BMI v Pandora SDNY May 28 2015

8/9/2019 BMI v Pandora SDNY May 28 2015

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4.-- - - -

~ l f G f ~ ' L

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF

NEW

YORK

- - - - - - - - - - - - - - - -X

BROADCAST

MUSIC, INC.,

P e t i t i o n e r ,

-

ag a i n s t

-

P NDOR MEDIA, INC.,

Respondent ,

- - - - - - - - - - - - - -X

VSD

SO\Y

DO l

IEYf

E L E C l R O ~ I C L L Y FILED

DOC :

DATE

F IL E D: ... ..c ~ . . . . . . > f _ _ / ~ . J

' · ~ · . ; . · · ; : : = ======='=='=::::::;: 1,,_

13

Civ .

4037

(LLS)

R e la t e d to

64

Civ . 3787

(LLS)

OPINION ORDER

TABLE OF CONTENTS

B CKGROUND

............................................................................................................................................................... 3

A.

BMI

Consent Decree

....................................................................................................................... 6

B.

The Onl ine Music In d u s t ry

.................................................................................................. 7

C.

Pandora ........................................................................................................................................................ 9

1. The Music Genome Proj e c t ...................................................................................10

2 . Pa ndor a s

Bus iness and Revenue .................................................................

11

D.

BMI'

s

L ic e ns ing

Hi s t o r y o f

Pandora

....................................................................

13

E.

P u b l i s h e r

Wi t hd r a wa l s ...........................................................................................................15

F.

P a ndor a - P ub l i s he r

Di r e c t

Licenses

.......................................................................19

1. Round One Agreements .........................................................................................19

a .

Pandora-EMI License ...................................................................................

19

b .

Pandora

-Sony

and EMI

Licenses

..................................................... 2 0

c .

Pandora-UMPG

L i c e n s e ................................................................................23

2.

Round Two

Agreements

......................................................................................... 2 5

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Case 1:13-cv-04037-LLS Document 242 Filed 05/28/15 Page 1 of 60


2/60

a .

Pandora -Sony

and EMI Licenses ..................................................... 2 6

b . Pandora UMPG License ................................................................................ 2 9

c . Pandora-

BMG License ...................................................................................32

G.

Suspens ion

Agreements

...........................................................................................................

35

H.

BMI'

s

Licenses wi th Pando ra s Competi

t o r s ............................................... 3 6

DISCUSSION ...........................................................................................................................................................37

A.

Recent

Under s tand ing in

t h e Music In d u s t ry

............................................37

B.

RMLC Radio

Broadcas t ing

S t a t i o n s

Rate

as Benchmark .................

45

C. BMI'

s

Primary Benchmarks Suppor t

a

2. 5 Rate

...................................... 4 8

D.

Pa ndor a s Proposed Benchmarks

...................................................................................52

1.

BMI

Form License

Agreement

.............................................................................53

2. 2012 Pandora-EMI

License ...................................................................................53

3. RMLC

License .......................................................................................................................54

4. ASCAP-Pandora License ............................................................................................54

5.

Pandora-BMG

License

..................................................................................................

54

E. BMI's AFBL Framework

Is

Adopted .............................................................................55

F.

BMI'

s A d v er t i s in g Deduction Proposa l i s

Appropr ia t e

.................

58

G. Term o f License ............................................................................................................................. 5 9

CONCLUSION ............................................................................................................................................................

60

Broadcas t

Music,

Inc .

( BMI )

has

p e t i t i o n ed

pur sua n t

to

a r t i c l e

XIV o f t h e

BMI

Consent

Decree

fo r

a d e te rmin a t io n o f

r e a sona b l e f e e s

and

terms

fo r

an

a d j u s t a b l e - f e e

b lan k e t

l i c e n s e

( AFBL )

to

Pandora

Media, I n c . , a s t reaming

i n t e r n e t r ad io

2



3/60

se rv ice , for the t ime per iod

January

1, 2013

through

December

31, 2016.

After

a

f ive week non-jury

t r i a l

and p o s t - t r i a l

submissions,

the

fol lowing

cons t i tu t es

the f indings ,

Opinion

and

Order

of

the Court , holding

tha t the

2.5%

percentage of revenue

ra te and othe r terms offered to Pandora by BMI are reasonable .

B CKGROUND

BMI i s

a

non-pro f i t performing

r i gh t s organ iza t ion

( PRO )

t ha t

l i censes non-exc lus ive r igh t s

of publ i c performance to

a

v a r i e t y

of music users on beha l f of

a f f i l i a t e s

who are the music

composi t ions '

copyright holders .

BMI's a f f i l i a t e s

comprise

approximate ly 600,000 composers, songwri ters and music publ ishers ,

and

BMI's

reper tory

cons i s t s

of

approximately

8.5 mil l ion

musical

composi t ions.

Pandora

i s

a

streaming

customized

i n t e rne t

radio se rv ice

t ha t

plays

musical

composi t ions

under

l i censes which t

has obtained

d i rec t l y

from t he i r copyright

holders , or

through BMI and

other

PROs such

as

ASCAP

(American Socie ty

of

Composers,

Authors

and

Publ i sher s ) .

BMI

o f fe r s

a blanke t

l i cense fee

of 2.5% of

Pandora ' s gross

revenue, sub jec t to adjustments to

accommodate

performances

of

works

t has l i censed d i r e c t ly

from

t h e i r au thors or another

PRO. The adjustment formula inc ludes : i ) a

f loor

fee

equal

to

10 of the t r ad i t i ona l blanke t

l i cense fee;

i i )

an inc rementa l

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4/60

admin is t r a t ive fee , equal to 3

of the

remaining

90

of

the

t r ad i t i ona l blanke t

l i cense

fee , t ha t Pandora

would be

requi red

to pay rega rd le s s

of

the ex ten t

of

d i r e c t l i cens ing ; and

( i i i )

c re d i t s

for

performances of BMI

works

d i r e c t ly

l i c ensed

or

withdrawn.

BMI a l so

proposes

t ha t in

ca l cu l a t i n g

gross

revenue,

Pandora may

deduct up

to

15 of

commissions

pa id to

t h i rd -p a r t y

adver t i s ing agencies .

The

p r ev a i l i n g method fo l lowed in

s e t t i ng a reasonable

fee i s

by

re fe rence

to

benchmarks : the r a t e s s e t

in

(or ad jus t ed from)

contemporaneous

s imi l a r

t ransac t ions .

As

the

Second C i r cu i t

explained

in

United Sta tes v.

Broadcas t

Music, Inc . (In re Music

Choice) , 316 F. 3d 189, 194

(2d Cir .

2003):

In

making a dete rmina t ion

of

reasonableness (or of a

reasonable fee ) , the

cour t

at tempts to

make

a dete rmina t ion

of the f a i r market value the

p r i ce

t ha t a

wil l ing

buyer

and

a

wil l ing s e l l e r would agree to in an arm's l eng th

t r a ns a c t ion .

Showtime,

912

F.2d

a t

569.

This

dete rmina t ion

i s

of t en

f a c i l i t a t e d by the

use of a benchmark t ha t

i s ,

reasoning by analogy to an agreement reached a f t e r

arms'

l ength

nego t ia t ion

between s imi la r ly

s i t u a t e d pa r t i e s .

Indeed,

the

benchmark

methodology

i s suggested

by

the BMI

consent decree i t s e l f ,

of which

a r t i c l e VIII(A)

enjoins

d ispara te

t rea tment o f s imi la r ly

s i t u a t e d l i censees .

The Second Circu i t

l a t e r

ampl i f i ed ( id . , 426 F.3d 91, 95 (2d

Cir .

2005)) :

In

choosing a

benchmark

and

determining

how t

should be

adjus ted , a r a t e cour t must

determine

the degree

o f

com parab i l i ty o f the nego t ia t ing pa r t i e s

to

the pa r t i e s

contending in the r a t e

proceeding,

the

comparab i l i ty o f

the

r i g h t s in

ques t ion ,

and the

s im i l a r i t y of

the economic

circumstances a f fec t ing the e a r l i e r nego t ia to r s and the

cur ren t l i t i g a n t s , United Sta tes v.

ASCAP

(Applica t ion of

4



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Buffa lo

Broad. Co.,

Inc . ) , No.

13-95 WCC), 1993

W

60687 a t

[*] 18, 1993 U.S. Dist . LEXIS

2566,

a t *61 (S.D.N.Y.

Mar.

1,

1993),

as well as

the

degree to

which the asse r t ed ly

analogous

market under

examinat ion

r e f l e c t s

an adequate

degree of compet i t ion to j u s t i fy

r e l i an ce

on agreements t ha t

it has spawned.

Showtime,

912 F.2d a t 577.

BMI bears

the

burden of

proof to

e s t a b l i s h the

reasonableness

of the

fee reques ted by it.

BMI Consent

Decree

Art . XIV A) .

Should it not

do

so, then

the Court s ha l l

determine a reasonable

fee

based

upon a l l of the

evidence.

Id .

BMI o f fe r s as i t s primary benchmarks

f ive d i r e c t

l i cens ing

agreements

between Pandora

and

major

music

publ ishers

Sony,

EMI,

and

UMPG.

Those

agreements

were

ente red i n to

between

March

2012

and

December

2013. Thei r agreed ra t es range from 2.25 to 5.85%

of

Pandora ' s revenue. BMI proposes as conf i rmatory benchmarks

BMI's l i censes with Pandora ' s compet i tors ,

ente red

i n to between

2010

and

2013, w hich have a range of

e f fec t ive

ra te s

from

2.5 to

4.6%

of

revenue.

Pandora argues t ha t the

2.5%

ra te

proposed by

BMI

i s

unreasonable

because

t he pub l i she r agreements were the r e su l t of

a non-competi t ive market s i t ua t ion in which it was cons t ra ined

to agree to

ra te s

higher than those

pa id

by i t s s imi la r ly -

s i t ua t e d compet i to rs , who it

cla ims

are thousands of commercial

radio

broadcas ters . Pandora contends t ha t

the long-s tanding

BMI-Pandora

l i cense , which has s t i pu l a t e d a 1.75% ra te

for the

pas t seven

years ,

i s

the

bes t and most comparable benchmark for

- 5 -



6/60

es tab l i sh ing a

reasonable

fee .

Pandora also r e l i e s on i t s

d i r e c t

l i censes with

publ ishers EMI and BMG,

i t s l i cense with

ASCAP

and BMI's

agreement

with

the

Radio Music License

Committee

( RMLC ),

which

represents the

commercial

radio

( t e r r e s t r i a l ) broadcas t ing s t a t i ons ,

as benchmarks

es tab l i sh ing a

reasonable

ra te between 1.7 and 1.85% of

Pandora ' s revenue.

Pandora proposes

a

s imi la r

adjus tment

formula

with

c re d i t s

fo r performances

of

d i r e c t ly l icensed

or

withdrawn BMI works as

well as

an

adver t i s ing deduct ion between 9.5% and 12 on a f l a t

deduct ion bas i s

or

an ac tua l deduct ion

of 15

inc lus ive

of

i n t e rna l cos t s .

A

BMI Consent

Decree

BMI's

business of

l i cens ing

the

pub l i c performance r igh t s

of

i t s

musical

reper tory

i s

governed

by

the

Consent Decree

s e t t l i n g

t h i s

a n t i t r u s t

s u i t

brought

by the

United

Sta tes .

United Sta tes

v. BMI

1996 Trade

Cas. (CCH)

J[ 71,941

(S.D.N.Y. 1966), amended

No.

64-cv-3787, 1994

WL 901652, 1996-1 Trade

Cas. (CCH) J[

71,378

(S.D.N.Y.

Nov.

18, 1994). The

1994

amendment to

the BMI

Consent

Decree es tab l i shes

t h i s Court

as

a

r a t e c o u r t , which

se t s

fees

for

l i censes when BMI and app l ican t s cannot agree on

a

reasonable

fee .

BMI Consent Decree Art .

XIII .

Sect ion VII(B)

of the BMI

Consent Decree r equ i res

t ha t BMI

upon

the reques t of any unl icensed broadcas te r ,

l i cense

the

r igh t s

6



7/60

pub l ic ly

to perform i t s r eper to ry by

broadcas t ing

on e i the r a per

program

or programming

per iod

bas i s ,

a t

defendan t ' s op t ion .

Sect ion VIII(A) provides:

Defendant

sha l l

not

en te r in to ,

recognize

as

va l id

or

perform

any performing

r i gh t s l i cense agreement which s ha l l r e su l t in

d i sc r imina t ing

in ra te s

or

terms between

l i censees s imi la r ly

s i tua ted ;

provided, however, t ha t d i f f e r e n t i a l s based upon

appl icable

business

fac tors which j u s t i fy d i f f e r e n t

ra te s

or

terms s ha l l

not

be considered discr iminat ion within

the

meaning

of

t h i s

sec t ion ;

and provided fu r the r tha t nothing

conta ined

in t h i s

sec t ion

sha l l

prevent

changes in ra te s

or

terms from

t ime

to

t ime

by reason of

changing condi t ions

a f fec t ing

the market for

or marke tab i l i ty of performing

r i gh t s .

I f , as in

t h i s case, BMI and an appl icant cannot

agree

on a

l i cense

fee, Sect ion

XIV A) provides t ha t

e i t he r

par ty may apply

to t h i s

Court

for

the determinat ion

of

a

reasonable

l i cense

fee ,

which BMI

has done.

B The Online

Music

Industry

n

over-a rching ques t ion

i s

how

Pandora s produc t

i s

proper ly c l a s s i f i ed . A b r i e f overview

of

the

main

sources

of

onl ine music - programmed radio , customized radio , and

on-demand

s e r v i c e s -

i s he lp fu l in

understanding

Pandora s

place wi th in

the music business and the

l i censees

to whom t

i s

most

s imi la r ly s i t ua t ed .

Radio i s

a

form of

broadcas t

media by which

a provider

t ransmits

audio

programming

to a l i s t ene r .

His tor ica l ly ,

a

l i s t ene r

had

the

a b i l i t y

to

tune in to

a par t i cu l a r radio

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8/60

s t a t i on , but could hear only

the

programming prov ided by t ha t

s t a t i on .

Over the pas t century , new

radio

de l ive ry

systems

have been

developed,

and

radio

programming

can

now

be

t r ansmi t ted

by

broadcas t

s igna l ,

cable , s a t e l l i t e ,

or

over the i n t e rne t .

The

advent

of

the i n t e rne t as radio

de l ive ry

pla t form

has

allowed

many broadcas t or t e r r e s t r i a l u

radio providers

such as

iHeartMedia

(a

conglomerate

which

owns hundreds of M and

FM

s t a t ions )

to

broadcas t t h e i r convent iona l radio

programming

s imul taneously

to

l i s t ene r s ' computers or mobile

devices.

I t

has

also al lowed radio providers to

c r ea t e

an

unprecedented

l eve l

of

l i s t e n e r in te rac t ion

with

the broadcas te r

through

customizable

radio

se rv ices .

In

con t ras t

to

the broadcas t ing

of

common

s igna l

throughout geographic

area

for

t e r r e s t r i a l

radio ,

with

the

i n t e rne t each

l i s t e n e r ' s device can

now rece ive

i t s

own

ind iv idua l ized

da ta

s t ream.

The

t r ad i t i ona l

model can be

re fe r red to as

the

one-to-many, as

compared to

the

one - to -

one cur ren t model.

Because they

now opera te

on one- to-one

model,

customizable

i n t e rne t radio se rv ices

are

ab le to o f fe r

music programming

t ha t

i s

ad jus tab le by

the

ind iv idua l

use r ' s

feedback.

Present

customizable

radio

se rv ices

inc lude Pandora,

iHear tMedia ' s Create Sta t ionu

with in i t s

iHeart Radio pla t fo rm,

and

Spot i fy Radio.

8



9/60

On-demand

s t reaming

se rv ice s using

a

one- to -one model

o f fe r

an

even

more persona l ized

m ~ n s of de l ive ry o f music

through

the i n t e rne t . On-demand se rv ice s

prov ide

users

with

i nd iv idua l

access to

l a rge

l i b r a r i e s

of

songs,

from which

each

l i s t e n e r can

se l e c t

exac t ly

which song she

wishes to

play

a t

any

t ime. Most o f fe r

both

adver t i s ing

and

subsc r ip t ion-based

se rv ices , which con t ro l the number

of adver t i sements

to

which

a

l i s t e n e r i s exposed:

fewer

fo r

a

subscr ip t ion- fee paying

customer,

more

fo r

one whose compensat ion to the se rv ice

prov ider comes from payments

by

adver t i se rs .

Spot i fy i s the

lead ing on-demand se rv ice ; othe r popular se rv ice s include

Rhapsody and Rdio.

Pandora

does

not o f fe r an on-demand se rv ice .

There i s overlap

between

programmed radio ,

customizable

radio ,

and on-demand se rv ices .

For example, some programmed

rad io p rov iders

a l so

o f fe r

customizable

rad io p roduc t s ,

such

as

iHear tMedia ' s Crea te Sta t ion in i t s iHear tMedia product .

Many

on-demand se rv ice s

a l so

o f fe r customizable rad io

products , such

as

Spot i fy Radio.

C Pandora

Pandora

i s the l a rge s t i n t e rn e t rad io se rv ice

now

opera t ing

in the United

Sta tes . Launched

in 2005, today t has approximately

200

mil l ion reg i s t e red users worldwide

and

supp l i e s approximately

70

of

the s t reaming

music

market

in

the United

Sta tes .

I t i s

the

l a rg e s t s ing le l i c ensee

of

BMI music.

9



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1

The Music

enome roject

Pandora has

b u i l t i t s

business on

i t s

propr i e t a ry

Music

Genome

Project

( MGP ),

which analyzes and records the

cha rac t e r i s t i c s

of

each

song

in

i t s

database.

Trained

music

analys ts ,

most

with

degrees in music

composit ion

or music

theory,

l i s t e n

to the

composi t ions

se lec ted for

inc lus ion in

the database

and

c l a s s i fy

the

composi t ion

according to as

many

as 450

cha rac t e r i s t i c s . For

example,

pop and rock songs

t yp i c a l ly have

between

150 and 200

musical t r a i t s

according

to M P

ana lys i s , whereas

c l a s s i ca l

songs

have

between 300 and 400

cha rac t e r i s t i c s .

Pandora

keeps

t rack

of

which songs

share s imi la r

t r a i t s ,

and i t s algori thms use those

cha rac t e r i s t i c s

to j o in

s imi lar

songs in

a

program

for i t s radio

s t a t i ons

t ha t

the

par t i cu l a r

l i s t ene r i s pred ic ted

to

be

l i ke l y

to

enjoy.

Pandora

has

a

cata log o f

approximate ly

2,000,000 songs,

which

i s

cons iderably l e s s than

those of on-demand

serv ices ,

who must be

able

to

play

v i r tua l ly any composit ion a customer may se lec t .

For

example, Spot i fy has a cata log of about twenty

mil l ion songs.

A

Pandora

user can c rea te her pe rsona l i zed

s t a t i on by

se lec t ing a

song,

a r t i s t , genre or composer, which serves as tha t

s t a t i o n ' s

seed . The s t a t i on then plays music

t a i l o red

to tha t

seed.

Users

can cont inuously add var i e ty to t he i r s t a t i ons

by

input t ing addi t ional

seed songs or a r t i s t s .

10



11/60

Each Pandora user can

crea te

up

to

100 persona l ized s t a t i ons ,

and can also l i s t e n to 690 pre-programmed

genre

s ta t ions

such as

Today 's Country and Today 's

Hip

Hop and Pop

Hits .

Once

a

Pandora

l i s t ene r

has

c rea t ed

a

s t a t i on ,

the

l i s t e n e r

can inf luence

i t s con ten t by ra t ing thumbs

up

or thumbs down

on

i t s

songs.

I f a

l i s t e n e r

gives a

song

a

thumbs-up,

it wi l l be

played with grea te r frequency, and i f a l i s t e n e r gives a song a

thumbs-down, it

w i l l

not be played again

on

t ha t s t a t i on . Pandora

wi l l also customize the

next

song

heard

based on thumbs-up and

thumbs-down

feedback

- i f a

l i s t e n e r

gives a

song

a

thumbs-up, the

M P

wi l l loca te othe r composi t ions t ha t

the l i s t e n e r

i s l i ke ly to

enjoy,

and i

a

l i s t e n e r gives

a

song

a thumbs-down,

songs

shar ing

i t s

c ha ra c t e r i s t i c s

w i l l

be

played

l e s s f requen t ly on t ha t s t a t i on .

Clicking thumbs

down,

sk ip , or I 'm t i r e d of t h i s t rack

wi l l

cause a

song

to

be

skipped. This

means

t ha t

the

song

wi l l

immediately

s top

play ing and

the

s t a t i on w i l l s t a r t

a

new one.

Users may skip

a

ce r ta in

number

of songs per day

and

can also pause

a

song a t any t ime.

2. Pandora s Business and Revenue

Pandora de l ive rs

music

content to i t s audience in two ways:

i)

a

f ree serv ice

which

der ives

i t s

revenue

from the sa le

of

di sp lay , audio and v isua l adver t i s ing ; and ( i i ) Pandora

One,

a

subscr ip t ion se rv ice which charges a fee

fo r

user s ' access to

Pandora 's music

without adver t i s ing .

Pandora 's f ree serv ice

- 11 -



12/60

accounts for

approximately

80

of i t s revenue, while

the

remaining

20

i s der ived from

Pandora

One.

Pandora 's

revenue

has grown exponent ia l ly s ince

i t s

incept ion

a

decade

ago.

For

f i sca l

year

2009,

Pandora

repor ted

revenue of approximately 19 mil l ion ; by f i sca l year 2014, i t s

revenue

had r i sen to over 600 mil l ion .

Never the less a t

presen t Pandora has not demonstra ted sus t a ined p r o f i t a b i l i t y .

Pandora 's

payments

of l i cens ing fees for the use

of

music

consume

a

l a rge por t ion of i t s revenue. For

the 2013 f i sca l

year , Pandora 's music acqu i s i t ion cos t

t over

60 of

i t s

revenue.

A su b s t a n t i a l por t ion of those expenses were

payments

fo r

l i censes of

sound

recordings

(d iscussed

below)

.

Pandora

i den t i f i e s


radio broadcas t ing s t a t i ons

as i t s ch ie f compet i tors

for l i s t ene r s

and adver t i s ing

dol la r s .

In

i t s

2014

10-K,

Pandora

i de n t i f i e d

as

i t s

d i r e c t

compet i tors

both t e r r e s t r i a l broadcas t s t a t i ons

and

i n t e rne t radio

providers inc luding

iHear tRadio,

LastFM, and

Songza.

In i t s

10-K and in

i n t e rna l

company

documents, Pandora

a l so i de n t i f i e d

on-demand se rv ices such as

Spot i fy

and Slacker as d i r e c t

compet i to rs .

While Pandora

cons iders


radio

to

be i t s

pr inc ipa l compet i tor , t

has s t rugg led

to monetize i t s product

as e f f e c t ive ly as

t e r r e s t r i a l broadcas te rs do.

At presen t

Pandora i s ab le

to

s e l l only 60 of i t s

adver t i s ing

inven to ry

12



13/60

and t i s working

for

improvement.

Pandora has h i red a l a rge

in-house adver t i s ing

s a l e s

team to compete

for

the

l o ca l

adver t i s ing

do l l a rs t ha t

are

respons ib le for

most

broadcas t

radio

adver t i s ing

revenue.

Pandora

has

a l so inves t ed

heav i ly

ln

becoming as ubiqu i tous as


radio by expanding i t s

ava i l ab i l i t y on

mobile devices ,

appl iances ,

automobi les and

othe r consumer

product s .

Pandora 's

s t rugg le with

monet izat ion means t ha t

broadcas t

rad io s t a t i o n s pay

MI

in fees per l i s t e n e r performance

approximate ly

twice what Pandora does, and t ha t

Spot i fy

pays

MI

in

fees per l i s t e n e r performance

approximate ly e igh t t imes as

much as Pandora.

D.

BMI s Licensing History o Pandora

In

1995 MI f i r s t in t roduced

the

MI Web

Si te Music

Performance

Agreement

( the

Form

Website

License ) ,

a

gener ic

l i cense to cover

publ i c

performances

of

BMI-a f f i l i a t ed

musical

composi t ions

on webs i t es . At t h a t

t ime,

webs i te music

performances

were

not a major por t ion of those l i censees '

businesses .

Under the Form Website License, a

webs i te

pa id

e i the r : 1)

1.75% o f i t s gross

revenues ;

or

2)

the

g r ea t e r

of

a)

2.5% of the

webs i te ' s music - re l a t ed

revenues ,

o r b) the number of music

r e l a t e d

page

impressions

divided

by

1,000,

then mul t ip l i ed by

$0.12.

13



14/60

Pandora f i r s t ente red i n to the

Form

Website

License

on

June

30,

2005,

choosing to

pay

a

fee based

on 1.75% of i t s

t o t a l

gross revenue.

From

2005

to 2012,

MI

continued to l i cense

Pandora

under

t ha t

Form

Website

License ,

which renewed

i t s e l f

automat ica l ly

on a ca lendar year - to -year bas i s .

By

2011, MI had concluded tha t the 1.75% ra te

had

become

inappropr ia te

for the

emerging

music - in tens ive

streaming

se rv ices .

MI crea ted and began

of fe r ing

the

Music Service

Web

Si te Music Performance Agreeme nt ( Music

Service

Website

License ) .

The Music Service Website License was offered to any

music serv ice which predominant ly der ived i t s revenue from

the

use

of music,

and

s t i pu l a t e d

a

ra te of

2.5%

of

gross revenue.

In 2012, MI rep laced the

Music Service

Website

License

with

the MI

Dig i ta l Music

Service

Music Performance License

Agreement

( the

Digi ta l

Music

Service

License ) .

The Digi t i a l

Music

Service

License

a l so inc ludes

a

l i cense fee of 2.5% of

gross revenue, but

added

a

de f in i t i on of

Music

Serv ice , which

inc ludes

t ransmiss ions del ivered

over

the

In te rne t [and]

mobile

and/or

wire les s networks.

This

l i cense

became

BMI's

opera t ive

l i cense

for onl ine streaming music

se rv ices , while

the

Form

Website License was offered only to websi tes

whose

use

of music

was only i nc iden ta l .

On October 24, 2012, a f t e r BMI's and Pandora ' s nego t ia t ions

on a new

type

of

l i cense fa i l ed , Pandora formally no t i f i e d

MI

14



15/60

of i t s

i n t en t i o n

to t e rmina te the

Form

Website License . On

December 5, 2012, Pandora app l ied fo r a l i cense under t h e

MI

Consent Decree commencing January 1, 2013.

In

response

by

l e t t e r

dated

March 4, 2013

MI

of fe red

Pandora a l i cense covering the two

year

per iod from 2013 through

2014 a t a

h ig h e r

r a t e than what

had been

p a i d by Pandora under

i t s

prev ious l i c en s e . After

nego t i a t ions

f a i l e d again

on

June

13

2013 MI f i l e d

t h i s

p e t i t i o n

wi th

the Cour t fo r

t h e

de te rmina t ion

of reasonab le l i cense fees . I t seeks the

de te rmina t ion

t h a t 2.5 of g ross

revenues

i s a reasonab le r a t e .

E Publisher Withdrawals

During BMI's nego t i a t ions wi th Pandora, the

music

l i c ens ing

indus t ry

was undergoing an unprecedented t rans fo rmat ion .

MI

and

i t s ch ie f compet i to r ASCAP

have

h i s t o r i c a l l y

l i c ensed

the

publ i c

per formance

r igh t

on

a

non-exclus ive

b a s i s

on beha l f

o f music

publ i she rs who own

o r

admin i s te r the

copyr igh t in a musica l composi t ion . While the

publ i she rs

r e ta ined t h e r i g h t to engage

in

d i r e c t l i cens ing o f the

performers they

exe rc i sed

t h i s r i g h t i n f requen t ly .

In recen t years many major

publ i she rs

have

expressed

d i s s a t i s f a c t i o n wi th the PRO fee system, as s e r t i n g

pa r t i c u l a r ly

t h a t the performing r igh t s fees t h a t Pandora paid to MI

and

ASCAP

did not

r e f l e c t the fa i r -marke t value

of

t h e i r copyr igh t s .

That p e rcep t i o n has been re in fo rced by the d i sp a r i t y

between

the

15



16/60

high fees d i g i t a l performing se rv ice s pay to record companies

fo r

sound

recording

r i g h t s , and

the s ign i f i c a n t ly

lower fees

they

pay to the

PROs (and hence to

the copyright holder , authors

and

composers)

fo r

publ i c

per formance

r i gh t s .

While

the r i g h t o f publ i c performance in

a

composi t ion i s

the r i g h t to use

the

under ly ing musical composi t ion i t s e l f , the

r i g h t

to

the

publ i c

per formance

of

a sound

record ing

i s the

r i g h t

to play

one

recording of

a per formance

o f

a

song.

In 1995,

Congress

passed

the

Dig i ta l

Performance in

Sound

Recordings Act ( DPSRA ), which

for

the f i r s t

t ime

provided a

publ i c performance copyright

in sound record ings . See

17

U.S.C.

§ § 106,

114 ( Sec t ion 114 ) .

Under

t h a t Act,

the Copyright

Royal ty

Board des igna tes SoundExchange

as

a n o n -p ro f i t

organiza t ion to c o l l e c t

and

d i s t r i b u t e ro y a l t i e s

fo r

the

performance

of

sound

recordings

to

the copyright

holders .

Only

d i g i t a l se rv ice s are

requ i red

to

pay ro y a l t i e s

for performances

of

sound record ings .

17 U.S.C. §

106(6);

United Sta tes v. Am

Soc'y of

Composers, Authors

Publ i shers (In re P e t i t i o n of

Pandora Media,

Inc . ) ,

6

F. Supp.

3d 317, 345 (S.D.N.Y.

2014) ,

a f f ' d ,

May

6, 2015 (2d Cir . 2015) .

In

b r i e f , sound

recording

fees

are

ca lcu la ted using a penny

per-performance

r a t e

r a th e r than a

percen tage-of - revenue

fee ,

and

t y ie lds a fee

t ha t

i s twelve to

t h i r t e e n

t imes higher than

the percen tage-of - revenue fee Pandora pays to

the

PROs.

-

16

-



17/60

Consequently, while

Pandora pays

approximately 60 of i t s

revenue to record companies, it

pays

only

approximately

4

to

the PROs for the publ ic performance

r igh t s

to t he i r

songs.

Motivated

by

a

des i re to l i cense

t h e i r works a t

higher

r a t e s to d ig i t a l media e n t i t i e s , between

2011

and

2013

four

l a rge

music p u b l i s h e r s -

Sony/ATV

Music

Publ ishing ( Sony ) ,

EMI

Music

Publ ishing

( EMI )

1

,

Universa l Music

Publ ishing Group

( UMPG ), and BMG Rights Management (US)

LLC

( BMG )

- t o o k the

unprecedented s tep

withdrawing

from ASCAP and BMI

the

r igh t to

l i cense t h e i r composi t ions to so -ca l l ed

New

Media Serv ices

such

as

Pandora.

Sony CEO

Marty

Bandier

s t a t e d

of the withdrawals:

By

withdrawing

ce r ta in

l imi ted ca tegor ies

of

d i g i t a l

performance r igh t s from the s oc i e t i e s ,

we

be l ieve t ha t

Sony/ATV and EMI wi l l be on a l evel play ing

f i e l d

with

prospec t ive l i censees . This wi l l allow both pa r t i e s to

engage

in f ree

market

nego t ia t ions ,

while

t ak ing

i n to

account

the

value

of the

songs to

be

l icensed .

Exh. BX 740.

UMPG CEO Zach Horowitz echoed:

With

the consent decree cons t ra in t s t ha t

apply to both

ASCAP and

BMI,

in our view it s espec ia l ly

cha l lenging for

e i the r soc ie ty to achieve

market

r a t e s in nego t ia t ions

with

d ig i t a l se rv ices .

In

order

to

ensure t ha t our

songwri t e rs are f a i r l y compensated, we bel ieve

the

bes t

approach i s for us

to

nego t ia te

d i rec t l y

with

these

se rv ices .

Exh. BX 548.

Sony/EMI

re fe r s

to

the

combined

ca ta logs

of

Sony

and

EMI;

Sony/ATV became

the

adminis t ra tor of

EMI's

ca ta log in July 2012.

-

17

-



18/60

Effec t ive

May 1,

2011,

EMI became

the f i r s t

publ i she r to

withdraw

from

ASCAP the r igh t to

l i cense

c e r t a i n d i g i t a l audio

t ransmiss ions performed

by

d i g i t a l music

se rv ices . In September

2011,

Sony

formally

no t i f i e d

ASCAP

of

i t s i n t e n t to withdraw

Sony s

grant

to

l i cense

d i g i t a l performances

e f f e c t i v e

Apri l 1,

2012,

subsequent ly

extended to December 31, 2012, which

l ed

to

the Pandora-ASCAP r a t e l i t i g a t i o n . United Sta tes v. Am Soc 'y

of Composers,

Authors & Publ i shers (In re P e t i t i o n of Pandora

Media,

Inc . ) ,

6

F.

Supp. 3d 317,

345

(S.D.N.Y.

2014) ,

a f f ' d ,

May

6, 2015

(2d Cir . 2015).

In

October

2012,

Sony

(which had then r ecen t ly

acqu i red

EMI s

ca ta log) became the

f i r s t

publ i she r to no t i fy BMI of i t s

i n t e n t to withdraw BMI s

r i g h t

to

l i cense

d i g i t a l ( New Media

Services )

performances o f Sony and

EMI

works, e f f e c t i v e January

1,

2013.

Under t h i s pre ssure ,

BMI

acquiesced in i t s

a f f i l i a t e

publ i she r copyr igh t -ho lde rs ' withdrawals of the r i g h t s to

d i g i t a l performance of t h e i r

musical composi t ions e f f e c t i v e

January

1,

2013, and

modif ica t ions

of

t h e i r a f f i l i a t i o n

agreements

to exclude BMI s r i g h t to l i cense those r i g h t s to new

media se rv ices .

As the

predominant

i n t e rn e t d i g i t a l performer

of t h e i r

composi t ions ,

Pandora

was the primary

t a rge t of those

-

18

-



19/60

withdrawals .

While they

were

in e f f e c t , Pandora could

no

longer

enjoy

the

r i g h t

to

perform

those

pub l i sher s ' composi t ions

a t

the

1.75% r a t e

afforded

by

i t s blanke t l i cense

with

BMI. To r e t a in

the

r i g h t

to

perform

them,

it

had

to nego t ia te

d i r e c t ly

with

the

pub l i sher s .

F.

Pandora-Publisher

irect

Licenses

Between March 2012 and Ju ly

2014,

Pandora en te red

i n to

seven d i r e c t

l i censes with

publ i she rs fo r

the

i n t e rne t d i g i t a l

performances

o f musical composi t ions they had

withdrawn

from the

SC P and BMI r e p e r t o r i e s .

1. "Round One

Agreements

a. Pandora-EM License

Soon a f t e r l e a rn ing in

May

2011 t ha t EMI

had

withdrawn i t s

new media

l i cens ing

r igh t s

from

ASCAP Pandora began

nego t ia t ing

a

d i r e c t

l i cense

with EMI.

The

key

terms

of the

l i cense

fee were

discussed and agreed upon as ea r ly as July

2011, al though

the

l i cens ing agreement

i t s e l f was

not executed

u n t i l March

2012.

At no poin t

during

the nego t ia t ions did

Pandora

ask

EMI for a list

of

EMI-published

works

t ha t had been

withdrawn

from ASCAP;

i . e .

the works

Pandora

would be unable to

perform

i

it could not agree wi th EMI.

On

March

16,

2012, Pandora

ente red

i n to

a

l i cense

agreement

with

EMI a t

a r a t e

of 1.85%

of Pandora ' s

prora t ed gross

revenue

- 19 -



20/60

for i t s performance of

EMI's

withdrawn

SC P

works, e f fec t ive

January

1,

2012.

b .

Pandora Sony and MI

Licenses

In October

2012, a f t e r

Sony no t i f i e d

BMI

t ha t

e f f e c t i v e

January

1, 2013

t planned to withdraw

the

Sony/ATV

ca ta log

and

r ecen t ly

acquired EMI cata log ,

Sony

and Pandora immediately

began

nego t ia t ing a d i r e c t

l i cense . Because Pandora had a l ready

nego t i a t ed a l i cense

for

EMI's

SC P

works

in

March

2012,

the

Pandora-EMI

l i cense was for

i t s

BMI works,

while

the Pandora

Sony

l i cense

was for

Sony 's

SC P

and

BMI works.

The l i cense was negot ia ted by

Pete r

Brodsky, Sony's

Execut ive Vice

Pres ident of

Business and

Legal

Affa i r s , and

Robert Rosenbloum, Pandora ' s outs ide

counse l .

They have

known

each othe r

for years ,

have done

about f i f t e e n dea ls together ,

and have

never

s t a r t ed

nego t ia t ing

a

dea l

t ha t

they

did

not

accomplish. Brodsky

581.

On

November

1,

2012 Rosenbloum

sought

to

def ine the

loss

of

reper tory

Pandora

would face i f unable to agree

on

ra t es with

Sony.

He sent

an email to Brodsky

s t a t i ng tha t

given

the

uncer t a in t i e s

around

Sony/ATV's and

EMI's

pos i t ion

with

respec t

to webcast ing

ra te s ,

Pandora has

decided

t ha t t

needs

to be

prepared to t ake down a l l Sony/ATV and EMI con ten t in

the

event

we

are

unable

to

agree on r a t e s by the end of

the

year . Exh.

20



21/60

BX

2389. He asked fo r an e lec t ron ic

l i s t i n g

of

the

Sony/ATV and

EMI cata logs , and

a

ra te

proposa l from

Sony.

Brodsky t e s t i f i e d

t ha t he be l ieved

Sony

made

an

ora l

l i cense

proposal

before

a

breakfas t

meeting

between Sony

and

Pandora on November 30,

2012,

a t a

5

ra te of

revenue. On

December

6, 2012, Brodsky sent Rosenbloum an emai l

asking,

Any

feedback on our proposal , Exh.

BX

2394,

and followed

up

with

Rosenbloum on

December 13,

2012, wri t ing I t ' s been awhile .

Do

you

have anything to

repor t on th i s? Exh.

BX 2395. Brodsky

t e s t i f i e d

t ha t

he thought he reached

a

dea l with Rosenbloum a t

some poin t in the next few days. During t h i s t ime the reques t

for

a l st

was

e f f e c t ive ly shelved. I t

was

l e s s

than

a minor

po in t

in

t h e i r

nego t ia t ion . Brodsky

583.

On the evening of December 17,

2012, Pandora ' s

then-genera l

counsel ,

Delicta

Cost in ,

in te rvened.

She

sent

an

email

to

Brodsky

c l e a r ly r e i t e ra t i ng

Pandora ' s

reques t for a

l st of

withdrawn

works.

Brodsky t e s t i f i e d :

I

was pre t ty su rp r i sed t ha t

she

was wri t ing t h i s note a f t e r

we

were on the eve of c los ing

the

dea l , and a t

l ea s t

in my

mind

we

had

an

agreement

on

a

dea l for qu i te some t ime

before tha t .

And

so

the

next

morning,

the

f i r s t

th ing

I

did

was

ca l l

Bobby and

I

sa id ,

Bobby,

what ' s going on

with

t h i s email .

This

doesn ' t

make any

sense

to me. And he sa id , don ' t

worry, you know,

we

don ' t need

the

l i s t ,

she ' s j u s t

cover ing her ass .

Brodsky 599.

21



22/60

Rosenbloum t e s t i f i e d t ha t he

did

not say

or

imply to

Brodsky t ha t

Cost in ' s

email was merely

precaut ionary or

t ha t

Pandora

did

not need a l i s t ; he sa id he had a l ready reques ted

the

l st from Sony. Rosenbloum 2206.

In

any

event ,

Sony did

not provide

a l st to Pandora. On

December 18,

2012,

Brodsky

sent

Rosenbloum a dra f t term

shee t

for the

agreement , and

they

then exchanged rev i sed term sheets .

On December 21,

2012,

Pandora and Sony ente red i n to a binding

term

shee t

dea l , a t 5 of

Pandora ' s

gross revenue. Effec t ive

January

1, 2013, Pandora ente red

in to

formal

l i cense

agreements

with

Sony cover ing

both

the Sony/ATV and EMI cata logs , a t

indust ry-wide

ra te s of

5

of

gross revenue (2.25%

of revenue

adjus ted for BMI's market share for EMI (a BMI-adjusted ra t e

for BMI

works

only) and for Sony (BMI and ASCAP works)) .

In

her

ASCAP-Pandora

ra te

cour t

opinion,

Judge Cote

ques t ioned

Brodsky 's c r e d i b i l i t y about

those nego t ia t ions :

Brodsky t e s t i f i e d

t ha t Sony did not

provide

Pandora

with

a

l st

of

works because, when he con tac ted Rosenbloum

regarding Ms. Cost in ' s reques t ,

Rosenbloum rep l i ed t ha t

the re

was no need for Sony/ATV

to provide

such a l st of

works because

we were

very

c lose

to

f i na l i z ing a dea l .

Rosenbloum denies ever

t e l l i ng

Brodsky any

such th ing .

Brodsky a l so t e s t i f i e d

t ha t

Rosenbloum

did

not make o ra l

reques ts for the

l st

of

works

in

between

the

November

1

wri t t en reques t

and

the reques t

dur ing

the

breakfas t

meeting on November 30. While Rosenbloum was e n t i r e ly

cred ib le in h i s tes t imony

on these i ssues ,

Brodsky was not .

22



23/60

United Sta tes

v. Am.

Soc y o f Composers, Authors Publ i shers

( In r e P e t i t i o n

of

Pandora Media, In c . ) , 6 F.

Supp.

3d 317, 345

(S.D.N.Y. 2014) , a f f d , May 6,

2015

(2d Cir . 2015) .

On

h is

and

Mr.

Rosenbloum s

tes t imony

and

the

r eco rd

before

me, I do not

f ind

Brodsky s

c r e d i b i l i t y

impai red. The two

men

had

a

long exper ience o f

nego t i a t ing

wi th each

othe r ,

had

a good

persona l r e l a t i o n s h ip , and n e i th e r one an t i c ip a t ed (nor was

there )

any

squabble on the sub jec t

o f

the

r a t e .

They were in

f ac t

very

c l o s e to f i n a l i z i n g a dea l ,

al though

a bind ing

te rm

shee t

was not

execu ted un t i l December

21. I

f ind

Brodsky s

t es t imony p e r s u as i v e . There i s no ques t ion he c a l l e d Rosenbloum

the

morning

a f t e r Ms.

C o s t in s

email

and complained about

it

That

would

have

been

incons i s ten t , di s ingenuous and

i nexp l i cab le

if the list was an open poin t of

concern

between the two, and

out

o f

cha rac te r

with

t h e i r

r e l a t i o n s h ip .

c Pandora UMPG

i cense

In February 2013, Pandora l ea rned

t h a t

UMPG was withdrawing

i t s new

media

l i c ens ing r igh t s from ASCAP e f f e c t i v e Ju ly 1,

2013.

On March

22, 2013, Pandora s

then-CEO,

Joseph Kennedy,

met

wi th Zach

Horowitz,

then-chai rman and CEO o f UMPG to discuss a

d i r e c t

l i cense

between

Pandora

and

UMPG

fo r

the

withdrawn

ASCAP

works.

In the ensuing nego t i a t ions , UMPG proposed an i n d u s t ry -

- 23 -



24/60

wide ra t e

of

8 ,

which would be prora ted to

r e f l e c t

UMPG's

share of

performances

on Pandora.

Pandora reques ted

a l st of

works

a f f ec t ed

by withdrawal ,

which UMPG

provided,

sub jec t

to

a

Non-Disc losure

Agreement

( NDA ). The

NDA

s t a t e d

t ha t

UMPG's

ca ta log informat ion

could

not be used fo r any

purpose

except to eva lua te and engage in

discuss ions

concerning a p o t e n t i a l bus iness

re l a t ionsh ip

between

the

p a r t i e s . The pa r t i e s disagree

as

to whether the NDA

permi t t ed Pandora to use t to

e f fec tua te

a

take-down.

UMPG

and Pandora

held

ano ther in -person

meeting

on

May

21,

2013. Pandora then placed the nego t i a t ions on hold .

On June 11, 2013, Pandora announced i t s purchase

of

KXMZ

FM a

t e r r e s t r i a l rad io s t a t i on in

Rapid

City , South Dakota .

On

the same day, Pandora moved fo r p a r t i a l summary

judgment

in i t s

r a t e

case

aga ins t

ASCAP,

arguing

t h a t

any

purpor ted

new

media

withdrawals fo l lowing the

ASCAP

ru l e s ' modi f ica t ion d id not

a l t e r

the scope of

ASCAP's

repe r to ry ava i lab le

to

Pandora under

i t s

app l ica t ion fo r an

ASCAP

l i cense .

In a June 13,

2013 email to

UMPG Chris Harr i son , Pandora ' s

a s s i s t a n t genera l counse l , apologized fo r the delay in the

nego t ia t ions . Harr i son explained t h a t

we

expect the

ASCAP

ra t e

cour t to r u l e on

our

motion

promptly,

and

we

hope, before Ju ly

1. We a l so expect confi rmat ion of our en t i t l ement to the RMLC-

-

24

-



25/60

ASCAP

l i cense [because

of

its purchase

of KXMZ FM} before

Ju ly

1 . He cont inued:

In the unl ike ly event we d o n ' t

have

a d ec i s i o n on e i t h e r o f

t h e s e

poin t s by July 1,

it

i s

our

p re fe ren ce

to

con t inue

to

perform

works

in

the

UMPG

ca ta log . To

help

f a c i l i t a t e

t h a t ,

we propose

accep t in g

UMPG s

7.5

o f

revenue

o f fe r on

a prov i s iona l ba s i s s t a r t i n g Ju ly

1, 2013, pending

the

Cour t ' s

ru l ings ,

with

the unders tand ing t h a t i the

ASCAP

r a t e cour t subsequen t ly ru les

in

Pandora ' s favor t h a t

Pandora

w i l l

immedia te ly t h e re a f t e r - and on a

r e t r o ac t i v e

b a s i s back to Ju ly

1,

2013 - l i cense the r i g h t to works in

the

UMPG

repe r to ry

through

ASCAP a t

whatever r a t e

the r a t e

cour t

dec ides .

Exh.

BX 283.

On

June 19, 2013, Horowitz responded,

wri t ing

t h a t UMPG

was

w i l l i n g to accep t Pandora ' s approach

for

a s ix-month per iod .

Pandora

and

UMPG en t e red i n to a l i cense e f f e c t i v e Ju ly 1, 2013

a t

an

indus t ry -wide r a t e o f

7.5

of g ross revenue, o r 3.38 a t a

BMI-adjus ted r a t e , fo r a term o f

s ix

months.

2

Round

Two

Agreements

On September 17, 2013 Judge

Cote

in t h e Pandora

v.

ASCAP

case

gran ted

Pandora ' s

motion fo r p a r t i a l

summary judgment ,

holding t h a t the pub l i sher s ' p a r t i a l withdrawals were not

permi t t ed under the ASCAP

consen t

decree .

In my December 18, 2013

Opinion and

Order I reached a

s imi l a r conclus ion in t h i s case, holding t h a t the BMI Consent

Decree requ i re s

BMI

to o f fe r a l l app l i can t s a l i cense to perform

a l l

o f

the composi t ions in i t s repe r to ry . When

music

publ i she r

copyr igh t

holders exe rc i se

t h e i r

r igh t to

withdraw

t h e i r d i g i t a l

- 25 -



26/60

r igh t s

and

revoke BMI's au th o r i t y

to

l i cense

those

composi t ions

to

Pandora

and othe r new media se rv ices , those

composi t ions

no

longer qua l i fy fo r inc lus ion in BMI's reper tory and

BMI

can no

longer

l i c en s e

them

to

Pandora

or

any

othe r app l ican t .

Thus,

the publ i she r

loses

the whole list

of

BMI l i censees

for

t h a t

composi t ion .

On November 5, 2013, Pandora ' s

outs ide

counsel

Ste in tha l

emai led s ubs t a n t i a l l y

i d e n t i c a l

communications to the outs ide

counsel

of Sony/EMI and UMPG

( the S te in th a l

Nov. 5 email ) .

The

one

to Sony/EMI s t a t ed :

Pandora reques ts t ha t EMI and SATV as soon as

poss ib le , provide informat ion to

Pandora iden t i fy ing

the

Works t ha t

EMI

and S TV have withdrawn from BMI's l i cens ing

au thor i ty ,

inc lud ing the i de n t i t y of any co-owners of sa id

works and the

percentage shares of

ownership

of

sa id co

owners,

so

t ha t

Pandora

can

cons ider removing such works

from i t s se rv ice

i the pa r t i e s

are unable to agree on

d i r e c t

l i cense

terms

(should

d i r e c t

l i cens ing be

requi red

as

discussed

above).

Exh.

BX 262.

Pandora 's a s s i s t a n t

counsel

Harr ison sent an email

with

i de n t i c a l language to BMG management on November

4, 2013 ( the

Harr ison Nov. 4

emai l ) .

a

Pandora Sony and MI Licenses

The

Sony

and EMI l i censes with Pandora were

se t

to

expi re

on December

31, 2013.

On November 8,

2013,

Zakarin , Sony 's

out s ide

counsel ,

responded to

Ste in tha l , proposing two

opt ions to Pandora:

(i)

- 26 -



27/60

nego t i a t e

and en te r in to ano ther one year d i r e c t l i cense ; o r

( i i )

nego t i a t e

and en t e r i n to

a

d i r e c t

l i cense

o r o r

othe r

arrangement commencing on January 1, 2014 and

exp i r ing upon

f i n a l

dete rmina t ion

o f

the ques t ion

whether

the

publ i she rs

could

exclude

Pandora and

new

media

from works ava i lab le through

BMI.

Pandora ' s

a s s i s t a n t genera l

counsel Harr i son emai led Sony's

execu t ive

v i c e -p r e s i d e n t Brodsky on November 11, 2013, asking to

discuss these two proposa l s .

On November 19, 2013, Harr i son

emai led Brodsky

and

asked him

to prov ide

a

list o f withdrawn

works

as

soon as p o s s i b l e [ . ] Exh. PX 913.

On

November 22,

2013, Brodsky

r ep l i ed

to Harrison

and

assured him

t h a t Sony was

working on the

l i s t s ,

s t a t i n g , [W]e

w i l l

provide you with the

l i s t s in more than

enough

t ime

fo r Pandora

to

remove

the S TV

and EMI composi t ions

from the

Pandora

se rv ice

when our l i cense

ex p i r e s

on December

31St.

Id .

On

November 26, 2013, Brodsky sen t Harr i son

a

l i n k

to a web

s i t e con ta in ing two l i s t s o f Sony/ATV

and

EMI withdrawn works.

Harr i son

was

unable to access the s i t e ,

and

so Sony s en t Pandora

the l i s t s on December 2, 2013.

In

a

December 4, 2013 emai l to

Brodsky,

Harr i son conf i rmed

t h a t Pandora

had rece ived the

repe r to ry informat ion.

On

December 9, 2013, Pandora of fe red Sony

a

quar te r ly , f l a t

fee o f $500,000 fo r the r igh t to perform Sony/ATV

and

EMI music

on Pandora.

Sony

r e j ec t ed

Pandora ' s o f fe r

on

December

12, 2013

27



28/60

and

coun te r -o f fe red a Covenant Not

to

Sue

Agreement with

the

fol lowing

te rms: ( i )

the agreement

would cover

four consecut ive

quar te r ly

per iods ,

commencing

on

January

1, 2014;

( i i )

the

agreement

would

c a l l

for

the

payment by

Pandora

of

$2.25

mil l ion

to

Sony

for the f i r s t and

second

quar te r s of

2014;

and ( i i i ) the

fees for

the

t h i rd

and

four th

quar te r s

of 2014

would be

adjus ted , on a

pro r a t a bas i s , to

r e f l ec t

i nc rea se s in Pandora ' s

revenue

for

the most

recent

quar te r ,

with

a

f loor fee o f $2.25

mil l ion each

quar te r . The

agreement

was

t e rminab le

a t Pandora ' s

opt ion before each of the l a s t th ree quar te r s

of

the

agreement .

On

December

19,

2013,

Brodsky

sent

Harr ison

a

dra f t

agreement ( s ty l ed as

a

Covenant

Not

to Sue )

r e f l e c t i ng

the

t erms

of t h i s counte r-proposa l .

Brodsky conf i rmed t ha t as

of

January

1,

2014,

Sony

and

EMI's

ca ta logs

would

be

withdrawn from

BMI's

reper tory .

On

December

24, 2013,

Ste in tha l

emailed

MI

and i t s

outs ide

counsel

a

reques t

t h a t

BMI

immediately

provide

Pandora

with

the

e lec t ron ic Reper to i re

F i l e

fo r each of the withdrawing

pub l i she rs . Exh. X 303.

BMI's

outs ide

counsel

Atara Mil l e r

responded on December

26,

2013, wri t ing

t ha t

MI

be l ieved

Pandora 's

reques t was most

appropr i a t e ly

d i rec ted to the

pub l i sher s . On

December

27, 2013,

Ste in tha l

asked

Sony to

provide the

informat ion reques ted

in

his

December 24 emai l

or to

d i r e c t MI

to

fu rn i sh t ha t informat ion.

- 28 -



29/60

Harr i son sent

an

i n t e rn a l emai l

with

the sub jec t l i n e

Publ i sher

Update to Pandora

management on

December 26, 2013.

In

t h i s

emai l ,

Harr i son s t a t e d t h a t he, Cost in , and Pandora ' s

Chief

Financ ia l

Off i ce r

Mike

Herr ing

recommended

t ha t

Pandora

accep t Sony's proposa l

and

execute an agreement fo r the f i r s t

qua r t e r

a t

$2.25 mil l ion .

On

December 30, 2013, Harr i son sen t Brodsky an executed

copy

of the agreement ,

with

no changes from

Brodsky's

December

19

proposa l except

the add i t ion of Pandora ' s address fo r not i ce .

The f igure s in the agreement fo r the Sony and EMI

ca ta logs

amount

to a BMI-adjusted r a t e

of

5.85%

for

the 2014 ca lendar

year .

b

Pandora UMPG

License

UMPG's l i cense with Pandora was scheduled to

expi re ,

and

UMPG

was

s e t

to

withdraw

from

BMI,

e f f e c t i v e

January

1,

2013.

Glenn

Pomerantz, UMPG's

outs ide

counse l , responded promptly

to the

S te in th a l

Nov. 5

emai l , saying

t h a t UMPG was wil l ing to

nego t i a t e a d i r e c t l i cense

and

was wil l ing to prov ide a list of

i t s BMI composi t ions i Pandora would

s ign a Non-Disclosure

Agreement .

Pomerantz

assured

S te in th a l

t ha t the

ND

express ly

al lowed Pandora to use the

list

to

t ake down UMPG's

BMI works

in

the

event the

pa r t i e s

f a i l e d

to

reach an

agreement .

David

Kokakis ,

UMPG Senior Vice

Pres ident , Head of

Business Legal

-

29

-



30/60

Affa i r s /Bus iness

Development,

sent Ste in tha l the

NDA on November

12, 2013.

On

November 20,

2013,

Kokakis emailed Harr ison and proposed

a

UMPG-Pandora l i cense

with

the

fol lowing

ra te s

and

terms: (i)

7.5% of

Pandora ' s UMPG-Adjusted

Revenue

base

for

2015; ( i i )

8.5%

of

UMPG s Adjusted

Revenue base for

2015; ( i i i ) a

Most

Favored

Nation c lause t ha t

could

inc rease to

15

the ra te of

UMPG s

Adjusted Revenue base i f

spec i f i ed t h re sho lds

r e l a t e d to sound

recording

fees

were met or exceeded; and (iv) t ha t

the

l i cense

would

not

be con t ingen t

on the

outcome

of

any

ra te cour t

proceeding.

On

November 22, 2013, Harr ison

emai led Kokakis

to say t ha t

Pandora

would

review

and

respond

to UMPG s

proposal ,

and

asked

when UMPG could provide a l st

of the ca ta log informat ion for

i t s

BMI

r eper to ry .

Kokakis

responded

l a t e r

t ha t

af te rnoon.

He

informed

Harr ison

t ha t

UMPG had a ca ta log l st ready to go,

but had been wai t ing

for Pandora

to

s ign the

NDA.

Exh.

BX 263.

Pandora

re turned the

signed

NDA

to UMPG on November 25, 2013.

On November 27,

2013,

Kokakis sent Harr ison

a

l st of

UMPG

works.

On December 4, 2013, Harr ison wrote to

Kokakis

t ha t

Pandora

was

st ll eva lua t ing the

r e p e r t o i r e

informat ion provided and

the economics of

UMPG s

November

20,

2013

l i cense

proposal .

Exh.

BX 294.

Five

days l a t e r , on

December

9, 2013,

Pandora

- 30 -



31/60

re j ec ted UMPG's

proposa l .

Harr ison

s ta ted

in an email to

Kokakis

t ha t we i n t end

to

use the

repe r to i re

informat ion

UMPG

provided

to t ake

down

the re levant songs by the

end

of

the

ca lendar

year .

Id .

Harr ison

proposed

t ha t UMPG

and

Pandora

en te r

i n to a 90 day agreement whereby i f

UMPG

agreed

not

to

br ing

an

infr ingement ac t ion Pandora would pay

UMPG

$200,000,

reasoning

t ha t t h i s

would provide

Pandora t ime to

i d en t i fy and

remove

the

r e levan t songs.

Kokakis responded on

December

18,

2013

and re j ec ted

t h i s

reques t , wri t ing ,

We

are

disappointed

t ha t Pandora has chosen

not

to engage

in any

nego t ia t ions with respec t

to our l i cense

proposal

and in s tead

has decided

to shu t

down a l l discuss ions

r a t he r

than seek

an amicable so lu t ion . Exh.

X

266.

Ste in tha l

asked MI

to

provide

a

r epe r t o i r e f i l e of

UMPG's

withdrawn

works

in

an

email

dated

December

24, 2013.

When

MI

re j ec ted t h i s reques t , Ste in tha l forwarded

t to UMPG on

December

27, 2013. UMPG

dec l ined

to provide

a repe r to i re

f i l e , s t a t i ng

tha t

t had

a l ready

provided Pandora with

a

ca ta log

l i s t .

On December

26,

2013,

Harr ison

wrote to

Kokakis

to rev ive

UMPG's

l i cens ing

proposa l .

According to Harrison,

the

revised

proposal included the

fol lowing

prov i s ions :

(i)

a

one year

term,

with a second

year

a t UMPG's

opt ion; ( i i )

a $5

mil l ion

guaran teed minimum fee in

years

one and

two,

with

t rue ups

in

-

31

-



32/60

both years

i

Pandora ' s

2014

and

2015

gross

revenue exceeded

sp e c i f i c parameters ; and ( i i i )

a

Most Favored Nation

c lause

in

re spec t of

both

PROs

and publ ishers . Kokakis agreed with

the

genera l

terms

ou t l ined ,

but

c la r i f i ed

tha t

the

revenue

t rue -ups

were

based

on ac tua l gross revenue

for

2014 and the MFN

prov i s ion accounted

for the

value

of a l l

cons ide ra t ion in

a

re levant

PRO

or

publ isher dea l .

La te r

t ha t day, Harr ison sent

the

i n t e rna l Publ i sher

Update

to

Pandora senior execut ives .

Harr ison

wrote t ha t

he,

Cost in ,

and

Herring

recommended execut ing a Headl ine ra te of

8.5% ( industry-wide)

with

an e f fec t ive ra te of 4.25% for j u s t

UMPG s

MI

r e pe r to i r e . In

a

subsequent email dated

December

27,

2013,

Harr ison e labora ted:

I don ' t

see

8.5% as s e t t i ng

the ra te

Pandora i s wil l ing

to

pay to any publ isher .

Rather ,

it

i s

a r a t e we

are

wil l ing

to

pay

fo r

a

major

publ isher .

We

would

not

be

wil l ing to

pay 8.5% for

smal le r

publ ishers (as

evidenced

by our

re fusa l

to

do a dea l

with

the

smal le r MG for 10%).

Exh.

X

256.

On

December

29,

2013,

Harr ison

informed

Kokakis

t ha t

he had

a green

l i gh t

from Exec

Mgt

to move forward.

Exh.

PX 987. On

December

30, 2013, Pandora

ente red

i n to a l i cense

agreement

with

UMPG

fo r

the

2014

ca lendar

year ,

a t an indust ry-wide ra te of

8.5% of

gross

revenue for withdrawn

MI

music, a t a BMI-adjusted

ra te of

3.83%.

- 32 -



33/60

c Pandora BMG

License

While nego t ia t ing with

Sony

and

UMPG, Pandora was

also

exchanging

l i cens ing

proposals

with BMG.

Keith Hauprich,

BMG s

Vice

Pres ident

of

Business

and

Legal

Affa i r s , responded

to

the

Harr ison Nov.

4

email ,

s t a t i ng tha t

BMG was i n t e r e s t e d in secur ing a d i r e c t l i cense a t a

10

of

revenue

ra te , and i f BMG and

Pandora

were unable to come to

terms,

Pandora

should

remove BMG content

from i t s se rv ice .

BMG

sent

i t s

complete

reper tory in format ion to

Pandora on December

12, 2013.

In h is

December

26,

2013 Publ i sher

Update

i n t e rna l

emai l ,

Harr ison

recommended

to

Pandora

execu t ives

t ha t Pandora r e j ec t

BMG s proposal of 10 of revenue

and t ake down BMG con ten t .

Harr ison s t a t ed , At

t h i s s tage I

don ' t th ink BMG i s

'worth '

anything

more

than

what

we

are

cur ren t ly

paying

BMI,

so

I

wouldn ' t want to o f fe r them more than 1.75%.

Exh.

BX 256.

Pandora ' s execu t ives

debated

whether they

should

make a

coun te r -o f fe r

a t a lower percentage,

but

Pandora

u l t imate ly

re j ec ted BMG s of fe r .

Pandora

decided to

remove

BMI works

wholly

con t ro l l ed by BMG

( i . e . ,

not also l icensed to BMI by

others)

from i t s se rv ice .

On

December

27, 2013,

Eric

Bieschke, Pandora ' s Chief

Sc ie n t i s t , rep l i ed

to

the

Publ i sher Update email and s ta ted

tha t

spins

so le ly by BMG

were

respons ib le

for

only

1 of a l l

-

33

-



34/60

spins on Pandora

and

thus dispensable ) while

a

lo s s

of

both

BMG

and UMPG would be

subs tan t ia l . Bieschke

wrote :

Removing

BMG only

spins

wi l l

have a

small impact

on

l i s t e n ing .

Unless

they

own the

e n t i r e cata log by

a

well

known

a r t i s t

on j u s t the

BMI

ha l f ,

which

we

have

not seen

so fa r ,

the

impact

on l i s t e n ing

wi l l be neg l ig ib le .

I f however

we remove

both UMPG and

BMG w e re

looking

a t

an

i de n t i f i e d 12

of

l i s t e n ing and

another

un iden t i f i ed 6 .

Th a t s 18 of l i s t e n ing , h a l f

of

which i s

BMI,

or 9 of

cur ren t l i s t e n ing . I d expect

to

see

a

1 to 3 drop

in

t o t a l

l i s t e n ing hours with in 28

days

i we go t ha t route .

Exh. BX

300.

In

order

to

e f fec tua te

the

BMG

take-down,

Pandora

used

the

ca ta log list

provided by

BMG

to

a

l imi ted ex ten t ,

and also

r e l i e d on t h i rd

par ty

serv ices such

as LyricFind

and the

ASCAP

and BMI

onl ine

reper tory databases . The take-down was

begun

on

December

30,

2013 and completed

l a t e r

t ha t day.

BMG withdrew

from

BMI on

January

1,

2014.

Three

months

l a t e r ,

on March

31, 2014,

BMG

and

BMI ente red i n to an agreement

e f fec t ive

January

1, 2014 suspending BMG's withdrawal

from

BMI

un t i l December

31, 2014.

On

March

20, 2014, Pandora

and

BMG held an

in-person

meeting a t

BMG's

o f f i c e s

to

i n i t i a t e discuss ions for

a

new

l i cense . The pa r t i e s

continued

negot ia t ions

fo l lowing

BMG's

re -

a f f i l i a t i o n with

BMI.

On

July

16, 2014,

Laurent Hubert , Pres ident

of

BMG North

America,

sent

an email summary of

a

Pandora and BMG ca l l to Mike

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35/60

Herr ing, Pandora s CFO, Simon Fleming-Wood,

Chief

Market ing

Off ice r ,

Harr ison, and copied Ste in tha l . Hubert sugges ted a

l st of ac t ion po in t s , inc lud ing

• Pandora and BMG to

discuss

ways to i nc rea se spins on

BMG a r t i s t s

Exh. BX 359.

Two weeks

l a t e r ,

on Ju ly

28, 2014,

Pandora ente red

i n to

a

two-year f l a t fee agreement

with

BMG which se t

fees a t :

(i)

$1.15 mil l ion ,

payable

on or before Ju ly

2014;

( i i ) $1.15

mil l ion ,

payable

on

or before

January

5,

2015;

( i i i )

$1.9

mil l ion ,

payable

on or before Ju ly 15,

2015;

and (iv) $1.9

mil l ion ,

payable

on or before

January

15,

2016.

These amount to

an impl ied

equiva lent

head l ine r a t e of

1.81%

of

Pandora s

gross

revenue.

G Suspension greements

In

ea r ly

2014,

Sony, EMI, UMPG

and

BMG

ente red

i n to

suspens ion

agreements

with

BMI which suspended the withdrawal

of t h e i r new media l i cens ing r igh t s

for

a f i n i t e amount of

t ime.

On

January 31, 2014,

UMPG

and

BMI

suspended UMPG s

withdrawal from BMI

u n t i l

December

31, 2014,

l a t e r extended

through

December 31, 2015.

On February

7, 2014,

Sony

and BMI suspended

Sony

and EMI's

withdrawal

from BMI

un t i l December 31,

2014,

e f f e c t i v e February

7,

2014.

- 35 -



36/60

As discussed above, on March

31, 2014, BMG and BMI

suspended BMG s withdrawal

from

BMI un t i l December 31,

2014,

e f fec t ive

January

1, 2014.

H

BMI s

Licenses

with

Pandora s Com petitors

Between

2010 and 2013, BMI ente red i n to

l i censes with

Spot i fy

Rdio,

Rhapsody,

and Apple iTunes Radio, a t

ra te s

ranging

from 2.5 to

4.6 .

The BMI-Apple iTunes

Radio l i cense was s igned in

2013 and

i s s e t a t 2.53 of revenue through 2014 and 2.76 of revenue

through

2015. The

l i cense

inc ludes a Most Favored Nation c lause

which was t r iggered when Apple and

the

publ ishers ente red i n to

d i r e c t l i cens ing agreements a t an

indust ry-wide ra te of

10

of

revenue. Apple

agreed

to pay BMI

the

same r a t e which i s

equiva lent to a BMI-adjusted ra te of

4.6

of

revenue.

The BMI

Spot i fy

l i cense

was

s igned

in

2011

with

a fee equal

to the

grea te r of e i the r 2.5 of revenue or 6.25 of l abe l cos t s . The

BMI-Rdio

l i cense

was ente red i n to

in

2010 and has a s t i pu l a t e d

ra t e of

2.5

of

revenue.

The

Rhapsody-BMI l i cense was

ente red

i n to in November

2012

and

r e f l ec t s

an ea r ly approach t ha t

d i f fe ren t i a t e s ra te s

based on

user

i n t e rac t i v i t y which Dr.

Pie r re Cremieux, BMI's economic expe r t

ca lcu la ted

yie lded

a net

blended

ra te

based

on Rhapsody's

on-demand

and

non- in te rac t ive

serv ices of 2.48 .

- 36 -



37/60

These

four

serv ices

compete

with

Pandora

but do

not

have

i de n t i c a l

bus iness models , as wi l l be discussed fu r the r below.

DIS USSION

The

evidence

presen ted

a t

t r i a l

shows t ha t

BMI's

proposed

l i cense

fee

of 2.5 of Pandora ' s gross revenue i s reasonab le

and

indeed

a t

the

low

end

of

the

range of fees of recent

l i censes .

The

d i r e c t

l i censes between Pandora and

Sony

and UMPG

for

the 2014 ca lendar

year

are the bes t benchmarks because they

are the most recent indices of compet i t ive

market

r a t e s .

A

Recent

Understanding

n the Music Industry

While t i s the ana lys i s

of

benchmarks and t h e i r

app l ica t ion

which

i s

dec i s ive

one must

a l so be aware o f

condi t ions

Documents

BMI v Pandora SDNY May 28 2015