## Facts

- Several successful recording artists (including B.J. Thomas and members of the Shirelles) entered recording contracts with Scepter Records, Inc.
- Under the contracts, Scepter owned the master sound recordings and held exploitation rights, including the ability to license the masters.
- Gusto Records, Inc. and G.M.L., Inc. later acquired Scepter’s catalog, including the plaintiffs’ masters, and exploited the recordings through sales and domestic third-party licenses.
- The Scepter contracts did not specify how income from domestic third-party licensing of the master recordings would be divided between label and artist.
- Plaintiffs claimed the defendants, as successors exploiting the masters, owed and underpaid royalties from this licensing activity.
- After a bench trial, the district court found for plaintiffs and awarded $843,209.89 plus prejudgment interest, relying heavily on expert testimony about industry custom.

## Issues

1. Whether the district court clearly erred in finding that industry custom, when contracts are silent, provides artists 50% of net income from domestic third-party licensing of master recordings.
2. Whether the district court clearly erred in calculating unpaid royalties and prejudgment interest based on its accounting reconstruction and royalty-rate findings.
3. Whether the district court’s fact findings supporting the damages award were clearly erroneous under Federal Rule of Civil Procedure 52(a).

## Decision

- The Sixth Circuit affirmed the district court’s judgment in full.
- The court held the district court did not clearly err in accepting expert testimony that the customary royalty split for third-party licensing is 50% of net licensing income to the artist when the contract is silent.
- The court held the district court did not clearly err in its damages computation and upheld the award of $843,209.89 plus prejudgment interest.
- Because defendants challenged only the amount of damages and not liability, the appeal turned on deference to the trial court’s factual determinations and credibility assessments.

## Legal Principles

- When a contract is silent on a material term in a specialized industry, a court may supply a reasonable term using evidence of trade custom and usage, including expert testimony.
- In a bench trial, damages calculations and related factual findings (including credibility determinations about expert testimony) are reviewed on appeal for clear error under Rule 52(a).
- Contract damages are intended to place the injured party in the position it would have occupied absent the breach, here measured by unpaid royalties due under the contract as reasonably construed and supplemented by trade usage.

## Conclusion

The Sixth Circuit upheld a substantial royalty award against a successor record company, concluding that the district court permissibly used expert evidence of industry custom to supply a 50% net licensing royalty term and that the resulting damages findings were not clearly erroneous.


Thomas v. Gusto Recs., Inc., 939 F.2d 395 (6th Cir. 1991)