Like everybody in the record business, Schwartz Brothers Inc. joined in the celebration this year of Motown Records' 25th anniversary.
The Lanham-based company had been with Motown since the beginning, distributing millions of records by Stevie Wonder, Diana Ross, Michael Jackson and other Motown stars who performed on a televised anniversary gala last spring.
But now the party's over.
On July 1, Motown terminated its distribution agreement with Schwartz Brothers and other independent record distributors around the country, switching its entire business to MCA Inc.
Motown's pullout deprived Schwartz Brothers of a client that had recently accounted for more than 50 percent of its record distributing business, Schwartz claims in a $5 million lawsuit filed in Maryland Circuit Court in Prince George's County.
In the lawsuit, Schwartz Brothers demands that Motown restore the distribution arrangement. Motown contends it never had a written agreement with Schwartz Brothers and had the right to terminate the 25-year relationship at will.
Schwartz Brothers has won a temporary injunction blocking Motown's move, pending a trial Sept. 19.
But Motown, claiming $232,000 in payments from Schwartz Brothers are overdue, refuses to ship any more records. As a result, except for the items left over in Schwartz Brothers' warehouses, no new Motown records and tapes are being distributed in the Washington, Baltimore and Philadelphia markets that Schwartz formerly covered.
Schwartz Brothers contends Motown's refusal to ship records violates the injunction and has asked the court to cite Motown for contempt. That case also will be heard Sept. 19.
The fracas illustrates the changes taking place in the record business, which is as mercurial as the Top 40 sales charts that are its backbone.
Companies like Schwartz Brothers for years served as regional sales agents for Motown and other independent record companies. But that business is drying up, as the independents contract with major labels like Columbia and Capital to distribute their records.
Motown was the last of the big independents to make the move. Earlier, Arista allied itself with RCA, and Chrysalis moved its distribution to Columbia. The 125 remaining independent labels still distributing through Schwartz Brothers are for the most part tiny record companies with meager sales.
The regional distributors purchase records from the independent labels for resale to record stores and provide local promotion and merchandising for the albums. By switching to national distribution by a major label, the independents say they gain efficiencies that weren't available through the regional distributors.
Buffeted by declining sales due to the recession, competition from video games and unpredictable musical tastes, the record companies are scrambling for profitability.
Such forces have hurt companies like Schwartz Brothers as well. Last year the company lost $211,377 on sales of $50.8 million--including its distribution business, its 20 Harmony Hut record stores and a recently set up video division that handles many of the products the record industry claims are providing it with such stiff competition.
About 40 percent of the company's revenues come from the wholesale distribution of records, tapes, videotapes and videogames. In court papers, the company describes its wholesale operation as "the heart and soul of Schwartz Brothers." Wholesale record distribution was the original business of Schwartz Brothers when the publicly held company was founded in 1946, and through the years the company became a key distributor of records on the Eastern Seaboard.
Schwartz Brothers counted on Motown, Arista and Chrysalis for 30 percent of its record-distribution business last year. The defection of Arista and Chrysalis increased Motown's importance to the company, and the lawsuit says the loss of the label would deal a "crippling blow" to Schwartz Brothers' record and tape distribution operations. If it loses its Motown business, Schwartz says it will likely have to lay off half the approximately 80 employes in its distribution division.
"The sudden loss of the Motown family of labels would have a devastating effect on Schwartz Brothers," the company's president, James Schwartz, said in an affidavit filed in connection with the case. "That sales volume will be next to impossible to replace." James Schwartz declined to be interviewed for this story.
Schwartz Brothers' suit argues that although the distribution agreement with Motown was an oral one dating back 25 years, Schwartz deserved better treatment when Motown decided to move on. James Schwartz, at a July 22 court hearing, testified that Motown officials had always implied that "as long as I am doing a good job for Motown, I will continue to be their distributor."
Motown gave Schwartz notice by telephone on July 1 and in a mailgram four days later that it was switching its distribution to MCA as of July 15. "It is with regret that Motown advises you that due to recent developments in the sale and merchandising of records and the current economic situation in the industry, it has been forced to reconsider its distribution system and has elected to enter into a national distribution agreement with MCA," the mailgram read.
In his July 22 testimony, Schwartz said that if Schwartz Brothers had known further in advance that the agreement would be terminated, "I think there is very definite positions and steps the company could take to deal with in a much more orderly fashion than the . . . confusion we are living with today."
But Motown argued that it "was entitled to terminate the relationship at will upon giving notice," and that the short notice given Schwartz was not out of line with record-industry practices. Indeed, Motown's attorneys cited in court a statement in Schwartz Brothers' 10-K filing with the Securities and Exchange Commission that "distribution arrangements with the manufacturers are subject to cancellation on relatively short notice."
And Motown also claimed that it would have made little difference how much warning it had given Schwartz Brothers. It said Schwartz Brothers "has not alleged and cannot allege any facts demonstrating that an additional period of notice would allow it to further minimize losses resulting from Motown's termination." Motown pointed out that Schwartz had said it would be extremely difficult, in any event, to replace Motown's business.
Even though Schwartz Brothers won its injunction, pending the Sept. 19 trial, it still hasn't been able to buy records from Motown. In a request for a contempt citation filed last week, Schwartz Brothers said it had placed 10 orders with Motown since winning the injunction July 22, but that the record company had refused to fill them. It charged that Motown was trying to "increase Schwartz Brothers' litigation costs, deplete its cash flow and put it in a bind as to future payments."
Motown, however, argues that it is not violating the injunction. It says it is not shipping records to Schwartz Brothers because Schwartz owes Motown money.
Motown says that as of July 15, Schwartz Brothers owed it more than $1 million, $424,000 of it due immediately. Schwartz Brothers sent Motown a $192,000 check and, as is common in the record industry, asked that the other $232,000 be charged against supplies of records and tapes that Schwartz planned to return to the record company as soon as Schwartz Brothers could collect the unsold items from dealers. Such returns are the way record makers and distributors shuffle inventories between themselves based on current sales, and credits for promised returns are often used as currency.
That's what Schwartz Brothers says it was trying to do. But Motown counters that under the record company's written policy, Schwartz Brothers was not eligible for credit for the returns until the records had actually been returned. Schwartz, however, says this is the first time Motown has ever enforced its written policy, and that it is contrary to the way the two companies have done business in the past.
Even though Motown isn't shipping records to Schwartz Brothers, it's also barred by the court from shipping records to MCA for distribution in the Washington, Baltimore and Philadelphia markets. That's something of a break for Schwartz Brothers, which can now keep record stores supplied with the backstock it might otherwise have had to return to Motown. But it also means that newly issued Motown albums will be rarities in those three markets until the dispute between the companies is settled.
Schwartz Brothers also sued Arista when that label dropped its independent distribution system, and the two companies settled out of court in late May, although they refused to disclose the terms. An attorney for Schwartz Brothers wouldn't comment on whether the company was negotiating with Motown over a possible settlement.
Barring a settlement, the companies will go to court to argue the various facets of the dispute on Sept. 19--a court date that will doubtlessly have an major bearing on Schwartz Brothers' future. At the last court appearance, James Schwartz said that as a result of Motown's defection, the situation at his company "looks pretty dreadful at this time. I know we'll have to make severe cutbacks in the company and try to adjust with the remaining labels."