Examining Rulings On Pandora and Performance Rights

Little more than a week after music-streaming service Pandora Inc. won a key ruling in its royalty rate dispute with the American Society of Composers, Authors and Publishers (ASCAP), Pandora was dealt a setback in a parallel fight with ASCAP's rival performing rights organization, Broadcast Music Inc. (BMI). In a 60-page ruling, U.S. District Judge Louis Stanton in Manhattan sided with BMI's lawyers, led by Milbank, Tweed, Hadley & McCoy's Scott Edelman, and ordered Pandora to pay 2.5% of its revenue for the rights to play songs in BMI's catalogue. According to BMI, the decision sets the rate until the end of 2016. Broadcast Music Inc. v. Pandora Media Inc., 1:2013cv04037.

In a note to employees posted on the organization's website, BMI CEO Mike O'Neill noted that Judge Stanton concluded that BMI's request for a 2.5% royalty was “at the low end of the range of fees of recent licenses.” O'Neill continued: “The decision also establishes that existing marketplace agreements can be taken into account when determining rates, a key factor for us, and the industry.”

Judge Stanton's decision stood in contrast to a ruling last year by his Manhattan colleague, U.S. District Judge Denise Cote, who sided in large part with Pandora in a parallel dispute with ASCAP and set a lower 1.85% royalty. The week before Judge Stanton decided the BMI dispute, the U.S. Court of Appeals for the Second Circuit upheld Judge Cote's decision, which had also rejected efforts by some ASCAP members to opt out of the organization's rate-setting process when dealing with new media companies like Pandora. Pandora Media Inc. v. American Society of Composers, Authors and Publishers, 14-1158 (2d Cir. 2015).'Pandora's key lawyers in the Second Circuit case were King & Spalding's Jeffrey Bucholtz and Kenneth Steinthal. Steinthal also led Pandora's efforts in the BMI trial.

Benchmarks Challenged

Pandora vowed to challenge Judge Stanton's BMI ruling to the Second Circuit. “We strongly believe the benchmarks cited by the court do not provide an appropriate competitive foundation for a market rate,” Pandora spokesman Dave Grimaldi claimed in a statement.

In the ASCAP litigation, Judge Cote refused to consider direct licenses that Pandora reached with some of the major music publishing houses ' EMI Music Publishing, Sony/ATV Music Publishing, Universal Music Publishing ' as benchmarks for setting the ASCAP rate. Those publishers had tried to partially withdraw from ASCAP to pursue direct license negotiations with new media companies such as Pandora, while having ASCAP handle licensing for other media companies. Judge Cote found those partial withdrawals were impermissible under the long-standing U.S. Department of Justice consent decree that governs ASCAP's licensing. Partially opting out was the same as not opting out at all, meaning that the publishers' songs remained part of the ASCAP catalogue, Judge Cote concluded. In Re Petition of Pandora Media, 6 F.Supp. 3d (2014).

Judge Stanton had also considered the partial withdrawal issue in a December 2013 ruling that denied a summary judgment motion by Pandora. While the judge found that partially opting out was inconsistent with a similar consent decree that binds BMI, he took the position that a partial withdrawal was equivalent to a full withdrawal of all a publishers' songs from BMI. Under that view, BMI's lawyers maintain, Pandora's direct licenses with publishers ' which were generally at higher rates than those agreed to by the performing rights organizations ' could be used as a benchmark in determining a fair rate for Pandora's access to the BMI catalogue.

ASCAP represents almost half of music composers and publishers in the United States. Its consent decree with the federal government for the performance rights market, called AFJ2, requires that it “grant to any music user ' a non-exclusive license to perform all of the works in the ASCAP repertory” in return for what ASCAP says is a reasonable fee. If the parties cannot agree on a reasonable fee within a set period of time, they can petition the Southern District of New York as the “rate court” to set one.

But facing the threat of new media companies like Pandora, the music publishers companies argued that ASCAP was setting below-market rates for public performance licenses; that's why they threatened to withdraw from ASCAP completely.

Despite a modification of ASCAP rules, EMI withdrew new media licensing rights on May 11, 2011, Sony withdrew on Jan. 1, 2013, and Universal on July 1, 2013.

Pandora terminated its ASCAP license in 2010 and asked for a new one to run from 2011 through 2015. EMI, Sony and Universal entered into direct licenses with Pandora. Pandora filed a rate court petition in 2012 and moved for summary judgment before Judge Cote in 2013. EMI, Sony and Universal intervened in September 2013. Judge Cote held a bench trial that concluded with her March 14, 2014, opinion granting summary judgment to Pandora. She then set a rate well below the amount proposed by ASCAP for all five years.

The ASCAP Case

In its appellate brief in the ASCAP case, Universal said that what began as a “relatively routine matter” of rate setting under the consent decree had ended with Judge Cote issuing “an unprecedented ruling that seriously misconstrued the scope of the ASCAP consent decree in a manner that infringes on the exclusive statutory rights of publishers.”

In the performing rights society's words, Judge Cote held that “regardless of the effective date issue, AFJ2 required ASCAP to grant Pandora performance rights to the withdrawing publishers' works despite the fact that those publishers had refused to grant ASCAP those rights.” Universal argued that nothing in the AFJ2 supports Judge Cote's “notion that ASCAP has the authority to grant licensing rights that have been denied to it by copyright holders.”

But the Second Circuit found that the AFJ2 definition of “ASCAP repertory,” as well as other provisions, “establish that ASCAP has essentially equivalent rights across all of the works licensed to it.”

“The licensing of works through ASCAP is offered to publishers on a take-it-or-leave it basis,” the appellate judges said. “As ASCAP is required to license its entire repertory to all eligible users, publishers may not license works to ASCAP for licensing to some eligible users but not to others.”

The Second Circuit said it wouldn't “rewrite the decree [which the Justice Department is considering doing] so that it speaks in terms of the right to license the particular subset of public performance rights being sought by a specific music user,” and nothing about this result compromises the publishers' exclusive rights under the Copyright Act.

“Individual copyright holders remain free to choose whether to license their works through ASCAP,” the appeals court said. “They thus remain free to license ' or to refuse to license ' public performance rights to whomever they choose.”

Pandora lawyer Jeffrey Bucholtz, from King & Spaulding, said the Second Circuit's decision affirms the streaming company's “right to equal treatment under the consent decree,'including in particular the right to perform the works of all publishers who are ASCAP members.'

Co-counsel Kenneth Steinthal said the aspect of the appeals court's decision on partial withdrawals “clearly applies more generally to all music services.” He said the publishers “wanted to circumvent the effective compulsory license and court oversight provisions of ASCAP's decree and the result of the decision is you can't do that.”

Jay Cohen, partner at Paul, Weiss, Rifkind, Wharton & Garrison, argued for ASCAP. Daniel Collins, partner at Munger Tolles & Olson in Los Angeles appeared for Universal. Donald Zakarin, partner at Pryor Cashman, appeared for EMI and Sony/ATV.

Scott Flaherty writes for Litigation Daily, and Mark Hamblett writes for the New York Law Journal, both ALM siblings of Entertainment Law & Finance.

Little more than a week after music-streaming service Pandora Inc. won a key ruling in its royalty rate dispute with the American Society of Composers, Authors and Publishers (ASCAP), Pandora was dealt a setback in a parallel fight with ASCAP's rival performing rights organization, Broadcast Music Inc. (BMI). In a 60-page ruling, U.S. District Judge Louis Stanton in Manhattan sided with BMI's lawyers, led by Milbank, Tweed, Hadley & McCoy's Scott Edelman, and ordered Pandora to pay 2.5% of its revenue for the rights to play songs in BMI's catalogue. According to BMI, the decision sets the rate until the end of 2016. Broadcast Music Inc. v. Pandora Media Inc., 1:2013cv04037.

In a note to employees posted on the organization's website, BMI CEO Mike O'Neill noted that Judge Stanton concluded that BMI's request for a 2.5% royalty was “at the low end of the range of fees of recent licenses.” O'Neill continued: “The decision also establishes that existing marketplace agreements can be taken into account when determining rates, a key factor for us, and the industry.”

Judge Stanton's decision stood in contrast to a ruling last year by his Manhattan colleague, U.S. District Judge Denise Cote, who sided in large part with Pandora in a parallel dispute with ASCAP and set a lower 1.85% royalty. The week before Judge Stanton decided the BMI dispute, the U.S. Court of Appeals for the Second Circuit upheld Judge Cote's decision, which had also rejected efforts by some ASCAP members to opt out of the organization's rate-setting process when dealing with new media companies like Pandora. Pandora Media Inc. v. American Society of Composers, Authors and Publishers, 14-1158 (2d Cir. 2015).'Pandora's key lawyers in the Second Circuit case were King & Spalding's Jeffrey Bucholtz and Kenneth Steinthal. Steinthal also led Pandora's efforts in the BMI trial.

Benchmarks Challenged

Pandora vowed to challenge Judge Stanton's BMI ruling to the Second Circuit. “We strongly believe the benchmarks cited by the court do not provide an appropriate competitive foundation for a market rate,” Pandora spokesman Dave Grimaldi claimed in a statement.

In the ASCAP litigation, Judge Cote refused to consider direct licenses that Pandora reached with some of the major music publishing houses ' EMI Music Publishing, Sony/ATV Music Publishing, Universal Music Publishing ' as benchmarks for setting the ASCAP rate. Those publishers had tried to partially withdraw from ASCAP to pursue direct license negotiations with new media companies such as Pandora, while having ASCAP handle licensing for other media companies. Judge Cote found those partial withdrawals were impermissible under the long-standing U.S. Department of Justice consent decree that governs ASCAP's licensing. Partially opting out was the same as not opting out at all, meaning that the publishers' songs remained part of the ASCAP catalogue, Judge Cote concluded. In Re Petition of Pandora Media, 6 F.Supp. 3d (2014).

Judge Stanton had also considered the partial withdrawal issue in a December 2013 ruling that denied a summary judgment motion by Pandora. While the judge found that partially opting out was inconsistent with a similar consent decree that binds BMI, he took the position that a partial withdrawal was equivalent to a full withdrawal of all a publishers' songs from BMI. Under that view, BMI's lawyers maintain, Pandora's direct licenses with publishers ' which were generally at higher rates than those agreed to by the performing rights organizations ' could be used as a benchmark in determining a fair rate for Pandora's access to the BMI catalogue.

ASCAP represents almost half of music composers and publishers in the United States. Its consent decree with the federal government for the performance rights market, called AFJ2, requires that it “grant to any music user ' a non-exclusive license to perform all of the works in the ASCAP repertory” in return for what ASCAP says is a reasonable fee. If the parties cannot agree on a reasonable fee within a set period of time, they can petition the Southern District of New York as the “rate court” to set one.

But facing the threat of new media companies like Pandora, the music publishers companies argued that ASCAP was setting below-market rates for public performance licenses; that's why they threatened to withdraw from ASCAP completely.

Despite a modification of ASCAP rules, EMI withdrew new media licensing rights on May 11, 2011, Sony withdrew on Jan. 1, 2013, and Universal on July 1, 2013.

Pandora terminated its ASCAP license in 2010 and asked for a new one to run from 2011 through 2015. EMI, Sony and Universal entered into direct licenses with Pandora. Pandora filed a rate court petition in 2012 and moved for summary judgment before Judge Cote in 2013. EMI, Sony and Universal intervened in September 2013. Judge Cote held a bench trial that concluded with her March 14, 2014, opinion granting summary judgment to Pandora. She then set a rate well below the amount proposed by ASCAP for all five years.

The ASCAP Case

In its appellate brief in the ASCAP case, Universal said that what began as a “relatively routine matter” of rate setting under the consent decree had ended with Judge Cote issuing “an unprecedented ruling that seriously misconstrued the scope of the ASCAP consent decree in a manner that infringes on the exclusive statutory rights of publishers.”

In the performing rights society's words, Judge Cote held that “regardless of the effective date issue, AFJ2 required ASCAP to grant Pandora performance rights to the withdrawing publishers' works despite the fact that those publishers had refused to grant ASCAP those rights.” Universal argued that nothing in the AFJ2 supports Judge Cote's “notion that ASCAP has the authority to grant licensing rights that have been denied to it by copyright holders.”

But the Second Circuit found that the AFJ2 definition of “ASCAP repertory,” as well as other provisions, “establish that ASCAP has essentially equivalent rights across all of the works licensed to it.”

“The licensing of works through ASCAP is offered to publishers on a take-it-or-leave it basis,” the appellate judges said. “As ASCAP is required to license its entire repertory to all eligible users, publishers may not license works to ASCAP for licensing to some eligible users but not to others.”

The Second Circuit said it wouldn't “rewrite the decree [which the Justice Department is considering doing] so that it speaks in terms of the right to license the particular subset of public performance rights being sought by a specific music user,” and nothing about this result compromises the publishers' exclusive rights under the Copyright Act.

“Individual copyright holders remain free to choose whether to license their works through ASCAP,” the appeals court said. “They thus remain free to license ' or to refuse to license ' public performance rights to whomever they choose.”

Pandora lawyer Jeffrey Bucholtz, from King & Spaulding, said the Second Circuit's decision affirms the streaming company's “right to equal treatment under the consent decree,'including in particular the right to perform the works of all publishers who are ASCAP members.'

Co-counsel Kenneth Steinthal said the aspect of the appeals court's decision on partial withdrawals “clearly applies more generally to all music services.” He said the publishers “wanted to circumvent the effective compulsory license and court oversight provisions of ASCAP's decree and the result of the decision is you can't do that.”

Jay Cohen, partner at Paul, Weiss, Rifkind, Wharton & Garrison, argued for ASCAP. Daniel Collins, partner at Munger Tolles & Olson in Los Angeles appeared for Universal. Donald Zakarin, partner at Pryor Cashman, appeared for EMI and Sony/ATV.

Scott Flaherty writes for Litigation Daily, and Mark Hamblett writes for the New York Law Journal, both ALM siblings of Entertainment Law & Finance.