Toto, Inc. v. Sony Music Entertainment

Citations: 60 F. Supp. 3d 407; 2014 U.S. Dist. LEXIS 144136; 2014 WL 5089418Docket: No. 12-cv-1434 (RJS)

Court: District Court, S.D. New York; October 8, 2014; Federal District Court

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Toto, Inc., a prominent rock band, has initiated legal action against Sony Music Entertainment (SME) for breach of contract concerning unpaid royalties from the band’s recordings. SME has counterclaimed against Toto for breach of contract, unjust enrichment, and seeks declaratory relief. The court is currently reviewing cross-motions for summary judgment on Toto's claim and SME's counterclaim.

The case centers on the contractual obligations between Toto and SME, established through recording agreements from 1977 and 1983 with SME's predecessor, CBS Records. Under these agreements, Toto was to deliver recordings for SME’s commercial exploitation, with SME responsible for advancing funds and paying royalties based on sales. Key provisions include: 

1. **Basic Provision (Paragraph 9.01(a))** - Establishes the royalty rate for sales of Toto’s recordings in the U.S.
2. **Foreign Sales Provision (Paragraph 9.06)** - Details the royalty rate for international sales.
3. **Lease Provision (Paragraph 9.03)** - Requires SME to pay Toto 50% of net receipts from leased recordings.

SME has adhered to these provisions for all sales, including those from affiliates and licensees. Amendments in 1986 and 2002 adjusted the agreements to address digital music, introducing the Audiophile Provision, which set a lower royalty rate for digital records. Notably, from 2006 to 2012, SME mistakenly paid Toto at a higher rate due to an accounting software transition. In 2003, SME began distributing Toto’s music digitally through major platforms and formed a licensing agreement with Apple, which was updated twice thereafter. 

The court's preliminary ruling favors SME regarding Toto's breach of contract claim but supports Toto’s position on the declaratory judgment counterclaim.

Under the 2011 agreement, SME licenses its recordings to Apple for the creation of "eMasters," which Apple purchases and resells to end users. In 2007, SME's subsidiary, SMED, entered a digital distribution agreement with Amazon to sell SME records, with Amazon acting as a sales agent. Since 2004, SME has paid Toto royalties for permanent digital downloads, based on the Audiophile Provision, except for a period from 2006 to 2012 due to an accounting error. SME also licensed Toto’s recordings for temporary "streams," paying Toto fifty percent of net receipts from these streams. An audit by Haber Corp. in 2010 suggested royalties for digital downloads should be at a rate of "50% net receipts," per the Lease Provision, which SME disputed, maintaining adherence to the Audiophile Provision. 

Following the lawsuit initiation by Toto on February 27, 2012, claiming breach of contract and other causes, several claims were dismissed or withdrawn, with the case focusing on SME's royalty payments for digital downloads post-December 31, 2008. Subsequent to the reassignment of the case, SME counterclaimed for breach of contract and unjust enrichment regarding overpayments made to Toto. Discovery concluded, leading to cross-motions for summary judgment on the remaining claims, fully submitted by April 7, 2014.

Summary judgment under Rule 56(a) of the Federal Rules of Civil Procedure is granted when the movant demonstrates no genuine dispute exists over any material fact and is entitled to judgment as a matter of law. A genuine dispute is absent if (1) all facts are agreed upon, (2) factual disagreements do not permit a reasonable factfinder to accept the non-moving party's account, or (3) even accepting the non-moving party's version, the moving party would prevail as a matter of law. The court must view evidence favorably for the non-moving party, without weighing it or assessing credibility; however, the non-moving party must present "hard evidence" rather than mere allegations or speculation to show a genuine dispute. A moving party is entitled to judgment if it meets its burden of proof with undisputed facts or if it demonstrates the non-moving party lacks evidence to support its position.

Regarding Toto's breach of contract claim, the focus is on the calculation of royalty payments for digital downloads, master tones, and ringtones post-December 31, 2008. Toto contends that SME's licensing with third parties constitutes "leases" under the Lease Provision, while SME argues that these downloads are sales of Audiophile Records governed by the Audiophile Provision. Alternatively, SME claims the Basic Provision applies to sales by any licensees. Under New York law, the interpretation of contractual terms at summary judgment occurs in two stages: first, determining if terms are ambiguous by examining the contract language alone; if clear, they are interpreted by their plain meaning. If ambiguous, summary judgment is typically denied as such interpretations are factual questions for the factfinder. The court may consider industry-specific meanings if proven to be fixed and invariable.

The court may clarify ambiguous contractual language as a matter of law if the evidence regarding the parties' intended meaning is overwhelmingly one-sided or if the nonmoving party fails to provide relevant extrinsic evidence. The court analyzes the Recording Agreements and determines that the Audiophile Provision establishes the royalty rate for permanent downloads of Toto’s recordings through Digital Retailers, irrespective of whether these downloads are sold by SME, its affiliates, or third-party licensees. This conclusion is based on the plain meaning of the contract and uncontroverted evidence of industry norms.

The analysis hinges on the relationship between the Basic Provision, which details payment for sales through normal retail channels, and the Lease Provision, which outlines payments for master recordings leased to others. The dispute centers on whether SME's licensing with Digital Retailers is classified as a "sale" under the Basic Provision or a "lease" under the Lease Provision. The parties agree that "license" cannot equate to "lease" without resulting in inconsistent royalty rates for identical transactions but disagree on the definitions of these terms.

Toto contends that "Licensee" refers only to SME’s corporate affiliates, while SME argues it includes all licensees, regardless of affiliation. Toto's narrow interpretation relies on the ejusdem generis canon, suggesting that a general term should be interpreted to only include items similar to those specifically listed. However, the Second Circuit has clarified that this principle implies that general terms following specific ones encompass only objects of the same kind as those specified.

The term "Licensee" is not restricted to "subsidiaries, wholly or partly owned" by SME or its divisions; rather, it is a defined term that encompasses a broader scope. The interpretive principle states that including specific items in a general definition does not limit the defined term's scope, even in the absence of non-limiting language, although explicit non-limiting language reinforces this principle. The Court finds no support for Toto’s interpretation that "Licensee" is limited to SME affiliates, as Paragraph 17.01 of the Recording Agreements allows SME to assign rights to any subsidiary or other entity without restrictions, making any limiting interpretation redundant. Consequently, "Licensee" is determined to include Digital Retailers.

Additionally, Toto argues that "lease" equates to "license" and should include all licenses to third parties. SME counters that "lease" refers specifically to licenses permitting third parties to incorporate SME recordings into their products, such as compilation records or films. SME provides uncontroverted evidence defining "lease" within the industry context, emphasizing that it pertains to the licensee’s product rather than their identity. Toto’s claims of interchangeability between "lease" and "license" are based on misinterpretations of SME representatives' testimonies. Notably, SME’s witness clarified that a "lease" involves limited use of SME's recordings for manufacturing distinct products, not identical to those produced and sold by SME.

Ritholz's testimony indicated that "lease" and "license" can be interchangeable only in the context of third parties using recordings in their products. Contrary to Toto's claims, SME's witnesses consistently defined "lease" distinctly. Toto's reliance on dictionary definitions oversimplifies the terms, which are not synonymous; "lease" typically refers to rights in tangible property, while "license" relates to intellectual property. This distinction supports SME's position that "lease" is an industry-specific term for licenses allowing third parties to use recordings in their products. Toto's example of past transactions, where SME paid under the Lease Provision for licensing Master Recordings to third parties, further corroborates SME's argument rather than supporting Toto's assertion that all third-party licenses are "leases." The Court finds that "lease" has a clear, fixed meaning within the contract, defining it as a license for third parties to incorporate recordings. Because SME's arrangements with Digital Retailers do not qualify as such a license, the Lease Provision is inapplicable.

Regarding the Audiophile Provision, the Court confirms it covers SME's arrangements with Digital Retailers and supersedes the Basic Provision. The Audiophile Provision defines "Audiophile records" as records marketed for superior sound quality, including all records made for digital playback. Since digital downloads from Retailers qualify as "Records made for digital playback," the Audiophile Provision's royalty rate applies to these sales without distinction about who sells them. Even if interpreted as modifying the Basic Provision, the Audiophile Provision remains applicable because the term "Licensee" encompasses Digital Retailers. The Audiophile Provision explicitly states it applies "notwithstanding anything to the contrary," which under New York law, takes precedence over conflicting terms. Toto acknowledges that the Audiophile Provision controls when both it and another royalty provision are in effect. Therefore, the Court concludes the Audiophile Provision governs the applicable royalty rate for digital downloads from Digital Retailers.

SME has fulfilled its obligation by paying Toto the Audiophile Provision rate, leading the Court to conclude that there has been no breach of contract, resulting in a summary judgment in favor of SME regarding Toto's breach of contract claim. Additionally, SME's counterclaim for declaratory judgment arises from Toto's threat to sue SME for breaching the implied covenant of good faith and fair dealing if SME stops distributing Toto records through specific retailers. SME argues, based on the Recording Agreements' explicit language granting it the right to manage the distribution of Phonograph Records, that it is not obligated to distribute Toto records through any particular retailer. The Court notes that declaratory judgment actions require a substantial and immediate controversy between parties with opposing interests. However, the situation here is deemed more hypothetical than real, as Toto's potential lawsuit hinges on an uncertain future decision by SME to cease distribution through unnamed retailers.

SME's claim lacks sufficient "immediacy" or "reality" to constitute a ripe controversy, leading the Court to grant summary judgment in favor of Toto regarding SME’s declaratory judgment claim. The Court also grants SME's cross-motion while denying Toto's motion for summary judgment on Toto's breach of contract claim. Conversely, the Court grants Toto’s motion and denies SME’s cross-motion concerning SME’s declaratory judgment counterclaim. As SME's additional counterclaims for breach of contract and unjust enrichment were not addressed in the motions, the parties are ordered to submit a joint letter by October 29, 2014, regarding the next steps in the case. The Clerk is instructed to terminate the motions listed in docket entries 84 and 89. The Court has relied on the Local Civil Rule 56.1 Statements from both parties, and relevant documents have been reviewed, including memoranda and affidavits. For clarity, the Court uses "SME" to refer to both Sony Music Entertainment and CBS Records, and the term "Recording Agreements" encompasses the 1977 and 1983 agreements where applicable. The Court clarifies terminology related to recordings and records as defined in the agreements.