Tvt Records v. Island Def Jam Music Group

412 F.3d 82

TVT RECORDS, Plaintiff-Counter-Defendant-Appellee, TVT Music, Inc., Plaintiff-Appellee, v. THE ISLAND DEF JAM MUSIC GROUP, a division of UMG Recordings, Inc., Defendant-Counter-Claimant-Appellant Lyor COHEN, Defendant-Appellant Steven Gottlieb, Counter-Claimant.

Docket No. 03-9026(L).

Docket No. 03-9046(CON).

Docket No. 03-9122(CON).

Docket No. 03-9258(CON).

United States Court of Appeals, Second Circuit.

Argued: August 10, 2004.

Decided: June 14, 2005.

Paul G. Gardephe (Kathleen L. Jennings, Shawn V. Morehead, Richard O. Jackson, on the brief), Patterson, Belknap, Webb & Tyler LLP, New York, NY, for Defendant-Counter-Claimant-Appellant.

Andrew L. Frey (Sanford I. Weisburst, on the brief), Mayer, Brown, Rowe & Maw LLP, New York, N.Y. (Matthew S. Dontzin, David A. Fleissig, the Dontzin Law Firm LLP, New York, NY, on the brief), for Defendant-Appellant.

Edward P. Lazarus (William A. Norris, Peter L. Haviland, Michael C. Small, Jonathan Gottlieb, on the brief), Akin Gump Strauss Hauer & Feld LLP, Los Angeles, CA (Lewis J. Liman, Karen A. Newirth, Cleary Gottlieb Steen & Hamilton, New York, NY, on the brief), for Plaintiff-Counter-Defendant-Appellee and Plaintiff-Appellee.

Before: JACOBS, B.D. PARKER, and HALL, Circuit Judges.

B.D. PARKER, JR. Circuit Judge.

Island Def Jam Music Group ("IDJ") and Lyor Cohen, an IDJ principal, appeal from a judgment of the United States District Court for the Southern District of New York (Marrero, J.) in favor of TVT Records and TVT Music, Inc. (collectively "TVT"). Following a failed venture to produce and promote a series of recordings, TVT sued IDJ and Cohen on contract, tort and copyright claims. The jury awarded $25 million in compensatory and $107 million in punitive damages, an amount the court remitted to a total of $54 million. Because we conclude that TVT's tortious interference and fraudulent concealment claims had no legally sufficient evidentiary basis and that, as a matter of law, TVT was not entitled to assert a copyright claim, we reverse the judgment and set aside the awards on these grounds. Because we also conclude that punitive damages were not recoverable for the breach of contract proved at trial, we reverse that award as well.

Background

This litigation arose from a contractual dispute between IDJ and TVT over the right to produce and market recorded music performances by a group known as Cash Money Click ("CMC"). Except as noted, the facts are undisputed. IDJ and TVT are both major players in the recording industry. TVT, founded in 1985, is the nation's largest independent record label. It produces and distributes the works of a number of highly successful hip-hop artists. IDJ is a division of Universal Music Group Recordings, Inc., the world's largest record company.

Irving Lorenzo of IDJ, known professionally as Irv Gotti, is one of the industry's most successful hip-hop producers. He began his career as a talent scout at TVT in the early 1990s and a few years later recruited CMC to TVT. CMC's members were Christopher Bristole, Otha Miller and Jeffrey Atkins, professionally known as Ja Rule. All were relatively obscure at that time. CMC subsequently signed an exclusive recording contract with TVT in 1994 (the "1994 Agreement"). The group recorded a number of songs, most of which were not released, and no albums incorporating the songs were produced. In 1996, Gotti left TVT and joined IDJ.

Ja Rule was released from his contractual obligations to TVT in 1994 and eventually followed Gotti to IDJ, signing an exclusive recording contract in 1998. Although TVT retained no rights to any of Ja Rule's new recordings after 1994, it still owned the rights to old CMC masters that had been made while Ja Rule was under contract to TVT.

Ja Rule's relationship with IDJ was highly successful, and he evolved into one of the recording industry's major stars. Gotti's career also flourished at IDJ. Serving as producer, co-producer, or executive producer, he released a series of enormously successful albums for numerous major hip-hop artists such as Jay Z, Ja Rule and DMX. In 1999, Gotti entered a joint venture with IDJ to form a record label, Murder, Inc., through which Gotti would produce records by various artists, including Ja Rule.

In early 2001, despite Ja Rule and Gotti's exclusive recording contract with IDJ, TVT approached Ja Rule and Gotti about reuniting CMC for a new album. Although Lyor Cohen, IDJ's chairman, was reluctant to give IDJ's consent to a new CMC album produced by TVT, he found himself in an awkward predicament. He felt the need to accommodate Ja Rule and Gotti, who were in the midst of renegotiating both the Murder, Inc. joint venture agreement and the terms of Ja Rule's future recordings with IDJ. Cohen was concerned that a failure to accommodate Ja Rule's request to do the CMC project might, at this fragile time, impair IDJ's relationship with Gotti and perhaps alienate Ja Rule. The discussions culminated in a Heads of Agreement ("HOA") signed by TVT, Ja Rule and Gotti — both on his own behalf and on behalf of Murder, Inc. The HOA called on Gotti to produce a CMC album containing eight new songs and four re-mixes of CMC's earlier, never-released recordings. The HOA further provided that TVT would receive fifty percent of the profits from the new venture and would own the copyrights to all the masters. However, since IDJ had exclusive contracts with Ja Rule and Gotti, the agreement was subject to IDJ's consent and the HOA itself appeared to contemplate IDJ's ultimate role in "sign[ing]-off on this [agreement] signifying its acceptance and agreement thereto."

IDJ contends that, as leverage to secure its consent, TVT threatened to release the old CMC masters to coincide with the release of IDJ's next Ja Rule album and that Ja Rule and Gotti were, in part, motivated to assist the careers of the two former, comparatively less successful, CMC members. Nevertheless, Gotti and Ja Rule warranted in the HOA that they had "the right, power and authority to enter into and perform the [HOA's] terms and conditions," and "indemnifie[d] and h[e]ld[ ] TVT harmless of and from any claims by any third parties that TVT's exploitation of the Album ... infringe upon or violate the rights of any such party."

Negotiations commenced and resulted in a Side Letter Agreement ("SLA") dated September 2001 between IDJ and TVT, Gotti and Ja Rule. Under the SLA, IDJ agreed "to comply with and honor all of the terms and conditions set forth in the [HOA] (as same pertains to or affects [IDJ]) and to permit `Ja Rule', Murderers Inc.[sic] and Irv Gotti to perform for [TVT] and grant to [TVT] the rights set forth in the [HOA]." The SLA also modified the profit distribution formula in the HOA. Instead of fifty percent, TVT would receive forty percent, Gotti, Ja Rule and Murder, Inc. would together receive thirty percent, and IDJ would receive thirty percent. The SLA was signed on behalf of IDJ by Jeffrey Kempler, senior vice president of business and legal affairs at IDJ, but was not returned to TVT. TVT's lawyer William Leibowitz, Esq. became concerned when he did not receive IDJ's executed copies of the SLA and, in November 2001, contacted IDJ's lawyers. They assured Leibowitz that the deal was final, but still did not forward executed copies to TVT. Later that month, Leibowitz took the precautionary step of writing IDJ to place it on notice that TVT was relying on IDJ's assurances regarding its commitment to the SLA and that TVT was proceeding on that basis. IDJ did not respond to the letter.

Sometime after execution of the HOA by Gotti and Ja Rule in October 2001, TVT, Ja Rule and Gotti began to perform obligations imposed by the HOA. The signing of the HOA triggered a $400,000 advance payment from TVT to Gotti and Ja Rule, and the artists began recording new CMC tracks and remixing old ones. In the spring of 2002, Gotti, Murder, Inc. and TVT developed promotional materials for the album, including a teaser DVD and CD featuring two of the remastered CMC tracks released by IDJ. In this regard, IDJ obtained oral and written licenses for the songs "The Rain" and "Get Tha Fortune," respectively, from TVT. A release date was set for the fall of 2002.

TVT's theory, which it successfully pursued at trial, was that IDJ and Cohen never really intended to cooperate on the new TVT album and, in fact, intended to sabotage it. They initially consented to the CMC project in order to gain time to renegotiate an extension of Gotti's contract, which was expiring at the end of 2001. Because Cohen knew he could not alienate Gotti during this period, he accommodated Gotti and Ja Rule's desire to produce (at TVT's expense) a new CMC album. Once Gotti was re-signed in December 2001, IDJ proceeded, through a variety of steps, to kill the album. According to TVT, IDJ promised Gotti and Ja Rule that it would pay additional compensation if they could deliver the TVT-owned CMC masters to IDJ for release. IDJ, at the same time, moved up the release date for Ja Rule's next IDJ album from early 2003 to November 2002 to compete with, and presumably detract attention from, the new CMC album. To cap things off, in August 2002, IDJ finally responded to TVT's request of ten months earlier for the executed copy of the SLA by rejecting it, forbidding TVT from exploiting Ja Rule's services and informing TVT that it could not proceed with the release of the CMC album.

Faced with the prospect of losing the potentially valuable CMC album and having IDJ issue its own Ja Rule album that might include old CMC music, TVT sued IDJ, asserting a number of claims that have survived to this appeal. TVT claimed for breach of contract, contending that IDJ breached the SLA by repudiating it after agreeing to execute it and instructing Murder, Inc., Gotti and Ja Rule not to deliver the CMC album to TVT. It claimed that IDJ tortiously interfered with Ja Rule and Gotti's performance under the HOA and...