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.