Pandora Media, Inc. v. American Society Of Composers, Authors, And Publishers

Facts

ASCAP (D) is an unincorporated membership organization of music copyright holders created and controlled by music writers and publishers. D coordinates the licensing of copyrighted musical works, and the distribution of royalties, on behalf of its nearly 500,000 members. Members grant D the non-exclusive right to license non-dramatic public performances of their music. 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. This process creates significant economies of scale in the market for music licensing. D offers the option of blanket licenses to users. A blanket license is a license that gives the music user the right to perform all of the works in D's repertoire, the fee for which does not vary depending on how much of the music the user actually uses. D competes with Broadcast Music, Inc. (BMI) and SESAC, LLC. (SESAC), each of whom also offers blanket licenses. BMI, which is slightly smaller operates under a consent decree that is similar to the one that governs ASCAP's licenses. SESAC is not currently bound by any consent decree. Since 1941, D has operated under a consent decree. The most recent version of the consent decree was issued in 2001 and is known as 'AFJ2.' AFJ2 restricts how D may issue licenses in a variety of ways. A court, known as the rate court, will determine a reasonable fee for D licenses when D and an applicant for a license cannot reach an agreement. AFJ2 requires D to grant a license to perform all of the musical compositions in D's repertoire to any entity that requests such a license. AFJ2 prevents D from discriminating in pricing or with respect to other terms or conditions between 'similarly situated' licensees. D is governed by a series of internal rules and contracts. The D Compendium can be modified by the ASCAP Board and reflects many of the important rules that govern ASCAP's obligations to its copyright holder members and vice versa. In 2011, D modified its Compendium to permit its members to selectively withdraw from D the right to license works to new media entities. Never before had D granted partial withdrawal rights to its members. The modification of the Compendium came in response to pressure from D's largest music publishers. These publishers were focused principally on the disparity between the enormous fees paid by Pandora (P) to record companies for sound recording rights and the significantly lower amount it paid to the PROs such as D for public performance rights to compositions. The modification was enacted despite significant concern about the impact of this change on D, its writers, and its independent publishers. A right to the public performance of a sound recording is the right to control the performance of one recording of a performance of a song. By contrast, a right of public performance in a composition is the right to control the use of the underlying musical composition itself. The latter right has been long recognized, but the right of public performance of a sound recording is a relatively new phenomenon and is restricted to digital services. The licensing fees for sound recordings are paid to an entity called SoundExchange, which collects and distributes these fees to the holders of sound recording copyrights. Technology has made a great impact on the traditional 'radio' business. In the 1990s, the first successful national cable radio network was launched, using cable TV transmission lines. Also in the 1990s, the internet provided a new means of radio transmission. As of today, over 10,000 AM and FM stations stream online. Internet radio includes not just the simulcasting of signals broadcast by AM and FM stations, but also the creation of internet-only radio stations. Over time, some independent companies built directories of internet radio stations. These directories can contain tens of thousands of radio stations. Thus, the internet has enabled providers to present listeners with a vast library of radio programming, the likes of which have never been available before. With the internet, each listener's device gets its own data stream, in contrast to the broadcasting of a common signal across a geographic area. As of today, Pandora (P) is the most successful customized radio service. The emergence of  'on-demand' streaming services that provide users with access to large libraries of songs, from which they can select exactly which song to play at any time had gained traction. Almost half of radio listening occurs while the listener is in an automobile. The RMLC  is a trade association that represents the commercial radio industry. Much of the radio industry obtains its license for the public performance of D music through the RMLC. In 2009, the RMLC began to negotiate new licensing terms to apply to commercial radio stations effective January 1, 2010, through December 31, 2016. t also wanted a license not only for new media transmissions by RMLC member stations but also for new media transmissions by Clear Channel which aggregates many stations for delivery over the internet and mobile devices. RMLC offered a dual rate structure for new media and terrestrial broadcasts, under which the RMLC would pay a proposed rate of XXX of revenue for terrestrial broadcasting and simulcasting of terrestrial radio over the internet, and a separate rate of XXX of revenue for other new media uses of the ASCAP repertoire. The revenue for the latter category of uses was miniscule in comparison with the revenue to be covered at the XXX rate. RMLC licensees still derive almost all of their revenue from traditional broadcasting services. The rate for Music Format Stations was set at 1.70% of all revenue, including revenue derived from new media uses. The 1.70% rate applies both to revenue derived from terrestrial broadcasting and from internet transmissions by RMLC members. P uses its Music Genome Project (MGP) database to create customized internet radio stations for each of its customers. The MGP contains a wealth of data for every composition in its database. P users can opt to listen to programmed 'genre' stations as well as their own custom stations. The most popular P genre stations include 'Today's Hits,' 'Today's Country,' and 'Today's Hip Hop and Pop Hits.' These genre stations are populated by songs that are hand selected by P curators. P has a catalog of approximately 1,000,000 to 2,000,000 songs, somewhat less than half of which are licensed through D. This number is considerably lower than the catalog size of an on-demand service like Spotify. Successful on-demand services have catalogs in the range of 20 million songs. P derives approximately 80% of its revenue from the sale of display, audio, and visual advertising, and the remaining 20% or so from a paid subscription service without advertising called 'Pandora One.' Pandora's revenue has grown exponentially since its inception. By the fiscal year 2013, P's revenue had risen to over $400 million. P has yet to demonstrate sustained profitability. In 2013, P's content acquisition costs were close to $260 million, or over 60% of its revenue for that fiscal year. A very substantial portion of these costs is for the fees paid to record companies for licenses for sound recordings. P is unable to play as many minutes of advertising per hour as its broadcasting competitors. P plays on average approximately 15 songs per hour as compared to terrestrial radio's roughly 11 songs per hour. P is considered a new media entity under the terms of the D Compendium amendment. When members began to withdraw new media rights from D, P began negotiating direct licensing agreements. Sony wanted a license fee equal to 12 percent of P’s revenues. The industry average was four percent. D made a distinction between interactive and non-interactive new media services. It did not, however, make any distinction between programmed and customized internet music services. P also applied in 2010 for a new D license for the years 2011 through 2015. P was required to pay the greater of either the percentage of revenue corresponding to its applicable rate or a fee based on a concept known as 'sessions.' A 'session' is defined in the license as 'an individual visit and/or access to [the] Internet Site or Service by a User.' Any visit that exceeded one hour in length began a new session. At some point in 2010, P recognized that it had been calculating sessions incorrectly and that it had substantially underpaid D. It paid D over $1 million to account for that error. If the payments P was required to make when measured by the per session rate, are converted into a flat percentage of P's annual revenue, the effective rate for the years 2005 through 2010 ranged from a high of 3.63% in 2006 to a low of in 2007. There is no evidence that any party believed that P was obligated to pay above the 1.85% rate until 2010. D raised the rate for new media licenses, reflecting a judgment that those services made more intensive use of music than broadcast radio. On October 28, 2010, P sent a letter to D terminating its license and applying for a new license, pursuant to the terms of AFJ2, to run from January 1, 2011, through December 31, 2015. D did not negotiate the license terms, and when Sony withdrew in September 2012, P filed a rate court petition to determine a license rate. P agreed to pay Sony five percent of revenues, or an increase of 25 percent over the previous rate. In 1995, Congress passed the Digital Performance in Sound Recordings Act (DPSRA), which provided for the first time a public performance copyright in sound recordings. Section 114 did not require all music users to obtain a license to perform a sound recording, but only services that 'perform the [sound recording] publicly by means of a digital audio transmission.' An interactive service is defined as a service 'that enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording . . . which is selected by or on behalf of the recipient.' P is a non-interactive service within the meaning of Section 114. The DPSRA provides that 'license fees payable for the public performance of sound recordings . . . shall not be taken into account in any . . . proceeding to set or adjust the royalties payable to copyright owners of musical works for the public performance of their works.' The CRB decided that the market for sound recording rights was materially different from the market for the public performance rights to musical compositions, and set rates for compulsory license fees for sound recordings at rates many times higher than the prevailing rates for the licensing of the public performance of the compositions. P pays over half of its revenue to record companies for their sound recording rights, and only approximately four percent to the PROs for the public performance rights to their songs. Upon learning in May 2011 of EMI's withdrawal of its new media licensing rights from D, P immediately began to negotiate with EMI for a license to its catalog. The negotiations were not contentious. The 1.85% rate in the Pandora-EMI agreement was the same rate that was available to P under DP's 5.0 License for a non-interactive service. The EMI agreement did not contain any 'per-session' component like that included in the D 5.0 License. The agreement included a most-favored-nation clause, or 'MFN,' for the benefit of P. The agreement contemplated a prospective decrease in the headline rate from 1.85% to as low as 1.70% if P succeeded in obtaining a lower rate for licensing a repertoire as large or larger than EMI's catalog. On September 16, 2011, P executed an interim license agreement with D effective as of January 1, 2011. It adopted the 5.0 License rate of 1.85% without any per session fee. On September 28, 2012, Pa learned that Sony was also withdrawing its new media rights from D. P filed this rate court petition on November 5. Some in the D community threatened P and its law firm. P's motion for partial summary judgment was granted. The AFJ2 prohibited D from withdrawing from P the rights to perform any compositions over which D retained any licensing rights. The AFJ2 prohibited D’s amendment to the Compendium because D’s members must allow for licensing to any music user requesting a license. The publishers' purported withdrawals of only new media rights under the Compendium modification were held inoperative. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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