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Television Stations' Antitrust Claims Against Performing Rights Entity Advance

Thursday, March 6, 2014
By Eleanor S. Tyler

March 4 --Television stations complaining that SESAC LLC's licensing practices for its music are anticompetitive presented enough evidence to reach a jury on claims for restraint of trade, monopolization and conspiracy to monopolize in violation of Sherman Act §1 and §2, according to a March 3 opinion from the U.S. District Court for the Southern District of New York denying SESAC's motion for summary judgment (Meredith Corp. v. SESAC LLC, 2014 BL 56990, S.D.N.Y., No. 1:09-cv-09177-PAE, 03/03/14).

Challenged Conduct

SESAC LLC--along with Broadcast Music Inc. and the American Society of Composers, Authors, and Publishers--is one of three major not-for-profit performance rights organizations, which collects royalties from the public performance of musical compositions in which its members hold copyright interest. The plaintiffs, groups of local television stations, filed a putative class action alleging that SESAC's licensing practices since 2008 have violated federal antitrust law.

Specifically, the stations claimed that, in practice, they must obtain licenses for some music in SESAC's repertory because of its size and the fact that it includes works so ubiquitous that some are inevitably embedded in shows that the stations acquire and wish to air.

Since 2008, SESAC, with its affiliates' assent, has allegedly taken steps to make illusory any alternative to its blanket license, which conveys the right to play the music of all SESAC affiliates. Having insulated this product from competition and forced local television stations to acquire it, the plaintiffs argue, SESAC has set an exorbitant price for that “all or nothing” license, even though stations have no interest in buying the rights to the entirety of SESAC's catalogue.

They sued SESAC and 50 of its affiliated composers, who are named as “John Doe” defendants, alleging a conspiracy to restrain trade in violation of Sherman Act §1 and monopolization and conspiracy to monopolize in violation ofSherman Act §2.

The plaintiffs alleged that SESAC has a monopoly over the works in its repertory and committed overt acts in furtherance of keeping that monopoly--namely,

(1) preventing select SESAC-affiliated composers from entering into direct license agreements with music users;

(2) tying together all musical compositions, including both unwanted and desired compositions into an all-or-nothing blanket license;

(3) refusing to offer plaintiffs and members of the class a viable alternative form of license to its all-or-nothing blanket license;

(4) refusing to offer users fair and reasonable interim licenses pending resolution of negotiations; and

(5) refusing to negotiate in good faith.

The plaintiffs contend these practices have restrained and impeded the growth of SESAC's existing or potential competitors and impeded competitive licensing arrangements.

The plaintiffs also challenged supplemental affiliation agreements that SESAC entered with some of its affiliates. They noted that the affiliates paid an up-front royalty in return for an agreement to a large penalty if the affiliate entered into a direct license with any client station, or forcing the affiliate to forfeit to SESAC the revenue from any direct license.

The plaintiffs claimed that these were explicit agreements between SESAC and its affiliates to restrain competition by forcing affiliates to refrain from offering any direct licenses, leaving no alternative to the blanket license. The plaintiffs further pointed to a sizeable increase in the prices charged for a blanket license between 2008 and 2012.

SESAC moved for summary judgment, arguing that there is no evidence that its agreements and licensing practices had any anticompetitive effect. SESAC further contended that its agreements with affiliates are nothing more than 20,000 bilateral agreements between the PRO and each affiliate and that there is no evidence of concerted action that involves all of the affiliates or somehow binds them to a common anticompetitive purpose. SESAC also challenged the plaintiffs' market definition, contending that a market bounded by SESAC's repertory is, in effect, a disfavored single-brand market.

Analysis

Judge Paul A. Engelmayer denied SESAC's motion for summary judgment, but narrowed the plaintiffs' §1 claim by concluding that the challenged conduct is not per se illegal. He also narrowed any conspiracy claim to only those affiliates who signed a supplemental affiliation agreement with SESAC.

First, the court reasoned, per se treatment is reserved for conduct “which, based on extensive experience, can be categorically condemned as anti-competitive.” The plaintiffs pointed to no such judicial experience with arrangements like the supplemental affiliation agreements, the court averred, much less the kind of “extensive experience” that would warrant per se treatment.

Accordingly, the court concluded that the plaintiffs may not assert a per se claim under §1, only a claim analyzed under the rule of reason.

Next, the court saw no evidence that the vast majority of SESAC's 20,000 affiliates had any reason to know of any conspiracy to restrain trade. Therefore, the court granted summary judgment against the plaintiffs' claim of a “sweeping pact” to restrain trade, and restricted the plaintiffs' claim that SESAC conspired with its affiliates to those who entered supplemental affiliation agreements with SESAC.

The court reasoned, however, that the “direct licensing restrictions in these agreements,” along with the testimony of two affiliates, “together supply a sufficient basis on which a jury could infer that the affiliates who entered into these agreements with SESAC were well aware that these terms tended to choke off a key avenue of competition with the blanket license.”

Indeed, the court added, “the inference logically follows from the fact of the restraint itself, and particularly from the prohibitive size of the direct-license penalty.” One affiliate acknowledged that he would pay a $500,000 penalty if he entered any direct license agreement, the court noted.

While the court reasoned that the evidence does not compel a conclusion that the affiliates who entered supplemental agreements agreed with SESAC to restrain trade, the court agreed with the plaintiffs that there is enough evidence to allow a jury to make that inference. “At trial, SESAC could plausibly argue that, if trade was restrained, it acted alone,” the court noted, but added that the plaintiffs presented enough evidence of a conspiracy to get to a jury.

The plaintiffs argued that the penalties for independently licensing music in the supplemental agreements, and the lack of viable alternatives to the blanket license, force television stations to buy the blanket license when they would prefer a competitive alternative. SESAC countered that the penalties in its supplemental agreements are benign, and that only a small percentage of its 20,000 affiliates are parties to supplemental agreements at all.

At this juncture, the court reasoned that it need not resolve the parties' dispute as to the inferences to be drawn from the facts in the record. “With SESAC alone having moved for summary judgment, the only issue before the Court is whether there is sufficient evidence on which a jury could find that SESAC's practices qualified as a restraint, i.e., that those practices closed off viable alternatives to its blanket license.” The court saw such evidence presented here.

The plaintiffs also provided ample evidence from which a jury could conclude that the relevant market is television performance rights to works “bounded, or defined, by SESAC's reportory,” the court concluded. While SESAC urged an alternative market definition, the court noted reasons why it would not entitle SESAC to summary judgment and, ultimately, left the question of the correct market definition to the jury.

The court declined to weigh the procompetitive and anticompetitive effects of SESAC's conduct, noting that “the weighing of these contentions is properly left for trial.” At this stage, the court concluded, “plaintiffs have adduced evidence upon which a jury could find, between SESAC and those affiliates who have entered into supplemental affiliation agreements, a combination in restraint of trade, in violation of § 1.”

The court reasoned that the plaintiffs' §2 monopolization claim survives summary judgment for the same reasons as the §1 claim. “In sum, there is sufficient evidence upon which a jury could find that SESAC took action to maintain and fortify its monopoly over licensing of its affiliates' work, by adopting licensing practices that eliminated all realistic competition with its blanket license,” the court concluded. “SESAC does not appear to dispute that, as a matter of law, the claimed acts of exclusion are legally cognizable under § 2.” the court added.

“As under §1, the Court finds that plaintiffs have adduced sufficient evidence upon which a jury could find that the anti-competitive effects of SESAC's licensing practices outweigh their pro-competitive virtues.”

Having held that the evidence is sufficient to warrant a finding of concerted action among SESAC and certain affiliates, and also sufficient to warrant a finding of § 2 liability for monopolization, the court also rejected SESAC's attack on the plaintiffs' allegations of a conspiracy to monopolize among SESAC and the affiliates subject to supplemental affiliation agreements.

Lead counsel for plaintiffs: Bruce Alan Colbath, Robert Bruce Rich and Steven Alan Reiss, Weil, Gotshal & Manges LLP, New York City; lead counsel for defendant: David Andrew Handzo, Jenner & Block, LLP, Washington, D.C.; Susan Joan Kohlmann, Jenner & Block LLP, Los Angeles.

To contact the reporter on this story: Eleanor Tyler in Washington at etyler@bna.com

To contact the editor responsible for this story: Sheldon B. Richman at srichman@bna.com


Text of the court's decision is at http://www.bloomberglaw.com/public/document/Meredith_Corporation_et_al_v_Sesac_LLC_et_al_2014_BL_56990_SDNY_M -- at Bloomberg Law's website.

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