Sunday, August 05, 2007

Contracts Involving Copyrights and Forum Selection Clauses: Motions To Dismiss

A musician enters into a recording contract for an album. The forum selection clause specifies England as the exclusive forum to bring legal proceedings. The choice of law clause specifies English law. The musician provides sufficient tracks to release an album. The musician also provides enough additional tracks to launch a second album. The record company asks for permission to launch the second album. The musician refuses. The record company launches the second album.

Can the musician sue in the Southern District of New York? The Second Circuit tackled this question in Phillips v. Audio Active Limited, --- F.3d ---, 2007 WL 2090202 (2d Cir.). The answer is "yes" on copyright claims and "no" on contractual claims.

The musician sued in New York claiming breach of contract, copyright infringement and pendent state law claims. The defendant record company moved to dismiss pursuant to Rule 12(b)(3) - improper venue.

The Second Circuit applies a four-part analysis in deciding motions to dismiss based on a forum selection clause in a contract:

(1) was the clause reasonably communicated to the party resisting enforcement?
(2) is the language of the forum selection clause mandatory rather than permissive? (ie does the language require a lawsuit to be brought in the specified jurisdiction or merely permit jurisdiction)
(3) are the claims and parties involved in the suit subject to the forum selection clause?
(4) if the answer to the above three questions is "yes", the final question is whether the resisting party has rebutted the presumption of enforceability by making a sufficiently strong showing that (a) enforcement would be unreasonable or unjust or (b) the clause was invalid for such reasons as fraud or overreaching.

The District Court dismissed the entire action for improper venue. The Second Circuit affirmed the dismissal of the contract claims.

The Second Circuit reversed on the copyright claims, permitting the copyright claims to proceed in the Southern District of New York. The court looked to the language of the forum selection clause which applied to claims "arising out of" the contract. The court found that the copyright claims did not "arise out of" the contract. The court held that even though the defendant could invoke the contract as a defense, the plaintiff's claims were grounded in the Copyright Act and in his authorship of the works.

The Second Circuit explicitly rejected the approach of the Seventh Circuit in Omron Healthcare, Inc. v. Maclaren Exps. Ltd., 28 F.3d 600 (7th Cir. 1994), which interpreted similar language as "all disputes the resolution of which arguably depend on the construction of an agreement 'arise out of' that agreement." The Omron case involved a distributor selling off excess inventory of strollers bearing trademarks following termination of a distribution agreement. The Seventh Circuit sent the trademark infringement claims over to England.

In other words, applying Omron the Seventh Circuit would have dismissed the copyright claims for lack of venue as well, since determining the validity of the copyright claims would rely on construing the language of the contract.

The result in Phillips was that the plaintiff was permitted to file copyright infringement claims in the Southern District of New York and would have to file breach of contract claims in England.

Professor Patry expresses his dissatisfaction with the Phillips case here. Anyone who drafts copyright or trademark license agreements and does not want to be litigating claims in two separate fora should read the Phillips case and redraft their forum selection clauses.

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