Malmsteen v. Universal Music Group, Inc.
940 F. Supp. 2d 123 (2013)
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Rule of Law:
When a recording contract includes broad 'future technology' language, new distribution methods like digital downloads will be governed by the most analogous existing royalty provision, typically 'Normal Retail Channels'. Furthermore, a party waives its right to challenge royalty accounting by failing to object within the contract's specified limitation period.
Facts:
- On November 1, 1985, PolyGram (now UMG Recordings, Inc.) and DeNovo Productions (Yngwie J. Malmsteen's predecessor-in-interest) entered into a recording agreement.
- The agreement granted UMG exclusive rights to Malmsteen's master recordings and established different royalty rates: a lower rate (8-15%) for 'Records' sold through 'Normal Retail Channels' and a higher 50% rate for licenses for sales via specified methods like 'direct mail, mail order... or other methods.'
- The contract's definition for 'Records' included 'Any device now or hereafter known... by which sound may be recorded and reproduced.'
- A 1989 amendment allowed UMG to recoup 50% of the production costs for a concert video from Malmsteen's royalties.
- In the late 1980s and early 1990s, UMG incurred costs producing Malmsteen's video recordings.
- Years later, UMG began distributing Malmsteen's music via digital downloads on third-party platforms like Apple's iTunes Store, paying royalties at the 'Normal Retail Channels' rate.
- In 2006, Universal Music Group International, Ltd. (UMGI), an affiliate of UMG, released a DVD titled 'Far Beyond the Sun' containing recordings owned by UMG.
- UMG itself did not create, manufacture, sell, or receive any income from the 'Far Beyond the Sun' DVD.
Procedural Posture:
- On May 12, 2010, Yngwie J. Malmsteen filed a lawsuit against UMG Recordings, Inc., Universal Music Group, Inc., and Universal Music Canada, Inc. in the U.S. District Court for the Southern District of New York (the trial court of first instance).
- On January 6, 2012, Malmsteen filed an Amended Complaint, which asserted a breach of contract claim against the original defendants and added a second claim against Universal Music Group International, Ltd. (UMGI).
- On June 14, 2012, the trial court granted the defendants' motion to dismiss in part, dismissing the claims against UMG Canada and UMGI for lack of personal jurisdiction.
- In the same ruling, the court held that any of Malmsteen's claims relating to royalty statements rendered before March 31, 2006, were time-barred by the contract's limitation provision.
- The remaining defendants, UMG and Universal Music Group, Inc., moved for summary judgment on the remaining breach of contract claim.
- Malmsteen opposed the defendants' motion and filed a cross-motion for summary judgment on two of his theories of breach.
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Issue:
Does a record company breach a 1985 recording contract by paying royalties on digital downloads at the rate applicable to 'Records' sold through 'Normal Retail Channels' rather than at a higher rate provided for licenses for sales through specific, non-traditional methods like mail order?
Opinions:
Majority - Engelmayer, J.
No, the record company did not breach the contract. UMG correctly applied the lower royalty rate for 'Normal Retail Channels' to digital downloads and is not liable for the other alleged breaches. The court reasoned that the contract's definition of 'Record' —'[a]ny device now or hereafter known'— was intentionally broad to encompass future technologies like digital downloads. In the modern music industry, sales through platforms like iTunes are the new 'Normal Retail Channels.' Malmsteen's argument for a 50% royalty rate under § 7.06(a)(ii) fails because digital downloads are not similar to the specific distribution methods listed there (e.g., mail order, TV advertising). The court applied the canon of ejusdem generis, holding that the general phrase 'or other methods' is limited to items of the same kind as those listed, which digital retail is not. Malmsteen's claim regarding improper recoupment of video production costs from the late 1980s and early 1990s is time-barred by the contract's limitation provision, as he failed to object for over two decades. Finally, UMG owed no royalties for the 'Far Beyond the Sun' DVD because it is undisputed that UMG never received any payment for its sales, a prerequisite for royalty payments under the agreement.
Analysis:
This decision illustrates the judicial application of traditional contract interpretation principles to agreements drafted before the digital era. The court's reliance on the 'now or hereafter known' clause and the ejusdem generis canon provides a clear framework for how future technology disputes in legacy entertainment contracts may be resolved. The ruling emphasizes that broad, forward-looking language will be interpreted logically within the contract's existing structure, rather than creating windfalls based on ambiguous catch-all phrases. Furthermore, the case serves as a stark reminder of the enforceability of contractual statutes of limitations, barring claims not timely raised and preventing parties from litigating decades-old accounting practices.
