10:17am PT by Eriq Gardner
Did SiriusXM Pull a Fast One on Major Record Labels in a Deal With Suing Indie Musicians?
In November, SiriusXM was scheduled to go to trial in a class action lawsuit for publicly performing pre-1972 sound recordings when days before jury selection, the satcaster arrived at a proposed settlement with independent musicians worth between $25 million and $99 million. Observers may have thought at the time that Flo & Eddie of The Turtles, the named plaintiffs, got a good deal for recordings that never garnered compensation for radio play. Some insiders may have speculated that SiriusXM's lawyer Daniel Petrocelli's work defending Donald Trump in the Trump University fraud case — which also settled on the eve of a November trial — factored. But others in the music industry establishment smelled something rotten. On Monday, SiriusXM had to respond to concerns that it snuck language into the settlement for the purpose of advantaging the satcaster in future royalty rate-setting proceedings.
To back up a moment, and acknowledge that music licensing is incredibly complicated, most radio outlets haven't traditionally paid to publicly perform sound recordings. In the old days, the promotional value of radio was deemed sufficient. Over the years, with changing technological currents, there's been proposals made in Congress to change this, but at the moment, there are some good arguments why owning song publishing rights is a better place to be these days than owning sound recordings.
In August 2013, Flo & Eddie tried something new. In a series of lawsuits, they alleged that when it came to sound recordings made before Feb. 15, 1972 — when sound recordings began falling under federal copyright protection — those were protected by state laws such as misappropriation, unfair competition and conversion. These rights are often known as "common law copyrights."
Not only did Flo & Eddie experience some success both in California and New York, but the major labels copied their strategy by filing their own lawsuit against SiriusXM before arriving at a $210 million settlement. Attorneys for the indie musicians then cried foul about being usurped, but they were given the chance to win damages against SiriusXM in their own case.
Then came the settlement, which provided the settling class of indie musicians a baseline of $25 million for hits previously played on digital channels like SiriusXM Radio's '60s on 6, an amount that potentially rose to $40 million depending on the outcome of various appeals. Additionally, the settling musicians agreed to a 10-year licensing deal, providing for royalty payments of up to 5.5 percent of SiriusXM's gross revenue. The exact royalty rate depended on the outcomes of appeals as well, but was estimated by an expert at the time to be worth somewhere in the vicinity of $45 million to $59 million in additional cash payments.
SiriusXM then prevailed at a New York appeals court on its contention that there's no public performance rights for pre-1972 recordings while a decision is looming by a California appeals court. The appellate decisions may lessen what SiriusXM has to pay to resolve the lawsuit, but that's not exactly why some in the industry are irate at the SiriusXM-Flo & Eddie settlement agreement.
Instead, the concerns pertain to royalties on the webcasting front.
Although the owners of sound recordings haven't traditionally received compensation for radio public performance, there's provisions under federal law with respect to those like SiriusXM, Pandora and iHeartRadio operating non-interactive digital music services. Every few years, the Copyright Royalty Board — a part of the U.S. Library of Congress — sets royalty rates for those webcasters electing a compulsory license. In other words, SiriusXM, Pandora and iHeartRadio don't have to cut direct deals with copyright owners. They benefit from a statutory license. Then again, and very importantly, the Copyright Royalty Board considers theoretical market rates when figuring out what royalties should be for such a license. The CRB is soon scheduled to rate-set for the years 2018-22.
With that in context, the proposed Flo & Eddie settlement states: “The Parties agree that [the royalty rate] represents the rate that has been established by negotiations between a willing buyer and willing seller in a competitive market for Pre-1972 Sound Recordings, and shall be precedential in all future and/or pending proceedings (including rate making proceedings and arbitrations) relating to sound recordings.”
In early March, in advance of a hearing to determine whether this settlement gets a judge's final approval, the RIAA, SAG-AFTRA, AFM, SoundExchange and others requested the opportunity to submit an amicus brief expressing their concerns.
According to this brief, "[I]t is clear from the settlement’s face, as well as obvious marketplace facts, that the proposed royalty rate is well below the market rate for sound recordings, particularly classic sound recordings that are among the world’s most valuable. Far from having anything to do with the settlement's economic terms, this language just gives Sirius XM fodder for future rate-setting proceedings — at the expense of copyright owners and recording artists."
The major labels and other interjectors say that a 10-year license of any sort "is virtually unheard of in the music industry, where new platforms, technologies, and business models are constantly emerging," and that a 5.5 percent rate isn't close to the statutory license rate of 11 percent currently being paid by SiriusXM. They argue that not only has SiriusXM included "gratuitous" language in its settlement in order to arm itself with marketplace evidence moving forward, but that the settlement amounts to using the courts to arrive at a new compulsory license that effectively operates on an "opt-out" basis.
"Indeed, under the proposed settlement, if owners do not declare themselves, then Sirius XM gets to perform their recordings for free — a windfall that should raise red flags for the Court," states the brief (read here) authored by Daniel Rozansky and Joshua Segal at Jenner & Block.
On Monday, SiriusXM submitted its response, telling the judge that not one class member filed an objection because "the reality is that class members want to share in the guaranteed multi-million dollar payout for past performances, and look forward to potential future royalties."
The satcaster then argued that the major labels "are not class members and have no legitimate interest in this matter" and that the concerns about establishing a "market rate" and creating an improper compulsory license are neither "legitimate, relevant, or helpful" in helping the judge determine whether the proposed settlement is fair to class members. As to 11 percent, SiriusXM says that rate is for post-1972 recordings and not a proper benchmark.
Is SiriusXM attempting to divide and conquer — splitting the pre-1972 indies from the majors before tackling royalties at large at a consequential rate proceeding? The brief (read here) hardly denies that's happening. Instead, the judge is told to disregard an "attempt to protect [the majors'] monopoly in the area of sound recordings and to deprive class members of their fundamental right to enter into such licenses."