Case Analysis: Compulsory Mechanical License And Distribution Contract Terms

An indie label's lawsuit against its distributor, Artemis Records, and competitor Sony Music Entertainment was thrown out of federal court Sept. 20 because the label didn't follow the Copyright Act's

An indie label's lawsuit against its distributor, Artemis Records, and competitor Sony Music Entertainment was thrown out of federal court Sept. 20 because the label didn't follow the Copyright Act's specific procedures for compulsory mechanical licenses before releasing the CD.

24/7 Records in 2001 entered into an exclusive distribution agreement with Artemis, which was distributed through Sony Music’s RED Distribution subsidiary.

The following summer, Sony's Columbia Records label released the recording "The Ketchup Song (Heh Hah)" by Spanish group Las Ketchup, which became a hit outside the United States. Within weeks, 24/7 recorded a cover of the song by the Hines Girls and released a single through Artemis in the United States. Columbia also released its version as part of an album in the United States.

24/7 claims that within days of its release, Sony executives convinced Artemis to stop distributing the indie label's single because it was competing with the major’s release.

Several Sony executives called Artemis CEO Danny Goldberg to express "displeasure" over the competing release, the court’s opinion states. Don Ienner, then president of Columbia, "made clear that he was unhappy about the 24/7 single and that he was hoping Artemis would withdraw it. Goldberg informed Ienner that he would see if there were a basis on which the single could be withdrawn. Similarly, Ienner spoke with Ken Antonelli of RED and stated that he did not understand why RED would be competing against Sony with a cover of a song which Sony already had in distribution."

Artemis stopped distributing the single, claiming that the cover art of a ketchup bottle might lead to a trademark dispute with the owner of the Heinz ketchup trademark, and that the recording might infringe rights of the "distributor of the original version" of the song. According to its agreement with 24/7, Artemis could cease distributing a record it believed could infringe upon rights of a third party.

24/7 sued Sheridan Square Entertainment (d/b/a Artemis Records) for breach of contract and Sony Music for tortious interference with the contract and unfair competition.

Artemis and Sony moved for summary judgment, claiming that the terms of the distribution agreement were unenforceable because the artwork violated Heinz's trademark rights, which made the distribution of the recording illegal. They also claimed that, regardless of those rights, Artemis' determination that it had the right to cease distribution was made in good faith.

During oral arguments on the motion, Artemis and Sony raised the issue of the mechanical license, which was addressed only briefly in their original motion. The court permitted the parties the opportunity to gather additional evidence on this point.

The mechanical license then became the focus of the case.

24/7 had been unable to find the name of the owner of the composition before releasing its version. After searching public records unsuccessfully, the label filed a "notice of intention" to obtain a compulsory license with the Copyright Office, as required by the Copyright Act. The notice was received by the office nine days after the release of the CD.

24/7 then learned that Sony/ATV Publishing either administered or published the composition. The label requested a license -- once after distribution and again after distribution ended. The publisher refused. Three weeks before filing this lawsuit, 24/7 also sent a royalty check to the publisher.

The court noted that the Copyright Act requires anyone who wishes to obtain a compulsory license to serve notice of intention to do so on the copyright owner, or with the Copyright Office if the owner isn't identified, before or within 30 days after “making” the recording, but before "distribution." If the notice isn’t served before distribution, then there is no longer a right to obtain a compulsory license, the court held.

The distribution agreement required 24/7 to secure all necessary licenses for distribution. Since it failed to obtain a mechanical license before release, the court held, Artemis was not required to distribute the CD. Further, the initial distribution by Artemis did not waive this requirement because the failure to secure the license was “incurable” -- there was no longer a legal obligation for the publisher to grant a compulsory license.

“[O]nce a license could no longer be obtained,” the court wrote, “in essence, the contract became a bargain to commit an illegal act .... [A] court will not enforce a contract to commit an unlawful act.”

Since 24/7 couldn't pursue a breach of contract claim against Artemis, the motivation for Artemis to stop distribution became irrelevant.

As for the indie label's claim against Sony, a contract must be in existence before one may recover for interference, the court noted. Since the distribution agreement was unenforceable, Sony could not be liable for interfering with distribution.

The claim for unfair competition was also defeated. The court held that this claim required proof that Sony misappropriated some property or benefit. Since 24/7 wasn't entitled to distribute its release under the Artemis agreement, the label hadn’t shown any misappropriation by Sony.

Further, the court stated, Second Circuit cases have stated that New York unfair competition law may not be misapplied to “resuscitate a failed tortious interference claim.” Since the interference claim couldn't be proved, Sony was entitled to a summary judgment on the unfair competition claim as well.

Case: 24/7 Records, Inc. v. Sony Music Entertainment Inc. and Sheridan Square Entertainment LLC d/b/a Artemis Records, Case No. 03 Civ. 3204 (MHGC)
Opinion: U.S. District Court, Southern District of New York, Judge Miriam Goldman Cedarbaum, Sept. 20, 2004
Counsel for Plaintiff 24/7: Cinque & Cinque PC by Robert W. Cinque and James P. Cinque, New York City
Counsel for Defendants Sony Music and Sheridan Square d/b/a Artemis: Manatt, Phelps & Phillips LLP by Steven M. Hayes and Gregory A. Clarick, New York City