Broadcast Music, Inc. v. Pandora Media, Inc.
115 U.S.P.Q. 2d (BNA) 1795, 140 F. Supp. 3d 267, 2015 U.S. Dist. LEXIS 69002 (2015)
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Rule of Law:
A reasonable license fee under a consent decree is determined by its fair market value, which is best established by using benchmarks from contemporaneous, arm's-length agreements between similarly situated parties in a competitive market, such as direct licenses between a music service and publishers.
Facts:
- Starting in 2005, Pandora, a streaming internet radio service, licensed music from Broadcast Music, Inc. (BMI), a performing rights organization, under a standard agreement at a rate of 1.75% of Pandora's gross revenue.
- Believing the 1.75% rate was below fair market value for digital services, major music publishers including Sony/ATV Music Publishing (Sony), EMI Music Publishing (EMI), and Universal Music Publishing Group (UMPG) took the step of withdrawing their digital licensing rights from BMI between 2011 and 2013.
- The publishers' withdrawal of rights forced Pandora to negotiate directly with them to continue playing their popular and essential music catalogs.
- Pandora subsequently entered into a series of direct license agreements with Sony and UMPG at effective rates significantly higher than the previous 1.75%, ranging from 2.25% to 5.85% of revenue.
- Pandora claimed these direct deals were coercive because publishers allegedly created a threat of massive copyright infringement liability by being slow to provide complete lists of the withdrawn songs.
- During negotiations with another publisher, BMG, Pandora rejected BMG's 10% rate proposal and successfully removed BMG's wholly-owned content from its service, demonstrating it had the technical ability to remove a publisher's catalog if a deal was not reached.
- Internal Pandora executive emails from late 2013 revealed discussions about market rates, with executives acknowledging that rates of 4-6% could be acceptable for major publishers and that the old 1.75% rate was no longer viable in a free market.
Procedural Posture:
- On December 5, 2012, after terminating its prior licensing agreement, Pandora applied to BMI for a new license to be effective January 1, 2013, under the terms of the BMI Consent Decree.
- After negotiations for a new license failed, BMI, the petitioner, filed a petition with the U.S. District Court for the Southern District of New York on June 13, 2013.
- BMI requested that the court, acting as a special 'rate court' under the Consent Decree, determine a reasonable license fee for Pandora, the respondent, for the period of January 1, 2013, through December 31, 2016.
- The rate court conducted a five-week non-jury trial to hear evidence and determine the reasonableness of the fee proposed by BMI.
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Issue:
Is a 2.5% percentage-of-revenue fee a reasonable rate for an adjustable-fee blanket license for Pandora's use of BMI's musical repertory, when recent, direct-license agreements between Pandora and major publishers establish benchmarks at or above that rate?
Opinions:
Majority - Stanton, J.
Yes. A 2.5% percentage-of-revenue fee is a reasonable rate because it is supported by the most relevant market benchmarks. The court found that the direct license agreements Pandora negotiated with major publishers like Sony and UMPG were the best evidence of fair market value, as they were recent, arm's-length transactions reflecting real-world valuations. The court rejected Pandora's argument that these agreements were the result of coercion, concluding they were driven by Pandora's commercial need to retain access to essential music, not a fear of copyright liability. This conclusion was heavily supported by internal Pandora emails, which the court described as 'revelatory' of the executives' true 'appreciation of free-market rates.' The court dismissed Pandora's proposed benchmarks, such as its old 1.75% BMI rate as outdated and the 1.7% terrestrial radio (RMLC) rate because Pandora is not 'similarly situated' to traditional broadcasters.
Analysis:
This decision significantly bolsters the strategy of music publishers withdrawing digital rights from performing rights organizations (PROs) to secure higher royalty rates through direct negotiations. It establishes that rates from such direct deals, even when negotiated under the pressure of a potential catalog loss, will be treated by rate courts as the most persuasive benchmarks for fair market value. The ruling diminishes the relevance of older, lower-rate blanket licenses and rates paid by other media, like terrestrial radio, solidifying a market shift where digital music services face licensing costs determined by what major publishers can command in direct deals.
