Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 1 of 19 Page ID #:24663 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 JENNER & BLOCK LLP DANIEL A. ROZANSKY (CA #161647) DRozansky@jenner.com 633 West Fifth Street, Suite 3600 Los Angeles, CA 90071 Telephone: +1 213 239 5100 Facsimile: +1 213 239 5199 JOSHUA M. SEGAL (pro hac vice application pending) JSegal@jenner.com 1099 New York Avenue, NW Suite 900 Washington, DC 20001 Telephone: +1 202 639 6000 Facsimile: +1 202 639 6066 Attorneys for Proposed Amici Curiae UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA Case No. CV13-5693 PSG (GJSx) PROPOSED BRIEF OF AMICI CURIAE AMERICAN ASSOCIATION FLO & EDDIE, INC, a California corpo- OF INDEPENDENT MUSIC, ration, individually and on behalf of all AMERICAN FEDERATION OF others similarly MUSICIANS OF THE UNITED situated, STATES AND CANADA, AFM & SAGAFTRA INTELLECTUAL PROPERTY Plaintiff, RIGHTS DISTRIBUTION FUND, RECORDING INDUSTRY v. ASSOCIATION OF AMERICA, SCREEN ACTORS GUILD – AMERICAN FEDERATION OF TELEVISION SIRIUS XM RADIO, INC, a Delaware AND RADIO ARTISTS, AND corporation; and DOES 1 through 10 SOUNDEXCHANGE, INC. REGARDING FINAL APPROVAL OF CLASS Defendants. ACTION SETTLEMENT Date: May 8, 2017 Hearing Time: 1:30 p.m. Courtroom: 6A Judge: Hon. Philip S. Gutierrez 25 26 27 28 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 2 of 19 Page ID #:24664 1 TABLE OF CONTENTS 2 TABLE OF AUTHORITIES ..................................................................................... ii 3 INTEREST OF AMICI CURIAE.............................................................................. 1 4 INTRODUCTION ..................................................................................................... 1 5 BACKGROUND ....................................................................................................... 2 6 I. THE PROPOSED SETTLEMENT’S WILLING BUYER/ WILLING SELLER LANGUAGE IS IMPROPER. ...................................... 4 II. 9 BY BINDING CLASS MEMBERS TO WHAT IS EFFECTIVELY A COMPULSORY LICENSE, THE SETTLEMENT WOULD IMPROPERLY SET COPYRIGHT POLICY........................................................................................................... 9 10 CONCLUSION........................................................................................................ 14 7 8 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 i PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 3 of 19 Page ID #:24665 1 TABLE OF AUTHORITIES 2 3 4 CASES Acosta v. Trans Union LLC, 243 F.R.D. 377 (C.D. Cal. 2007) .............................. 12 5 Authors Guild v. Google, Inc., 770 F. Supp. 2d 666 (S.D.N.Y. 2011) ............. 10, 11 6 Hanlon v. Chrysler Corp., 150 F.3d 1011 (9th Cir. 1998) ........................................ 1 7 In re Masters Mates & Pilots Pension Plan & IRAP Litigation, 957 F.2d 1020 (2d Cir. 1992) .................................................................................. 1, 8 8 9 Mirfasihi v. Fleet Mortgage Corp., 356 F.3d 781 (7th Cir. 2004) .......................... 12 10 Reynolds v. Beneficial National Bank, 288 F.3d 277 (7th Cir. 2002) ....................... 1 11 Rodriguez v. West Publishing Corp., 563 F.3d 948 (9th Cir. 2009) ......................... 2 12 13 14 Safari Club International v. Harris, No. 2:14-cv-01856, 2015 WL 1255491 (E.D. Cal. Jan. 14, 2015) ....................................................................... 1 Vardon Golf Co., v. BBMG Golf Ltd., 156 F.R.D. 641 (N.D. Ill. 1994) ................... 6 15 16 STATUTES 17 17 U.S.C. § 104a(a)(1)............................................................................................... 9 18 17 U.S.C. § 104a(h)(6) .............................................................................................. 9 19 17 U.S.C. § 114(d)(2) ................................................................................................ 2 20 17 U.S.C. § 114(f)(1) ....................................................................................... 3, 5, 11 21 17 U.S.C. § 114(f)(1)(B) ........................................................................................... 3 22 23 17 U.S.C. § 114(f)(2) ............................................................................................. 3, 5 24 17 U.S.C. § 114(f)(2)(B) ....................................................................................... 3, 7 25 17 U.S.C. § 114(g) ................................................................................................... 11 26 17 U.S.C. § 114(g)(2) ................................................................................................ 3 27 17 U.S.C. § 301(c) ................................................................................................. 3, 9 28 ii PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 4 of 19 Page ID #:24666 1 17 U.S.C. § 801.......................................................................................................... 3 2 17 U.S.C. § 801(b)(1) ................................................................................................ 7 3 17 U.S.C. § 803.......................................................................................................... 3 4 5 17 U.S.C. § 804.......................................................................................................... 3 6 LEGISLATIVE MATERIALS 7 Fair Play Fair Pay Act of 2015, H.R. 1733, 114th Cong. (2015) ............................ 13 8 Competition and Commerce in Digital Books: Hearing Before the H. Comm. on the Judiciary, 111th Cong. (Sept. 10, 2009), 9 https://judiciary.house.gov/_files/hearings/printers/111th/11110 31_51994.PDF .................................................................................................... 11 11 Respecting Senior Performers as Cultural Treasures Act, H.R. 4772, 12 113th Cong. (2014) ............................................................................................. 13 13 14 OTHER AUTHORITIES 37 C.F.R. § 382.11 ..................................................................................................... 3 15 37 C.F.R. § 382.12(a) ................................................................................................ 5 16 17 18 37 C.F.R. § 382.13 ..................................................................................................... 3 37 C.F.R. § 382.13(f) ................................................................................................. 3 Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, 73 Fed. Reg. 20 4080 (Jan. 24, 2008) ............................................................................................. 7 19 21 22 23 24 Federal Judicial Center, Managing Class Action Litigation: A Pocket Guide for Judges (3d ed. 2010) ............................................................................ 8 4 William B. Rubenstein et al., Newberg on Class Actions § 13.40 (5th ed. 2011)........................................................................................................ 8 25 Sirius XM Holdings Inc., Current Report (Form 8-K) (June 26, 2015), https://www.sec.gov/Archives/edgar/data/908937/ 26 000093041315002915/c81845_8k.htm ................................................................ 7 27 28 iii PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 5 of 19 Page ID #:24667 1 SoundExchange, Does SoundExchange Have Royalties for You?, https://www.soundexchange.com/artist-copyright-owner/does2 soundexchange-have-royalties-for-you/ ............................................................. 13 3 4 U.S. Copyright Office, Circular No. 56, Copyright Registration for Sound Recordings (rev. July 2014) ...................................................................... 9 5 Written Rebuttal Testimony of David J. Frear (public version), Determination of Royalty Rates and Terms for Transmission of Sound Recordings by Satellite Radio and “Preexisting” Subscription Ser7 vices, No. 16-CRB-0001-SR/PSSR (Library of Cong. Copyright 8 Royalty Bd. Feb. 17, 2017) .................................................................................. 8 6 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 iv PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 6 of 19 Page ID #:24668 1 INTEREST OF AMICI CURIAE 2 As explained in the Motion for Leave, amici are music industry organizations 3 that work to advance the interests of copyright owners and performing artists. Amici 4 believe that all copyright owners and artists should receive fair compensation for the 5 use of their sound recordings, regardless of whether those recordings were originally 6 fixed prior to February 15, 1972, and regardless of whether they are protected by 7 state or federal law. Amici file this brief to express concerns about the proposed 8 settlement’s impact on future rate-setting proceedings, as well as its impact on how 9 pre-1972 recordings are valued and licensed. See Hanlon v. Chrysler Corp., 150 10 F.3d 1011, 1028 (9th Cir. 1998) (analyzing objections to class action settlement 11 raised by amici curiae); Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277, 288 (7th 12 Cir. 2002) (noting the “risk of collusion over . . . the terms of settlement,” and finding 13 it “desirable to have as broad a range of participants in the fairness hearing as possi- 14 ble”); In re Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 15 1026 (2d Cir. 1992) (in reviewing class action settlements, district courts should 16 “consider the views of the non-participating parties and counsel” (internal quotation 17 marks omitted)); see also Safari Club Int’l v. Harris, No. 2:14-cv-01856, 2015 WL 18 1255491, at *1 (E.D. Cal. Jan. 14, 2015) (amici may raise “legal issues that have 19 potential ramifications beyond the parties directly involved” and may possess 20 “unique information or perspective that can help the court beyond the help that the 21 lawyers for the parties are able to provide” (quotation marks and citations omitted)). 22 INTRODUCTION 23 In this case, the owners of certain classic recordings have fought hard to se- 24 cure payment for the use of those recordings by Sirius XM. Amici applaud the class 25 representatives for fighting to establish payment for use of their creative work, and 26 amici welcome Sirius XM’s willingness to pay for its past use of these recordings. 27 But amici have deep misgivings about the prospective relief embedded in the 28 proposed settlement. First, the settlement gratuitously and erroneously asserts that 1 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 7 of 19 Page ID #:24669 1 the going forward rate is a “market” rate, and may be used as evidence of such in 2 future proceedings. In fact, the proposed settlement would impose a steep discount 3 from the rate that Sirius XM pays for federally protected recordings. The plaintiffs 4 no doubt agreed to settle at such reduced rates due to the costly and uncertain pro- 5 spects of multiple state court litigations, and not because those rates reflect what 6 would happen in the marketplace. The Court should not endorse the settlement rate 7 as a “market” rate—an obvious self-serving characterization by Sirius XM, to which 8 class counsel had no real reason to object. See Rodriguez v. West Publ’g Corp., 563 9 F.3d 948, 968 (9th Cir. 2009) (emphasizing, in an analogous context, that a district 10 court “has a fiduciary role for the class”). Indeed, Sirius XM is already trying to use 11 this “market” characterization in an effort to receive a more favorable royalty rate in 12 another proceeding. 13 Second, the settlement effectively imposes a compulsory license that binds all 14 members of the class—and the recordings they own as of the date of the settlement— 15 for the next decade, without any of the features that a legislature would consider 16 when imposing such a license. As the Copyright Office has explained in another 17 context, such profound changes in the law should be created through the legislative 18 process, not through the mechanism of class action litigation. 19 BACKGROUND 20 Sound recordings fixed on or after February 15, 1972 are protected by federal 21 copyright law. Among other protections, these recordings are subject to a digital 22 public performance right, with a compulsory “statutory license” available to non- 23 interactive services such as Sirius XM (but not to on-demand services such as 24 Spotify). See 17 U.S.C. § 114(d)(2). Rates and terms for the statutory license are 25 set by the federal Copyright Royalty Board (“CRB”), which sets rates after adver- 26 sarial, trial-type proceedings that depend heavily on expert economic testimony. See 27 28 2 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 8 of 19 Page ID #:24670 1 id. §§ 114(f)(1)-(2), 801, 803, 804. Amicus SoundExchange administers the statu- 2 tory license for the music industry. 1 3 Recordings fixed before February 15, 1972 (so-called “pre-1972 recordings”), 4 by contrast, generally are protected only by state law. See id. § 301(c). State law 5 rights, including rights in pre-1972 recordings, are generally licensed directly be- 6 tween copyright owners and users. Still, some services that make use of the federal 7 statutory license—including Sirius XM—have long asserted that they need no li- 8 cense at all to perform pre-1972 recordings. Sirius XM’s failure to obtain licenses 9 to perform these recordings, of course, is what underlies this litigation. 10 The proposed settlement contains both retrospective and prospective compo- 11 nents; if approved, the settlement would bind a class consisting of all owners of pre- 12 1972 recordings that Sirius XM has exploited in the United States from August 1, 13 2009 through November 14, 2016 (other than the major labels, direct licensors, and 14 opt-outs). 2 Stipulation of Class Action Settlement, at 3 (ECF No. 666-4). The ret- 15 rospective component requires Sirius XM to pay the class at least $25 million (and 16 as much as $40 million) for past performances of pre-1972 recordings. Id. at 15-16, 17 19. The prospective component, meanwhile, grants Sirius XM a license to perform 18 all of the class members’ pre-1972 recordings through January 1, 2028, at a royalty 19 rate of 5.5% of Sirius XM’s gross revenues—a figure that will itself be prorated 20 based on the percentage of sound recording performances for which the recordings 21 22 23 24 25 26 27 28 1 SoundExchange and other amici participate in rate-setting proceedings before the CRB, seeking rates that fairly compensate artists and copyright owners for use of the recordings covered by the statutory license. In addition, SoundExchange collects and distributes statutory royalties. Specifically, users of the statutory license are required to make payments to SoundExchange at the rates and pursuant to the terms promulgated by the CRB. 17 U.S.C. § 114(f)(1)(B), (2)(B); 37 C.F.R. §§ 382.11, 382.13. SoundExchange, in turn, distributes royalties to copyright owners and performing artists, pursuant to a formula prescribed by statute. See 17 U.S.C. § 114(g)(2); 37 C.F.R. § 382.13(f). 2 This brief uses the term “major labels” to refer to what the settlement calls the “Major Record Labels,” defined to include Capitol Records LLC; Sony Music Entertainment; UMG Recordings, Inc.; Warner Music Group Corp.; ABKCO Music & Records, Inc.; and their respective subsidiaries and affiliates. Stipulation of Class Action Settlement, at 5 (ECF No. 666-4). 3 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 9 of 19 Page ID #:24671 1 at issue account. Id. at 6-7, 19, 20-21. 3 Thus, for instance, if performances of class 2 members’ pre-1972 recordings constitute 5% of Sirius XM’s sound recording per- 3 formances, then Sirius XM must pay less than three-tenths of a percent of its gross 4 revenues. Id. at 6-7, 21. That figure, in turn, is subject to deduction of attorney’s 5 fees awarded to class counsel. Id. at 21. 6 Amici have significant concerns about the settlement’s prospective compo- 7 nent. Amici are concerned, first, that the Court is being asked to endorse the settle- 8 ment as representative of a transaction between a willing buyer and willing seller. 9 Second, amici are concerned that the settlement uses the class action mechanism to 10 put in place what is fundamentally a policy solution to an industrywide problem, not 11 a solution appropriate for judicial adoption. The settlement should not be approved 12 without changes to address these deficiencies. 13 I. 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 THE PROPOSED SETTLEMENT’S WILLING BUYER/WILLING SELLER LANGUAGE IS IMPROPER. The proposed settlement states: “The Parties agree that [the royalty rate] rep- resents the rate that has been established by negotiations between a willing buyer and willing seller in a competitive market for Pre-1972 Sound Recordings, and shall be precedential in all future and/or pending proceedings (including rate making proceedings and arbitrations) relating to sound recordings.” Stipulation of Class Action Settlement, at 21. Yet it is clear from the settlement’s face, as well as obvious marketplace facts, that the proposed royalty rate is well below the market rate for sound recordings, particularly classic sound recordings that are among the world’s most valuable. 4 Far from having anything to do with the settlement’s economic terms, 3 More specifically, each “Bona Fide Claimant” is entitled to a “Pro Rata Share” of the 5.5% figure for each “properly Identified Pre-1972 Sound Recording” that it owns, where the “Pro Rata Share” constitutes the total number of “Performances” of that recording on certain “Reference Channels,” divided by the total number of “Performances” of all sound recordings on those channels. Id. at 6-7, 21. 4 The settlement recites that the major labels, direct licensors, and opt-outs— all of which are excluded from the proposed settlement class—collectively account for 85% of Sirius XM’s plays of pre-1972 recordings from August 2009 through October 2016. Id. at 17. Thus, the supposed “market” rate of 5.5%, which the parties 4 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 10 of 19 Page ID #:24672 1 this language just gives Sirius XM fodder for future rate-setting proceedings—at the 2 expense of copyright owners and recording artists. 3 To begin with, the settlement’s prospective component does not remotely re- 4 flect the marketplace. As a threshold matter, a ten-year license of any sort is virtually 5 unheard of in the music industry, where new platforms, technologies, and business 6 models are constantly emerging. Just the last few years, for instance, have seen 7 dramatic increases in the popularity of streaming services. Given the market cir- 8 cumstances that exist today, and especially in the digital streaming market, it is far 9 more standard to have a license of two or three years. Even the CRB’s rate-setting 10 proceedings for the statutory license cover only a five-year period, with the possi- 11 bility of mid-cycle rate-settings if a “new type” of service is introduced. 17 U.S.C. 12 § 114(f)(1), (2). Simply put, a license spanning ten years is inconceivable as the 13 product of a transaction between a willing buyer and willing seller. 14 A 5.5% royalty rate, too, is not remotely close to “market.” Currently, the 15 statutory license royalty rate for Sirius XM’s satellite radio service is 11% of its 16 gross revenues. 37 C.F.R. § 382.12(a). The royalty rate reflected in the settlement 17 agreement is just half of that, at most. See Stipulation of Class Action Settlement, 18 at 19-20. Yet when pre-1972 recordings are licensed in the free market, they gener- 19 ally are licensed on the same financial terms as post-1972 recordings, not at a deep 20 discount. That is unsurprising, for pre-1972 recordings encompass some of the most 21 popular and valuable in the world. They include recordings by the Beatles, Led 22 Zeppelin, Ella Fitzgerald, Johnny Cash, Elvis Presley, and Miles Davis—just to 23 name a few. 5 There also is no evidence relating the 5.5% royalty rate to the $210 24 now ask the Court to deem “precedential,” was negotiated to cover just a small fraction of the pre-1972 recordings used by Sirius XM—a fraction that will diminish even more to the extent that additional class members opt out of the settlement. 5 The absurdity of the willing buyer/willing seller language is only underscored by what happens if Sirius XM prevails on the performance right issue in the California appeal, the New York appeal, and the Florida appeal. In that event, the settlement provides, Sirius XM’s royalty obligation will be terminated. Stipulation of Class Action Settlement, at 19. Nonetheless, the license will remain in effect. Id. at 19-20. In other words, as long as Sirius XM prevails on the performance right 25 26 27 28 5 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 11 of 19 Page ID #:24673 1 million lump sum that Sirius XM agreed to pay the major labels for its past infringe- 2 ments of their rights in pre-1972 recordings. 3 The face of the settlement makes clear why class counsel was willing to accept 4 a prospective license on these below-market terms: They were uncertain, rightly or 5 wrongly, about whether Sirius XM would pay for pre-1972 recordings at all. See 6 Stipulation of Class Action Settlement, at 12 (noting plaintiff and class counsel’s 7 consideration of “the substantial risks and uncertainty of protracted litigation and 8 trial and appeals, especially in complex actions such as this, as well as the difficulties 9 and delays inherent in such litigation”). Even now, Sirius XM has taken the unusual 10 step of preserving the right to challenge the legal basis for the complaint. Against 11 this backdrop, class counsel secured a guarantee of at least $25 million for the past, 12 when they were looking at additional years of litigation against a determined and 13 well-funded adversary. See id. at 12 (noting plaintiff and class counsel’s considera- 14 tion of “the desirability of promptly providing relief to Plaintiff and the Settlement 15 Class Members” (emphasis added)). In other words, class counsel held onto the 16 proverbial bird in the hand, even if that meant terms that were highly favorable to 17 Sirius XM. Those license terms represent not a market outcome but a litigation 18 judgment. See, e.g., Vardon Golf Co., v. BBMG Golf Ltd., 156 F.R.D. 641, 651 19 (N.D. Ill. 1994) (observing that “many factors come into play in reaching and ob- 20 taining settlement and, as such, settlement payments could not be a reliable guide 21 for computing the value of a reasonable royalty”). 22 Given all of this, why would the settlement include a gratuitous statement that 23 the 5.5% royalty rate “represents the rate that has been established by negotiations 24 between a willing buyer and willing seller in a competitive market for Pre-1972 25 issue in three states, it receives a ten-year license in nearly all other states for free. Not only that, but a three-state victory on the performance right issue would leave 26 Sirius XM with a free license, even in those states, to engage in whatever “reproductions, distributions, and other exploitations” are “necessary or incident” to its digital 27 audio performances—even though reproduction and distribution are valuable rights that are entirely separate from performance rights. Id. at 19-21. None of this is a 28 deal to which a willing seller plausibly would agree. 6 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 12 of 19 Page ID #:24674 1 Sound Recordings”? The answer is that Sirius XM intends to use this as evidence 2 of a “market” rate in future rate-setting litigation. For instance, Sirius XM’s settle- 3 ment with the major labels provides that it may enter into a license with each label 4 to perform that label’s pre-1972 recordings from 2018 through 2022—and, in the 5 absence of agreement between the parties, the rates for the license are to be set in 6 binding arbitration.6 In its own rate-setting proceedings, moreover, the CRB often 7 sets rates by analogizing to “benchmark” rates that the parties put forward as evi- 8 dence of the free-market value of the rights at issue. In some proceedings, the CRB 9 is directly charged with setting rates that a willing buyer and willing seller would 10 have agreed to. 17 U.S.C. § 114(f)(2)(B) (CRB “shall establish rates and terms that 11 most clearly represent the rates and terms that would have been negotiated in the 12 marketplace between a willing buyer and a willing seller”). In others, the CRB is 13 directed to set rates that advance other objectives. See id. § 801(b)(1). But even in 14 such proceedings, its analysis is bounded by its assessment of what rates would pre- 15 vail in the market. See, e.g., Determination of Rates and Terms for Preexisting Sub- 16 scription Services and Satellite Digital Audio Radio Services, 73 Fed. Reg. 4080, 17 4089 (Jan. 24, 2008). In rate-setting proceedings such as these, Sirius XM will 18 doubtless seek to use the settlement as evidence that 5.5% is an appropriate royalty 19 rate, to the detriment of copyright owners and artists—even though the current stat- 20 utory license rate is 11%, and even though the 5.5% figure most assuredly does not 21 result from the sort of detailed and robust economic analysis on which the CRB bases 22 6 23 24 25 26 27 28 Sirius XM’s settlement with the major labels, which covers approximately 80% of the pre-1972 recordings that Sirius XM historically has used, does not prescribe a fixed rate for some period into the future. Instead, it provides that, if Sirius XM and a label cannot agree on a rate for pre-1972 recordings, that rate will be set in binding arbitration. See Sirius XM Holdings Inc., Current Report (Form 8-K) (June 26, 2015), https://www.sec.gov/Archives/edgar/data/908937/ 000093041315002915/c81845_8k.htm. That arrangement underscores the absurdity of the claim that a fixed 5.5% rate for ten years represents a “market” rate. The major labels’ settlement with Sirius XM also illustrates the harm that could flow from that absurd claim. Specifically, placing a judicial imprimatur on the assertion that 5.5% is a “market” rate could grossly prejudice efforts to obtain fair compensation for the 80% of pre-1972 recordings that the major labels control. 7 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 13 of 19 Page ID #:24675 1 its rate determinations. Indeed, Sirius XM has already attempted to rely upon the 2 settlement’s willing buyer/willing seller language in the CRB’s pending rate-setting 3 proceeding for the 2018-2022 period. 7 4 Although class members do have the opportunity to opt out of the settlement, 5 that does not fix the problem. Class members almost certainly will not focus on the 6 throwaway language regarding market rates as they decide whether to opt out. See 7 4 William B. Rubenstein et al., Newberg on Class Actions § 13.40, at 431 (5th ed. 8 2011) (“class members generally have so little at stake in most cases and are so ig- 9 norant about the law that they lack both the incentive and means to review the set- 10 tlement”); see also Federal Judicial Center, Managing Class Action Litigation: A 11 Pocket Guide for Judges 12 (3d ed. 2010) (judges must “examine critically . . . the 12 proposed settlement terms” because “the class itself typically lacks the motivation, 13 knowledge, and resources to protect its own interests”). The court-approved notice 14 to class members does not even mention this language, much less disclose its import. 15 See ECF No. 666-5, at 2-3. In addition, by providing Sirius XM with ammunition 16 to secure lower rates in future proceedings, the settlement harms the interests of peo- 17 ple and entities outside the class, including both copyright owners and performing 18 artists, for whom opting out is logically impossible. See In re Masters Mates & 19 Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1026 (2d Cir. 1992) (noting that 20 when district courts review class action settlements, “[w]here the rights of third par- 21 ties are affected, . . . their interests too must be considered,” and that “if third parties 22 complain to a judge that a decree will be inequitable because it will harm them un- 23 justly, he cannot just brush their complaints aside” (internal quotation marks omit- 24 ted)). Before it can approve the settlement, the Court must insist upon the removal 25 of any self-serving description of the license terms as reflecting a market rate. 26 7 See Written Rebuttal Testimony of David J. Frear (public version) at 15-16, Determination of Royalty Rates and Terms for Transmission of Sound Recordings by Satellite Radio and “Preexisting” Subscription Services, No. 16-CRB-000128 SR/PSSR (Library of Cong. Copyright Royalty Bd. Feb. 17, 2017). 27 8 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 14 of 19 Page ID #:24676 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 II. BY BINDING CLASS MEMBERS TO WHAT IS EFFECTIVELY A COMPULSORY LICENSE, THE SETTLEMENT WOULD IMPROPERLY SET COPYRIGHT POLICY. More fundamentally, amici have deep misgivings about the use of the class action settlement process to saddle a class of copyright owners with what amounts to a ten-year compulsory license. The settlement would allow Sirius XM to perform class members’ sound recordings for a decade into the future, with those recordings encumbered even if the underlying rights are sold to a third party. But granting the license, class members will be told, is the only way to collect payment for past unauthorized performances of their recordings. Put differently, the only way to collect for past unauthorized performances under this settlement is to authorize future ones. This prospective aspect of the settlement is outside the scope of this litigation and thus improper. This case is about Sirius XM’s past unauthorized use of pre1972 recordings—not its use of sound recordings for the next decade. See Stipulation of Class Action Settlement, at 10. As to the future, the appropriate judicial relief would be an injunction forbidding Sirius XM from performing class members’ recordings without a license—not a grant of authority to undertake what otherwise would be acts of infringement. 8 The parties could have chosen to mitigate this problem by structuring the settlement’s prospective component as opt-in, rather than optout, but they evidently chose not to do so. 20 21 22 23 24 25 26 27 28 8 The settlement exceeds the scope of the original litigation in other ways, too. For example, even though pre-1972 recordings are generally not protected by federal copyright law, see 17 § U.S.C. 301(c), there are exceptions: Certain (though by no means all) subsequently remixed or remastered versions of pre-1972 recordings are federally protected. See U.S. Copyright Office, Circular No. 56, Copyright Registration for Sound Recordings at 3-4 (rev. July 2014). The same is true of certain pre-1972 recordings of foreign origin. See 17 U.S.C. § 104a(h)(6); id. § 104a(a)(1). The settlement defines “Pre-1972 Recordings,” however, to include all sound recordings initially fixed prior to February 15, 1972, regardless of their country of origin, and regardless of whether they were subsequently remixed or remastered. Stipulation of Class Action Settlement, at 6. In granting Sirius XM a prospective license to perform all pre-1972 sound recordings, therefore, the settlement conveys rights arising under federal law that were never at issue in this litigation in the first place. See id. at 10 (listing state law claims against Sirius XM). And it may even do so for free, depending on the outcome of various appeals. See supra at 5 n.5. 9 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 15 of 19 Page ID #:24677 1 At least one district court in analogous circumstances has rejected a proposed 2 class action settlement as improperly exceeding the scope of the litigation. See Au- 3 thors Guild v. Google, Inc., 770 F. Supp. 2d 666 (S.D.N.Y. 2011). In a case arising 4 out of Google’s unauthorized scanning and display of books, a proposed settlement 5 would have put in place “a forward-looking business arrangement” giving Google 6 permission to use class members’ books long into the future. Id. at 669, 671-72. 7 The court rejected the settlement, in part because it “would release claims well be- 8 yond those contemplated by the pleadings.” Id. at 678. Indeed, the Copyright Office 9 likewise expressed its disapproval. See Competition and Commerce in Digital 10 Books: Hearing Before the H. Comm. on the Judiciary, 111th Cong., at 67 (Sept. 10, 11 2009) (prepared statement of Marybeth Peters, Register of Copyrights) 9 (opposing 12 settlement as “not really a settlement at all, in as much as settlements resolve acts 13 that have happened in the past and were at issue in the underlying infringement 14 suits”). The Office explained that the going-forward license should be imposed on 15 owners not via a class action settlement, but instead—if at all—through legislative 16 action: “[S]uch decisions are the domain of Congress and must be weighed openly 17 and deliberately, and with a clear sense of both the beneficiaries and the public ob- 18 jective.” Id. at 68. 19 Authors Guild is instructive in another way, too. The court in that case ex- 20 pressed concern that the settlement intruded on the rights of copyright owners, for 21 “[a] copyright owner’s right to exclude others from using his property is fundamental 22 and beyond dispute.” Authors Guild, 770 F. Supp. 2d at 681 (citing Fox Film Co. v. 23 Doyal, 286 U.S. 123 (1932)). Because “[a]bsent class members who fail to opt out 24 will be deemed to have released their rights even as to future infringing conduct,” 25 id., the settlement improperly “place[d] the onus on copyright owners to come for- 26 ward to protect their rights when Google copied their works without first seeking 27 9 28 Available at: https://judiciary.house.gov/_files/hearings/printers/111th/11131_51994.PDF. 10 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 16 of 19 Page ID #:24678 1 their permission.” Id. at 682; see Statement of Marybeth Peters, Register of Copy- 2 rights, Before the H. Comm. on the Judiciary, at 70 (stressing that “[c]ompulsory 3 licenses . . . are scrutinized very strictly because by their nature they impinge upon 4 the exclusive rights of copyright holders”). The same reasoning governs here: that 5 Sirius XM previously performed recordings without seeking permission should not 6 mean that class members now have the burden of coming forward to preserve their 7 rights in the future. 8 Indeed, the proposed settlement’s license component is not really resolution 9 of a dispute. Rather, it improperly attempts to create a quasi-legislative solution 10 going forward. See Authors Guild, 770 F. Supp. 2d at 677 (rejecting settlement be- 11 cause, among other things, “the establishment of a mechanism for exploiting un- 12 claimed books is a matter more suited for Congress than this Court”); Statement of 13 Marybeth Peters, Register of Copyrights, Before the H. Comm. on the Judiciary, at 14 70 (observing that any compulsory license should be created “after open and public 15 deliberations that involve all affected stakeholders, and after ensuring that they are 16 appropriately tailored”). And although a one-size-fits-all licensing framework may 17 not be necessary, there are stark differences between the settlement’s licensing sys- 18 tem and the one that Congress has adopted for federally protected recordings. For 19 instance: 20 • Under the federal system, rates and terms are set every five years after litigated 21 proceedings. See 17 U.S.C. § 114(f)(1). Here, the rate has been set arbitrarily 22 in a private deal and lasts for ten years. 23 • Under the federal system, performance royalties are split equally between 24 copyright owners and recording artists. See id. § 114(g). Featured artists re- 25 ceive 45% of the royalties via direct payment from SoundExchange, and non- 26 featured (session) musicians and vocalists receive 5%. Id. Here, the settle- 27 ment requires no split between owners and artists. See Stipulation of Class 28 Action Settlement, at 22. 11 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 17 of 19 Page ID #:24679 1 • Under the federal system, royalties must be paid to SoundExchange, a non- 2 profit collective controlled by artists and labels. Here, royalties would be paid 3 to a for-profit administrator chosen by Sirius XM and class counsel. See Stip- 4 ulation of Class Action Settlement, at 7, 22. And class counsel, for its part, 5 seeks 30% of going-forward royalties for itself, before any disbursements to 6 class members. Id. at 21; see ECF No. 669-1, at 3; ECF No. 670, at 1, 3. 7 • Under the federal system, SoundExchange—the payee designated to receive 8 royalties from statutory license users—invests substantial resources to find 9 and pay the correct owners and performers. Here, owners would have the 10 burden of declaring themselves to the administrator. See Stipulation of Class 11 Action Settlement, at 22. 12 Indeed, under the proposed settlement, if owners do not declare themselves, 13 then Sirius XM gets to perform their recordings for free—a windfall that should raise 14 red flags for the Court. 10 If a class member does not take certain prescribed steps to 15 submit a claim, then—according to the settlement—Sirius XM will not owe royal- 16 ties, but can still perform the class member’s recordings without fear of liability. See 17 id. at 22-23 (providing that “Sirius XM shall have no liability for past royalties re- 18 sulting from a Settlement Class Member’s failure to properly Identify any Pre-1972 19 Sound Recording owned or controlled by he, she, or it” (emphasis added)); id. at 22 20 (stating that “[t]he license granted pursuant to Section IV.C.1 shall remain in full 21 force and effect throughout the Term, regardless of whether Settlement Class Mem- 22 bers submit claims pursuant to this paragraph”). 11 23 24 25 26 27 28 10 See Acosta v. Trans Union LLC, 243 F.R.D. 377, 389-91 (C.D. Cal. 2007) (rejecting settlement that “makes economic relief available to only a select group of class members” and provided no award to non-claimants, because its effect would be to “dramatically limit the Settlement Class’s potential cash recovery”); Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 782-83 (7th Cir. 2004) (rejecting settlement that settled claims for no compensation, because “colorable legal claims are not worthless”). 11 A class member’s failure to take the required steps, moreover, will mean that even a subsequent owner (whether by assignment or by will) is not entitled to 12 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 18 of 19 Page ID #:24680 1 That arrangement differs sharply from those that prevail under the statutory 2 license: Sirius XM pays SoundExchange for all recordings used pursuant to the stat- 3 utory license, regardless of whether copyright owners or performing artists have al- 4 ready come forward to identify themselves. SoundExchange then enables copyright 5 owners and artists to claim those royalties after the fact. See SoundExchange, Does 6 SoundExchange Have Royalties for You?, https://www.soundexchange.com/artist- 7 copyright-owner/does-soundexchange-have-royalties-for-you/. An artist or copy- 8 right owner need only register with SoundExchange, which—as stated—aggres- 9 sively seeks out the owners and artists who are entitled to payment. 10 Finally, the matters on which the settlement would legislate are encompassed 11 by actual legislative efforts that many parties in the recording industry have sup- 12 ported. Despite some significant successes, efforts to address pre-1972 recordings 13 through litigation necessarily have yielded piecemeal results. See, e.g., Stipulation 14 of Class Action Settlement, at 10-11 (describing status of lawsuits, and raising pos- 15 sibility of 45 additional lawsuits by Plaintiff against Sirius XM). But industry play- 16 ers have also been seeking a legislative solution. The Fair Play Fair Pay Act, for 17 instance, would have required statutory license users to make payments for perfor- 18 mances of pre-1972 recordings in the same manner as for performance of other re- 19 cordings. See Fair Play Fair Pay Act of 2015, H.R. 1733, 114th Cong. (2015). The 20 Respecting Senior Performers as Cultural Treasures Act (the “RESPECT Act”) 21 would have done the same. See RESPECT Act, H.R. 4772, 113th Cong. (2014). 22 Both bills addressed the specific problem that the prospective component of the set- 23 tlement purports to solve, but did so in a manner consistent with how federally pro- 24 tected sound recordings are treated. 25 The settlement’s prospective component appears designed to supplant the 26 work that Congress is already doing—indeed, class members would not even receive 27 28 past royalties. And that subsequent owner may not even be aware of the steps it must take to receive royalties going forward. 13 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX) Case 2:13-cv-05693-PSG-GJS Document 684-1 Filed 03/03/17 Page 19 of 19 Page ID #:24681 1 the benefit of any new federal legislation. See Stipulation of Class Action Settle- 2 ment, at 21. In other words, in the event that a comprehensive federal solution is 3 legislated at any point in the next decade, and new royalty payments are obligated 4 under the new legislation, class members under the settlement would be ineligible 5 to receive the benefits of such legislation—even if the new legislated rate exceeds 6 the settlement rate. Instead of embracing the settlement’s overreaching attempt to 7 fix the problem of pre-1972 recordings, this Court should defer to Congress for a 8 legislative solution regarding the future licensing of those recordings, or at least al- 9 low class members to opt into the benefits of any legislation that may be enacted in 10 the future. CONCLUSION 11 12 13 The Court should give serious consideration to the points raised above in determining whether to approve the settlement as proposed. 14 15 16 17 Dated: March 1, 2017 JENNER & BLOCK LLP 18 19 20 21 22 By: /s/ Daniel A. Rozansky Daniel A. Rozansky (CA #161647) Joshua M. Segal (pro hac vice application pending) Attorneys for Proposed Amici Curiae 23 24 25 26 27 28 14 PROPOSED BRIEF OF AMICI CURIAE CASE NO. CV13-5693 PSG (GJSX)