Rate Courts May Consider Direct Licensing Programs When Setting Music Licensing Fees: Second Circuit

Practical Law Legal Update 5-519-9074 (Approx. 4 pages)

Rate Courts May Consider Direct Licensing Programs When Setting Music Licensing Fees: Second Circuit

by PLC Intellectual Property & Technology

Key Litigated Issue

In Broadcast Music, Inc. v. DMX, Inc. before the US Court of Appeals for the Second Circuit, the key litigated issue was whether it was reasonable for a district court in a copyright rate court proceeding to:

Set the blanket license fee from a performing-rights organization (PRO) with a carve-out exception for music which has been directly licensed by the licensee from composers and their music publishers who are also represented by that PRO.
Use those direct licenses, as opposed to the PRO's agreement with the licensee's competitors, as a benchmark for setting a reasonable royalty.

Background

Broadcast Music, Inc. is a consolidated action covering two copyright rate court proceedings:

Broadcast Music, Inc. v. DMX.
American Society of Composers, Authors and Publishers v. DMX.

The American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI) are PROs which negotiate, implement and enforce agreements with licensees that grant the right to perform their members' copyrighted songs. DMX is a commercial music service provider supplying foreground and background music to establishments such as restaurants, hotels and retail stores.

PROs, such as ASCAP and BMI, have historically offered blanket music licenses that grant access to a PRO's entire catalog in exchange for a flat annual fee. In 2001, both ASCAP and BMI entered into a consent decree with the US as a result of settling an antitrust suit which alleged blanket licenses constituted an illegal restraint of trade. If a PRO is unable to reach a fee agreement with a licensing party, the US District Court for the Southern District of New York has jurisdiction under the consent decree to determine a reasonable license fee. Each PRO has the burden before the district court of proving that its proposal is reasonable. If the district court deems the proposal unreasonable, the court sets a reasonable fee, which may take into account the licensee's proposal.

In the instant matter, DMX began a direct licensing campaign in 2006 and by 2010 had successfully negotiated 850 direct licenses with individual music composers and their publishers, rather than with ASCAP or BMI. DMX's direct licenses generally provide each publisher a pro rata share of a royalty pool based on a $25 per-location charge. Due to DMX's direct licensing campaign, DMX requested that ASCAP and BMI offer it an adjustable-fee blanket license (that is, a blanket license with a carve-out reduction to account for music directly licensed that also appears in the PRO's catalog). Neither ASCAP nor BMI were willing to provide DMX with an adjustable-fee blanket license and requested that the district court set a reasonable rate for DMX's requested license. All parties submitted their proposals for a reasonable rate to the district court for consideration.

Proposals Before the District Court

ASCAP presented two license fee options:

A blanket license with no carve-out for DMX's direct licensing program. This proposal included a flat fee based on an annual rate per location, multiplied by the number of years of the license. Additionally, this proposal was based on a blanket fee license agreement ASCAP had reached with one of DMX's competitors, Muzak LLC (Muzak).
A blanket license with a carve-out based on the fees Muzak had agreed to pay to ASCAP plus a portion of the payments DMX made to the entities with which it had a direct license. This proposal included the same flat fee offered in the first option, reduced by a discount for directly licensed work, with an additional administrative fee for administering the carve-out exception.

BMI proposed a blanket license fee based on the fee it obtained from a competitor of DMX, increased by 15% to account for the additional costs of administering an adjustable fee blanket license as well as a premium for choosing an adjustable fee blanket license over a traditional blanket license.

For ASCAP, DMX proposed a calculation based the following:

A "floor fee" which reflected the minimum amount DMX would be obligated to pay ASCAP even if all of the music DMX utilized was covered under a direct license.
An "unbundled music fee" which accounted for the pure value of the performance rights of music covered by ASCAP.

Under this proposal, the sum of the floor fee plus the unbundled music fee would be multiplied by the share of ASCAP-licensed music that was utilized by DMX.

For its dealings with BMI, DMX proposed a blanket license that was nearly identical in composition to the structure proposed for ASCAP.

In both instances, the district court rejected the PRO's proposal and adopted DMX's proposal. In doing so, the district court accepted DMX's proposed benchmark of its direct licensing arrangements as a measure for determining the fair market value of a license. ASCAP and BMI appealed these rulings.

Outcome

In its June 13, 2012 decision, the Second Circuit first addressed ASCAP's contention that a rate structure including an adjustable carve-out conflicts with the consent decree because it is not explicitly referenced. However, the court found this approach permissible because it represents a blanket fee with a different fee basis, rather than a new type of license outside the bounds of the consent decree.

The Second Circuit next evaluated whether it was clearly erroneous for the district court to reject the PRO's proposals and to accept DMX's proposed rates using its direct licensing as a benchmark for rate-setting and for the district court to incorporate direct licensing when setting the applicable rate. The appellate court found it was not clearly erroneous for the district court to reject the PRO's proposals based on their dealings with Muzak as the rates reflected in those agreements did not reflect the rates that would have been set in a competitive market. The Second Circuit noted that the license agreements with Muzak:

Could not form the basis of a license agreement with DMX, because DMX, with its direct licensing program, was in a different economic position than DMX's competitor.
Incorporated additional costs, including the resolution of audits and back-pay disputes, yet ASCAP and BMI failed to show that their proposals with DMX excluded those additional costs.

The appellate court also found that the rates set by the district court reasonably:

Compensated the PROs for their services. The court noted that while the rates were lower than those historically obtained by the PRO's this reflected a changing marketplace and the inclusion of a floor fee in the rates ensured that the PROs would continue to be compensated regardless of DMX's direct licensing efforts.
Used DMX's direct licensing as a suitable benchmark because the collective decisions of the direct licensors is comparable to the decision a PRO makes in a competitive market when granting a license.
Incorporated direct licensing into the fee structures because this fosters a competitive licensing market and prevents DMX from having to pay twice to use the same musical work.

Practical Implications

This decision sanctions the direct licensing of performance rights and suggests that direct licenses reflect a more competitive rate than those set in the blanket licenses unilaterally offered by PROs. It is therefore likely to influence the way in which performance rights are licensed and the rates PROs can obtain in the future, as licensees are likely to seek similar adjustable-fee blanket licenses.

Court Documents

Broadcast Music, Inc. v. DMX, Inc., Nos. 10-3429-cv, 11-27-cv (2nd Cir. June 13, 2012).

Rate Courts May Consider Direct Licensing Programs When Setting Music Licensing Fees: Second Circuit | Practical Law