Related to United States v. Am. Soc'y Composers (In re Petition of Pandora Media, Inc.)

Citation6 F.Supp.3d 317
Decision Date18 March 2014
Docket NumberNos. 12 Civ. 8035(DLC), 41 Civ. 1395(DLC).,s. 12 Civ. 8035(DLC), 41 Civ. 1395(DLC).
PartiesIn re Petition of PANDORA MEDIA, INC. Related to United States of America, Plaintiff, v. American Society of Composers, Authors, and Publishers, Defendant.
CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York

6 F.Supp.3d 317

In re Petition of PANDORA MEDIA, INC.
Related to United States of America, Plaintiff,
v.
American Society of Composers, Authors, and Publishers, Defendant.

Nos. 12 Civ. 8035(DLC), 41 Civ. 1395(DLC).

United States District Court,
S.D. New York.

Signed March 14, 2014.
Filed March 18, 2014.


[6 F.Supp.3d 318]


Kenneth L. Steinthal, Joseph R. Wetzel, Jason Blake Cunningham, Katherine Merk, King & Spalding, LLP, San Francisco, CA, Jeffrey Scott Seddon, King & Spalding, LLP, New York, NY, Mary Katherine Bates, King & Spalding, LLP, Atlanta, GA, Marc Brian Collier, Fulbright & Jaworski LLP, Austin, TX, for applicant Pandora Media, Inc.

Jay Cohen, Eric Alan Stone, Darren W. Johnson, Amy E. Gold, Lynn Beth Bayard, Paul, Weiss, Rifkind, Wharton & Garrison, LLP, New York, NY, Richard H. Reimer, Christine A. Pepe, American Society of Composers, Authors and Publishers, New York, NY, for the American Society of Composers, Authors and Publishers.


OPINION & ORDER

DENISE COTE, District Judge.
TABLE OF CONTENTS

INTRODUCTION

320


FINDINGS OF FACT

322


I.

The American Society of Composers, Authors and Publishers

322
A.

ASCAP Background

322
B.

The ASCAP Consent Decree

323


II.

The Evolution of the Radio Industry

323


III.

The RMLC–ASCAP License Agreement for the Period 2010–2016

325


IV.

Pandora

327
A.

Pandora's Music Genome Project

327
B.

Pandora Premieres

328
C.

Pandora's Comedy Programming

328
D.

Pandora's Revenue

328
E.

Pandora's Competitive Environment

328


V.

Pandora's Licensing History with ASCAP

330


VI.

The April 2011 ASCAP Compendium Modification

331
A.

Overview and Context

331
B.

Public Performance Rights for Compositions versus Sound Recordings

332
C.

ASCAP–Publisher Negotiations Prior to the Compendium Modification

333
D.

The Compendium Modification Allowing New Media Withdrawals is Enacted

336
E.

ASCAP Provides Administrative Services for Withdrawing Publishers

337


VII.

A Second Compendium Modification in December 2012 the “Standard Services” Agreement

338


VIII.

Pandora Negotiates Direct Licenses with EMI, Sony, and UMPG and Fails to Negotiate an Agreement with ASCAP

339
A.

The Pandora–EMI License Negotiations

339
B.

The Pandora–ASCAP License Negotiations

340
C.

The Pandora–Sony License Negotiations

342
D.

The Pandora–UMPG License Negotiations

347


IX.

September 17 Partial Summary Judgment Opinion

350


X.

Other Licensing Agreements Put Forth as Benchmarks

351
A.

The Pandora–SESAC License

351
B.

Apple's iTunes Radio Licenses with Publishers and PROs

351


CONCLUSIONS OF LAW

353


I.

ASCAP's Rate Proposal of 1.85% for 2011 and 2012

355


II.

ASCAP's Rate Proposal of 2.50% for 2013 and 3.00% for 2014 and 2015

355
A.

Presumption of a Single Rate

356
B.

Pandora's Direct Licenses with Sony and UMPG

357
1.

ASCAP and Publisher Coordination

357
2.

The Pandora–Sony License

358
3.

The Pandora–UMPG License

360
C.

ASCAP's Secondary Benchmarks: the SESAC and Apple Licenses

361
1.

The Pandora–SESAC license

361
2.

The Apple Licenses

362
D.

ASCAP's Theoretical Arguments and Motivations

363
1.

An Increase in Competition

363
2.

Demand for Variety

364
3.

Disparity Between Sound Recording and Composition Fees

366
4.

Cannibalization of Music Sales

367
5.

Music Intensity

368
6.

Pandora's Success

368


III.

Whether Pandora is Entitled to the RMLC 1.70% Rate

369


IV.

Publisher Concerns Regarding the Consent Decree and the Rate Court

372


CONCLUSION

372

[6 F.Supp.3d 320]


INTRODUCTION

Pandora Media Inc. (“Pandora”) has applied for a through-to-the-audience blanket license to perform the musical compositions in the repertoire of the American Society of Composers, Authors and Publishers (“ASCAP”) for the period of January 1, 2011 through December 31, 2015. The parties having been unable to reach agreement on an appropriate licensing fee, pursuant to Article IX of the consent decree under which ASCAP operates—known as the Second Amended Final Judgment (“AFJ2”), see United States v. ASCAP, Civ. No. 41–Civ–1395, 2001 WL 1589999 (S.D.N.Y. June 11, 2001)—Pandora requested on November 5, 2012 that this Court set a rate for that licensing fee.

The parties disagree as to which are the most appropriate benchmarks for the license rate here. Pandora asserts principally that it is similarly situated to radio stations licensed through a 2012 agreement between the Radio Music License Committee (“RMLC”), which represents commercial radio stations, and ASCAP, and is therefore entitled to the rate in that license. Pandora also points to a direct license agreement between Pandora and EMI Music Publishing Ltd. (“EMI”) that was entered into after EMI purported to withdraw its new media 1 licensing rights from ASCAP in 2011.

ASCAP proposes a variety of benchmarks, including the direct licensing agreement into which Pandora entered with EMI, as well as Pandora's direct licenses with Sony/ATV Music Publishing LLC (“Sony”) and Universal Music Publishing Group (“UMPG”) in the wake of those publishers' putative withdrawals of new media licensing rights from ASCAP. ASCAP also puts forward other agreements between music rights holders and music users as secondary benchmarks.

The parties have proposed the following rates, expressed as a percentage of revenue: ASCAP proposes a rate of 1.85% for the years 2011 and 2012, 2.50% for 2013, and 3.00% for the years 2014 and 2015. Pandora proposes a rate of 1.70% for all five years. This Opinion sets the rate for all five years at 1.85%.

The task at hand is to determine the fair market value of a blanket license for the public performance of music. As this Court explained in a prior rate court proceeding:

[6 F.Supp.3d 321]

The challenges of [determining a fair market rate for a blanket music license] include discerning a rate that will give composers an economic incentive to keep enriching our lives with music, that avoids compensating composers for contributions made by others either to the creative work or to the delivery of that work to the public, and that does not create distorting incentives in the marketplace that will improperly affect the choices made by composers, inventors, investors, consumers and other economic players.

In re Application of MobiTV, Inc., 712 F.Supp.2d 206, 209 (S.D.N.Y.2010), aff'd sub nom. ASCAP v. MobiTV, Inc., 681 F.3d 76 (2d Cir.2012).


A bench trial was held from January 21 through February 10, 2014. Without objection from the parties, the trial was conducted in accordance with the Court's customary practices for non-jury proceedings, which includes taking direct testimony from witnesses under a party's control through affidavits submitted with the Joint Pretrial Order. The parties also served with the Joint Pretrial Order copies of all exhibits and deposition testimony that they intended to offer as evidence in chief at trial.

Prior to trial, ASCAP presented affidavits constituting the direct testimony from ten witnesses, including four ASCAP employees, two music publishing executives, one composer, and three experts.2 The ASCAP employees are CEO John LoFrumento; Vice President for New Media and Technology Matthew DeFilippis; Director of Licensing Vincent Candilora; and Senior Vice President Seth Saltzman. ASCAP's music publisher witnesses were Peter Brodsky, the Executive Vice President of Business and Legal Affairs at Sony; and Zach Horowitz, the Chairman and CEO of UMPG. ASCAP's composer-witness was Brett James. ASCAP's experts were Dr. Kevin Murphy, Dr. Orley Ashenfelter, and Robin Flynn. ASCAP also provided designated deposition excerpts from six witnesses. 3

Pandora provided affidavits constituting the direct testimony of eight witnesses, four of whom are current or former Pandora employees and four of whom are experts. The current or former Pandora employees were founder and Chief Strategy Officer Timothy Westergren; former CEO Joseph Kennedy; Chief Technology Officer Thomas Conrad; and Chief Marketing Officer Simon Fleming–Wood. Pandora's experts were Dr. Leslie Marx, Dr. Roger Noll, William Rosenblatt, and Fred McIntyre. Pandora also provided the designated deposition testimony of a number of witnesses.4

The parties also offered deposition designations of certain witnesses as joint exhibits.5 At the trial, the parties waived their right to cross-examine several of the witnesses. The witnesses who testified at trial were Brodsky, LoFrumento, DeFilippis, Murphy, Flynn, Marx, Rosenblatt, Horowitz, Saltzman, Noll, Conrad, Kennedy,

[6 F.Supp.3d 322]

Fleming–Wood, and McIntyre. In addition, Pandora called its outside counsel, Robert Rosenbloum, as a witness.

This Opinion constitutes the Court's findings of fact and conclusions of law following that trial. The factual findings are principally set forth in the first section of this Opinion, but appear as well in the second section.

FINDINGS OF FACT
I. The American Society of Composers, Authors and Publishers
A. ASCAP Background

ASCAP is an unincorporated membership organization of music copyright holders created and controlled by music writers and publishers.6 Its function is to coordinate the licensing of copyrighted musical works, and the distribution of royalties, on behalf of its nearly 500,000 members. ASCAP members grant ASCAP the non-exclusive right to license non-dramatic public performances of their music. ASCAP licenses these works on behalf of the copyright holders to a broad array of music users, including television networks, radio stations, digital music services, colleges, restaurants, and many other venues in which music is performed.

Employing ASCAP to perform these functions is efficient for both music users and copyright holders. A music user can license an enormous portfolio of copyrighted music through the execution of a single license without having to contact each copyright holder. Copyright holders benefit from ASCAP's expertise and resources in policing the market, negotiating licenses, and distributing the revenue from a vast array of licenses promptly and reliably among the multiple owners of the public performance copyrights in each work. The ability of ASCAP and other performing rights organizations...

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