In 2012, a music company, VMG Salsoul, LLC, sued Mr. Pettibone and Warner for copyright infringement, contending that Mr. Pettibone had copied a portion of the song “Love Break” and used it without authorization in “Vogue.”

Represented by separate counsel and bearing their own costs, Warner and Mr. Pettibone prevailed in the trial court and on appeal.

Following the VMG suit, Warner withheld in excess of $500,000 in royalties due Mr. Pettibone to offset the attorneys' fees it had incurred in defending the suit. When Mr. Pettibone demanded payment of the royalties, Warner refused to comply, contending that under Section 8.1 of the agreement – the indemnification provision – Warner was entitled to withhold the royalties.

Mr. Pettibone sued Warner in the U.S. District Court for the Southern District of New York, arguing that he had never breached the agreement and, therefore, was under no duty to indemnify Warner.

Warner moved to dismiss, contending that Section 8.1 clearly permitted it to withhold royalties even in the absence of a breach of the agreement.

Mr. Pettibone cross-moved for summary judgment.

The district court dismissed Mr. Pettibone's claim for royalties, reasoning that the agreement “unambiguously” required Mr. Pettibone to indemnify Warner for the attorneys' fees and costs it incurred in defending against the VMG lawsuit, up to the $1.5 million retention in Warner's insurance policy.

Mr. Pettibone appealed.

The Pettibone-Warner Agreement

Section 8.1 of the Pettibone-Warner agreement provided:

Each party will indemnify the other against any loss or damage (including court costs and reasonable attorneys' fees) due to a breach of this agreement by that party which results in a judgment against the other party or which is settled with the other party's prior written consent (not to be unreasonably withheld). In addition, [Mr. Pettibone's] indemnity shall extend to the “deductible” under [Warner's] errors-and-omissions policy without regard to judgment or settlement. Each party is entitled to be notified of any action against the other brought with respect to [the song “Vogue”], and to participate in the defense thereof by counsel of its choice, at its sole cost and expense.

The Second Circuit's Decision

The Second Circuit disagreed with the district court, vacated its decision, and remanded for entry of judgment in favor of Mr. Pettibone.

In its decision, the circuit court explained that, under applicable New York law, which governed the agreement, an indemnification provision could not be enforced unless the intention to impose such an obligation was “unambiguous.” The circuit court added that this principle applied “with particular force” in an agreement that purported to shift attorneys' fees.

The Second Circuit then ruled that Section 8.1 was “pock-marked with ambiguity” and, in fact, more readily evinced an understanding between the parties “that, in the absence of a breach, each party will shoulder its own attorneys' fees and costs.”

The Second Circuit reasoned that Section 8.1 contained language that explicitly cabined the indemnification obligation to attorneys' fees and costs arising from a breach of the agreement and that, by contrast, there was “no explicit mention” of whether an indemnification obligation existed absent such a breach.

Moreover, the circuit court continued, Section 8.1 stated that each party was “entitled to be notified of any action against the other brought with respect to [the song “Vogue”], and to participate in the defense thereof by counsel of its choice, at its sole cost and expense.” (Emphasis added.)

The Second Circuit added that Section 8.1, read as a whole, could be “reasonably interpreted” to limit Mr. Pettibone's indemnification obligation, in the event of Mr. Pettibone's breach, to the retention amount set forth in Warner's insurance policy, regardless of the amount of any judgment or settlement against Warner resulting from that breach. In the circuit court's opinion, this reading gave effect to every word of Section 8.1 and also made economic sense, as Warner's insurance policy “likely covers it for breach-related damages in excess of the retention amount.”

The circuit court was not persuaded by Warner's argument that the only reasonable reading of “without regard to judgment or settlement” in the second sentence of Section 8.1 was “without regard to breach,” reasoning that Warner drafted the agreement and “could have easily included, in reasonably intelligible language, an indemnification obligation for all allegations” and could have expressly clarified that Section 8.1's indemnification obligation extended beyond instances of breach. “Warner did neither,” the Second Circuit said.

It then concluded that Warner could not enforce Section 8.1 against Mr. Pettibone.

The case is Pettibone v. WB Music Corp., No. 18-1000-cv (2d Cir. April 17, 2019). Attorneys involved include: FOR PLAINTIFF-APPELLANT: RICHARD STEVEN BUSCH, King & Ballow, Nashville, TN; FOR DEFENDANTS-APPELLEES: ALEXANDER KAPLAN (Sandra A. Crawshaw-Sparks & David A. Munkittrick, on the brief), Proskauer Rose LLP, New York, NY.