BY:Neil J. Rosini, Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal on Friday, April 29, 2011)
The quandaries raised by a contractual authority “coupled with an interest” have been known since the days when ships were propelled mostly by wind. In an 1823 decision involving two vessels, Chief Justice John Marshall of the United States Supreme Court posed this question: Does the expression “a power coupled with an interest” refer to “an interest in the subject on which the power is to be exercised, or is it an interest in that which is produced by the exercise of the power?” The answer, wrote the Chief Justice, was the former: the interest “must be an interest in the thing itself.” 1
Despite that unambiguous counsel, representatives in the entertainment industry including literary agents and theatrical agents, to this day, seek to make their powers “irrevocable,” or to secure their entitlement to continuing commissions, by invoking the phrase “coupled with an interest” in contractual provisions. But for reasons discussed in Peter Lampack Agency, Inc. v. Grimes 2, a relatively recent decision of the Supreme Court, New York County, the phrase has substance only when a power actually is coupled with an interest in the subject matter of the agency, such as a book or play. That interest can take several forms, such as a security interest in, or title to part of, the subject matter. Because such actual “coupling with an interest” for an agent’s benefit is quite rare in the entertainment industry, the legal principles applied in the Lampack decision may leave authors and other principals free to challenge a declaration of “irrevocability.”
In this article, we will review the facts and holdings of this modern exposition of the phrase and some of its ramifications.
The Lampack Case
Beginning in 1996, the Peter Lampack Agency (the “Agency”) represented Martha Grimes, the author of the “Richard Jury” series of mysteries and other fiction, whose worldwide sales number in the millions. During a 12-year period, the Agency obtained publishing deals for “numerous works” that resulted in payments to the author in excess of twelve million dollars. The author obtained a new representative in 2007 and fired the Agency, which did not represent the author in subsequent negotiations.
Among the agreements obtained for the author during that time was a four-book publishing contract with Penguin made in 2005 that also granted the publisher an “option” to publish the author’s next book-length fictional work. Like most “options” in publishing agreements, this right would better be described as one of first negotiation. It required the author to give notice of her desire to commence negotiations on the next book and to give the publisher an exclusive opportunity to make a deal during a designated period of time.
In 2009, the author’s attorney sent Penguin the manuscript of the novel, The Black Cat, the author’s next fictional work. Penguin expressed interest and the parties negotiated and entered into a publishing agreement. Having previously terminated the Agency’s services, the author refused to pay it any commission on the contract for The Black Cat. The Agency sued the author for breach of contract (among other theories), relying on the “option” clause and the statement in the 2005 Penguin agreement that the Agency’s authority was “irrevocable” and “coupled with an interest.” The author moved to dismiss that claim and others.
Like many agreements between authors and publishers, the 2005 Penguin agreement contained an agency clause. Under its terms, the author appointed the Agency “irrevocably as the Agent in all matters pertaining to or arising from this Agreement” and required that “[a]ll sums of money due the Author under this Agreement” be paid to the Agency. Further, it provided that “[t]he Author does also irrevocably assign and transfer to [the Agency], as an agency coupled with an interest, and [the Agency] shall retain a sum equal to fifteen percent (15%) of all gross monies due and payable to the account of the Author” under the agreement. Central to the dispute was whether the phrase “agency coupled with an interest” in this clause had any significance at all. The author argued that because the Agency’s appointment was not coupled with an interest, the Agency had no entitlement to commissions from an agreement that was negotiated and entered into after the Agency was terminated. 3
The Court began its analysis with the general rules that an agency for no definite term is revocable at will, but when an agency authority is coupled with an interest, it becomes irrevocable. The test applied by the Court of to determine whether an agency is coupled with an interest asks if “as a part of the agreement with the principal, the agent receives title to all or part of the subject matter of the agency.” To have a “mere interest in the result of the execution of the authority” – such as an interest in a percentage of payments generated under a book contract — is insufficient to make the power irrevocable. And merely declaring the existence of an agency coupled with an interest does not bring it into being. A decision cited in Lampack articulated the principle this way: “The words, ‘the intention hereof being to create an agency coupled with an interest,’ do not mean that it is an agency coupled with an interest. There must be more than mere words to establish that.” 4
The Court held that notwithstanding the assertion in the contract that the agency appointment was irrevocable and coupled with an interest, the 15% commission was based on “its sale of rights in [the author’s] literary works and not an interest in those literary works themselves.” Accordingly, there was no “agency coupled with an interest,” the agency was not irrevocable, and the Agency was not entitled to a commission from monies earned under a publishing agreement made after its term as an agent had ended. 5
The Agency took the position that even if its status as an agent had come to an end, it was still entitled to commissions from The Black Cat agreement because the agency clause in the 2005 Penguin agreement so provided. (An at-will representative is entitled to post-termination commissions only if the parties’ agreement expressly provides for those commissions. 6) In support, the Agency relied on two premises: first, the language of the agency clause based the Agency’s commission on all “gross monies due and payable” to the author “under this Agreement.” Second, the 2009 agreement for The Black Cat arose out of the “option” mechanism in the 2005 agreement for the next fictional work. But this theory also failed because the Court found no express entitlement to a commission from the new publishing agreement that was made after the Agency’s termination. Rather, the Court interpreted the agency clause to limit the Agency’s commission to revenues generated by the four books that were published under the 2005 agreement itself, and according to the plaintiff’s complaint, those payment obligations were being met by Penguin. (There was no indication in Lampack that the author was relieved of her obligation to pay the Agency for commissions earned under the 2005 Penguin agreement, notwithstanding termination of the at-will agency. 7)
The Agency further argued that the author breached her payment obligations to the Agency under additional publishing contracts with Penguin and related entities, which the Agency had obtained for the author between 1999 and 2003. The Agency contended that agreements made between the author and Penguin after the Agency’s term had ended were “extensions” of the agreements that the Agency had obtained, and the author’s failure to pay commissions on the newer agreements breached the older agreements. The author again defended her position by denying that the agency relationship with the plaintiff had been coupled with an interest and by asserting that the relationship had been properly revoked. The Court again sided with the author. Because the underlying publishing agreements granted the Agency a 15% commission in proceeds from its sale of rights in the author’s literary works, and not an interest in those literary works themselves, the agency was revocable and properly revoked. The Court found that the remainder of the payment clauses in those underlying agreements only entitled the Agency to a commission for the literary works that are the subject of those agreements. Absent an express provision for commissions from “extensions” made after that termination, the Agency had no entitlement.
The plaintiff’s breach of contract claims were dismissed.
Coupling and Irrevocability
There were three key factors in Lampack: the term of the agency was not a definite period; the term was not irrevocable (notwithstanding its purporting to be so); and the agreement did not expressly apply the agent’s commission to post-termination agreements. The linchpin of the structure was irrevocability. If the agency were irrevocable, there was no logic in having provisions either for a definite term or for commissionable post-termination agreements, and none appeared in the clause. But because the term of the agency was indefinite, and its authority was not coupled with an interest, the agency was revocable and the Agency’s entitlement to commissions — from agreements arising under the “option” clause and from extensions of commission-bearing older agreements — was undermined.
A 2009 decision from the Southern District of New York in Ravallo v. Refrigerated Holdings, Inc., 8 cited in Lampack, shines more light on these principles in a context outside the entertainment industry. In Ravallo, three shareholders, who were selling a trucking company, and the purchaser of the company agreed that one of the sellers, named Winrow, would be appointed the representative of all three sellers, including plaintiff Ravallo, on matters relating to the purchase. This agency included the power to “handle and settle” certain potential claims by the purchaser following the transaction. No mention was made of revocability in the clause. When the purchaser made a claim for $7 million based on alleged breaches of representations and warranties by the sellers, Ravallo decided that Winrow would not adequately represent his interests and purported to revoke Winrow’s authorization to act on Ravallo’s behalf. The Court decided that the agency was irrevocable – even without an express provision – because it was coupled with an interest.
In reaching this result, the court cited the “ancient and well-settled” rule that an agency relationship ordinarily is revocable at will by the principal. But the presumption against irrevocability is reversed when agent’s authority is coupled with an interest or is given as security, crediting Chief Justice Marshall for first articulating the doctrine. The decision noted that “[a]n agency coupled with an interest cannot be revoked by acts, conditions, or even by the death of the principal before the expiration of the interest, unless the parties expressly agree to the contrary.” When the agency is coupled with an interest in the subject matter, the agent “has an interest in the subject matter of the power and so is acting for himself as well as for the principal.” If the power does not enable the agent to act for himself with regard to the subject matter of the agency, the agent’s power has not been coupled with an interest.
In Ravallo, Winrow “unquestionably” held the power as the three sellers’ representative for his own benefit because he too was a seller of the truck company. The subject matter of the power was the sale of the company as well as the compensation received by the three sellers. Winrow had a “personal interest” in the subject matter of the dispute in which he exercised his power on behalf of all three sellers. Had Winrow been appointed simply to resolve the dispute with the purchaser, earning a mere fee once he exercised his power, there would have been no coupling with an interest and his agency would have been revocable. (The Court further observed that Winrow also held the power for the benefit of the purchaser, which “clearly preferred the convenience of dealing with just one person.”) Winrow’s agency coupled with an interest was irrevocable in the absence of language that expressly guaranteed revocability.
Lampack and Ravallo suggest that an entity can gain an interest in the subject matter of an agency relationship by obtaining a security interest in the property or by becoming part-owner of it. Merely having a contractual entitlement to commissions based on future third party payments is not the same as having an interest in the subject matter of the agency. Merely declaring an agency “irrevocable” has no effect whatever in the absence of a coupled interest. And, merely asserting the existence of an “agency coupled with an interest” will not overcome the presumption that an agency relationship may be terminated at any time.
1 Hunt v. Rousmanier’s Administrators, 21 U.S. 174 (1823).
2 29 Misc.3d 1208(A), 2010 WL 3960602, 2010 N.Y. Slip Op. 51749(U) (N.Y. Sup. Ct., Oct. 6, 2010).
3 The author further argued that the “option” clause was an unenforceable agreement to agree and that the publishing agreement for The Black Cat did not arise out of the “option” clause in any event. The Court’s decision did not reach those arguments.
4 In re Jarmakowski’s Estate, 169 Misc. 463, 8 N.Y.S.2d 35 (Sur. Ct., Erie Co. 1938).
5 Lampack also argued that “the agency authority was given as security for the debts” it incurred in “procuring the publishing agreements” for the author, making that authority coupled with an interest. Because the right of an agent to reimburse itself for expenses out of the proceeds of the agency was not “a property interest in the subject matter of the power,” the Court rejected this argument, too.
6 McGimpsey v. J. Robert Folchetti & Associates, 19 A.D.3d 658, 798 N.Y.S.2d 498 (2d Dep’t 2005), cited elsewhere in Lampack.
7 Even when a principal has the power to revoke an agent’s authority to represent her, she is not immune to liability to the agent for breach of contract. Wilson v. International Paper Makers Realty Corporation, 307 N.Y. 20 (1954).
8 2009 WL 612490 (S.D.N.Y. 2009).
(Originally published in the Entertainment Law column of the New York Law Journal, April 29, 2011.)