Amid Collusion, Judge Sets Rate in Pandora/ASCAP Dispute
On March 14, 2014, U.S District Judge Denise Cote ordered Pandora Media, Inc. (“Pandora”)- the Internet’s most popular streaming radio service – to pay 1.85% of its gross revenue to the American Society of Composers, Authors and Publishers (“ASCAP”) for the right to stream songs held in ASCAP’s repertory. ASCAP is the world’s second-largest performing rights organization (“PRO”), responsible for collecting and distributing public performance royalties from terrestrial radio, television, streaming Internet, and other public broadcasts (think clubs, restaurants, and concerts) for its member songwriters and publishers. While not the 1.7% rate Pandora proposed, in line with rates traditional radio broadcasters pay, the ruling is a minor victory for Pandora in its ongoing struggle with record labels and rights organizations; as ASCAP sought a 3% rate, comparable to interactive streaming services, like Spotify.
Pandora’s rate will remain at 1.85% for the next 5 years under the blanket license – the same rate Pandora has been paying since 2005. The contentious negotiation has drawn unusual moves from both sides – ASCAP unlawfully amended their rules, Pandora bought a radio station in South Dakota – in an effort to make a case for their proposed licensing rates. Judge Cote’s latest rulings shed some light on how the court views these efforts, and more importantly how the court views disruptive Internet radio offerings, like Pandora.
A BRIEF HISTORY OF THE DISPUTE
From July 11, 2005 through the end of 2010, Pandora paid 1.85% of its revenue to ASCAP under ASCAP’s Experimental License Agreement for Internet Sites and Services. In late 2010, Pandora exercised its option to terminate the Experimental License Agreement and applied for a new license to govern the royalty rate paid to ASCAP over the next five years, beginning in 2011 and extending through 2015.
While engaged in negotiations with Pandora for a new licensing agreement, ASCAP amended its rules in April 2011 to allow its members to withdraw ASCAP’s right to license their music directly with “New Media” outlets starting January 1, 2013, affecting digital streaming services like Pandora. This would give individual publishers the right to negotiate higher rates directly with Pandora and other digital service providers, while allowing ASCAP to retain the rights to license and collect on behalf of the songwriter for traditional broadcasting outlets, like terrestrial radio. More significantly to Pandora, ASCAP’s rule change would also allow the individual publishing units of major labels to skirt the compulsory licensing and reasonable rate requirements of ASCAP’s Consent Decree, and threaten to pull their music if Pandora didn’t agree to their significantly higher licensing rates. In response, Pandora began entering into separate licensing agreements with individual publishers, including Sony/ATV (“Sony”) and EMI. Sony eventually purchased EMI with other investors, giving Sony control of around 30% of Pandora’s catalog.
After the acquisition, in late 2012 Sony announced its intention to withdraw their “New Media” rights from ASCAP’s repertory in January 2013, and Universal Music Publishing Group (“UMPG”) followed. Pandora made repeated requests to Sony, UMPG, and ASCAP to produce a list of the potentially withdrawn songs from ASCAP’s repertory so they could remove any infringing songs from their own catalog before the labels withdrew their songs. Sony and ASCAP ignored the requests. UMPG provided a list, but the terms of the accompanying Non-Disclosure Agreement prevented Pandora from removing the songs from their database. This left Pandora facing the threat of potential copyright infringement liability for the unidentified songs in Sony’s catalog and irremovable songs in UMPG’s catalog, and a window of just days to reach a new deal. Unable to remove potentially infringing songs from their database, without reaching a deal with Sony or UMPG before they withdrew their “New Media” rights, Pandora would have to shut down its service to avoid copyright infringement liability. Under the gun, Pandora reached an agreement with Sony for 2013 at a 5% pro-rata royalty rate.
Following the deal with Sony, Pandora and UMPG agreed to 7.5% pro-rata royalty rate for 6 months. The equivalent rates of both the Sony and UMPG deals are 2.28% and 3.42%, respectively, both a significant increase compared to the 1.85% Pandora paid ASCAP under the Experimental License. In the face of the rate increases demanded by the individual labels’ publishing units after ASCAP’s withdrawal amendment, Pandora bought a terrestrial radio station in Rapid City, South Dakota, in an attempt to qualify for ASCAP’s Radio Music Licensee Committee (“RMLC”) license that governs commercial radio stations. Under the RMLC, broadcasters pay 1.7% of their gross revenue to ASCAP under a blanket license, after a 12% standard deduction for traditional broadcasters and a 25% standard deduction for New Media outlets, like Pandora. Other non-interactive digital streaming services, like iHeartRadio (owned by terrestrial radio conglomerate Clear Channel), have similarly availed themselves of the favorable RMLC rates.
THE BATTLE MOVES TO COURT
After a year of failed negotiations, Pandora filed suit against ASCAP on November 5, 2012. At trial, Pandora alleged ASCAP President Paul Williams encouraged the labels to withdraw to drive up the rates in ASCAP’s own negotiations. Pandora further alleged that ASCAP reneged on a handshake agreement to an increase over the prior rate after ASCAP reached a deal with Sony, demanding an even higher rate in light of the Sony agreement. Evidence emerged of the labels and ASCAP working in coordination, blatantly sharing confidential information with each other, conspiring to prevent Pandora from identifying or removing potentially infringing material, and levying veiled threats to Pandora implying the shut down of Pandora’s service if Pandora failed to acquiesce to the labels increasing demands.
In a September 2013 proceeding, Judge Cote ruled that the terms of ASCAP’s Consent Decree explicitly bars ASCAP from selectively separating and revoking certain rights to any song in their repertory. As a result, the court ruled ASCAP’s withdrawal amendment violated the Consent Decree, and ordered ASCAP to license all songs, including the digital and “new media” rights, under the blanket license.
Last month Judge Cote set the rate at 1.85% of gross revenue for Pandora under the blanket license. Rejecting ASCAP’s proposals for an escalating rate ultimately reaching 3% by the end of the 5-year term, Judge Cote observed that the 3% rate level historically has been reserved for interactive streaming services, noting that services like iTunes Radio (paying nearly 10% in licensing fees) and Spotify are not comparable marketplaces to the non-interactive service Pandora provides. Significantly, Judge Cote noted to the collusive behavior between the labels and ASCAP, citing their failure to provide Pandora with a means to remove potentially infringing songs and their organized efforts to force Pandora into a disadvantaged negotiating position as coordinated activities in an attempt to magnify the “fair market value” of the licensing agreement. Accordingly, Judge Cote refused to allow ASCAP to cite the individual, directly negotiated label deals as evidence in the rate court proceedings, as they were not representative of a true marketplace.
While the ruling is fairly favorable for Pandora, it is worth noting the court did not grant the 1.7% rate Pandora sought in line with terrestrial broadcasting rates under the RMLC, as Judge Cote held Pandora failed to demonstrate that is a reasonable rate for Pandora’s service. The costly maneuvering failed to pay off for either side, as Judge Cote explicitly rejected the collusive deals borne out of ASCAP’s rule change and failed to recognize Pandora as comparable to a traditional terrestrial broadcaster. Nevertheless, these recent decisions can be looked at as a win for Pandora and digital and new media streaming services like it. Judge Cote’s rejection of ASCAP’s proposals bodes well for Pandora as they prepare to face-off in court against BMI, the worlds largest PRO, and for the future of disruptive Internet radio services. Despite exceptional push-back from the legacy music industry, Pandora is finding success in an industry in flux. The outcomes of recent proceedings suggest courts are poised to reward, rather than penalize, their success.
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