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Current Developments in the Commercial Divisions of the
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Posted: October 31, 2014

Court of Appeals Holds That, Absent Express Language, “Affiliate” only Includes Existing Affiliates

On October 23, 2014, the Court of Appeals issued a decision in Ellington v. EMI Music, Inc., 2014 NY Slip Op. 07197, affirming a decision of the First Department affirming a Supreme Court dismissal of an action for breach of contract brought by a grandson of music legend Duke Ellington.

Ellington, presented a type of dispute apparently common in the entertainment industry—a creative artist suing a copyright holder/distributor for engaging in some form of self-dealing in order to reduce the amount of royalties to be paid.

Here, the plaintiff was a grandson of Duke Ellington, who, along with his heirs, was the First Party to a 1961 copyright renewal agreement. The agreement provided that the Second Parties—various music publishers, including EMI’s predecessor in interest as well as “any other affiliate of [the predecessor],” would pay the First Party royalties from the publication of Ellington’s works, including 50% “of the net revenue actually received by the Second Party from . . . foreign publication.” Plaintiff sued EMI for breach of contract, alleging that EMI had at some point begun distributing Ellington’s works through affiliated foreign subpublishers rather than independent foreign subpublishers (as was industry practice when the agreement was signed), thereby effectively increasing EMI’s share of the net revenues at plaintiff’s expense.

However, the foreign subpublishers were retaining the same 50% share of the overall royalties from foreign sales as the previous, unaffiliated subpublishers had. So, it appears that (although not stated explicitly in the opinion) at the time of the contract, the foreign subpublishers would retain 50% of the foreign royalties, with 25% going to EMI and 25% to Ellington. Under the new arrangement, Ellington is getting the same 25%, but EMI and its affiliates collectively get the entire remaining 75%.

In an opinion written by Judge Abdus-Salaam, the majority affirmed the lower courts’ dismissal.

The majority first held that “net revenue actually received” was clear and unambiguous, and that that term did not preclude the use of affiliated foreign subpublishers. The majority also found that the affiliated foreign subpublishers were not included in the term “any other affiliate” because they were not in existence at the time the contract was signed:

Absent explicit language demonstrating the parties’ intent to bind future affiliates of the contracting parties, the term “affiliate” includes only those affiliates in existence at the time the contract was executed. Furthermore, the parties did not include any forward-looking language. If the parties intended to bind future affiliates they would have included language expressing that intent. Absent such language, the named entities and other affiliated companies of EMI’s predecessor which existed at the time are bound by the provision, not entities that affiliated with EMI after execution of the agreement.

(Internal citations omitted.)

The majority dismissed the dissent’s criticism, stating that “the parties merely did not account for the possibility that the publisher would eventually affiliate with foreign subpublishers.”

Concurring, Judge Smith rejected the majority’s reasoning: “As a general proposition, it seems wrong to me that, when a contract is written to bind ‘any affiliate’ of a party, its effects should be limited to affiliates in existence at the time of contracting. That invites parties to create new affiliates, and to have them do what the old affiliates are prohibited by the contract from doing.” He also stated that, if the facts had been different and the foreign affiliates had been keeping a greater overall share of the total revenues, the majority would probably have interpreted the term “affiliate” differently.

Judge Smith concurred in the judgment based upon the plaintiff and his predecessors’ apparent acquiescence with the current scheme since 1994.

In dissent, Judge Rivera, joined by Chief Judge Lippman, thought that the term “affiliate” was not clear and unambiguous, and that EMI’s argument that foreign affiliates were not included “merely begs the question of what is an affiliate.” For the dissent, the majority holding excluding subsequently-created affiliates from the term was inconsistent with the purpose of the agreement and with then-prevailing industry practice, and that the plaintiff’s proposed interpretation of the term was “reasonable, or at least as reasonable as the one proposed by EMI.”

The dissent also shared Judge Smith’s policy concerns, stating that the majority interpretation was “troubling” and “sets the stage for the type of abuse alleged here, namely corporate reconfigurations that avoid the understanding of the parties.”

The most interesting question about this decision is whether Judge Smith is right—if under the new arrangement, if the heirs had been getting less than their previous 25%, would the final outcome have been different? On its face, it also appears to be a victory for the kind of prosy contract drafting that long since went out of favor in law schools and legal writing manuals: if the key provision had only included some phrase like “that now exist or ever have existed since the beginning of the world or ever will exist until the end of the world,” plaintiff would have prevailed.

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