recordings through certain online retailers. (SME 56.1 Stmt. ¶ 181.) Toto advised SME that if SME did so, Toto would bring a claim for breach of the implied covenant of good faith and fair dealing. ( Id. ¶ 182.)

B. Procedural History

Toto commenced this action on February 27, 2012. (Doc. No. 1.) The original Complaint asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, accounting, and a declaratory judgment. ( Id.) On April 23, 2012, the Honorable Lewis A. Kaplan, District Judge, to whom this case was originally assigned, dismissed the claim for breach of the implied covenant of good faith and fair dealing. (Doc. No. 8.) Toto thereafter filed the First Amended Complaint,

Page 412

asserting the same four causes of action. (Doc. No. 20 (" FAC" ).) Subsequently, at an October 12, 2012 conference before the Honorable Andrew J. Peck, Magistrate Judge, Toto withdrew its claims for accounting and declaratory judgment. (Doc. No. 39 at 14:13-16.) On December 11, 2012, Judge Peck issued a Report and Recommendation recommending dismissal of Toto's claims, except the portion of the contract claim based on SME's alleged failure to properly pay royalties for digital downloads for the royalty period ending December 31, 2008 and later. (Doc. No. 43.) The case was reassigned to my docket on December 20, 2012, and, on January 15, 2013, the Court adopted the Report and Recommendation in its entirety. (Doc. No. 46.)

On February 8, 2013, SME answered the First Amended Complaint and asserted counterclaims for breach of contract and unjust enrichment based on Toto's retaining SME's mistaken royalty overpayments from 2006 to 2012 and for declaratory relief regarding its right to cease distribution of Toto records through any particular digital retailer. (Doc. No. 56 (" SME Answer" ).) Toto answered these counterclaims on March 29, 2013. (Doc. No. 62 (" Toto Answer" ).) At the conclusion of discovery, the parties sought, and the Court granted, leave to file the instant cross-motions for summary judgment on the remainder of Toto's breach of contract claim and on SME's declaratory judgment counterclaim. (Doc. No. 77.) Neither party moved ...

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