Copyright Claims Not Subject to Contractual Forum Selection Clause
Reading the introductory sentences in the Second Circuit's decision in Phillips v. Audio Active Limited, No. 05-7017, one might have thought that things did not bode well for the plaintiff, Peter Phillips, professionally known as Pete Rock:
"A plaintiff may think that as the initiator of a lawsuit he is the lord and master of where the litigation will be tried and under what law. But if he is a party to a contract that contains forum selection and choice of law clauses his view of himself as ruler of all he surveys may, like an inflated balloon, suffer considerable loss of altitude."
But in the end, things could've been much worse for Pete Rock.
In Phillips, the musician Peter Phillips entered into a recording contract with Audio Active Limited/Barely Breaking Even ("BBE"), under which he agreed to produce no less than ten tracks and of which BBE would be the copyright owner. The recording contract also provided that "[t]he validity[,] construction[,] and effect of this agreement and any or all modifications hereof shall be governed by English Law and any legal proceedings that may arise out of it are to be brought in England." Phillips also signed a letter agreement that was attached to the recording contract, which stated that this letter agreement "shall be subject to the same laws and exclusive jurisdiction as the [recording contract]."
While Phillips was producing the songs under the recording contract, he recorded additional tracks which BBE and another recording company later sought Phillips' permission to release. Phillips denied the request but BBE and others released the additional tracks anyway. Phillips then filed suit against BBE and others alleging breach of the recording contract by BBE for failing to pay the second installment of an advance. Phillips also asserted claims for direct and contributory infringement under the Copyright Act and related alternative state law claims for unjust enrichment and unfair competition based on the defendants' exploitation of the additional tracks created by Phillips.
Two of the defendants moved to dismiss Phillips' complaint on the ground that the recording contract's forum selection clause required Phillips to bring his suit in England. The District Court agreed with the defendants, concluding that the forum selection clause was mandatory rather than permissive and that Phillips had failed to show that enforcing the clause would be unreasonable. As to Phillips' copyright claims, the District Court held that the dispute concerning defendants' right to exploit Phillips' music was primarily contractual because defendants had acquired the music under the recording contract.
The Second Circuit readily concluded, albeit with extensive discussion, that the forum selection clause was mandatory and that Phillips' breach of contract claim fell squarely within the clause. The same was not true, however, for Phillips' copyright and related state law claims.
The question facing the Second Circuit was whether these claims "arise out of" the recording contract. The Second Circuit was not persuaded by Phillips' argument that because his claims arise under the Copyright Act, they could not also arise out of the contract, stating that it must examine the substance of the claims "shorn of their labels." Ultimately, the Second Circuit concluded that because Phillips' rights, which were predicated on ownership of the copyrights to the additional tracks released by the defendants without his permission, did not originate from the recording contract, his copyright (and related state law) claims did not "arise out of" the contract. Rather, Phillips' claim of ownership of the copyrights was based on his authorship of the works. Although it did not discount the likely possibility that the recording contract would be raised in connection with Phillips' copyright claims, the Second Circuit found that because Phillips denied that the contract had any relevance to his copyright claims, the contract "is only relevant as a defense" in the suit and therefore could not say "that the origins of the proceedings were in the recording contract."
Ultimately, the Second Circuit therefore affirmed the dismissal of Phillips' breach of contract claim based on the enforceable forum selection clause but reversed the dismissal of his copyright and related state law claims, although it simultaneously noted, "without deciding," that it is likely his state law claims are preempted by the Copyright Act.
