Court Holds Reznor/Malm Contract Not Unconscionable

In an ongoing litigation between Nine Inch Nails' Trent Reznor and his former manager and business partner John Malm Jr., a federal judge held April 22 that their management contract was not "unconsci

NEW YORK -- In an ongoing litigation between Nine Inch Nails' Trent Reznor and his former manager and business partner John Malm Jr., a federal judge held April 22 that their management contract was not "unconscionable."

Reznor and Malm are embroiled in a lawsuit after their 15-year business relationship ended "in cacophony and discord in late 2003," judge Jed Rakoff with the U.S. District Court in New York wrote in his opinion.

Reznor charges Malm and his wholly-owned management company, J. Artist Management (JAM), with 10 claims including fraud, breach of contract and breach of fiduciary duty. He also alleges six claims against Richard Szekelyi and his accounting company Navigent Group. Malm and JAM assert eight claims against Reznor.

After completing discovery, the parties moved for summary judgment.

In ruling on the motions, the court wrote in its opinion that around 1987, Malm informally became Reznor's manager after he left the band Exotic Birds and began working on his own. Malm -- who worked in his family's machine equipment business by day and as a part-time promoter of local music acts by night -- paid for Reznor's expenses, including equipment, recording costs and rent.

Once Nine Inch Nails was formed the following year, Malm retained attorney Michael Toorock to assist in negotiating the record deal with TeeVee Toons (TVT). Although Toorock never spoke with Reznor, he understood himself to be representing Reznor's interests, the court wrote. The recording agreement was signed in early 1989.

Malm then asked Toorock to prepare a management agreement, the opinion states. Toorock claims that he used a form management agreement and included certain material terms that Malm requested, such as duration (five years) and commission (20%). He provided Malm with the contract, understanding that the parties had discussed those terms but had not completed discussing other terms.

Toorock did not want to come between Malm and Reznor by representing either of them as discussions continued, he testified in a deposition, so he provided the draft "so that the two of them could see what a management agreement looked like." He believed the agreement to be in draft form.

The attorney discovered "years later" that his draft had been signed by Reznor and Malm on April 20, 1989. The deal provided that JAM was to receive 20% of Reznor's gross compensation for all contracts and engagements then in existence or entered into or negotiated during the term -- and any extensions of the contracts -- including any proceeds from any copyrights in music composed during the agreement. It also permitted JAM to direct lawyers and accountants to work on Reznor's behalf.

In 1991 Interscope acquired Reznor's contract from TVT. New agreements reached between the parties obligated Reznor and Nine Inch Nails to record seven albums -- three are still to be produced.

Among other claims, Malm contends that he is entitled to his commission on all of the albums. Reznor claimed that the contract, which he "may have glanced through," was unconscionable.

The court disagreed. It held that this type of claim required proof that the contract was procedurally and substantively unconscionable when made. There must be an absence of meaningful choice on the part of one party together with terms unreasonably favorable to the other party. Some matters that would lend to such a finding, the court wrote, include: the size and commercial setting of the transaction; whether deceptive or high-pressured tactics were employed; the use of fine print; the experience and education of the party claiming unconscionability; and whether there was disparity in bargaining power.

The court wrote that there was no allegation that Reznor lacked bargaining power or that Malm pressured him into signing any deal. Reznor claimed that Malm induced him into entering the contract without scrutinizing its contents by making misrepresentations as to its terms, failing to fully disclose the import of various provisions and misleading him into believing that Malm and Toorock were protecting his interests.

The court held that such allegations related to a claim for fraud rather than an unconscionable contract. While Reznor could have commanded more favorable terms had he driven a tougher bargain, the court wrote, there was no evidence that the objected-to provisions were unusual for the industry -- let alone in violation of any public policy. Therefore, the contract was not unconscionable.

Szekelyi and Navigent Group were granted summary judgment. The court held that Reznor was not, as an individual, their client so there could be no malpractice. Further, there was no evidence of fraud or of aiding or abetting fraud.

Other claims between the parties are still pending.