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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 156
Paul M. Ellington,
Appellant,
v.
EMI Music, Inc., et al.,
Defendants,
EMI Mills Music, Inc.,
Respondent.
Richard J. J. Scarola, for appellant.
Donald S. Zakarin, for respondent.
ABDUS-SALAAM, J.:
In this breach of contract action, we have been asked
to interpret the terms of a royalty provision contained in a 1961
United States copyright renewal Agreement between the legendary
Edward Kennedy "Duke" Ellington (Duke Ellington)and Mills Music,
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Inc. (now EMI). We hold that the disputed terms of the Agreement
are clear and unambiguous. Thus, we affirm the Appellate
Division.
I.
Plaintiff Paul Ellington, an heir and grandson of Duke
Ellington, commenced this breach of contract action to recover
royalties allegedly due under a royalty provision contained in a
copyright renewal agreement dated December 17, 1961. The
Agreement designates Duke Ellington and named members of his
family as the "First Parties." The Agreement is expressly
binding upon all of Duke Ellington's heirs and assigns. The
Agreement defines "Second Party" as consisting of a group of
music publishers including Mills Music, Inc. (whose successor in
interest is respondent EMI) as well as "American Academy of
Music, Inc., Gotham Music Service, Inc. and their predecessors in
interest, and any other affiliate of Mills Music, Inc."
(Agreement, preamble).
The Agreement assigned to the Second Party the right to
renew the United States copyright to certain musical compositions
written by Duke Ellington, specified in Schedules 1, 2, and 3 of
the Agreement, subject to the payment of royalties. Accordingly,
the music publishers designated as the Second Party owned the
copyright to the relevant compositions and were required to renew
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the copyrights on behalf of Duke Ellington. Specifically, the
Agreement states that Duke Ellington confirms that, "Mills Music,
Inc., American Academy of Music, Inc., and Gotham Music Service,
Inc., or any of their predecessors in interest or any other
affiliated companies of Mills Music, Inc., not specifically
mentioned, were and are now possessed of and are entitled to the
original copyrights of the [relevant] musical compositions"
(Agreement,¶5).
Paragraph 3(a) of the Agreement, the royalty provision
at issue, requires the Second Party to pay the First Parties "a
sum equal to fifty (50%) percent of the net revenue actually
received by the Second Party from . . . foreign publication" of
the relevant musical compositions (Agreement, ¶3 [a] [emphasis
added]). This type of provision is known as a "net receipts"
arrangement under which a composer, such as Duke Ellington, would
collect royalties based on income received by a publisher after
the deduction of fees charged by foreign subpublishers (see e.g.
Jobim v Songs of Universal, 732 F Supp 2d 407, 413 [SD NY 2010]).
At the time the Agreement was executed, foreign subpublishers
were typically unaffiliated with domestic music publishers.
Recently, however, many domestic publishers, including EMI, have
affiliated with foreign subpublishers and it is this development
that forms the basis of plaintiff's claim of breach of contract.
Pursuant to limited audit rights allowed by contract,
plaintiff requested an audit of EMI. During the audit plaintiff
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discovered that EMI had begun using affiliated foreign
subpublishers, who retained 50% of the royalties generated from
the foreign sale of the relevant musical compositions originally
retained by the unaffiliated subpublishers. The remaining 50%
was split equally between EMI and the First Parties as required
by the royalty provision.
Plaintiff commenced this action against EMI alleging
breach of contract and fraudulent concealment, and also requested
declaratory and injunctive relief.1 Plaintiff claimed that by
using affiliated foreign subpublishers, EMI was double-dipping
into the entire pot of revenue generated from the foreign sale of
the relevant musical compositions. Essentially, plaintiff claims
that the amount retained by the affiliated foreign subpublishers
prior to remittal of the remainder to EMI is an amount received
by EMI, and therefore, when using affiliated foreign
subpublishers, EMI should remit to the First Parties half of the
entire amount generated from the foreign sale of the relevant
musical compositions. By failing to do so, he alleges that EMI
has breached the Agreement by diluting his share of the
royalties.
EMI moved to dismiss plaintiff's complaint pursuant to
CPLR 3211 (a) (1) and (7), arguing that its method of accounting
and payment is consistent with the terms and conditions of the
Agreement. In opposition, plaintiff argued that the terms of the
1
Plaintiff abandoned his fraudulent concealment claim.
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Agreement are ambiguous and he therefore needed discovery.
Supreme Court granted EMI's motion, and dismissed the
amended complaint in its entirety (Ellington v EMI, 33 Misc 3d
1209 [A] [Sup Ct, NY County 2011]). The court held that "[t]he
royalty payment provision is clear and unambiguous" (id. at *4).
"[T]he contracting parties made no distinction in the royalty
payment terms based on whether the foreign subpublishers are
affiliated or unaffiliated with the [domestic] publisher" and
thus, the court determined "it would be improper at any time, but
especially now, some 50 years after the date of the [Agreement]'s
execution, to read such a distinction into the [Agreement]"
(id.). The court also held that "[a]bsent explicit language
demonstrating the parties' intent to bind future affiliates of
the contracting parties, the term 'affiliates' [in the definition
of Second Party] includes only those affiliates in existence at
the time that the contract was executed" (id. at *5).
The Appellate Division affirmed (Ellington v EMI Music,
106 AD3d 401 [1st Dept 2013]), holding that Supreme Court
"correctly determined that the [A]greement's definition of
'Second Party' included only the parties named therein and 'other
affiliates of [EMI]' that were in existence at the time the
[A]greement was executed," which "did not include foreign
subpublishers that had no existence or affiliation with [EMI] at
the time of contract" (id. at 403). This Court granted plaintiff
leave to appeal (21 NY3d 865 [2013]).
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II.
Where the terms of a contract are clear and
unambiguous, the intent of the parties must be found within the
four corners of the contract, giving a practical interpretation
to the language employed and reading the contract as a whole (see
Greenfield v Philles Records, 98 NY2d 562, 569 [2002]; W.W.W.
Assoc. v Giancontieri, 77 NY2d 157, 162-163 [1990]). "The words
and phrases used by the parties must, as in all cases involving
contract interpretation, be given their plain meaning" (Brooke
Group v JCH Syndicate 488, 87 NY2d 530, 534 [1996]; see Quadrant
Structured Products Co., Ltd. v Vertin, 23 NY3d 549, 564 [2014];
J. D'Addario & Co., Inc. v Embassy Industries, Inc., 20 NY3d 113,
119 [2012]).
An agreement is unambiguous "if the language it uses
has 'a definite and precise meaning, unattended by danger of
misconception in the purport of the [agreement] itself, and
concerning which there is no reasonable basis for a difference of
opinion'" (Greenfield, 98 NY2d at 569, quoting Breed v Insurance
Co. of N. Am., 46 NY2d 351, 355 [1978]). Ambiguity in a contract
arises when the contract, read as a whole, fails to disclose its
purpose and the parties' intent (see Brooke Group v JCH Syndicate
488, 87 NY2d 530, 534 [1996]), or when specific language is
"susceptible of two reasonable interpretations" (State of New
York v Home Indem. Co., 66 NY2d 669, 671 [1985]; see Chimart
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Assoc. v Paul, 66 NY2d 570, 573 [1986]). "The best evidence of
what parties to a written agreement intend is what they say in
their writing . . . a written agreement that is complete, clear
and unambiguous on its face must be enforced according to the
plain meaning of its terms" (Greenfield, 98 NY2d at 569 [internal
citation and quotation marks omitted]).
Plaintiff argues that two terms in the Agreement are
ambiguous: (1) the phrase "net revenue actually received" in the
royalty provision and (2) the term "any other affiliate" in the
definition of Second Party.
A. "Net Revenue Actually Received"
As stated, the royalty provision provides that the
"Second Party" will pay to the "First Parties" "a sum equal to
fifty (50%) percent of the net revenue actually received by the
Second Party . . . from foreign publication" (Agreement, ¶3 [a]
[emphasis added]). This language is not ambiguous, as a plain
reading of the provision indicates that plaintiff, through
payment to the First Parties, is entitled to receive 50% of the
net revenue actually received from foreign subpublishers.
The Agreement does not state what percentage of the net
receipts generated from the foreign sale of the relevant musical
compositions is to be retained by the foreign subpublishers.
Rather, it states only that whatever amount EMI actually received
would be split equally with the First Parties. The Agreement
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contemplates that the royalties paid to the First Parties would
be based on the revenue remitted to EMI itself. Although at the
time the Agreement was executed the parties apparently did not
contemplate that EMI would affiliate itself with foreign
subpublishers, the percentage retained by the affiliated foreign
subpublishers is not an amount actually received by EMI, but a
fee for the subpublishers' services.
The royalty provision makes no distinction between
affiliated and unaffiliated foreign subpublishers. Therefore,
the courts below properly declined to read such a distinction
into the contract as it does not appear to have been the intent
of the parties that such a distinction be included, primarily
because they were understandably unaware that such a change in
the industry would occur. Nonetheless, the Agreement does not
prevent EMI from using affiliated foreign subpublishers, and it
does not prevent the affiliated foreign subpublishers from
retaining a portion of the total sale owed to them for their
services, prior to remitting the remainder to EMI.2 Thus, the
phrase "net revenue actually received" is not ambiguous.
2
Plaintiff's argument that defendant may have breached the
covenant of good faith and fair dealing by paying its affiliate
foreign subpublishers rates that far exceed the market rate paid
to unaffiliated subpublishers was raised for the first time in
this Court, and is unpreserved. Although the parties mentioned
in their Appellate Division briefs a hypothetical case where EMI
may have breached the covenant of good faith and fair dealing,
plaintiff did not plead that claim and did not squarely make that
claim prior to his appeal to this Court.
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B. "Any Other Affiliate"
The second phrase plaintiff claims is ambiguous is
within the definition of Second Party. The Agreement defines
"Second Party" as consisting of a group of music publishers
including "Mills Music, Inc., American Academy of Music, Inc.,
Gotham Music Service, Inc. and their predecessors in interest,
and any other affiliate" (Agreement, preamble). Plaintiff
asserts that the affiliated foreign subpublishers are included in
the term "any other affiliate."
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 that the contract was executed (VKK Corp. v National
Football League, 244 F3d 114, 130-131 [2d Cir 2001] ["The
Releases's reference to 'affiliates' [is] stated in the present
tense. Nothing . . . indicates the inclusion of future rather
than present members"]; Budget Rent A Car Sys. v K&T, Inc., 2008
U.S. Dist. LEXIS 73024, at *10-11 [D NJ 2008] [the exclusive
license at issue was not violated here because “[n]othing in the
License Agreement suggests that the parties intended the License
Agreement to extend to future corporate parents or affiliates”]).
Furthermore, the parties did not include any forward
looking language. If the parties intended to bind future
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affiliates they would have included language expressing that
intent. Absent such language, the named entities and other
affiliated companies of EMI's predecessor which existed at the
time are bound by the provision, not entities that affiliated
with EMI after execution of the Agreement. As it is undisputed
that the affiliated foreign subpublishers at issue here were not
affiliates at the time the Agreement was executed, they are not
members of the Second Party.
Additionally, the use of present tense language in the
Agreement also demonstrates that the parties intended that the
Agreement would bind only affiliates in existence at the time of
the Agreement. A later clause in the Agreement states that Duke
Ellington confirms that "Mills Music, Inc., American Academy of
Music, Inc., and Gotham Music Service, Inc., or any of their
predecessors in interest or any other affiliated companies of
[EMI], not specifically mentioned, were and are now possessed of
and are entitled to the original copyrights of the [relevant]
musical compositions" (Agreement, ¶5 [emphasis added]). This
language indicates that the parties intended that the members of
the Second Party were to be entities who own the copyright in the
relevant musical compositions, rather than entities, who for any
number of reasons, may be affiliated with the publisher. As the
affiliated foreign subpublishers do not acquire a United States
copyright to the relevant compositions, the parties likely would
not have intended them to be members of the Second Party. The
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role of the affiliated foreign subpublishers is simply to provide
subpublication services in their respective countries. EMI still
retains the copyright to the relevant musical compositions.
III.
We conclude that the terms "net revenue actually
received" in paragraph 3(a) and "any other affiliate" in the
definition of Second Party are not ambiguous.
We note that the globalization of the music industry
has rendered this "net receipts" arrangement much more favorable
to music publishers than to artists.3 Nonetheless, we must
examine the parties' intentions based on the plain language
within the four corners of the Agreement. In 1961, Ellington and
Mills Music, Inc. agreed that they would share equally the
royalties that Mills Music, Inc. actually received from the
foreign sale of the relevant musical compositions. EMI's
corporate reconfiguration did not, as the dissent suggests,
"avoid the understanding of the parties" (dissenting op at 8).
Rather, the parties merely did not account for the possibility
3
According to the parties, rather than the "net receipts"
type of arrangement at issue in this case, agreements between
artists and music publishers now usually employ an "at source"
formula, under which an artist "collect[s] royalties based on a
percentage of income determined before licensing fees are
deducted" (Jobim v Songs of Universal, Inc., 732 F Supp 2d 407,
413 [SD NY 2010]).
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that the publisher would eventually affiliate with foreign
subpublishers. The terms of the contract are clear and
unambiguous and the Appellate Division correctly held that
plaintiff has not stated a cause of action for breach of the
agreement.
Accordingly, the order of the Appellate Division should
be affirmed, with costs.
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Paul M. Ellington v EMI Music, Inc.
No. 156
RIVERA, J.(dissenting):
I disagree with the majority that respondent EMI has
carried its burden on this motion to dismiss because, in my
opinion, the term "affiliate" as used in the Agreement may be
interpreted as appellant suggests to include EMI's foreign
affiliated entities. This reasonable interpretation of the
Agreement supports a conclusion that appellant has sufficiently
pled a cause of action for breach of contract. To hold
otherwise, as the majority does here, forecloses appellant from
pursuing his claim that EMI has avoided its obligations under the
Agreement by employing music industry business models that
increase revenue for publishers, to the detriment of creative
artists. Therefore, I dissent.
Our review of this appeal, which is from dismissal of
the complaint pursuant to CPLR 3211(A)(1) and (7), requires that
we "must accept as true the facts as alleged in the complaint and
submissions in opposition to the motion, accord plaintiffs the
benefit of every possible favorable inference and determine only
whether the facts as alleged fit within any cognizable legal
theory" (Whitebox Concentrated Convertible Arbitrage Partners,
L.P. v Superior Well Services, Inc., 20 NY3d 59, 63 [2012]).
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"[T]he pleading is to be afforded a liberal construction" (Goshen
v Mutual Life Ins. Co. of NY, 98 NY2d 314 [2002]; see CPLR 3026),
and "[u]nder CPLR 3211(a)(1), a dismissal is warranted only if
the documentary evidence submitted conclusively establishes a
defense to the asserted claims as a matter of law" (Leon v
Martinez, 84 NY2d 83, 87-88 [1994], citing Heaney v Purdy, 29
NY2d 157 [1971]). Unlike on a motion for summary judgment where
the court "searches the record and assesses the sufficiency of
the parties' evidence," on a motion to dismiss the court "merely
examines the adequacy of the pleadings" (State v Barclays Bank of
New York, N.A., 151 AD2d 19, 21 [3d Dept 1989], affd 76 NY2d 533
[1990]).
The Court has previously faced questions regarding the
application of existing legal doctrines to agreements which
predated industry-wide developments, and has reaffirmed the
vitality of traditional contract precepts in the face of even
unanticipated changes. For example, in Greenfield v Philles
Records we said that, "[d]espite technological innovations that
continue to revolutionize the recording industry, long-settled
common law contract rules still govern the interpretation of
agreements between artists and their record producers" (98 NY2d
562, 569 [2002][citation omitted]).
Under our law, where the parties to a breach of
contract action dispute the intended meaning of the agreement, we
look to the contract itself to determine if the terms are
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unambiguous, giving the words of the contract "their plain
meaning" (Quadrant Structured Products Co., Ltd. v Vertin, 23
NY3d 549, 559-60 [2014]["a written agreement that is complete,
clear and unambiguous on its face must be enforced according to
the plain meaning of its terms"][citations omitted]). If the
terms are ambiguous, dismissal of the complaint under CPLR 3211
must be denied (see Telerep, LLC v U.S. Intern. Media, LLC, 74
AD3d 401, 402 [1st Dept 2010]). Ambiguity exists when, looking
within the four corners of the document, the terms are reasonably
susceptible of more than one interpretation (see Greenfield, 98
NY2d at 569 [citation omitted]; Chimart Assoc. v Paul, 66 NY2d
570, 573 [1986]).
Applying these contract principles to this Agreement,
and reading the complaint liberally, as the Court is required to
do, I would conclude that the Agreement contains unclear and
contradictory language which renders the term "affiliate"
ambiguous. I would therefore reverse the Appellate Division.
At the heart of the parties' dispute is the intent of
the Agreement's foreign publication royalties provision.
Respondent EMI argues that under this provision the parties share
the net revenues actually received, meaning the revenues that EMI
receives after the costs and fees for foreign publication are
deducted. Appellant agrees, but claims that EMI has sought to
garner a greater share of the revenues by using its own
affiliates, rather than unaffiliated entities, to conduct the
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foreign publication process. This, appellant maintains, is in
direct contravention of the intent of the parties because at the
time the parties entered the Agreement they intended to share the
costs and fees charged only by unaffiliated entities.
Appellant argues, and EMI concedes, that there have
been changes in the manner in which publishers pursue foreign
publication of creative works such as those involved in this
case. According to appellant, over time the music publishers
began to use their own affiliates for foreign publication. By so
doing, the music publishers, including EMI, captured a greater
share of the revenue for themselves by claiming net revenues as
well as the fees formerly charged by the unaffiliated foreign
entities. (See also Ira B. Selsky, Music Publishing in the
International Marketplace, 17 Whittier L Rev 293, 298 [1995]).
Appellant claims EMI's share comes at a cost to the Ellington
Family members and their successors because EMI does not include
as part of the "net revenue actually received" the revenue EMI's
foreign affiliates are paid for foreign publication.
Respondent EMI contends that the only affiliates
referred to in the Agreement are those of EMI's predecessor,
Mills Music, Inc., which, according to EMI, cannot include
foreign subpublishers. This merely begs the question of what is
an affiliate. I find the failure to define affiliate in this
Agreement indicates that the meaning is not as obvious and clear
as EMI suggests, and very well supports appellant's argument that
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affiliate includes foreign affiliates.
As a general matter, an "affiliate" is defined as a
"corporation that is related to another corporation by
shareholdings or other means of control; a subsidiary, parent, or
sibling corporation" (Black's Law Dictionary [9th ed 2009]; see
also VKK v National Football League, 244 F3d 114, 130 [2d Cir
2001][defining "affiliate" as "being close in connection, allied,
associated, or attached as a member or branch"], citing Black's
Law Dictionary 67 [7th ed 1999]). Nothing in this common
definition suggests that an affiliate does not include a foreign
affiliate. Courts may not redefine a term to suit one party's
argument, or choose to ignore the meaning generally attached to a
term without some basis in the parties' agreement. Therefore,
there is an open question that cannot be answered on this motion
to dismiss as to whether the parties intended to include foreign
affiliates.
Respondent EMI argues, nevertheless, that, in context,
the Agreement's references make clear that foreign affiliates are
excluded from that term's coverage. I cannot find such absolute
clarity in the text of the Agreement. For example, although EMI
asserts that the only affiliates are those of Mills Music, the
Agreement does not appear to be so limited. For example, the
second "Whereas" clause refers to "the Second Party or any of its
affiliated companies." If, as EMI claims, the only affiliates
covered by the Agreement are those of Mills Music, there is no
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need to reference affiliated companies of the Second Party, which
consists of several other music publishers in addition to Mills
Music. Perhaps this reference is merely redundant or
superfluous; or perhaps it refers to affiliates of the other
companies listed in the Preamble as "Second Party" entities.
In response to appellant's contention that EMI uses
foreign subpublisher affiliates to avoid its obligations under
the contract and reduce the revenues due to appellant, EMI claims
that the Agreement includes only affiliates in existence at the
time of the formation of the contract. However, the purpose of
the Agreement, as well as the custom in the music industry,
supports appellant's interpretation.
Under the Agreement, Ellington Family members
transferred to the music publishers their interests in certain of
Duke Ellington's creative works; works which at the time, and
today, are undeniably of great creative and monetary value. In
return, the music publishers agreed to provide royalties from
various sales of these works, including revenues from foreign
publication. Appellant argues that Duke Ellington and his family
did not intend to enter an Agreement which promised them
royalties, but permitted the music publishers, through corporate
sleight of hand, to increase the publishers' revenues while
reducing the Ellingtons' royalties.
Appellant further asserts, and EMI does not dispute,
that at the time the parties entered the Agreement Mills Music
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followed the general industry practice of using foreign
unaffiliated subpublishers for foreign publication. The
existence of this music industry custom, understood by the
parties to be the operative business model and the way things
were done, supports appellant's claim that all the parties to the
Agreement understood that foreign subpublishers would be used,
and their fees would be discounted from the revenue. "When trade
usage is widespread, there is a presumption that the parties
intended its incorporation by implication, unless the contract
negates this implication" (see Jobim v Songs of Universal, 732 F
Supp 2d 407, 417 [SD NY 2010], citing 28 NY Prac, Contract Law §
9:25).
Respondent EMI argues that nothing in the contract
prohibits it from modifying its practices and adapting to
industry changes. It contends that appellant is in reality
arguing to reform the Agreement from a net revenue contract to an
at source contract. This argument is simply an attempt to
distract attention from the real issue in the case. Appellant
does not dispute that the foreign publication provision applies a
net receipt methodology for determining royalties. Rather, he
argues that EMI has manipulated the agreed-to net receipt
provision to exclude revenues EMI actually receives through its
foreign affiliate. The Agreement lends itself to more than one
interpretation concerning the net revenue sharing provision, and
appellant's interpretation seems reasonable, or at least as
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reasonable as the one proposed by EMI.
As a final note, appellant's claims should give us
pause because they suggest this is not, as the majority seems to
believe, the unintended results of "the globalization of the
music industry" that renders the Agreement "more favorable to
music publishers than to artists" (majority op at 11 [footnote
omitted]). Indeed, I share the concurring opinion's sense that
there is something troubling about interpreting "affiliate" in
the context of this Agreement, as the majority does, to include
only those affiliates in existence at the formation of the
contract (concurring op at 1). This interpretation sets the stage
for the type of abuse alleged here, namely corporate
reconfigurations that avoid the understanding of the parties.
* * * * * * * * * * * * * * * * *
Order affirmed, with costs. Opinion by Judge Abdus-Salaam.
Judges Graffeo, Read and Pigott concur. Judge Smith concurs in
result in an opinion. Judge Rivera dissents and votes to reverse
in an opinion in which Chief Judge Lippman concurs.
Decided October 23, 2014
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