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19 Recordings Ltd. v. Sony Music Entm't

United States District Court, S.D. New York

March 17, 2015

19 RECORDINGS LIMITED, Plaintiff,
v.
SONY MUSIC ENTERTAINMENT, Defendant

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[Copyrighted Material Omitted]

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For 19 Recordings Limited, Plaintiff: Richard Steven Busch King, & Ballow, Nashville, TN.

For Sony Music Entertainment, Defendant: Christopher Yuk Lun Yeung, Jonathan Michael Sperling, Covington & Burling LLP(NYC), New York, NY.

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OPINION AND ORDER

Ronnie Abrams, United States District Judge.

Since 2002, Plaintiff 19 Recordings Limited (" 19" ), a record company, has entered into exclusive recording agreements with contestants on the popular television show American Idol. For the winners and some finalists of American Idol, 19 has also entered into licensing agreements with Defendant Sony Music Entertainment (" Sony" ), which grant Sony the exclusive right to exploit the recordings of these artists signed by 19. In the instant diversity action, 19 brings state-law claims for breach of contract and of the implied duty of good faith and fair dealing. 19 alleges that Sony failed to pay 19 the royalties to which it was entitled under the terms of the licensing agreements. Sony seeks dismissal

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of 19's complaint pursuant to Fed.R.Civ.P. 12(b)(6), arguing that 19's claims are precluded by the plain language of the licensing agreements.

BACKGROUND[1]

In 2002, 19's affiliate launched American Idol in the United States. (Am. Compl. ¶ 6.) For each of American Idol 's twelve seasons, 19 has signed the show's contestants to exclusive recording agreements. (Id.) These recording agreements assign 19 the right to enter into individual licensing agreements with Sony (collectively, the " Licensing Agreement" ). (Id. ¶ 15.) For the winners and certain finalists of the show, including Kelly Clarkson, Clay Aiken, Carrie Underwood, Chris Daughtry, Kellie Pickler, Jordin Sparks, David Archuleta, and David Cook (collectively, the " Artists" ), 19 signed such agreements with Sony. (Id. ¶ 17.) Pursuant to each largely identical Licensing Agreement,[2] Sony was granted the exclusive right to " manufacture, promote, distribute, sell, and otherwise exploit, and to license such rights to others, the individual recordings of the Artists in all configurations throughout the world." (Id. ¶ 16. See also Licensing Agreement (" LA" ) Dkt. 20, Exs. B--I ¶ 12.1.1(a).)[3] Among those recordings produced by 19 and delivered to Sony are " some of the biggest hits of the 21st Century." (Id. ¶ 18.)

As consideration for 19's delivery of the Artists' recordings, Sony agreed to pay 19 pursuant to a highly complex royalty structure, as set forth in the Licensing Agreement. The Licensing Agreement also permits 19 to audit Sony's books and records to determine whether its calculation of royalty payments was consistent with this royalty structure. (LA ¶ 17.4.)

Pursuant to this provision, 19 performed an audit of Sony's books and records. (Am. Compl. ¶ 20.) Sony has purportedly refused to allow 19 access to all necessary books and records (id. ¶ 30), but based on those books and records 19 has audited, it claims that Sony has systematically miscalculated royalty payments (id. ¶ ¶ 24--25). 19 alleges that these miscalculations breached numerous provisions of the Licensing Agreement, detailed below, as well as the implied duty of good faith and fair dealing, such that 19 was significantly underpaid. (Id. ¶ ¶ 32--150.)

It is these allegations that form the basis of 19's Amended Complaint, which Sony now moves to dismiss.

LEGAL STANDARD

I. Motion to Dismiss

To survive a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a pleading must contain " a short and plain statement of the claim showing that the pleader is entitled to relief," Fed.R.Civ.P. 8(a)(2), and be " plausible on its face," Bell A. Corp v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). " A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

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II. Breach of Contract

" To state a claim in federal court for breach of contract under New York law, a complaint need only allege (1) the existence of an agreement, (2) adequate performance of the contract by the plaintiff, (3) breach of contract by the defendant, and (4) damages." Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996).[4] At least initially, however, the construction of a contract is " a matter of law for the court to decide." K. Bell & Assocs., Inc. v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir. 1996) (quotation omitted). Where a claim for breach turns on an ambiguous contractual provision, the " claim may not be dismissed for failure to state a claim." Wurtsbaugh v. Banc of Am. Sec. LLC. No. 05 Civ. 6220 (DLC), 2006 WL 1683416, at *5 (S.D.N.Y. June 20, 2006). But where a claim for breach turns on an unambiguous contractual provision, a Court must " give effect to the contract as written," K. Bell & Assocs., Inc., 97 F.3d at 637 (quotation omitted), and dismissal pursuant to a motion under Fed.R.Civ.P. 12(b)(6) is proper, Wurtsbaugh, 2006 WL 1683416, at *5.

III. Breach of the Implied Duty of Good Faith and Fair Dealing

" In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance." 511 W. 232nd Owners Corp. v. Jennifer Realty Co., 98 N.Y.2d 144, 773 N.E.2d 496, 500, 746 N.Y.S.2d 131 (N.Y. 2002). This covenant " embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Dalton v. Educ. Testing Serv.. 87 N.Y.2d 384, 663 N.E.2d 289, 291, 639 N.Y.S.2d 977 (N.Y. 1995) (quotation omitted). In addition, it " encompass[es] any promises which a reasonable person in the position of the promisee would be justified in understanding were included." 773 N.E.2d at 500--01 (quotation omitted).

The implied covenant " does no more" than this, however; " it works only to ensure that a party with whom discretion is vested does not act arbitrarily or irrationally." 663 N.E.2d at 296. " For this to occur, a party's action must directly violate an obligation that may be presumed to have been intended by the parties." Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 407--08 (2d Cir. 2006) certified question accepted, 7 N.Y.3d 837, 857 N.E.2d 528, 824 N.Y.S.2d 207 (N.Y. 2006) and certified question answered, 8 N.Y.3d 283, 864 N.E.2d 1272, 832 N.Y.S.2d 873 (N.Y. 2007). The covenant, however, " does not extend so far as to undermine a party's general right to act on its own interests in a way that may incidentally lessen the other party's anticipated fruits from the contract." Id. at 408 (quotation omitted).

Indeed, " New York law is clear that the implied covenant cannot be used to create independent obligations beyond the contract." ARI & Co. v. Regent Int'l Corp., 273 F.Supp.2d 518, 523 (S.D.N.Y. 2003). Nor does " New York law . . . recognize a separate cause of action for breach of the implied covenant . . . when it

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is based on the same facts as the breach of contract claim." Goldblatt v. Englander Commc'ns, L.L.C., No. 06 Civ. 3208 (RWS), 2007 WL 148699, at *5 (S.D.N.Y. Jan. 22, 2007). Where the two claims depend on the same facts, the breach of the implied covenant of good faith and fair dealing claim must be dismissed. See Nat'l Gear & Piston, Inc. v. Cummins Power Sys., LLC, 861 F.Supp.2d 344, 365 (S.D.N.Y. 2012). So, too, where " the relief sought in claiming a breach of the implied covenant of good faith is intrinsically tied to the damages allegedly resulting from the breach of contract." Goldblatt, 2007 WL 148699, at *5.

DISCUSSION

In this action, 19 alleges that Sony's improper calculation of royalty payments breached multiple provisions of the Licensing Agreement. Sony responds that 19 is simply seeking to rewrite its agreement with Sony in order to claim millions of dollars in royalties to which it is not entitled. (Def.'s Mem. 1.) Sony does not appear to contest the existence of the Licensing Agreement or the adequacy of 19's performance under this Agreement. Thus, 19's claims can survive only if a finding of breach is not precluded by the plain, unambiguous language of the Licensing Agreement. 19 also brings multiple claims for breach of the implied duty of good faith and fair dealing.

The Court addresses each disputed contractual provision, in turn, below, beginning with 19's breach of contract claims, followed by any related good faith and fair dealing claims.

I. 19's Claim that Sony Improperly Calculated Royalty Escalations

19 alleges that Sony breached the Licensing Agreement by failing to aggregate sales of single track downloads into so-called " track equivalent albums" for purposes of calculating royalty escalations due based on " Album" sales under paragraph 7.1 of the Licensing Agreement. (Am. Compl. ¶ ¶ 77--90.) In a related claim, it also argues that Sony breached the implied duty of good faith and fair dealing by " unilaterally allow[ing] iTunes and other DSPs [digital service providers] to 'disaggregate' every album into individual song downloads . . . ...


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