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When Rdio declared Chapter 11 bankruptcy in November 2015, the event marked a blight on the music industry’s transition from downloads to streams. Losing $2 million each month, Rdio announced it would be selling its key assets to Pandora for $75 million. Distribution of the proceeds has been contentious. Sony Music is still grumbling about what happened on the brink of Rdio’s bankruptcy and believes it is being shortchanged. Now, Rdio wants to put Sony on the defensive.
The Hollywood Reporter has learned that Rdio has retained the prominent law firm of Winston & Strawn to investigate Sony on the antitrust front. Rdio has recently told a bankruptcy judge it has “potentially highly valuable claims” against Sony for allegedly colluding with Universal and Warner Bros. in the streaming music market. If Rdio moves forward with an antitrust lawsuit as currently being envisioned, it would be raising similar issues explored in the Justice Department’s lawsuit against Apple and book publishers over the way that “most favored nation” clauses in contracts can enforce pricing floors for the licensing or sale of content.
The investigation — which entails how the major labels have communicated with each other with respect to licensing negotiations — will do nothing to settle the simmering bad blood between Rdio and Sony, which exploded in April.
That month, Sony sued Rdio’s three top executives, alleging that before Rdio declared bankruptcy, the streamer made misrepresentations, false statements and concealments in order to avoid millions of dollars in payments that had come due as well as win the right to continue exploiting sound recordings from artists including Michael Jackson, Bruce Springsteen, Beyonce and others. In court papers, Sony also has hinted at possibly suing Pandora, too, for its own involvement in the alleged fraud.
Rdio responded by pushing a judge to issue a preliminary injunction on the Sony lawsuit. On Wednesday, though, U.S. Bankruptcy Judge Dennis Montali issued a ruling denying any restraining order.
Meanwhile, as the spoils of the Rdio asset sale get divided, Sony wants more than the five percent it has been earmarked under a reorganization plan. Sony alleges that the bankruptcy has been set up to enrich insiders like Rdio chief executive officer Anthony Bay. With a $12.4 million claim, Sony is Rdio’s largest unsecured creditor. Additionally, Sony subsidiary Orchard, which specializes in digital licensing for independents, has a $4.5 million claim and is Rdio’s third-largest unsecured creditor. Sony aims to leverage its $17 million stake to block the plan for distributing the Pandora money.
Rdio is fighting back. The debtor not only asserts that Sony’s claims for “unearned” minimum guarantees under the streaming licensing deals are unwarranted, but Rdio’s lawyers are now looking to possibly sue Sony.
“In particular, the Debtor believes that Sony and Orchard have engaged in anticompetitive conduct to fix and control prices and unreasonably restrain trade for the licensing, marketing, and use of music by services, like the Debtor, for the digital streaming of music to consumers worldwide,” states a Rdio motion aimed at compelling the production of documents from Sony. “For example, one of the Debtor’s preliminary antitrust theories relates to what are commonly known as Most Favored Nations clauses (‘MFNs‘) which play a major role in Sony’s agreements with Rdio and in Orchard’s agreements with Rdio.”
The bankruptcy judge is told that antitrust enforcement agencies and courts are applying greater scrutiny to MFNs, which guarantee that parties in contracts get industry-best rates. Rdio nods towards a law review article discussing the DOJ’s lawsuit over the e-book market. There, Apple was alleged to have organized book publishers into rebelling against Amazon.com with higher prices enforced through MFNs. In return, Apple got a percentage of sales. In June 2015, the 2nd Circuit Court of Appeals agreed that under the right circumstances, MFNs can be misused to anti-competitive ends and can facilitate horizontal coordination and reduce a company’s incentive to deviate. Rdio is now probing whether Sony is misusing MFNs “under a collusion theory.”
Sony is cooperating to some extent, offering to search the files of its key streaming negotiators and produce its licensing agreements with Spotify, Amazon, Apple, Google, Rhapsody and Microsoft, but Rdio wants more. Among the documents being sought are wide-ranging communications between the labels and with their trade associations as well as any depositions and witness interviews conducted by the FTC, the Justice Department, the European Commission and other regulatory bodies.
Rdio says that Sony has “cherry-picked categories of documents which they know will likely offer little-to-no evidence of collusion” and adds that Sony is stone-walling on documents relating to possible government investigations. The court papers report: “During the June 21, 2016, meet and confer, rather than confirm or deny the existence of any such investigation, Sony’s counsel pressed Debtor’s counsel to identify for Sony the governmental investigation into Sony to which it was referring. But these governmental investigations by their very nature are non-public; and, thus, the demand that Debtor identify for Sony the responsive and relevant governmental investigations into Sony’s conduct — investigations that could, in fact, be highly probative of Debtor’s claims — is absurd.”
(No known investigation into the streaming market is happening. Back in 2015, the Justice Department was reported to be looking into Apple for allegedly forcing Spotify into ending free tiers, but according to one source, the investigation closed without any adverse finding.)
On Tuesday, Sony filed opposition documents that characterize Rdio’s potential antitrust claims as “nothing but speculation and conjecture.”
According to Sony, the MFNs being agreed upon by various entities have material differences (like whether premium tiers on the streaming platform trigger per stream minimums) that are inconsistent with a price-fixing theory, and that the law recognizes that MFNs are widely used in the entertainment industry and “typically are entirely proper.”
“The MFN in the Sony Music/Rdio agreement requires Rdio (the buyer) to give Sony Music (the seller) an overall deal that is at least as good as it offers anyone else,” states Sony, being represented by eight attorneys at three law firms including Munger, Tolles & Olson. “Debtor has not cited a single case finding that this type of MFN leads to anticompetitive collusion. And for good reason: This type of MFN cannot prevent any record company from providing Rdio or any other audio subscription streaming service a lower price.”
Addressing the law review article that discussed the DOJ’s case against Apple and the book publishers, Sony says that entailed a “completely different type of MFN — an MFN in which a seller promises to give a buyer the best price it offers anyone else.”
Sony says that to comply with the discovery requests would cost millions of dollars and consume months of employee and outside counsel time. It suspects that the debtor is merely attempting to stop Sony from voting to block the distribution of money to Rdio’s other creditors. As evidence, it points to settlements that Rdio has made with Universal and Warner Bros. where the debtor got very little to release antitrust claims. “So why is Debtor seeking to impose a multi-million dollar burden on Sony Music if it knows its antitrust claim is meritless?” asks Sony. “The answer is transparent: It seeks to force Sony Music to drop its legal claims.”
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