After five-week bench trial, district court holds BMI's proposed license fee of 2.5 percent of Pandora's gross revenue was reasonable, using Pandora's 2013 direct licenses with Sony/ATV and Universal Music Publishing as benchmarks.

The performing rights organization Broadcast Music, Inc. (BMI), which licenses on behalf of music publishers and copyright owners the musical compositions in its repertoire, petitioned the U.S. District Court for the Southern District of New York, pursuant to BMI’s Consent Decree with the U.S. Department of Justice, for a determination of reasonable fees and terms for an adjustable-fee blanket license for the online music streaming service Pandora Media, Inc. After a five-week trial and post-trial submissions, the district court determined that BMI’s proposed blanket license fee of 2.5 percent of Pandora’s gross revenue (subject to various adjustments) was reasonable.

The district court adopted as primary benchmarks (i.e., other license agreements by which the reasonableness of BMI’s proffered license fee would be measured) the direct license agreements that Pandora entered into with Sony/ATV Music Publishing (Sony) and Universal Music Publishing Group (UMPG) in 2013—which the district court referred to as the most recent indices of competitive market rates. Those agreements were formed in the wake of Sony and UMPG’s (and other publishers’) withdrawal of their digital licensing rights from BMI and its chief competitor, the American Society of Composers, Authors and Publishers (ASCAP). Prior to those withdrawals, Pandora enjoyed a 1.75 percent blanket license rate with BMI. In 2012 and 2013, however, Sony and UMPG determined that this rate undervalued their catalogs and sought to withdraw their compositions from BMI’s (and ASCAP’s) repertoire, and to negotiate direct licenses with Pandora. During those negotiations, Pandora asked both Sony and UMPG to provide lists of their compositions for the ostensible purpose of removing them from Pandora’s streaming service in the event the parties could not reach an agreement on rates. Sony declined to provide such a list to Pandora. UMPG did provide a list, but it was accompanied by a nondisclosure agreement (NDA) that, Pandora claimed, prohibited its use to effectuate a takedown of UMPG’s compositions. In early 2013, both publishers agreed to direct licenses with Pandora that would expire at the end of that year. The Sony license was for 2.25 percent of Pandora’s gross revenue (adjusting for BMI’s market share of Sony compositions), and the UMPG license applied a 3.38 percent adjusted rate. In December 2013, shortly after Sony and UMPG provided lists of compositions in their repertoires, Pandora agreed upon new adjusted rates for the 2014 calendar year—5.85 percent for Sony, and 3.83 percent for UMPG.

Pandora argued that the Sony and UMPG rates were improper benchmarks because Sony’s initial failure to provide a list of its compositions, and UMPG’s initial provision of its list subject to an NDA, prohibited Pandora from removing the compositions from its service. As a result, Pandora argued, it was subjected to potentially “crippling” copyright infringement liability in the event that the parties failed to reach an agreement. Pandora maintained it had no alternative but to enter into the direct licenses, which were therefore set in a “noncompetitive market.” The district court rejected this argument. Reviewing the record, it determined that Pandora was motivated to enter into direct licenses not by the threat of potential infringement liability, but instead by the potentially huge loss of revenue occasioned by the loss of Sony’s and UMPG’s catalogs from its service. The district court determined that BMI’s licenses with digital “on demand” services such as iTunes Radio, Spotify, Rdio and Rhapsody further confirmed that BMI’s proffered 2.5 percent rate falls within the range of contemporaneous market rates set under free market conditions.

The district court rejected Pandora’s proffered benchmarks—among them the 1.7 percent rate paid by the Radio Music License Committee (RMLC), which represents approximately 10,000 commercial broadcast radio stations. Despite Pandora’s claim that it directly competes with radio broadcasting stations, the district court held that Pandora’s service, which enables users to customize the music they consume, differs substantially from the broadcast radio model. The fact that at least one RMLC member, iHeartMedia, offers online music streaming, was immaterial, given that the RMLC rate was negotiated prior to emergence of iHeartMedia’s streaming service. Nor, the district court held, did Pandora’s purchase of a terrestrial radio station in South Dakota entitle it to the application of the RMLC rate as a benchmark.

Finally, the district court adopted BMI’s position that the rate formula should include a floor fee of 10 percent of the blanket license fee (which represented the benefit of BMI’s centralized licensing services), an incremental administrative fee of 3 percent of the blanket fee (to account for BMI’s license tracking and other administrative costs) and other minor rate adjustments, as well as a four-year license term, through 2016, rather than a five-year term as Pandora requested.