Pandora Appeals BMI Rate Court Ruling

Pandora at SXSW 2015.
Robin Marchant/Getty Images for PANDORA Media

General view of Pandora at SXSW 2015.

Pandora has filed an appeal to the rate court determination handed down by Judge Stanton earlier this year, in which he ruled that Pandora should pay the performance rights organization (PRO) 2.5 percent of its revenue. At the very same court, the U.S. Second Circuit Court of Appeals, earlier this year upheld ASCAP's rate of 1.85 percent.

Pandora's appeals petition begins by saying Judge Stanton's opinion, and the way he conducted the BMI/Pandora rate court trial generally, is a "case study in how a district court should not handle a rate court case, particularly one with dramatic implications for all digital music services in the U.S." Pandora's challenge seeks to discredit the benchmarks that Stanton relied upon for his decision -- the Sony/ATV agreement with Pandora and the Universal Music Publishing Group direct license that yielded a headline rate of 8.5 percent of revenue. The company also accuses Judge Stanton of being mistaken in disregarding the ASCAP rate court ruling, which upheld for that PRO the rate that BMI paid previously, as well as the BMI form license and that precedent has been set for interactive/on-demand services such as Spotify pay a higher rate than radio-like services such as Pandora.

"We think Judge Stanton got it right in his decision, and we look forward to presenting our arguments once again in our reply brief," a BMI spokesperson said in a statement. "We are confident the Court of Appeals will affirm the decision."

The Pandora appeal also revives allegations that the direct licenses and partial withdrawals by Sony/ATV and UMPG were part of an elaborate and coordinated scheme to raise prices for Pandora.

Furthermore, Pandora says the BMI rate court disregarded "evidence that Pandora, not BMI or the publishers, has made and continues to make significant investments to grow the revenue base subject to its BMI license," according to the court document. "Under the consent decree, it was BMI's burden to justify a proposal to increase its rates by 43 percent overnight with something more than that it wanted to appease two of its largest affiliates."

The document also stated that the BMI rate court "ignored evidence that BMI's public performance rights are no more inherently valuable today than they were ten or even twenty years ago."

Finally, the Pandora appeal said that the BMI rate court's "failure to at least consider the Pandora/ASCAP license and this Court's decision in [upholding] the ASCAP case [rate determination, as a plainly relevant benchmark... is indefensible." The appeal says that the BMI rate court's "failure to conduct the competitive market analysis required by this Court is reason enough to reverse. "The district court's decision should be vacated, and the case should be remanded for further proceedings."

In presenting its appeal, Pandora and its lawyers -- Ken Steinthal, Joseph Wetzel, Ethan Davis and Jeff Bucholtz of King & Spalding -- made much of the alleged plot "hatched" by Sony and UMPG, supposedly endorsed by ASCAP and BMI, to "selectively withdraw from the PROs" so that they could extract higher rates in direct agreements, without sacrificing the benefits of the blanket license. BMI and ASCAP then use those higher rates as benchmarks in rate court to drive higher rates for themselves, according to Pandora's filing.

Judges in both the ASCAP and BMI rate courts ruled against partial withdrawals, determining music publishers are required to be all-in or all-out of the blanket license, Pandora insists that Judge Stanton's BMI ruling resulted in the two publishers having "unwittingly withdrawn entirely from BMI," pointing to those withdrawals as the point where the court's mistakes began.

That ruling threw the music licensing world into chaos, and the marketplace turmoil it created gave Sony and UMPG "overwhelming leverage in the few days left before the new year," the document states. "Both publishers represented to Pandora that as of Jan. 1 2014, they would be fully withdrawn while simultaneously obtaining secret assurances that their withdrawals could be retroactively suspended. It allowed the publishers to demand higher rates from Pandora and then, when mission accomplished, return to the BMI blanket license."

The Pandora appeal further stated that while "holding Pandora's feet to the fire" to reach a direct deal in the 13 days before the year ended, UMPG was offering other licensees stand-still agreements meant that other music users -- companies licensing those catalogs -- would have no worries when playing that publisher's songs during in the first three months of that year -- that only Pandora would be liable for infringement, if it didn't sign a direct deal by year's end.

"If all went according to plan, the publishers would extract higher rates in direct agreements with Pandora that BMI would then use for its own benefit as new benchmarks in rate court," the document states. "If not, the publishers could simply return to BMI as if they never had left."

By working together and using the standstill and suspension agreements, "BMI, Universal, and Sony effectively achieved the exact result that both rate courts (and later this Court) held was prohibited by the consent decrees: a selective withdrawal that narrowly targeted Pandora," while the BMI looked the other way.