USDC S.D. New York, September 25, 2009

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  • In a breach of contract action, the district court grants defendant producer’s motion to dismiss claims by The Weinstein Company, holding that parties’ oral negotiations for licensing and distribution rights to the motion picture Push, allegedly confirmed by an email exchange, do not constitute a writing that satisfies Section 204 of the Copyright Act

Plaintiff The Weinstein Company alleged that it orally negotiated, and confirmed via email, a binding agreement with defendant Smokewood Entertainment Group for the licensing and distribution rights to the motion picture Push: Based on the Novel by Sapphire. Plaintiff alleged that defendant’s agent promised to provide a written agreement and plaintiff’s emails indicated plaintiff’s acceptance of the terms of the deal discussed earlier at a breakfast meeting. Emails from defendant’s agent said that the agent was discussing the terms of the deal with the defendant and the agent would call plaintiff as soon as possible. Plaintiff’s subsequent emails stated that the parties had closed the deal, that plaintiff was waiting for written documentation, and that plaintiff would take whatever actions necessary to enforce the deal.

An email the next day from defendant’s agent indicated that no deal had been reached because there were several essential points, including the division of profits, that had not been agreed upon, and several days later defendant announced a distribution deal with a different company, Lions Gate Entertainment Corp. (Lionsgate). Plaintiff filed suit for breach of contract.

Section 204(a) of the Copyright Act requires that a transfer of copyright ownership, including an exclusive agreement for distribution rights, be in a writing signed by the copyright owner. According to the court, to the extent that plaintiff alleged a purely oral agreement for the exclusive license and distribution rights to the motion picture, “that claim fails as a matter of law” because such a transfer must be in writing.

Although a writing evidencing a transfer of copyright ownership need not be lengthy or detailed, the court also rejected plaintiff’s argument that the email exchange satisfied the writing requirement, noting that although plaintiff clearly expressed its intention to acquire the exclusive distribution rights, the defendant’s emails did not demonstrate a clear intention to transfer an exclusive license in the motion picture. The intention of the copyright owner to transfer an ownership interest must be clear and unequivocal. The court noted that the complaint focused on the “absence” of a written agreement as the grounds for the claim of breach of contract. The court distinguished this case from decisions holding that a check endorsement could satisfy the writing requirement, noting that the very act of accepting payment can corroborate a copyright owner’s intention to transfer rights and that the language on the checks clearly described what rights were being transferred.

The court also rejected plaintiff’s argument that it is customary in the entertainment industry for parties to reach an agreement orally and follow up with a written document. According to the court, Congress did not exempt parties in the entertainment industry from the requirements of the Copyright Act, such as the requirement that a transfer of ownership be in a writing signed by the copyright owner.

Advancing an alternative theory of liability, plaintiff agued that even if the court found that there was no valid writing under § 204(a), plaintiff nonetheless stated a claim for breach of an implied non-exclusive license. According to the court, in the Second Circuit, as in other circuits, implied non-exclusive licenses are found “only in narrow circumstances where one party created a work at the other’s request and handed it over,” intending that the other exploit it. Analyzing the record under this standard, the court concluded that it was clear that plaintiff never requested the creation of Push and negotiations began only after it was created.

Although the facts of this case did not warrant a finding of a non-exclusive license, the court left open the possibility that an oral agreement contemplating an exclusive license can nevertheless be enforced as a non-exclusive license. This is only possible, however, where the plaintiff requests the creation of the work at issue.

Plaintiff’s final theory of liability was that defendant breached a binding preliminary commitment to negotiate in good faith when defendant negotiated and then closed a competing deal with Lionsgate. Under New York law, the court noted, binding preliminary commitments exist in two narrow circumstances. In the first instance, “all essential terms have been agreed upon in the preliminary contract, no disputed issues are perceived to remain,” and the parties envision a further contract as a mere formality. In the second instance, the parties recognize the existence of open terms, even major ones, but, having agreed to certain important terms, agree to bind themselves to negotiate in good faith. Plaintiff argued that it stated a claim under the second theory.

Before proceeding to the discussion of the factors to be considered, the court indicated that it must bear in mind that when parties are negotiating an agreement the default assumption is that enforceable legal rights do not arise. The court then highlighted five factors courts consider when determining whether parties have entered into a preliminary binding commitment to negotiate in good faith: (1) the language of the agreement; (2) the context of the negotiations; (3) the existence of open terms; (4) any partial performance; and (5) the necessity of putting the agreement in final form, as indicated by the customary form of the transactions.

The first factor - the language of the agreement - weighed in favor of defendant. Here, the district court noted that the defendant never “accepted language that indicated a firm or binding commitment.” Rather, the disputed language suggested nothing more than the defendant was considering the deal on the table.

Next, the court concluded that the context of the negotiations favored neither plaintiff nor defendant. On one hand, plaintiff failed to allege a reason why defendant would have needed to secure a commitment to conclude the licensing deal. On the other hand, the court gave full weight to plaintiff’s allegation that negotiations had virtually concluded by the time the parties exchanged emails.

Moving on to the third factor, the court agreed with plaintiff that this factor was neutral. While plaintiff conceded that not all major terms to the purported deal were resolved during the negotiations, plaintiff did not concede that there were still significant terms that had yet to be worked out between the parties.

Similarly, the court found that the partial performance factor was inconclusive. Less than ten hours after the alleged agreement was reached, the defendant sent an email stating that there had been no agreement. Thus, the court reasoned, even assuming the parties reached a binding preliminary commitment, the absence of partial performance was not surprising. It is understandable that plaintiff would not have performed where defendant had expressly denied the existence of a contract.

Lastly, the district court found that the last factor - the necessity of putting the agreement in final form - weighed in favor of the defendant. The primary inquiry was whether in the entertainment industry “it is customary to accord binding force” to an informal or preliminary agreement. The plaintiff argued that it is custom and practice in the entertainment industry to negotiate deals orally, confirm them via email and commit them to writing at a later date. The court reiterated that, claims about custom and practice in the entertainment industry notwithstanding, federal copyright law dictates the terms by which an exclusive license can be granted. To accept plaintiff’s claim, the district court concluded, would open a “serious loophole” in § 204 and raise concerns under the Supremacy Clause of the United States Constitution. The district court therefore declined to hold that a copyright licensee can state a claim for breach of a preliminary binding commitment merely by alleging negotiations between the parties and the existence of non-committal emails from the copyright owner.