Introduction

To build visibility for its brand, a record label or production company will want its logo included on products containing its master recordings manufactured and distributed by third-parties. This will be addressed in the agreement between the label or production company, and manufacturer/distributor. The failure to include the logo may raise a host of issues, from the breadth of the logo-placement obligation — such as whether it includes with Internet downloads — to the proper theory on which to base any damages and just which album-sales figures are subject to evidentiary discovery. A recent ruling by the U.S. Court of Appeals for the Sixth Circuit — in a long-running dispute between Cleveland International Records and Sony Music Entertainment — illustrated how these issues may be argued and decided. Popovich v. Sony Music Entertainment Inc., 508 F.3d 348 (6th Cir. 2007).

The Case

Plaintiff Stephen Popovich’s company had signed a production deal with CBS Records in 1977. CBS promised to include the logo of Popovich’s “Cleveland International Records” “with respect to records comprised exclusively of an Artists' performances” distributed in the United States, Canada and seven other countries, “provided however, that the size of such Mark and the particular area on such label or jacket or advertisement onto which CBS places such Mark shall be determined solely by CBS.” But “no failure on the part of CBS to comply with its [logo] obligations pursuant to this paragraph 7.05 will constitute a material breach of this agreement,” the production contract stated. Instead, if the logo wasn’t included, Popovich’s relief was limited to CBS “rectify[ing] the error in all such materials prepared after its written receipt of written notice thereof from [Popovich].” Popovich and CBS Records renewed this agreement several times.

In 1977, CBS’s Epic Records released “Bat Out of Hell,” the debut album by Cleveland International artist Meat Loaf that has sold over 30 million copies. CBS subsequently released three more Meat Loaf, including a greatest-hits package. Popovich’s company sued Sony Music in 1995, alleging underpayment of royalties. In 1998, the parties entered into a settlement agreement that included the following clause:

“Sony Music will continue to place the Cleveland logo (in the design currently used on the tape configuration of ‘Bat Out of Hell’) on albums, CDs, cassettes, and all other forms and configurations of master recordings embodied on the [Meat Loaf] albums entitled ‘Bat Out of Hell,’ ‘Dead Ringer,’ ‘Midnight at the Lost and Found,’ ‘Hits Out of Hell’ and will add such logo to all forms and configurations on which it does not presently appear (including CDs) manufactured by Sony Music after September 1, 1998, provided, however, that Sony Music shall reasonably determine the size and location of such logo.”

Popovich and Sony Music otherwise ratified the original terms of the 1977 agreement. Then in 2002, Popovich sued again, later claiming in court documents that “Sony omitted the Cleveland Logo on more than 10 million CDs between September 1, 1998 and March 8, 2005 (the date its last discovery responses were certified). This included 32 separate releases of Bat Out of Hell, 22 releases of Dead Ringer, Midnight at the Lost and Found, Hits Out of Hell and other Meatloaf albums, and literally hundreds of other compilation albums (that themselves sold millions of copies).” Popovich also insisted the 1998 logo clause included Internet download-purchase sites.

Sony Music countered: “The 1977 Agreement explicitly and unequivocally provides that breach of the logo obligation provision will not constitute a material breach, and that Popovich will have no right to damages for breach of this provision. … Such limitation of remedies clauses are customary in music industry contracts because recordings are typically manufactured by multiple third-parties who are difficult to police, and because such logo placement has little practical value in the marketplace, given that consumers purchase records based on the artists they enjoy and not because of a music company's logo.”

The U.S. District Court for the Northern District of Ohio granted summary judgment for Sony Music on Popovich’s fraud, rescission and reverse-passing-off claims. The district court also found on Popovich’s breach-of-contract claim that the 1998 logo clause didn’t cover Internet downloads. The court then sent the case to a jury, which ruled that the 1977 agreement and its remedy limitation didn’t apply to not-as-yet developed CDs, thus increasing Sony Music’s liability under the 1998 agreement. The jury also found that under the 1998 settlement agreement, Sony Music should have had the logo placed on compilation albums containing Meat Leaf recordings and that the term “manufactured” in the settlement agreement included product manufactured by parties other than Sony Music. The jurors awarded Popovich about $5 million.

On appeal, the Sixth Circuit affirmed, except for the district court’s ruling on the scope of discovery. The appeals court first considered whether, before sending the case to the jury, the lower court had properly determined that the 1998 settlement agreement was ambiguous on whether any breach of the logo obligation in that agreement limited Popovich to the relief cited in the 1977 agreement. The Sixth Circuit explained: “According to the district court, if the 1998 Agreement contained new logo obligations, such as for compilations, CDs, or internet downloads, the remedy limitation contained in paragraph 7.05 of the 1977 Agreement would not apply to those new obligations. Alternatively, if the 1998 Agreement did not create any new logo obligations, then the remedy limitation would apply to Popovich's claims as all of Sony's logo obligations would necessarily fall under paragraph 7.05 of the 1977 Agreement. … As the district court held, if Sony failed to meet any new obligations created by the 1998 Agreement, Popovich may ‘sue for breach of contract and seek the full range of relief afforded by contract law.’ ”

The Sixth Circuit then agreed that other ambiguities justified send those issues to the jury. On any obligation in the 1998 agreement to use the logo in compilations, the appeals court noted: “The district court found that the terms ‘forms’ and ‘configurations’ could include compilations or any other arrangement of the master recordings. The court realized these terms could also mean simply other types of physical formats such as CDs, cassettes, etc. The district court was also puzzled by the term ‘master recordings embodied on,’ finding it could be read to include any individual master recording from one of the albums or to albums comprised exclusively of Meat Loaf songs embodied on the Meat Loaf albums.”

The court continued: “Also troubling is the use of the word ‘continue’ in the 1998 Agreement: ‘Sony Music will continue to place the Cleveland logo on albums.’ Sony contends that the use of the word ‘continue’ merely reaffirms its prior obligations under the 1977 Agreement. While the 1977 Agreement is clear — ‘phonograph records comprised exclusively of an Artist's performances recorded hereunder’ — the 1998 Agreements language is much broader … The district court then analyzed extrinsic evidence in order to clear up the ambivalent language of the 1998 Agreement, but found that neither previous drafts of the 1998 Agreement nor both sides' experts' opinions cleared up the issue.”

The appeals court also agreed that the district judge correctly ruled that the 1998 agreement didn’t cover logo use for Internet downloads: “The relevant question for this Court is whether the sentence ‘all forms and configurations … manufactured by Sony’ includes internet downloads. Neither party has cited to, nor have we been able to find, a case holding that internet downloads may be ‘manufactured.’ As the district court noted, had the parties included the words ‘distributed by,’ the agreement would have lent itself to the interpretation that internet downloads were meant to be included in the logo obligation.”

The district court allowed Popovich to seek damages for the breaches found based on “cost of completion” theory by, as Sony Music noted, “Analogizing Sony's breach to a painter who breaches a ‘construction contract’ by painting a house the wrong color.” But Sony Music argued, “Under well-settled New York law, however — which governs the 1977 and 1998 Agreements — it is clear that this damages theory cannot be utilized in a case founded on alleged lost profits and reputational harm.” The Sixth Circuit emphasized, however: “Where, as in this case, the asset is intangible — Popovich's right to have Sony affix his logo to Meat Loaf albums — New York courts have adopted the hypothetical market standard in order to determine the asset's value. … The district court in this case properly allowed Popovich to pursue a damages theory consistent with the above law, namely, how much it would cost Popovich to obtain the logo rights elsewhere.”

But at the end of its decision, the Sixth Circuit disagreed with the district court that evidentiary discovery for Popovich should be limited to Meat Loaf album sales in the countries cited in the 1977 logo, noting “it is at least ambiguous as to whether paragraph 7.05's geographic limitation applies to any new logo obligations contained in the 1998 Agreement.” But the appeals court upheld the denial of prejudgment interest to Popovich, explaining: “Had the estimates of damages at trial been calculated from the date of each of Sony's alleged breaches, pre-judgment interest from those dates would have been warranted. However, the estimates were based on present value estimates of damages, which presumably have risen with inflation over time.”

Conclusions

The Popovich case certainly demonstrates that the value of a record-label or production-company logo is in the eye of the beholder. Sony Music’s argument that “consumers purchase records based on the artists they enjoy and not because of a music company's logo” appears to be more so today as many of the single audio files that consumers download lack even basic packaging information. Still, as major labels struggle in the digital era, the marketplace power of independent labels has increased, seeming to give more credence to the argument that the branding of production-company and independent-label names is also increasing in importance.

This article is based upon a piece that appeared in Entertainment Law & Finance.

Stan Soocher is an Associate Professor of Music & Entertainment Industry Studies at the University of Colorado at Denver, where he has served as Music Department Chair.

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