Peloton Hits Back at Music Publishers With Antitrust Countersuit

Survival Guide for Awards-Season Stress -Peloton bike- EMBED 1 -2016
Courtesy of Subject

Riders on the high-tech Peloton bike can watch this streaming workout.

In French, "peloton" means "pack," as in a group of riders sticking together to draft off the energy generated by the collective. There's nothing wrong with doing so in the sport of cycling, but how about in business? Peloton Interactive believes something is amiss. On Tuesday, in a countersuit, Peloton alleges that the National Music Publishers Association has become a vehicle for anticompetitive behavior.

After taking the French word as the moniker of its company, Peloton Interactive has built an enterprise now being valued at several billion dollars. The company is more than an exercise equipment vendor. Instead, Peloton Interactive has gained enormous popularity via social interactivity, hooking up users to one another and streaming on-demand workouts.

One problem...

Peloton Interactive uses a ton of music, and in March, a bunch of song publishers ganged up for a massive lawsuit in New York federal court alleging infringement of thousands of works. If a court finds Peloton Interactive liable for copyright infringement, the company could be on the hook for more than $150 million.

Peloton is now engaging in what cyclists call a counterattack.

"Peloton is not the bad actor that Plaintiffs portray it to be," begins a cross-complaint filed Tuesday.

According to the defendant, Peloton has been working proactively to secure licenses, but the National Music Publishers Association "has instigated a coordinated effort" with some of its members "to fix prices and to engage in a concerted refusal to deal with Peloton."

Represented by attorneys at King & Spalding, Peloton adds that these actions exceed the bounds of legitimate conduct for a trade association and are in violation of antitrust law.

When it comes to music licensing, there are all sorts of rights that require different forms of payment. Reproduction of sound recordings is certainly something that needs to be licensed, as is the public performance of song compositions. For the latter, music users can obtain rights from collectives like ASCAP and BMI. Because of consent decrees, which arrived back in the 1940s to settle antitrust investigations by the government, users of music — radio and television stations, bars, restaurants, fitness clubs, etc. — have enjoyed the ability to obtain blanket licenses for songs whenever they wished. If there's a dispute on licensing rates and terms, it goes to a New York federal court.

But that's not the end of the story because there's also something called a "synchronization license," which is needed when music is matched to screen visuals. Publishers have traditionally held more control over sync licensing — and can negotiate them individually.

"As Peloton’s business evolved, it became apparent that the existing infrastructure for sync licensing was ill-suited to address the reproduction rights licenses that were appropriate for Peloton’s use case," writes Peloton's lawyers.

According to court papers, Peloton has obtained "catalog-wide" sound recording rights from major record labels and has also obtained comprehensive public performance rights. But there is still a hole, and while Peloton says it is working with music publishers to develop a licensing framework that covers what's missing, Peloton clearly prefers there be some overarching way to gain full licenses.

Frankly, that's neither an unusual nor novel phenomenon. Peloton may be one of the newest unicorns in the tech sphere, but some of these same legal problems were experienced by the karaoke industry at the height of that craze more than a decade ago. More recently, some of the issues related to mechanical licensing (reproduction of songs) led to the Music Modernization Act.

In April 2018, says Peloton, the NMPA opened licensing negotiations with Peloton.

"One significant point of disagreement between NMPA and Peloton concerned NMPA’s insistence on compensation for all its member publishers that had not previously entered into agreements with Peloton, regardless of whether Peloton had any desire to use songs controlled by every NMPA member publisher," states the countercomplaint. "Peloton explained to NMPA during negotiations that, unlike music streaming services, Peloton does not need licenses to all or even most music to provide a compelling experience for Peloton users; and it was therefore unreasonable and uneconomical for Peloton to pay publishers whose works would never be used on Peloton’s platform."

Ultimately, after some back and forth, both sides couldn't come to a deal. Peloton alleges that it then attempted to negotiate with individual publishers, but after some talks, these publishers "suddenly ceased communications with Peloton in a near-simultaneous and identical fashion in early 2019. This was the product of a concerted refusal to deal with Peloton instigated by NMPA and its leadership."

Peloton is now alleging violation of Section 1 of the Sherman Act on the part of the music publishers and tortious interference on the part of the NMPA. The countersuit demands trebled damages, disgorgement of profits, an injunction, and further relief.

"Peloton’s countersuit has no merit and is an attempt to divert attention from the fact that it has been operating without sufficient licenses for years in order to build its multibillion dollar business," responds NMPA general counsel Danielle Aguirre. "The NMPA routinely defends the interests of its members’ copyrights in order to protect their value, prevent future infringement and to seek damages to which they are entitled under the law when their property has been stolen. Peloton’s countersuit is further evidence that it does not value its relationship with the music industry but is instead hostile to the people without which it could not have built its thriving business. We will continue to fight for the rights of music creators until they are paid what they deserve.”