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Soun Exchange Response

Soun Exchange Response

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IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK SIRIUS XM RADIO INC. Plaintiff, v. SOUNDEXCHANGE, INC. and AMERICAN ASSOCIATION OF INDEPENDENT MUSIC, Defendants. No. 12-CV-2259 (TPG)

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT SOUNDEXCHANGE, INC.’S MOTION TO DISMISS ALL COUNTS OF THE COMPLAINT

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TABLE OF CONTENTS Page No. INTRODUCTION ...........................................................................................................................1 BACKGROUND .............................................................................................................................3 I. II. III. The Statutory and Regulatory Framework ...........................................................................3 Sirius, SoundExchange, and the CRB Proceedings .............................................................5 Sirius’s Direct License Campaign .......................................................................................6

ARGUMENT ...................................................................................................................................7 I. II. Section 114’s Express Antitrust Exemption Bars Plaintiffs Claims ....................................7 Sirius’s Claims Must Be Dismissed Under The Filed Rate Doctrine And For Their Related Failure To Plead Any Cognizable Injury..............................................11 A. B. III. IV. All of Sirius’s Claims Are Barred By The Filed Rate Doctrine ............................11 Sirius Has No Standing Because There Is No Antitrust Injury .............................14

The Sherman Act Section 2 Claims Must Be Dismissed Because The Complaint Does Not Allege Unlawful Monopolization ....................................................16 The Sherman Act Section 1 Claims Must Be Dismissed Because The Complaint Does Not Plausibly Allege Price-Fixing Or A Prohibited “Boycott” ...........................................................................................................................18 A. B. Count 1 Must Be Dismissed Because Sirius Has Alleged No Conduct Falling Within Any Per Se Rule Of Antitrust Liability...........................18 Both Section 1 Counts Must Be Dismissed Under Twombly And Iqbal Because Their Allegations Are Implausible Or Conclusory ........................20

V.

The Tortious Interference Claims Fail To Plead Any Wrongful Act ................................23

CONCLUSION ..............................................................................................................................25

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TABLE OF AUTHORITIES Page(s) CASES Am. Tel. & Tel. Co. v. Central Office Tel., Inc., 524 U.S. 214 (1998) .................................................................................................................12 Anderson News, L.L.C. v. American Media, Inc., No. 10-4591-cv, 2012 WL 1085948 (2d Cir. Apr. 3, 2012) ....................................................20 Apex Oil Co. v. DiMauro, 713 F. Supp. 587 (S.D.N.Y. 1989)...........................................................................................19 Ashcroft v. Iqbal, 556 U.S. 662 (2009) .................................................................................................................22 Balaklaw v. Lovell, 14 F.3d 793 (2d Cir. 1994).......................................................................................................20 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) .................................................................................................7, 20, 21, 22 Beth Israel Hospital v. NLRB, 437 U.S. 483 (1978) .................................................................................................................11 Bogan v. Hodgkins, 166 F.3d 509 (2d Cir. 1999).....................................................................................................20 Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977) .................................................................................................................15 Chambers v. Time Warner, Inc., 282 F.3d 147 (2d Cir. 2002).....................................................................................................10 City of Pittsburgh v. West Penn Power Co., 147 F.3d 256 (3d Cir. 1998).....................................................................................................15 Diario El Pais, S.L. v. Nielson Co., No. 07CV11295, 2008 WL 4833012 (S.D.N.Y. Nov. 6, 2008) ..............................................24 Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961) .................................................................................................................23 Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451 (1992) ...........................................................................................................16, 17 Fairdale Farms, Inc. v. Yankee Milk, Inc., 635 F.2d 1037 (2d Cir. 1980)...................................................................................................17 ii

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Friedman v. Coldwater Creek, Inc., 551 F. Supp. 2d 164 (S.D.N.Y. 2008) (Preska, J.), aff’d, 321 F. App’x 58 (2d. Cir. 2009) ..................................................................................................................................24, 25 FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) .................................................................................................................20 Holly Sugar Corp. v. Goshen Cnty. Coop. Beet Growers Ass’n, 725 F.2d 564 (10th Cir. 1984) .................................................................................................17 In re California Wholesale Elec. Antitrust Litig., 244 F. Supp. 2d 1072 (S.D. Cal. 2003), order aff’d sub nom. Pub. Util. Dist. No. 1 of Snohomish Cnty. v. Dynegy Power Mktg., Inc., 384 F.3d 756 (9th Cir. 2004)........................14 In re Canadian Import Antitrust Litig., 470 F.3d 785 (8th Cir. 2006) ...................................................................................................15 In re Elevator Antitrust Litig., 502 F.3d 47 (2d Cir. 2007)...........................................................................................20, 21, 23 In re Enron Corp., 326 B.R. 257 (Bankr. S.D.N.Y. 2005) .....................................................................................12 In re New Jersey Title Ins. Litig., Case No. Civ. A. 08-1425, 2009 WL 3233529 (D.N.J. Oct. 5, 2009) .....................................14 Keogh v. Chi. & N.W. Ry. Co., 260 U.S. 156 (1922) .................................................................................................................12 Kirch v. Liberty Media Corp., 449 F.3d 388 (2d Cir. 2006).....................................................................................................24 Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290 (2d Cir. 2008).....................................................................................................18 Marcus v. AT&T Corp., 138 F.3d 46 (2d Cir. 1998).................................................................................................12, 13 Masefield AG v. Colonial Oil Indus., No. 05 Civ. 2231, 2006 WL 346178 (S.D.N.Y. Feb. 15, 2006) ..............................................25 Northwest Wholesale Stationers, Inc.v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985) .................................................................................................................20 NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998) .................................................................................................................15

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Pa. State Educ. Ass’n-NEA v. NLRB, 79 F.3d 139 (D.C. Cir. 1996) ...................................................................................................11 Paycom Billing Servs., Inc. v. Mastercard Int’l, Inc., 467 F.3d 283 (2nd Cir. 2006).......................................................................................14, 15, 16 RSA Media, Inc. v. AK Media Group, Inc., 260 F.3d 10 (1st Cir. 2001) ......................................................................................................15 Shelton v. Sethna, No. 10 Civ. 4128, 2012 WL 1022895 (S.D.N.Y. Mar. 26, 2012) ............................................7 Simon v. Keyspan Corp., 785 F.Supp.2d 120 (S.D.N.Y. 2011)..................................................................................12, 14 SoundExchange, Inc. v. Librarian of Congress, 571 F.3d 1220 (D.C. Cir. 2009) ...........................................................................................4, 19 Starr v. Sony BMG Music Entm't, 592 F.3d 314 (2d Cir. 2010).......................................................................................................7 United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965) .................................................................................................................23 United States v. Broadcast Music, Inc., 426 F.3d 91 (2d Cir. 2005).........................................................................................................8 United States v. Grinnell Corp., 384 U.S. 563 (1966) ...........................................................................................................16, 17 Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) ....................................................................................................8, 11 W. Goebel Porzellanfabrik v. Action Indus., Inc., 589 F. Supp. 763 (S.D.N.Y. 1984).......................................................................................9, 16 Webcaster Alliance, Inc. v. Recording Industry Ass’n of America, No. CV-03-3948, 2004 WL 1465722 (N.D. Cal. Apr. 1, 2004) ........................................13, 14 Wegoland Ltd. v. NYNEX Corp., 27 F.3d 17 (2d Cir. 1994) ........................................................................................................12 WTWV, Inc. v. Nat’l Football League, 678 F.2d 142 (11th Cir. 1982) .................................................................................................11 STATUTES 17 U.S.C. § 106(6) ...........................................................................................................................3

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17 U.S.C. § 114(d)(2) ................................................................................................3, 9, 14, 18, 19 17 U.S.C. § 114(e) ...................................................................................................................4, 5, 7 17 U.S.C. § 114(e)(1).......................................................................................................4, 9, 17, 23 17 U.S.C. § 114(f) ..................................................................................................................3, 8, 15 17 U.S.C. § 114(f)(1)(A)............................................................................................................3, 18 17 U.S.C. § 114(g) ...........................................................................................................................4 17 U.S.C. § 801(b)(1) ................................................................................................................3, 15 17 U.S.C. § 803 ............................................................................................................................3, 4 LEGISLATIVE MATERIALS S. Rep. No. 104-128, at 10 (1995), reprinted in 1995 U.S.C.C.A.N. 356, 357 .............................. 4 OTHER AUTHORITIES 37 C.F.R. § 382.10(c).......................................................................................................................4 Determination of Rates and Terms for Preexisting Subscription and Satellite Digital Audio Radio Services,76 Fed. Reg. 591 (Jan. 5, 2011) (“2013-2017 Initial CRB Order”) ...................................................................................................................................6, 8 Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, 73 Fed. Reg. 4080, 4099 (Jan. 24, 2008) (“2007-2012 CRB Decision”) ................................................................................................. 5, 10, 21-22, 24 Digital Performance Right in Sound Recordings and Ephemeral Recordings, 72 Fed. Reg. 24,084, 24,104 (May 1, 2007) ...........................................................................................5 Sirius XM Radio Inc., 2009 Form 10-K Annual Report at 25, available at http://investor.sirius.com/secfiling.cfm?filingID=1193125-09-49874 ......................................5 Sirius XM Radio Inc., 2011 Form 10-K Annual Report at 26, available at http://investor.siriusxm.com/ secfiling.cfm?filingID=1193125-12-49086&CIK=908937 .......................................................5

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INTRODUCTION This Court should recognize the complaint filed by Sirius XM Radio Inc. (“Sirius”) for what it is: an improper attempt to ensnare this Court in the issues currently being litigated in a complex ratemaking proceeding before the federal Copyright Royalty Board (“CRB”); and to prevent SoundExchange and its constituents from fully participating in that ratemaking process as Congress expressly intended. By law, Sirius is guaranteed a “statutory license” to perform copyrighted sound recordings for a “reasonable” royalty rate set by the CRB – the federal agency with exclusive jurisdiction for setting such rates. The current statutory rates were set by the CRB in 2007 after a lengthy proceeding in which Sirius fully participated, and were affirmed on appeal by the D.C. Circuit. Now, however, Sirius asks this Court to declare those rates unlawfully “supracompetitive” and to relieve Sirius from having to pay them. In turn, Sirius and SoundExchange are again litigating before the CRB to determine the rates for the next five years. And Sirius’s argument there is identical to its argument in this lawsuit. Trial before the CRB begins June 5, 2012, and the CRB will issue its ruling by the end of this year. Sirius cannot be allowed to use this lawsuit as a second forum in which to re-litigate the last rate-setting proceeding, and to preempt and undermine the currently pending one. Rather, the complaint must be dismissed for a number of reasons: First, Congress has granted the record companies and SoundExchange an express statutory exemption from all antitrust laws when negotiating rates and terms for the services subject to the statutory license. In other words, the antitrust laws simply do not apply here. The antitrust exemption is a cornerstone of the carefully crafted regulatory regime in which Congress guaranteed Sirius access to all sound recordings at a rate set by the CRB – not by the record companies. Sirius’s claims that SoundExchange and the record companies nevertheless violated

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the antitrust laws flies in the teeth of Congress’s express desire to encourage the efficiencies of collective bargaining. Ultimately, Sirius wants all of the statutory license’s benefits – including guaranteed access to music, as well as a rate ceiling set by the CRB – while depriving copyright owners of their ability to negotiate collectively to protect the rights Congress granted them. Second, the harm about which Sirius complains is that it must pay the CRB-determined royalty rate, rather than rates negotiated directly with certain independent record companies. In other words, Sirius is seeking to use this litigation to challenge and otherwise avoid having to pay the CRB-determined rate. All of Sirius’s claims are therefore barred by the filed rate doctrine. For the same reasons, all of its antitrust claims must be dismissed for their failure to plead any cognizable antitrust injury. Third, Sirius makes a number of truly extravagant claims to shoehorn SoundExchange’s lawful activities into various antitrust causes of action. Sirius claims price-fixing while admitting (as it must) that the rates are set by the CRB – not by the defendants. It alleges a “boycott” despite admitting that Sirius has guaranteed access to the record companies’ sound recordings under the statutory license. And it alleges wrongfully acquired monopoly power where SoundExchange’s market position is conferred by statute and regulation, and where it can control neither output nor prices. Finally, Sirius’s contends that its failure to obtain additional direct licenses is itself evidence of an unlawful conspiracy, but that is facially implausible. Sirius readily admits that it offered record labels lower rates than those that are available under the statutory license, while demanding that record companies surrender to Sirius more rights than the statutory license covers. The rejection of a deal in which record companies must give away more rights in

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exchange for less money for themselves and their artists is explained by simple economics – not a complicated conspiracy. For all of these reasons, Sirius’s complaint should be dismissed with prejudice. BACKGROUND I. The Statutory and Regulatory Framework A copyright owner of a sound recording (typically a record company) has the exclusive right “to perform the copyrighted work publicly by means of a digital audio transmission.” 17 U.S.C. § 106(6). Thus, if a digital music service, such as Sirius, wishes to play sound recordings for its listeners, it must obtain a license. Rather than require every digital music service to negotiate separate licenses with every copyright owner, Congress granted certain types of services – including satellite radio services such as Sirius – an automatic “statutory license” to perform all sound recordings, subject to certain conditions. Id. § 114(d)(2). The statutory license – also known as a “compulsory license” because it cannot be withheld by the copyright owners – guarantees immediate, full, and unfettered access to all commercially released sound recordings. See id. In turn, the statute provides that “reasonable rates and terms of royalty payments” for the satellite radio statutory license are to be set by a panel of three Copyright Royalty Judges. Id. § 114(f)(1)(A); see id. §§ 801-805. Proceedings before the panel – known as the Copyright Royalty Board (“CRB”) – are adversarial, trial-type proceedings in which copyright owners, recording artists, and would-be licensees may participate, conduct discovery, and present evidence. See id. § 803. Ultimately, the CRB sets rates based on certain statutory objectives, including “maximiz[ing] the availability of creative works to the public” and “afford[ing] . . . the copyright user a fair income under existing economic conditions.” Id. § 801(b)(1). These “reasonable rates” set by the CRB apply industry-wide for five years, id. § 114(f)(1)(A)-(B), and 3

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are reviewable exclusively by the U.S. Court of Appeals for the D.C. Circuit. Id. § 803(d)(1); see SoundExchange, Inc. v. Librarian of Congress, 571 F.3d 1220 (D.C. Cir. 2009). Section 114 also guarantees the performing artists (i.e., singers and musicians) a percentage of the royalties from the statutory license, even though the copyrights typically are owned by the record companies. 17 U.S.C. § 114(g)(2)(B)-(D). This right to receive payment directly, as opposed to through the record companies, reflects Congress’s goal of ensuring that artists are fairly and directly compensated for their contributions, and that they can participate directly in new streams of revenue even if they do not own the copyrights. See, e.g., S. Rep. No. 104-128, at 10 (1995), reprinted in 1995 U.S.C.C.A.N. 356, 357 (purpose of legislation is to protect “performing artists, record companies and others whose livelihood depends upon effective copyright protection for sound recordings”). As an alternative to litigating before the CRB, record companies and licensees such as Sirius may voluntarily negotiate royalty rates. 17 U.S.C. § 114(e); 37 C.F.R. § 382.10(c). Importantly, Congress expressly authorized collective negotiations – and expressly exempted them from all antitrust laws: Notwithstanding any provision of the antitrust laws, in negotiating statutory licenses in accordance with subsection (f), any copyright owners of sound recordings and any entities performing sound recordings affected by this section may negotiate and agree upon the royalty rates and license terms and conditions for the performance of such sound recordings and the proportionate division of fees paid among copyright owners, and may designate common agents on a nonexclusive basis to negotiate, agree to, pay, or receive payments. 17 U.S.C. § 114(e)(1) (emphasis added). Under this express antitrust exemption, record companies may negotiate with Sirius either individually, in groups, or collectively through a

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common agent, such as SoundExchange. Id. § 114(e). Whether negotiations are conducted individually, in groups, or through a common agent, the antitrust laws do not apply. II. Sirius, SoundExchange, and the CRB Proceedings Since the 2008 merger of Sirius and XM, Sirius has been the nation’s sole satellite radio service. See Cplt. ¶¶ 22-24. As a result, its business is booming. For instance, from 2008 to 2011, Sirius went from $902 million in annual net loss to $427 million in annual net income.1 SoundExchange is a not-for-profit organization representing the interests of a broad cross-section of record companies and artists, see Cplt. ¶ 19. In 2007, the CRB selected SoundExchange to collect and distribute royalties from licensees under certain statutory licenses. Digital Performance Right in Sound Recordings and Ephemeral Recordings, 72 Fed. Reg. 24,084, 24,104 (May 1, 2007). The CRB concluded that “SoundExchange is the superior organization” with a “proven track record in collecting and processing section 112 and 114 royalties, having done so since the inception of the statutory licenses,” and that its “operational practices appear efficient and fair.” Id. at 24,105. It further explained that “the structure and composition of SoundExchange’s Board of Directors – with equal representation for copyright owners and performers – provides a greater balance of competing interests,” and that artists and performers had “demonstrated a decided preference for the services of SoundExchange.” Id. The next year, and without objection from Sirius, the CRB again appointed SoundExchange as the collective under the statutory license for performances over satellite radio. See Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, 73 Fed. Reg. 4080, 4099 (Jan. 24, 2008) (“2007-2012 CRB Decision”).
Compare Sirius XM Radio Inc., 2009 Form 10-K Annual Report at 25, available at http://investor.sirius.com/secfiling.cfm?filingID=1193125-09-49874&CIK=908937, with Sirius XM Radio Inc., 2011 Form 10-K Annual Report at 26, available at http://investor.siriusxm.com/ secfiling.cfm?filingID=1193125-12-49086&CIK=908937.
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Both Sirius and SoundExchange participated in the CRB proceeding that set the statutory rates for the 2007-2012 license period. That proceeding involved over 26 trial days, 230 exhibits, 7700 pages of transcripts, and over 400 pleadings, motions and orders. See id. at 4081. In a lengthy written opinion affirmed by the D.C. Circuit, the CRB set the rate for 2007 at 6% of a satellite radio provider’s gross revenues, rising each year to 8% in 2012. See id. at 4098. The current CRB proceeding to set the rates for the upcoming 2013-2017 term commenced in January 2011, and is well underway. See Determination of Rates and Terms for Preexisting Subscription and Satellite Digital Audio Radio Services,76 Fed. Reg. 591 (Jan. 5, 2011) (“2013-2017 Initial CRB Order”); Cplt. ¶ 29. The parties have filed hundreds of pages of written testimony in that proceeding. Following extensive fact discovery, trial is scheduled to begin on June 5, 2012, and the CRB is required by statute to set a rate by the end of the year. In that proceeding, SoundExchange has proposed a royalty rate of 12% in 2013, rising to 20% by 2017; Sirius, in turn, has proposed a range of 5% to 7% and is relying on the direct licenses that are the subject of this lawsuit as its principal evidence. See id. ¶¶ 29, 32. III. Sirius’s Direct License Campaign As the current CRB proceedings got underway, Sirius sought to negotiate directly with the record companies. Instead of offering rates that might have been more appealing than the CRB-determined license fee, Sirius offered a mere 5%-7% of its revenues – the same range it is now proposing in the CRB proceedings. Cplt. ¶ 32. That obviously is less than the current statutory rate, and far less than what SoundExchange now seeks to obtain for the recording industry at the CRB. Id. ¶¶ 29, 32, 34. Even as it offered less money than the prevailing statutory rate, Sirius was also demanding more rights in return. Id. ¶ 32. In other words, for one new low price, Sirius sought to obtain not only all the rights granted in the statutory license, but additional rights that 6

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extended beyond what the statutory license allows: “rights needed for all of its platforms and the range of its desired uses.” Id. ¶ 32. The complaint rightly concedes (and it is hardly surprising) that virtually the entire recording industry balked at Sirius’s offer. Id. ¶¶ 35, 37, 42. ARGUMENT To survive a motion to dismiss, “a complaint must plead sufficient facts to state a claim to relief that is plausible on its face. In deciding such a motion, a court must accept as true the facts alleged in the complaint, but it should not assume the truth of legal conclusions.” Shelton v. Sethna, No. 10 Civ. 4128, 2012 WL 1022895, at *4 (S.D.N.Y. Mar. 26, 2012) (Griesa, J.) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); and Ashcroft v. Iqbal, 556 U.S. 662 (2009)) . Moreover, “[w]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, . . . dismissal is appropriate.” Starr v. Sony BMG Music Entm't, 592 F.3d 314, 321 (2d Cir. 2010) (quoting Iqbal, 129 S. Ct. at 1950), cert. denied, 131 S. Ct. 901 (2011); see Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 559-60 & n.6 (2007) (grounding pleading standards in the need to avoid burdensome and wasteful antitrust discovery). Under these standards, Sirius’s complaint must be dismissed. I. Section 114’s Express Antitrust Exemption Bars Plaintiffs Claims Sirius concedes that Section 114 of the Copyright Act grants record companies and their common agents (such as SoundExchange) the right to organize and bargain collectively for purposes of negotiating the terms of the statutory license. Cplt. ¶ 27. In connection with that right, Section 114 grants them an express exemption from all antitrust laws. Despite Sirius’s attempts to plead around it, the exemption flatly bars each of plaintiff’s antitrust claims. The plain text of Section 114’s antitrust exemption expressly allows record companies (and services such as Sirius) to do two things “[n]otwithstanding any provision of the antitrust laws.” 17 U.S.C. § 114(e). First, the exemption allows them “to negotiate and agree upon the 7

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royalty rates.” Id. Second, the exemption allows them to “designate common agents on a nonexclusive basis to negotiate” royalty rates. Id. Thus, the exemption permits record companies and services to organize and act collectively with respect to the negotiation of statutory license rates. Importantly, Section 114 also contains a built-in safety valve. Specifically, if a voluntary agreement is not reached, a neutral body – the CRB – sets “reasonable” rates. Id. § 114(f); see generally United States v. Broadcast Music, Inc., 426 F.3d 91, 96 (2d Cir. 2005) (observing that establishment of a rate court is a traditional means of guarding against anticompetitive harm); Verizon Commc’ns, Inc. v. Law Offices of Curtis v. Trinko, LLP, 540 U.S. 398, 412 (2004) (“One factor of particular importance [to antitrust analysis] is the existence of a regulatory structure designed to deter and remedy anticompetitive harm”). Particularly in light of this safety valve, coordination among record companies surrounding licenses for the statutory service is at the very heart of what the express antitrust exemption protects. Yet that is exactly what Sirius alleges violated the antitrust laws. Specifically, Sirius alleges that it first approached record companies with its direct license offer in the summer of 2011, during the current CRB rate-setting proceeding for the statutory service. See Cplt. ¶ 35; 2013-2017 Initial CRB Order, 76 Fed. Reg. at 591. Sirius alleges that record companies unlawfully agreed among themselves to opt for the statutory license, rather than Sirius’s direct license offers. Section 114 makes it clear that the antitrust laws simply do not apply to the very coordination that Sirius now alleges was unlawful. Sirius’s antitrust claims necessarily are barred. Sirius attempts to avoid the express antitrust exemption, but its efforts are tortured and futile. First, Sirius claims the exemption permits collective bargaining only in connection with

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services eligible for the statutory license (i.e., non-interactive satellite radio as defined in 17 U.S.C. § 114(d)(2)), whereas Sirius’s direct license offers also covered services outside the scope of the statutory license. See Cplt. ¶¶ 28, 30. It was Sirius’s own unilateral decision, however, to bundle statutory and non-statutory services into the one direct license it was offering to the labels – i.e., to seek rights for non-statutory services only in conjunction with rights for the statutory service. See id. ¶ 32. Section 114 expressly permits the record companies to negotiate the rates for the statutory service collectively, and Sirius surely cannot strip the entire recording industry of the antitrust exemption simply by unilaterally deciding to offer a bundled license. See W. Goebel Porzellanfabrik v. Action Indus., Inc., 589 F. Supp. 763, 766 (S.D.N.Y. 1984) (plaintiff cannot establish antitrust claim where alleged injury is “self-inflicted”). Second, Sirius claims that the exemption does not apply because the collective negotiations permitted by the exemption must be “non-exclusive.” The statute, however, merely states that the record companies “may designate common agents on a non-exclusive basis.” 17 U.S.C. § 114(e)(1) (emphasis added). It does not require record companies to enter into, or even negotiate for, direct licenses. Here Sirius makes no allegation that any record company’s designation of SoundExchange as its agent for collective bargaining was “exclusive” in that the designation prohibited direct licensing. Indeed, the complaint admits that 80 record companies signed direct licenses with Sirius. See Cplt. ¶ 58. Left with nothing else, Sirius suggests that SoundExchange nevertheless tried to coerce the record companies not to negotiate with Sirius, thus rendering its designation as a common agent somehow “exclusive.” See id. ¶¶ 28, 55, 59. These allegations are ludicrous. All Sirius can cite to are two open letters that SoundExchange publicly posted on its website to answer its members’ questions about what services SoundExchange provides and what it planned to argue

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for in the pending CRB rate case. Sirius complains that SoundExchange “deliver[ed] its message explicitly” that it was planning to seek a substantial rate increase in the CRB proceeding, id. ¶ 40, that it “promised that it would be ‘seeking a substantial increase in the next term,’” id. ¶ 43, and that it stated that in the prior rate proceeding, the CRB had raised the rate by 300 percent, id.2 The complaint itself, however, generally concedes that all of this true.3 More importantly, these allegations simply show SoundExchange educating its members about what was at stake in the pending CRB proceeding and what SoundExchange planned to argue for there.4 Sirius’s attempts to turn them into something threatening or coercive make no sense at all. Essentially, Sirius is arguing that it is coercive for record companies to be told the truth. Indeed, if Sirius is correct that statements like this render a designation “non-exclusive,” then the upshot of Sirius’s position is that even though it is lawful for record companies to negotiate as a collective, it is unlawful for them to educate others about the collective’s lawful benefits, to share information regarding strategy for the collective negotiations, or to encourage others to join and remain in the collective. This argument reduces collective bargaining to a nullity. As the Supreme Court has recognized, the right “to self-organize and bargain
2

True and complete copies of the two SoundExchange statements selectively quoted in Sirius’s complaint are attached hereto as Exhibits A and B. The complete documents show the absurdity of Sirius’s antitrust claims. Because these are documents upon which the complaint relies, this Court can rely on them in considering the motion to dismiss. See, e.g., Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002). 3 See Cplt. ¶ 56 (describing what SoundExchange is seeking in the current CRB proceeding); 2007-2012 CRB Decision, 73 Fed. Reg. at 4090, 4098 (increasing the rate from approximately 2.5% to 8% ). The suggestion that SoundExchange misrepresented the CRB’s reasoning in its prior ratemaking determination, Cplt. ¶ 39, is also demonstrably false as shown infra at pp. 24-25. 4 The same is true of the conduct alleged on the part of defendant A2IM, other copyright owners, and the artist unions. The complaint alleges at length that numerous independent record labels admitted to having conferred with A2IM (a trade association representing the interests of independent labels), a major record label, and other rights owners about the relative merits of taking Sirius’s direct license offers versus operating under the statutory license and statutory rate. See Cplt. ¶¶ 38, 48-54. That sort of consultation is at the core of the right to bargain collectively, free of the antitrust laws, that Congress bestowed in Section 114(e). The allegations that the artists somehow violated the antitrust laws are even further afield. See Cplt. ¶¶ 4142, 44-46. Artists typically do not own copyrights and thus are not market participants at all. It cannot possibly state an antitrust claim that various artist advocacy groups essentially lobbied the labels to remain operating under the statutory license – a regime that guarantees numerous benefits to the artists, and that the artists are entitled to seek to encourage and protect.

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collectively . . . necessarily encompasses the right effectively to communicate with one another regarding self-organization.” Beth Israel Hospital v. NLRB, 437 U.S. 483, 491 (1978); cf. Pa. State Educ. Ass’n-NEA v. NLRB, 79 F.3d 139, 143 (D.C. Cir. 1996) (“The heart of a union’s membership drive is its effort to persuade a majority of unit employees to support it.”). Sirius’s position here would eviscerate the Congressionally designed antitrust exemption in Section 114(e) and must be rejected. See, e.g., WTWV, Inc. v. Nat’l Football League, 678 F.2d 142, 143 (11th Cir. 1982) (stating, with respect to antitrust exemption, that “courts should interpret [that] statutory language in a way that accomplishes the obvious purpose of Congress in enacting the statute”); Trinko, 540 U.S. at 412 (counseling caution in extending antitrust liability to highly regulated environment). II. Sirius’s Claims Must Be Dismissed Under The Filed Rate Doctrine And For Their Related Failure To Plead Any Cognizable Injury The crux of Sirius’s complaint is that the record companies have unlawfully banded together to foreclose direct licensing and place Sirius in a position where it has no choice but to take the statutory license – both for the current CRB rate period and for the 2013-2017 period. Sirius’s claims are barred by the filed rate doctrine and by the lack of any cognizable antitrust injury, for Sirius is at bottom complaining about having to pay a “reasonable” rate set by the federal government. A. All of Sirius’s Claims Are Barred By The Filed Rate Doctrine

For nearly 100 years, it has been firmly settled that parties cannot go to court, on federal or state claims, to seek damages or other relief from having to pay rates that were determined or approved by a federal agency. Nevertheless, the essence of Sirius’s complaint is that defendants’ conduct has forced it “to pay excessive license royalties.” Cplt. ¶ 76. Sirius seeks compensatory damages, as well as an order effectively excusing it from paying the statutory rate set by the

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CRB or any royalties whatsoever. Id. ¶¶ 34-35. The filed rate doctrine bars these claims as a matter of law. “[T]he filed rate doctrine bars all claims – state and federal – that attempt to challenge the terms of a tariff that a federal agency has reviewed and filed.” Simon v. Keyspan Corp., 785 F. Supp. 2d 120, 138 (S.D.N.Y. 2011); see Keogh v. Chi. & N.W. Ry. Co., 260 U.S. 156 (1922); Wegoland Ltd. v. NYNEX Corp., 27 F.3d 17, 22 (2d Cir. 1994). The doctrine operates with powerful preemptive force to bar all claims that a plaintiff is harmed because agency-approved rates are somehow “supra-competitive.” See, e.g., Simon, 785 F. Supp. 2d at 138 (because alleged supra-competitive price “is the filed rate . . . , any claim asserting that some other rate would have been charged is barred as a matter of law”); id. (doctrine bars claims requiring court to determine hypothetical rate different from the one set by agency). Admitting of virtually no exceptions, the filed rate doctrine bars such claims even where there are allegations of fraud on the rate-setting agency. See Wegoland, 27 F.3d at 22; Marcus v. AT&T Corp., 138 F.3d 46, 58 (2d Cir. 1998) (doctrine’s application “is not determined by the culpability of the defendant’s conduct or the possibility of inequitable results”). Courts frequently use the filed rate doctrine to dismiss antitrust claims. See, e.g., Simon, 785 F. Supp. 2d at 138; In re Enron Corp., 326 B.R. 257, 260 (Bankr. S.D.N.Y. 2005). Indeed, this is the very context in which the filed rate doctrine was first announced by the United States Supreme Court in 1922. See Keogh, 260 U.S. at 164-65. The doctrine is equally applicable to state law claims, including claims for tortious interference. See, e.g., Am. Tel. & Tel. Co. v. Central Office Tel., Inc., 524 U.S. 214, 227-28 (1998). Overall, the filed rate doctrine’s purpose is to “preserv[e] the exclusive role of federal agencies . . . by keeping courts out of the ratemaking process.” Marcus, 138 F.3d at 58; see Wegoland, 27 F.3d at 21 (compared to agencies,

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“courts do not approach the same level of institutional competence to ascertain reasonable rates”). Here, Sirius is doing just what the filed rate doctrine prohibits: claiming injury for having to pay, and seeking relief from, rates approved by a federal agency. Indeed, the filed rate doctrine has been applied in circumstances virtually identical to these. In Webcaster Alliance, Inc. v. Recording Industry Ass’n of America, No. CV-03-3948, 2004 WL 1465722 (N.D. Cal. Apr. 1, 2004), the plaintiff – a trade association of statutory licensees – pled Sherman Act and state law violations. Much like Sirius here, the plaintiff alleged that record companies and a trade association had conspired to negotiate artificially high royalty agreements that the CRB’s predecessor used to set allegedly supra-competitive royalty rates under the statutory license. Webcaster Alliance, 2004 WL 1465722, *1-2. The court granted a motion to dismiss, explaining: Plaintiff cannot now collaterally attack those rates through this [antitrust] proceeding. . . . Plaintiff’s claims that attack the Librarian’s rates as being unreasonable are barred by the filed rate doctrine. This Court is forbidden from undertaking such analysis. Id. at *5 (citing Montana-Dakota Utils. Co. v. Northwestern Pub. Serv. Co., 341 U.S. 246, 25152 (1951) (emphasis added)); see id. at *3 (doctrine “bars antitrust recovery by parties claiming injury from the payment of a filed or fixed rate”). This reasoning applies here with equal force. Indeed, the present case is even easier, because Sirius itself litigated the CRB proceeding that resulted in the very license rates that Sirius now claims are “supra-competitive.” Sirius’s claims for injunctive relief are no more permissible than its claims for damages. Like a similar request in Webcaster Alliance, Sirius’s requests depend on the notion that it is harmed by having to pay the statutory rates, and necessarily ask the court to determine what rates would have been reasonable. See, e.g., Cplt. p. 35 (seeking injunction “to dissipate fully the 13

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effects of Defendants’ unlawful activities”). That is impermissible. See, e.g., Webcaster Alliance, 2004 WL 1465722, at *4 (dismissing request for injunction to “restore competitive conditions” and to “enjoin enforcement of the royalty rates”); In re California Wholesale Elec. Antitrust Litig., 244 F. Supp. 2d 1072, 1078 (S.D. Cal. 2003) (dismissing antitrust claims where plaintiff sought an order immediately enjoining defendants from charging statutory rates), order aff’d sub nom. Pub. Util. Dist. No. 1 of Snohomish Cnty. v. Dynegy Power Mktg., Inc., 384 F.3d 756 (9th Cir. 2004); In re New Jersey Title Ins. Litig., Case No. Civ. A. 08-1425, 2009 WL 3233529, at *3 (D.N.J. Oct. 5, 2009) (dismissing antitrust claims and holding that filed rate doctrine bars broad requests for injunctive relief that attack filed rates). B. Sirius Has No Standing Because There Is No Antitrust Injury

For reasons similar to those supporting application of the filed rate doctrine, the antitrust claims must be dismissed because Sirius has pled no cognizable antitrust injury. Antitrust law does not provide a remedy for “all injuries that might conceivably be traced to an antitrust violation.” Paycom Billing Servs., Inc. v. Mastercard Int’l, Inc., 467 F.3d 283, 290 (2nd Cir. 2006) (internal quotation marks omitted). Instead, a plaintiff must plead antitrust injury, i.e., “injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” Id. (internal quotation marks omitted); Simon, 785 F. Supp. 2d at 134. Sirius cannot do this. First, Sirius is complaining merely about having to pay rates determined to be “reasonable.” The Section 114 license is compulsory, meaning that it guarantees Sirius access to the product it needs and deprives copyright owners of any holdout power. 17 U.S.C. § 114(d)(2). And Section 114(f) ensures that if record companies demand supra-competitive license fees, the CRB – an “impartial tribunal,” Cplt. ¶ 26 – will conduct administrative proceedings and determine a “reasonable” royalty that affords Sirius “a fair income under 14

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existing economic conditions.” 17 U.S.C. § 114(f); id. § 801(b)(1)(B). No matter what Sirius alleges, the result of so-called “anticompetitive” behavior by record companies is simply that Sirius takes the statutory license at a CRB-imposed rate, which insulates it from supracompetitive pricing. Under these circumstances, there can be no antitrust injury, for paying prices deemed “fair” and “reasonable” by a federal regulatory agency is not “injury of the type the antitrust laws were intended to prevent.” Paycom, 467 F.3d at 290; see In re Canadian Import Antitrust Litig., 470 F.3d 785, 791 (8th Cir. 2006) (no antitrust injury where harm is caused by a “federal statutory and regulatory scheme . . . not by the conduct of the defendants”); City of Pittsburgh v. West Penn Power Co., 147 F.3d 256, 265 (3d Cir. 1998) (no antitrust injury where harm flowed from “realities of the regulated environment”); RSA Media, Inc. v. AK Media Group, Inc., 260 F.3d 10, 15 (1st Cir. 2001) (no antitrust injury where plaintiff was excluded from outdoor billboard market because of regulatory restrictions). Indeed, the premise of Sirius’s complaint is that a purchaser has the right, under the antitrust laws, to enjoy rates that are lower than reasonable. That is self-evidently absurd. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (no antitrust injury to plaintiff who is merely deprived of the ability to sell services at supra-competitive prices). Even if Sirius’s own costs have increased, this harm “to a single competitor” does not establish antitrust injury. NYNEX Corp. v. Discon, Inc., 525 U.S. 128, 135 (1998); Paycom, 467 F.3d at 290 (“The antitrust laws . . . . were enacted for the protection of competition, not competitors.” (ellipsis in original; internal quotation marks omitted)). Second, Sirius vaguely asserts that it cannot “expand its product offerings and services” because SoundExchange is somehow prohibiting record companies from licensing rights that are not eligible for statutory licensing. Cplt. ¶¶ 65-66. But as explained above, Sirius does not even

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allege that it tried to obtain the necessary rights on a stand-alone, unbundled basis. Compare Cplt. ¶ 32 (direct license offers, made for lower than the CRB-determined statutory license rate, would have also required record companies to surrender “the rights needed for all [Sirius’s] platforms and the range of its desired uses”). A plaintiff cannot establish antitrust injury where the alleged harm is “strictly self-inflicted.” W. Goebel Porzellanfabrik, 589 F. Supp. at 766. Because Sirius cannot allege antitrust injury, it has no standing as a matter of law, and its antitrust claims must be dismissed. Paycom, 467 F.3d at 290. III. The Sherman Act Section 2 Claims Must Be Dismissed Because The Complaint Does Not Allege Unlawful Monopolization Counts 3 and 4 allege violations of Sherman Act Section 2’s prohibitions on monopolization and conspiracy to monopolize, respectively. These counts must be dismissed because Sirius cannot allege unlawful monopolization within the meaning of the Sherman Act. First, the complaint itself establishes that SoundExchange’s market position does not result from any wrongful conduct by SoundExchange or record companies.5 In particular, as the Second Circuit has explained, where Congress has authorized cooperative or collective action, the resulting “monopoly” does not violate Section 2.6 Here, the complaint alleges that SoundExchange has monopolized the market for “performance rights available under Section 114,” Cplt. ¶¶ 61-62 – but those are precisely the rights for which Section 114(e) authorizes copyright owners to designate common agents and to collectively bargain “[n]otwithstanding any
See, e.g., United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966) (requiring “willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident”); Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 488 (1992) (Section 2 liability requires “exclusionary or anticompetitive behavior”). 6 See Fairdale Farms, Inc. v. Yankee Milk, Inc., 635 F.2d 1037, 1045 (2d Cir. 1980) (rejecting Section 2 monopolization claim because “[i]t is not a violation of the Sherman Act for the members of an agricultural cooperative to carry out the legitimate objectives of their association which follow naturally from their attempts to achieve unity of effort and the voluntary elimination of competition among themselves”); see also Holly Sugar Corp. v. Goshen Cnty. Coop. Beet Growers Ass’n, 725 F.2d 564 (10th Cir. 1984) (where Congress has authorized cooperative associations, they do not violate antitrust laws by prohibiting their members from contracting directly with buyers).
5

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provision of the antitrust laws.” 17 U.S.C. § 114(e)(1); see Cplt. ¶ 27 (acknowledging that “SoundExchange was organized by the record industry to fulfill” the role described by the statute). In other words, the “monopoly” alleged is precisely coterminous with the role that Congress expected a collective to play, and is the natural result of the statutory scheme. Any “monopoly” that SoundExchange possesses flows from record companies’ lawful “attempts to achieve unity of effort,” Fairdale Farms, Inc. v. Yankee Milk, Inc., 635 F.2d 1037,1045 (2d Cir. 1980), and thus does not violate Section 2. Second, Section 2 requires that a plaintiff allege not only an unlawful monopoly but “monopoly power in the relevant market.” United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966) (emphasis added); Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 488 (1992) (explaining that “[t]he concerns . . . that have led the courts to heightened scrutiny” of a monopolist’s exclusionary conduct “are completely without force when the participants lack market power”). The Supreme Court, in turn, has defined monopoly power as “the ability of a single seller to raise price and restrict output.” Id. at 488. The complaint itself establishes that SoundExchange cannot restrict output. The product sold in the alleged relevant market is “performance rights to sound recordings available under Section 114.” Cplt. ¶ 61. But such rights are automatically granted to anyone meeting the statutorily defined criteria for eligibility, regardless of whether SoundExchange or any copyright owner might want to withhold them. See 17 U.S.C. § 114(d)(2) (digital performances of sound recordings “shall be subject to statutory licensing”); Cplt. ¶ 26 (admitting that “Congress . . . established a compulsory licensing mechanism, available to users such as Sirius XM, to obtain a ‘statutory’ license” (emphasis added)). If particular rights are not subject to Section 114’s

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“compulsory licensing mechanism,” they are by definition outside the scope of the relevant market alleged by Sirius, for they are not “available under Section 114.” Cplt. ¶ 61. Nor does the complaint allege that SoundExchange has the ability to raise prices. That, of course, is because, unless Sirius and copyright owners agree otherwise, the CRB sets the royalty rates. See 17 U.S.C. § 114(f)(1)(A); Cplt. ¶ 26. Thus, although the complaint makes ominous references to “extract[ing] monopoly fees,” “unlawful expectation of monopoly rents,” and “a scheme to establish and maintain supra-competitive royalty rates,” id. ¶¶ 21, 36 & 37, its only specific pricing allegations are that SoundExchange is seeking a rate increase before the CRB. See, e.g., Cplt. ¶ 40 (alleging SoundExchange said it was “planning to seek a substantial increase in the statutory rate” from the CRB); id. ¶ 38 (alleging a SoundExchange board member said SoundExchange would “pursue the best possible statutory rates”). Needless to say, it is not an antitrust violation to ask a rate court to set any particular rate. IV. The Sherman Act Section 1 Claims Must Be Dismissed Because The Complaint Does Not Plausibly Allege Price-Fixing Or A Prohibited “Boycott” Certain kinds of agreements – such as horizontal agreements to fix prices – are per se unlawful under Section 1 of the Sherman Act. Other agreements, however, are judged against the “rule of reason” and are unlawful only if their anticompetitive effects exceed their procompetitive ones. See, e.g.¸ Major League Baseball Props., Inc. v. Salvino, Inc., 542 F.3d 290, 315-17 (2d Cir. 2008). Here, the complaint asserts per se violations of Section 1 (Count 1), as well as violations of the rule of reason (Count 2). Both counts must be dismissed. A. Count 1 Must Be Dismissed Because Sirius Has Alleged No Conduct Falling Within Any Per Se Rule Of Antitrust Liability

Count 1 of the complaint claims per se violations of Section 1 – specifically, price fixing and a group boycott. Cplt. ¶¶ 70-71. Neither of these provides a basis for per se liability here.

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First, and most glaringly, the complaint has not actually alleged price fixing. Sirius recognizes that, to the extent it does not receive direct licenses, it takes a statutory license at the CRB-determined rate. See id. ¶ 10. None of the alleged co-conspirators, including SoundExchange and the record companies, has the power to set the rates for the statutory license. Indeed, after the last satellite radio rate-setting proceeding, it was SoundExchange that appealed to the D.C. Circuit, and Sirius that defended the rates set by the CRB. See SoundExchange, 571 F.3d 1220. Any assertion that the recording industry’s alleged conduct constitutes “price fixing” is preposterous. Second, the claim of a “boycott” is equally implausible. Sirius concedes that the effect of the alleged “boycott” is not to prevent it from buying record companies’ products. See Cplt. ¶¶ 2, 4. To the contrary, by virtue of the statutory license, Sirius already has complete access to all of the record companies’ sound recordings. 17 U.S.C. § 114(d)(2). Thus, under the statutory license, neither SoundExchange nor any record company has the power to withhold products from Sirius – a precondition for an unlawful boycott. See Apex Oil Co. v. DiMauro, 713 F. Supp. 587, 599 (S.D.N.Y. 1989) (no per se boycott where plaintiff “simply was not frozen out of the relevant market”). Moreover, any arrangement to reject direct licensing deals would not constitute a per se unlawful “boycott” because Sirius is merely a customer, and not a competitor of any of the alleged co-conspirators. The Supreme Court has been careful to limit the scope of per se liability to boycotts ultimately aimed at competitors (either directly, or by targeting the competitor’s suppliers or customers). See FTC v. Indiana Federation of Dentists, 476 U.S. 447, 458 (1986) (explaining that “the per se approach has generally been limited to cases in which firms with market power boycott suppliers or customers in order to discourage them from doing business

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with a competitor” (emphasis added)).7 As a user of the record companies’ sound recordings, Sirius is only the record companies’ customer – not their competitor. B. Both Section 1 Counts Must Be Dismissed Under Twombly And Iqbal Because Their Allegations Are Implausible Or Conclusory

In Section 1 cases, a “crucial question” is whether challenged conduct “stems from independent decision or from an agreement.” Twombly, 550 U.S. at 553 (internal quotations, brackets, and citations omitted). A complaint must “provide ‘some factual context suggesting that the parties reached an agreement,’ not facts that would be ‘merely consistent’ with an agreement.” Anderson News, L.L.C. v. American Media, Inc., No. 10-4591-cv, 2012 WL 1085948, at *18 (2d Cir. Apr. 3, 2012) (quoting Twombly, 550 U.S. at 556, 549, 557); see id. at *15 (“Conclusory allegations of participation in a conspiracy have long been held insufficient to state a claim.” (internal quotation marks omitted)). Thus, allegations of parallel business behavior, standing alone, are insufficient because such behavior is “consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy prompted by common perceptions of the market.” Twombly, 550 U.S. at 554; see In re Elevator Antitrust Litig., 502 F.3d 47 (2d Cir. 2007). Here, the complaint conjectures an agreement not to deal directly with Sirius. Even if such an agreement existed, the claims are barred by the antitrust exemption, the filed rate doctrine, and the absence of any cognizable antitrust injury. See supra Parts I-II. But even apart

See also id. (observing that even though the challenged practice “resembles practices that have been labeled ‘group boycotts,’” the Court would “decline to resolve this case by forcing the [practice] into the ‘boycott’ pigeonhole and invoking the per se rule”); Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284, 294 (1985) (explaining that group boycotts deemed per se unlawful “have generally involved joint efforts by a firm or firms to disadvantage competitors” by denying them business relationships (emphasis added)); see also, e.g., Balaklaw v. Lovell, 14 F.3d 793, 800 (2d Cir. 1994) (group boycotts “may in some limited circumstances constitute per se violations of the Sherman Act” (emphasis added)); Bogan v. Hodgkins, 166 F.3d 509, 515 (2d Cir. 1999).

7

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from these failings, the complaint does not allege the facts necessary to establish “plausible grounds to infer” such an agreement in the first place. Twombly, 550 U.S. at 556. First, the complaint conclusorily alleges a laundry list of antitrust buzzwords – “conspiracy”, “boycott”, “unlawful and tortious conduct”, “coercion”, “unlawful collusion”, and the like, see Cplt. ¶¶ 1, 5, 9, 21, 36, 55, 57 – “without any specification of any particular activities by any particular defendant,” Elevator Antitrust, 502 F.3d at 50-51 (quoting In re Elevator Antitrust Litig., No. 04 CV 1178(TPG), 2006 WL 1470994, at *2-3 (S.D.N.Y. May 30, 2006) (Griesa, J.)). Because these allegations are “nothing more than a list of theoretical possibilities, which one could postulate without knowing any facts whatever,” id., they do not enable the complaint to survive a motion to dismiss. See Twombly, 550 U.S. at 557. Second, in an effort to create an inference of coordination, the complaint suggests that declining Sirius’s direct license offers would not have made sense for a record company acting unilaterally. See Cplt. ¶¶ 3, 8, 32. Yet, the complaint itself shows just how incredible this assertion is. Sirius repeatedly concedes that the royalty rates it offered were not only below the 2012 statutory rates, but substantially below the rates that SoundExchange is seeking in the pending 2013-2017 CRB proceeding. See, e.g., id. ¶ 40 (alleging that SoundExchange advised record companies that it expected significant rate increases by the CRB). Further, the complaint alleges that in exchange for this lower rate, the direct licenses would have required record companies to license interactive capabilities beyond the statutory license – which command higher, not lower, rates. See id. ¶ 32; see generally 2007-2012 CRB Decision, 73 Fed. Reg. at 4093. In other words, Sirius offered to pay record companies less money if the record companies gave up more rights. It is only natural that record companies, acting unilaterally, would reject such a deal. See Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009) (allegations of parallel conduct

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insufficient when the conduct is “not only compatible with, but indeed was more likely explained by, lawful, unchoreographed free-market behavior”); Twombly, 550 U.S. at 557 (“allegations of parallel conduct . . . must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action”). Third, the complaint overlooks that a record company still can pursue direct licenses after a statutory rate has been set – and that its bargaining power would obviously be enhanced if the CRB sets a rate that the recording industry finds favorable. That is a powerful incentive for a record company, acting individually, to wait until later before considering a direct license offer. Fourth, Sirius urges the Court to infer a group boycott from “coordinated messaging” by industry organizations about the benefits of the statutory license. Cplt. ¶ 37. For instance, the complaint alleges that SoundExchange communicated to the industry that, in the CRB proceeding, it planned to seek a substantial increase over the 2007-2012 rates. Id. ¶ 40. It alleges that the Future of Music Coalition, which represents the interests of performing artists, described Sirius’s direct license initiative as a “dangerous thing for performing artists.” Id. ¶ 41. And it complains of statements that the direct license campaign was “blatantly anti-artist and anti-musician,” and that performing artists should call their labels and urge them not to enter into direct licenses. Id. ¶¶ 42, 44-45. These statements reflect nothing more than perfectly permissible efforts to educate the industry about the benefits of the statutory license and the financial implications of Sirius’s direct license – especially as it would impact artists. It would turn Section 114 (including the antitrust exemption) on its head to regard these statements – in furtherance of statutorily permitted conduct, including SoundExchange’s efforts to advocate before the CRB – as suggesting a conspiracy. See 17 U.S.C. § 114(e)(1); Eastern R.R.

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Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965). Finally, the complaint provides no plausible explanation for how SoundExchange and other industry organizations could possibly have coerced hundreds of record companies into complying with the alleged “boycott.” The complaint speculates that record companies “fear” that SoundExchange would wrongfully withhold royalty payments due from services other than Sirius if they were to enter into direct licenses. See Cplt. ¶ 55. Sirius, however, does not identify a single label that claims to have this fear, nor does it explain how such a fear would be remotely rational. Likewise, it fails to allege that SoundExchange has ever intentionally or vindictively withheld royalties, or that it has done anything else to support the complaint’s rank conjecture. To the contrary, the CRB has found that SoundExchange “has a proven track record” and that its “operational practices appear efficient and fair.” See supra p. 5. Sirius’s remarkable allegation, devoid of any factual support, is precisely what Twombly and its progeny prohibit. See Elevator Antitrust, 502 F.3d at 50-51 (rejecting conclusory allegation made “without any specification of any particular activities by any particular defendant”) (quoting In re Elevator Antitrust Litig., No. 04 CV 1178 (TPG), 2006 WL 1470994, at *2-3 (S.D.N.Y. May 30, 2006) (Griesa, J.)). It is also particularly ironic given the complaint’s ready admission that Sirius was implicitly threatening the smallest labels that their recordings would get less airtime if they refused to take Sirius’s one-sided deal. See Cplt. ¶ 8. V. The Tortious Interference Claims Fail To Plead Any Wrongful Act

To state a claim for tortious interference under New York law, a plaintiff must allege, among other things, that “the defendant acted solely out of malice, or used dishonest, unfair, or improper means.” Kirch v. Liberty Media Corp., 449 F.3d 388, 400 (2d Cir. 2006). For this element to be satisfied, the conduct in question must constitute an “independent crime or tort,” must have been 23

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undertaken “solely out of malice,” or must “amount to ‘extreme and unfair’ economic pressure.” Friedman v. Coldwater Creek, Inc., 551 F. Supp. 2d 164, 170 (S.D.N.Y. 2008) (Preska, J.), aff’d, 321 F. App’x 58 (2d. Cir. 2009). Importantly, “[t]ortious interference claims have a limited scope and an extremely high pleading standard.” Diario El Pais, S.L. v. Nielson Co., No. 07CV11295, 2008 WL 4833012, at *7 (S.D.N.Y. Nov. 6, 2008). Sirius’s complaint offers three possible predicates for its tortious interference claims (Counts 5 and 6) – but each is legally insufficient. First, the complaint premises the tortious interference claims on alleged antitrust violations. Cplt. ¶ 94. Because the antitrust allegations fail to state a claim (as set forth above), they cannot support a tortious interference claim. Second, the complaint refers to purported misrepresentations by SoundExchange to record companies. Cplt. ¶ 95. But the only specific allegation on this score is the assertion that SoundExchange mischaracterized the last CRB rate-setting decision by stating that the CRB had identified a market rate of 13% but adjusted it downward based on Sirius’s then-perceived precarious financial position. Cplt. ¶ 39. In fact, that is precisely what the CRB did. Specifically, the CRB determined that “the 13% rate identified hereinabove marks the upper boundary for a zone of reasonableness of potential marketplace benchmarks.” 2007-2012 CRB Decision, 73 Fed. Reg. at 4094. It then explained, over Sirius’s objection, that “a rate close to the upper boundary is more strongly supported than one close to the lower boundary.” Id. Yet the CRB ultimately concluded that, for the sake of Sirius’s “profitability and positive free cash flow, . . . some rate within the zone of reasonableness that is less than 13% is warranted.” Id. at 4097. Far from being misleading, SoundExchange accurately described the CRB’s published decision. And even if SoundExchange had misstated the record, that would not support a tortious interference claim. See Friedman, 551 F. Supp. 2d at 170 (explaining that “[p]leading

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the presence of false statements alone is not enough to support a claim for tortious interference”). Third, the complaint asserts that the defendants have “encouraged individual record labels to act in breach of contracts with Sirius.” Cplt. ¶ 96; see id. ¶ 54 (allegation, with respect to a single direct license, that advice by bands’ business manager, who also happened to be SoundExchange board member, led bands to “request[] that they be released from the deal) (emphasis added)). Nothing in this allegation suggests that the business manager was acting on instructions from SoundExchange. More to the point, Sirius does not even allege that the bands breached their contract; it alleges only that they requested to be released from their direct license. That fact alone does not support a claim for tortious interference. See Masefield AG v. Colonial Oil Indus., No. 05 Civ. 2231, 2006 WL 346178, at *9 (S.D.N.Y. Feb. 15, 2006) (urging third party to cancel contract does not support tortious interference claim). In short, Sirius’s tortious interference claims must be dismissed. CONCLUSION For the foregoing reasons, the complaint should be dismissed with prejudice.

Respectfully Submitted, Dated: May 7, 2012 New York, New York

SoundExchange, Inc. By: /s Michael B. DeSanctis_______________

Richard L. Stone (pro hac vice forthcoming) David R. Singer (pro hac vice forthcoming) JENNER & BLOCK LLP 633 West 5th Street, Suite 3600 Los Angeles, CA 90071-2054 Phone 213-239-5100 Fax 213-239-5199

Michael B. DeSanctis Joshua M. Segal (pro hac vice forthcoming) JENNER & BLOCK LLP 1099 New York Avenue, NW, Suite 900 Washington, DC 20001-4412 Phone 202-639-6000 Fax 202-639-6066 Attorneys for Defendant SoundExchange, Inc.

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EXHIBIT A

August 2011: SoundExchange Statement on Satellite Radio Royalty Proceedings « Sound... Page 1 of 2 Case 1:12-cv-02259-TPG Document 16-1 Filed 05/07/12 Page 2 of 3

Latest August 2011: SoundExchange Statement on Satellite Radio Royalty Proceedings
August 11th

August, 2011 (see October 2011 statement) In recent weeks, SoundExchange has received many questions from our members about the statutory license royalty rates currently paid by Sirius XM for plays on satellite radio, as well as the status of the proceeding before the Copyright Royalty Judges to set new satellite radio rates. So we wanted to take this opportunity to give you an update. As you may know, Sirius XM currently owes sound recording royalties equivalent to 7.5% of gross revenues (as defined in the regulations), and that rate is scheduled to rise to 8% in 2012. The Judges set that rate back in 2007, based primarily on their review of privately negotiated licenses in the marketplace. The Judges actually concluded that the appropriate “market rate” was 13% — but, based on what the Judges believed to be Sirius’s and XM’s precarious financial positions at that time, they adjusted the rate downward to the current levels. The new proceeding to set the statutory rate for 2013-2017 is now underway. It is scheduled to begin in earnest later this year, and we can expect a decision from the Judges by the end of 2012. We have long been preparing for this proceeding, and are planning to seek a substantial increase in the statutory rate. In other words, we plan to seek rates well in excess of the 2012 rate of 8%. As in the past, we will present evidence of the rates reflected in current privately negotiated licenses in the marketplace. Those rates may play a very significant role in the outcome. Equally significant is the fact that SiriusXM – with its monopoly power in the satellite radio marketplace – has been announcing unprecedented earnings and profits. Financial indicators which may have justified a downward adjustment in the rates in 2007 have reversed. Today, we believe that there is no reason that the statutory rate should remain artificially subsidized any longer. SiriusXM’s own public financial statements, as well as the glowing projections they tout to their investors, make that much clear. • Sirius and XM’s merger successfully closed and the consolidated company (which is now the nation’s only commercial satellite radio provider) has reduced its overhead costs. • SiriusXM has gone from claiming to be on the brink of bankruptcy to experiencing record profits that are projected to grow even further in the coming years. • SiriusXM’s revenues have risen dramatically over the past few years and are estimated to top $3 billion in 2011. • SiriusXM’s subscriber levels are at an all time high (currently about 21 million subscribers) and are projected to continue increasing by over 1 million per year for the foreseeable future. • SiriusXM’s stock price has increased significantly since 2009, improving over 75% during the past 12 months (as of 8/10/11).

http://www.soundexchange.com/2011/08/11/soundexchange-statement-on-satellite-radio-ro... 5/7/2012

August 2011: SoundExchange Statement on Satellite Radio Royalty Proceedings « Sound... Page 2 of 2 Case 1:12-cv-02259-TPG Document 16-1 Filed 05/07/12 Page 3 of 3 More listeners than ever access great music by signing up with SIRIUS-XM, and they’re coming to hear YOUR tracks. Given their size, the amount of music they play, and their financial success, SiriusXM is one of the most significant payers of performance royalties to SoundExchange and as such, to you. In that regard, we have every interest in seeing satellite radio’s success continue. But that success must be fairly shared with those who make the music that forms the very core of SiriusXM’s business. We believe that if, as in the past, the Judges again review the evidence of marketplace licenses and consider SiriusXM’s current financial position, our industry should expect to see a significantly increased statutory rate. We are busily working toward that result, and will keep you all apprised of the progress of these important proceedings. SoundExchange will continue to fight vigorously on behalf of both artists and copyright owners to make sure that the products of their hard work and investment is appropriately valued when it forms the very backbone of services like SiriusXM.

http://www.soundexchange.com/2011/08/11/soundexchange-statement-on-satellite-radio-ro... 5/7/2012

Case 1:12-cv-02259-TPG Document 16-2

Filed 05/07/12 Page 1 of 3

EXHIBIT B

October 2011: SoundExchange Statement on Sirius XM Direct Licenses and the Statutory... Page 1 of 2 Case 1:12-cv-02259-TPG Document 16-2 Filed 05/07/12 Page 2 of 3

Latest October 2011: SoundExchange Statement on Sirius XM Direct Licenses and the Statutory License
October 27th

SoundExchange recently received questions from artists and independent labels about Sirius XM’s requests for direct licenses. Those offers are apparently being delivered by Music Reports Inc. (MRI), a company that represents the services who use music rather than the people and companies that make music. Indeed, MRI’s website states that it strives to license music from music creators “at the lowest possible cost.” We are not privy to the discussions MRI is having about these direct licenses. We can, however, provide some background about the statutory license for satellite radio, and what we do on behalf of the thousands of record labels and recording artists that we represent. SoundExchange fights for artists and copyright owners Unlike Sirius XM and MRI, we fight for royalty structures that recognize the vital role that the creators of music play for digital services. We represent everyone in the creative process – record labels and recording artists – and we spend countless hours and millions of dollars fighting for their rights. In the last satellite radio proceeding, we obtained a 300 percent increase in the rate paid by Sirius XM. MRI, by contrast, works with services, and in past rate proceedings has closely coordinated with digital music services that sought to lower rates for creators’ music. SoundExchange manages the statutory license on behalf of the industry, and believes the current rates for satellite radio are below-market. The statutory rates for satellite radio are set in proceedings before the Copyright Royalty Board (“CRB”) every five years. SoundExchange represents artists and rights owners in those proceedings and advocates for rates that give proper weight to the value of music, and proper compensation to rights holders. We’ve achieved dramatic increases in the statutory rates for webcasting and satellite radio in the past, and will always advocate to ensure the artist is paid rates that properly reflect the value of his or her music. The current rates for satellite radio are based on a percentage of Sirius XM’s gross revenues, as defined in the regulations. For 2011, the rate is 7.5 percent, and will go up to 8 percent next year. The proceeding to set rates for the next term is currently underway. Importantly, Sirius XM also owes separate royalties for its other platforms, such as webcasting. Those streams are not included in the 8 percent royalty rate described above. As we’ve previously explained, SoundExchange believes the current rates are artificially low and will seek a substantial increase in the next term. In the last rate setting proceeding, the CRB acknowledged that the evidence pointed to a market rate in the range of 13 percent, but then reduced the rate because of Sirius XM’s financial condition at the time. We believe that it is no longer appropriate for musicians to be subsidizing Sirius XM.

http://soundexchange.com/2011/10/27/october-2011-soundexchange-statement-on-sirius-x...

5/7/2012

October 2011: SoundExchange Statement on Sirius XM Direct Licenses and the Statutory... Page 2 of 2 Case 1:12-cv-02259-TPG Document 16-2 Filed 05/07/12 Page 3 of 3 Currently, artists participate directly and immediately in the royalties paid to SoundExchange under the statutory license. With direct licenses, they will not. SoundExchange administers a statutory license designed by Congress to ensure that artists participate directly in the stream of royalties generated by the digital performance right. Under the statutory license, 45 percent of the performance royalties are paid directly to featured artists, whether or not they are “recouped” – or still owe money to their record labels. Recouped or not, the statutory license ensures artists are able to receive royalty payments from SoundExchange. In addition, through SoundExchange, 5 percent of performance royalties are paid to a fund for distribution to non-featured artists – again, without passing through a record label. The ability of artists to participate directly and immediately in this new and growing stream of revenue is a core policy of the statutory license. SoundExchange is a non-profit organization with a passion for music SoundExchange represents thousands of artists and labels, and is governed by a Board comprised of varying interests in the industry – half representing artists and half representing labels. As a non-profit organization, we are not overseen by any particular commercial interest. Instead, we advocate the interests of all creators. Our incentive is to ensure that artists receive their proper compensation, and our goal is to keep our operating costs as low as we reasonably can to maximize the royalties that we pay out to the creators and owners of music. We’ve been successful, paying more than $800 million in performance rights royalties to date. The statutory license, as administered by SoundExchange, is transparent and efficient for rights owners as well as artists The statutory license is an extremely efficient tool for rights owners and artists as well as services, and generates value for everyone in the creative process, not just record labels. SoundExchange distributes tens of millions of dollars every quarter to artists and rights owners who owe nothing to SoundExchange other than keeping their paperwork up to date. In addition, SoundExchange has one of the lowest administrative rates in the industry – if not the lowest. For 2010, our administrative rate was 6.9 percent – which covers rate settings, royalty accounting, oversight, enforcement and audits on behalf of all or our members and other activities that labels otherwise might have to undertake themselves. All of this is covered by our 6.9 percent admin rate. We strive to be transparent, efficient and accurate in everything that we do. The way we distribute royalties is spelled out by statute and regulations – under rules that we advocate – and we’ve always sought the maximum degree of precision from services that we can get. Whenever possible, we distribute royalties according to exactly what a service played. We devote substantial resources to registering labels and artists to ensuring that every penny is distributed to its rightful owner, and we continue to dedicate resources to correcting the insufficient data we receive from services. Our mission is representing the creators of music, and it’s a mission that we embrace with passion.

http://soundexchange.com/2011/10/27/october-2011-soundexchange-statement-on-sirius-x...

5/7/2012

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