Peterson v. Highland Music, Inc.
140 F.3d 1313 (1998)
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Rule of Law:
In a contract requiring ongoing performance, such as an installment or royalty agreement, a new cause of action for rescission arises with each new material breach. The statute of limitations for seeking rescission based on a particular breach begins to run from the date of that specific breach, not from the date of the first-ever breach of the contract.
Facts:
- The musical group, The Kingsmen, recorded the hit song 'Louie, Louie' over thirty years ago.
- In 1968, The Kingsmen entered into a contract with Specter Records, assigning the rights to the master recordings ('Masters') in exchange for nine percent of any profits or licensing fees.
- The rights to the Masters were eventually transferred to Gusto Records and GML.
- For over thirty years, Gusto Records and GML collected considerable royalties from 'Louie, Louie' but never paid any of the agreed-upon share to The Kingsmen.
- Gusto Records and GML continued to breach the agreement by failing to pay royalties in the years immediately preceding the lawsuit.
Procedural Posture:
- In 1993, The Kingsmen sued Gusto Records and GML in federal district court in California, seeking rescission of the 1968 contract.
- Defendants filed a motion to dismiss for lack of personal jurisdiction, which the district court denied.
- After a full trial, the district court ruled in favor of The Kingsmen and granted rescission of the contract, restoring ownership of the Masters to them.
- Defendants refused to comply with the judgment and filed a separate declaratory action in federal district court in Tennessee, seeking a declaration that The Kingsmen were not entitled to income from pre-rescission licenses.
- The Tennessee court transferred the declaratory action to the California district court.
- The California district court granted summary judgment for The Kingsmen in the declaratory action.
- The Kingsmen then filed a motion for contempt, and the district court found the defendants in contempt for violating the original judgment.
- Gusto Records and GML appealed the rescission judgment, the declaratory judgment, and the contempt order to the U.S. Court of Appeals for the Ninth Circuit.
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Issue:
Does the statute of limitations for seeking rescission of a contract with ongoing performance obligations, such as royalty payments, begin to run only from the first breach, thereby barring a suit based on subsequent, identical breaches that occurred within the statutory period?
Opinions:
Majority - Fletcher, J.
No. The statute of limitations does not bar a rescission action based on recent breaches of a contract with continuing obligations, even if earlier breaches occurred outside the limitations period. For contracts with ongoing duties, like installment or royalty agreements, California courts have held that each breach starts the clock afresh for statute of limitations purposes. The contract here involved a continuing obligation to pay a portion of profits as they were generated, not a fixed sum. The district court correctly based its rescission remedy on breaches that occurred within the four-year limitations period preceding the lawsuit. To hold otherwise would mean that a party could breach a contract with impunity forever after it passed up its first opportunity to sue, which is not supported by California law.
Analysis:
This decision solidifies the legal principle that in contracts with continuous performance obligations, each separate breach can be treated as a new cause of action for the purpose of the statute of limitations. This prevents a party in breach from gaining a perpetual shield against rescission simply because the initial breach occurred long ago. The ruling also provides an important procedural clarification for the Ninth Circuit regarding the waiver of personal jurisdiction: while a defendant preserves the issue by filing a motion to dismiss, failing to contest it further at trial limits their appeal to the lower prima facie standard of proof, not the higher preponderance of the evidence standard.
