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Why Pandora’s Batting 500 with BMI’s Recent Rate Court Win

On May 18, BMI’s “Rate Court” judge, Louis L. Stanton of the Southern District of New York, ruled in BMI’s favor in its rate dispute with Pandora. However, it wasn’t until May 28 that Judge Stanton’s 60-page opinion was made public. As my former colleague, BMI’s CEO, Mike O’Neill, reminded me at the BMI Student Composer Awards on May 18, Rate Court opinions are not made public for several days until confidential information is redacted. Mike was fairly giddy that evening given that Judge Stanton gave BMI a slam dunk in finding that the rate BMI sought, 2.5% of Pandora’s revenue, was reasonable. This was particularly good news for songwriters and music publishers as well since Pandora was the clear winner in its prior Rate Court dispute with ASCAP.

BMI and ASCAP are music performing rights organizations (PROs) and both operate under decades-old Consent Decrees which are currently being reviewed by the Justice Department. Both decrees contain a provision that if either ASCAP or BMI and a licensee can’t agree upon a rate, either party can submit the dispute to their respective “Rate Court” for a determination of a “reasonable” rate, in each case a district judge in the Southern District of New York. BMI’s Rate Court Judge is Judge Stanton and ASCAP’s is Denise Cote.

Because BMI and ASCAP are heavily regulated, a Rate Court’s determination of a “reasonable” rate under the relevant Consent Decree (i.e., what a willing seller and buyer would negotiate in an arm’s length transaction) usually requires referring to one or more “benchmarks,” which as Judge Stanton explained, are “the rates set in (or adjusted from) contemporaneous similar transactions.” BMI and Pandora bitterly argued over what the appropriate benchmark(s) should be for Pandora’s internet streaming service.

The PROs’ publisher members, particularly the majors (Universal, Warner-Chappell and Sony/ATV (which now controls the EMI catalog)), felt they could negotiate better deals for digital (Internet) rights themselves than through ASCAP and BMI because of the Consent Decree restrictions. So the majors undertook a “partial withdrawal” of their grant to ASCAP and BMI to license public performances of their music to Internet streaming services, allowing the PROs to continue licensing the publishers’ works for all other purposes.

This partial withdrawal was itself the subject of Rate Court litigation, with both Judge Stanton and Judge Cote eventually ruling, albeit with slightly different rationales, that publishers could not partially withdraw their grants to ASCAP and BMI, respectively. In other words, they were either “all in” or “all out” at ASCAP and BMI and the partial withdrawals were invalid.

However, between March 2012 and December 2013 (before the Rate Courts said such deals were verboten), the major publishers entered into a series of separate deals with Pandora, with rates ranging from 2.25% to 5.85% of Pandora’s revenue. BMI also submitted as benchmarks, agreements with Pandora’s competitors, entered into between 2010 and 2013, with rates ranging between 2.5% and 4.6% of the service’s revenue. Pandora disputed not only the validity of the interregnum partial withdrawal agreements but also the agreements of its “competitors” as appropriate benchmarks.

As for the agreements made during the period of partial withdrawals, Pandora claimed they were not, in fact, arms-length negotiations, but rates that the PROs extracted under threat of infringement litigation. As for the other agreements, Pandora claimed its service was different from its competitors, and more like traditional over-the-air radio, which has a rate of 1.75% of revenues, which was also the rate for Pandora’s prior BMI license. The foregoing is very much an over-simplified distillation of more the more than 30 pages of factual background in the Court’s opinion.

After the lengthy recitation, including quoting various email exchanges, the Court began its discussion with a concise statement of its conclusion:

The evidence presented at trial shows that BMI’s proposed license fee of 2.5% of Pandora’s gross revenue is reasonable, and indeed at the low end of the range of recent licenses. The direct licenses between Pandora and Sony and UMPG [Universal] for the 2014 calendar year are the best benchmarks because they are the most recent indices of competitive market rates.

Shortly after this, Judge Stanton quotes verbatim an email chain which consists of several single-spaced pages of internal discussion among Pandora’s executives (leaving one to wonder what was actually redacted from the Court’s public opinion), in support of its conclusion that Pandora’s deals with the publishers were, in fact, market rate negotiations: “Once the rate negotiations were freed from the overhanging control of the rate courts, the free-market licenses reflect sharply increased rates.”

The Court then went on to distinguish how Pandora is not just different from traditional radio, but also from other online streaming services: “

The fact (not unusual when traditional business models are evolving and shifting) is that Pandora cannot be accurately characterized as in any specific category for which rates have been established. It has aspects of several, but it is not confined to any one in particular.

As for radio, even considering Pandora’s purchase of a traditional radio station, Judge Stanton concluded:

Pandora is not similarly situated to any RMLC [Radio Music Licensing Committee] licensee, including iHeartMedia. The rate for the ten thousand terrestrial broadcasting members of the RMLC is not a useful benchmark for Pandora.

Both ASCAP and BMI, in their respective Rate Court cases, relied upon the testimony of Peter Brodsky, Sony’s EVP and in-house counsel, to demonstrate the arm-length nature of the negotiations he had with Pandora’s attorney, Robert Rosenblum, during the “partial withdrawal” period. Judge Cote specifically found that Brodsky‘s testimony wasn’t credible. Judge Stanton took great pains set forth the specifics of these negotiations in his concluding that “I do not find Brodsky’s credibility impaired.”

Similarly, in rejecting Judge Cote’s conclusion in the ASCAP proceeding that the rates produced in the Pandora-publisher negotiations were not proper benchmarks because of the fear of “crippling copyright infringement liability, Judge Stanton stated that the record before him, many months after the closing of the record in the ASCAP case, “is far more extensive that what Judge Cote had before her.”

As with Judge Cote’s decision, Judge Stanton’s decision will likely be appealed. If, as with Judge Cote’s ASCAP decision, Judge Stanton’s BMI decision is affirmed, it will be a significant victory for the publishers of the songs streamed on Pandora, although the publishers still get a fraction of what the labels, who are not subject to Consent Decrees, get paid by streaming services. And Pandora can still take solace in its ASCAP win.

The conflicting decisions reached by the ASCAP and BMI Rate Courts regarding Pandora are another example of why the Copyright Office, in its Music Licensing Report, recommended that rate-setting for PROs and their licensees should be removed from a single life-tenured federal district judge and instead be given to the Copyright Royalty Board, with its panel of specialized judges who each serve for a limited term. While that won’t eliminate results that some may not like, at least there will be consistency in the decision-making.

A Peek from the Peaks of the PROs: the ASCAP, BMI and SESAC CEOs Speak

Yesterday, the Association of Independent Music Publishers (AIMP) sponsored a luncheon where veteran entertainment lawyer Bob Donnelly interviewed the CEOs of the three performing rights organizations (PROs): ASCAP’s John LoFrumento, BMI’s Mike O’Neill and SESAC’s Pat Collins. The meeting took place before a packed house in the performance space at the barbecue joint, Hill Country, in Manhattan and it was the heads of the organizations, rather than any of the musicians they represent, who took the stage for a discussion that lasted about 90 minutes.

Rather than having a panel discussion, Donnelly interviewed each leader separately while the other two left the room, supposedly to avoid any possibility of collusion. O’Neill, who spoke last, joked that he LoFrumento had a nice chat while Collins was interviewed. And after the meeting, a senior BMI executive confirmed to me that the theatrics were not legally required and further stated that “if I were going to collude with ASCAP I wouldn’t do it in front of the entire music industry.”

Topics included the Department of Justice (DOJ) review of the ASCAP and BMI Consent decrees and the proposed Songwriter Equity Act, subjects I’ve previously written about here and here. The ASCAP and BMI Rate Court proceedings with Pandora were also a major topic of discussion as was the development of the MusicMark portal for registering works.

Much ink has been spilled over the Pandora decisions in the ASCAP and BMI Rate Courts, entities I’ve previously discussed. In short, both Rate Court judges largely sided with Pandora, with LoFrumento noting that all of ASCAP’s proposed rate-setting benchmarks were rejected by Judge Cote and O’Neill discussing BMI’s similar fate. One of the central issues in both cases was the ability of a publisher to withdraw certain digital rights from the PROs and license them to users directly while remaining a member of the particular PRO for all other uses, such as terrestrial broadcast and live performances. Both Judges said “no” with O’Neill stressing that the ASCAP judge said the publishers were “all in” while the BMI judge said that the publishers would be “all out,” meaning none of their repertoire would be covered by a BMI license if they withdrew. Both cases are on appeal.

The attempts by major publishers such as Sony/ATV to withdraw digital rights and do deals directly with licensees could have a significant impact on PRO revenues and the ability for independent publishers to obtain comparable terms. That said, the consensus was that partial withdrawal of rights should be permitted, instead of the Rate Court rulings of “all in” or “all out” as this flexibility fosters competition. Regarding withdrawal, Donnelly asked both LoFrumento and O’Neill what would happen if a publisher were to withdraw rights but the writer did not. Both were equivocal, with O’Neill elaborating that the situation would require a case-by case evaluation of many factors, including provisions in the publisher and writer contracts and the status of any advances.

In the discussion of the Rate Court Proceedings, the Songwriter Equity Act and the DOJ Consent Decree Review, all three leaders stressed that the rules for music licensing (emphasizing performance, but including mechanicals) need to be changed from current benchmarks to market rates, with consideration of what a willing buyer and seller would negotiate as the appropriate rate-setting inquiry. All maintained that the current rate-setting system has significantly undervalued music for decades.

LoFrumento, Collins and O’Neill were all in favor of scrapping the ASCAP and BMI Rate Courts, which lead to very lengthy and costly litigation, and replacing them with arbitration. For example, LoFrumento stated that 10% of ASCAP’s costs are paid to outside counsel. The CEOs favor a three-member arbitration panel whose members would have music industry expertise and would serve limited terms, unlike Rate Court judges who serve indefinitely.

Given the discussion of Consent Decree reform, competition was a theme throughout the discussion. When asked about SESAC being at a disadvantage because, unlike ASCAP and BMI, it has to earn a profit for its private equity owners, Collins stated that they, like all private companies, have to compete and that “nobody joins SESAC to be paid less.” However, he conceded that unlike ASCAP and BMI, SESAC does not disclose what percentage of their revenue is paid to writers and publishers. And O’Neill, when asked about Irving Azoff’s new venture that includes licensing performing rights, chuckled and replied: “Competition is good no matter what, even if it’s bad.” He went on to say that BMI started as a competitor to ASCAP and that competition made both companies stronger.

The three leaders all seemed to agree that the future for the PROs is for each to be an efficient portal for licensees, a one-stop shop for music users. This would entail some form of bundling of music rights ( e.g., mechanical and synch rights, in addition to performing rights) which would need to be allowed under the Consent Decrees. They also indicated that while technology continues to allow for movement from sampling to a census of performances, some areas, such as “general licensing” including payment on performances in clubs, do not lend themselves to a census.

With regard to creating a more efficient environment, both LoFrumento and O’Neill touted their collaboration with SOCAN on MusicMark, a portal which allows publishers to register works only once if they use common works registration or electronic batch registration formats and those works will be registered with all three organizations. MusicMark, however, is not being built as a hub for licensing, which would still be done separately by each of the PROs.

When asked why SOCAN, rather than SESAC was an initial collaborator, O’Neill replied that SOCAN, unlike SESAC, already has both ASCAP and BMI data and they were the logical partner to help reconcile the data. LoFrumento stated he expects MusicMark to be operational in 2015 and the goal is to create a hub where others, including SESAC, HFA and CMRRA could participate. When asked if SESAC plans to join, Collins stated “we applaud the initiative and have an interest in being part of it and we’ll see how it goes but we’re not part of it today.”

*****

Regardless of what type or genre of music one writes, income from public performances has always been, and continues to be, a critical component of any composer’s income. All composers should be aware of the continuing market, legislative and legal challenges the PROs face – and the entities that are posing these challenges to their ability to earn a living. It’s not often that the CEOs of all three PROs share the same stage – even if not at the same time – and the fact that each of them sees becoming a one-stop for a variety of music rights licenses as critical to their future success is something worth noting.