SAN FRANCISCO, September 28, 2010 -- A U.S. rate-setting court's formula for establishing the fees that Yahoo! and RealNetworks must pay the nation's dominant music licensing group is fundamentally flawed because it uses inconsistent data sets and because the benchmarks it uses aren't relevant or comparable, said a U.S. appeals court Tuesday.
"The district court did not adequately support the reasonableness of its method for measuring the value of the internet companies' music use," wrote Judge John M. Walker in the Tuesday opinion for the U.S. Court of Appeals for the Second Circuit on behalf of himself, Chief Judge Dennis Jacobs and Judge Debra Ann Livingston.
The judges also said that the rate court's establishment of benchmarks using the rates cable companies and broadcast stations pay for licensing music was inappropriate because the nature and scope of the online companies' use of music differed significantly.
"The district court did not adequately support the reasonableness of the 2.5% royalty rate applied to he value of the internet companies' music use," wrote Walker.
The judges also sided with Yahoo! when it faulted the rate court for relying on inconsistent sets of data sources for coming up with its music licensing formula. And they said that the rate court's attempt to come up with a simple 2.5% across-the-board license for the two online services is imprecise, and does not take into account the different kinds of services that both Yahoo! and RealNetworks offer.
The three-judge panel also found that the rate court did not give enough of a rationale for basing its licensing fee formula on the amount of time a piece of music is streamed, rather than on page views, which is the primary driver of advertising revenue.
"The district court must follow an approach more tailored to the varying nature and scope of Yahoo!'s music use," wrote Walker.
And Yahoo can't be compared to television stations because its business isn't as reliant on music as the television industry, argued the three judges.
"Nearly every program on a television station somehow utilizes musical works," wrote Walker. "In contrast, only a fraction of the traffic on Yahoo!'s web site uses music -- much of Yahoo!'s web site does not implicate any music whatsoever. Given that Yahoo!'s revenue base relies far less on ASCAP content than the television networks' revenue base, we believe that comparing percentages of overall revenue bases is of little probative value in this benchmark analysis."
ASCAP stands for the American Society of Composers, Authors and Publishers. It's responsible for licensing 45% of the legal music online and represents 295,000 people in the music business.
The judges pointed to Yahoo!'s more specific licensing terms with BMI, another licensing body, for the different kinds of uses of music as an example of how licensing agreements can be more reflective of the nature of the use of the music.
ASCAP's agreements with Turner Broadcasting for its various cable stations also accommodate different kinds of licenses depending on how each station uses music, noted Walker.
The appellate court did agree with the lower court on one separate, but key issue in this case that was also on appeal: That downloads do not constitute a public performance of a work as defined under current copyright law.
"Jimmy Hendrix memorably (or not, depending on one's sensibility) offered a "rendition" of the Star-Spangled Banner at Woodstock when he performed it aloud in 1969," Walker wrote. Yo-Yo Ma "plays" the Cello Suite No. 1 when he draws the bow across his cello strings to audibly reproduce the notes that Bach inscribed. Music is neither recited, rendered, nor played when a recording (electronic or otherwise) is simply delivered to a potential listener."