19 Recordings Ltd. v. Sony Music Entm't

165 F.Supp.3d 156

19 Recordings Limited, Plaintiff,

v.Sony Music Entertainment, Defendant.

14 Civ. 1056 (RA) (GWG)

United States District Court, S.D. New York.

Signed March 18, 2016

Richard Steven Busch, Steven C. Douse, King & Ballow, Nashville, TN, for Plaintiff.

Christopher Yuk Lun Yeung, Douglas Sleater Curran, Eudokia Evie Spanos, Jonathan Michael Sperling, Covington & Burling LLP, New York, NY, for Defendant.

OPINION AND ORDER

GABRIEL W. GORENSTEIN, United States Magistrate Judge

In this suit by 19 Recordings (“19”) against Sony Music Entertainment (“Sony”), 19 moves to amend the existing complaint to include claims for breach of the implied covenant of good faith and fair dealing.¹ For the reasons stated below, the plaintiff's motion is denied.

I. BACKGROUND

Because the resolution of the motion to amend turns on whether the proposed Second Amended Complaint states a claim for relief, we assume its allegations are true and draw all reasonable inferences in 19's favor. See, e.g., Steginsky v. Xcelera Inc., 741 F.3d 365, 368 (2d Cir.2014) (citation omitted). As is true for motions to dismiss for failure to state a claim, we have also considered documents that are annexed to or incorporated by reference in the proposed complaint, as described further below. See, e.g., Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir.2002).² We focus on the allegations relating to the claim for relief that is the subject of the motion to amend.

The proposed amended complaint alleges that 19 entered into individual recording agreements with several singers who appeared on the American Idol television series. See [Proposed] Second Amended Complaint, appended as Exhibit A to P. Mem. (“SAC”), ¶¶ 6–15. These recording agreements “assigned to 19 the rights necessary for 19 to enter into” licensing agreements with third parties. Id. ¶ 15. Based on its control of individual artists' recordings, 19 entered into a series of licensing agreements with Sony, id., an example of which is contained in the record, see Licensing Agreement, appended as Exhibit B to Declaration of Christopher Y.L. Yeung, filed June 19, 2014 (Docket # 20) (the “Licensing Agreement” or “LA”).³ Under the Licensing Agreement, Sony paid 19 “pursuant to a highly complex royalty structure.” 19 Recordings, Ltd. v. Sony Music Entm't, 97 F.Supp.3d 433, 437 (S.D.N.Y.2015). In pertinent part, the provisions on royalties direct Sony to make payments to 19 based on the exploitation of “albums” and “records.” See, e.g., LA ¶ 7.1. The Licensing Agreement provides, however, that 19 “shall not be entitled to a share of income received by or credited to [Sony] on a general or label basis.” LA ¶ 7.17. It also provides that Sony's right to license the songs subject to the agreement “may be exercised ... in any ... manner ... as shall be determined ... by [Sony] in its sole and absolute discretion.” Id. ¶ 12.3.

Sony subsequently contracted with third party streaming providers, who made the artists' recordings available over the Internet. SAC ¶¶ 36, 39. One of these providers was Spotify. Id. ¶ 42; see January 18, 2011 Agreement between Sony Music Entertainment and Spotify USA Inc., appended as Exhibit C to P. Mem. (“Spotify Contract”). Spotify allows end users to access Sony's music catalog, including songs by artists associated with 19. SAC ¶ 45.

19 alleges that Sony “structured its agreement with the streaming service, Spotify, in a manner designed to rob 19, its artists, and other artists of royalties.” Id. ¶ 42. The SAC relies heavily on the allegation that Sony “owns an equity interest in Spotify” that 19 alleges is “in excess of five percent,” id. ¶ 44, and that Sony made an arrangement with Spotify in the Spotify Contract that could “only” be obtained by “self dealing,” id. ¶ 48.

19 alleges that the royalty rate in the Spotify Contract is “substantially below industry standard.” SAC ¶ 45. Sony's “per stream” rate with Spotify is alleged to be substantially below what is paid by Spotify's competitors. Id. ¶ 46.⁴ This lower rate is alleged to “increase[ ] the value of Sony's ownership in Spotify at the expense of 19.” P. Mem. at 4. The lower rate allegedly

allows Sony to structure its agreement with Spotify to receive income which is purportedly unconnected to the exploitation of sound recordings so that Sony does not have to share that revenue with 19, the artists involved in this action, or other artists, and therefore further enriches Sony in the process.

SAC ¶ 47.

The complaint alleges that the agreement “moves consideration” from exploitation of 19's catalog to “other forms of income.” Id. ¶ 48. The only example given in the complaint is the allegation that the Spotify Contract gives advertising rights to Sony, which Sony can resell. Id. ¶ 49. The SAC alleges that payments to Sony that are unrelated to the exploitation of 19's catalog reflect “a scheme to enrich Sony while robbing 19 ... of the fruits of [its] agreement[ ] with Sony.” Id. ¶ 50. This portion of the complaint concludes with the allegation that Sony has “us[ed] its ability to self deal in a manner which rob[s]” 19 of the “benefit of [its] bargain[ ].” Id. ¶ 53.

II. LAW GOVERNING MOTIONS TO AMEND

Fed. R. Civ. P. 15(a)(2) provides that leave to amend should be “freely give[n] ... when justice so requires.” While the decision to grant leave to amend a pleading is within the discretion of the Court, the Court must have “good reason” to deny leave to amend. See Acito v. IMCERA Grp., Inc., 47 F.3d 47, 55 (2d Cir.1995) (citing S.S. Silberblatt, Inc. v. East Harlem Pilot Block Bldg. 1 Hous. Dev. Fund Co., 608 F.2d 28, 42 (2d Cir.1979) ). Leave to amend may be denied where there has been “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party ... [or] futility of amendment.” Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962).

“An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6).” Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 258 (2d Cir.2002) (citing Dougherty v. N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 88 (2d Cir.2002) ). Rule 12(b)(6) provides that a party may move to dismiss an opposing party's pleading that “fail[s] to state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). As we have already noted, such a motion requires a court to accept as true all of the allegations contained in a complaint. However, that principle does not apply to legal conclusions. See Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ; Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (“[A] plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.”) (citation, internal quotation marks, and brackets omitted). In other words, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice,” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citation omitted), and thus a court's first task is to disregard any conclusory statements in a complaint, id. at 680, 129 S.Ct. 1937.

Next, a court must determine if the complaint contains “sufficient factual matter” which, if accepted as true, states a claim that is “plausible on its face.” Id. at 678, 129 S.Ct. 1937 (citation and internal quotation marks omitted); accord Port Dock & Stone Corp. v. Oldcastle Ne., Inc., 507 F.3d 117, 121 (2d Cir.2007) (“[A] complaint must allege facts that are not merely consistent with the conclusion that the defendant violated the law, but which actively and plausibly suggest that conclusion.”). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citations and internal quotation marks omitted). “[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct,” a complaint is insufficient under Fed. R. Civ. P. 8(a) because it has merely “alleged” but not “ ‘show[n] that the pleader is entitled to relief.’ ” Id. at 679, 129 S.Ct. 1937 (quoting Fed. R. Civ. P. 8(a)(2) ) (internal punctuation omitted).

III. DISCUSSION

Sony argues, inter alia, that 19's new claim is futile. Accordingly, we turn to the question of whether it could survive a motion to dismiss.

A. Law Governing the Implied Covenant of Good Faith and Fair Dealing

The parties' briefs cite nearly exclusively to New York case law and thus we apply the law of New York to plaintiff's claims. See, e.g., Krumme v. WestPoint Stevens Inc., 238 F.3d 133, 138 (2d Cir.2000) (“The parties' briefs assume that New York law controls, and such implied consent is sufficient to establish choice of law”) (citation and internal punctuation omitted); see also Licensing Agreement ¶ 28.1 (choice-of-law clause selecting New York). One case helpfully summarized New York law on the implied covenant of good faith and fair dealing as follows:

Under New York law, “a covenant of good faith and fair dealing in the course of contract performance” is “[i]mplicit in all contracts.” Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389, 639 N.Y.S.2d 977, 663 N.E.2d 289 (1995) (citing Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publ'g Co., 30 N.Y.2d 34, 45, 330 N.Y.S.2d 329, 281 N.E.2d 142 (1972) ). The implied covenant of good faith and fair dealing obligates a promisor to fulfill “any promises which a reasonable person in the position of the promisee would be justified in understanding were

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