Jay Topkis, New York City (Simon H. Rifkind, Allan Blumstein, David E. Nachman, Gidon M. Caine, Daniel McNeel Lane, Jr., Paul, Weiss, Rifkind, Wharton Garrison, New York City, on the brief), for appellant.
R. Bruce Rich, New York City (Kenneth L. Steinthal, Evie C. Goldstein, Jonathan T. Weiss, Weil, Gotshal Manges, New York City, on the brief), for applicant-appellee.
Appeal from the United States District Court for the Southern District of New York.
Before FEINBERG, NEWMAN and CARDAMONE, Circuit Judges.
JON O. NEWMAN, Circuit Judge:
[1] In 1941, the Government settled its antitrust suit against the American Society of Composers, Authors and Publishers (ASCAP) with the entry of a consent decree.
As amended in 1950, the consent decree requires ASCAP to offer users of music a so-called “blanket license,” the non-exclusive right to perform any music in the
ASCAP repertory.[2] The amended consent decree also provides that in the event of a dispute concerning the amount of a fee for the blanket license, the District Court for the Southern District of New York is authorized to determine a reasonable fee. This appeal is the first to challenge a fee determination for a blanket license under the ASCAP consent decree.
[2] ASCAP appeals from the October 12, 1989, order of the District Court for the Southern District of New York (Michael H. Dolinger, Magistrate) determining the fee to be paid by the applicant-appellee Showtime/The Movie Channel, Inc. (SMC). Magistrate Dolinger, sitting by consent pursuant to
(c) (1988), set the fee for the period April 4, 1984, through December 31, 1988, at 15 cents per subscriber, rejecting ASCAP’s request for a fee of 25 cents per subscriber. For substantially the reasons set forth in the Magistrate’s comprehensive opinion, reprinted in the appendix to this opinion, we affirm.
[5] SMC, the applicant in the pending matter, operates two pay cable television network services, “Showtime” and “The Movie Channel.” SMC charges the operators of local cable systems a fee for the right to carry its programming, which consists primarily of movies. Since the films contain copyrighted music, SMC must obtain performance rights for the music on the soundtracks of the films it makes available on its cable channels. Like most users of copyrighted music, SMC finds the blanket license to be the most convenient way to obtain the rights it requires.
[6]
SMC’s predecessor entities held blanket licenses from ASCAP for the years 1977 through 1979. In these early years of the cable industry, the parties agreed to nominal license fees and stipulated that the licenses were entered into on an “experimental” basis and would not be “prejudicial to any position taken by either of the parties” in the future. The owners of Showtime held a blanket license from BMI for the years 1978-1980, also at nominal fees.
[7] More pertinent to the pending controversy are the licenses in effect in the 1980’s. For the period July 1, 1983, through December 31, 1986, SMC obtained a BMI blanket license at a cost of $3.75 million and for the years 1987-1989 at an estimated cost of $2.6 million.
For the earlier period, the fee amounted to about 13 cents per subscriber per year, and for the latter period about 12 cents per subscriber per year. For the years 1986-1989, Home Box Office (HBO), another pay cable service, held a BMI blanket license at a cost set at 12 cents per subscriber per year.
[8] For the years 1980-1982, HBO held an ASCAP blanket license at a cost of $6 million and for the years 1983-1985 at a cost of $13 million. Though these fees were set as fixed dollar sums, they amounted to approximately 25 cents per subscriber per year. In December 1985 HBO offered
to extend its ASCAP license through 1988 for a fee of 24.1 cents per subscriber per year. For the years 1983-1985, the Disney Channel, another pay cable service, held an ASCAP blanket license at a cost of $875,000; this cost amounted to 21 cents per subscriber per year, based on Disney’s total year-end subscribers during the period, and 29 cents per subscriber per year, based on the average number of subscribers during the period.
[9] During the years pertinent to this controversy, SMC, HBO, and Disney were the major pay cable services. In 1986, these three services accounted for more than 30 million subscribers, out of a nationwide total of just under 32 million subscribers to all pay cable services.
[10]
On April 4, 1984, SMC requested from ASCAP a blanket license from that date through 1986.
When the parties were unable to agree upon a license fee, SMC, exercising its rights under the Consent Decree, initiated the instant proceeding by asking the District Court to set a “reasonable fee” for the license. Consent Decree, ¶ IX(A).
The parties later agreed to extend the fee-setting application to cover the period through 1988. The fee application was heard by Magistrate Dolinger by agreement,
(c). The Magistrate conducted a seven-day trial in 1988.
[11] ASCAP contended that a reasonable annual fee for SMC would be 25 cents per subscriber. ASCAP relied on the fees paid by HBO during the years 1980-1985 for an ASCAP blanket license, which were approximately 25 cents per subscriber, and those paid by Disney during the years 1983-1985, which were either 21 or 29 cents per subscriber per year, depending on whether year-end or average subscriber totals are used. ASCAP also relied on HBO’s 1985 offer to extend its then existing license at an annual fee of 24.1 cents per subscriber.
[12] SMC contended that the fees paid to ASCAP by HBO and Disney should not provide the basis for a “reasonable fee” to be set for SMC because the HBO and Disney fees reflect ASCAP’s monopoly power and are much higher than prices that would obtain in a freely competitive market for copyrighted music rights. Instead, SMC urged the Court to estimate the economic value of the music used by SMC in its programming by analyzing the costs of acquiring other creative components such as script writing and film directing. Using this approach, SMC contended that a reasonable annual fee for the ASCAP blanket license would be 8 cents per subscriber.
[13]
The District Court accepted half of SMC’s position, agreeing with SMC that the HBO and Disney fees for ASCAP licenses were not suitable bases for determining a “reasonable” fee for SMC. The Magistrate pointed out that the HBO license for 1980-82 was specified to be “experimental” in nature. He then observed that HBO’s 1983-85 license contained a “most favored nation” clause, entitling HBO to a retroactive reduction of its fee to whatever fee might be agreed upon between ASCAP and any pay television service with at least one million subscribers, such as SMC. In the Magistrate’s view, if the HBO negotiated fee were to be
used as a benchmark for SMC’s fee, it would have to be discounted by some value attributable to the benefit of this clause, a reduction that he concluded would be entirely speculative on the record before him.
[14] The Magistrate also rejected the rate of 25 cents per subscriber per year derived from the HBO fees for 1983-85 because HBO had agreed to a flat dollar amount and had done so based on projections of larger numbers of subscribers than it obtained. He pointed out that with the high subscriber projections at hand, it was doubtful that HBO would have agreed in 1983 to pay at a rate that turned out to be 25 cents per subscriber, based on the actual number of subscribers. He also found unpersuasive the rate of 24.1 cents per subscriber offered by HBO in 1985 to extend its license because this offer included the “most favored nation” clause from the 1983-85 license and therefore was not an unconditional offer to pay that rate.
[15] The Magistrate also rejected the Disney license rate as an appropriate benchmark because this rate was agreed to at an early stage of the Disney Channel’s existence and reflected considerations not pertinent to arm’s length bargaining between ASCAP and an established cable service like SMC.
[16] Overshadowing these specific grounds for rejecting the pertinence of the HBO and Disney license rates, however, was the Magistrate’s basic conclusion that ASCAP’s bargaining power in negotiating rates for its blanket license was unduly enhanced by the absence of a truly competitive market for copyrighted music or, at a minimum, that the licensees’ perception of ASCAP’s undue market power prompted them to pay fees higher than those that would obtain in a more competitive market. In support of his view concerning the actuality and the perception of ASCAP’s enhanced market power, the Magistrate relied on several factors. These included the necessity of obtaining music rights in order to offer local cable systems films containing copyrighted music; the difficulties SMC would likely encounter in obtaining music rights by alternatives to the blanket license such as per-program licenses (a license from ASCAP to use all of the music in the ASCAP repertory that is needed for performance of a single program); direct licensing (a license from the composer or other copyright proprietor of each song to be performed), or source licensing (a license from the producer of a program for the music contained in that program); and the aversion of those needing music licenses to invoke the heretofore unused rate-setting authority of the District Court. The Magistrate also placed considerable reliance on the fact that the BMI blanket license, which commanded prices only slightly below those for the ASCAP blanket license in other segments of the entertainment industry,
and HBO at prices between 12 and 13 cents per subscriber, far below ASCAP’s claimed price of 25 cents.
[17] Having concluded that ASCAP had not sustained its burden of proving that its claimed price was reasonable, the Magistrate turned to the task of setting a reasonable fee. He rejected SMC’s suggested price of 8 cents per subscriber,
and instead determined that a reasonable price would be 15 cents per subscriber. The Magistrate started his calculation by using the price of approximately 12 cents per subscriber paid by SMC and HBO for the BMI blanket license. He rejected SMC’s objection that the price for the BMI blanket license reflected a degree of undue market power similar to that of ASCAP, doubting that BMI “has or chooses to exert the type of leverage that SMC attributes to it.” Appendix, infra, at 595. The Magistrate then adjusted the BMI rate upward by a factor reflecting the 55-45 ratio that ASCAP and BMI had agreed to use in splitting the amount determined by the Copyright Tribunal to be payable to both organizations out of the royalties for compulsory licenses paid by cable system operators for program retransmissions.
(d) (1988). Though recognizing that the ASCAP repertory contains three times as many songs as the BMI repertory, he concluded that the value of the ASCAP license only slightly exceeded that of the BMI license and that the difference was best reflected by the agreement between ASCAP and BMI respecting the Copyright Tribunal payments. He specifically declined to credit ASCAP’s claim that programs carried on SMC channels use twice as much ASCAP music as BMI music. Based on the adjusted BMI rate, the Magistrate set a fee of 15 cents per subscriber for the ASCAP blanket license.
is content to defend the Magistrate’s fee of 15 cents per subscriber.
[20] The parties also differ in their approach to the appropriate standard of review. ASCAP declines to specify a standard of review, simply contending that the Magistrate has erred in rejecting the 25 cent rate, in rejecting the pertinence of the ASCAP licenses to HBO and Disney, in relying on the BMI licenses to HBO and SMC, and in calculating the adjustment to the BMI license rate. SMC contends that each of these aspects of the Magistrate’s decision is a finding of fact, subject to review under the “clearly erroneous” standard. Neither side’s approach to the standard of review is satisfactory.
[21] Fair market value is a factual matter, albeit a hypothetical one. It is the price that a willing buyer and a willing seller would agree to in an arm’s length transaction. That the value to be determined is hypothetical does not render it any the less a matter of fact, for purposes of the standard of review. Fact-finders frequently are obliged to determine as a matter of fact hypothetical values pertinent to damage calculations.
, 66 S.Ct. 574, 90 L.Ed. 652 (1946) (lost profits);
, 51 S.Ct. 248, 75 L.Ed. 544 (1931) (same). But the factual component of the issue before the Magistrate does not render all aspects of his decision-making subject to review under the “clearly erroneous” standard. In making a factual determination, a decision-maker might rely on legally impermissible factors, fail to give consideration to legally relevant factors, apply incorrect legal standards, or misapply correct legal standards. In jury trials, such matters are normally resolved by rulings on admissibility of evidence and by jury instructions. In court trials, where the functions of fact-finding and exposition of law are performed by the same person, the line between the functions is not always distinct. For example, the line between admissibility of evidence (law) and evaluation of the persuasive force of evidence (fact) is often blurred. Nevertheless, an appellate court is obliged to observe the law/fact distinction as best it can and accord plenary review to any aspect of a trial court’s decision that can fairly be isolated as determining an issue of law.
With that principle in mind, we consider the various steps in the Magistrate’s decision-making process in this case.
[22] The Magistrate’s first step, and the one most vigorously challenged by ASCAP, was the refusal to regard the HBO and Disney blanket licenses from ASCAP as the most pertinent transactions for determining a reasonable fee for an ASCAP blanket license to SMC. Recognizing the general utility of comparable sales in determining the fair value of property, the Magistrate concluded that HBO had paid a price higher than fair value because of ASCAP’s undue market power in the field of licensing music rights,
a price higher than would have obtained if there existed a freely competitive market for music rights or at least a market more competitive than the one currently functioning. There are factual and legal components to that conclusion. Whether a market is freely competitive and, if not, whether a particular seller enjoys more market power than would obtain in a freely competitive market are matters of fact, albeit not as easy to ascertain nor as free from dispute as amounts of gross sales or net profits. Like many matters of fact, the competitiveness of a market and the market power of a seller may be ascertained with the aid of expert opinions, whose persuasive force is itself a factual matter within the purview of the fact-finder. On the other hand, whether the price paid by a buyer may be
given less weight as a “comparable sale” either because the price was higher than would have obtained in a more competitive market or was perceived by the buyer to be higher is a matter of law. In a jury trial, this question would have arisen as an objection to evidence of the competitive nature of the market and the buyer’s perception of the market.
[23] The Magistrate’s view that the market for licensing music rights is not freely competitive finds support in the evidence. Though SMC’s expert economist may have indulged in some hyperbole in stating that ASCAP operates in “as close to a perfect monopolistic market that I have ever seen,” his view, even if discounted, was entitled to be relied upon. The evidence disclosed that in the licensing of music rights, songs do not compete against each other on the basis of price. Though it is theoretically possible for a licensee to obtain music rights to particular songs by negotiating with the composer or the producer of a film, the record is clear that this is not occurring, that cable channels need access to the ASCAP and BMI repertories to supply films to cable systems, and that the blanket license is the existing method for obtaining the needed rights. The Magistrate was entitled to find that the market is less competitive than it would be if direct or source licensing were regularly used or if music rights were scattered among numerous performing rights societies with users free to secure only those licenses needed to distribute particular films. And he was entitled to find that ASCAP’s dominant position in the music licensing field gives it considerable market power.
[24] ASCAP contends that the findings about the market and ASCAP’s market power cannot stand (are clearly erroneous) in light of this Court’s decisions in the
cases. We there ruled that antitrust plaintiffs had not sustained their burden of proving that the blanket license functioned to restrain trade, a burden they were obliged to discharge in order to impose treble damage liability upon ASCAP for an alleged violation of section 1 of the Sherman Act,
(1988). But the failure of those antitrust plaintiffs to prove an antitrust violation does not mean that the Magistrate lacked evidence sufficient to support a finding that ASCAP enjoys more market power than it would have in a freely competitive market for music rights.
[25] Nor did the Magistrate commit legal error in regarding ASCAP’s market power as a relevant consideration in diminishing the weight of the ASCAP licenses to HBO and Disney as comparable sales. The rate court was established as a component of the settlement of the Government’s antitrust challenge to ASCAP’s licensing practices. Though the rate court’s existence does not mean that ASCAP has violated the antitrust law, the court need not conduct itself without regard to the context in which it was created. The opportunity of users of music rights to resort to the rate court whenever they apprehend that ASCAP’s market power may subject them to unreasonably high fees would have little meaning if that court were obliged to set a “reasonable” fee solely or even primarily on the basis of the fees ASCAP had successfully obtained from other users. The Ninth Circuit has observed that “as a potential combination in restraint of trade, ASCAP has been `disinfected’ by the [consent] decree.”
, 4 (9th Cir. 1967),
, 88 S.Ct. 761, 19 L.Ed.2d 838 (1968). The disinfectant need not be a placebo.
[26] It is a slightly closer question whether the Magistrate properly relied on HBO’s
that ASCAP enjoyed undue market power in agreeing to the rate for HBO’s license. As ASCAP points out, courts do not permit psychoanalysis of buyers in comparable transactions to explore the complex mental processes that affected their decision finally to agree on a price. Yet we are not so sure that buyer motivation is never relevant to the weight of what is alleged to be a comparable sale. Suppose, for example, that in valuing a tract of land the selling prices of five lots of similar size and location were presented, one of which was significantly higher than the
average of the other four. We are not prepared to say that it would not be relevant to show that the buyer of the fifth lot mistakenly believed that there was oil under that lot.[12]
However that may be, it was not error for the Magistrate to receive and weigh evidence that HBO thought it was paying a high price for the blanket license but was willing to do so because it felt it had no choice.
[27] Ultimately, the Magistrate weighed all of the evidence and found, as a matter of fact, that ASCAP had not sustained its burden of proving that its price of 25 cents per subscriber was reasonable. No legal error contributed to that finding, and the finding itself, adequately supported by the record, is not clearly erroneous.
[28] Having determined that ASCAP’s price was not reasonable, the Magistrate was then obliged to determine a price that was reasonable. ASCAP faults this phase of the decision in two respects, first, the use of the BMI license to SMC as a starting point for the determination, and, second, the degree of adjustment from the price of the BMI license.
[29] In determining that the BMI license to SMC was sufficiently comparable to provide guidance toward a reasonable rate for an ASCAP license, the Magistrate was making factual findings and, in effect, a legal conclusion. The circumstances concerning the BMI license,
the number of songs in the BMI repertory, the extent to which SMC uses BMI music, and the amount of dollars paid for the BMI license, were matters of fact. Only the relative use of BMI music compared to ASCAP music was in dispute. ASCAP contended that SMC uses twice as much ASCAP music as BMI music. This claim was based on ASCAP data purporting to count “needledrops,” instances where music in the ASCAP repertory is played on an SMC program, regardless of the duration of each “play.” The Magistrate found that ASCAP’s data on this point was “subject to methodological question,” Appendix, infra, at 596 n. 49, surely a matter for factual assessment. It was also a factual matter for the Magistrate to deem more pertinent the fact that SMC needs both the ASCAP and the BMI blanket licenses and that BMI “provides a service comparable to that of ASCAP.” Appendix, infra, at 594. All of the factual findings relating to the comparability of the ASCAP and BMI licenses have adequate support in the record.
[30] Based on these factual determinations, the Magistrate, in effect, drew the legal conclusion that SMC’s BMI license was a “comparable” license, a determination analogous to an evidentiary ruling that would have occurred if the price of the BMI license had been offered at a jury trial. The factors bearing on the comparability of the BMI license placed it well within the degree of latitude enjoyed by a trial judge in ruling on the admissibility of such evidence.
[31] The Magistrate’s final step, adjusting the BMI price by the 55-45 ratio ASCAP had negotiated with BMI for allocation of cable retransmission royalties awarded by the Copyright Tribunal, was a factual determination fully supported by the record. The appropriateness of the 55-45 ratio was confirmed by the similar ratios of rates for ASCAP and BMI licenses in other segments of the broadcasting industry.
[32] Magistrate Dolinger performed the ratesetting task conscientiously, thoroughly, and fairly. The judgment of the District Court is affirmed.
APPENDIX
United States District Court, Southern District of New York.
United States of America, Plaintiff, v. American Society of
Composers, Authors and Publishers, Defendants.
In The Matter of the Application of Showtime/The Movie
Channel, Inc., Applicant.
For A License for Its Pay Television Services.
Civ. 13-95 (WCC)
MICHAEL H. DOLINGER,
UNITED STATES MAGISTRATE:
ORDER
Since applicant Showtime/The Movie Channel, Inc. has withdrawn
its request for determination of a per-program license fee for
the period April 4, 1984 through December 31, 1988 (see
Stipulation and Order dated December 18, 1989), this proceeding
is deemed to have been completed in accordance with the terms
specified in this Court’s Memorandum and Order dated October 12,
1989 at pages 1 to 69 and 72 to 73.
DATED: New York, New York
December 20, 1989
SO ORDERED.
/s/ Michael H. Dolinger
MICHAEL H. DOLINGER
UNITED STATES MAGISTRATE
Copies of the foregoing Order have been transmitted this date to:
Allan Blumstein, David E. Nachman, Paul, Weiss, Rifkind, Wharton
Garrison, New York City, for American Society of Composers,
Authors and Publishers.
R. Bruce Rich, Kenneth L. Steinthal, Evie C. Goldstein, Weil,
Gotshal Manges, New York City, for Showtime/The Movie Channel,
Inc.
United States District Court, Southern District of New York.
United States of America, Plaintiff, v. American Society of
Composers, Authors and Publishers, Defendants.
In the Matter of the Application of Showtime/The Movie
Channel, Inc., Applicant.
For A License for Its Pay Television Services.
Civ. 13-95 (WCC)
Originally filed under Seal on October 12, 1989.
Subsequently unsealed when it went up on appeal.
MICHAEL H. DOLINGER, UNITED STATES MAGISTRATE:
MEMORANDUM AND ORDER
Showtime/The Movie Channel, Inc. (“SMC”) has applied to this
Court pursuant to Article IX(A) of the Amended Consent Decree for
an order setting a reasonable fee for a “blanket” license from
the American Society of Composers, Authors and Publishers
(“ASCAP”) for the period from April 4, 1984 through December 31,
1988. SMC also seeks an order declaring that it is entitled to a
so-called “per program” license from ASCAP under Article VII(B)
of the Decree.
For the reasons that follow, the fee for the blanket license
for the period in question is set at $0.15 per subscriber. With
respect to the per-program license question, since ASCAP has
represented that it is willing to negotiate a fee for such a
license, there is no current controversy that requires resolution
of the meaning of the Decree. Accordingly, the parties are to
attempt for a period of twenty-one (21) days to resolve by
negotiation the amount of any such fee, at which time SMC may
return to the Court under Article IX(A).
Page 573
A. Background
As noted in prior decisions in this proceeding, the
jurisdiction of this so-called “rate” court is an artifact of a
consent decree negotiated between the United States Department of
Justice and ASCAP to settle an antitrust lawsuit commenced by the
Government to challenge various practices of ASCAP in the
licensing of the copyrighted music of ASCAP’s members. As amended
in 1950, the decree requires ASCAP to make available on request a
license for the public performance of its music. (Consent Decree,
Article V.)[1a] In addition to the traditional blanket license —
which makes the entire ASCAP repertory available for unlimited
use during the license period, in exchange for a specified
payment — the decree requires ASCAP to offer to “radio and
television broadcasters” a so-called “per program license,” which
exacts a fee for each designated program. (Article VII(B).)
The Consent Decree further provides that the parties are to
attempt, in the first instance, to negotiate a mutually
acceptable fee for the license and, failing that, either party
may, after sixty days, apply to this Court to set a “reasonable
fee.” (Article IX(A).) The Decree does not attempt to define the
term “reasonable fee” and thus apparently leaves to the Court
broad discretion to fashion an appropriate methodology for
deriving such a rate.
Article IX(B) of the Decree also permits the Court to set an
interim fee upon application by either party. That fee is to
govern during the period when the parties either negotiate a
final fee or litigate its terms before the rate court. The
interim fee, however, is subject to retroactive modification to
conform to the final fee that is either agreed to or imposed by
court order.
In this case, SMC served on ASCAP on April 4, 1984 a request
for a license for both the preceding period from April 4, 1981 to
April 4, 1984 forward to December 31, 1986. When negotiations
failed SMC filed an application with the Court seeking a
determination of fees for the same time period. By Memorandum and
Order dated July 8, 1986, the Court dismissed SMC’s application
insofar as it sought relief for the three-year period prior to
April 4, 1984 since the Consent Decree did not authorize such
retroactive fee setting. Subsequently the parties agreed to
modify SMC’s fee application to encompass an additional two-year
period, ending December 31, 1988. (See Joint Pre-trial
Statement (“JPS”) at ¶ 3, n. 2.)
During the pendency of this proceeding, ASCAP applied for the
award of interim fees. By Memorandum and Order dated October 15,
1984, the Court ordered that SMC commence paying provisional fees
in the amount of $90,000.00 per month. Thereafter, based upon a
fuller written record, the Court ordered SMC to pay interim fees
for a blanket license in the same amount. (See Memorandum and
Order dated January 14, 1985.) That interim fee has been in place
since January 14, 1985.
Finally, since the parties’ episodic efforts at settlement
proved unavailing, the Court conducted a seven-day trial in
January 1988. Post-trial briefing followed in March 1988.
B. The Parties and their Relationship
ASCAP is an unincorporated membership association consisting of
approximately 40,000 composers and music publishers, who rely
upon it to license the performing rights in their copyrighted
musical compositions. (JPS at ¶ 2.)[2a] ASCAP serves as both the
licensing agent and the collector and distributor of royalties
for licensed performances. Its repertory includes more than three
million compositions. See Buffalo
Page 574
Broadcasting Co. v. ASCAP, 744 F.2d 917, 920 (2d Cir. 1984),
cert. denied, 469 U.S. 1211 [105 S.Ct. 1181, 84 L.Ed.2d 329]
(1985).[3a]
SMC is in the business of acquiring, producing, marketing and
transmitting programs through pay-cable television channels. It
operates principally two pay cable services, known as Showtime
and The Movie Channel.[4a] (JPS at ¶ 1.) For the most part, the
programs of SMC consist of made-for-theatre movies; a smaller
portion consist of general entertainment programs. (JPS at ¶¶
11-12.) The programs acquired or produced by SMC are transmitted
to viewers through cable television system operators, who charge
willing subscribers a monthly fee for access to each of the SMC
services, and pass along a portion of that fee to SMC. (JPS at ¶¶
1, 7.)
SMC and its predecessor entities have a very limited history of
fee negotiations and agreements with ASCAP. In 1979 both Showtime
and The Star Channel — the predecessors of SMC[5a] — entered
into licensing agreements with ASCAP for the period from January
1, 1977 through December 31, 1979. (See Memorandum and Order
Dated January 14, 1985, at 5; JPS at ¶¶ 26, 27.) Under the
Showtime agreement, no fee was payable for 1977, and for the next
two years Showtime was to pay $12,500.00 and $52,500.00
respectively. (Id.) The agreement for Star Channel provided for
no payment for 1977, and payments of $6,000.00 and $9,000.00 for
1978 and 1979. (Id.) Both agreements contained an identical
provision specifying that they were
being entered into on an experimental and
non-prejudicial basis, shall apply for the term of
this agreement only, and shall not be binding upon or
prejudicial to any position taken by either of the
parties for any period subsequent to the termination
of the agreement.
(Joint Exhs. 2 3 at ¶ 1(c).)
For the period from 1980 to April 1984, neither SMC nor its
predecessors held any ASCAP license. See David v. Showtime/The
Movie Channel, 697 F.Supp. 752, 754 (S.D.N.Y. 1988); Deposition
of Benson Begun at 9-15; Deposition of Michael Gerber at
23-24.[6a] This state of affairs apparently resulted from an
initial inability to reach agreement and then an abortive effort
by ASCAP to seek royalty payments directly from the cable system
operators rather than from the pay cable programming services.
See Gerber Dep. at 32-38; David v. Showtime/The Movie Channel,
supra, 697 F.Supp. at 754. When this attempt was abandoned and
the parties were again unable to reach agreement, SMC formally
requested a license from ASCAP on April 4, 1984.
C. The Positions of the Parties
In valuing the blanket license under which SMC now operates,
the parties have offered strikingly different approaches. ASCAP
urges that a “reasonable” fee is best judged by a comparison with
fees agreed to either between the same parties or between
comparably situated parties if the agreements were reached in
“arms length” negotiations. Since the parties in this proceeding
have no meaningful record
Page 575
of prior dealings — the early “experimental” rates having
concededly reflected the nascent status of Showtime and the Star
Channel in the late 1970’s — ASCAP would have the Court look to
its course of dealings with SMC’s principal current competitor in
the pay cable television market, Home Box Office, Inc. (“HBO”).
Citing its agreements with HBO for the 1980-to-1982 period and
its subsequent agreement with HBO for 1983 to 1985, ASCAP argues
that those deals involved annual payments that ultimately
approximated $0.25 per HBO subscriber. ASCAP also invokes the
fact that on December 17, 1985 HBO offered, in effect, to extend
its prior agreement on the basis of an annual payment
representing $0.24.1 per subscriber. According to ASCAP, the
willingness of HBO to accept these fee levels in “arms length”
negotiations should govern here since HBO is comparable to SMC in
its market position and its use of music on its programming.
Indeed, HBO not only offers programming very similar to that of
SMC, but is its principal competitor.
Based on these comparisons, ASCAP seeks a fee of $0.25 per
subscriber. In further support of this position ASCAP cites its
license agreement with the Disney Channel for the period from
April 18, 1983 through the end of 1985. Although this agreement,
like the HBO contracts, called for lump sum payments, ASCAP
calculates that, based on Disney’s subscriber levels, those fees
in effect amounted to payments of between $0.21 and $0.29 per
subscriber.[7a]
SMC frontally attacks the proposed reliance on any prior ASCAP
agreements principally because, in its view, ASCAP is a classical
monopolist and is thus able to extract prices well above the
levels that would be set in a freely competitive market. In place
of the HBO and Disney analogies, SMC offers a mode of analysis
that attempts to assign an economic value to the music used by
SMC in its programming. To do this SMC looks to the cost of
acquiring other creative elements of such programming,
specifically scriptwriting and directorial services. Based on
this approach, SMC suggests that a generous valuation of the
benefits that it receives under the ASCAP blanket license would
permit an award of no more than $0.08 per subscriber.
With respect to the per-program license question, ASCAP argues
that because SMC is a cable program supplier, it is not entitled
to a per-program license under the terms of Article VII(B) of the
Consent Decree. It also argues that SMC should not be permitted
at this stage to press for such a license because it has never
manifested any interest in obtaining one. Predictably, SMC
disagrees with both of these contentions and seeks an order
directing ASCAP to make such a license available.
ANALYSIS
I. The Blanket License Question
A. General Standards
The Consent Decree provides very limited guidance as to the
criteria by which royalty fees are to be established. Indeed, it
refers only to the setting of a “reasonable fee,” without further
defining the term.
As a general matter consent decrees are to be read in
accordance with their “plain meaning” or “explicit language.”
See, e.g., United States v. Atlantic Refining Co., 360 U.S. 19,
22-23 [79 S.Ct. 944, 946, 3 L.Ed.2d 1054] (1959); Berger v.
Heckler, 771 F.2d 1556, 1568 (2d Cir. 1985); Artvale, Inc. v.
Rugby Fabrics Corp., 303 F.2d 283, 284 (2d Cir. 1962) (per
curiam); cf. Schurr v. Austin Galleries of Illinois, Inc.,
719 F.2d 571, 577 (2d Cir. 1983) (Van Graafeiland, J., concurring).
This emphasis on interpreting the decree within its “four
corners” is based on the notion that the decree “represents a
compromise between parties who have waived their right to
litigation and, in the interest of avoiding the risk and expense
of suit, have `give[n] up something they might have won had they
proceeded
Page 576
with the litigation . . . .'” Berger v. Heckler, supra, 771 F.2d
at 1568 (quoting United States v. Armour Co., 402 U.S. 673, 681
[91 S.Ct. 1752, 1757, 29 L.Ed.2d 256] (1971)). Accordingly, we
are cautioned, “the scope of the consent decree must be discerned
within its four corners, and not by reference to what might
satisfy the purposes of one of the parties to it.” Firefighters
Local Union No. 1784 v. Stotts, 467 U.S. 561, 574 [104 S.Ct.
2576, 2585, 81 L.Ed.2d 483] (1984); SEC v. Levine, Dkt. Nos.
88-6294, 6296, 6298, 6300, 6302, 6304, slip op. 4887, 4916-17
[881 F.2d 1165, 1178-79] (2d Cir. Aug. 2, 1989); Berger v.
Heckler, supra, 771 F.2d at 1568.
Nonetheless, as is the case with contracts, if the terms of a
decree are not self-explanatory, the court may look to contextual
indicia of meaning. See, e.g., United States v. ITT Continental
Baking Co., 420 U.S. 223, 238 [95 S.Ct. 926, 935, 43 L.Ed.2d
148] (1975); SEC v. Levine, supra, slip op. at 4917 [at 1179]
(citing Schurr v. Austin Galleries of Illinois, Inc., supra,
719 F.2d at 575). See also United States v. American Cyanamid
Co., 719 F.2d 558, 564 (2d Cir. 1983). That is surely necessary
here, since the key term “reasonable fee” is not defined and does
not have an explicitly accepted meaning.
In prior interim fee decisions in this and related proceedings,
this Court has indicated that the appropriate analysis ordinarily
seeks to define a rate or range of rates that approximates the
rates that would be set in a competitive market. See, e.g., In
re Buffalo Broadcasting Co., Memorandum Order at 9-11
(S.D.N.Y. Feb. 17, 1987). This conclusion is based in large
measure on the perception that the ratesetting mechanism defined
by the decree was designed to address potential pricing problems
in a market that is concededly not freely competitive. See,
e.g., U.S. v. ASCAP, 586 F.Supp. 727, 728, 730 (S.D.N.Y. 1984);
Deposition of Dr. Paul Fagan at 35[8a] ; Tr. 114-15; Sobel,
supra, 3 Loyola Ent.L.J. at 33-34. See also Cirace, “CBS v.
ASCAP: An Economic Analysis of a Political Problem”, 47
Ford.L.Rev. 277, 303-04 (1978); Finkelstein, supra, 19 Law
Contemp.Probs. at 288. Indeed, the courts have repeatedly
acknowledged that the rate court not only functions as an
alternative source of pricing for public performance licenses in
the event that the would-be licensee and ASCAP are unable to
reach agreement in direct negotiations, see, e.g., K-91, Inc. v.
Gershwin Pub. Corp., 372 F.2d 1, 4 (9th Cir. 1967), cert.
denied, 389 U.S. 1045 [88 S.Ct. 761, 19 L.Ed.2d 838] (1968), but
also serves to minimize the likelihood that ASCAP’s evident
market leverage may be exerted to obtain unacceptably inflated
price levels for its licenses. See, e.g., Broadcast Music, Inc.
v. Columbia Broadcasting System, Inc., 441 U.S. 1, 24 [99 S.Ct.
1551, 1564, 60 L.Ed.2d 1] (1979); Buffalo Broadcasting Co. v.
ASCAP, 744 F.2d 917, 923 (2d Cir. 1984), cert. denied, 469 U.S. 1211
[105 S.Ct. 1181, 84 L.Ed.2d 329] (1985).
Notwithstanding the primacy of these concerns, it is
appropriate to note certain caveats with respect to the specific
application of this general policy. These indicate that
restraining ASCAP’s pricing is not necessarily the only relevant
consideration and that even that goal does not dictate a search
for the perfectly competitive market price.
As a general matter a consent decree may fairly be interpreted
with an eye to the policies of the statute under which the Court
approves the decree. See, e.g., United States v. American
Cyanamid, supra, 719 F.2d at 564. Nonetheless, as previously
noted, the Supreme Court has cautioned against the assumption
that a consent decree has, as its central purpose, the
alleviation of a problem that was only alleged, and not proven,
by the plaintiff in the underlying case. See, e.g., Firefighters
Local Union No. 1784 v. Stotts, supra, 467 U.S. at 574 [104
S.Ct. at 2585]; United States v. Armour Co., supra, 402 U.S.
at 681 [91 S.Ct. at 1757]; SEC v. Levine, supra, slip op. at
4916-17 [at 1178-79]; Berger v. Heckler, supra, 771 F.2d at
1568. Since the Justice Department chose to settle its
Page 577
antitrust suit, the Decree in this case should not be viewed as
simply an endorsement of its theory of monopolistic power and
conduct by ASCAP.
The very generality of the term “reasonable rate” suggests that
in appropriate circumstances the rate court has some discretion
to look to considerations beyond simply the policy of encouraging
pricing restraint for ASCAP music. The nature of that discretion
is at least suggested by the fact that the apparent antecedent
for the rate court provision of the Consent Decree was a line of
cases in which the courts have ordered antitrust violators to
license their patents to all applicants for a “reasonable”
royalty. Timberg, “The Antitrust Aspects of Merchandising Modern
Music”, 19 Law Contemp.Prob. 294, 308 (1954). See, e.g., 1A
R. Callman, Unfair Competition, Trademarks Monopolies § 4.56
at 60 n. 31 (4th ed. 1981) (citing cases); Besser Mfg. Co. v.
United States, 343 U.S. 444, 447 [72 S.Ct. 838, 840, 96 L.Ed.
1063] (1952); International Salt Co. v. United States, 332 U.S. 392,
398 n. 7 [68 S.Ct. 12, 16 n. 7, 92 L.Ed. 20] (1947). As the
analysis in these cases suggests, the principal concern in
seeking to determine a reasonable royalty is the policy of
encouraging competition in the relevant industry and avoiding
inflated pricing resulting from artificial market control. See,
e.g., Int’l Salt Co. v. United States, supra, 332 U.S. at 401
[68 S.Ct. at 17]; United States v. Hartford Empire Co., 65
F.Supp. 271, 275-76 (N.D.Ohio 1946) (citing cases). Nonetheless,
this goal did not lead those courts to attempt to construct a
model of a perfectly competitive market, presumably because cause
the antitrust laws do not compel such a pristine from of
competition, because other relevant statutes — such as the patent
laws — may embody important countervailing policies, and because
there is generally no data available to recreate such a
hypothetical market.
The same limitations are evident here. Perfect competition is
required neither by the antitrust laws nor by the Decree.
Moreover, the policies underlying the Copy-right Act are at least
potentially relevant to the court’s analysis, depending of course
upon the nature of the evidence adduced. Furthermore, since there
is no competitive market in music rights, the parties and the
Court lack any economic data that may be readily translated into
a measure of competitive pricing for the rights in question.
See, e.g., Sobel, supra, 3 Loyola Ent.L.J. at 33-34, 41;
Cirace, supra, 47 Ford.L.Rev. at 277. Of necessity, then, we
must look to very imperfect surrogates, particularly agreements
reached either by these parties or by others for the purchase of
comparable rights. See, e.g., Amusement Music Operators Assn.
v. Copyright Royalty Tribunal, 676 F.2d 1144, 1155-57 (7th
Cir.), cert. denied, 459 U.S. 907 [103 S.Ct. 210, 74 L.Ed.2d
168] (1982); In re Buffalo Broadcasting Co., Memorandum and
Order at 12-17 (S.D.N.Y. Feb. 17, 1987); In re Home Box Office,
Inc., Memorandum Order at 4-16 (S.D.N.Y. July 11, 1986); In re
Showtime/The Movie Channel, Inc., Opinion and Order at 8-23
(S.D.N.Y. Jan. 14, 1985); In re American Broadcasting Companies,
Inc., Findings of Fact Conclusions of Law at 8 (S.D.N.Y. May
26, 1982). Such an exercise of course requires not only an
analysis of comparability, but also consideration of the degree
to which the assertedly analogous market under examination
reflects an adequate degree of competition to justify reliance on
agreements that it has spawned.
Bearing these general standards in mind, I turn to the specific
disputes in this case. As will be seen, the parties have not
sought to inject into this proceeding any policies other than the
need for setting a fee that reasonably approximates a competitive
market rate. (E.g., Tr. 107) (ASCAP views “arm length”
negotiated agreements as indicators of competitive market rates.)
Rather, the core of the controversy involves disagreements as to
the adequacy of each side’s chosen surrogates, as well as an
implicit disagreement as to the nature of the rights that must be
priced.
B. The HBO Disney Rates
ASCAP relies principally upon a variation of the rates agreed
to by HBO for the
Page 578
1980-to-1982 and the 1983-to-1985 periods. Both of these sets of
agreements involved payments of a flat sum, but if calculated on
a per-subscriber basis, the 1980-82 fees amounted to either $0.20
or $0.24 and the 1983-85 fees amounted to approximately $0.25 per
subscriber. ASCAP also seeks to invoke an offer by HBO in
December 1985 to renew its license agreement with ASCAP for an
additional term on essentially the same conditions, except
explicitly stated in terms of a “per-subscriber” rate of $0.24.1.
ASCAP additionally cites the agreement of Disney Channel to an
arguably similar rate for the period April 18, 1983 to December
31, 1985.[9a]
SMC has launched a systematic attack on this approach, premised
principally on the theory that ASCAP is a monopolist supplier of
music rights, and therefore the results of its negotiations with
music users merely ratify monopoly pricing. SMC also attacks the
comparability of HBO’s and Disney’s agreements and suggests as
well that if other negotiated fee arrangements must be looked to,
they should be its own arrangements with BMI, which is ASCAP’s
principal rival in the music licensing industry.
We may accept as a general proposition that HBO and SMC are
similarly situated since they are the two largest pay cable
program suppliers, they supply a comparable range of programming
with comparable use of music, they receive generally comparable
payments on a per-subscriber basis from the cable system
operators and each regards the other as its principal competitor
for the growing pay cable TV market. (E.g., Tr. 320-21, 331-35,
342-46, 348-54, 404; JPS at ¶¶ 6, 7.) Although SMC argues at
length that HBO’s greater commercial success during the relevant
period — principally in terms of number of subscribers and costs
(e.g., Tr. 357-58, 368-69, 384; SMC Exh. D) — undercuts ASCAP’s
reliance on it as a comparable purchaser of rights, I find this
argument to be unpersuasive. We can scarcely expect to find two
purchasers of music rights who are in all respects identically
situated, and this fact does not in itself preclude some measure
of reliance on one purchaser’s agreement as an indicator of
reasonable rates for another purchaser, particularly in view of
the somewhat impressionistic nature of this rate-setting
exercise. Moreover, in this case the rate proposal of ASCAP would
translate the HBO payments into a “per subscriber” figure, thus
addressing at least the disparity in subscriber levels between
HBO and SMC.[10a]
That said, I nonetheless conclude, for a number of reasons,
that the fees agreed to by HBO for 1980 through 1985, even if
translated into a per-subscriber figure, have not been shown to
constitute a reasonable rate for SMC.[11a] Similarly, the cited
Disney agreement does not constitute an appropriate model.
Most obviously, the terms of the cited agreements and offers,
as well as the particular circumstances in which they were
negotiated, demonstrate that they `do not support ASCAP’s
requested rate for SMC. Furthermore, as a more general matter,
Page 579
ASCAP’s substantial control of the market for the music rights of
its members and the cable companies’ past perception that they
had virtually no economically viable alternative to a negotiated
fee for ASCAP’s blanket license caution against assuming that the
rates incorporated in the agreements and offer cited by ASCAP
represent a reasonable rate for SMC. I first address the
specifics of the cited agreements and offer.
1. HBO and Disney Licenses Distinguished
The agreement between ASCAP and HBO for the 1980-82 period was
reached at an early stage of HBO’s commercial success, and
specifically provided that it was “experimental” in nature.
(Joint Exh. 7 at ¶ 1(C); Charap Dep. at 34.) It is doubtful,
therefore, that it reflects an educated assessment by HBO of its
long-term prospects, much less of the value of the ASCAP
repertory to its anticipated success. In any event, this early
period is well before the time period at issue here.
As for the HBO-ASCAP agreement covering the 1983-85 period, it
included a socalled “most favored nation” provision under which
HBO would be entitled to a reduction in its fee if ASCAP
subsequently reached agreement with SMC on a fee that was lower
than the rate charged to HBO. (Joint Exh. 8 at ¶ 4(A).) Whatever
may have been the likelihood of such an eventuality,[12a] HBO’s
insistence on this clause undercuts the notion that it was
agreeing, without qualification, to pay the amounts specified in
the agreement. (See Deposition of Howard Schlieff at 121-22,
190-94, 247-48.)[13] Of necessity, then, any valuation of the
benefit of the bargain to ASCAP would have to reflect a discount
from the amounts stated in the contract in order to account for
this contingency, although the amount of such a reduction is
entirely a matter of speculation on the present record.[14]
Still another technical problem with the use of the 1983-85 HBO
agreement as a model for SMC is that it was not cast in the form
of a per-subscriber rate.[15] Rather, it stated the fee simply
as a sum certain to be paid over a specified period of time. This
is significant for our purposes because HBO’s negotiator has
testified credibly, and without contradiction, that in agreeing
to the sums embodied in the agreement for the period 1983 to
1985, HBO was relying upon certain projections of future
subscriber growth. In the end, it turned out that these
projections were over-optimistic and, as a result, the sums
reflected in the 1983-85 agreement amounted in effect to
approximately $0.25 per subscriber. (Schlieff Dep. at 109-10,
114-15, 182-83.)
The point of this distinction is that, if called upon to agree
to a $0.25 per subscriber rate for the 1983-85 period — or an
absolute sum that would have yielded this per-subscriber figure
if HBO’s projections proved accurate — HBO might have declined to
do so; at the very least, ASCAP has not demonstrated by virtue of
invoking the 1983-85 contract that HBO would have agreed.
Accordingly, the underlying premise of ASCAP’s reliance on the
HBO agreements — that HBO willingly entered into one or more
agreements to pay $0.25 per subscriber to ASCAP for a blanket
license — is not borne out by the record.
Page 580
As for HBO’s offer in December 1985 to extend its agreement
with ASCAP at a rate of $0.24.1 per subscriber (ASCAP Exh. 2),
ASCAP seeks to introduce this proposal for various purposes.
Principally, the offer is said to be relevant as evidence of
HBO’s willingness to pay that rate at that time for the blanket
license and thus as probative of what a reasonable rate would be
for a similar time period. In addition, ASCAP argues that this
offer undercuts the assertion by HBO’s negotiator, Mr. Schlieff,
that in negotiating the agreement for the preceding period — 1983
to 1985 — HBO would have been unwilling to pay more than
approximately $0.20 per subscriber. SMC objects to consideration
of the offer for these purposes, citing Fed.R.Evid. 408.
This proposal by HBO was invoked by ASCAP in another
proceeding, commenced by HBO, and was rejected by this Court as
inadmissible for this purpose under Fed.R.Evid. 408 and the
implicit policy of the Consent Decree. See In re Home Box
Office, Inc., Memorandum and Order at 16-19 (S.D.N.Y. July 11,
1986.) In this instance I find it admissible although not
especially probative.
The principal distinction between the two cases is that in this
proceeding ASCAP does not seek to use the “settlement” offer of
HBO against the offeror. The offer was made to avoid a proceeding
concerning HBO’s fees, and it is now being offered in a
proceeding that is designed to set a fee for SMC.
Although at least one court has indicated that the common-law
rule against admission of statements made in the course of
settlement discussions applies only between the parties to the
negotiation, see Huntley v. Snider, 86 F.2d 539, 540 (1st
Cir. 1936), the Second Circuit has not so limited Rule 408.
Instead, it and other courts have indicated that Rule 408 may bar
introduction of settlement discussions, or agreements, even if
the settlement involved another case and a different party. See
Playboy Enterprises, Inc. v. Chuckleberry Pub. Inc., 687 F.2d 563,
568-69 (2d Cir. 1982); see also American Ins. Co. v. North
American Co., 697 F.2d 79, 82 (2d Cir. 1982). Accord, U.S. v.
Contra Costa County Water District, 678 F.2d 90, 92 (9th
Cir. 1982); Young v. Verson Allsteel Press Co., 539 F.Supp. 193,
196 (E.D.Pa. 1982).[16] It must be noted, however, that these
decisions all involved the proposed use of the offer against
either the offeror or another party to the settlement. This
distinction is significant because the most commonly accepted
rationale for Rule 408 is that it encourages settlement by
protecting parties to a settlement agreement or negotiation from
having their good-faith efforts to settle a dispute used against
them in subsequent litigation. As the Second Circuit has noted:
Settlements have always been looked on with favor,
and courts have deemed it against public policy to
subject a person who has compromised a claim to the
hazard of having a settlement proved in a subsequent
lawsuit by another person asserting a cause of action
arising out of the same transaction.
Hawthorne v. Eckerson Co., 77 F.2d 844, 847 (2d Cir. 1935).
Although Wigmore suggests that the underlying concern is one of
relevance — that “an offer of compromise . . . does not
ordinarily proceed from and imply a specific belief that the
adversary claim is wellfounded . . . .” 4 C. Wigmore, Evidence
§ 1061 at 36 (Chadborne rev. 1972) (emphasis in original) — this
view has generally been rejected, since an offer may in fact be
quite probative as to liability or damages, particularly if the
offered amount is close to the figure that represents the
adversary’s maximum supportable damage claim. See, e.g., 2 J.
Weinstein M. Berger, Weinstein’s Evidence ¶ 408 [02] at
408-17 to 20 (1986); Morgan, Basic Problems of Evidence 210-11
(1962); Cleary, McCormick on Evidence § 274, at 812-13 (3rd ed.
1984). But see United States v. 46,672.96 Acres of Land, More or
Less, 521 F.2d 13, 17 (10th Cir. 1975) (evidence of
Page 581
prices paid to avoid condemnation proceedings). Instead, as Judge
Weinstein notes, “Rule 408 is based upon the policy of aiding the
compromise and settlement of disputes.” 2 Weinstein’s Evidence,
supra, at 408-19 (citing cases). See, e.g., Fed.R.Evid. 408
Notes of Advisory Committee (stating that this is “[a] more
consistently impressive ground” for the Rule); S.Rep. No.
93-1277, 93d Cong.2d Sess. (1974), reprinted in 1974 U.S.Code,
Cong. Admin.News 7051, 7056; C. Wright K. Graham, Federal
Practice Procedure § 5302, at 173 (1980); Trebor Sportswear
Co. v. The Limited Stores, Inc., 865 F.2d 506, 510 (2d
Cir. 1989); Fiberglass Insulators, Inc. v. Dupuy, 856 F.2d 652,
654-55 (4th Cir. 1988).
The implication of this policy for our case is that settlement
offers or agreements are not automatically inadmissible — even as
to liability or the amount of damages — if they are offered
against a party who was not a participant in the settlement
discussions or agreement. See Kennon v. Slipstreamer, Inc.,
794 F.2d 1067, 1075-76 (5th Cir. 1986) (Thornberry, J., dissenting).
Rather the Court must assess the degree of relevance and
potential prejudice of the evidence in light of the particular
circumstances of the case. See e.g., Wyatt v. Security Inn Food
Beverage, Inc., 819 F.2d 69, 71 (4th Cir. 1987); Kennon v.
Slipstreamer, Inc. supra, 794 F.2d at 1076 (Thornberry, J.,
dissenting) (suggesting applicability of Fed. R.Evid. 403).
In this case the introduction of the HBO offer against SMC
plainly does not pose the same danger to the policy of
encouraging settlements as would the proscribed use of such an
offer against HBO itself. Furthermore, in this unusual type of
proceeding, it may fairly be said that a significant part of the
court’s inquiry inevitably concerns the process of negotiation by
would-be licensees for blanket licenses from ASCAP and other
comparable entities. Although we may conclude, for various
reasons, that some of these negotiations and agreements are not
reliable indicators of a reasonable fee for SMC, there is no
cogent reason for finding that the 1985 HBO offer is so uniquely
irrelevant to our inquiry that it should not find its way into
the evidentiary record for this purpose.
As for potential prejudice, I note that all of the many offers
and agreements that are being cited by ASCAP and SMC are being
subjected to close scrutiny by the Court and will not be relied
upon to any greater extent than is justified by the particular
circumstances in which they were made. As will be seen, I find
that HBO’s having made its 1985 offer does not demonstrate the
appropriateness of imposing that proposal on SMC; nonetheless, it
is admissible as at least relevant to that issue since admission
would not contravene the policy underlying Rule 408.[17]
Although admissible, HBO’s offer is not persuasive as proof of
what would be a “reasonable” rate for SMC. The HBO offer was to
renew the prior agreement, and that prior contract encompassed a
“most favored nation” provision. Thus, even if it had been
accepted by ASCAP, HBO could ultimately have achieved a lower fee
if ASCAP settled with SMC. Accordingly, HBO’s fee proposal does
not represent an unconditional agreement to pay the quoted fee.
(E.g., Schlieff Dep. at 121-22, 190-94, 247-48.)[18]
Page 582
The final agreement that ASCAP cites in support of a
$0.25-per-subscriber fee for SMC is the Disney Channel license,
which involved payments variously estimated as amounting to $0.21
to $0.29 per subscriber for the period from April 1983 to the end
of 1985. (Joint Exh. 10.) The principal problem with the proposed
use of this agreement is that the Walt Disney Music Company owns
the rights to much of the music aired on the Disney Channel and
is a member of ASCAP. Accordingly, the use by the Disney Channel
of that copyrighted music as a significant portion of the musical
fare on its programming means that the Disney organization will
recoup a large portion of the moneys it pays to ASCAP by way of
royalties to its publishing house. (Deposition of Peter Nolan at
50, 52.)[19] Thus, in effect, Disney ends up paying
substantially less than $0.25 per subscriber[20] , and indeed
this consideration apparently contributed significantly to its
willingness to agree to the fee that ASCAP now seeks to impose on
SMC. (See Charap Dep. at 287-89; Nolan Dep. at 52, 61.)
Furthermore, I note that the Disney Channel agreed to these fees
at an early stage of its existence, when it was seeking to
minimize substantial unplanned expenses — such as the cost of
litigation in the rate court, with the attendant risk of an
unfavorable outcome — and that its agreement to the stated fees
for that early period appears to reflect a host of considerations
that would undercut any assumption that the agreed-upon rate was
representative of what a competitive market would produce. (See
Nolan Dep. at 60-61, 129-30.)
2. Inequality of Bargaining Power
The more global difficulty with ASCAP’s reliance on any of
these various agreements or offers is that, although they
resulted from so-called “arms length” negotiations, they do not
necessarily reflect rates that have a discernible relationship to
what a competitive — or even partially competitive — market would
produce, and ASCAP offers no other persuasive reason for relying
on them.
We start from the premise, adopted in prior fee-setting
decisions, that license agreements entered into by parties in
circumstances comparable to those of the litigants may provide
guidance in setting a reasonable fee in a rate proceeding. See
e.g., In re Buffalo Broadcasting Co., Memorandum Order at
12-17 (S.D.N.Y. Feb. 17, 1987); In re Home Box Office, Inc.,
Memorandum Order at 3-16 (S.D.N.Y. July 11, 1986); In re
Showtime/The Movie Channel Inc., Opinion and Order at 8-23
(S.D.N.Y. Jan. 14, 1985). Accord, Amusement Music Operators
Ass’n v. Copyright Royalty Tribunal, supra, 676 F.2d at 1155-57.
Cf. Krinsk v. Fund Asset Management, Inc., 875 F.2d 404, 411-12
(2d Cir. 1989). The relevance of such agreements depends upon
whether they can fairly be viewed as the product of market
control by ASCAP or as some indication of what prices would be
set in a comparatively competitive market. Plainly, if the terms
of the agreement reflect the fact that the licensee had no
realistic alternative, it would be fair to infer that those
agreements could not be the source of a “reasonable” fee. Cf.
Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923,
929 (2d Cir. 1982).
To assess the relevance of these “comparable” agreements, we
must address two questions — first, does ASCAP have the sort of
leverage that, if utilized, would likely compel the cable program
suppliers to agree to non-competitive, or excessive, fee levels,
and, second, has ASCAP in fact exerted such leverage to achieve
this result. The answer to both questions is a qualified “yes”.
In order to compete effectively, SMC and the other cable
companies must have licenses covering their use of all of the
music
Page 583
encompassed in the type of programming for which their
subscribers are paying. In part for historical reasons of
industry practice, they have come to rely exclusively on blanket
licenses issued by ASCAP, BMI and the third of the music
licensing societies, SESAC, rather than seeking licensing from
another source — such as the composers themselves (direct
licensing) or the producers of the programming that they purchase
(source licensing) — or demanding per-program licensing from the
societies. (E.g., Tr. 491-92, 746-50.)
Because SMC and its competitors have come to rely on the
blanket license, the societies — particularly ASCAP, which is the
largest of these organizations — have acquired a significant
degree of bargaining leverage. This has occurred because of the
perception on the part of most, if not all, of the cable
companies that they have no realistic alternative to meeting
ASCAP’s irreducible demands. (E.g., Tr. 456-60, 746-50.) Based
on this claimed lack of any economically viable alternative to
the blanket license, SMC argues that negotiations serve merely to
validate the monopolistic prices that ASCAP can extract by virtue
of its stranglehold on the market for use of its members music.
ASCAP strongly disputes the notion that it is “a monopolist”
and urges that if SMC’s premise is rejected, then the negotiated
agreements may be relied upon in setting fees. It particularly
cites court decisions in two cases that have rejected antitrust
challenges to its use of the blanket license. One involved a
challenge by the CBS television network and the other a suit by a
nationwide group of local television stations. In each case the
court, in effect, found that the plaintiffs there had not
demonstrated that they lacked alternatives to the blanket license
as a means of access to the music used on their programs, and
therefore they had not demonstrated that ASCAP’s use of the
blanket license involved an unreasonable “restraint of trade”
under section 1 of the Sherman Act. See BMI v. CBS, 441 U.S. 1,
23-24 [99 S.Ct. 1551, 1564, 60 L.Ed.2d 1] (1979), rev’g
562 F.2d 130 (2d Cir. 1977), rev’g 400 F.Supp. 737 (S.D.N.Y. 1975);
CBS v. ASCAP, 620 F.2d 930, 935 (2d Cir. 1980) (on remand from
441 U.S. 1 [99 S.Ct. 1551, 60 L.Ed.2d 1 (1979)]), cert. denied,
450 U.S. 970 [101 S.Ct. 1491, 67 L.Ed.2d 621] (1981); Buffalo
Broadcasting Inc. v. ASCAP, 744 F.2d 917, 924-33 (2d Cir. 1984),
cert. denied, 469 U.S. 1211 [105 S.Ct. 1181, 84 L.Ed.2d 329]
(1985).
The parties’ dispute over the significance of these decisions
for the present case appears in some measure to skirt the point.
Even if the mode of analysis in these cases were directly
pertinent here, it is questionable whether these decisions would
control with respect to SMC. In any event, these cases are not
directly relevant.
We may fairly accept, at least as a possibility, that if CBS or
the local television stations chose to undertake source or direct
licensing or utilized the per-program license either as an
economic alternative or as a bridge to full source or direct
licensing, they might in the long run limit the economic leverage
exercised by ASCAP through its use of the blanket license.
Indeed, despite the contrary testimony of SMC’s economic expert,
Dr. Benston, it appears that the decisions in CBS and Buffalo
Broadcasting compel us to acknowledge this possibility since the
plaintiffs in both of those cases offered virtually identical
expert testimony and the courts nonetheless concluded that
restraint of trade by use of the blanket license had not been
proven.
It is also certainly conceivable that if HBO (or the Disney
Channel or SMC) chose to forego a blanket license in favor of
attempting source or direct licensing, it might in the long run
obtain licensing coverage for much if not all of its programming.
In the meantime, to bridge the gap, it would still have to pay
for a blanket license or a per-program license (if ASCAP relented
from its initial refusal to quote a fee for such a license), or
else forego a substantial part of its programming. Even if HBO
survived the inevitably higher costs and competitive
disadvantages vis-a-vis the other cable companies during this
interregnum, it is fair to assume that in the long term the
pursuit of such an endeavor
Page 584
would not save the company much, if any, money since copyright
holders would have no incentive to agree to lower rates than
those paid to them now via ASCAP, and HBO would then be saddled
in futuro with the substantial costs that it now avoids by
reliance on the blanket license. (Tr. 545-51.) (See also Schlieff
Dep. at 85-86.) See generally Cirace, supra, 47 Ford.L.Rev. at
292 n. 99.
We must further bear in mind that the individual cable
companies might well find it more difficult than either CBS or
the nationally organized local television industry to induce
large numbers of copyright holders to forego reliance on the
blanket license. CBS is, of course, one of a small handful of
national networks,[21] with the advantages of a very high
public profile, substantially greater revenues than the
individual cable companies, more control over the content of its
programming, and a parent that controls a large business in music
publication. As the Second Circuit noted in rejecting CBS’s
antitrust challenge, “we have some difficulty even contemplating
the feared situation of individual songwriters displaying
reluctance to arrange to have their songs performed on a national
television network, especially one owned by `the giant of the
world in the use of music rights.'” CBS v. ASCAP, supra, 620
F.2d at 937-38 (quoting CBS v. ASCAP, supra, 400 F.Supp. at
771).[22]
As for the local television stations, they have the bargaining
advantage of negotiating jointly through their All-Industry
Committee. See, e.g., Sobel, supra, 3 Loyola Ent.L.J. at
39-40 (countervailing power of organized buyers); see also id.
at 31-32 (in the music industry, if three or fewer major buyers,
they “have substantial monopsony power — the power to lower
prices.”) (quoting Cirace, supra, 47 Ford.L.Rev. at 281 n. 34).
The local stations have the further advantage that by virtue of
their number they represent a much larger source of revenue to
ASCAP and a much more difficult industry to police for copyright
infringement. Id. at 34, 40 (substantial cost to sellers of
policing large number of potential users for infringing
activities limits seller’s ability to charge above competitive
price).[23] These circumstances also suggest that they may be
able to negotiate on more equal terms with ASCAP than could the
individual cable program suppliers. See Broadcast Music, Inc. v.
Moor Law, Inc., 527 F.Supp. 758, 764 (D.Del. 1981), aff’d mem.,
691 F.2d 490 (3d Cir. 1982).
In any event, we need not speculate as to whether the
circumstances in which HBO and Disney found themselves in the
mid-1980’s were sufficiently dissimilar to those of CBS and the
local television stations to have permitted an antitrust
challenge by the cable companies.[24] Our concern is to set a
fair rate for the blanket license on the assumption that its use
by ASCAP is consistent with the antitrust laws. What is relevant
for our purposes is the relative bargaining power of ASCAP and
the cable companies in negotiating a price for the blanket
license. If the negotiating parties
Page 585
exert generally equivalent bargaining leverage, the results may
be viewed as a reasonable equivalent of a competitive market.
See, e.g., Sobel, supra, 3 Loyola Ent. L.J. at 39 (citing, inter
alia, J. Bain, Industrial Organization 152 (2d ed. 1968)). If
not, it is doubtful whether the resulting agreements are
appropriate guides to a reasonable rate.
For the reasons already noted, it is questionable whether any
of the cable companies could have made effective use of direct or
source licensing, especially within the limited time period in
which the blanket license agreements cited by ASCAP were
concluded. Furthermore, the principal other alternative suggested
in CBS and Buffalo Broadcasting — the use of a per-program
license — has until now apparently been for all practical
purposes unavailable to HBO and the other cable program suppliers
since ASCAP has declined until recently to make one available to
them based on its interpretation of the Consent Decree. (See
pp. 69-72 [pp. 596-597], infra.)[25]
The one remaining alternative, invocation of the rate court’s
jurisdiction, has always been available, although the testimony
of both SMC’s representatives and especially the negotiators for
the other cable companies suggests that they looked upon this
Court with what can fairly be described as measured aversion.
(E.g., Nolan Dep. at 60; Schlieff Dep. at 92, 103.) Their
concerns, as expressed in testimony, involved both the belief
that this Court was “ASCAP-friendly,” and the assumption that
participation in a rate proceeding was exceedingly expensive. How
expensive is not made clear on the present record, although the
unstated implication is that they assumed that the added expense
exceeded the likely reduction, if any, that they would obtain
from ASCAP’s demanded fees.[26] Cf. Buffalo Broadcasting Co.
v. ASCAP, supra, 744 F.2d at 927 (television stations described
as “represented by a vigorous committee with the demonstrated
resources, skill, and willingness to invoke the rate-adjustment
process.”)
Regardless of how these witnesses characterize their reasons
for not resorting to the rate court, their testimony is at least
credible in indicating that their decision was not based on any
purported assumption that the rates that they agreed to were in
any meaningful sense “reasonable.” Rather, given the absence of
any track record in the rate court and the fact that such a
proceeding would probably be expensive, a cautious businessman
would likely opt for even a fairly high fee to avoid both the
uncertainty of the alternative result and the likelihood of
substantial expense involved in pursuing it. Furthermore, since
the amounts of money payable even under the ASCAP formula do not
constitute a large proportion of the companies’ overall costs, it
was certainly understandable for these companies to agree to
payments that they may have viewed as “excessive.”
In short, it may fairly be said that there have been
substantial constraints, both objective and subjective, on the
willingness of the cable companies to invoke alternatives to
ASCAP’s blanket license demands. Whether these constraints were
realistically assessed by the would-be ASCAP licensees may have
been a crucial question for the antitrust suits, in which the
plaintiffs bore the burden of proving that ASCAP (and BMI) used
the blanket license to restrain competition unreasonably, but it
is not so in this setting, in which ASCAP
Page 586
bears the burden of demonstrating that the rate it seeks is
reasonable and that such reasonableness can be measured by what
some of the cable companies agreed to pay in the past. Even if
these companies were mistaken in believing they lacked viable
options, their bona fide belief that this was the fact is
relevant in assessing whether the negotiated agreements are an
appropriate measure of a reasonable fee.
Based on a review of the testimony of record and the data on
other licensing agreements, I conclude that the cable companies —
much like the networks, local television stations and other
licensees — have in fact assumed in the past that direct or
source licensing was economically unfeasible and that per-program
licenses, even if offered by ASCAP or ordered by the rate court,
would be too expensive.[27] It appears as well that the cable
companies other than SMC also assumed — whether correctly or not
— that the rate court was not an economical alternative for them,
presumably because it was thought to be a costly process and one
fraught with uncertainty as to the ultimate result.[28]
(E.g., Schlieff Dep. at 103-05; see also Tr. 573-74.)
The validity of these assumptions is not crucial for our
purposes; this is not an antitrust suit and we are not called on
to determine whether ASCAP has violated the Sherman Act. It
suffices to observe that the concerns of the cable companies
appear to have constrained their negotiating posture, and this
supports the conclusion that prior negotiated agreements — even
though agreed to after “arm’s length” negotiations — are not
necessarily appropriate as a dollar-for-dollar measure of a
“reasonable fee” for SMC.[29]
Given the apparent limitations — whether self-imposed or not —
on the cable companies’ bargaining leverage, we would strongly
question the appropriateness of relying on the old ASCAP license
agreements even if they were not, on their face, readily
distinguishable. Moreover, this impression is further reinforced
by the evidence that ASCAP’s posture in negotiations took
advantage of this apparent weakness in its interlocutors’
position. In short, it may fairly be concluded that the
agreements reached by ASCAP with the cable licensees reflect a
de facto but significant inequality of bargaining leverage.
Represented by counsel who has had substantial experience in
dealing on ASCAP’s behalf with the broadcasting industry, ASCAP
appears to have followed a sophisticated approach to maximize its
long-term revenues. ASCAP routinely issues a license at no fee or
a nominal fee to fledgling companies, in the hope that they will
prosper and ultimately be able to afford substantial fees.
(Charap Dep. at 201-02.) Upon realization of this goal, ASCAP
typically has demanded, as a price for re-licensing, sharply
increased fee levels at each renewal. (E.g., Schlieff Dep. at
50-51; Gerber Dep. at 47-50; Charap Dep. at
Page 587
102, 116-18; see Fagan Dep. at 47-48.) See also Cirace, supra, 47
Ford.L.Rev. at 287-88. In so doing ASCAP has chosen in each
instance to negotiate an agreement first with the largest music
user in the industry — in this case HBO — and has then used
that agreement as a floor in its dealings with the other
companies, based on its invocation of Article IV(C), the
non-discrimination provision of the Consent Decree. (Tr. 848-49;
Gerber Dep. at 58, 90; Charap Dep. at 18-21, 80, 85, 110-12,
115.)[30] In conducting these negotiations ASCAP’s
representatives have also taken pains to impress upon the
licensees the expense and uncertainty of any resort to the rate
court, with the attendant threat that ASCAP would seek far higher
fees in court. (Tr. 837-40; Charap Dep. at 60.) The unmistakable
message conveyed is that ASCAP viewed the rate court as a
receptive forum for its views and that the licensee would be well
advised to settle since the rate court might award fees
substantially in excess of those then being offered by ASCAP.
(E.g., Schlieff Dep. at 236-39; see also Charap Dep. at 60,
63-64.)
In addition, in its dealings with the cable program suppliers
ASCAP has in the past declined to offer any per-program license
at all, citing its own reading of Article VII(B) of the Consent
Decree. Although the attorneys for the cable companies might have
advised their clients that this reading was doubtful — indeed,
that issue is now before this Court — the prospect of having to
litigate both that legal issue and the appropriate fee for a
per-program license served in effect as a further deterrent to
the cable companies resorting to this forum.
These negotiating tactics are cited, not in criticism of ASCAP,
but rather as indicative of the fact that ASCAP’s negotiating
posture has been forceful, and has taken advantage of perceived
weaknesses in the licensees’ negotiating posture. The point is
not that there are no objective constraints on ASCAP’s
negotiating leverage, but rather that the conjunction of these
factors has led to negotiated fees seemingly in excess of what
one would expect to be produced if the licensees did not believe
themselves largely constrained to obtain a blanket license on the
basis of a negotiated settlement with ASCAP.[31]
This conclusion is buttressed by the seeming anomaly that these
same licensees have reached agreements with ASCAP’s principal
counterpart — BMI — at markedly lower rates, generally ranging,
in effect, from $0.09 to $0.13 per subscriber in recent years.
(E.g., Gerber Dep. at 118; Schlieff Dep. at 173-74.) The
anomalousness of this result rests on several facts. First,
although BMI has a smaller repertory than does ASCAP —
approximately one million compositions compared to about three
million (see Deposition of Edward Cramer at 11-12)[32] —
there seems no question that the cable companies need the same
protection with respect to that repertory as they require with
regard to the ASCAP music; simply stated, there is so much BMI
music enmeshed in their programming that they must obtain a
license from BMI. (Tr. 580; Schlieff Dep. at 61-62, 153.) Second,
both societies appear about equally well positioned to extract
fees for their licenses since they operate under equivalent
consent decrees and both offer the blanket
Page 588
license as their principal or sole form of licensing to the cable
companies.
Not surprisingly, in their dealings with licensees comparable
to the cable program suppliers and with each other, ASCAP and BMI
have agreed to fees that are generally in a similar range. (See,
e.g., Tr. 95-99; ASCAP Exh. 3.) Thus, their respective blanket
licenses with the television networks reflect a ratio between
ASCAP and BMI of approximately 1.18-to-one (Tr. 160, Joint Exhs.
28, 30, 33; ASCAP Exh. 6; JPS at ¶¶ 44-50), even though the
networks use far more ASCAP than BMI music (Tr. 191); their
agreements with the local television industry reflect a ratio of
about 1.43-to-one (ASCAP Exh. 5); their agreements with the local
radio industry reflect a ratio of about 1.16-to-one (Tr. 97); and
their licenses with the MTV network provide for virtually equal
license rates. (JPS at ¶ 36, SMC Exh. E.)[33] In addition,
ASCAP and BMI have agreed to divide the royalties paid by cable
system operators for cable retransmission of programs on the
basis of an approximately 1.2-to-one ratio. (Joint Exh. 42; Tr.
859.)
In striking contrast, the agreements cited by ASCAP in this
proceeding — with HBO and Disney — reflect a far higher fee rate
than either of these licensees, or SMC, is paying BMI; indeed the
ratio between ASCAP and BMI fees that would result if ASCAP were
awarded a $0.25 rate would be on the order of 2:1. Although ASCAP
argues that this far greater differential reflects the cable
companies’ valuation of the respective blanket licenses issued by
ASCAP and BMI, there is little, if anything, in the record to
support this conclusion. Indeed, the record plainly demonstrates
that the relevant licensees seek the lowest rates that they can
obtain from ASCAP and from BMI, and thus the results appear to
reflect largely the perceived relative bargaining leverage of the
negotiating parties. Since a reasoned evaluation of the ASCAP and
BMI licenses suggests that their value to the cable companies
does not greatly differ — as we noted, both are plainly necessary
for the current operations of the cable program suppliers — it is
reasonable to infer that the ratios reflecting a nearly
one-to-one relationship between ASCAP CAP and BMI are better
indicators of equivalent bargaining leverage between ASCAP and
licensee, and that the rates cited by ASCAP are therefore
probably in excess of a range of reasonable fees.[34]
The foregoing considerations strongly suggest that $0.25 is not
a reasonable fee for SMC. Moreover, ASCAP’s arguments to the
contrary do not carry much force. In substance ASCAP suggests
that the very fact that HBO and Disney agreed to comparable fees
compels the conclusion that they are reasonable rates for SMC.
This ipse dixit form of argument fails to explain why those
rates are appropriate surrogates for the “reasonable fee” that we
are instructed to set, and fails to deal with the congeries of
record evidence suggesting
Page 589
that these rates rest somewhere above a range of reasonable
rates.[35]
C. SMC’s Proposal for an Economic Analysis
As an alternative to ASCAP’s proposal, SMC urges that an
appropriate blanket license fee reflect the intrinsic value of
the music that is made available under the license. To that end
it offers an elaborate scheme for measuring what it contends is
the fair or competitive market value of the music. Although I am
ultimately unpersuaded by SMC’s case, it deserves some detailed
attention.
SMC starts from the premise that ASCAP is in fact a monopolist,
notwithstanding the arguably contrary conclusions of the Second
Circuit and the Supreme Court, and that therefore the Court
cannot rely on any of the agreements into which it (or BMI) has
entered. Instead, SMC proposes that the Court view music as
simply one of a number of so-called creative services utilized in
the production of a film or television program, and it suggests
that the valuation of such creative services in a more
competitive market than the music industry will provide a
reliable approximation of how music would be valued in a
competitive market.
SMC’s specific analysis involves a two-step process in which it
utilizes certain data concerning payments made by producers to
obtain two other forms of creative services for the production of
their films — screenwriting and direction.[36] Since the issue
in this proceeding concerns the amounts that should be paid for
the right to use copyrighted music in programming on cable
television, SMC initially focusses upon the level of payments
made to screenwriters and directors in connection with the
exhibition of their films on cable television. (Tr. 587-88.) For
this data it looks to the respective collective bargaining
agreements of the Screenwriters Guild and the Directors Guild of
America, each of which provides for payment of residuals to their
members for cable performances, at the rate of 1.2 percent of the
amount paid by the pay cable television service to the film
distributor. (Id.; Joint Exhs. 37-38.)
If the same figure were applied directly to value music rights
in connection with the performance of films or other programming
on cable television, the resultant fee for SMC would approximate
$0.32 per subscriber. SMC, however, posits that music is
generally a far less important creative element in the artistic,
and presumably financial, success of a film than are such inputs
as the script, the direction, and the acting. Accordingly, it
offers a methodology for discounting from the 1.2 percent figure
in order to arrive at an appropriate fee for music use.
To accomplish this task, SMC selected an assertedly
representative sample of made-for-theatre films that had been
shown on its program services, and then sought to obtain from the
producers of these films data indicating the amount of money
spent “up front” by the producer to obtain screenwriting,
directorial and musical services.
Page 590
(Tr. 590, 595.) Ultimately SMC obtained data of this sort from
four studios reflecting either actual outlays or the relative
size of such expenses for fifty films. (Tr. 599-600.)[37] They
did not receive data from a number of major studios, including
Warner, Universal, Columbia and Disney. (Tr. 675-76.) Although
the results vary very substantially from film to film, when
aggregated they reflect that on average the producers spent
substantially less money per film for music than for either
screenwriting or directorial services. Indeed, the median figures
for each category of expenditure indicate that the typical cost
of acquisition of music was approximately one-quarter the average
costs of acquiring either screenwriting or directorial services.
(Tr. 619; SMC Exh. K.)
Utilizing this four-to-one ratio, SMC argues that the 1.2
percent figure for pay cable residuals contained in the
collective bargaining agreements for screenwriters and directors
should be reduced by seventy-five percent, to .3 percent, to
account for the fair market value of music use in the
presentation of SMC programming. This would leave us with a value
of about eight cents per subscriber for all music used on SMC.
(Tr. 620-21.) Although SMC points out that a substantial quantity
of music on its programming comes from the repertory of BMI —
thus justifying a reduction of the already reduced figure to
account only for ASCAP’s share of the music used on SMC — it
nonetheless proposes to ignore this final reduction and argues
simply that any fee award for a blanket license should not exceed
eight cents per subscriber.
Even if we accept arguendo the initial premise of SMC’s
argument — that the performing rights societies exert such
control of the market for music rights as to preclude any
reliance on negotiated agreements — its analysis in this case
does not itself yield a reasonable measure of a fee for ASCAP’s
license. This conclusion flows from certain technical problems
with its methodology and from the fact that its analysis assumes
that what the court should be valuing is simply the market value
of music as an element of the program, rather than the value of
the blanket license itself.
On its face, SMC’s attempt to look to the market for other
creative inputs as a means of measuring what the market would
charge for music acquisition by cable companies is plausible. Its
method of doing so, however, is open to serious question. The
initial problem with SMC’s approach to measuring the value of
music is its reliance upon the guild agreement provisions for
payment of residuals to screenwriters and directors. These
provisions are part of an extensive set of contractual terms that
also govern up-front compensation, benefits, and an array of
working conditions for writers and directors. It is fair to
assume that in any negotiation that encompasses as many disparate
issues as do the guild agreements, the negotiators will agree to
tradeoffs among the various negotiated items, with one side
giving ground on some issues in exchange for concessions from the
other side in other areas. The process of negotiation is thus
likely to yield a complex pattern of results, most of which would
have been different if the individual issue had been negotiated
entirely separately from the others. Accordingly, plucking one
term out of the contract is likely to yield a fairly arbitrary
result.[38] Although at least one witness for SMC opined that
these provisions reflect a reasonable valuation of the rights
that are involved (Tr. 773, 784), this conclusory assertion was
unsupported by any explanation of the basis for the proferred
opinion, and is therefore unpersuasive. (Compare
Page 591
Fagan Dep. at 131-32.)[39]
The next step in the analysis by SMC, which involves a
reduction by three-quarters in the payments contained in the
guild agreements, is equally open to question, even though it is
conceded that producers generally pay somewhat less up front for
music than for directorial or scriptwriting services. (Tr. 269.)
I summarize only some of the problems with SMC’s approach.
First, because of great difficulties in obtaining sensitive
cost information from the film studios, SMC apparently settled
for a smaller and somewhat different database from what it
originally sought. (E.g., Schindler Dep. at 21-22; Dorsey Dep.
at 20-21; Deposition of Alida D. Camp at 9; Deposition of
Christine M. Sims at 45.)[40] As an apparent result of the
small sample size, the range of figures that one obtains by
applying a 95 percent confidence interval to the various samples
is so broad as to suggest little reliability in the median
figures on which SMC relies. Second, and more important, there is
no clear showing that the set of films ultimately included in the
study are representative of the films shown on SMC (or cable
television generally). (See also Finkel Dep. at 33.) This is of
particular significance because the data reflects substantially
different cost relationships from film to film and between film
categories that are defined by intensity of music use. (See SMC
Exhs. K L; Schindler Dep. at 42; Finkel Dep. at 31; Camp Dep.
at 20-21.) As a consequence of this, it appears that the results
obtained are highly sensitive to the mix of films included in the
sample. Of particular concern is that SMC’s heavy, and apparently
arbitrary, reliance on only a handful of film studios — which
themselves seem to differ markedly in their relative spending on
directorial and screenwriting services as compared to music
services — suggests a likely bias in the sample.[41]
In addition, the premise of this exercise is somewhat undercut
by the data on “up front” payments. Although directors and
screenwriters receive identical residuals from cable replays,
their “up front” payments differ substantially, with writers
receiving on average approximately one-third more than directors.
(Tr. 701.) Indeed, SMC’s economist conceded that his model was
not necessarily an accurate reflection of the real world. (Tr.
661.)[42]
Wholly apart from these technical concerns, SMC’s invocation of
the eight-cents-per-subscriber figure is conceptually flawed
because it assumes that the licensee should pay only for the
value of the music, rather than the value of the blanket license
itself. As suggested in several earlier interim fee decisions,
this is not the case. See e.g., In re Buffalo Broadcasting
Co., Memorandum and Order at 22-26 (S.D.N.Y. Feb. 17, 1987); In
re Buffalo Broadcasting Co., Memorandum and Order at 32-36
(S.D.N.Y. June 17, 1985).
Acquisition of a blanket license transfers to the licensee the
right to unlimited use of ASCAP’s repertory for a specified time
period. Although this is more music than a licensee such as SMC
could conceivably
Page 592
make use of during the license period, the blanket license has a
major benefit for the licensee — in conjunction with blanket
licenses from the other performing rights societies, it ensures
that the licensee need not attempt to locate the copyright owners
of each composition included in its year-long programming and
negotiate separately with each an acceptable fee. It represents,
in effect, an insurance policy against copyright liability for
the full range of the cable company’s acquired programming.
(E.g., Tr. 470, 579-80.)
This unique feature of the blanket license, which sets it apart
from any other form of licensing — whether direct licensing,
source licensing, or a per-program license from the performing
rights society — was explicitly noted by the Supreme Court and
Second Circuit in CBS and by the Second Circuit in Buffalo
Broadcasting. See BMI v. CBS, supra, 441 U.S. at 21-22 [99 S.Ct.
at 1563]; CBS v. ASCAP, supra, 620 F.2d at 939; Buffalo
Broadcasting, Inc. v. ASCAP, supra, 744 F.2d at 927, 932; id.
at 934 (Winter, J. concurring). The significance of this point
for our analysis is somewhat different but nonetheless not wholly
divorced from the analysis in those cases.
SMC is, for the most part, not the producer of programming, but
rather the purchaser of previously produced programming.[43] It
is therefore not purchasing music as such, but rather the right
to exhibit the programming that it wishes to offer, including the
music that the original producer has caused to be incorporated on
the sound track.[44] Moreover, because of the apparent
impracticality at this stage and in this industry of obtaining
source or direct licensing for all programming except at greater
cost than the blanket license, the cable supplier is deriving a
significant benefit by purchasing the service of aggregation — in
effect the avoidance of substantial cost and uncertainty that
would be faced in the absence of an ASCAP blanket license.
Thus, if we are to talk of competitive pricing, we must start
with the premise that the relevant market is one for aggregative
performance licenses, not the market for the services of
individual composers and musicians. Since SMC’s method of
valuation looks to payments by producers for the initial
acquisition of music or other creative services, it does not
fully reflect the benefits conveyed by a performing rights
society blanket license to a cable programming service.
To measure the full value of the blanket license, we must
account for not only the market value of acquisition of the music
for particular programs but also the market value of the
aggregative function of the license. In a hypothetical purely
competitive market, this would presumably translate to the cost
to the performing rights society and its members of providing the
music and the aggregative feature plus whatever rate of return is
necessary to justify the supplier remaining in that line of
business. If, on the other hand, we posit a market characterized
by a degree of competitiveness that does not fully match this
pristine state of affairs, the fees awarded would presumably be
still higher.[45]
Page 593
There is no direct evidence in the record of the costs
associated with the supplying of music rights in gross to the
licensees. The record does reflect that ASCAP’s administrative
costs account for about 20 percent of its revenues generally (Tr.
619, 622-23), but there is no evidence in the record as to the
relationship of expenses to revenues in connection with the
blanket licenses offered to the cable companies. Moreover, as
noted before, there is no reason to assume that a perfectly
competitive market is the appropriate model for ratesetting here,
and, in view of the wording of the Consent Decree as well as the
policies embodied in the Copyright Act, there is some reason to
conclude otherwise. In any event this analysis indicates that
even if SMC’s approach had sufficient statistical validity, its
suggested result would have to be increased by some unstated
amount to account for the nature of the services that are being
provided under the blanket license.
In sum, I conclude that the approach proffered by SMC does not
yield a fully defensible result. Although it is at least
suggestive of the fact that the rate urged by ASCAP is excessive
under relevant standards, it cannot by itself provide a reliable
measure of a reasonable rate.
D. A Reasonable Rate
The foregoing analysis suggests that neither the approach of
ASCAP nor that of SMC to the formulation of a reasonable rate is
wholly satisfactory. It is equally apparent that a
“reasonableness” inquiry does not lend itself to the application
of a clear and simple formulation and ultimately involves some
conceded arbitrariness on the part of the rate setter. See
Cirace, supra, 47 Ford.L.Rev. at 277 (“there is no economically
meaningful method of determining a competitive price.”).
It is not surprising that the drafters of the relevant decree
provisions themselves eschewed finely focussed formulations and
contented themselves — both in the decree and in their
presentations to the Court that approved it — with such general
criteria as the avoidance of “exorbitant” fees, and the
imposition of a “reasonable” or “fair” rate. (See Joint Exhs.
44, 45). Indeed, this approach is foreshadowed in the line of
cases that apparently were the source of the reasonable rate
provision; in those cases the courts have struggled to define the
appropriate standard with some degree of concreteness and have
generally conceded in the end that the determination of a
“reasonable” fee for use of a product or service was a very
impressionistic process. See, e.g., U.S. v. Hartford Empire Co.,
supra, 65 F.Supp. at 275-76.
On a more general level, the courts have been equally candid in
noting the absence of any uniquely acceptable formula for either
the setting of rates in regulated industries or the judicial
review of rate-setting by the authorized administrative agencies.
See, e.g., In re Permian Basin Area Rate Cases, 390 U.S. 747,
790-92 n. 59 [88 S.Ct. 1344, 1372-73 n. 59, 20 L.Ed.2d 312]
(1968). See also Duquesne Light Co. v. Barasch, [488 U.S. 299]
109 S.Ct. 609, 616 [102 L.Ed.2d 646] (1989) (quoting, inter
alia, Smyth v. Ames, 169 U.S. 466, 546 [18 S.Ct. 418, 433, 42
L.Ed. 819] (1898)); Edgerton, “Value of the Service as a Factor
in Rate Making,” 32 Harv.L.Rev. 516, 540-46 (1919). As the
Supreme Court recently noted in a related context: “The economic
judgments required in rate proceedings are often hopelessly
complex and do not admit of a single correct result.” Duquesne
Light Co. v. Barasch, supra, 109 S.Ct. at 619.[46]
Page 594
In general terms the courts reviewing rate-making decisions
have looked to whether those decisions have (1) compensated the
producer or supplier for its costs, (2) provided a sufficient
return on capital to compensate investors for their risk, and (3)
ensured both financial integrity and further necessary
investment, while at the same time (4) adequately protecting the
legitimate interests of purchasers of those goods or services and
any other cognizable public interests defined by the governing
statutes. See, e.g., In re Permian Basin Area Rate Cases,
supra, 390 U.S. at 792 [88 S.Ct. at 1373].[47] Furthermore, to
the extent that the suppliers’ costs — the most basic and, in
many cases, most readily available data — do not yield a precise
result, it is at least arguable that the value of the product or
service to the consumer may also be taken into account. See,
e.g., Edgerton, supra, 32 Harv.L.Rev. 516. See also Buffalo
Broadcasting Co. v. ASCAP, supra, 744 F.2d at 926-27 (whether
price of per-program license is “too costly” depends upon whether
price “is higher than the value of the rights obtained”).
This form of analysis cannot be literally applied to our case.
There is no record reflecting the “cost” of music production as
such, nor could there reasonably be since the principal
information that seems relevant is the living expenses of the
individual composer and such minimal overhead as he might incur
in carrying out his composing activities, and this scarcely seems
a reasonable basis for establishing a fee. In any event, the
record contains no data on these matters. As for return on
investment or encouragement of further investment, again this is
not directly applicable here since we are not engaged in
regulating the price of corporate production, and in any event
there is no information in the record concerning what level of
fees would be necessary to provide a continuing incentive for
composers to compose. See generally Cirace, supra, 47
Ford.L.Rev. at 305.
In exploring alternative avenues we are left principally with
the two forms of analysis proffered by the litigants, and an
array of rates that might be derived depending upon the precise
terms of that analysis. In assessing those alternatives, the
general goal is to arrive at a rate that would not reward ASCAP
for the exercise of any leverage that may be inconsistent with
generally accepted antitrust principles while still providing its
members with a return for their labors that is generally
commensurate with the value that a competitive market would place
on both the musical fruits of those efforts and the benefits
offered by the blanket license.
Since we have no free market in the rights conveyed by a
blanket license, the principal data must perforce be specific
negotiated agreements, although these results necessarily must be
modified to the degree that they are believed to be influenced by
considerations deemed inappropriate for our present analysis. For
reasons already noted, the HBO and Disney results probably
overstate the range of reasonable rates. Similarly, because SMC’s
analysis does not adequately account for the range of rights
conveyed by the blanket license, it probably understates the
range of appropriate rates even if one were to ignore the degree
of random error and bias that appears to pervade the selection
and use of the sample.
Between these two extremes, the most obvious alternative
approach looks to an arguably comparable type of agreement — the
arrangements entered into by BMI with licensees such as SMC and
others similarly situated. Such an analogy is based upon the fact
that BMI provides a service comparable to that of ASCAP and thus,
in the absence of reliable direct indicia of a fair rate for
ASCAP, can at least provide a useful benchmark for such a
measurement.
Page 595
Both sides offer arguments against direct reliance on the BMI
agreements, although ASCAP’s opposition is far more strongly
pressed. SMC would view BMI as holding a monopoly power
equivalent to that of ASCAP since the two organizations are
functionally indistinguishable. Accordingly, it suggests, any
agreement achieved by BMI with its licensees, even if
significantly less remunerative than the ASCAP licenses, should
be viewed as the product of coercive market power and thus an
inappropriate measure of reasonable fees. In contrast ASCAP
challenges the BMI rate as the product, in effect, of a
“sweetheart” arrangement because BMI is an instrument of the
broadcast industry and thus does not seriously defend its
members’ interests. ASCAP also argues that since HBO and Disney
agreed to pay ASCAP far more than BMI, necessarily BMI’s license
must be deemed less valuable.
Neither view is persuasive. Although BMI performs a role
equivalent to that of ASCAP — indeed, that is the basis for
looking to its agreements as a guide for an ASCAP fee — it is not
at all clear that it has or chooses to exert the type of leverage
that SMC attributes to it. Indeed, even if we disregard entirely
the alternatives to the blanket license that would-be licensees
may potentially have with respect to both BMI and ASCAP, it must
be noted that BMI operates under a potential disadvantage
compared to ASCAP in that it does not have a rate court to which
it can repair to obtain a fee order; although it can sue
unlicensed users for copyright infringement, this does not give
it a means of prompt redress or ensure a continuing flow of
revenue to its members, a fact that may encourage it to be more
forthcoming in negotiations.[48] In any event, it appears to be
the fact that in the past BMI has not negotiated as aggressively
as ASCAP with the cable program suppliers. It may therefore be
fairly inferred that the results of its dealings with those
licensees reflect in effect a greater equality of negotiating
leverage than do the ASCAP agreements. Under these circumstances
BMI’s agreements may provide guidance in assessing an appropriate
rate for ASCAP since equality of bargaining power is likely to
result in rates that are reasonable, even if not precise,
measures of what a free market would yield. See, e.g., Sobel,
supra, 3 Loyola Ent.L.J. at 39. But cf. Cirace, supra, 47
Ford.L.Rev. at 281-85 (discussing impact of bilateral monopoly on
pricing).
As for ASCAP’s argument that BMI’s bona fides are suspect, it
is not especially telling for two reasons. First, it is
unsupported by any evidence other than the fact that BMI has
agreed to lower rates than has ASCAP. Second, even if BMI is
deliberately staying its own hand as an aid to its network
founders, this does not change the ultimate conclusion; because
BMI in practice does not appear to exert the same degree of
bargaining leverage as ASCAP, the balance of power at the BMI
bargaining table appears to be more equal than is the case with
ASCAP, and hence the results of those negotiations may be
significant for our purposes.
Finally, I note that in those instances in which ASCAP and BMI
have agreed upon the distribution of a common royalty fund —
specifically, the compulsory fees paid by cable systems operators
for re-transmission of programs — they have arranged for a far
more equal distribution of the fund than is reflected in their
respective licensing agreements with HBO and Disney. Thus, as
noted before, in their most recent agreement, ASCAP receives only
approximately fifty-five (55%) percent of the available fund.
(Joint Exh. 42.) This too suggests that BMI’s agreed-upon rates
have some probative weight for setting ASCAP fees.
The foregoing analysis indicates that the negotiated BMI rates
for SMC and comparable licensees are a fair starting point for
setting an ASCAP fee. The most recent agreements between BMI and
both SMC and HBO involve payments of between $0.12 and $0.13 per
subscriber. (See Joint Exh. 21; ASCAP Exh. E; Tr. 476-79.) The
Page 596
question remains, however, whether any adjustment is appropriate
for purposes of setting a rate for ASCAP.
In valuing what is being offered, one may fairly note that the
ASCAP license offers somewhat more than the BMI license in the
narrow sense that it permits unlimited use of a repertory that is
significantly larger, by a factor of approximately three.
Although both licenses may, as a practical matter, be necessary,
the cost of foregoing the blanket license of ASCAP is likely to
be higher since SMC apparently uses more ASCAP music (Tr. 84-91;
ASCAP Exh. 4)[49] and therefore it is probable that more of
SMC’s programs contain ASCAP music than contain BMI music.[50]
Thus the alternatives of either foregoing programming containing
ASCAP music or seeking other forms of licensing for such programs
would likely be more costly to the licensee than would the
equivalent steps in lieu of a BMI license. In short, the ASCAP
blanket license may be viewed as conveying somewhat more value to
the licensee than does the BMI license.
Under these circumstances, some differential between the BMI
and ASCAP rates is reasonable. See Edgerton, supra, 32
Harv.L.Rev. at 556 (where pricing on cost basis yields a range of
possible rates, the benefit to the purchaser can be used to
influence where the price is set within that range). See also
Buffalo Broadcasting Co. v. ASCAP, supra, 744 F.2d at 926-27
(discussing comparison of price and value received). As for the
size of the differential, it may fairly be based on the very
figures agreed to by ASCAP and BMI between themselves in their
allocation of the Copyright Tribunal fund for cable operators’
program retransmissions.
As noted, the most recent of these agreements divided the
moneys in question on the basis of a 55 percent-45 percent split.
(See Joint Exh. 42.) Applying the same ratio to a $0.12 per
subscriber figure (see ASCAP Exh. E; Tr. 476-79), we arrive at
an adjusted rate of approximately $0.15 per subscriber.[51]
In sum, the annual fee for SMC’s blanket license from ASCAP for
the period from April 4, 1984 to December 31, 1988 is set at
$0.15 for each subscriber to the cable services provided by
SMC.[52]
II. The Per-Program License Issue
At some point in the course of negotiations between the
parties, ASCAP took the position that SMC was not entitled to a
per-program license and apparently declined at that stage to
quote any fee for such a license. (Tr. 117, 120.) At no time
until the trial did SMC seek judicial relief
Page 597
from this refusal to quote a per-program fee, apparently because
it was intent upon achieving a satisfactory blanket license
agreement.
As part of its contentions enumerated in the joint pre-trial
statement, SMC asserted that it is entitled to a per-program
license on demand, and it therefore requested an order requiring
ASCAP to quote a rate. (JPS at ¶¶ 120-23). Although SMC appeared
alternatively in its portion of the Joint Pretrial Statement and
its post-trial Memorandum to request that this Court impose a
fee, it offered no evidence at trial relevant to such a
determination.
In response ASCAP urges that SMC should be barred from
obtaining court intervention either because it has shown no real
interest in such a license in the course of negotiations or
because the Consent Decree does not entitle it to such a license.
Alternatively ASCAP asserts, and has proffered testimony, that it
has been and remains willing to negotiate a per-program fee for
SMC. (See Tr. 822-24.)
ASCAP’s interpretation of the Decree rests upon its reading of
Article VII(B), which directs it, in effect, to issue per-program
licenses on written request by “any unlicensed radio or
television broadcaster. . . .” According to ASCAP, SMC is not a
television “broadcaster” within the meaning of the Decree. In
support of this reading ASCAP offers principally a laundry list
of perceived technological and economic differences between a
cable television program supplier, such as SMC, and over-the-air
television stations or networks, which are concededly covered by
this provision. SMC of course argues the contrary.
As a technical matter, since SMC has requested of ASCAP a fee
quote for a per-program license and ASCAP has declined to give
one, there is jurisdiction in this Court to adjudicate the issue
of SMC’s entitlement to such a license.[53] Nonetheless, since
the record reflects without contradiction that ASCAP is prepared
to negotiate a fee for such a license, it does not appear at this
stage that we face a live controversy requiring a definitive
interpretation of the disputed provision. Although SMC appears
now also to be seeking an order setting an appropriate fee, this
can scarcely be done on the current record. Moreover, in view of
the evident priority that the Consent Decree gives to the
negotiation of fees by the parties, see, e.g., United States v.
ASCAP, supra, 586 F.Supp. at 730-31; In re Home Box Office,
Inc., Memorandum and Order at 18 (S.D. N.Y. July 11, 1986), it
is appropriate in the present circumstances to give the parties
an opportunity to arrive at an agreed-upon figure if SMC wishes
to pursue the matter.
Rather than adjudicate the abstract issue of entitlement or
attempt to set a fee in a vacuum, the Court will simply direct
that ASCAP quote a per-program fee to SMC within seven (7) days,
and undertake goodfaith negotiations with SMC concerning the
terms of such a license. If, within twenty one (21) days after
ASCAP proposes a fee, the parties have been unable to reach an
agreement, either may come to the Court to seek appropriate
relief.[54]
CONCLUSION
For the reasons stated, the Court determines that a “reasonable
fee” for a blanket license for SMC for the period from April
Page 598
4, 1984 through December 31, 1988 shall be set at $0.15 per
subscriber to the SMC services during the relevant period. The
fee payable should be computed monthly to conform to the records
of SMC reflecting the number of SMC subscribers.
With respect to SMC’s application for a per-program license,
the Court directs that ASCAP transmit a proposal for such a
license fee to SMC within seven (7) days and undertake good-faith
negotiations with SMC concerning the terms of such a license for
a period of twenty-one (21) days. This directive is based upon
ASCAP’s representation of willingness to negotiate such a license
with SMC and is without prejudice to its position that the
Consent Decree does not compel it to issue a per-program license
to SMC. If the parties cannot reach agreement within the
specified time period, either party may seek appropriate judicial
relief.
DATED: New York, New York
October 12, 1989
SO ORDERED.
/s/ Michael H. Dolinger
MICHAEL H. DOLINGER
UNITED STATES MAGISTRATE
Copies of the foregoing Memorandum and Order have been
transmitted this date to:
Allan Blumstein, David E. Nachman, Paul, Weiss, Rifkind, Wharton
Garrison, New York City, for American Society of Composers,
Authors and Publishers.
Kenneth L. Steinthal, Evie C. Goldstein, Weil, Gotshal Manges,
New York City, for Showtime/The Movie Channel, Inc.
