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Broadcast Music, Inc. v. DMX

July 26, 2010

BROADCAST MUSIC, INC., PETITIONER,
v.
DMX, INC., RESPONDENT.



Opinion and Order

Broadcast Music, Inc. ("BMI"), pursuant to article XIV of the BMI Consent Decree,*fn1 petitions for a determination of reasonable fees and terms for an adjustable-fee blanket license ("AFBL") to DMX, Inc., a member of the commercial music services ("CMS") industry, for the time period July 1, 2005 through December 31, 2012. (Tr. at 54). The AFBL will differ from BMI's traditional blanket license in allowing the licensee to reduce its fee to BMI by licensing, directly from individual music authors or their publisher-representatives, rights to perform music which is also in the BMI repertoire.

The parties agree that the fee owed to BMI under the AFBL should be expressed as an annual per-location rate. They also agree that the AFBL should include the following components:

(1) a "Blanket Fee," which is the fee that DMX would pay BMI if DMX did not directly license any of the BMI music it performed;

(2) a "Floor Fee," which is the fee DMX would pay BMI even if DMX directly licensed all of the BMI music it performed; and (3) a "Direct License Ratio," which would reduce the Blanket Fee based on the percentage of DMX's total performances of BMI music that is directly licensed. Thus, the Blanket Fee represents the maximum, and the Floor Fee the minimum, of the range of potential fees to BMI. Within that range the actual annual per-location fee paid by DMX to BMI is determined by subtracting the Floor Fee from the Blanket Fee (in order to remove the Floor Fee from the reduction calculation), applying the Direct License Ratio to the remaining Blanket Fee, and subtracting the resulting amount from the original Blanket Fee.*fn2

The parties disagree on what the reasonable values of the Blanket and Floor Fees are, and the scope of DMX performances to be included in the Direct License Ratio. There is also a question whether DMX's performances of BMI music in bowling centers should fall under the AFBL or a separate, higher fee regime.

Background

BMI is a non-profit music licensing organization that, on behalf of approximately 400,000 affiliated songwriters, composers, and music publishers, licenses non-exclusive rights to perform publicly approximately 6.5 million musical works to a variety of music users, including CMS providers. CMS providers such as DMX provide pre-programmed music to a variety of business establishments, including restaurants, bars, hotels, offices, and retail stores. DMX is one of the largest members of the CMS industry, with approximately 70,000 customer locations.*fn3 DMX offers a wide variety of music across many genres to its customers.

BMI's business of licensing the public performance rights in its music is governed by the BMI Consent Decree. The Decree requires BMI to make licenses available for public performances of its music and to provide applicants with proposed license fees upon request, and prohibits BMI from "discriminating in rates or terms between licensees similarly situated" unless "business factors . . . justify different rates or terms," or preventing its affiliated writers and publishers from directly licensing their works to users such as DMX. BMI Consent Decree Arts. VIII(B), XIV(A), VIII(A), IV(A). In 2001, the Court of Appeals for the Second Circuit held that the Decree requires BMI to offer a license performing the function of the AFBL. See United States v. Broadcast Music, Inc. (In re AEI Music Network, Inc.), 275 F.3d 168, 176-77 (2d Cir. 2001).

DMX requested that BMI provide it with a fee quote for an AFBL, which BMI did in October 2007. The parties were unable to reach agreement, and BMI petitioned this Court on January 10, 2008. My December 19, 2008 Memorandum and Order set interim fees at $25 per location annually, applied the reduction ("carve-out") formula, and adopted DMX's proposed Floor Fee of 11.7% and method of implementing the direct licensing process. A two-week non-jury trial concluded on February 1, 2010.

Rate Court Approach

The general method the rate court should follow in setting a reasonable fee is well-established. As the Second Circuit described in United States v. Broadcast Music, Inc. (In re Music Choice), 316 F.3d 189, 194 (2d Cir. 2003):

In making a determination of reasonableness (or of a reasonable fee), the court attempts to make a determination of the fair market value- "the price that a willing buyer and a willing seller would agree to in an arm's length transaction." [ASCAP v. Showtime/The Movie Channel, 912 F.2d 563, 569 (2d Cir. 1990)]. This determination is often facilitated by the use of a benchmark-that is, reasoning by analogy to an agreement reached after arms' length negotiation between similarly situated parties. Indeed, the benchmark methodology is suggested by the BMI consent decree itself, of which article VIII(A) enjoins disparate treatment of similarly situated licensees.

The best available benchmark may need to be adjusted to produce a reasonable fee for the case at hand. In a later opinion in the same Music Choice case, 426 F.3d 91, 95 (2d Cir. 2005) the Second Circuit explained:

In choosing a benchmark and determining how it should be adjusted, a rate court must determine "the degree of comparability of the negotiating parties to the parties contending in the rate proceeding, the comparability of the rights in question, and the similarity of the economic circumstances affecting the earlier negotiators and the current litigants," United States v.

ASCAP (Application of Buffalo Broad. Co., Inc.), No. 13-95(WCC), 1993 WL 60687 at [*]18, 1993 U.S. Dist. LEXIS 2566, at *61 (S.D.N.Y. Mar. 1, 1993), as well as the "degree to which the assertedly analogous market under examination reflects an adequate degree of competition to justify reliance on agreements that it has spawned." Showtime, 912 F.2d at 577.

BMI bears "the burden of proof to establish the reasonableness of the fee requested by it." BMI Consent Decree Art. XIV(A). Should it not do so, "then the Court shall determine a reasonable fee based upon all the evidence." Id.

We will consider each structural component of the AFBL in turn.

1.

The parties offer competing benchmarks for the Blanket Fee, producing strikingly different views of its reasonable value. BMI argues that the appropriate benchmark is the 2004--2009 blanket license it first made with Muzak, a competitor of DMX, and later with nearly all the others in the CMS industry except for DMX. BMI argues that benchmark is equivalent to a $36.36 annual per-location rate, which reasonably should be increased by 15% to cover the "option value" the AFBL provides over the traditional blanket license, and additional costs to BMI, yielding a proposed Blanket Fee of $41.81 per location.

DMX's proposal of a Blanket Fee of $11.32 per location separates the Fee into two components: a fee for the rights to perform the works in BMI's repertoire, and a fee to compensate BMI for the value it provides by assembling its repertoire and the benefits its blanket coverage gives to DMX. (Tr. at 1326). DMX argues that it has entered into approximately 550 direct licenses with music publishers which are appropriate benchmarks for the value of the music rights, and that they reflect a $25 annual per-location rate, of which $10 represents the portion of performances of music in BMI's repertoire. The additional value of the AFBL must then be added, which DMX contends is accounted for in the Floor Fee. Applying DMX's proposal that the Floor Fee be 11.7% of the Blanket Fee yields the $11.32 Blanket Fee.

Because BMI bears the burden of proof, we will consider its proposal first.

(a)

The 2004--2009 BMI/Muzak license was a traditional blanket license, not an AFBL. It did not express the fees owed to BMI in per-location terms. Rather, Muzak agreed to pay BMI a base fee of $30 million over the five-year license period ($6 million annually). (JX-0132 ¶ 4). Muzak had 165,000 locations on December 31, 2003. BMI derives the $36.36 annual per-location rate by dividing the $6 million annual fee by the 165,000 Muzak locations.

The license provided for increases to the $6 million annual fee if Muzak attained certain types of growth. If Muzak grew organically (i.e., without acquiring or merging with an existing CMS provider) at a rate up to eight percent per year, it owed no additional fees to BMI. If it grew organically over eight percent per year it would pay BMI increased amounts, but the resulting per-location rate would decrease regardless of the amount by which Muzak's organic growth exceeded eight percent. It could potentially reach as low as $24.75.*fn4 The annual fee also increased if Muzak grew through acquisition or merger. If the acquired locations had an existing license with BMI, Muzak would pay those locations' current rates. If they did not, the acquisition was essentially considered organic growth. (Tr. at 67--68).

As part of the negotiation for their 2004--2009 agreement, BMI and Muzak also negotiated fees for the years 1994-2004, during which no blanket fee agreement had been in effect, and Muzak had simply continued to pay, and BMI had accepted without prejudice, fees set by out-dated agreements covering the years 1987--1993. Since 1994 Muzak had been paying those interim fees at a blended rate which equated to approximately $12--$14 per location. BMI made a series of proposals to Muzak seeking from $4.5 to $5.5 million dollars to be paid in addition to fees for 2004--2009 but spread out over that period, to recoup the past shortfall between what Muzak had paid and what BMI saw as a reasonable market rate. (JX-1164). Ultimately BMI's and Muzak's agreement in principle for the 2004--2009 license foreclosed the claimed recoupment (it deemed the terms prior to July 1, 2004 "final and . . . not subject to adjustment"), and set the BMI/Muzak 2004--2009 payments at $6 million a year ($30 million over the five years) with the above provisions for adjustments as the number of locations fluctuated. (JX-1234 at 2--6).

It is objectively obvious that BMI and Muzak took account, even if only tacitly, of the "retroactive" claim when agreeing on the future fee. A contingent liability of about five million dollars would be removed from Muzak's back, as part of its agreement to pay $30 million over five years. The jump from $12--$14 per location to $36.36 is dramatic. What was fairly priced at $12--$14 one day could hardly be fairly priced at $36.36 the next. Muzak must have recognized the force of the retroactive claim. In fact, the $36.36 per-location figure in the BMI/Muzak 2004--2009 license is no more than an arithmetical allocation ...


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