## Facts

- Tom Waits entered exclusive recording and songwriting agreements (1972 and 1977) with Third Story Productions, later succeeded by Third Story Music, Inc. (TSM).
- Third Story assigned to Asylum Records/Elektra/Asylum (Warner entities) broad worldwide rights to exploit Waits’s recordings, including the right to license the recordings “upon such terms and conditions as [Warner] may approve.”
- The assignment agreements also expressly provided that Warner “may at [its] election refrain from any or all” exploitation of the recordings.
- TSM’s compensation included a royalty percentage from Warner’s exploitation revenues and specified advance/guaranteed payments.
- In 1993, TSM’s affiliate (Bizarre/Straight Records) requested a license from Warner to use four Waits recordings on a compilation album.
- Warner conditioned approval on obtaining Waits’s consent; Waits refused, and Warner denied the license.
- TSM sued, alleging Warner’s refusal (tied to Waits’s approval) breached the implied covenant of good faith and fair dealing.
- The trial court sustained defendants’ demurrer without leave to amend and entered judgment for Waits and the Warner entities; TSM appealed.

## Issues

1. Whether the implied covenant of good faith and fair dealing limits a contract term granting a party the express right, at its election, to exploit or refrain from exploiting recordings.
2. Whether an express discretionary “refrain from performance” clause renders the promise illusory absent an implied obligation to exploit, where the contract includes guaranteed payments.
3. Whether Warner’s refusal to license tracks for a compilation, conditioned on the artist’s consent, can constitute bad faith when the contract reserves absolute discretion over exploitation.

## Decision

- The Court of Appeal affirmed the judgment for Waits and the Warner entities.
- The court held the implied covenant of good faith and fair dealing did not restrict Warner’s express contractual right to refrain from exploiting or licensing the recordings.
- The court concluded the agreements were not unenforceable for lack of consideration because Warner’s guaranteed payments and advances constituted substantial independent consideration.
- Warner’s denial of the requested license, including conditioning approval on Waits’s consent, fell within the discretion expressly reserved by the contracts and could not support an implied-covenant claim.

## Legal Principles

- The implied covenant of good faith and fair dealing cannot be used to prohibit conduct that a contract expressly permits, including an express right to refrain from performance.
- An apparently discretionary or noncommittal performance promise does not make a contract illusory if the agreement is supported by independent, noncontingent consideration (such as guaranteed payments or advances).
- Courts will not rewrite an unfavorable bargain by implying substantive duties that contradict the contract’s allocation of discretion and risk.

## Conclusion

The court held that where agreements expressly grant a record company the right to exploit recordings or to refrain from exploitation at its election, the implied covenant cannot be invoked to impose a duty to license or market for the assignor’s royalty benefit, particularly when the contract includes substantial guaranteed consideration independent of exploitation.


Third Story Music, Inc. v. Waits, 41 Cal. App. 4th 798 (Ct. App. 1995)