American Soc. of Composers, Authors and Publishers v. Showtime/The Movie Channel, Inc.

• Citation: 912 F.2d 563
• Decision Date: 27 August 1990
• Docket Number: D,No. 1400,1400
• Parties: , 1990-2 Trade Cases 69,167, 1990 Copr.L.Dec. P 26,626, 16 U.S.P.Q.2d 1026 AMERICAN SOCIETY OF COMPOSERS, AUTHORS AND PUBLISHERS, Appellant, v. SHOWTIME/THE MOVIE CHANNEL, INC., Applicant-Appellee. ocket 90-6034.
• Court: U.S. Court of Appeals — Second Circuit

Page 563

912 F.2d 563

59 USLW 2182, 1990-2 Trade Cases 69,167,

1990 Copr.L.Dec. P 26,626, 16 U.S.P.Q.2d 1026

AMERICAN SOCIETY OF COMPOSERS, AUTHORS AND PUBLISHERS, Appellant, v. SHOWTIME/THE MOVIE CHANNEL, INC., Applicant-Appellee.

No. 1400, Docket 90-6034.

United States Court of Appeals Second Circuit.

Argued June 8, 1990.

Decided Aug. 27, 1990.

Jay Topkis, New York City (Simon H. Rifkind, Allan Blumstein, David E. Nachman, Gidon M. Caine, Daniel McNeel Lane, Jr., Paul, Weiss, Rifkind, Wharton & Garrison, New York City, on the brief), for appellant.

R. Bruce Rich, New York City (Kenneth L. Steinthal, Evie C. Goldstein, Jonathan T. Weiss, Weil, Gotshal & Manges, New York City, on the brief), for applicant-appellee.

Before FEINBERG, NEWMAN and CARDAMONE, Circuit Judges.

JON O. NEWMAN, Circuit Judge:

In 1941, the Government settled its antitrust suit against the American Society of Composers, Authors and Publishers (ASCAP) with the entry of a consent decree. ¹ As amended in 1950, the consent decree requires ASCAP to offer users of music a so-called "blanket license," the non-exclusive right to perform any music in the ASCAP repertory. ² The amended consent decree also provides that in the event of a dispute concerning the amount of a fee for the blanket license, the District Court for the Southern District of New York is authorized to determine a reasonable fee. This appeal is the first to challenge a fee determination for a blanket license under the ASCAP consent decree.

ASCAP appeals from the October 12, 1989, order of the District Court for the Southern District of New York (Michael H. Dolinger, Magistrate) determining the fee to be paid by the applicant-appellee Showtime/The Movie Channel, Inc. (SMC). Magistrate Dolinger, sitting by consent pursuant to 28 U.S.C. Sec. 636(c) (1988), set the fee for the period April 4, 1984, through December 31, 1988, at 15 cents per subscriber, rejecting ASCAP's request for a fee of 25 cents per subscriber. For substantially the reasons set forth in the Magistrate's comprehensive opinion, reprinted in the appendix to this opinion, we affirm.

Facts

The background of the blanket license for the right to perform copyrighted music has been set forth in several opinions considering antitrust challenges to its validity. See Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 99 S.Ct. 1551, 60 L.Ed.2d 1 (1979); Buffalo Broadcasting Co. v. ASCAP, 744 F.2d 917 (2d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1181, 84 L.Ed.2d 329 (1985); Columbia Broadcasting System, Inc. v. ASCAP, 620 F.2d 930 (2d Cir.1980), cert. denied, 450 U.S. 970, 101 S.Ct. 1491, 67 L.Ed.2d 621 (1981). As required by the ASCAP consent decree, ASCAP offers a blanket license for all of the three million songs in its repertory. A substantially similar blanket license is offered by Broadcast Music, Inc. (BMI), the other major organization holding rights to copyrighted music. The BMI repertory includes one million songs.

SMC, the applicant in the pending matter, operates two pay cable television network services, "Showtime" and "The Movie Channel." SMC charges the operators of local cable systems a fee for the right to carry its programming, which consists primarily of movies. Since the films contain copyrighted music, SMC must obtain performance rights for the music on the soundtracks of the films it makes available on its cable channels. Like most users of copyrighted music, SMC finds the blanket license to be the most convenient way to obtain the rights it requires.

Prior licenses. SMC's predecessor entities held blanket licenses from ASCAP for the years 1977 through 1979. In these early years of the cable industry, the parties agreed to nominal license fees and stipulated that the licenses were entered into on an "experimental" basis and would not be "prejudicial to any position taken by either of the parties" in the future. The owners of Showtime held a blanket license from BMI for the years 1978-1980, also at nominal fees.

More pertinent to the pending controversy are the licenses in effect in the 1980's. For the period July 1, 1983, through December 31, 1986, SMC obtained a BMI blanket license at a cost of $3.75 million and for the years 1987-1989 at an estimated cost of $2.6 million. ³ For the earlier period, the fee amounted to about 13 cents per subscriber per year, and for the latter period about 12 cents per subscriber per year. For the years 1986-1989, Home Box Office (HBO), another pay cable service, held a BMI blanket license at a cost set at 12 cents per subscriber per year.

For the years 1980-1982, HBO held an ASCAP blanket license at a cost of $6 million and for the years 1983-1985 at a cost of $13 million. Though these fees were set as fixed dollar sums, they amounted to approximately 25 cents per subscriber per year. In December 1985 HBO offered to extend its ASCAP license through 1988 for a fee of 24.1 cents per subscriber per year. For the years 1983-1985, the Disney Channel, another pay cable service, held an ASCAP blanket license at a cost of $875,000; this cost amounted to 21 cents per subscriber per year, based on Disney's total year-end subscribers during the period, and 29 cents per subscriber per year, based on the average number of subscribers during the period.

During the years pertinent to this controversy, SMC, HBO, and Disney were the major pay cable services. In 1986, these three services accounted for more than 30 million subscribers, out of a nationwide total of just under 32 million subscribers to all pay cable services.

The pending license application. On April 4, 1984, SMC requested from ASCAP a blanket license from that date through 1986. ⁴ When the parties were unable to agree upon a license fee, SMC, exercising its rights under the Consent Decree, initiated the instant proceeding by asking the District Court to set a "reasonable fee" for the license. Consent Decree, p IX(A). ⁵ The parties later agreed to extend the fee-setting application to cover the period through 1988. The fee application was heard by Magistrate Dolinger by agreement, 28 U.S.C. Sec. 636(c). The Magistrate conducted a seven-day trial in 1988.

ASCAP contended that a reasonable annual fee for SMC would be 25 cents per subscriber. ASCAP relied on the fees paid by HBO during the years 1980-1985 for an ASCAP blanket license, which were approximately 25 cents per subscriber, and those paid by Disney during the years 1983-1985, which were either 21 or 29 cents per subscriber per year, depending on whether year-end or average subscriber totals are used. ASCAP also relied on HBO's 1985 offer to extend its then existing license at an annual fee of 24.1 cents per subscriber.

SMC contended that the fees paid to ASCAP by HBO and Disney should not provide the basis for a "reasonable fee" to be set for SMC because the HBO and Disney fees reflect ASCAP's monopoly power and are much higher than prices that would obtain in a freely competitive market for copyrighted music rights. Instead, SMC urged the Court to estimate the economic value of the music used by SMC in its programming by analyzing the costs of acquiring other creative components such as script writing and film directing. Using this approach, SMC contended that a reasonable annual fee for the ASCAP blanket license would be 8 cents per subscriber.

The District Court's decision. The District Court accepted half of SMC's position, agreeing with SMC that the HBO and Disney fees for ASCAP licenses were not suitable bases for determining a "reasonable" fee for SMC. The Magistrate pointed out that the HBO license for 1980-82 was specified to be "experimental" in nature. He then observed that HBO's 1983-85 license contained a "most favored nation" clause, entitling HBO to a retroactive reduction of its fee to whatever fee might be agreed upon between ASCAP and any pay television service with at least one million subscribers, such as SMC. In the Magistrate's view, if the HBO negotiated fee were to be used as a benchmark for SMC's fee, it would have to be discounted by some value attributable to the benefit of this clause, a reduction that he concluded would be entirely speculative on the record before him.

The Magistrate also rejected the rate of 25 cents per subscriber per year derived from the HBO fees for 1983-85 because HBO had agreed to a flat dollar amount and had done so based on projections of larger numbers of subscribers than it obtained. He pointed out that with the high subscriber projections at hand, it was doubtful that HBO would have agreed in 1983 to pay at a rate that turned out to be 25 cents per subscriber, based on the actual number of subscribers. He also found unpersuasive the rate of 24.1 cents per subscriber offered by HBO in 1985 to extend its license because this offer included the "most favored nation" clause from the 1983-85 license and therefore was not an unconditional offer to pay that rate. ⁶

The Magistrate also rejected the Disney license rate as an appropriate benchmark because this rate was agreed to at an early stage of the Disney Channel's existence and reflected considerations not pertinent to arm's length bargaining between ASCAP and an established cable service like SMC. ⁷

Overshadowing these specific grounds for rejecting the pertinence of the HBO and Disney license rates, however, was the Magistrate's basic conclusion that ASCAP's bargaining power in negotiating rates for its blanket license was unduly enhanced by the absence of a truly competitive market for copyrighted music or, at a minimum, that the licensees' perception of ASCAP's undue market power prompted them to pay fees higher than those that would obtain in a more competitive market. In support of his view concerning the actuality and the perception of ASCAP's enhanced market power, the Magistrate relied on several factors. These included the necessity of obtaining music rights in order to offer local cable...