Antitrust Law Daily Peloton’s antitrust counterclaim against music publishers derailed
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Thursday, January 30, 2020

Peloton’s antitrust counterclaim against music publishers derailed

By Peter Reap, J.D., LL.M.

Failure to define the relevant market to encompass all interchangeable substitute products doomed the counterclaim.

An antitrust counterclaim brought by stationary bike manufacturer and fitness company Peloton Interactive against fifteen music publishers (the Music Publishers) and the National Music Publishers’ Association (NMPA) for violation of the Sherman Antitrust Act by engaging in a conspiracy to refuse to deal with Peloton was dismissed because Peloton failed to define the relevant market to encompass all interchangeable substitute products, the federal district court in New York City has decided. Peloton defined the relevant market as sync "licenses to the copyrighted works controlled (in whole or in part) and collectively negotiated by the [Music] Publishers through NMPA" but failed to explain why it could not substitute songs with sync licenses owned by the Music Publishers for songs with sync licenses owned by other publishers. Peloton’s request for leave to amend its antitrust counterclaim was denied. In addition, its tortious interference counterclaim against NMPA was dismissed, also without leave to amend (Downtown Music Publishing LLC v. Peloton Interactive, Inc., January 29, 2020, Cote, D.).

Peloton manufacturers stationary bicycles with a built-in screen that displays live and on-demand workout classes, and it also offers instructor-led classes that contain music. Because instructors provide Peloton with limited notice of the music that they intend to play in class, Peloton alleged that it is "ill-suited" to the more traditional type of music licenses for derivative works with audio and visual components—synchronization or "sync" licenses—that Peloton alleged are generally agreed to "on an individual composition basis, one by one, and well in advance of exhibition of the content." Thus, Peloton explained, it acquired from certain music publishers "catalog-wide" sync licenses, which cover all or substantially all of a licensor’s repertoire.

However, after Peloton received a letter from NMPA accusing Peloton of infringing uses of works owned, at least in part, by unnamed NMPA members, negotiations between Peloton and NMPA reached an impasse. Peloton alleged that NMPA "demanded" that Peloton deal exclusively through NMPA, except for those members with whom Peloton already had licensing agreements. Further, after Peloton attempted to negotiate directly with several of the Music Publishers, NMPA "conveyed information to and coordinated with" these Music Publishers during Peloton’s futile attempts to negotiate individual licenses, according to Peloton.

Subsequently, on March 29, 2019, the Music Publishers commenced this action against Peloton, alleging that Peloton willfully infringed their copyrights in musical works they own and control. Although not a plaintiff, NMPA issued a press release publicizing the lawsuit. Peloton’s two counterclaims, an antitrust counterclaim against both the NMPA and the Music Publishers (together, the plaintiffs) and a tortious interference counterclaim against NMPA, were before the court on a motion to dismiss.

Antitrust counterclaim. The plaintiffs’ argument that Peloton’s Sherman Act counterclaim was barred by the Noerr-Pennington doctrine was without merit, the court held. "[G]ood faith litigation to protect a valid copyright ... falls within the protection of the Noerr-Pennington doctrine," the court noted. Primetime 24 Joint Venture v. Nat’l Broad., Co., 219 F.3d 92, 100 (2d Cir. 2000). However, the Second Circuit has clarified that while "coordinated efforts to enforce copyrights against a common infringer may be permissible, copyright holders may not agree to limit their individual freedom of action in licensing future rights to sue an infringer before, during, or after" a lawsuit. Id. at 102-03. Thus, the Noerr-Pennington doctrine did not protect the Music Publishers’ alleged concerted refusal to license copyrighted works to Peloton. Peloton alleged that NMPA and the Music Publishers agreed to unlawfully limit the individual freedom of action of the Music Publishers, and the plaintiffs’ arguments that the Noerr-Pennington doctrine protected their conduct was rejected.

Next, the plaintiffs argued that Peloton failed to adequately plead the existence of a conspiracy with its Section 1 Sherman Act counterclaim. The court disagreed. According to Peloton, NMPA demanded Peloton deal exclusively with NMPA and repeatedly declined to give Peloton a list of NMPA members, impeding Peloton in its effort to independently negotiate licenses. When Peloton finally attempted bilateral discussions with several Music Publishers, they cut off those negotiations simultaneously and abruptly. Further, on the same day the Music Publishers filed this lawsuit, NMPA’s President and CEO appeared on a news segment as "the man behind the Peloton lawsuit." This evidence, in the court’s view, suggested that the Music Publishers’ decisions to stop discussions with Peloton were not coincidental and that the Music Publishers decided together that they would refuse to negotiate with Peloton.

Finally, Peloton’s antitrust counterclaim failed because Peloton failed to define the relevant market to encompass all interchangeable substitute products, the court ruled. Peloton defined the relevant market as sync "licenses to the copyrighted works controlled (in whole or in part) and collectively negotiated by the [Music] Publishers through NMPA." This proposed market failed to encompass all interchangeable substitute products and Peloton did not explain why it could not substitute songs with sync licenses owned by the Music Publishers for songs with sync licenses owned by other publishers. Indeed, Peloton admitted that it has successfully "collaborated with music publishers to develop an innovative [sync] licensing framework that is appropriate for its business and reached agreements with all the ‘major’ music publishers and many independent music publishers," the court noted.

Peloton argued that sync licenses are not interchangeable because every song has "nonfungible qualities." But while it was true that there was some amount of originality with every copyrighted work, that did not explain why songs not controlled by the Music Publishers could not substitute in exercise programming for songs they do control, the court reasoned.

Peloton’s request that, if its alleged relevant market was found legally deficient, it should be granted leave to amend in order to define the relevant market as all members of NMPA that have not licensed their rights to Peloton, was denied. Peloton did not make a formal request by submitting the proposed amendment to its counterclaims. Instead, it requested leave informally in three sentences in its opposition brief to the plaintiffs’ motion to dismiss. Further, Peloton did not explain why its alternative definition of a relevant product market would cure the deficiencies that it anticipated this court would find or otherwise show that its proposed amendment would be anything other than futile. Moreover, Peloton also failed to demonstrate the diligence necessary for a finding of good cause. Allowing Peloton to amend its counterclaim at this late stage of the litigation would, at a minimum, require additional discovery regarding the entire universe of musical compositions controlled by NMPA’s membership, as well as their licensing patterns and practices.

Tortious interference. Peloton also counterclaimed that NMPA committed tortious interference with prospective business relations under New York law by disrupting Peloton’s licensing negotiations with individual Music Publishers. This counterclaim was dismissed because Peloton insufficiently alleged that it would have entered into sync licenses with the Music Publishers but for NMPA’s conduct. Although it alleged that it sent "term sheets," "other offer materials," and a non-disclosure agreement to certain Music Publishers, and "provided data and proposed license terms" to another before NMPA’s alleged interference, Peloton failed to allege that any of these Music Publishers reciprocated Peloton’s interest in continuing, much less finalizing, these agreements, according to the court.

This case is No. 1:19-cv-02426-DLC.

Attorneys: Darren Wright Johnson (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Downtown Music Publishing LLC, Ole Media Management, L.P., Big Deal Music, LLC, CYPMP, LLC and Peer International Corp. Christopher Yook (King & Spalding LLP) for Peloton Interactive, Inc.

Companies: Downtown Music Publishing LLC; Ole Media Management, L.P.; Big Deal Music, LLC; CYPMP, LLC; Peer International Corp; Peloton Interactive, Inc.

MainStory: TopStory Antitrust NewYorkNews

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