Sirius XM Brings Law Suit Against SoundExchange Alleging Collusion to Stop Direct Licensing of Music - Impact on Royalties?

by Davis Wright Tremaine LLP
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SiriusXM announced that is has filed a legal action, including antitrust claims, against SoundExchange and A2IM (the American Association of Independent Music - the association of independent record labels), charging, according to a press release, these two organizations "with unlawfully interfering in SiriusXM's efforts to secure, through a competitive market, copyrights critical to its business. The complaint contends that the conduct violates federal antitrust, as well as New York state law." The claim is essentially that these defendants conspired to prevent SiriusXM from negotiating direct licenses with musicians, licenses that could take music out of the royalty scheme administered by the Copyright Royalty Board, where royalties are paid to SoundExchange.  We wrote about the attempts by SiriusXM to negotiate such direct licenses, and the opposition of music groups to these agreements, last year. 

Why would SoundExchange and A2IM oppose direct music licensing?  One reason is that music licenses that are directly negotiated between music users and rights holders are traditionally the best evidence of the value of music.  In recent rate court cases involving performing rights organizations, direct licenses formed crucial evidence of the value of music rights.  In cases dealing with ASCAP and BMI royalties for "business establishment" or "background music" services, evidence of direct licenses at rates significantly lower than previously established resulted in court decisions dropping rates by as much as two-thirds from the rates that ASCAP and BMI had previously been charging.  Were SiriusXM to be successful in its suit, and if it is in fact able to negotiate direct music licenses for substantial catalogs of music at rates lower than what it has paid under previous rate decisions, it would presumably introduce such evidence in proceedings before the Copyright Royalty Board (which is now in the process of setting the rates for the public performance of sound recordings by SiriusXM over its satellite service for the next 5 years), and argue that these direct deals are the best evidence of what a willing buyer and willing seller would agree to in a competitive marketplace. While the rates set by the CRB for SiriusXM are not like Internet radio rates and established solely based on a willing buyer, willing seller test, the question of marketplace rates is still a very important component to any CRB decision setting those rates (see our article here on the rates that SiriusXM currently pays to SoundExchange and the standard used to set such rates). 

As we've written before, one of the biggest issues in all rate proceedings heard before the CRB has been establishing what a willing buyer and willing seller would agree to pay in a competitive marketplace like the one for which the rates are being set.  In most cases, as there are no direct licenses, the CRB has to extrapolate what willing buyers and willing sellers would pay for sound recording performance royalties in a noninteractive market from evidence of what companies pay in other markets.  In the past, the CRB has relied on evidence of what is paid in the interactive marketplace, and adjusted those payments downward using some economic expert witnesses to determine what the appropriate adjustment would be.  Most recently, in the last webcasting royalty case, the CRB looked at rates that had actually been negotiated with SoundExchange for noninteractive webcasting services, but these were rates that had been agreed to after prior decisions of the CRB, and included other benefits to the parties that had agreed to the royalties, including the reduction of royalty rates that had already been previously set.  Also, in these cases, the only rates that could be introduced as evidence before the CRB were rates agreed to by SoundExchange.  Where SoundExchange had agreed to other, lower rates (as they did, for instance, with Pureplay webcasters), these rates were excluded from evidence as SoundExchange had insisted, before these agreements at lower rates were signed, that these lower-rate deals would be nonprecedential - and this agreement as to the nonprecedential nature of the agreements was binding on the CRB because of provisions in the Webcaster Settlement Act that allowed such agreements to reduce royalty rates that had already been established by the CRB and to make these lower rates binding on all copyright holders. 

Were SiriusXM to be able to directly negotiate lower royalties with a significant number of artists or labels, such royalties might provide crucial evidence in CRB proceedings as to what the true marketplace value of such rates should be.  Lower direct licensing rate could impact not only the rates paid by SiriusXM, but also other proceedings dealing with the sound recording royalty rate, including potentially proceedings for webcasting royalties (proceedings that will also affect the rates that broadcasters pay for streaming their signals). The next royalty proceeding for webcasters begins in 2014, and will set the rate for webcasting from 2016-2020.  Obviously, that could make the outcome of this lawsuit by SiriusXM, and its ability to negotiate direct licenses, very important to the future of digital music. 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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