Third Story Music, Inc. v. Waits

• Decision Date: 28 December 1995
• Docket Number: No. B084531,B084531
• Citation: 41 Cal.App.4th 798,48 Cal.Rptr.2d 747
• Court: California Court of Appeals Court of Appeals
• Parties: , 96 Cal. Daily Op. Serv. 107, 96 Daily Journal D.A.R. 125 THIRD STORY MUSIC, INC., Plaintiff and Appellant, v. Tom WAITS et al., Defendants and Respondents.

Page 747

48 Cal.Rptr.2d 747

41 Cal.App.4th 798, 96 Cal. Daily Op. Serv. 107,

96 Daily Journal D.A.R. 125

THIRD STORY MUSIC, INC., Plaintiff and Appellant, v. Tom WAITS et al., Defendants and Respondents.

No. B084531.

Court of Appeal, Second District, Division 4, California.

Dec. 28, 1995.

Review Denied March 21, 1996.

Cohen and Luckenbacher, Evan S. Cohen and S. Martin Keleti, Los Angeles, for Plaintiff and Appellant.

McCambridge, Deixler, Marmaro & Goldberg, Bert H. Deixler and Daniel L. Germain, Los Angeles, for Defendants and Respondents.

EPSTEIN, Acting Presiding Judge.

This case involves a dispute between a company which owned the rights to the musical output of singer/songwriter Tom Waits from 1972 to 1983 and the party which purchased those rights. The issue is whether a promise to market music, or to refrain from doing so, at the election of the promisor is subject to the implied covenant of good faith and fair dealing where substantial consideration has been paid by the promisor. We conclude that the implied covenant does not apply.

FACTUAL AND PROCEDURAL SUMMARY

According to the complaint, Waits agreed to render his services as a recording artist and songwriter exclusively to Third Story Productions (predecessor-in-interest to plaintiff and appellant Third Story Music, Inc.) from 1972 to 1983, pursuant to written agreements dated July 1, 1972 and July 1, 1977. Third Story Productions transferred its rights in Waits' music to Asylum Records (predecessor-in-interest to defendant/respondent Warner Communications, Inc.) on August 31, 1972, and to Elektra/Asylum Records (currently a division of Warner Communications, Inc.) pursuant to an agreement dated June 15, 1977. ¹ Under these agreements, TSM was to produce master recordings featuring performances by Waits. Warner obtained from TSM the worldwide right to "manufacture, sell, distribute and advertise records or other reproductions (visual or nonvisual) embodying such recordings, to lease, license, convey or otherwise use or dispose of the recordings by any method now or hereafter known, in any field of use, to release records under any trademarks, trade names or labels, to perform the records or other reproductions publicly and to permit the public performance thereof by radio broadcast, television or any other method now or hereafter known, all upon such terms and conditions as we may approve, and to permit others to do any or all of the foregoing...." This clause of the agreements also specifically stated that Warner "may at our election refrain from any or all of the foregoing." ²

TSM was to receive as a royalty a percentage of the amount earned by Warner from its exploitation of the music. In addition, Warner was required to pay TSM a specific dollar amount as an advance on royalties. ³

So far as can be ascertained from the record, the parties operated under these agreements without controversy until 1993. At that time, an affiliate of TSM known as Bizarre/Straight Records sought to compile and market an album of previously-released Waits compositions, including four which were the subject of the TSM/Warner agreement: On the Nickel, Jitterbug Boy, Invitation to the Blues, and Ruby's Arms. Bizarre/Straight presented a licensing proposal to Warner through its agent Warner Special Products. During negotiations, Bizarre/Straight and TSM learned that Warner had no objection to the deal, but that it would not be made final unless Waits personally approved the licensing request. For reasons unknown, but which TSM claims have to do with Waits' desire to maximize profit on music created after his association with TSM, Waits refused consent. TSM brought suit for contract damages based on breach of the implied covenant of good faith and fair dealing, claiming that Warner "has created an impediment to [TSM] receiving material benefits under the [parties'] agreements and has wrongfully interjected that requirement [the requirement of Waits' approval] into an unknown number of potentially lucrative licensing arrangements, in so doing preventing at least the issuance of the four licenses described above, and other licenses, which TSM will ascertain through discovery."

Warner demurred to the complaint, alleging that the clause in the agreement permitting it to "at [its] election refrain" from doing anything to profitably exploit the music is controlling and precludes application of any implied covenant. The demurrer was sustained on those grounds. TSM contends on appeal, and argued below, that when a party to a contract is given this type of discretionary power, that power must be exercised in good faith, and that permitting the artist to decide whether a particular licensing arrangement was or was not acceptable did not represent a good faith exercise.

DISCUSSION

I

When an agreement expressly gives to one party absolute discretion over whether or not to perform, when should the implied covenant of good faith and fair dealing be applied to limit its discretion? Both sides rely on different language in the recent Supreme Court decision in Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 6 Cal.Rptr.2d 467, 826 P.2d 710 to answer that question. In Carma, the parties had entered into a lease agreement which stated that if the tenant procured a potential sublessee and asked the landlord for consent to sublease, the landlord had the right to terminate the lease, enter into negotiations with the prospective sublessee, and appropriate for itself all profits from the new arrangement. In the passage relied on by TSM, the court recognized that "[t]he covenant of good faith finds particular application in situations where one party is invested with a discretionary power affecting the rights of another." (2 Cal.4th at 372, 6 Cal.Rptr.2d 467, 826 P.2d 710.) The court expressed the view that "[s]uch power must be exercised in good faith." (Id.)

At the same time, the Carma court upheld the right of the landlord to freely exercise its discretion to terminate the lease in order to claim for itself--and deprive the tenant of--all profit from the expected sublease. In this regard, the court stated: "We are aware of no reported case in which a court has held the covenant of good faith may be read to prohibit a party from doing that which is expressly permitted by an agreement. On the contrary, as a general matter, implied terms should never be read to vary express terms. [Citations.] 'The general rule [regarding the covenant of good faith] is plainly subject to the exception that the parties may, by express provisions of the contract, grant the right to engage in the very acts and conduct which would otherwise have been forbidden by an implied covenant of good faith and fair dealing.... [p] This is in accord with the general principle that, in interpreting a contract "an implication ... should not be made when the contrary is indicated in clear and express words." 3 Corbin, Contracts, § 564, p. 298 (1960).... [p] As to acts and conduct authorized by the express provisions of the contract, no covenant of good faith and fair dealing can be implied which forbids such acts and conduct. And if the defendants were given the right to do what they did by the express provisions of the contract there can be no breach.' " (2 Cal.4th at p. 374, 6 Cal.Rptr.2d 467, 826 P.2d 710, quoting VTR, Incorporated v. Goodyear Tire & Rubber Company (S.D.N.Y.1969) 303 F.Supp. 773, 777-778.)

In reaching its holding, the court cited with approval three cases in which discretionary powers were upheld despite claims that they were not exercised in good faith: Gerdlund v. Electronic Dispensers International (1987) 190 Cal.App.3d 263, 235 Cal.Rptr. 279; Brandt v. Lockheed Missiles & Space Co. (1984) 154 Cal.App.3d 1124, 201 Cal.Rptr. 746; and Balfour, Guthrie & Co. v. Gourmet Farms (1980) 108 Cal.App.3d 181, 166 Cal.Rptr. 422. (2 Cal.4th at pp. 374-376, 6 Cal.Rptr.2d 467, 826 P.2d 710.)

In situations such as the present one, where a discretionary power is expressly given by the contractual language, the quoted passages from Carma set up an apparent inconsistency between the principle that the covenant of good faith should be applied to restrict exercise of a discretionary power and the principle that an implied covenant must never vary the express terms of the parties' agreement. We attempt to reconcile the two.

II

We first emphasize a long-established rule concerning implied covenants. To be imposed " '(1) the implication must arise from the language used or it must be indispensable to effectuate the intention of the parties; (2) it must appear from the language used that it was so clearly within the contemplation of the parties that they deemed it unnecessary to express it; (3) implied covenants can only be justified on the grounds of legal necessity; (4) a promise can be implied only where it can be rightfully assumed that it would have been made if attention had been called to it; (5) there can be no implied covenant where the subject is completely covered by the contract.' " (Lippman v. Sears, Roebuck & Co. (1955) 44 Cal.2d 136, 142, 280 P.2d 775; City of Glendale v. Superior Court (1993) 18 Cal.App.4th 1768, 1778, 23 Cal.Rptr.2d 305.)

With this in mind, we review the authorities cited in Carma for the proposition that a discretionary power must be exercised in good faith. In Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 216 Cal.Rptr. 345, 702 P.2d 503, a bank was given discretion to set non-sufficient fund (NSF) charges to be paid by the customer. The contention was made that since the charges were subject to the bank's sole discretion, the contract lacked mutuality and was, in fact, illusory. (See Automatic Vending Co. v. Wisdom (1960) 182 Cal.App.2d 354, 357, 6 Cal.Rptr. 31 [" 'An agreement that provides that the price to be paid, or other performance to be rendered, shall be left to the will and discretion of one of the parties...