On November 14, 2106, literally “on the eve of trial” over the amount of damages SiriusXM might owe Flo and Eddie, Inc. due to the unauthorized use of its sound recordings, a motion was filed with the trial court announcing the parties had settled the case. 1
What seemed curious at the time was that this trial was not the only fight going on between the two. As recounted previously on this blog, similar lawsuits were filed against SiriusXM in both New York and Florida. 2 Plus, according to the District Court Judge in the Florida proceedings:
[d]ue to Sirius’ licenses with the Federal Communications Commission and technological restraints on its satellite delivery systems, Sirius broadcasts identical programming to its subscribers in every state in the continental United States. 3
This would make it impossible to beam different programing into specific States. So how would this settlement affect the ongoing litigation? According to the documents filed November 28, 2016, we now have the answer. 4
What the settlement entails is a fairly complex variation on the often used method that can be best described as the “high-low settlement.” Before I became an attorney, I worked in the Florida Court system as a court clerk and saw this used on many occasions. This method essentially provides a “win-win” (if there is such a thing in litigation).
Frequently occurring when the jury was deliberating, but had not yet returned a verdict, the parties would agree that regardless of the verdict there would be a threshold award and a maximum award. If the jury awarded something in the middle, then that would be the award. For example, the threshold amount might be $1 million with a cap of $10 million. So even if the jury returned a verdict totally in favor of the Defendant, in essence awarding nothing, the Plaintiff gets paid $1 million. On the other side, the jury could award $100 million. Regardless of the jury’s award, the maximum the Defendant would pay would be $10 million. Any amount awarded in between those two figures would then be the award to be paid.
In the Flo and Eddie case, the jury would, in no uncertain terms, be faced with a daunting task in assessing damages. According to the Court filings, the Plaintiff class members account for 15% of the 11,808,927 plays of pre-1972 sound recordings at issue. 5 SiriusXM was prepared to contend that:
Plaintiff cannot show that it lost any sales due to SiriusXM’s use of its property, that SiriusXM did not prevent Plaintiff from granting other non-exclusive licenses, and that SiriusXM’s use of Plaintiff’s recordings enhanced Plaintiff’s ability to profit from their recordings. (citation omitted) SiriusXM planned to offer expert testimony that the appropriate measure of damages was a reasonable royalty rate, less any deduction for Plaintiff’s failure to mitigate damages. 6
This amount was, according to Court filings, “tens of millions” lower than Flo and Eddie’s expert’s calculations. 7
So, in order to avoid this fight (and the inevitable appeal) here’s how the settlement breaks down, and please bear with me, there are a lot of moving parts to contend with.
The Minimum Payment
This amount is $25 million. This payment is made regardless of the outcome in any appeal of the California action, and regardless of any adverse ruling against Flo and Eddie in either the New York or Florida proceedings, including all appeals. 8 SiriusXM also agrees not to appeal the ruling the Plaintiffs are entitled to class action status. 9 If approved by the Court this will mean that if you are the owner of a pre-1972 sound recording that has been played by SiriusXM, (and not subject to any previous license or settlement) anywhere in the world you will be entitled to receive some compensation.
Additional Contingent Payments
For every final win that Flo and Eddie rack up, SiriusXM will kick in an additional $5 million per jurisdiction. If Flo and Eddie run the table, this would mean an additional $15 million would be paid by SiriusXM. 10
In addition to that amount, SiriusXM will make prospective royalty payments of 5.5% of its annual gross revenue for the next ten years commencing January 1, 2018 until modified or terminated by adverse appellate rulings. However, all payments made prior to any adverse appellate ruling against Flo and Eddie cannot be reclaimed or recouped by SiriusXM.
Hang on, this gets a little complex.
SiriusXM will be entitled to reduce this royalty for each appellate win that becomes final on the issue of common law performance rights. If SiriusXM wins ultimate victory in California or New York, this would reduce the royalty payment by 2% for each jurisdiction. If SiriusXM wins ultimate victory in Florida, this amount is 1.5%. So, victory in California only, or New York only, reduces the royalty to 3.5%. Victory for SiriusXM in California and New York, but not Florida, would reduce the royalty to 1.5% and so on. If SiriusXM wins all three, the royalty is eliminated, but only prospectively. The Plaintiff class would keep all royalty payments made up to that point. 11
If the royalty continues at the full 5.5%, the payments made by SiriusXM “could generate between approximately $45.47 million (assuming that SiriusXM has no annual revenue growth) to over $59.21 million (assuming continued annual revenue growth) in additional cash payments to the Class over the next 10 years.” 12 This plus the other contingent payments add up to the “$99 million” figure that has been bandied about in the press. There are, however, a lot of “ifs, ands or buts” that have to occur before that happens, not the least of which is:
The Commerce Clause Exception
SiriusXM has long contended that State laws affording common law copyright performance rights would violate the “dormant commerce clause” restrictions of Federal law. In the simplest terms, State regulation of what is in effect a national broadcast operation would interfere with interstate commerce, and only Congress has the power to control interstate commerce. The settlement allows SiriusXM to continue to pursue this theory on appeal in all three jurisdictions.
The odds against SiriusXM succeeding are steep. This is an argument that SiriusXM has lost in all three cases. 13 The California Court dismissed it in footnote. The Florida Court held:
Congress specifically authorized the states to regulate pre–1972 sound recordings. “Any rights or remedies under the common law or statutes of any State shall not be annulled or limited by this title until February 15, 2067.” 17 U.S.C. § 301(c). Where Congress specifically authorizes state action, the dormant commerce clause does not apply. 14
The Judge in New York was also unpersuaded as to Sirius’ dormant commerce clause argument, but for a different reason than utilized in California or Florida.
Sirius’s Dormant Commerce Clause challenge fails for a different reason: New York does not “regulate” anything by recognizing common law copyright. The issue is nothing more than a red herring.
The Clause itself “withholds from the states[,] the power to regulate Commerce among the several States.” SSC Corp. v. Town of Smithtown, 66 F.3d 502, 510 (2d Cir.1995) (original alterations omitted). Thus, “the strictures of the dormant Commerce Clause are not activated unless a state action may be characterized as a ‘regulation.’” 15
Holding Sirius liable might affect interstate commerce—just as a finding of liability did in Sherlock. (citation omitted) But concluding that Sirius is liable under New York property law principles would not amount to a “regulation” of interstate commerce by New York. It would, therefore, not give rise to a Dormant Commerce Clause claim. 16
Yet, in the face of being a three time loser on this argument, SiriusXM seems hell-bent on pursuing it further. If only for the very reason that it could yield a significant savings to SiriusXM if it should prevail.
If SiriusXM prevails on this argument on a final decision in any of the 9th 2nd or 11th Circuit Courts of Appeals, the 5.5% royalty described above goes away, albeit prospectively. While the current court filing is silent on the contingency in the case of a Circuit split on the issue, correspondence with Plaintiff’s counsel indicates there would have to be a final determination by the Supreme Court of the United States.
See? It’s as simple as explaining credit default swaps!
Another form of hedging your bets.
- Flo & Eddie Settle With SiriusXM on Eve of California Trial ↩
- Flo and Eddie v. SiriusXM Radio: Have Two Hippies from the 60’s Just Changed the Course of Broadcast Music? ↩
- Flo & Eddie, Inc. v. Sirius XM Radio, Inc. 2015 WL 3852692 District Court for the Southern District of Florida, 2015 at 1 ↩
- Memorandum of Points and Authorities in Support of Plaintiff’s Motion for Preliminary Approval of Class Action Settlement found at Flo & Eddie, Inc. v. SiriusXM Radio, Inc. ↩
- Memorandum of Points and Authorities at 9. ↩
- Id. at 18 ↩
- Id. ↩
- Id. at 8 ↩
- Id. at 7 ↩
- Id. at 9 ↩
- Id. ↩
- Id. at 2 ↩
- Flo and Eddie Lose Florida Lawsuit against SiriusXM ↩
- Flo & Eddie, Inc. v. Sirius XM Radio, Inc. 2015 WL 3852692 District Court for the Southern District of Florida, 2015 at 6 ↩
- 62 F.Supp.3d at 351 ↩
- Id. at 352 ↩