Pre-72 Red Herrings from Pandora’s Chris Harrison (and that’s not the IPO kind)

Pandora executives are still prancing around cashing out stock options while telling their stockholders that they are intentionally stiffing American artists on recordings released after 1972–well…sort of telling their stockholders.  If their stockholders are also copyright experts.  Because what Pandora doesn’t tell their stockholders is that not only is Pandora not paying royalties, Pandora’s position actually acknowledges that Pandora is still exploiting these pre-72 recordings without any rights.  This is exceptionally bizarre because if Pandora just paid the statutory webcasting royalties under the U.S. Copyright Act, they would at least have a fig leaf that they actually had some kind of license.  

By saying that the recordings are not subject to the compulsory license like all the other recordings Pandora exploits, they essentially have no license for the pre-72 recordings (but do have the compulsory license for the post-72 recordings).  So then they have to prove that when the Congress created the statutory license for webcasting and the royalty system for royalty payments, the Congress actually intended to exclude all sound recordings before 1972.  (The magic of 1972 is that is the year that the Congress first included sound recordings in the federal Copyright Act–sound recordings previously were covered by “common law copyright” not no copyright.)

According to Pandora’s latest Form 10-Q:

On April 17, 2014, UMG Recordings, Inc., Sony Music Entertainment, Capitol Records, LLC, Warner Music Group Corp., and ABKCO Music and Records, Inc. filed suit against Pandora Media Inc. in the Supreme Court of the State of New York. The complaint claims common law copyright infringement and unfair competition arising from allegations that Pandora owes royalties for the performance of sound recordings recorded prior to February 15, 1972.

The outcome of any litigation is inherently uncertain. Based on our current knowledge we believe that the final outcome of the matters discussed above will not likely, individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations or cash flows; however, in light of the uncertainties involved in such matters, there can be no assurance that the outcome of each case or the costs of litigation, regardless of outcome, will not have a material adverse effect on our business. In particular, rate court proceedings could take years to complete, could be very costly and may result in royalty rates that are materially less favorable than rates we currently pay.

This risk factor is actually misleading–not only is Pandora being sued for money, the lawsuit also asks for the court to order Pandora to stop exploiting the pre-72 recordings altogether:

A preliminary and permanent injunction preventing, enjoining, and restraining Pandora and its respective agents, servants, directors, officers, principals, employees, representatives, subsidiaries and affiliated companies, successors, assigns, and those acting in concert with them or at their direction, from directly or indirectly infringing in any manner any right in any and all Pre-72 Recordings in which any Plaintiff owns or controls an exclusive right under statutory or common law, including without limitation by directly or indirectly reproducing and digitally publicly performing any of Plaintiffs’ Pre-72 Recordings….

Don’t you think that Pandora should have told their stockholders that they might actually lose the right to use pre-72 recordings altogether?

Now what is interesting about this is that Pandora chooses to take a position that hurts artists (and union players and singers) whose performances are on pre-72 recordings based on this arbitrary cut off date.  Somehow they seem to think that a recent Copyright Office study supports Pandora’s decision to screw artists.  Here’s what the Copyright Office actually said (on p. 129-130):

In reviewing the potential application of section 114 [Pandora’s compulsory license] to pre-1972 sound recordings, the [Copyright] Office believes that section 114’s statutory royalty requirements should apply to nonexempt, noninteractive digital transmissions of those recordings [meaning Pandora], thereby providing an additional revenue stream for older artists and works….The [Copyright] Office thinks it is unreasonable for the age of a sound recording to dictate whether royalties are paid on public performances by means of digital audio transmissions, so long as copyright subsists in that sound recording. Bringing pre-1972 sound recordings within the scope of federal protection would subject them to the statutory license and provide online music services with an easy means to offer lawful public performances of those recordings while offering copyright owners and performers a reliable new source of income.

What Pandora’s Chris Harrison (or “Artist Enemy Number 1” as he is known around the Trichordist) says about the lawsuit is that Pandora favors something called “full federalization” of the pre-72 sound recordings (or “the entire history of recorded music” as it is known around the Trichordist).

Harrison says that Congress made the decision not to include pre-72 recordings when it created the digital performance right for sound recordings in 1995.  We think this is actually false–many of the members of Congress who were on the House Judiciary Committee in 1995 are still on the committee, and none of them have acknowledged that it was a conscious decision of the Congress to exclude pre-72 recordings.  However, we’re looking forward to the conga line of congressmen linking up to take ownership of the decision to stiff old guys and dead cats and their heirs from webcasting royalties like Harrison wants to do.

Because…think about it.  Even if you were the man who fell to freaking Earth, would anyone in their right mind think that American elected officials would create a legal goodie in the form of a statutory royalty–which is actually fair compensation for rights the law takes away from artists and copyright owners in the compulsory license that is necessary to avoid a “taking” under the 5th Amendment–but these American officials would say but not for thee?  You American artists who gave the world the rich history of blues, jazz, rock, R&B before 1972, nothing for you, sorry.  That’s not only insane, it explains why there’s no legislative history evidence supporting Pandora’s position.

Harrison also equivocates when it comes to acknowledging this thievery:  “We’ll still pay the songwriter”.  Not the question being asked.  But Harrison tells us that the loophole is Congress’s fault.  No, it’s actually Pandora’s fault–they were paying until Harrison arrived on the scene.  We wonder what the confluence of these two events have to do with each other.  The reason that the RESPECT Act was introduced–which Pandora opposes–was to clarify this loophole, or the “Pandora loophole” as it’s known.  The RESPECT Act is really just a technical amendment and shouldn’t be opposed by anyone.

Yet Pandora rejects the RESPECT Act in favor of “full federalization” of sound recordings.  Why is this?  We think that this is one of those ice in winter situations where somebody dreams up a problem that they try to convince you that you somehow have, then wants you to give up something real in order to get them to relent.  Bullies are exceptionally good at this when they are holding on to your lunch money.  All you have to do is lick their boots and they promise to give your lunch money right back to you because they’re really only thinking of your nutritional well being.

The reasons Harrison gives for Pandora’s position start with the RESPECT Act unfairly targeting Internet radio, because Internet radio is the only one who would pay more.  If the RESPECT Act just included terrestrial radio, then that would be all better.  (That’s using the term “reason” rather loosely.)

This, of course, is the usual fallacious crap we hear from Harrison and Pandora.  The point of the RESPECT Act as told by the bill’s author Rep. Holding is a “rifle shot” solution to fix the the problem with the digital performance royalty that Pandora has created–to fix the Pandora loophole.  It has nothing to do with terrestrial radio–just like the 1995 change that created the digital performance right had nothing to do with terrestrial radio.

That’s the point.  So for Harrison to say that the problem is that the RESPECT Act only deals with Internet radio is like saying the antibiotic your doctor prescribed only dealt with the infection you have today, not the limp from the broken leg you got 10 years ago.

Harrison says that Pandora wants this full-federalization thingy for the protections built into the Copyright Act for copyright users like fair use, the ability of libraries to keep archival copies, rights of termination of transfers for artists–and of course the DMCA safe harbors.

The only problem with this list of supposedly high minded and pure souled desires of Pandora is that none of the issues Harrison identifies have anything to do with Pandora.  Pandora doesn’t rely on fair use because they get a statutory license, they’re not a library, they have proven quite unequivocally that they don’t give a rats ass about artists and songwriters, and they don’t rely on the DMCA.

Which is the revealing part–because you know who does care about most of that list?

Google cares.  This is why Pandora’s position on “full federalization” makes more sense as the position of the Digital Media Association.  Pandora’s “full federalization” position requires Pandora to take on considerable risk that is not in the interest of Pandora’s stockholders, especially compared to the ill-will, lawsuits and infringement exposure for Pandora stockholders from the decision by Harrison to stiff the old guys and the dead cats and their heirs–like Duke Ellington, The Beatles, Louis Armstrong, Roy Orbison, Johnny Winter and The McCoys.  The dominant member of the DiMA is–Google.  And Google robs artists every day with ad-sponsored piracy alone.  Not to mention the incompetent CMS and Content ID.  This smells like inside Washington back scratching to us.

And Google controls all the advertising on Pandora through DoubleClick thanks to the Antitrust Division of the Department of Justice that permitted the Google’s acquisition of DoubleClick–which gives Google such leverage over Pandora that Doubleclick has its own risk factor in Pandora’s SEC filings:

 We rely upon an agreement with DoubleClick, which is owned by Google, for delivering and monitoring our ads. Failure to renew the agreement on favorable terms, or termination of the agreement, could adversely affect our business.

We use DoubleClick’s ad-serving platform to deliver and monitor ads for our service. There can be no assurance that our agreement with DoubleClick, which is owned by Google, will be extended or renewed upon expiration, that we will be able to extend or renew our agreement with DoubleClick on terms and conditions favorable to us or that we could identify another alternative vendor to take its place. Our agreement with DoubleClick also allows DoubleClick to terminate our relationship before the expiration of the agreement on the occurrence of certain events, including material breach of the agreement by us, and to suspend provision of the services if DoubleClick determines that our use of its service violates certain security, technology or content standards.

If we’re wrong about this, we are looking forward to Chris Harrison’s explanation of exactly why all these “full federalization” issues are in the best interests of Pandora stockholders, particularly when compared to the potential downside of being found an intentional infringer under common law copyright, unfair competition and possibly some state criminal statutes.

But he can leave out his hearts and roses serenade about how much he cares about artists and songwriters getting the termination right for common law copyrights.  We can take care of ourselves without his “help” thank you very much.

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