Broadcast Music, Inc. v. DMX Inc. , 683 F.3d 32 ( 2012 )

10-3429-cv, 11-127-cv
BMI v. DMX, ASCAP v. THP Capstar
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term 2011
(Argued: June 16, 2011 Decided: June 13, 2012)
Docket Nos. 10-3429-cv, 11-127-cv
BROADCAST MUSIC, INC.,
Petitioner-Appellant,
v.
DMX INC.,
Respondent-Appellee.
UNITED STATES OF AMERICA,
Plaintiff,
AMERICAN SOCIETY OF COMPOSERS, AUTHORS AND PUBLISHERS,
Defendant-Appellant,
v.
THP CAPSTAR ACQUISITION CORP., NOW KNOWN AS DMX, INC.,
Applicant-Appellee.
Before:
PARKER, CHIN, and LOHIER, Circuit Judges.
Appeals from judgments of the United States
District Court for the Southern District of New York (Louis
L. Stanton and Denise Cote, JJ.) setting licensing fees,
pursuant to antitrust consent decrees, for the public
performance of copyrighted music.
AFFIRMED.
SETH P. WAXMAN (Jonathan E. Nuechterlein,
Catherine M.A. Carroll, Eric F.
Citron, on the brief), Wilmer Cutler
Pickering Hale and Dorr LLP,
Washington, District of Columbia;
Marvin L. Berenson, Joseph J.
DiMona, Broadcast Music, Inc., New
York, New York, for Broadcast Music,
Inc.
THEODORE B. OLSON (Amir C. Tayrani, Dace C.
Martinez, Jennifer L. Conn, on the
brief), Gibson, Dunn & Crutcher LLP,
Washington, District of Columbia;
Joan M. McGivern, Richard H. Reimer,
Samuel Mosenkis, ASCAP, New York,
New York; Christopher J. Glancy, I.
Fred Koenigsberg, Stefan M. Mentzer,
White & Case LLP, New York, New
York, for American Society of
Composers, Authors and Publishers.
R. BRUCE RICH (Benjamin E. Marks, Todd D.
Larson, on the brief), Weil, Gotshal
& Manges LLP, New York, New York;
Christopher S. Harrison, Christopher
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Harrison, PLLC, Austin, Texas, for
DMX, Inc.
Christine A. Varney, Assistant Attorney
General; Robert B. Nicholson, Robert
J. Wiggers, Daniel McCuaig, Matthew
J. Bester, Attorneys, U.S.
Department of Justice, Washington,
District of Columbia, for Amicus
Curiae United States in BMI v. DMX,
Inc.
Christopher J. Glancy, I. Fred
Koenigsberg, Stefan M. Mentzer,
Scott E. Hershman, White & Case LLP,
New York, New York; Joan M.
McGivern, Richard H. Reimer, ASCAP,
New York, New York; Catherine E.
Stetson, Hogan Lovells US LLP,
Washington, District of Columbia;
Ira M. Feinberg, Hogan Lovells US
LLP, New York, New York, for Amicus
Curiae American Society of
Composers, Authors and Publishers in
BMI v. DMX, Inc.
Bruce G. Joseph, Wiley Rein LLP,
Washington, District of Columbia,
for Amici Curiae Television Music
License Committee, LLC, et al. in
ASCAP v. DMX, Inc.
Robert B. Nicholson, Robert J. Wiggers,
Daniel McCuaig, Matthew J. Bester,
Attorneys, U.S. Department of
Justice, Washington, District of
Columbia, for Amicus Curiae United
States in ASCAP v. DMX, Inc.
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CHIN, Circuit Judge:
In 1941, the United States brought an antitrust
action against the American Society of Composers, Authors
and Publishers ("ASCAP"). The suit resulted in a consent
decree that provided certain protections for prospective
music licensees. Where, for example, ASCAP and a
prospective licensee have reached an impasse over fees,
under the consent decree, either may petition the United
States District Court for the Southern District of New York
to set a "reasonable" licensing fee. In 1966, the United
States entered into a similar antitrust consent decree with
Broadcast Music, Inc. ("BMI").
In these parallel cases, separate petitions were
filed in the Southern District of New York requesting the
court to set a "reasonable" rate after ASCAP and BMI were
unable to agree on licensing fees with DMX, Inc. ("DMX"), a
provider of background/foreground music ("BG/FG music"). In
both cases, the district court (Louis L. Stanton, J., in BMI
and Denise Cote, J., in ASCAP) adopted DMX's proposals. BMI
and ASCAP appeal. We affirm.
-4-
BACKGROUND
1. The Facts1
a. ASCAP and BMI
ASCAP and BMI are "performing-rights
organizations" ("PROs"). See generally BMI v. CBS, 441 U.S.
1, 4-5 (1979) ("CBS"). ASCAP was created in 1914 by music
creators and publishers as an unincorporated membership
association. BMI was founded by broadcasters in 1939. Each
represents hundreds of thousands of songwriters, composers,
and publishers who hold copyrights in millions of musical
works. They negotiate, implement, and enforce agreements
with licensees that grant the right to perform their
members' copyrighted songs. They collect license fees and
remit royalties to the copyright holders. Together, ASCAP
and BMI license the music performance rights to most
domestic copyrighted music in the United States. See id. at
5.2 ASCAP and BMI have traditionally offered "blanket
1
The facts are largely undisputed and drawn primarily
from the trial record and district court opinions.
2
SESAC, Inc. ("SESAC") is a third, substantially
smaller, PRO. See In re Application of MobiTV, Inc., 712 F.
-5-
licenses," or licenses that grant access to a PRO's entire
repertory in exchange for a flat annual fee unaffected by
the extent to which its music is performed.
In 1941 and 1964, the United States filed separate
antitrust complaints against ASCAP and BMI for unlawfully
monopolizing the licensing of performing rights. See United
States v. BMI, 275 F.3d 168, 171-72 (2d Cir. 2001) ("AEI").
The government alleged, inter alia, that ASCAP and BMI's
blanket licenses, the only type of license offered when the
suits were brought, constituted "an illegal restraint of
trade[,] and that arbitrary prices were being charged as the
result of an illegal copyright pool." CBS, 441 U.S. at 10.
The government sought to enjoin ASCAP and BMI's exclusive
licensing powers and require them to offer different forms
of licensing. Id. at 10-11. Settlement of these complaints
led to the entry of two separate, but largely similar,
consent decrees that continue to "substantially control[]"
ASCAP and BMI's licensing practices, id. at 11, and minimize
the "danger of unreasonable activity" caused by ASCAP and
Supp. 2d 206, 211-12 (S.D.N.Y. 2010).
-6-
BMI's market power, K-91, Inc. v. Gershwin Pub. Corp., 372
F.2d 1, 4 (9th Cir. 1967). See United States v. ASCAP,
1940-43 Trade Cas. (CCH) ¶ 56,104 (S.D.N.Y. 1941), amended,
No. Civ.A. 42-245, 1950 WL 42273, 1950-51 Trade Cas. (CCH) ¶
62,595 (S.D.N.Y. July 17, 1950) ("ASCAP Decree"); United
States v. BMI, 1966 Trade Cas. (CCH) ¶ 71,941 (S.D.N.Y.
1966), amended, No. 64-CV-3787, 1994 WL 901652, 1996-1 Trade
Cas. (CCH) ¶ 71,378 (S.D.N.Y. Nov. 18, 1994) ("BMI Decree").
In 2001, ASCAP and the government agreed to a new
consent decree, the Second Amended Final Judgment (the
"AFJ2"). See United States v. ASCAP, No. 41-1395, 2001 WL
1589999, 2001-02 Trade Cas. (CCH) ¶ 73,474 (S.D.N.Y. June
11, 2001). The AFJ2 defines four types of licenses:
blanket licenses, per-program licenses, per-segment
licenses, and through-to-the-audience licenses. See AFJ2,
§§ II(E), (J), (K), (S).3
3
Section II of the AFJ2 ("Definitions") defines the
following licenses:
(E) "Blanket License" means a non-exclusive license
that authorizes a music user to perform ASCAP music,
the fee for which does not vary depending on the extent
to which the music user in fact performs ASCAP music.
-7-
Both the AFJ2 and the BMI Decree include a "rate
court" mechanism under which the United States District
Court for the Southern District of New York has jurisdiction
to determine reasonable license fees when the parties to a
licensing transaction are unable to reach agreement. See
AFJ2, § IX(A); BMI Decree, § XIV(A); see also infra note 13.
b. DMX
DMX, formerly known as THP Capstar Acquisition
Corp., is a leading commercial music service provider. It
(J) "Per-program license" means a non-exclusive license
that authorizes a broadcaster to perform ASCAP music in
all of the broadcaster's programs, the fee for which
varies depending upon which programs contain ASCAP
music not otherwise licensed for public performance;
(K) "Per-segment license" means a non-exclusive license
that authorizes a music user to perform any or all
works in the ASCAP repertory in all segments of the
music user's activities in a single industry, the fee
for which varies depending upon which segments contain
ASCAP music not otherwise licensed for public
performance.
(S) "Through-to-the-Audience License" means a license
that authorizes the simultaneous or so-called 'delayed'
performances of ASCAP music that are contained in
content transmitted or delivered by a music user to
another music user with whom the licensee has an
economic relationship relating to that content[.]
AFJ2, §§ II(E), (J), (K), (S).
-8-
was formed on June 3, 2005. It supplies BG/FG music to
thousands of locations, including restaurants, shopping
centers, hotels, retail stores, and similar public venues.4
DMX does not offer particular songs; rather, DMX music
designers select songs based on the general genre and feel
of a particular program. DMX typically delivers or uses
approximately 150,000 of its available musical compositions
each year. These works are owned or controlled by more than
14,000 different publishers.
DMX provides music programming to its customers
through "off-premise" and "on-premise" delivery mechanisms.
Off-premise delivery involves the transmission of music to
customers via direct broadcast satellite signals to the
establishment's sound system. On-premise delivery involves
the on-site transmission of music to customers through a
4
Under the AFJ2, BG/FG music service is defined as: a
service "that transmits performances of music to subscribers and
that furnishes to those subscribers equipment not otherwise
available to the general public that enables subscribers to make
the transmitted performances on their premises. A [BG/FG] music
service does not include radio or television stations or
networks, cable television networks or systems, persons that
transmit renditions of music to private homes, apartments, or
hotel or motel guest rooms, or persons that transmit renditions
of music to subscribers that charge admission." AFJ2, § II(D).
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proprietary DMX device that is installed at the customer
location. Both off- and on-premise DMX customers have
access to a wide array of programming. DMX's off-premise
data reflects the frequency with which particular works are
performed. In contrast, DMX's on-premise data identifies
which works were distributed, but not their relative
frequency. DMX also offers "select" and "signature"
service. Select service offers all or some of DMX's various
channels sorted by musical category. Signature service
involves music programming designed for the specific
customer.
DMX's main BG/FG music industry competitors are
Muzak LLC ("Muzak"), Music Choice, Inc. ("Music Choice"),
PlayNetwork, Inc. ("PlayNetwork"), and Trusonic, Inc.
("Trusonic"). In recent years, music consultants who
utilize digital media devices and online music services to
create programming for businesses have also created
increased competition in the BG/FB music industry.
Increased industry competition and the national economic
downturn have also reduced DMX's revenue and the fees that
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it charges its customers. From 2005 to 2010, DMX's average
per-customer monthly revenue declined by 37 percent. From
2008 to 2010, the rates DMX charged its customers declined
by 25 percent.
In 2006, DMX began a direct licensing campaign,
contracting directly with individual music composers and
their publishers. DMX pursued direct licenses, in part, to
reduce the cost of business primarily associated with ASCAP
and BMI's blanket licenses. DMX hired Music Reports
Incorporated, a company specializing in high-volume music
license administration, to assist in the design and
implementation of its direct licensing campaign.
By late 2010, DMX had signed 850 direct licenses,
covering more than 7,000 separate music catalogs and
hundreds of thousands of songs. DMX's direct licenses
typically provide each publisher with a pro rata share of an
annual $25 per-location royalty pool. This $25 amount
represents all annual royalty payments attributable to each
physical location at which a DMX program is performed. Each
publisher's pro rata share is calculated from its percentage
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of plays on DMX's off-premise channels as a proxy for plays
across DMX's entire service. DMX's direct licenses also
include a "most-favored-nations clause" that ensures that
each publisher's royalties are calculated using the same pro
rata allocation methodology.
In 2007, DMX obtained a direct license from
Sony/ATV Music Publishing ("Sony") -- one of the industry's
largest music publishers -- that contained the same royalty
allocation as all of DMX's other direct licenses: a pro
rata share of the annual $25 per-location royalty pool. DMX
believed that signing a major music publisher like Sony, or
one of its competitors (Universal Music Publishing Group
("Universal"), EMI Music Publishing ("EMI"), or Warner-
Chappell Music Publishing ("Warner-Chappell")), was
necessary for a successful direct licensing program. DMX
thus made substantial efforts to attract Sony, offering a
royalty advance of $2.4 million and an administrative
payment of $300,000. According to DMX, the advance was "the
price to be paid if DMX was to break through the powerful
status quo and pioneer a new licensing paradigm." Brief of
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Applicant-Appellee (DMX) at 19, ASCAP v. DMX, No. 11-127-cv
(2d Cir. April 29, 2011). In 2009, DMX's license with Sony
was extended through 2012. Since 2007, DMX has continued to
increase the frequency with which it plays Sony music.
c. ASCAP's Agreements with
Other BG/FG Music Providers
In 2005, ASCAP entered into a blanket license
agreement with Muzak (the "ASCAP-Muzak Agreement"), the
largest BG/FG music service provider in the United States.
The ASCAP-Muzak Agreement provided that, from 2005 through
2009, Muzak would pay ASCAP a flat annual fee of
approximately $6.8 million or an effective annual per-
location fee of $41.21.5 The ASCAP-Muzak Agreement also
provided that Muzak's annual fee would not increase if its
subscriber base grew at an annual rate of 8 percent or less.
If the annual growth rate of Muzak's subscriber base was
greater than 8 percent, Muzak agreed to pay ASCAP an
additional annual per-location fee of $41 for each location
5
The ASCAP-Muzak Agreement's annual per-location fee of
$41.21 was calculated by dividing its flat annual fee by the
number of Muzak's commercial subscriber locations.
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in excess of the allotted 8 percent growth allowance. In
effect, the ASCAP-Muzak Agreement's growth provision
provided that if, over the course of its five-year license
term, Muzak increased its subscriber base at an annual rate
of precisely 8 percent, then Muzak's per-location annual fee
would drop to $28.05, averaging $32.52 for the five-year
term. Muzak also agreed to pay ASCAP a lump sum to settle
all claims arising prior to 2005, including claims for past
due royalties. On April 24, 2009, as a result of Muzak's
lack of growth and then-pending bankruptcy, ASCAP agreed to
reduce Muzak's annual fee.
ASCAP also entered into agreements similar to the
Muzak-ASCAP Agreement with Music Choice, PlayNetwork, and
Trusonic that covered varying time periods between 1999 and
2010. These agreements included annual per-location rates
between $41 and $45. Under these agreements, Music Choice,
PlayNetwork, and Trusonic also paid ASCAP substantial lump
sums to resolve past disputes.
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d. BMI's Agreements with
Other BG/FG Music Providers
From 1994 to 2004, Muzak paid BMI an annual per-
location fee of approximately $12 to $14. In 2004, BMI and
Muzak entered into a traditional blanket licensing agreement
(the "BMI-Muzak Agreement") whereby Muzak agreed to pay BMI
a base fee of $30 million over the five-year license period
beginning in 2004 and ending in 2009. This five-year fee
translated into an annual per-location fee of $36.36.6 The
BMI-Muzak Agreement took into account approximately $5
million that BMI alleged Muzak owed for retroactive license
fees. Like the ASCAP-Muzak Agreement, the BMI-Muzak
Agreement provided that Muzak's annual per-location fee
would be maintained unless the number of Muzak locations
grew at a rate greater than 8 percent per year. If Muzak
grew at an annual rate of precisely 8 percent, Muzak could
eventually obtain an annual per-location fee of $24.75.7
6
When BMI and Muzak entered into the BMI-Muzak
Agreement, Muzak had 165,000 commercial subscriber locations.
The annual per-location fee of $36.36 was thus calculated by
dividing $30 million by 5 years and then by 165,000 locations.
7
This figure was calculated by dividing $30 million by 5
and then by 242,439. The 242,439 figure was calculated by
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BMI offered the $36.36 rate and a license similar
to the BMI-Muzak Agreement to DMX's other competitors;
PlayNetwork and Trusonic accepted BMI's offer.
2. Proceedings Below
a. ASCAP v. DMX
On June 3, 2005, DMX requested an "adjustable-fee
blanket license" ("AFBL"), or a "blanket license with a
carve-out," from ASCAP. An AFBL is essentially a blanket
fee reduced to account for music directly licensed from
music publishers and owners that also appear within the
PRO's repertoire. BMI v. DMX, 726 F. Supp. 2d. 355, 355
(S.D.N.Y. 2010). ASCAP and DMX, however, could not agree on
a license fee. On July 25, 2006, pursuant to the AFJ2,
ASCAP applied to the district court (the "ASCAP rate court")
to set a reasonable rate for DMX's requested license. ASCAP
presented two fee proposals to the ASCAP rate court and
increasing Muzak's 165,000 commercial subscriber locations by 8
percent each year over the course of 5 years, representing the
number of projected commercial subscriber locations Muzak would
have if it continued to grow at 8 percent over 5 years.
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maintained that a blanket license with a carve-out for
direct licensing was not a reasonable fee structure.
First, ASCAP proposed a blanket license with no
carve-out for DMX's direct licensing program. This first
proposal offered a flat fee calculated by multiplying an
annual per-location rate by the number of locations and then
by the number of years of the license. ASCAP argued that
this proposal was proportionate to the fees Muzak agreed to
pay ASCAP.
Specifically, for the period beginning June 5,
2005 and ending December 31, 2009, ASCAP proposed a flat fee
of $15,677,777 for all performances of all works in the
ASCAP repertory. ASCAP calculated this figure by
multiplying the annual per-location rate used in the ASCAP-
Muzak Agreement ($41.21) by 83,000, the number of DMX
customer locations in 2005, and then by 4 and 7/12 years,
the length of the period from June 5, 2005 to December 31,
2009. In addition, for the period from 2010 through 2012,
ASCAP proposed an annual per-location rate of $49, to be
adjusted for inflation. To arrive at this rate, ASCAP
-17-
divided the annual flat fee of $3,420,606 by 69,000, the
number of DMX customer locations in 2009.
Second, in the alternative, ASCAP proposed a
"blanket license with a static credit," or "carve-out,"
based on the fees Muzak agreed to pay ASCAP and on a portion
of the payments DMX made to its direct licensors in 2009.
ASCAP's second proposal offered the same flat fee proposed
in the first option, reduced by a discount and then
increased by an administrative fee. Under this proposal,
ASCAP's suggested flat fee of $15,677,777 or $3,420,606 per
year would be reduced by a credit for payments that DMX made
to ASCAP members for performances of their works licensed
through direct licenses. The credit was calculated by
reducing the amount DMX paid for directly-licensed music
first by 10 percent to account for the portion of those
payments intended to compensate publishers for mechanical
rights, and second by an additional 50 percent to identify
those royalties that were paid to publishers for
compositions not within the ASCAP repertory. The credit,
however, would be offset by an additional administration
-18-
charge of $25,000 per year for expenses that ASCAP would
incur in implementing the carve-out license. Because DMX
did not begin its direct license program until 2006, the
administrative fees would be applicable only from 2007
through 2009. Accordingly, ASCAP's total proposed license
fee of $15,410,096 constituted the blanket rate of
$15,677,777, reduced by the carve-out-credit and the
administrative fee of $75,000 for the applicable three-year
period.
Further, for the 2010 through 2012 period, ASCAP
proposed the same blanket rate as its first proposal -- $49
per-location, adjusted for inflation -- in addition to the
$25,000 yearly administrative charge. For this period,
under ASCAP's second proposal, DMX would receive an annual
$230,000 credit, adjusted for inflation, to account for the
amount of royalties DMX paid its direct licensors in 2009;
fluctuations in DMX's direct licensing would not affect its
credit.
DMX contended that ASCAP's agreements with other
BG/FG providers did not reflect the competitive market and,
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for the years following 2009, counter-proposed a blanket
license with a carve-out incorporating the extent to which
it relied on direct licenses. DMX's proposal involved: (1)
a "floor fee" reflecting the minimum amount that DMX would
be obligated to pay ASCAP even if all of the ASCAP-
affiliated music that DMX performed was directly licensed;
(2) an "unbundled music fee," or the "pure" value of the
performance rights for ASCAP music performed by DMX; and (3)
the share of all DMX performances of ASCAP-affiliated music
licensed to DMX solely by ASCAP (the "share licensed via
ASCAP"). Combined, the floor fee and the unbundled music
fee equaled the blanket fee, or the maximum amount to which
ASCAP would be entitled under DMX's proposal.
DMX contemplated the following rate formula: the
sum of the floor fee plus the unbundled music fee multiplied
by the share licensed via ASCAP.8 By multiplying the
8
DMX's proposed rate formula can also be described as
the product of the difference between the blanket fee and the
floor fee multiplied by the difference between 1 and the share
licensed via ASCAP and then subtracted from the blanket fee. One
minus the share licensed via ASCAP is equivalent to dividing the
total number of ASCAP works transmitted by DMX for which DMX has
a direct license by the total number of ASCAP works transmitted
-20-
unbundled music fee and the share licensed via ASCAP, DMX
would pay ASCAP an amount that varied depending on the
extent to which DMX subscribers actually played ASCAP works
that were also directly licensed.
Specifically, DMX proposed a floor fee of $3 per
location and an unbundled music fee of $10.74 per location.
DMX, drawing from ASCAP's records, contended that the $3
floor fee represented the combination of $2.14 for expenses
specific to BG/FG music service and $0.86 for general
overhead expenses. DMX calculated the $10.74 unbundled
music fee first by reducing the annual $25 per-location
royalty pool from the direct license agreements by 10
percent to account for the direct license agreements' grant
of mechanical and public performance rights. DMX then
further reduced the resulting $22.50 per-location fee to
reflect ASCAP's 48 percent share of total performances on
the DMX network.
On December 1, 2010, following a five-day bench
trial, the ASCAP rate court (Cote, J.) issued an opinion and
by DMX.
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order adopting DMX's proposal to set the final rate. In re
Application of THP Capstar Acquisition Corp., 756 F. Supp.
2d 516 (S.D.N.Y. 2010) ("ASCAP"). The court rejected
ASCAP's first proposal because it found that the Muzak
Agreement was "not a reliable benchmark." Id. at 543.
Specifically, the ASCAP rate court found that: (1) the
2005-2009 license on which ASCAP relied was only one part of
a much larger transaction settling existing disputes and
resolving issues relating to an eleven-year period; (2) "it
is dangerous to rely on a per[-]location fee" extrapolated
from the starting point of a flat fee deal that allowed
expected growth in locations and contemplated a possible
decline in the effective rate from $41.21 to $28.05 over the
license term; (3) DMX refused to enter a license premised on
the same formula; and (4) economic conditions in the
industry had changed since ASCAP and Muzak entered into
their agreement. Id. at 539-43. With respect to ASCAP's
second proposal, the ASCAP rate court found that: (1) ASCAP
failed to show that a $41.21 rate for the pre-2010 period or
a $49 rate for 2010 was an "appropriate base from which to
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construct the blanket rate"; (2) ASCAP's proposed flat fee
for 2006-2009 did not account for DMX's substantial loss of
customer locations during that period; (3) the "dollar-for-
dollar" carve-out-credit ASCAP proposed did not reasonably
reflect DMX's direct license initiative, would discourage
DMX from continuing with its direct licensing program, and
represented a windfall to ASCAP members who did not directly
contract with DMX; and (4) ASCAP failed to provide
sufficient evidence to support its proposed $25,000 annual
surcharge for administering the credits. Id. at 542-43.
On December 20, 2010, the ASCAP rate court entered
judgment setting the specific terms of the rate. Adopting
DMX's proposal, the ASCAP rate court set a floor fee of $3,
a blanket fee of $13.74, and an unbundled music fee of
$10.74.9 The resulting annual per-location fee was set at
$13.74 (the blanket fee) minus the product of $10.74 (the
unbundled music fee) and a direct license ratio of 48
percent. The direct license ratio was set as the total
9
The floor fee was calculated by subtracting the
unbundled music fee from the blanket fee.
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number of ASCAP works transmitted by DMX's off-premise
service for which DMX has a direct license with at least one
publisher of the work (pro-rated to reflect the ownership
shares of the directly-licensed ASCAP-affiliated publisher),
divided by the total number of ASCAP works transmitted by
DMX's off-premise service (pro-rated to reflect the share of
the song's ownership affiliated with ASCAP).
b. BMI v. DMX
On June 3, 2005, DMX requested an AFBL from BMI.
The parties commenced negotiations but were unable to reach
agreement. On January 10, 2008, BMI petitioned the district
court (the "BMI rate court") to determine a reasonable fee.
BMI did not dispute DMX's entitlement to an AFBL. DMX and
BMI agreed that the AFBL fee should include: (1) a full
blanket rate, or the amount DMX would pay if it used no
directly-licensed BMI music; (2) a floor fee that DMX would
pay even if it directly licensed all the BMI music it used;
and (3) a crediting mechanism for calculating DMX's discount
off the full blanket fee for each directly-licensed music
-24-
performance. The parties, however, disagreed as to how to
value these components.
BMI proposed a rate with a blanket fee calculation
based on the blanket license agreement it first entered into
with Muzak (the "BMI-Muzak Agreement") -- and later made
with other BG/FG providers -- for the 2004-2009 period. BMI
proposed a total blanket fee of $41.81 per location. To
arrive at this fee, BMI increased its proposed annual per-
location fee of $36.36 by 15 percent to account for the
additional costs of an AFBL and the "option value" the AFBL
provides over the traditional blanket license.
DMX proposed a blanket license rate with BMI that
incorporated its direct licensing program into its proposed
fee structure; this proposal was nearly identical to the one
DMX proposed in ASCAP. Specifically, DMX proposed a blanket
fee of $11.32 per location, representing an unbundled music
fee for the rights to perform the works in BMI's repertoire
and a floor fee to compensate BMI for the value of its
services and the benefits of a blanket license. DMX,
referencing approximately 550 direct licenses with music
-25-
publishers as benchmarks, proposed a share of an annual $25
per-location royalty pool equivalent to $10 -- 40 percent of
$25 -- to represent the portion of DMX's music performances
drawn exclusively from BMI's repertoire.
On July 26, 2010, following a ten-day bench trial,
the BMI rate court (Stanton, J.) rejected the BMI-Muzak
Agreement as a benchmark for the value of DMX's AFBL. BMI,
726 F. Supp. 2d at 359. The court adopted DMX's proposal
and entered judgment setting a final annual per-location
blanket fee of $18.91, an annual per-location floor fee of
$8.66,10 and a direct licensing ratio to be calculated using
DMX's off-premise performances as a proxy for all of its
performances. Id. at 364.
These appeals followed.
DISCUSSION
On appeal, ASCAP and BMI principally argue that
the district court in both cases set an unreasonable fee for
10
The floor fee included three components: (1) $6.18 in
overhead costs, equal to 17 percent of BMI's per-location income
of $36.36; (2) $2.38 in routine costs per location; and (3) $0.10
in initial development costs. Id. at 364.
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their respective licenses with DMX by incorporating the
extent to which DMX relied on direct licenses. First, ASCAP
argues that direct licenses should not be factored into its
licensing rate structure with DMX because a rate structure
with an adjustable carve-out for direct licenses conflicts
with the AFJ2 and is unreasonable.11 Second, ASCAP, in the
alternative, and BMI both argue that direct licenses should
only be marginally incorporated into their licensing fee
structures with DMX. They argue that the district court in
both cases erred by using DMX's direct licensing agreements
with music publishers as benchmarks for their respective
licensing fees and that their licenses with DMX's
competitors should have been adopted as benchmarks because
they were more accurate valuations of their services and
more indicative of the "competitive market."
We first discuss ASCAP's contention that a rate
structure with an adjustable carve-out conflicts with the
AFJ2; we then discuss the district court's rejection of
11
BMI did not dispute -- in the rate court proceeding or
on appeal -- that DMX was entitled to a blanket license with a
carve-out. Id. at 355-56.
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ASCAP and BMI's proposals and the reasonableness of the
rates set by the district court.
I. The AFJ2
ASCAP contends that a rate structure with an
adjustable carve-out conflicts with the AFJ2. ASCAP argues,
inter alia, that by defining certain licenses and not
defining a blanket license with an adjustable carve-out, the
AFJ2 excludes the latter. The ASCAP rate court rejected
this argument.
Consent decrees are construed "basically as
contracts." AEI, 275 F.3d at 175 (internal citations and
quotation marks omitted). When the language of a consent
decree is unambiguous, deference is paid to the plain
meaning of the decree's language. Id. The decree's scope
must be discerned within its four corners, and not with
respect to what might satisfy one of the parties' purposes.
Id. When the language of a decree is ambiguous, however, a
court may consider, inter alia, extrinsic evidence to
determine the parties' intent, including the purpose of the
provision and the overall context of the decree. Id. We
-28-
review the district court's interpretation of a consent
decree de novo and its factual findings for clear error.
Id.The AFJ2 defines four types of licenses: blanket,
per-program, per-segment, and through-to-the-audience
licenses. See supra note 3 and accompanying text. In
addition, section V of the AFJ2 discusses "Through-to-the-
Audience Licenses," section VI discusses "Licensing," and
section VII discusses "Per-Program and Per-Segment
Licenses." See AFJ2 §§ V, VI, VII. Section VII(C)
provides: "Nothing in th[e AFJ2] shall prevent ASCAP and
any music user from agreeing on any other form of license."
AFJ2, § VII(C). Thus, although the AFJ2 defines types of
licenses that ASCAP could provide to DMX, on its face, the
AFJ2 plainly permits other forms of licenses and does not
preclude blanket licenses with adjustable carve-outs.
Although we did not expressly address this issue
in AEI, BMI raised a similar argument in that case. AEI,
275 F.3d at 176. There, we explained that a request for a
blanket license subject to a carve-out constitutes "a
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request not for a new type of license, but for a blanket
license with a different fee basis, over which the district
court has rate-setting authority and which [the PRO] must
offer." Id. at 171, 175-77; see also United States v.
ASCAP, 309 F. Supp. 2d 566, 581 (S.D.N.Y. 2004) ("Muzak")
(concluding that "the present AFJ2 may be construed to
permit the issuance of a blanket license with a fee
structure that reflects direct licensing arrangements
previously entered into by applicants" and "the existence of
such direct licensing relationships may and will be
considered by this Court in a rate court proceeding"). We
rejected the contention, then advanced by BMI, that the BMI
Decree "applie[d] only to those licenses specifically
mentioned in the BMI Decree, and to the traditional blanket
license with its traditional per premise fee structure."
AEI, 275 F.3d at 176. Our reasoning in AEI applies with
equal force here.
Accordingly, the district court correctly rejected
ASCAP's contention that the AFJ2 does not permit a rate
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structure that features an adjustable carve-out. As the
ASCAP rate court correctly determined:
[The AFJ2] is an antitrust consent decree
providing a mechanism for the setting of
reasonable license fees in a unique
market in which ASCAP indisputably
exercises market power. While ASCAP may
be unwilling to offer a blanket license
with a carve-out for a direct licensing
program, the terms of AFJ2, the decisions
interpreting and applying AFJ2, and the
record evidence from this trial each
indicate that such a license is
appropriate and justified here.
ASCAP, 756 F. Supp. 2d at 541. We thus hold that the AFJ2
permits blanket licenses subject to carve-outs to account
for direct licensing, and we reject ASCAP's claim that a
blanket license with an adjustable carve-out conflicts with
the AJF2.
II. The Rates
A. Applicable Law
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
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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).
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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.
B. Application
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.
i. ASCAP and BMI's Proposed Benchmarks
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 carve-
out" 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 back-
pay 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.
ii. The Rates Set By the District Court
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 per-
location 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.
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CONCLUSION
For the reasons set forth above, we AFFIRM the
judgments of the district court.
-47-