On Tuesday, the Second Circuit set aside an award of $54 million in the long running dispute between TVT Records/Steve Gottlieb and Island Def Jam Music/Lyor Cohen over the right to produce and market sound recordings by the group Cash Money Click (which included Ja Rule), 2005 U.S. App. LEXIS 11147. Irv Gotti (Irving Lorenzo), originally a talent scout at TVT and then infamous from his role as a producer for Murder Inc., was also a key player. A jury had awarded $25 million in actual and $107 million in punitive damages on to TVT, but Judge Marrero remitted that amount to the $54 million. The Second Circuit has now reduced that amount to zero.
In an earlier decision that caused a stir, Judge Marrero held open the possibility of punitive damages under the Copyright Act. When plaintiffs later opted for statutory damages the issue was moot although it lives on as a bad dream for many. Bluntly put, punitive damages are never available in copyright cases. Bad behavior is remedied, if at all, under increased willful statutory damages.
The Second Circuit's vacation of the copyright infringement verdict and damages raises the economically and legally important relationship between breach of contract and copyright claims. The former are state law questions, the latter exclusively federal. The basis for the court of appeals' holding was its disagreement with Judge Marrero's legal conclusion that a fraudulently induced copyright license is invalid "ipso facto," and therefore any use which would constitute infringement in the absence of a license is infringement since the license doesn't exist. The Second Circuit, per Judge B.D. Parker, reversed, holding that "the license must be formally rescinded before an infringement action based on fraudulent infringement of a copyright license can proceed."
As a matter of contract law, a material breach will provide the grounds to terminate a license. An automatic recission provision is the best idea for copyright owners. With a material breach, the copyright owner can elect to sue for breach of contract or infringement, but absent a recission, the grant continues in place and only a contract action may be brought. The Second Circuit's TVT opinion makes clear this principle applies to claims of fraudulent inducement and the principle was worth $54 million. Those who wish to sue for copyright infringement where a contract existed but has been materially breached should make sure the contract has, in fact, been rescinded before an infringement claim is brought. Without recission (automatically or formally), any award for infringement will be void.