Just before Christmas, Magistrate Judge Lynne A. Sitarski, of the U.S. District Court for the Eastern District of Pennsylvania, issued a recommendation that a District Judge deny a motion by the Radio Music License Committee (the “RMLC”) for a preliminary injunction preventing SESAC from increasing its rates during the pendency of the RMLC’s antitrust suit against SESAC.  The result, on its face was not the result sought by the radio industry (and could result in higher SESAC fees in the short-term).  The underlying legal analysis, however, which held that the RMLC had demonstrated that it was likely to succeed on the merits of its antitrust claims, should leave radio and television broadcasters cautiously optimistic about their ability to keep SESAC licensing fees in check.

Before we delve into the opinion itself, a brief background of the case and discussion of the procedural posture of Judge Sitarski’s decision is in order.  SESAC is one of three performing rights organizations (PROs), which aggregate public performance copyright rights from music publishers and sell them to broadcasters and other users of copyrighted musical works.  SESAC is much smaller than the other two performing rights organizations, with a library of 250,000 to 400,000 songs compared to 7.5 million for BMI and 8.5 million for ASCAP.  Unlike BMI and ASCAP, SESAC is not subject to a court-supervised consent decree that regulates its rates and provides users with other safeguards against the exercise of unlawful collective market power.

The public performance licenses that PROs issue apply to featured usage (such as when a radio station plays a song or when a pre-recorded program features a song), music contained in commercials, music used in bumpers, and incidental performances (such as ambient music performed during a sporting event).  Broadcasters may not control, or even know the identity of the music used, in all of these performances.  For example, a broadcaster may receive commercials or syndicated programming with music already included and no opportunity to change that music.  And, historically, the PROs have refused to license performance rights to program or commercial producers at the time of production, insisting instead that they license the entity making the performance, often after it is impossible for that entity to affect the musical content of a program or commercial.  As a result, to avoid copyright infringement (which carries potentially hefty civil statutory damages for each work that is infringed), most broadcasters obtain blanket licenses from each of the three PROs.

The RMLC, which represents the interests of thousands of radio stations, brought suit against SESAC in October 2012, alleging that SESAC violated the Sherman Antitrust Act by imposing an unreasonable restraint on trade and using its monopoly power to artificially insulate itself from competition.  A similar case brought by television broadcasters is proceeding in the U.S. District Court for the Southern District of New York, where fact discovery has concluded and the court recently heard arguments on SESAC’s motion for summary judgment.  With the RMLC’s case still pending and SESAC poised to impose another rate increase, the RMLC sought a preliminary injunction.  In the Eastern District of Pennsylvania, pre-trial matters, such as motions for a preliminary injunction, routinely are handled by magistrate judges, who issue a Report and Recommendation that is not binding, but instead must be adopted by the district court judge.  Either party has fourteen days to object to the Report and Recommendation.

As Judge Sitarski recognized, preliminary injunctive relief is “an extraordinary remedy” and “should only be granted in limited circumstances.”  To prevail on a motion for injunctive relief, the movant must establish: (1) a likelihood of success on the merits; and (2) the extent to which it will suffer irreparable harm without injunctive relief; weighed against (3) possible harm to the nonmoving party if the injunction is issued; and (4) the public interest.  In recommending denial of RMLC’s motion, Judge Sitarski found that radio stations will not suffer irreparable harm from a SESAC rate increase.  Although the judge did not dispute RMLC’s contention that radio broadcasters faced a “Hobson’s Choice” to sign a blanket licensing agreement or face onerous copyright sanctions, Judge Sitarski held that it was unclear how preventing SESAC from raising its rates would protect broadcasters from that choice.  Rather, Judge Sitarski found the injury to be inherent in SESAC’s underlying licenses.  Further, Judge Sitarski found that because SESAC’s fees “account for a relatively small portion of the stations’ overall expenses,” any monetary loss from increased fees would not be irreparable.

The more important takeaway for broadcasters, however, is that, as part of her analysis, Judge Sitarski held that, based on the evidence presented, the RMLC demonstrated a likelihood of success on the merits as to both of its theories of antitrust violation.  A central issue in most antitrust cases is the definition of the relevant market.  Here, on a limited record, the magistrate agreed with the RMLC that SESAC’s blanket license constitutes its own market.  In reaching this conclusion, Judge Sitarski focused on the fact that, because there is no way to determine what songs are part of the SESAC blanket license, and because SESAC does not offer a per-program license or any other type of license that promotes direct licensing from individual music publishers, there cannot be a substitute for obtaining a blanket license from SESAC.  Further, Judge Sitarski weighed heavily the fact that broadcasters do not control all of the music they play, and therefore cannot avoid the need for a SESAC license.  The Magistrate Judge also credited the cross-elasticity analysis performed by RMLC’s expert, which found that despite SESAC’s consistent annual rate increases, radio stations were not able to find alternative sources of music rights. This market definition is significant in that if the relevant market is the market for a SESAC blanket license, SESAC by definition has market power within the relevant market.

A violation of Section 1 of the Sherman Act requires a “concerted action” that imposes an unreasonable restraint on trade.  For the purpose of a Section 1 analysis, concerted action generally takes two forms: (1) an agreement among competitors (horizontal agreement); or (2) several agreements between a central hub and numerous horizontal competitors (“hub and spoke” agreements).  Here, the Magistrate Judge concluded that SESAC’s agreement with its affiliates does not fit either of these models, as SESAC and its publishers generally are not competitors (given the lack of direct licensing) and there is no agreement among the affiliates.  Of course, it is the existence of the SESAC collective that eliminates the incentive for SESAC’s publishers to compete with each other.  Judge Sitarski apparently recognized this fact, noting that the Supreme Court has found that aggregation of music licenses by PROs constitutes “concerted action” within the meaning of Section 1, and therefore held that RMLC has a likelihood of success in proving concerted action.  Additionally, while recognizing that blanket licenses have certain pro-competitive benefits (reduced transaction costs, increased efficiency, and flexibility in use of musical material), Judge Sitarski determined that, on balance, because broadcasters have no choice but to obtain a SESAC license and because, unlike BMI and ASCAP, SESAC is not subject to rate regulation, SESAC’s conduct imposes an unreasonable restraint on trade.

The RMLC’s second theory, violation of Sherman Act Section 2, requires the possession of monopoly power in the relevant market and the use of that power for anti-competitive purposes.  Because the Magistrate Judge adopted the market for SESAC blanket licenses as the relevant market, it logically followed that SESAC has monopoly power in that market.  Judge Sitarski went on to find that “SESAC’s practice of offering only blanket licenses without any restriction is anticompetitive.”

Judge Sitarski’s favorable findings on the merits issues are encouraging, but are just a first step toward the RMLC’s ultimate goal.  The Report and Recommendation contains several disclaimers noting that the Magistrate Judge had a limited record before her and that “the ultimate merits will be determined at the appropriate stage of the proceedings.”  Among other things, SESAC did not conduct an independent market analysis, and instead only had its expert critique the analysis by RMLC’s expert.  Moreover, the Report and Recommendation is not an opinion of the trial judge, but rather of the Magistrate Judge.  Thus, the predictive nature of the opinion is limited.  Still, the Report and Recommendation provides an outline for how broadcasters can succeed on the merits and demonstrates that broadcasters’ arguments should not fall upon deaf ears.

We will provide further updates as they become available about developments in both the radio and television cases.

Related Posts: