The U.S. Court of Appeals for the Second Circuit on June 14 reversed a 2003 District Court judgment, which ordered Lyor Cohen and the Island Def Jam Music Group to pay about $54 million to Steve Gottl

The U.S. Court of Appeals for the Second Circuit on June 14 reversed a 2003 District Court judgment, which ordered Lyor Cohen and the Island Def Jam Music Group to pay about $54 million to Steve Gottlieb's TVT Records and TVT Music.

As a result, the final judgment in the high-profile case over Ja Rule recordings, which pitted the country's largest indie label against a division of the world's largest record company, is expected to state that Cohen is not liable for any damages and IDJ (part of Universal Music Group Recordings) is liable for $126,720.

The following is a summary of the appellate court's opinion.

BACKGROUND

Irving Lorenzo, known professionally as Irv Gotti, was an A&R man for TVT in the early 1990s. He brought to TVT Cash Money Click members Christopher Bristole, Otha Miller and Jeffrey Atkins, known professionally as Ja Rule, who signed an exclusive recording agreement in 1994.

CMC recorded a number of tracks, most of which were never released. An album of the recordings was never released.

Ja Rule was released from his TVT contractual obligations in 1994. Gotti joined IDJ in 1996 and became one of the industry's top hip-hop producers.

Ja Rule in 1998 rekindled his relationship with Gotti and signed an exclusive recording agreement with IDJ that year. He also became very successful under the IDJ umbrella. Gotti then formed Murder Inc. in 1999 as a joint venture with IDJ to produce a number of artists, including Ja Rule.

TVT in 2001 approached Gotti and Ja Rule to record a new album with the two other members of CMC. This required IDJ's consent.

Although reluctant to consent, Cohen as IDJ's chairman did not want to alienate Ja Rule by refusing his request to do the project. IDJ was renegotiating its deals with the artist and Gotti. IDJ also contended that TVT threatened to release the old CMC recordings to coincide with the release of the next Ja Rule album if IDJ would not consent to the new recording.

TVT entered a contract with Ja Rule, Gotti and Murder Inc. to record the CMC album, subject to IDJ's consent. In October 2001 they signed the contract, triggering an obligation for TVT to pay a $400,000 advance to the artist and producer. The deal gave TVT ownership of the masters and a 50% share of profits.

As the artists began recording, TVT had still not received a signed "side letter agreement" of consent from IDJ, dated September 2001, which changed the profit share to 40% for TVT, 30% for IDJ and 30% for Ja Rule, Gotti and Murder Inc. Although IDJ's senior VP of legal and business affairs signed the contract, it was never sent to TVT.

In November 2001, TVT's lawyer contacted IDJ's lawyers, who assured him that the deal was final but did not send the signed agreement. Later that month TVT's attorney sent a letter to IDJ, stating that TVT was relying on IDJ's assurances regarding its commitment to the letter agreement and that TVT was proceeding on that basis. IDJ did not respond.

The following spring, TVT, Gotti and Murder Inc. also prepared promotional materials, including a DVD and sampler CD for "The Rain" and "Got Tha Fortune." IDJ obtained oral and written licenses for the songs. Release was planned for the fall of 2002.

In August 2002, with Gotti re-signed to IDJ, the label forbade TVT from exploiting Ja Rule's services or releasing the new CMC album.

TVT sued Cohen and IDJ in federal District Court, contending that they never intended to cooperate and instead sabotaged the CMC album. TVT claimed it spent more than $1 million producing and promoting the album which IDJ persuaded Gotti and Ja Rule not to deliver.

During the liability phase of the two-phase (bifurcated) trial, the jury found IDJ and Cohen liable for fraud, interference with the TVT/Gotti/Ja Rule contract and copyright infringement of the songs on the promotional DVD and CD. The jury also decided that IDJ entered an oral contract on the terms spelled out in the side letter agreement. It found that IDJ breached this contract.

After the liability phase of the trial, a completed album was delivered to TVT's Steve Gottlieb in an apparent attempt to mitigate damages. This did not seem to work, however. The jury awarded TVT about $24 million to compensate its losses and about $108.3 million in punitive damages.

According to the "revised jury verdict sheet" obtained by ELW, the jury awarded the following damages for each cause of action.

  • For breach of contract against IDJ, compensatory damages of $126,720 ($50,994 general compensatory damages; $30,290 lost profits; $45,436 loss of goodwill) plus punitive damages of $1 million;

  • For tortious interference with a contractual relationship against IDJ and Cohen, jointly and severally, compensatory damages of $22,358,713 (-0- general compensatory damages; $10,358,713 lost profits; $12 million loss of goodwill) plus punitive damages of $50 million against IDJ and $50 million against Cohen;

  • For fraud by fraudulent concealment against IDJ and Cohen, jointly and severally, compensatory damages of $1,011,313 plus punitive damages of $1 million against IDJ and $6 million against Cohen;

  • For infringement of the song, "The Rain," against IDJ and Cohen, jointly and severally, actual damages and profits of $409,375;

  • For infringement of the video, "Get Tha Fortune," against IDJ and Cohen, jointly and severally, actual damages and profits of $1,900, statutory damages of $150,000, and punitive damages of $275,000 against IDJ and $25,000 against Cohen.



In response to motions filed by IDJ and Cohen after the trial, the judge reduced the award to about $54 million. IDJ and Cohen appealed all but the breach of contract award of $126,720.

COURT'S HOLDING & ANALYSIS

First, the court held that there was insufficient evidence to support the tortious interference and fraudulent concealment claims.

Second, it held that as a matter of law, TVT could not assert a copyright infringement claim without first rescinding the licenses for the songs used for the promotional DVD and CD.

Third, punitive damages were not recoverable for the breach of contract because the wrongful conduct was not directed at the "public at large."

As a result, the court reversed the award of damages, including the award of attorney's fees.

TORTIOUS INTERFERENCE

The court noted that under New York law, "a tortious interference claim requires a showing that a valid contract exists and that a third party with knowledge of the contract intentionally and improperly procured its breach."

This rule also requires a party that asserts the interference to show that the defendant was not a party to the contract.

Multiple agreements can be part of the same contract under New York law. "All writings which form part of a single transaction and are designed to effectuate the same purpose (must) be read together, even though they were executed on different dates and were not all between the same parties," the court wrote. Whether the agreements were part of the same contract was a decision for the court -- not the jury -- since the contracts were unambiguous, the court added.

The appellate court held that the written agreement between TVT, Ja Rule, Gotti and Murder Inc. and the oral side letter agreement were part of the same transaction. Their mutual purpose was to produce and release a CMC album. The oral agreement required all parties to honor the terms and conditions of the written contract and permitted Ja Rule, Gotti and Murder Inc. to perform their obligations under that written agreement.

The written agreement also contemplated IDJ's eventual participation, and the oral contract changed the profit split set up by the written agreement.

Since the oral side letter agreement would have been meaningless without the written contract, IDJ was a participant -- not a stranger -- to that contract. As a result, IDJ and Cohen could not be liable for interference.

Although the opinion does not explain why the judgment against Cohen was also reversed, it can be reasonably presumed that the court considered that Cohen acted within the course and scope of his authority for IDJ in connection with the contract so that he was not liable for any independent activities (Cohen's acts were made on behalf of IDJ and, therefore, were not wrongful).

FRAUDULENT CONCEALMENT

TVT's fraudulent concealment claim was based on the argument that IDJ failed to disclose that it never intended to perform its obligations under the side letter agreement.

The court held that under New York law, the failure to disclose an intention to breach a contract is not fraudulent concealment.

Fraudulent concealment requires proof of: (1) the defendant's failure to disclose something to the plaintiff that the defendant has a duty to disclose; (2) the defendant's intent to defraud; (3) the plaintiff's reliance on mistaken information; and (4) the plaintiff's resulting damages.

In business transactions, the court noted that the duty to disclose "arises where a party, with a duty to be complete, has made only a partial or ambiguous statement" or where one party possesses superior knowledge, not readily available to the other, and knows that the other party is acting on the basis of mistaken information.

However, the duty to disclose must involve something more than that which the party has a duty to perform under the contract, the court wrote. An intention to breach a contract does not give rise to a duty to disclose that intent. The party's recourse in such a case would be for breach of contract for failure to perform the contractual obligation.

In this case, TVT showed at trial that IDJ and Cohen not only planned to breach the side letter agreement by revoking the permission for Gotti and Ja Rule to work on the CMC album, but also used the existence of that agreement to "help lure Gotti into re-signing with IDJ and to lure TVT and CMC into creating new masters which IDJ would then appropriate for itself."

The court held that this evidence -- non-disclosure of collateral aims -- was not evidence of "distinct fraudulent misrepresentations." It only showed that the defendants' intended to breach the side letter agreement (i.e., it showed their motives for the breach).

"As a result, contract damages are available to TVT, but not tort damages sounding in fraud," the court wrote.

COPYRIGHT INFRINGEMENT

TVT claimed that IDJ fraudulently secured the licenses for the songs embodied on the promotional DVD and CD sampler because the releases were meant to be part of the overall deal.

The appellate court held that "the District Court mistakenly concluded that a 'fraudulently induced copyright license is invalid.'" The District Court overlooked the fact that a license must formally be rescinded before an infringement action based on fraudulent inducement of a copyright license could proceed.

The court held that since TVT did not sue for rescission of the licenses or allege any breach of the licenses, it could not recover for copyright infringement.

PUNITIVE DAMAGES

IDJ and Cohen argued on appeal that the jury could not award punitive damages on the breach of contract claim. New York law only permits such an award when a defendant's conduct is "part of a pattern directed at the public generally."

TVT argued that punitive damages could be awarded where there was a sufficiently high degree of bad faith by the defendants, showing disingenuous or dishonest failure to carry out contractual obligations.

Following recent New York case law, the court held that punitive damages for breach of contract may be awarded only if necessary to "vindicate a public right."

The court held that IDJ and Cohen were not trying to harm the public. Since this action involved only private rights between private parties, the punitive damages award was reversed.

CONCLUSION

In its final stroke, the court reversed the award of attorney's fees to TVT's lawyers. The case was remanded to the District Court to enter judgment consistent with this opinion. The judgment is expected to be a total award to TVT Records and TVT Music of $126,700 against IDJ for breach of contract.

CASE: TVT Records and TVT Music Inc. v. The Island Def Jam Music Group, a division of UMG Recordings Inc. and Lyor Cohen
COURT: U.S. District Court for the Second Circuit; Circuit Judges Jacobs, B.D. Parker and Hall; Docket Nos. 03-9026(L), 03-9046(CON), 03-9122(CON), 03-9258(CON)
APPELLATE COUNSEL FOR ISLAND DEF JAM: Paul Gardephe, Kathleen Jennings, Shawn Morehead and Richard Jackson with Patterson, Belknap, Webb & Tyler in New York
APPELLATE COUNSEL FOR LYOR COHEN: Andrew Frey and Sanford Weisburst with Mayer, Brown, Rowe & Maw in New York; Matthew S. Dontzin and David A. Fleissig with the Dontzin Law Firm in New York
TRIAL COUNSEL FOR IDJ & COHEN: During the liability phase, Charles Ortner with Proskauer Rose in New York for IDJ & Cohen; during the damages phase, Charles Ortner with Proskauer Rose in New York for IDJ, Matthew Dontzin with the Dontzin Law Firm in New York for Lyor Cohen
COUNSEL FOR TVT & STEVE GOTTLIEB: Edward Lazarus, William Norris, Peter Haviland, Michael Small and Jonathan Gottlieb with Akin Gump Strauss Hauer & Feld in Los Angeles; Lewis Liman and Karen Newirth with Cleary Gottlieb Steen & Hamilton in New York