Performing rights organizations (PROs) are entities that issue licenses to, and collect royalties from, television stations and other parties who wish to perform or broadcast copyrighted musical compositions. There are three PROs in the United States, the largest of which are ASCAP and BMI. The other PRO, the Society of European Stage Authors and Composers (SESAC) has until recently been the Jan Brady of the bunch – born in the middle and often overlooked. Founded in 1930 to represent European composers, it later concentrated on the Christian music genre.
Because ASCAP and BMI are bigger, they are also better known, not only by licensees and composers, but also by antitrust regulators. Since the 1940’s, BMI and ASCAP have been the target of numerous private antitrust lawsuits and government actions, and both have entered into consent decrees with the Department of Justice that place controls and restrictions on their licensing activities. SESAC, on the other hand, has largely flown under the antitrust radar.
However, in the early 1990’s, SESAC began expanding its catalogue, which now includes more than 20,000 affiliated composers, including Bob Dylan and Neil Diamond, and other lucrative properties such as the music embedded in reruns of Seinfeld. In 2008, SESAC allegedly attempted to parlay this increased market share into more favorable licensing terms with television stations. The Meredith Corporation and other television companies filed suit in 2009, alleging that these new terms violated the Sherman Act. On March 3, 2014, Judge Paul Engelmayer of the Southern District of New York, in Meredith Corp. v. SESAC LLC, denied SESAC’s motion for summary judgment and allowed most of these claims to move forward to trial.
SESAC’s Television Licensing Terms
Almost every television program contains music, but the right to broadcast a program does not ordinarily include the right to broadcast the music embedded in it, which must be separately secured. As a practical matter, this puts television stations in a tough spot. They can’t control which music is used in the programs they air (except for locally produced shows), and it would be darned impractical to try and license the music rights directly from every composer for each individual piece of music in every program. So, the stations have little choice but to take licenses from all three PROs.
The purported problem with this arrangement, from the perspective of licensees, is that PROs could take advantage of the situation and force television stations to accept expensive “blanket” licenses, in other words, an all-or-nothing deal that includes a PRO’s entire catalogue, even if the licensee only ends up using a few songs. The BMI and ASCAP consent decrees address this concern by requiring the option of a “per-program” license (PPL), under which a station only pays for the music it uses. SESAC (even though unencumbered by the consent decrees) offers both blanket licenses and PPLs. However, the television station plaintiffs argued that what SESAC was offering nevertheless was unlawful in the following ways:
- Although SESAC offered a PPL, the television stations claim that SESAC manipulated its terms, including by jacking up the administrative costs, so that it would always cost more than a blanket license and in effect elimiate the only economically viable alternative to the blanket license.
- SESAC allegedly increased its blanket license fee 10% over the prior license period, despite a decline in demand for SESAC music. By contrast, under the BMI and ASCAP consent decrees, disputed licensing rates must be deemed “reasonable” by a third party Rate Court.
- Most notably, SESAC allegedly entered into “supplemental affiliation agreements” with a few of its most popular composers. Under these agreements, the composers purportedly received more compensation up front from SESAC, and in return the composers agreed not to deal directly with the television stations (or at least to pay very steep fines if they did).
The Court’s Antitrust Analysis
Section 1 of the Sherman Act outlaws “[e]very contract, combination . . . or conspiracy in restraint of trade or commerce.” Judge Engelmayer wrote that, in order to make out a case under Section 1, a plaintiff must show both concerted action to accomplish an unlawful objective and an unreasonable restraint of trade. Under the “rule of reason” analysis applicable to most situations, a court determines whether an accused action is an unreasonable restraint of trade by considering, among other things, the definition of the relevant market, the defendant’s market power and the pro-competitive effects of the challenged activity.
The court held that a jury could find that SESAC’s activities satisfied the elements of a Section 1 violation. First, a jury could find concerted action among SESAC-affiliated composers, i.e., that they knew their rights would be bundled into a blanket license. Also, a jury could find that the small percentage of composers who agreed to “supplemental affiliation agreements” did so appreciating that they were unlawfully “choking off” any competition to SESAC’s blanket license.
As to whether this activity was an “unreasonable restraint” on trade, the court engaged in a “rule of reason” analysis. The Court first explained that the relevant market was not the entire PRO industry (SESAC, ASCAP and BMI). Each PRO has entirely different catalogues, so a television station cannot substitute one license for another, but always had to deal with all three. Therefore, the relevant market in this case was SESAC’s catalogue only. The Court held that, with that market definition in mind, a jury could find that the anticompetitive effects of the SESAC license terms (allegedly unrealistic pricing, restrictive supplemental affiliation agreements, etc.) outweighed any procompetitive benefits (which in this case would include giving stations the ability to acquire rights to many works at once and potentially lowering administrative costs).
The Court also refused to dismiss the television stations’ claim under Section 2 of the Sherman Act, which alleged that SESAC was attempting to “maintain and fortify” a monopoly by eliminating all realistic competition. After issuing its order, the court temporarily stayed all pretrial deadlines to give the parties a “time out” to explore settlement. They have until April 11, 2014 to report to the court.