BY:Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, April 22, 2005.)
The Appellate Division has upheld the decision of the New York Supreme Court which granted defendants’ motion to dismiss a complaint brought by recording artists to recover damages allegedly caused by recording companies’ release of their recordings for transmission over the Internet in digital format.[i] The Court held that the plaintiffs had granted to defendants any right they had to the said recordings, without reservations.
Plaintiffs are individual recording artists who, starting in the 1950’s, entered into agreements granting defendant companies or their predecessors master recording and licensing rights. They include the following artists who entered into contracts with the following companies: Tony Silvester, d/b/a The Main Ingredient with RCA Records as predecessor to BMG Entertainment, Inc. and with Polydor Records, as predecessor to defendant Universal Music Group, Inc.; Lester Chambers, d/b/a The Chambers Brothers with Columbia Records, predecessor to Sony Music Entertainment, Inc.; Carl Gardner, d/b/a The Coasters with Atlantic Records, predecessor to defendant Time Warner, Inc., and Bill Pinkney, d/b/a/ The Original Drifters, with Atlantic Records, predecessor to Time Warner, Inc.
The lower court decision indicates that all of the contracts contain provisions conveying full ownership rights to the master recordings to the defendant companies or their predecessors. Although there is some variation among the contracts, they all contain language identical or similar to the following:
“All recordings, phonograph record masters and reproductions made therefrom, together with the performances embodied therein, shall be entirely [the Record Company’s] property. [The Record Company] shall have the unrestricted right to manufacture, use, distribute and sell sound productions of the performances recorded hereunder made by any method now known, or hereafter to become known….”
Plaintiffs claim to represent a class of thousands of recording artists and their heirs, executors, successors and assignees who, at various times, between 1956 and 1996, signed master recording agreements with defendants or their predecessors in interest. Plaintiffs allege (i) that they and other proposed members of the class do not have any agreements with any defendant which authorize or entitle defendants to exploit plaintiffs’ sound recordings in any form other than as phonograph records or other analog media; (ii) that their contracts did not confer to the defendants the right to exploit the sound recordings by means of digital media including compact discs and digital audio files that can be distributed over the Internet and across computer networks, and (iii) that their contracts do not constitute the entire agreement among the parties because they are subject to the terms and conditions of the National Codes of Fair Practice for Sound Recordings of AFTRA (the “Codes”) which plaintiffs contend preclude the sound recordings from being used in any medium other than by means of phonograph records.
Plaintiffs note that the new digital mastering technology that was adopted by record companies in the early 1980’s enabled recordings to be copied without the loss of sound quality or distortions associated with the copying of analog recordings. Accordingly, digitalization was not permitted by the language in the contracts or in the Codes.
In or about 1999, an audio format MP3 was developed which allowed digital audio files to be compressed into much smaller files with little degradation of sound quality, which in turn made distribution over the Internet and across computer networks much easier. Various members of the recording industry, by prosecuting claims against MP3.com and Napster, Inc., obtained settlements of approximately $15 million to $20 million and warrants to purchase shares of MP3.com common stock and licensing fees of at least $6 million in exchange for releases. Plaintiffs contend that defendants had no right to enter into any agreements with MP3.com or Napster licensing them the right to distribute sound recordings in digital form over the Internet.
Plaintiffs seek compensatory and punitive damages for breach of the recording contracts, as modified by the Codes, copyright infringement and equitable share of defendants’ damages which were recovered for copyright infringement in the Federal courts.
The defendants moved to dismiss the Complaint on the basis that the plain language of each of the recording agreements provided that, in exchange for royalties, plaintiffs transferred all of their rights in the sound recordings to the applicable record companies. Defendants also claim that Copyright Act does not provide for equitable apportionment; thus, plaintiffs would not be entitled to any portion of the proceeds of the settlements in the copyright infringement action against MP3.com, Inc.
In its decision, the lower court indicated that contracts such as the ones in question have been interpreted according to their plain meaning. The words “by any method now known, or hereafter to become known,” which are contained in these contracts clearly indicate development of new technologies. Citing Greenfield v. Philles Records, Inc.[ii] the Court of Appeals, interpreting a contract involving the transfer of rights by a recording artist to a record company, held that in the absence of an explicit contractual reservation of rights by the artist, the transfer of full ownership rights to the master recordings of musical performances carried with it the unconditional right of the producer to redistribute those performances in any technological format. The Court in that action found that, despite the technological innovations that are revolutionizing the recording industry, long-settled common law contract law governed.
The Court also rejects plaintiffs’ argument that this case is distinguished from the Greenfield decision because the recording contracts here were subject to AFTRA union contracts or the Codes. It notes that the Codes are a series of fair practices agreements between AFTRA and the record companies which govern minimum wage and fee compensation and terms, including minimal payments for benefits to welfare funds and conditions for the engagement of artists making phonograph records. They do not affect the broader contractual provisions that convey property rights to the record companies.
For the above reason, the lower court dismissed the plaintiffs’ breach of contract claims. The Court upheld that decision stating: “The documentary evidence … demonstrates conclusively that plaintiffs contracted away any rights they had to the subject recordings, without reservation, and, indeed, expressly conveyed in each of the governing contracts entered into with defendants, the right to exploit the subject recordings by any method, including methods unknown at the time of contracting [citing Greenfield]. These arm’s-length contracts are entirely dispositive of plaintiffs’ various claims.”
An attorney for one of the defendants in this action has stated that the ruling will bring stability to the record industry because this is the first appellate court in New York to address the issue.
This decision is another in a line of cases which reinforce the weight given to clauses containing words similar to “by any method now known or hereafter to become known” in dealing with issues related to technologies developed after the time the applicable contracts were signed.
[i] Silvester v. Time Warner, 787 N.Y.S.2d 870 (2005).
[ii] 98 N.Y.2d 562 (2002).