Schlaifer Nance & Co. v. Estate of Warhol

Decision Date10 July 1997
Docket NumberD,No. 811,811
Citation119 F.3d 91
PartiesRICO Bus.Disp.Guide 9300 SCHLAIFER NANCE & COMPANY, Plaintiff-Appellant, v. The ESTATE OF ANDY WARHOL, Frederick Hughes, Edward W. Hayes, Esq., and Vincent Fremont, Defendants-Appellees. ocket 96-7740.
CourtU.S. Court of Appeals — Second Circuit

James C. Rawls, Powell, Goldstein, Frazer & Murphy, Atlanta, GA (Paul K. Rooney, New York City, of Counsel), for Appellant.

Paul J. Hanly, Jr., Colbence & Warner, New York City (Susan J. Kohlmann, Winthrop, Stimson, Putnam & Roberts, New York City, of Counsel), for Appellees.

Before: OAKES, KEARSE, McLAUGHLIN, Circuit Judges.

McLAUGHLIN, Circuit Judge:

BACKGROUND

Schlaifer Nance & Co., Inc. ("SNC") is a licensing company that arranges to market famous names or images. SNC sought a licensing agreement with Andy Warhol, the icon of 1960's and 70's pop culture, but Warhol died before they could sign an agreement. Eventually, Warhol's Estate negotiated and signed a broad-based licensing agreement with SNC.

Not long after, SNC sued the Estate in the Southern District of New York for fraud and civil violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961, 1962, claiming that many of the works of art that were the subject of the agreement were in the public domain. Judge Stanton (S.D.N.Y.) dismissed the RICO claims, and the fraud claim was assigned to Judge Chin (S.D.N.Y.) for trial. A jury returned a verdict in favor of SNC on the fraud claims, but Judge Chin granted the defendants' Rule 50(b) motions.

A. Negotiating the Licensing Agreement

SNC was founded by Roger Schlaifer and Susanne Nance Schlaifer, and both are officers of the company. SNC became very successful in the 1980's after launching a Warhol's business associate, Frederick Hughes, represented Warhol's interests during the negotiations. In December 1985, Schlaifer met with Hughes to discuss the licensing possibilities. An SNC memorandum summarizing that meeting notes that Hughes told Schlaifer that Warhol owned "most," not all, of his images.

licensing program for the popular "Cabbage Patch" dolls. Roger Schlaifer met Warhol after SNC commissioned the artist to paint images of the dolls, and they discussed the possibility of licensing Warhol's many works of art. Soon thereafter, Schlaifer hired attorneys David Baker and David Armitage to assist in the negotiation of a licensing agreement with Warhol.

Although the parties circulated a draft agreement in 1986, negotiations went into limbo when Warhol lost interest. In February 1987, Warhol died suddenly. In his will, Warhol appointed Hughes the executor of his Estate. Soon thereafter, Hughes retained Edward Hayes as counsel to the Estate.

In the Spring of 1987, Schlaifer met with Hughes in New York to renew discussions of a licensing agreement with Warhol's Estate. The talks were positive, and an agreement seemed imminent. At the meeting, Hughes asked Schlaifer if he objected to a friend of Warhol producing a limited edition watch that had Warhol's name and photographs on its face. Schlaifer had no problem with the idea, but added that the watch deal should be of limited scope, and should not interfere with the possibility of a separate SNC watch program. Consequently, in April 1987, the Estate entered an agreement with the North American Watch Company ("NAW") to allow NAW to produce a limited edition watch. The Estate also agreed that it would not permit another watch program for five years. The Estate did not divulge the details of the deal to SNC, and, indeed in November 1987, Hughes told Schlaifer that there was no watch deal.

Schlaifer, Hayes and Hughes continued the negotiations throughout the Spring of 1987, and met with representatives of SNC in May. At these meetings, Hayes assured Schlaifer that the Estate was going to halt the production of any infringing items. The group also discussed how royalties would be split between SNC and the Estate. Hughes proposed an even split, stating, "we own all of these rights. We control all of these rights, so we think it is more fair if it is just an even split."

Ultimately, SNC signed a Licensing Agreement with the Estate in the Fall of 1987.

B. The Agreement

The Licensing Agreement ("Agreement") was quite broad, and granted SNC many rights to license Warhol's artworks, name and likeness for items in the fashion, home decorating, gift, toy and entertainment industries. A few provisions of the Licensing Agreement are central to this appeal.

The first provision with which the parties are concerned is § 4(a), which calls for the creation of a list of the Warhol works that are the subject of the Agreement. It provides that:

[i]t is understood and agreed that the List provided as of the date hereof and which is attached hereto as Exhibit D and made a part hereof may not be a complete listing of all of Artist's Existing Artworks. The Estate agrees to use its best efforts and to cooperate with [SNC] to ensure that the List shall become an accurate and complete list as soon as is practicable. Additions of Existing Artworks to the List shall clearly identify those Existing Artworks to which the Estate does not own the Copyrights or otherwise have the right to license to [SNC] free of all rights of any third parties, specifying the nature of the limitation on the Estate's ability to grant the license.

The Agreement defined "Existing Artworks" as those Warhol works known to exist as of November 13, 1987.

Exhibit D (the list) contained a legend which read:

* This list is incomplete.

The Estate agrees to update this list as often as reasonably may be requested by [SNC] in regard to any specific works other than those listed herein which [SNC] Section 4(c) of the Agreement described a group of Warhol artworks designated "Celebrity Works." These were works where Warhol artistically distorted the likenesses of famous figures. Section 4(c) noted that SNC might have to work with the celebrity or the celebrity's estate to license the image.

wishes to exploit pursuant to the terms of the agreement. No representation is made that each of these works bears a proper copyright symbol, but the Estate will place such a symbol upon any works sold[,] publicly displayed [or] transferred in the future.

Section 9(a), entitled "Representations and Warranties," provided that:

(a) [t]he Estate represents and warrants to [SNC] on a continuing basis during the term of this Agreement that: ... (ii) the Artist is the sole creator and the Estate is the sole owner of the Copyrights (other than the right to exhibit previously sold or loaned Existing Artworks) in the Existing Artworks, although certain elements of the Existing Artworks may involve or incorporate concepts in the public domain; (iii) all Existing Artworks owned by the Estate contain and will contain, prior to publication, appropriate notices regarding the ownership of copyrights therein; (iv) except with respect to Celebrity Works, in which third parties have proprietary rights, and except as noted on Exhibit C, the Estate has and will continue to have the sole and exclusive right to transfer to [SNC] all rights to the Existing Artworks and the Works and the Copyrights, Trademarks and New Trademarks granted hereunder; (v) neither the Existing Artworks, the Trademarks nor the Works infringe the rights of any third parties; (vi) neither the Artist nor the Estate has granted and the Estate will not grant any right, license or privilege for Licensed Products with respect to the Trademarks, New Trademarks, Copyrights, or the Works or any portion thereof to any person or entity other than [SNC].... Upon [SNC's] request, the Estate shall affirm the accuracy of the warranties contained herein as they relate to specific Existing Artworks, and the Estate shall provide written notice to [SNC] of any breach hereof within five (5) days of acquiring knowledge of any such breach.

Exhibit C was to contain a list of licenses that had been granted to third parties before the Agreement with SNC. However, Exhibit C was a piece of paper that read "NONE."

Section 9(a) also provided a savings clause for any "inadvertent breach":

An inadvertent breach by the Estate of the warranties contained in subsections (ii) and (iii) of this Section 9(a) shall not be deemed a material breach of this Agreement so long as the Estate, immediately upon receipt of a written notice from the Company identifying a breach of warranty, undertakes in good faith and at no expense to [SNC] such actions as shall be necessary to establish its rights as warranted to [SNC] and diligently prosecutes the same to a successful conclusion.

C. After the Agreement is Signed

On November 23, 1987, after the parties signed the Agreement, SNC received an opinion letter, suspiciously dated October 27, 1987 (before the Agreement was executed), signed by a law firm claiming to represent the Estate. The opinion letter stated that the firm represented the executor of the Estate during the negotiation and execution of the Agreement. The letter continued that the firm had examined relevant documents and had concluded that the "Estate possesses all right, title, and interest in the Existing Artworks necessary to enable it to perform under the Agreement." Trial testimony revealed that the firm had misrepresented its position as counsel to the Estate, and that it had never even reviewed the documents necessary to reach the conclusion that the Estate controlled all rights to the Existing Artworks.

Soon after SNC entered the Agreement, the Estate began to disclose numerous problems regarding control over the rights to Warhol's works.

First, in early 1988, the Estate gave SNC a copy of the NAW watch agreement, revealing its exclusivity provision. Then, a month later, Fotofolio, a publisher of posters and Infuriated by this sudden cascade of outside interests, SNC filed a complaint against the Estate in the Southern District...

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