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SoundExchange Inc. v. Muzak LLC

United States Court of Appeals, District of Columbia Circuit

April 25, 2017

SoundExchange, Inc., Appellant
Muzak LLC, Appellee

          Argued November 9, 2016

         Appeal from the United States District Court for the District of Columbia (No. 1:15-cv-00476)

          Joshua M. Segal argued the cause for appellant. With him on the briefs were Michael B. DeSanctis, Emily L. Chapuis, and Devi M. Rao. David A. Handzo entered an appearance.

          Brian M. Willen argued the cause for appellee. With him on the brief was Gary R. Greenstein.

          Before: Rogers and Griffith, Circuit Judges, and Silberman, Senior Circuit Judge.


          Silberman, Senior Circuit Judge.

         This case pits SoundExchange, a nonprofit entity, charged with the responsibility of collecting royalties for performing artists and copyright owners of music, against Muzak, a company that supplies digital music channels to satellite television networks who, in turn, sell to subscribers. SoundExchange sued Muzak under the Copyright Act in district court, claiming that Muzak underpaid royalties owed. The district court dismissed SoundExchange's complaint. (From the point of view of classic administrative law, the Register of Copyrights, to which we normally are obliged to defer, plays a rather unusual role.) Although the case is close - the controlling statute is dreadfully ambiguous - we conclude that SoundExchange has the better position, and therefore reverse the district court.


         Muzak is a curator of copyrighted work. It generates revenue by packaging sound recordings into digital music-only channels and providing those channels to individuals who subscribe to cable and satellite television system operators. Businesses such as Muzak (called subscription services) at one time were not required to obtain a license to publicly perform sound recordings because copyright owners did not have an exclusive right to publicly perform their work. But, sensing that emerging technology posed a threat to copyright owners' interests, Congress stepped in. The Digital Performance Right in Sound Recordings Act of 1995 gave copyright owners an exclusive right "to perform the copyrighted work publicly by means of a digital audio transmission."[1]

         However, entities such as Muzak could obtain a statutory license that allowed them to play copyrighted music in return for the payment of "reasonable rates." These rates are set in adversarial rule-making proceedings every five years by a Copyright Royalty Board.[2] The first such proceeding began in 1996. Three curator companies participated: Muzak, Digital Cable Radio Associates (operating as "Music Choice"), and DMX Music, Inc. The panel set rates that, some argued, favored the subscription services providers over the copyright holders. Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings, 63 Fed. Reg. 25, 394, 25, 406 (May 8, 1998). Congress, persuaded, revisited the issue and passed the present statute, the Digital Millennium Copyright Act (the Act), which instructed the Royalty Board's predecessor to set rates reflecting those that "would have been negotiated in the marketplace between a willing buyer and a willing seller, " i.e., market rates.[3] That standard favored the copyright holders.

         As an obvious compromise, however - in a concession to the businesses that had invested under the more favorable pre-1998 rates - the Act provides a grandfather clause. "Preexisting subscription services" could still pay rates set according to the old method. "New subscription services, " on the other hand, were relegated to the new rate-making regime based on a hypothetical free market.[4] As should be obvious, a grandfather status is quite valuable and it is that status - the meaning of "preexisting subscription service" - at stake in this case.

         At the time Congress acted, Muzak apparently provided its collection of music channels only to customers of the satellite television network called the Dish Network (owned by EchoStar Corporation and then branded as the DiSH Network). Taking the name of the program from its distributor, the package of music-only channels was called DishCD. (The Dish Network also provided its customers other unrelated programming such as television channels.)

         SoundExchange is designated by regulation as the sole representative of the copyright holders.[5] Its job is to obtain the royalties owed under the statutory licenses and to distribute them to performing artists and copyright holders. In this case, SoundExchange claims that Muzak owes it substantial royalties because Muzak erroneously applied the grandfather rate to ineligible transmissions and therefore underpaid.

         The controversy stems from a series of corporate transactions. In 2011, Mood Media Corporation acquired Muzak, as well as, in 2012, one of Muzak's competitors, DMX. DMX offered a music program called SonicTap, which was quite similar to Muzak's DishCD, but was transmitted over a different satellite television network, DirecTV. Before Mood Media bought DMX and put it under the same corporate roof as Muzak, DMX was not entitled to, nor did it pay, the grandfather rates for its SonicTap program. (It will be recalled that an entity called "DMX" participated in the original rate-making proceedings beginning in 1996. But, due to corporate restructuring, that legal entity is not the same one as the "DMX" that Mood acquired in 2011.) After Mood bought both companies, it arranged to have DMX transfer to Muzak the right to make transmissions to DirecTV subscribers under the SonicTap brand.[6] When the smoke cleared, Muzak had acquired DMX's consumer music customers.

         After the corporate transactions, Muzak paid the grandfathered rate for all of its subscription service transmissions, which, as noted, led SoundExchange to sue in district court under the Copyright Act. SoundExchange claimed that Muzak was entitled to pay the more favorable rate only for its transmissions packaged as DishCD, but not for those made under the SonicTap brand or any others. The district court, essentially equating the new customers acquired by acquisition of DMX to new customers Muzak acquired on its own, dismissed the complaint. See SoundExchange, Inc. v. Muzak, LLC, 167 F.Supp.3d 147 (D.D.C. 2016).


         The dispute between the parties turns on the language of the Act, specifically, what does "preexisting subscription service" (the grandfathered category defined by the Act) mean? Does it refer to Muzak, the business entity, however it grows? Or is that term limited to the program offering, ...

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