Compulsory License Provision

October 22, 2004


Michael I. Rudell

Court Strictly Construes Time Limits In Compulsory License Provision

(Originally published in the Entertainment Law column in the New York Law Journal, October 22, 2004.)

The plaintiff, in an action for breach of a record distribution agreement has lost a motion for summary judgment on the grounds that it did not properly obtain a compulsory license for a CD recording.1 By failing to do so, it did not fulfill an essential element of its breach of contract claim.

In June, 2001, 24/7 Records, Inc. (“24/7”) entered into an exclusive record distribution agreement with Artemis Records (“Artemis”) designating Artemis as the sole distributor of all of its recordings released in the United States. As permitted under the agreement, Artemis assigned certain of its distribution responsibilities to RED Distribution, Inc. which is a subsidiary of Sony Music Entertainment, Inc.

The distribution agreement stated: “[24/7] solely shall be responsible for, and shall pay all costs in connection with, each of the following: the securing, in writing, of all necessary licenses, consents, and permissions required for the distribution of Records hereunder, including, without limitation, from recording artists, producers, other performers, music publishers, unions and guilds, and other Persons rendering services or granting rights in connection with the Recordings and the Records.”

The agreement further states that “[24/7] [has] or prior to release hereunder shall have, and shall at all times thereafter continue to have in effect a valid and enforceable grant of rights or license . . . with respect to each Recording, each musical composition, and all other copyrightable materials embodied in or on the Records, including, without limitation, mechanical licenses for all musical compositions and licenses for so-called ‘samples.’”

In the summer of 2002, a Spanish recording group recorded a song which ultimately became known as “The Ketchup Song (Heh Hah).” The song became popular outside the United States, where an affiliate of Sony distributed it both on an album and as a single. The affiliate also released the song in the United States, but only as part of an album.

Shortly after the song became successful, 24/7 recorded a cover version of the song (a recording of the same musical composition by a different artist). The song was sung by a musical group called “The Heinz Girls” and the jacket featured the title of the song and a red and green ketchup bottle, which is labeled with the words “Heinz Girls” and “The Ketchup Song.” Distribution commenced in the Fall of 2002, but no later than November 5.

Thereafter, several Sony executives called the CEO of Artemis to express displeasure over the release of that cover version, which they believed would compete with Sony’s recording. An executive of Columbia Records spoke with an executive of RED stating that he did not understand why RED would be competing against Sony with a cover of a song which Sony already had in distribution. (Although Artemis and Sony do not have a formal business relationship, it is the position of 24/7 that Sony and RED dominate Artemis economically.)

After internal discussions occurred at Artemis, which included Adrian White, an attorney at Artemis, White decided to withdraw the single from the market because she was concerned that, without a license from Heinz, the jacket for the single would infringe the trademarks of Heinz. White wrote a letter to 24/7 indicating that Artemis intended to immediately cease distributing the single entitled “The Ketchup Song.”

24/7 claims that Artemis breached the distribution agreement by, among other things, failing to distribute its records in good faith and failing to pay royalties to 24/7. It further alleges that Sony tortiously interfered with the distribution contract and engaged in unfair competition by causing Artemis to breach the contract.

Defendants initially moved for summary judgment on grounds related to trademark. At oral argument, however, it highlighted the position, only cursorily mentioned in its original briefs, that the claims of 24/7 cannot survive summary judgment because 24/7 never secured a license to use the copyrighted Ketchup Song composition, which made the distribution of the single unlawful. 24/7 disputes this, maintaining that it properly obtained a compulsory license.

After reviewing the grounds on which a motion for summary judgment will be decided, the Court discussed the four elements necessary to recover on a breach of claim under New York law: (1) the existence of an enforceable contract; (2) the performance of the contract by one party; (3) breach by the other party; and (4) damages. Thus, in order for 24/7 to establish that it fulfilled its obligations under the contract, it must prove that it secured a license to use the copyrighted composition.

One of the rights afforded to a copyright owner under the Copyright Act (the “Act”) is the exclusive right to reproduce the copyrighted work. The compulsory license provision of the Act provides that one who wishes to record a copyrighted non-dramatic musical work can do so without the consent of the copyright owner if it files a notice of intent to use the work and pays a statutory royalty. But, to take advantage of this section, the applicant must comply with strict time limits.

Those are set forth in, section 115(b)(1) of the Act which provides that “[a]ny person who wishes to obtain a compulsory license under this section shall, before or within thirty days after making, and before distributing any phonorecords of the work, serve notice of intention to do so on the copyright owner. If the registration or other public records of the Copyright Office do not identify the copyright owner and include an address at which notice can be served, it shall be sufficient to file the notice of intention in the Copyright Office.”

The Act further provides that failure to serve or file the requisite notice forecloses the possibility of a compulsory license and, in the absence of a negotiated license, renders the making and distribution of phonorecords (which include compact discs) actionable as acts of infringement. It has been held that the failure to serve the notice of intention before distributing phonorecords precludes the creation of a compulsory license, and it does so both as to copies distributed prior to service and as to copies distributed thereafter.

It is undisputed that 24/7 did not have a negotiated license to use “The Ketchup Song” and that it was its obligation to secure a compulsory license prior to distribution. Applying the terms of the statute, in order to have obtained a compulsory license, the notice of intention was required to have been filed before November 5, 2002, the date of distribution.

24/7 was not able to find the name of the copyright owner in the public records and, therefore, filed its notice of intention in the Copyright Office. The notice of intention which it submitted was received by the Copyright Office on November 14, 2002. Under the Act, the date of filing is “the date when a proper [n]otice and fee are both received in the Copyright Office.” Because 24/7 did not file its notice of intention until nine days after distribution began, the Court states that it is foreclosed from obtaining a compulsory license.

The Court rejects the argument by 24/7 that the filing of a notice of intention was timely. 24/7 bases its conclusion on a Circular published by the Copyright Office which, it argues, provides that only a notice of intention served on the owner found in the public records must be served before or within thirty days of making the record, but that there are no such restrictions for notices served on the Copyright Office. The Court indicates that section 115(b)(1) of the Act clearly states that notices are governed by the same time limits, whether filed on the owner or in the Copyright Office. Further, and more importantly, the Court states that the 30-day provision is not at issue in that 24/7 is precluded from obtaining a compulsory license because it did not serve a notice of intention “before distributing any phonorecords.”

The Court rejects the argument of 24/7 that Artemis was required to give it time to cure the license defect before ceasing distribution, noting that any such attempt to cure would have been futile. 24/7 was precluded from obtaining a compulsory license as of November 5.

24/7 states that it discovered that a Sony affiliate named Sony/ATV Publishing LLC administered or published the copyright to the song. It argues that it obtained a compulsory license by sending a copy of the untimely notice it filed in the Copyright Office to Sony/ATV. This was received by Sony/ATV on November 8, 2002. Further, 24/7 sent Sony/ATV what it asserts is a $251.60 royalty payment under the compulsory license six months after Artemis cancelled the distribution contract, and approximately three weeks before it filed suit. The fact that Sony/ATV deposited the payment does not bear on the ability of 24/7 to show that it fulfilled the license condition such that Artemis was obligated to distribute the single in November of 2002. That payment cannot revive an untimely and ineffective notice of intention served on the Copyright Office five months earlier. 24/7 did not secure a license and was foreclosed from curing that failure, thus excusing the obligation by Artemis to distribute the record.

The Court notes that Artemis initially distributed the record, even though 24/7 did not have a copyright license, but indicates that a condition precedent in favor of one party may be waived by that party. However, the Act makes clear that the distribution of the single without a license necessarily infringed the rights of the owner of the copyright in the composition. 24/7’s incurable failure to secure a license made distribution of the recording illegal, and that condition cannot be waived. The Court states that “Although the contract as written was not enforceable on grounds of illegality, once a license could no longer be obtained, in essence, the contract became a bargain to commit an illegal act. It is well settled that a Court will not enforce a contract to commit an unlawful act.”

The Court concludes this section of the decision by noting that, regardless of whether Artemis otherwise was motivated to cease distribution, 24/7 cannot prove that it performed its obligation to secure a license under the agreement, which is an essential element of its breach of contract claim.

Accordingly, the Court grants defendants’ motion for summary judgment.

[Author’s note: Our firm performs services for divisions of the Sony parent company, but does not perform services for Sony Music Entertainment, Inc. and was not involved in this action.]


1 24/7 Records, Inc. v. Sony Music Entertainment, Inc., 2004 WL 2093132 (S.D.N.Y.) (September 20, 2004)