Opinion ID: 802159
Heading Depth: 2
Heading Rank: 2

Heading: The Rates

Text: Under the AFJ2 and the BMI Decree, ASCAP and BMI are required to grant to any music user making a written request therefor a non-exclusive license to perform all of the works in the ASCAP repertory. AFJ2, § VI; see BMI -31- Decree, § IV(A).12 If the parties are unable to reach agreement, after prescribed periods of negotiations, either party may apply to the district court for a determination of a reasonable fee. AFJ2, § IX(A); see BMI Decree, § XIV(A).13 In these rate court proceedings, the burden of 12 The BMI Decree provides that BMI is enjoined and restrained from: (A) Failing to grant permission, on the written request of all writers and publishers of a musical composition including the copyright proprietor thereof, allowing such persons to issue to a music user making direct performances to the public a non-exclusive license permitting the making of specified performances of such musical composition by such music user directly to the public, provided that the defendant shall not be required to make payment with respect to performances so licensed. BMI Decree, § IV(A). 13 The AFJ2 provides: If the parties are unable to reach agreement within sixty (60) days from the date when the request for a license is received by ASCAP, or within sixty (60) days of ASCAP's request for information, whichever is later, the music user may apply to the Court for a determination of a reasonable fee retroactive to the date of the written request for a license . . . . If the parties are unable to agree upon a reasonable fee within ninety (90) days from the date when ASCAP advises the music user of the fee that it deems reasonable or requests additional information from the music user, and if the music user has not applied to the Court for a determination of a reasonable fee, ASCAP may apply to the Court for the determination of a reasonable fee . . . . AFJ2, § IX(A). -32- proof is on the PRO to establish the reasonableness of the fee it seeks. AFJ2, § IX(B); see BMI Decree, § XIV(A).14 If the PRO establishes that its requested rate is reasonable, then the district court shall adopt it. See AFJ2, § IX(D); BMI Decree, § XIV(A).15 If the PRO is unable The BMI Decree similarly provides: If the parties are unable to agree upon a reasonable fee within sixty (60) days from the date when defendant advises the applicant of the fee which it deems reasonable, the applicant may forthwith apply to this Court for the determination of a reasonable fee . . . . If the parties are unable to agree upon a reasonable fee within ninety (90) days from the date when defendant advises the applicant of the fee which it deems reasonable and no such filing by applicant for the determination of a reasonable fee for the license requested is pending, then defendant may forthwith apply to this Court for the determination of a reasonable fee. . . . BMI Decree, § XIV(A). 14 The AFJ2 provides: In any such proceeding, the burden of proof shall be on ASCAP to establish the reasonableness of the fee it seeks. . . . AFJ2, § IX(B). The BMI Decree provides: In any such proceeding, defendant shall have the burden of proof to establish the reasonableness of the fee requested by it. BMI Decree, § XIV(A). 15 The AFJ2 provides: Should ASCAP not establish that the fee it requested is reasonable, then the Court shall determine a reasonable fee based upon all the evidence. AFJ2, § IX(D). -33- to establish that its requested rate is reasonable, then the rate court shall determine a reasonable fee based on all the evidence, including a proposal from the music user. AFJ2, § IX(D); see BMI Decree, § XIV(A). We review rates set by the district court for reasonableness. United States v. BMI, 426 F.3d 91, 96 (2d Cir. 2005) (Music Choice). Fundamental to the concept of 'reasonableness' is a determination of what an applicant would pay in a competitive market, taking into account the fact that [the PRO], as a monopolist, 'exercise[s] disproportionate power over the market for music rights.' United States v. ASCAP, 627 F.3d 64, 76 (2d Cir. 2010) (RealNetworks) (quoting Music Choice, 426 F.3d at 91). Benchmarks, or agreements reached after arms' length negotiation between other similar parties in the industry, are often used by the rate court in determining the fair market value of the music. See id. In assessing whether The BMI Decree provides: Should defendant not establish that the fee requested by it is a reasonable one, then the Court shall determine a reasonable fee based upon all the evidence. BMI Decree, § XIV(A). -34- another agreement provides a valid benchmark, the district court must consider whether the other agreement dealt with a comparable right, whether it involved similar parties in similar economic circumstances, and whether it arose in a sufficiently competitive market. See Music Choice, 426 F.3d at 95. We review for clear error the district court's findings of fact relating to the benchmark agreements, including whether they were formed in a freely competitive market. See id. at 96 (benchmarks); ASCAP v. Showtime/The Movie Channel, Inc., 912 F.2d 563, 569 (2d Cir. 1990) (freely competitive market). Adjustments to the benchmark to best approximate the fair market value of the music may be based on factual findings, but also may contain legal conclusions that we review de novo. Music Choice, 426 F.3d at 96.
Under the AFJ2 and the BMI Decree, the district court, in both cases, had the authority to set a reasonable rate for DMX's licenses with ASCAP and BMI if ASCAP and BMI -35- did not satisfy their burden of proving that their proposals were reasonable. See AFJ2, § IX(B); BMI Decree, § XIV(A). For the reasons set forth below, we hold that it was not clearly erroneous for the ASCAP and BMI rate courts to find that the ASCAP-Muzak and BMI-Muzak Agreements (together, the Muzak Agreements) did not reflect rates that would be set in a competitive market. See Music Choice, 426 F.3d at 96. We also hold that, in both cases, the district court reasonably rejected ASCAP and BMI's proposals and adopted DMX's recommended benchmarks to set the licensing fees. See id. Finally, we hold that rate courts can take direct licenses into account in setting rates between commercial music service providers and PROs. We first discuss the district court's rejection of ASCAP and BMI's proposals; we then discuss the reasonableness of the rates set by the rate courts.
The district court reasonably rejected ASCAP and BMI's benchmarks in both cases. Although Muzak and DMX are both commercial music service providers and the Muzak -36- Agreements involved rights comparable to those at issue in this case (the right to public performance), Muzak and DMX's respective market positions and the economic circumstances surrounding their negotiations with ASCAP and BMI differ markedly. The rate courts did not err, much less clearly err, in holding that the Muzak Agreements did not involve similar parties in similar economic circumstances and did not reflect rates that would arise in a sufficiently competitive market. See id. at 95. In both cases, the district court, after making detailed findings of fact and carefully considering the issues, properly rejected ASCAP and BMI's overall proposals as unreasonable because they did not reflect rates that would be set in a competitive market. See id. First, ASCAP and BMI's proposed benchmarks did not account for DMX's substantial and growing direct licensing program -- an economic circumstance that distinguishes DMX's position from that of Muzak. Indeed, ASCAP's first proposal would have charged a flat fee for the first four years and seven months of the license and an annual per-location fee -37- for the remaining two years of the license period. ASCAP's second proposal of a blanket license with a static carveout used the same per-location annual fee as the first proposal, reduced by a credit equal to a fraction of the amount that DMX paid for directly-licensed music, plus an annual blanket administrative fee of $25,000. Finally, BMI proposed an annual per-location blanket fee of $41.81 based upon its five-year, $30 million license fee with Muzak. If DMX's licensing rates with ASCAP and BMI did not meaningfully account for its direct licenses, DMX would effectively pay twice for musical works covered by a PRO and its direct licensing program. These facts, however, were not factored into ASCAP's first proposal or BMI's only proposal, and their inclusion into ASCAP's second proposal was effectively negligible. Second, as the district court found in both cases, ASCAP and BMI failed to show that the rates in their respective agreements with Muzak excluded additional costs -- such as, for example, the resolution of audit and backpay disputes, and the incorporation of growth allowances -- -38- independent of the value of ASCAP and BMI's grants to perform their members' copyrighted music. Indeed, ASCAP and BMI's proposals were extrapolated from agreements with Muzak for nearly $35 and $30 million that spanned the course of five years. ASCAP and BMI's proposals then winnowed down these lump sums by Muzak's average number of locations to arrive at annual per-location rates of $41.21 and $36.36 -- rates that were respectively proposed to increase to $49 to account for time and inflation and to $41.81 to account for the option value of an AFBL over a traditional blanket license. Additionally, the Muzak Agreements contained growth terms that had the potential to reduce Muzak's projected costs over the period of the license term, and both agreements resolved claims that either party could have had against the other prior to the agreement date, unless, in BMI's case, rate court proceedings were initiated. Thus, based on the evidence presented at trial, the district court, in both instances, reasonably found that ASCAP and BMI's respective rates with Muzak accounted for more than per-location licensing fees. -39- Finally, the district court also found that ASCAP and BMI's benchmarks did not reflect a sufficiently competitive market and their proposals therefore did not reflect rates that would be set in a competitive market. See id. In both instances, the district court was entitled to find that the Muzak Agreements, upon which ASCAP and BMI's proposals were based, were less competitively set than they would have been if Muzak regularly used direct licensing or if music rights were more scattered among numerous performing rights societies. Showtime, 912 F.2d at 570. With respect to ASCAP's second proposal, based on the testimony of ASCAP's Chief Economist, it was not clearly erroneous for the district court to find that a static carve-out structure was anti-competitive and inequitable because it would effectively require DMX to pay more in total licensing fees and create incentives for DMX to abandon its direct licensing campaign. See ASCAP, 756 F. Supp. 2d at 544-45. With respect to BMI, based on the evidence presented at trial, it was not clearly erroneous for the district court to conclude that DMX's competitors -40- had no realistic opportunity freely to negotiate the future fees for their licenses. BMI, 726 F. Supp. 2d at 359. As the BMI rate court found, commercial music service providers who refused BMI's $36.36 rate and form license and proceeded to rate court faced the risk of retroactive payment claims from BMI because BMI had expressly reserved its right to seek such payments in any rate court proceeding. Id. Accordingly, the district court in both cases reasonably found that ASCAP and BMI did not sustain their burdens of proving that their proposals were reasonable. No legal error contributed to these findings, and the findings, supported by the record, were not clearly erroneous. See Showtime, 912 F.2d at 571. In both instances, the district court thus had the authority to set a reasonable rate for DMX's licenses.
The ASCAP and BMI rate courts essentially set rates comparable to DMX's direct license rates while providing an additional floor fee that guaranteed some compensation to ASCAP and BMI regardless of the extent to -41- which DMX used their repertory. The rates set by the ASCAP and BMI rate courts and the use of DMX's direct licenses as benchmarks were reasonable for the following reasons. First, the rates set by the district court reasonably compensated ASCAP and BMI for their services. As the ASCAP rate court found: [DMX's] proposal acknowledges that [PROs] provide[] important services to both its members and to music users. ASCAP, 756 F. Supp. 2d at 549. Indeed, the floor fee established by both the ASCAP and BMI rate courts compensated ASCAP and BMI for their licensing and overhead costs; the floor fee established by the ASCAP rate court was based on ASCAP's own records. Inclusion of the floor fee into the fee structure also ensured that ASCAP and BMI would be compensated for the value of their services regardless of the extent to which DMX played ASCAP or BMI works that were also directly licensed. That the rates set by the ASCAP and BMI rate courts were comparatively lower than those historically obtained by ASCAP and BMI is of no moment given ASCAP and BMI's longstanding market power and the industry's changing economic landscape. -42- Second, the annual $25 per-location royalty pool was not an unreasonable benchmark for DMX's per-location licensing fees with ASCAP and BMI. It reflected the competitive market, was an appropriate valuation of the right to publicly perform the licensed musical works, and was consistent with the four factors that guide the selection of a benchmark (a comparable right, similar parties, similar economic circumstances, and whether the rate would be set in a sufficiently competitive market). See Music Choice, 426 F.3d at 95. The right in question -- the right to public performance -- was comparable. The parties were also similarly situated. Hundreds of music publishers and administrators agreed to the annual $25 perlocation royalty pool, and thus, the ASCAP rate court did not err in finding that the collective decisions [of hundreds of publishers and administrators] to execute direct licenses [were] comparable to the decision [a PRO] makes in entering a license. ASCAP, 756 F. Supp. 2d at 550. While the economic circumstances of direct licensors differ from those of ASCAP and BMI, these differences were balanced by -43- the additional compensation that PROs received under the district court's rate formulas and the degree of competition that the direct licenses inject into th[e] marketplace. Id. Accordingly, in both cases, the district court did not err in finding that, for rights to publicly perform licensed musical works, direct licenses were more reflective of rates that would be set in a competitive market than blanket fees imposed by PROs on BG/FG music providers. Third, based on the evidence presented at trial, it was not clearly erroneous for the ASCAP and BMI rate courts to find that DMX's advance to Sony was a cost of entry into the market that DMX paid to sign at least one major music publisher into its new direct licensing program. See id. at 551-52; BMI, 726 F. Supp. 2d at 361. To support this finding, the ASCAP rate court explained that the Sony agreement with DMX was confidential and there was no evidence that any other direct licensor found the advance to be surprising, demanded a similar advance, or contended that -44- the annual $25 per-location royalty pool should be increased to account for the advance. ASCAP, 756 F. Supp. 2d at 552. Fourth, in light of the evolving commercial music market, the rate courts reasonably incorporated direct licenses to the extent they are relied upon by licensees like DMX. Direct licenses, and their incorporation into licensing fee structures, foster fair pricing and competition within the music licensing market, thereby advancing the very purpose of the AFJ2 and the BMI Decree. The rates set by the district court, as the ASCAP court found, allow[] the appropriate incentives for DMX to continue and to expand its direct licensing program. Id. at 549. We have already noted that if the ASCAP and BMI rate courts had not taken DMX's direct licenses into account, DMX would have had to pay twice to use the same musical works, and, more substantially, direct licensing within the commercial music industry would be discouraged. The AFJ2 and the BMI Decree were established as a result of the government's antitrust challenges to ASCAP and BMI's licensing practices. Their purpose was to, in part, -45- promote free competition in the music licensing industry and minimize the danger of unreasonable activity resulting from ASCAP and BMI's market power and potential restraints on trade. See K-91, 372 F.2d at 4; accord Showtime, 912 F.2d at 570. The rate court mechanism must be considered within this context. See Showtime, 912 F.2d at 570. The ability of users of music rights to avail themselves of a reasonable rate through the rate court mechanism when ASCAP and BMI's market power might otherwise subject them to unreasonably high fees would have little meaning if that court were obliged to set a 'reasonable' fee solely or even primarily on the basis of the fees [a PRO] had successfully obtained from other users. Id. The disinfectant [of the rate courts] need not be a placebo. Id. Accordingly, we hold that the district court did not err in setting DMX's licensing rates with ASCAP and BMI and that the rates set by the district court were reasonable. -46-