Coleman v. System Dialing LLC et al

Filing 61

OPINION & ORDER....The defendants May 15 motion to compel arbitration is granted. This action is stayed pending the outcome of arbitration proceedings. (Signed by Judge Denise L. Cote on 6/17/2016) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------- X
:
DENARDO COLEMAN as Guardian for
:
ORNETTE COLEMAN,
:
Plaintiff,
:
:
-v:
:
SYSTEM DIALING LLC, JORDAN McLEAN,
:
AMIR ZIV, AND JOHN DOES 1-10,
:
:
Defendants.
:
:
-------------------------------------- X
APPEARANCES:

15cv3868 (DLC)
OPINION & ORDER

For the plaintiff:
Brian C. Caplan
Robert W. Clarida
Brett Van Benthysen
Reitler Kailas & Rosenblatt, LLC
885 Third Avenue, 20th Floor
New York, NY 10022
For the defendants:
Justin S. Stern
Frigon Maher & Stern LLP
1271 Avenue of the Americas, Suite 4300
New York, New York 10020
Jonathan D. Plaut
Cohan Rasnick Myerson Plaut LLP
One State Street, Suite 1200
Boston, MA 02109
DENISE COTE, District Judge:
Before the Court is the defendants’ motion to compel
arbitration, or in the alternative, to dismiss the complaint.
For the reasons that follow, the defendants’ motion to compel
arbitration is granted.

Background
I.

Procedural History
On May 19, 2015, Denardo Coleman (“Coleman”) filed the
instant action alleging claims under the Anti-Bootlegging Act,
Lanham Act, New York General Business Law, and common law unfair
competition against defendants System Dialing LLC (“System
Dialing”), Jordan McLean (“McLean”), and Amir Ziv (“Ziv”).

The

allegations in the complaint are detailed in the Court’s Opinion
and Order of December 18, 2015.

Coleman v. Sys. Dialing LLC,

No. 15cv3868 (DLC), 2015 WL 9275684 (S.D.N.Y. Dec. 18, 2015).
In short, Coleman alleges that the defendants have sold and
continue to sell unauthorized recordings of performances by his
late father and famed jazz musician, Ornette Coleman.

Coleman

has acted as Ornette Coleman’s legal guardian since 2013, and
initiated this action in that capacity.
Ornette Coleman died on June 11, 2015.

Following

litigation over the issue, Coleman’s request to be formally
substituted as the plaintiff was granted.

Coleman v. Sys.

Dialing LLC, No. 15cv3868 (DLC), 2016 WL 1169518 (S.D.N.Y. Mar.
22, 2016).
On October 27, the defendants filed a motion to dismiss the
complaint on the ground that Coleman’s claims were subject to a

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written arbitration agreement.

Coleman opposed the motion on

two grounds: first, that Ornette Coleman lacked the capacity to
enter into the agreement, and second, that Ornette Coleman never
actually signed the agreement.

The Court held that whether a

contract containing an arbitration clause was formed is a
question properly adjudicated by this Court, but whether Ornette
Coleman lacked the capacity to enter into a contract containing
an arbitration clause is properly heard by an arbitrator.
Coleman, 2015 WL 9275684.

Discovery regarding contract

formation closed on April 29, 2016.
On May 13, the defendants filed a renewed motion to dismiss
or compel arbitration, arguing that all of Coleman’s claims are
governed by a binding arbitration agreement.1

The motion became

fully submitted on June 3.
II.

The Artist Agreement
The following facts are undisputed.2

During discovery, the

The defendants also seek an award of attorney’s fees under the
Artist Agreement’s indemnification clause for the plaintiff’s
purported breach of the Artist Agreement. Because the Artist
Agreement includes a binding arbitration clause, that issue must
be submitted to arbitration.
1

“In the context of motions to compel arbitration brought under
the Federal Arbitration Act, the court applies a standard
similar to that applicable for a motion for summary judgment.”
Schnabel v. Trilegiant Corp., 697 F.3d 110, 113 (2d Cir. 2012)
(citation omitted).
2

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defendants produced for the first time an agreement (the “Artist
Agreement”) between Ornette Coleman, McLean, Ziv, and Sound
Chemistry Records LLC (“Sound Chemistry”).3

The Artist

Agreement, dated November 28, 2011, was drafted by System
Dialing’s attorney, Justin Stern, and bears the signatures of
Ornette Coleman, Ziv, and McLean.

McLean signed on behalf of

both himself and Sound Chemistry.
Under the Artist Agreement, Ornette Coleman, McLean, and
Ziv agreed to work collaboratively to perform and record
original music with the ultimate intent to distribute their
joint recordings (the “Recordings”) through Sound Chemistry.
Sound Chemistry provided resources in connection with the
Recordings, including use of equipment, advance costs, and aid
in preparing the master track recordings.

The Artist Agreement

provides that Ornette Coleman, McLean, and Ziv jointly own, in
equal share, any of the Recordings they create together.

It

grants Sound Chemistry the exclusive right to administer,
control, use, and exploit the Recordings.

Specifically, Sound

Chemistry has the right, but not the duty, to manufacture,
distribute, promote, advertise, sell, lease, license, or

Sound Chemistry Records LLC is the former name of System
Dialing.
3

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otherwise exploit commercially the Recordings.

In the event

Sound Chemistry chooses to market and sell the Recordings, it
agreed to pay royalties to Ornette Coleman in the amount of 50%
of the net amount actually received, meaning all the proceeds
that Sound Chemistry received minus costs associated with
manufacturing, printing, distribution, promotion, advertising,
video production, website support, social media support, tour
support, and any other costs.

Ornette Coleman is also entitled

to receive royalty payments for any money made by Sound
Chemistry for any merchandise related to the Recordings, using
the same formula.
Paragraph 14 of the Artist Agreement, titled “Governing
Law/Arbitration,” provides:
This Agreement will be governed by, interpreted and
construed in accordance with the laws of the State of
New York, without regard to principles of conflict of
laws. In the event of a dispute by and between any
Artist and Sound Chemistry regarding the terms,
construction or performance of this Agreement, such
dispute shall be settled by binding arbitration in New
York, New York, according to the rules of the American
Arbitration Association for the settlement of
commercial disputes, then in effect. The award or
decision resulting therefrom shall be subject to
immediate enforcement in a New York court of competent
jurisdiction.
At his deposition, McLean testified that he was present
when Ornette Coleman signed the Artist Agreement.

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Specifically,

McLean testified that he read the Artist Agreement out loud to
Ornette Coleman, and witnessed Ornette Coleman sign the Artist
Agreement.

Ziv also testified at his deposition that Ornette

Coleman had expressed to him the intention to execute the Artist
Agreement.

Coleman no longer disputes that Ornette Coleman

signed the Artist Agreement.

Instead, Coleman now contends that

the Artist Agreement lacks consideration because Sound
Chemistry’s obligations under the Artist Agreement are illusory.
Discussion
I.

Duty to Arbitrate
Under Section 2 of the Federal Arbitration Act (“FAA”)
a written provision in . . . a contract evidencing a
transaction involving commerce to settle by
arbitration a controversy thereafter arising out of
such contract or transaction . . . shall be valid,
irrevocable, and enforceable, save upon such grounds
as exist at law or in equity for the revocation of any
contract.
9 U.S.C. § 2.

The FAA was enacted to counteract “widespread

judicial hostility to arbitration agreements.”
LLC v. Concepcion, 563 U.S. 333, 339 (2011).

AT&T Mobility
The Supreme Court

and Second Circuit have emphasized that the Act “declares a
national policy favoring arbitration.”

See, e.g., Nitro–Lift

Technologies, L.L.C. v. Howard, 133 S. Ct. 500, 503 (2012)
(citation omitted); Citigroup, Inc. v. Abu Dhabi Inv. Auth., 776
6

F.3d 126, 129 (2d Cir. 2015).

Consistent with this policy, “[a]

party to an arbitration agreement seeking to avoid arbitration
generally bears the burden of showing the agreement to be
inapplicable or invalid.”

Harrington v. Atlantic Sounding Co.,

Inc., 602 F.3d 113, 124 (2d Cir. 2010); see also Green Tree Fin.
Corp.-Ala. v. Randolph, 531 U.S. 79, 91–92 (2000).

In

interpreting a validly formed arbitration agreement, [courts]
apply a presumption of arbitrability if the arbitration
agreement is ambiguous about whether it covers the dispute at
hand.”

Lloyd v. J.P. Morgan Chase & Co., 791 F.3d 265, 269 (2d

Cir. 2015) (citation omitted).

Disputes concerning the validity

or application of a contract containing an arbitration agreement
are decided by an arbitrator, “unless the validity challenge is
to the arbitration clause itself or the party disputes the
formation of the contract.”

Granite Rock Co. v. Int’l Bhd. of

Teamsters, 561 U.S. 287, 299 (2010) (citation omitted).
Here, there is no longer any dispute that Ornette Coleman
signed the Artist Agreement, which contains an arbitration
agreement.

Coleman’s sole argument is that the Artist Agreement

as a whole lacked consideration, and thus is not an enforceable
contract, because Sound Chemistry’s obligations were illusory.
Accordingly, the Court must determine whether the Artist

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Agreement was supported by consideration under New York law.

If

so, issues relating to the application of the Artist Agreement
must be decided by an arbitrator.

See Citigroup, 776 F.3d at

129.
The defendants argue that whether the Artist Agreement is
supported by consideration goes to the enforceability of the
agreement, and must therefore be decided by an arbitrator.

The

defendants rely on the Court’s decision Kuchinsky v. Curry, No.
09cv00299 (DLC), 2009 WL 1492225, at *3 (S.D.N.Y. May 28, 2009).
Kuchinsky, however, predates the Supreme Court’s decision in
Granite Rock Co., which clarified that a court must resolve
issues relating to the “formation of the contract.”
Rock Co., 561 U.S. at 299.

Granite

Under New York law, the formation of

a contract requires five elements: “offer, acceptance of the
offer, consideration, mutual assent, and an intent to be bound.”
Kolchins v. Evolution Markets, Inc., 8 N.Y.S.3d 1, 9 (1st Dep’t
2015).

Absent consideration, no contract is formed.

Accordingly, the Court must decide the threshold issue of
whether the Artist Agreement was supported by consideration.
II.

Sufficiency of Consideration
Under New York law, “[a]ll contracts must be supported by
consideration, consisting of a benefit to the promisor or a

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detriment to the promisee.”
155, 156 (2006).

Beitner v. Becker, 824 N.Y.S.2d

Courts do not weigh the relative value of the

consideration exchanged because “[u]nder the traditional
principles of contract law, the parties to a contract are free
to make their bargain, even if the consideration exchanged is
grossly unequal or of dubious value.”

Apfel v. Prudential-Bache

Sec. Inc., 81 N.Y.2d 470, 475 (1993).

A contract lacks

consideration when the obligation of one party is illusory,
meaning only one side is bound to perform.

See Curtis

Properties Corp. v. Greif Companies, 628 N.Y.S.2d 628, 632
(1995).

“The courts avoid an interpretation that renders a

contract illusory and therefore unenforceable for lack of mutual
obligation and prefer to enforce a bargain where the parties
have demonstrated an intent to be contractually bound.”

Id.

The Artist Agreement is supported by consideration.
Ornette Coleman agreed to grant Sound Chemistry the exclusive
right to market his Recordings with McLean and Ziv, of which he
had a 33.3% ownership interest.

In exchange, Sound Chemistry

incurred the obligation to pay royalties to Ornette Colman in
the event it earned any money from the sale in excess of its
costs.

Sound Chemistry also incurred the obligation to pay

royalties to Ornette Coleman for any merchandise it sold in

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connection with the Recordings.

Sound Chemistry also agreed to

indemnify Ornette Colman against any damages and expenses
arising out of any third party claim against Ornette Coleman
resulting from Sound Chemistry’s development, production,
distribution, and/or exploitation of the Recordings.

Finally,

both parties mutually obligated themselves to arbitrate disputes
concerning the “terms construction or performance” of the Artist
Agreement, which is itself sufficient consideration.

See Kopple

v. Stonebrook Fund Mgmt., LLC, 794 N.Y.S.2d 648 (2005) (“The
parties’ mutual promises to arbitrate constituted
consideration.”).

Because both Ornette Coleman and Sound

Chemistry obtained and gave up something in agreeing to the
Artist Agreement, the agreement does not lack consideration.
Accordingly, because the parties entered into an agreement with
an arbitration clause, Coleman must submit his claims, as well
as any challenges to the validity of the Artist Agreement, to
arbitration.
Coleman’s arguments are unavailing.

First, he argues that

the Artist Agreement is illusory because it provides that “Sound
Chemistry is not required to do any of the undertakings
contemplated herein unless Sound Chemistry in its sole
discretion decides to do so.”

Coleman contends that this

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provision allows Sound Chemistry to avoid any of its obligations
in the Artist Agreement, including any obligation to pay
royalties even if it makes money off the Recordings.

Coleman’s

reading of the Artist Agreement is inconsistent with its text.
Sound Chemistry’s obligation to pay royalties uses mandatory
language: “Sound Chemistry will pay Coleman a royalty . . . .”
Sound Chemistry has the right, but not the obligation, to market
and sell the Recordings, but if it decides to do so, it must pay
royalties pursuant to the formula in the Artist Agreement.

For

that reason, Sound Chemistry’s obligations to pay Ornette
Coleman under the Artist Agreement are not illusory.
Second, Coleman contends that McLean, during his
deposition, agreed that Sound Chemistry had no obligation to pay
Ornette Coleman royalties.

The testimony at issue is:

Q: What undertakings could Sound Chemistry decide not
to do?
* * *
A: We were not beholden to do any of the work
necessary to release the record. Anything that is
previously stated, we are not beholden to.
* * *
Q: Is payment of royalties an undertaking?
A: Yes.
Q: It is. So Sound Chemistry could, in its sole
discretion, can decide not to pay royalties. Is that
what the agreement says?
* * *
A: That is what is stated in the contract.
For two reasons, McLean’s testimony does not alter the
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conclusion that consideration was exchanged.

First, McLean’s

testimony is extrinsic evidence which will not be considered
because the pertinent terms of the Artist Agreement are clear
and unambiguous.

See Osprey Partners, LLC v. Bank of New York

Mellon Corp., 982 N.Y.S.2d 119, 120 (2014) (“[W]here the terms
of a contract are clear and unambiguous, the intent of the
parties must be found within the four corners of the document.”
(citation omitted)).

Moreover, in context, McLean’s testimony

is consistent with text of the Artist Agreement.

He merely

recognized that Sound Chemistry did not obligate itself to
market or sell the Recordings, and if it chose not to do so, it
would owe no royalties to Ornette Coleman.

He did not testify

that Sound Chemistry could ignore its duty to pay royalties in
the event it made money off the Recordings.
Third, Coleman argues that Sound Chemistry’s obligations
are illusory because it is only required to pay royalties to
Coleman after subtracting its costs, and that by manipulating
those costs, including payments to McLean and Ziv, it could
chose to pay Ornette Coleman nothing.

This argument is

contradicted by the language of the Artist Agreement.

After

subtracting documented costs, Sound Chemistry is required to pay
Ornette Coleman fifty percent of the net amount as royalties,

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and may pay royalties to McLean and Ziv in an amount in its
discretion, up to fifty percent of the net amount.

The

defendants, therefore, cannot eliminate Coleman’s share of
royalties by increasing McLean and Ziv’s shares.

Finally, to

the extent Coleman is arguing that Sound Chemistry could
intentionally inflate its costs to deprive Ornette Coleman of
royalties, this is not a basis to conclude that the Artist
Agreement is illusory because such manipulation would constitute
a violation of the covenant of good faith and fair dealing,
which is implied in every contract under New York Law.

Fishoff

v. Coty Inc., 634 F.3d 647, 653 (2d Cir. 2011) (“Where the
contract contemplates the exercise of discretion, [the implied
covenant] includes a promise not to act arbitrarily or
irrationally in exercising that discretion.”).
Fourth, Coleman argues that the “provisions contained in
the [Artist] Agreement diverge greatly from the typical
provisions seen in any legitimate record contract, particularly
one for an artist of [Ornette] Coleman’s historic stature.”
Specifically, Coleman identifies (1) the fact that Ornette
Coleman did not retain the exclusive right to exploit the
Recordings, (2) the lack of accounting and audit provisions, and
(3) the lack of a promotion and marketing commitment.

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These

arguments are irrelevant to the issue of consideration because
“parties to a contract are free to make their bargain, even if
the consideration exchanged is grossly unequal or of dubious
value.”

Apfel, 81 N.Y.2d at 475.

Whether the Artist Agreement

was a wise business decision from Ornette Coleman’s perspective
does not alter the conclusion that the agreement was supported
by sufficient consideration.4
Conclusion
The defendants’ May 15 motion to compel arbitration is
granted.

This action is stayed pending the outcome of

arbitration proceedings.
Dated:

New York, New York
June 17, 2016
__________________________________
DENISE COTE
United States District Judge

To the extent Coleman is suggesting that the Artist Agreement
is unconscionable, that issue must be decided by the arbitrator.
See Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 70 (2010)
(holding that an arbitration provision is enforceable even when
party claims the entire contract is unconscionable).
4

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