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Rate court opinion in Pandora-ASCAP licensing dispute supported by Bates White analysis

On November 5, 2012, after failing to reach an agreement with the American Society of Composers, Authors, and Publishers (ASCAP), Pandora Media, Inc. (“Pandora”) filed a petition for determination of a reasonable royalty rate for the performance of copyrighted musical works in the In re Petition of Pandora Media, Inc. litigation. According to the provisions laid out in the consent decree entered into between the US Department of Justice and ASCAP, in the case of a disagreement between the parties on a reasonable licensing fee, the final determination of the fee rests with a judge of the United States District Court for the Southern District of New York (the “rate court”).1 The licensing fee is determined primarily based on the rate court’s consideration of other royalty rates that were set in a competitive environment between parties similarly situated to the petitioner and ASCAP.

Pandora is an Internet radio service that allows listeners to select from a number of pre-programmed music stations or create a personalized station based on one or more songs, artists, or musical genres selected by a listener. These personalized stations are made possible by Pandora’s proprietary algorithm. ASCAP is one of the two biggest performing rights organizations (PROs) in the United States and licenses roughly half of all published musical works. The ability to broadcast music from the ASCAP repertory is important to Pandora’s business.

Around or shortly after the time that Pandora filed its petition, Pandora learned that two of the largest music publishers whose works are licensed by ASCAP—Sony/ATV Music Publishing (Sony) and Universal Music Publishing Group (UMPG)—planned to withdraw their new media rights2 from ASCAP and negotiate licenses for these new media rights with Pandora (and presumably other “new media” licensees) separately from ASCAP, all while retaining their memberships on the ASCAP Board of Directors (and continuing to license collectively through ASCAP the vast majority of ASCAP’s licensees). To avoid the risk of copyright infringement, Pandora was under significant pressure to negotiate direct licenses for new media rights with both Sony and UMPG. The nature of these negotiations and their outcomes played an important role during the litigation.3

Bates White was retained by King & Spalding LLP on behalf of Pandora to opine as to what would constitute a reasonable licensing fee for a blanket license that would cover the performances of all musical works in the ASCAP repertory. Bates White Partner Leslie Marx was retained as an economic expert, and the Bates White team was led by Keith Waehrer. Dr. Marx submitted two reports and a declaration and then testified on January 29, 2014, during the rate court proceeding. The trial lasted three weeks and concluded in early February. In its ruling on March 14, 2014, the rate court substantially agreed with Pandora and set a headline royalty rate that essentially holds Pandora’s royalty obligations unchanged at 1.85% of revenue for a new five-year license term (2011–2015); in so doing, the court rejected ASCAP’s arguments that Pandora’s deals with Sony and UMPG were “fair market value” benchmarks (warranting an increase in rate up to 3% of Pandora revenues).

As part of the economic analysis, Dr. Marx and the Bates White staff studied the general competitive environment in which the royalty rates are negotiated between various entities that license musical works and the PROs. In her direct (written) testimony, she laid out the conditions required for a licensing fee negotiation to be considered competitive and provided a framework to help analyze the royalty rates determined under different economic environments. In particular, Dr. Marx analyzed numerous licensing agreements that were negotiated between PROs, music publishers, and their licensees and concluded that (i) the circumstances surrounding the negotiations of the Sony and UMPG deals with Pandora did not comport with the characteristics of a competitive market, and (ii) that several other of these agreements could serve as appropriate competitive benchmarks for the ASCAP–Pandora blanket license. Dr. Marx also expressed concern that possible coordination between ASCAP and some of its constituent members, such as Sony and UPMG, had disadvantaged Pandora in its rate negotiations. Finally, in her direct testimony, Dr. Marx also considered the economic model that was proposed by ASCAP’s primary economic expert. She highlighted errors in the model and opined that the model was not helpful in determining the appropriate royalty rate. Based on her comparative analysis, Dr. Marx opined that reasonable royalty rates for a blanket license ranged from 1.70% to 1.85% of Pandora’s revenue net of a deduction for advertising costs.

The rate court rejected ASCAP’s proposed escalating royalty rate structure and adopted key aspects of Dr. Marx’s proposed benchmark analysis to set the royalty rate at 1.85%. After considering the evidence produced at trial, the rate court agreed with Dr. Marx that there were genuine concerns of coordination between ASCAP and music publishers, and that Pandora’s agreements with Sony and UMPG were not appropriate competitive benchmarks. Many of Dr. Marx’s concerns regarding ASCAP’s economic model were shared by the rate court. The court agreed that the theoretical framework proposed by ASCAP’s expert was not helpful in determining a reasonable royalty rate.

Lead counsel for Pandora, Ken Steinthal of King & Spalding LLP, commented that “the economic analysis and testimony provided by Bates White and Dr. Marx were integral to the result secured by Pandora. Their thoroughness and ability to anchor their analysis in bedrock economic principles surely went a long way towards making this result possible.”

1Second Amended Final Judgment, United States v. Am. Soc’y of Composers, Authors & Publishers, No. 41-CV-1395 (S.D.N.Y. June 11, 2001).

2New media is an ASCAP term for product offerings involving “transmission of musical compositions made available or accessible (i) exclusively by means of the Internet, a wireless mobile telecommunications network, and/or a computer network.” Pandora is covered under this definition.

3In a partial summary judgment opinion, the rate court found these new media withdrawals to be “inoperative” under the provisions of the consent decree.

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