Contractual Term “Affiliates” Unambiguously Defined by New York Court of Appeals

For newly drafted agreements, especially involving copyright licensing in New York, clients and drafters need to be mindful of what “affiliates” embodies and explicitly define its constraints in light of Paul M. Ellington v. EMI Music, Inc, 24 N.Y.3d 239 (2014).

In Ellington, the Court of Appeals of New York held that the contractual term “affiliates” was unambiguously defined as those affiliates that were in existence at the time the agreement was executed, which did not include any future affiliates.

Plaintiff Paul Ellington, the grandson and heir of Duke Ellington, sought a claim for a breach of contract against EMI Music for effectively “double-dipping” into the royalties of the foreign sales of Duke Ellington’s music.

In the contract, the royal provision at issue requires EMI to pay Ellington “a sum equal to fifty (50%) percent of the net revenue actually received by [EMI] from foreign publication” of the relevant musical compositions. Under this provision, Ellington was to collect royalties based on income received by a publisher after the deduction of fees charged by foreign sub-publishers.

However, at the time of the agreement, foreign sub-publishers were typically not affiliated with domestic music published whereas recently, many domestic publishers, including EMI, have affiliated with foreign sub publishers. 

In an audit report of EMI, plaintiff discovered that that the affiliated foreign sub-publishers retained 50% of the royalties while the remaining 50% was split between EMI and the Ellingtons.  Effectively, because the foreign sub-publishers were not considered affiliates under the calculation, 50% of the income received through the affiliated foreign sub-publishers and 50% of the remaining income, resulting in 75% of the income, were received by EMI and “affiliates” in sum. 

However, the Court stated that “absent explicit language demonstrating the parties’ intent to bind future affiliates of the contracting parties, the term “affiliate” includes only those affiliates in existence at the time the contract was executed. (VKK Corp. v. National Football League, 244 F.3d 114, 130-31 [2nd Cir. 2001]).”

The Court analyzed the parties’ intent and held that the use of present tense language, and not forward looking language in the agreement. demonstrated the parties’ intent to bind only affiliates in existence at the time of the agreement.

The Court further analyzed that the use, in a later clause, of the confirmation that “any other affiliate companies of [EMI] not specifically mentioned, were and are now possessed of and are entitled to the original copyright of the [relevant] musical compositions” was probative of an intent to limit application then-current affiliates.

Four of the seven justices for the New York Court of Appeals supported the holding, a fifth concurred with the result but rejected the majority’s interpretation of “affiliate”, and two justices dissented, stating that the term “affiliate” was ambiguous and that Ellington’s interpretation seemed at least as reasonable as EMI’s, and should not have been decided by the Court on a motion to dismiss.

The holding may have ramifications that go beyond just licensing agreements. For example, in non-compete agreements, practitioners need to be wary of using forward-looking language in order to bind future subsidiaries to the terms of the non-compete agreement. However, the context of the full agreement may play a role in the ultimate interpretation as exemplified in Ellington.

Therefore, for newly drafted agreements, especially under New York law, practitioners need to consider including future-looking language for relevant terms such as “affiliates”.