Second Circuit Rules in Record Distribution Case

The U.S. Court of Appeals for the Second Circuit upheld cancellation of the distribution by Artemis Records of a cover recording of “The Ketchup Song (Heh Hah)” for which 24/7 Records failed to obtain a compulsory license for the musical composition. But the appeals court allowed 24/7 to proceed with claims of wrongful termination of 24/7's overall distribution contract with Artemis and that Artemis' distributor Sony Music, which distributed an earlier internationally successful recording of “The Ketchup Song,” had tortiously interfered with the 24/7-Artemis agreement. 24/7 Records Inc. v. Sony Music Entertainment LLC, 04-5563.

Florida-based 24/7 signed a deal for Artemis to serve as 24/7's exclusive record distributor in the United States. The agreement, which also acknowledged that Sony's RED Distribution would work on behalf of Artemis, stated:

“[24/7] solely shall be responsible for, and shall pay all costs in connection with, each of the following:
…
(b) 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 stated that 24/7 represented and warranted that 24/7 already had “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').”

The Second Circuit explained: “This representation required 24/7 to obtain a license for use of the Ketchup Song, which 24/7 failed to do, before Artemis became obligated to distribute that record. … In order to comply with the Artemis contract and to avoid copyright infringement for the Ketchup Song cover, 24/7 was required to obtain either a negotiated license (which Sony was free to grant or deny) or a compulsory license, which would allow 24/7 to cover the Ketchup Song without Sony's consent so long as it notified Sony of its intent to do so and complied with such statutory requirements as the payment of royalties at a fixed statutory rate.”

After Artemis stopped distributing 24/7's cover of the internationally popular “Ketchup Song,” 24/7 twice tried unsuccessfully to obtain a license from Sony. In any case, 17 U.S.C. Sec. 115(b)(1), the compulsory-licensing provision of the Copyright Act, requires 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.” Sec. 115(b)(1) also mandates: “Failure to serve or file the notice required by clause (1) forecloses the possibility of a compulsory license and, in the absence of a negotiated license, renders the making and distribution of phonorecords actionable as acts of infringement.”

For the appeals court, “24/7's failure to secure a license for use of the Ketchup Song is dispositive” of the breach-of-contract claim over the defendants' ceasing to distribute the 24/7 cover recording. (The appeals court declined to consider 24/7's argument that it had an implied negotiated license from Sony; 24/7 had failed to first raise the claim before the district court.)

But the appeals court also determined that the district court erred in failing to discuss 24/7's claim of wrongful termination of the distribution contract itself. Here, the Second Circuit surmised: “Artemis cites the deposition testimony of several Artemis employees to support its contention that it never terminated the Agreement and never stopped distributing 24/7's [other] records. However, 24/7 produced evidence from which a jury could find that the Agreement was terminated. … Otherwise, Artemis advances no reason, based either on the terms of the Agreement or some principle of New York contract law, why the termination of the Agreement ' if it occurred ' was warranted.”

The Second Circuit court went on to allow 24/7 to proceed with claims of Sony Music's alleged tortious interference and unfair competition under New York law, noting in part that determination of whether there was a breach of the overall 24/7-Artemis distribution agreement was needed to prove tortious interference, an element of which is proof that a defendant intentionally procured a breach of contract. The appeals court added: “A reasonable inference from the evidence presented is that Sony intentionally caused Artemis not only to cancel distribution of the Ketchup Song [to eliminate competition with Sony's distribution of the earlier, international "Ketchup Song" hit recording], but also to terminate the Agreement in its entirety. While Sony points to evidence that supports alternative views ' that the Agreement was never terminated, that the termination of the Agreement was contemplated by Artemis long before Sony came into the picture, etc. ' deciding between these competing views is for the jury.”

' Stan Soocher

The U.S. Court of Appeals for the Second Circuit upheld cancellation of the distribution by Artemis Records of a cover recording of “The Ketchup Song (Heh Hah)” for which 24/7 Records failed to obtain a compulsory license for the musical composition. But the appeals court allowed 24/7 to proceed with claims of wrongful termination of 24/7's overall distribution contract with Artemis and that Artemis' distributor Sony Music, which distributed an earlier internationally successful recording of “The Ketchup Song,” had tortiously interfered with the 24/7-Artemis agreement. 24/7 Records Inc. v. Sony Music Entertainment LLC, 04-5563.

Florida-based 24/7 signed a deal for Artemis to serve as 24/7's exclusive record distributor in the United States. The agreement, which also acknowledged that Sony's RED Distribution would work on behalf of Artemis, stated:

“[24/7] solely shall be responsible for, and shall pay all costs in connection with, each of the following:
…
(b) 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 stated that 24/7 represented and warranted that 24/7 already had “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').”

The Second Circuit explained: “This representation required 24/7 to obtain a license for use of the Ketchup Song, which 24/7 failed to do, before Artemis became obligated to distribute that record. … In order to comply with the Artemis contract and to avoid copyright infringement for the Ketchup Song cover, 24/7 was required to obtain either a negotiated license (which Sony was free to grant or deny) or a compulsory license, which would allow 24/7 to cover the Ketchup Song without Sony's consent so long as it notified Sony of its intent to do so and complied with such statutory requirements as the payment of royalties at a fixed statutory rate.”

After Artemis stopped distributing 24/7's cover of the internationally popular “Ketchup Song,” 24/7 twice tried unsuccessfully to obtain a license from Sony. In any case, 17 U.S.C. Sec. 115(b)(1), the compulsory-licensing provision of the Copyright Act, requires 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.” Sec. 115(b)(1) also mandates: “Failure to serve or file the notice required by clause (1) forecloses the possibility of a compulsory license and, in the absence of a negotiated license, renders the making and distribution of phonorecords actionable as acts of infringement.”

For the appeals court, “24/7's failure to secure a license for use of the Ketchup Song is dispositive” of the breach-of-contract claim over the defendants' ceasing to distribute the 24/7 cover recording. (The appeals court declined to consider 24/7's argument that it had an implied negotiated license from Sony; 24/7 had failed to first raise the claim before the district court.)

But the appeals court also determined that the district court erred in failing to discuss 24/7's claim of wrongful termination of the distribution contract itself. Here, the Second Circuit surmised: “Artemis cites the deposition testimony of several Artemis employees to support its contention that it never terminated the Agreement and never stopped distributing 24/7's [other] records. However, 24/7 produced evidence from which a jury could find that the Agreement was terminated. … Otherwise, Artemis advances no reason, based either on the terms of the Agreement or some principle of New York contract law, why the termination of the Agreement ' if it occurred ' was warranted.”

The Second Circuit court went on to allow 24/7 to proceed with claims of Sony Music's alleged tortious interference and unfair competition under New York law, noting in part that determination of whether there was a breach of the overall 24/7-Artemis distribution agreement was needed to prove tortious interference, an element of which is proof that a defendant intentionally procured a breach of contract. The appeals court added: “A reasonable inference from the evidence presented is that Sony intentionally caused Artemis not only to cancel distribution of the Ketchup Song [to eliminate competition with Sony's distribution of the earlier, international "Ketchup Song" hit recording], but also to terminate the Agreement in its entirety. While Sony points to evidence that supports alternative views ' that the Agreement was never terminated, that the termination of the Agreement was contemplated by Artemis long before Sony came into the picture, etc. ' deciding between these competing views is for the jury.”

' Stan Soocher