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IP/Entertainment Case Law Updates

United States v. American Society of Composers, Authors and Publishers, et al.

This 150-page decision is the culmination of a 13-day hearing conducted by the district court, in its capacity as the “rate court” pursuant to judicial decree, to determine reasonable fees for blanket licenses for the public performance of ASCAP-repertory music by AOL, RealNetworks and Yahoo! (the “Applicants”), three internet service providers who applied to ASCAP for such licenses but were unable to reach agreement on such fees. The court was required to analyze whether 1) the “structure” of ASCAP’s fee proposal is reasonable; and 2) the amount payable by each of the applicants is reasonable.

The court ruled that ASCAP’s proposal for a specified license fee that is a percentage of the Applicant's gross revenue derived from the licensed services is structurally reasonable. The court also found that ASCAP’s proposal that in the case of AOL and Yahoo! the Applicant's gross revenue is adjusted by a factor designed to reflect the extent and value of the Applicant's music use was also a reasonable approach. The court supported its finding by, among other things, citing authorities showing that the “percentage-of-total-revenue” formula has been used by ASCAP and approved by the courts for decades. The court enumerated several reasons supporting its decision, among them being that the percentage of revenue formula “yields a fee that adapts to changes in the economic conditions confronting the licensees” and that the numbers would be based on financial data that would be relatively simple for ASCAP to verify.

The court also found that ASCAP’s proposal was reasonable because it included a “music-use-adjustment factor” that properly takes into account the possibility that the amounts of music used by Applicants may vary, and thus the value of the blanket license should also vary. The court stated that the adjustment results in a license fee that is responsive to changes in the Applicant's use of music, and not just the company's gross revenues; and that by applying a ratio of music hours to total site hours, ASCAP's formula for AOL and Yahoo! takes into account the relative importance of music to the overall entertainment enterprise and the evolving nature of Applicants' businesses.

Next, in determining the proper rate to apply to gross revenues, the court found that “the amounts that music users such as Music Choice, terrestrial radio stations, and the major television networks ABC, CBS, and NBC pay for an ASCAP blanket license, as well as the amounts that Applicants themselves willingly pay to the major record companies for rights in music videos alone, are the best indicators of ‘the price that a willing buyer and a willing seller would agree to in an arms-length transaction’ for a blanket license to perform ASCAP music.” Though finding that no existing licensing arrangements were directly comparable, the court reviewed the actual rates paid by these entities and determined that a rate of 2.5%, as opposed to the 3% proposed by ASCAP, was a reasonable royalty rate.

Ultimately, the court concluded that, for each of the three Applicants, the fee for a blanket license for unlimited performance of all music in the ASCAP repertory for the subject time periods shall be determined by multiplying the total revenue of the licensed business unit, less customary deductions for advertising, sales commissions and traffic acquisition costs, by a music-use-adjustment fraction whose numerator is the total number of hours music is streamed to users by the licensee (as currently measured by the Applicant) and whose denominator is the total number of hours of use of the licensee's website (as measured by comScore or other means approved by the court) and applying to the resulting music-use-adjusted revenue a fee rate of 2.5%.

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