Profile Publishing v. Musicmaker.com

Citation: Profile Publishing and Management Corp. v. Musicmaker.com, Inc., 242 F.Supp.2d 363 (S.D.N.Y. 2003).

“Napster did make a mess of a lot of things,” federal District Judge Richard Owen observed. But this did not allow Musicmaker.com to avoid paying the balance it owed under a licensing agreement that authorized it to sell and perform recordings by The Who from the website it operated when the agreement was made.

The license agreement at issue in the case was one by which Profile Publishing and Management, a Danish corporation that owns the rights to recordings by The Who, granted Musicmaker exclusive Internet rights to those recordings for 10 years, in return for a $2.5 million advance against royalties. The agreement provided that $1.5 million of the advance was to be paid when Musicmaker received master recordings, and the balance was to be paid in four quarterly payments of $250,000 each. Musicmaker made all of the payments except the final quarterly installment, and that $250,000 is what Profile sought to collect in what should have been a simple breach of contract lawsuit.

Musicmaker, however, asserted eight affirmative defenses and three counterclaims, including claims for punitive damages, which the company refused to dismiss despite Profile’s assertion that all were “baseless” and should be withdrawn. Musicmaker

refused to dismiss them, that is, until Profile made a motion for summary judgment. At that time, Musicmaker did withdraw its defenses and counterclaims. In their place, Musicmaker sought to amend its answer to assert just one affirmative defense: “frustration of purpose.”

The “frustration of purpose” defense was based on Musicmaker’s contention that Napster had made exclusive Internet rights to recordings by The Who worthless. That contention was supported, at least in part, by the fact that in January 2001, Musicmaker shut down its website and announced plans to liquidate the company.

Judge Owen explained that the “frustration of purpose” doctrine allows the frustrated party to rescind a contract “when ‘. . . as a result of unforeseeable events, performance by party X would no longer give party Y what induced him to make the bargain in the first place.’“

In this case, however, the licensing agreement] between Profile and Musicmaker was entered into in December 1999, seven or eight months before Napster came into existence, two months before the [[IFPI announced a “global attack” on Internet music piracy, and three weeks after the RIAA filed its “highly publicized” lawsuit against Napster itself. As a result, Judge Owen concluded, “while it is obvious that Napster did make a mess of a lot of things . . . [t]hat . . . does not a legal frustration of purpose make, and while one can have a sympathetic emotional tug here, a contract is a contract, and Profile has stood ready to perform.”

Judge Owen granted Profile’s motion for sanctions, under Rule 11, because of Musicmaker asserted affirmative defenses and counterclaims “without the reasonable inquiry required under the circumstances.” The judge said that Musicmaker’s “counsel should have withdrawn them early on when [Profile] urged this, not forcing [Profile] to prepare and move for summary judgment which finally caused their evaporation.” The sanctions were “assessed against Musicmaker and its attorneys for the attorney fees for the summary judgment motion which Musicmaker did not oppose.”