BMI vs. Pandora in Federal Court

BMI or, Broadcast Music Inc., filed a lawsuit in federal court today against Internet radio giant Pandora Media Inc. over Pandora's attempt to lower its royalty obligations by buying a tiny radio station in South Dakota to qualify for the lower rates that terrestrial radio broadcasters pay to use music online.

The suit marks the first time that BMI has resorted to litigation over Internet music services.

Billboard magazine broke the news of the impending lawsuit late last night.  BMI is asking U.S. Southern District Federal Court in New York to determine the rates that Pandora must pay BMI members to use their work. The suit comes two days after Pandora announced it had made a deal to buy Rapid City, SD Radio Station, KXMZ-FM. Pandora had said it believed that the move would allow it to pay the reduced rates that terrestrial radio broadcasters such as Clear Channel Communications Inc. pay to use music on their digital services, such as Clear Channel's iHeartRadio.

BMI's suit says that prior to the Pandora maneuver, it (BMI) had proposed an increased in Pandora's fees consistent with market rates and internet streaming music's growth, but also included adjustments to account for the withdrawal of digital rights by some BMI affiliated publishers

BMI, which collects royalties for music publishers and songwriters when their works are played in public, called Pandora's radio-station acquisition a "stunt" and a "brazen effort to artificially drive down its license fees."

BMI and its rival, the American Society of Composers, Authors and Publishers, or Ascap, say that Internet radio doesn't benefit music-rights holders in the same way that terrestrial radio does. In the suit, BMI said it is willing to accept a lower royalty rate from terrestrial radio stations' online services because they pay such significant fees for on-air broadcasts.

The suit argued that Pandora's lopsided mix of online and broadcast audiences means that it shouldn't be treated like a terrestrial broadcaster.

Pandora, who has about 70 million active users, last year terminated its agreement with BMI. Meanwhile it launched its own rate-court proceeding to lower the fees it must pay ASCAP. Pandora spokeswoman Mollie Starr said in a statement: "We look forward to the court's oversight of this matter."

BMI is seeking higher rates than it gets now because online music streaming has become more pervasive—and because Pandora pays higher rates to certain music publishers that have withdrawn their catalogs from BMI's agreement with Pandora.

Pandora contends that its purchase of that station is sufficient to transform its online music streaming service into a new media transmission, according to the BMI document. But BMI counters that its radio station license is expressly limited to covering only those new media transmissions by radio stations with a commercial relationship with the terrestrial radio stations and "does not cover primarily internet-based music streaming service that happens to own a single radio station in a city with a total population that is less than 0.045 percent of Pandora's online membership."

In a statement released to the media, a Pandora spokesperson said: “Pandora values and respects those who create music and seeks to pay a rate that is fair to all artists, and fairness needs to account both for what artists receive and what Pandora’s competitors are asked to pay. This is not a case of Pandora trying to pay less. It is a case of publishers discriminating against Pandora.”