Titus v. UMG Recordings, Inc.

Background

Andres Titus and William McLean, who are professionally known as the hip-hop duo “Black Sheep,” brought a proposed class action against UMG Recordings, Inc. They alleged violations of New York law based on a recording contract originally formed with Polygram Records, Inc., UMG’s predecessor, in 1990 and amended in 1991. UMG later assumed the contract after merging with Polygram.

The contract provided that the plaintiffs would receive 50% of UMG’s “net receipts” from exploiting their master recordings. It defined net receipts as amounts received by UMG that were “solely attributable” to those recordings, after specified deductions. The contract also required semiannual royalty accountings and gave UMG the “sole, exclusive and unlimited right” to license the plaintiffs’ works, with sole discretion over the method, manner, and extent of their distribution and exploitation. The contract included a two-year deadline for suits connected to royalty accountings or payments.

The plaintiffs alleged that UMG and other record labels acquired Spotify shares in 2008 as part of an arrangement under which UMG accepted lower royalty payments for licensing its catalog. They alleged that UMG failed to compensate them for the reduced royalties, failed to distribute half of the Spotify shares or their value, and did not disclose the arrangement. They also alleged that UMG’s later Spotify holdings were worth substantial amounts. The complaint asserted claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment.

Statute of Limitations

UMG moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a legal claim. UMG argued that the plaintiffs’ claims were filed too late under New York’s six-year limitations period and the contract’s two-year limitations provision.

The court held that the contract’s two-year provision clearly applied to claims involving unpaid royalties and inaccurate royalty accountings. The plaintiffs’ claims concerning UMG’s failure to pay for or distribute the Spotify stock accrued in 2008, or at the latest after Spotify’s 2018 initial public offering, and were therefore untimely.

The court rejected the plaintiffs’ arguments that later royalty statements restarted the limitations period for the Spotify-stock claims. It concluded that the alleged failure to make a single payment for the stock was a one-time breach, and that continued nonpayment was only the continuing effect of that alleged breach. By contrast, the court held that claims concerning allegedly underpaid royalty payments made within two years before the complaint—after January 4, 2021—were timely under New York’s continuing-violations doctrine because the contract required recurring royalty payments.

The court also rejected the plaintiffs’ arguments that the limitations period began only after a reasonable time for UMG to perform or that equitable tolling applied. The court found that the contract specified when UMG had to account for royalties and that the complaint did not adequately allege the due diligence and affirmative concealment required for equitable tolling.

Merits of the Claims

The court then addressed the claims on their merits, assuming for purposes of analysis that they were timely.

Breach of contract. The court ruled that the contract’s plain language did not support the plaintiffs’ timely theory that UMG breached the agreement by accepting lower royalties from Spotify without compensating them. The contract gave UMG broad and unrestricted authority to license the plaintiffs’ works and determine how they would be exploited.

The court separately rejected the theory that UMG’s Spotify stock was royalty-bearing “net receipts.” It concluded that the stock was not “solely attributable” to the exploitation of the plaintiffs’ particular recordings. The court said the plaintiffs received royalties for the streaming of their music, but the Spotify equity itself could not be directly traced to the exploitation of their work alone. UMG therefore did not breach the contract by failing to account for or compensate the plaintiffs for the value of that stock.

Implied covenant of good faith and fair dealing. The court declined to dismiss this claim merely because it duplicated the contract claim, since the plaintiffs pleaded it as an alternative theory. But the court dismissed it because the duties the plaintiffs sought to impose were inconsistent with UMG’s express contractual rights. The contract gave UMG an unlimited right to license the recordings and sole discretion over their exploitation. The court found that the plaintiffs had not alleged facts showing that UMG acted arbitrarily or irrationally in a way that deprived them of the benefits of the contract.

Unjust enrichment. The court dismissed the unjust-enrichment claim because a valid and enforceable written contract governed the same subject—UMG’s royalty payment and accounting obligations. Under New York law, the court explained, unjust enrichment generally cannot be used to seek recovery for conduct governed by an express contract when the parties do not dispute the contract’s existence, validity, or enforceability.

Leave to Amend and Disposition

The plaintiffs requested permission to amend the complaint, primarily to add allegations about when they discovered UMG’s conduct and what they did afterward. The court denied that request because additional allegations about diligence would not cure the other defects, including the claims’ lack of merit. The court held that amendment would be futile.

The court granted UMG’s motion to dismiss, dismissed the Class Action Complaint, denied the plaintiffs’ alternative request for leave to amend, and directed the Clerk of Court to close the case.