Direct Licenses Should Be Considered in Determining Reasonable Royalty for Performing Rights Organizations

The U.S. Court of Appeals for the Second Circuit held that rate courts can take into account  direct license rates when determining reasonable royalties due to performing rights organizations in Broadcast Music Inc. v. DMX, Inc., Case Nos. 10-3429; 11-127 (2d Cir., June 13, 2012) (Chin, J.). 

The American Society of Composers Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI) are performing rights organizations, which each represent songwriters, composers and publishers who hold copyrights in musical works.  They negotiate agreements that grant licensees the right to perform their members’ copyrighted songs.  DMX is a commercial music provider that provides music services locations such as restaurants and retail stores. 

The United States previously brought antitrust actions against both ASCAP and BMI that resulted in consent decrees providing certain protections for prospective music licensees.  Under these agreements, if a prospective licensee and ASCAP and BMI reach an impasse, either may petition the district court to set a “reasonable” licensing fee. 

Such an impasse was reached separately between DMX and both ASCAP and BMI.  A significant cause of this impasse was DMX’s recent practice of negotiating direct licenses with ASCAP and BMI members.  DMX proposed a blanket license that incorporated its direct licensing program into its proposed fee structure and relied on its negotiated rates with direct licenses to arrive at a reasonable royalty amount.  ASCAP’s first proposed a blanket license that did not take into DMX’s direct licensing program.  ASCAP’s alternative proposal and BMI’s proposal both accounted to some extent for DMX’s direct licensing program, but both gave more weight to other court-mandated reasonable royalties reached with DMX’s competitors, none of which engaged in direct licensing.  In both cases the district court adopted DMX’s proposals.  ASCAP and BMI appealed. 

On appeal, ASCAP and BMI argued that the district court erred by adopting DMX’s reliance on its direct licenses. 

First, ASCAP argued that a rates structure with an adjustable carve-out for direct licenses conflicted with its consent order.  The 2d Circuit disagreed, finding that although the consent order defined four specific types of licenses and did not specifically provide for an blanket license with a carve out, it also stated nothing “shall prevent ASCAP and any music user from agreeing on any other form of license.” This language permitted a blanket license subject to carve-outs to account for direct licensing. 

Second, both ASCAP and BMI argued that the district court erred by using DMX’s direct licensing agreement with music publishers as a benchmark and that their licenses with DMX’s competitors were more accurate benchmarks.  The appeals court rejected this contention, finding that ASCAP’s and BMI’s agreements with DMX’s competitors were not an accurate assessment of the competitive market as to DMX.  Noting “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,” the 2d Circuit affirmed the lower courts reliance on DMX’s direct licenses as a more reasonable benchmark of the competitive market.