Pandora Ruling Has Far-Reaching Implications For U.S. Publishing Industry

On Sunday, the smoke began to clear after a round of clarifications by Judge Louis Stanton's on his Dec. 18 ruling against Pandora in the BMI rate court.

The immediate upshot is that Pandora--which is still petitioning the Judge to reconsider his ruling, according to sources--is in a difficult situation. By Jan. 1, the digital music service may need to make quick deals with publishers pulling out of BMI or pull down their songs from their service or face copyright violations, executives in both the publishing and digital music services tell Billboard. Or it could come to voluntary agreements with the withdrawing publishers, and thus not necessitate their complete withdrawal from BMI, says one music industry lawyer.

But the Federal Judge's ruling has far-reaching implications beyond whether Pandora will be fully licensed or not by Jan. 1. The bigger question is what happens to the music publishing industry in general and BMI in particular if the three publishers with nearly 48% in market share --Universal Music Publishing Group, Sony/ATV and its EMI Music Publishing administered catalog-- completely withdraw from BMI, as sources say they are now making preparations to do as a result of the ruling. At first blush, it looks like it will halve BMI's clout in future license negotiations.

But what about other licenses that expire at the end of the year and/or are up for renewal? What will happen to those licensees if those three publishers go through with withdrawal from BMI? Will thousands of licensees suddenly be in copyright violation?

While the music publishing industry faces these difficult questions, the heart of the Judge Stanton’s ruling on Dec. 18 and the Sept. 17 decision by Judge Denise Cote in the Pandora/ASCAP rate court is very simple. In their separate rulings, both Judges, which preside in the Southern District of New York Federal Court, say that the consent decrees each PRO signed with the U.S. Department of Justice disallows the partial withdrawal of rights. That publishers must have their entire catalog of songs available for all licensees--either be all in or all out.

But where the judges differ is  timing:  Judge Cote said that since the withdrawing publishers couldn't withdraw their digital rights, their songs are a part of Pandora's blanket license with ASCAP until it expires on Dec. 31, 2015.

Judge Stanton had the same "all or nothing" slant on the consent decree, but he instead ruled that any publisher that said it was withdrawing its digital rights now has to withdraw all of its songs for all types of music uses, not just digital, as of Dec. 31, 2013 – a week from Tuesady. But he added that their songs still reside in existing blanket licenses until they expire.

Judge Stanton's all encompassing withdrawl decision proved to be a shocker for some publishers--Universal Music Publishing Group, BMG Chrysalis, Kobalt, Wixen Music Publishing and George Johnson Music--which only wanted to withdraw digital rights now suddenly face being completely out of BMI come Jan. 1, unless they can cut a deal to stay with the PRO. According to sources, UMPG has decided to go ahead and completely withdraw from BMI while Wixen Music has decided to remain in BMI. The other publishers either didn't comment or couldn't be reached at press time.

Meanwhile, Judge Stanton's ruling also impacts Sony/ATV and its administered EMI Music Publishing catalog. Both catalogs were withdrawn from ASCAP and BMI as of Jan. 1, 2013; and both had cut a one-year deal set to expire, sources say, on Dec. 31, 2013. In other words the BMI ruling puts Sony/ATV and EMI in exactly the same boat as the other withdrawing publishers, with having to make a decision to withdraw completely or stay with BMI. Sources say Sony/ATV is leaning toward the former. As for ASCAP, that ruling seems to imply that Sony/ATV’s digital license with Pandora are now a part of the blanket license, unless the two voluntarily agree to extend their deal.

But the biggest worry--in terms of sheer number if not in total dollar volume: What happens to BMI's general licenses, many of which expire monthly on the last day and automatically renew on the first day of the new month? If any publishers withdraw on Dec. 31, will general licensees such as individual bars, restaurants and clubs suddenly be in copyright violation if they play songs from withdrawing publishers? How would a bar owner know which publisher represents which songs?

One knowledgeable publishing executives says that it remains an open question on how the Judges ruling impacts those types of general licenses, but  since the Judge hasn't particularly addressed those type of licenses maybe publishers and BMI can agree to a cooling off period before making hasty decisions on how to handle the perpetuating licenses.

"This [Judge Stanton} ruling is disastrous," says one lawyer intimately involved in music publishing licensing. "It has thrown the whole landscape into turmoil. It has created the potential for massive damages for services that play songs in violation of copyright law."

But initially, the Judge's decision only impacts a small portion of the eco-system on a dollar basis since it only applies to licenses that expire. Consequently, publishers and BMI could agree to put a stay on the situation while they accelerate talks with the Justice Department in the hopes of modifying the consent decree to allow for partial withdrawals.

If the publishers and BMI don't agree to a stay-put agreement and the publishers continue with plans to withdraw all songs come Jan. 1, then BMI would be faced with making a decision as to whether it wants to continue serving as administrator for the withdrawing publishers. That in effect would be agreeing to change the PROs business model. But so too would publisher withdrawals that don't allow for BMI to handle administration.

In the meantime, Pandora continues to request clarifications and rulings on different aspects of his Dec. 18 decision, and each clarification seems to put different components of the music publishing and digital services sector at risk.

"I don't see how Congress can ignore this situation," says the lawyer involved in music licensing, if the above temporary solutions fail and the publishers continue to unwind from BMI. "Will Congress standby and allow all of these licensees to potentially become infringers or will Congress come in and fix this?"