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Rdio hits back at Sony Music with allegations of anti-competitive behaviour

By Chris Cooke | Published on Thursday 7 July 2016

Defunct streaming firm Rdio is hitting back at Sony Music after the major sued three former execs at the digital company alleging misrepresentations, false statements and concealment in the months prior to the streaming platform’s bankruptcy. And the hit back, if allowed to proceed, could put the spotlight on the way the major music companies negotiate licensing deals with the streaming services.

As previously reported, Rdio announced last November that it had agreed a deal with Pandora, which basically saw the latter acquire the former. However, while personalised radio service Pandora – with plans to launch its own on-demand streaming set-up – was keen to get its hands on Rdio’s know-how and code, it was less keen on the rival firm’s liabilities, Rdio’s debts topping $220 million at that point.

To that end, Rdio declared itself bankrupt, and sold its assets to Pandora, rather than Pandora buying Rdio as a going concern. In among Rdio’s approximately $30 million of unsecured debts at the time of the bankruptcy were the monies owing to Sony, which were the minimum guarantee payments labels demand from streaming services. Sony-owned digital distributor The Orchard was also owed a stack of cash.

Back in April, Sony went legal, claiming that Rdio chief Anthony Bay, the dead company’s general counsel Elliott Peters and top licensing dude Jim Rondinelli had deliberately misled the major in a bid to delay paying owed advances while continuing to stream the music firm’s content. Sony claimed that, while plotting the bankruptcy and Pandora deal, Rdio implied to the record company that a new round of investment was being raised to assure the streaming set-up’s short-term future.

In its lawsuit, Sony said that, had it known of Rdio’s actual plans, it would have demanded the immediate payment of the unpaid monies, with the threat of pulling its content if the service did not comply. That threat would probably have had an effect at the time, because a significant loss of content might have scuppered the Pandora deal at a crucial stage.

Sony’s legal action also claimed that Bay himself stood to gain from the alleged misrepresentation, because he had a stake in one of Rdio’s secured creditors, which would receive preferential payment from the $75 million Pandora had agreed to pay for its rival’s assets. “Defendant Bay would expect to be first in line to receive proceeds of the Pandora deal; and [Sony Music] – as an unsecured creditor – would receive pennies on the dollar for the amounts owed to it under the amended content agreement”, said the lawsuit.

Having unsuccessfully sought a preliminary injunction from the bankruptcy courts to halt Sony’s action, Rdio has now told the judge overseeing the sale of the former company’s assets that it might have its own litigation to pursue against the music major. According to The Hollywood Reporter, Rdio’s lawyers are now accusing Sony Music of anti-competitive practices in the way it negotiates deals with the streaming services.

In a motion seeking to force Sony to share a stack of documents, Rdio’s legal reps write that “the debtor [Rdio] believes that Sony and Orchard have engaged in anti-competitive conduct to fix and control prices and unreasonably restrain trade for the licensing, marketing, and use of music by services, like the debtor, for the digital streaming of music to consumers worldwide”.

Those claims are mainly based around the so called ‘most favoured nation’ clauses that are common place in the music industry’s digital deals. The MFN in a label’s digital licence usually states that if the streaming platform subsequently offers a rival record company a better rate, that better rate will automatically apply to the earlier agreement too.

The MFN overcomes the problem that the last significant rights owner to sign up to a digital service can often exploit its hold-out status to get a better deal, which means that nobody would want to be the first label to agree terms. MFNs mean labels can sign up early knowing that they too will benefit from any last minute wrangling between the streaming platform and its final big label partner.

Which sort of makes sense. Though that isn’t to say that the use of MFNs isn’t sometimes controversial. In its legal claim against Sony, Rdio cites a Second Circuit Court Of Appeal ruling that says that – in some circumstances – MFNs can be misused “to anti-competitive ends”. It also cites a recent article reviewing action taken by the US Department Of Justice regarding the use of MFNs in the e-book sector.

But Sony reckons Rdio’s claims of anti-competitive behaviour are just a ruse designed to distract from the major’s own litigation against the former streaming service’s top execs, and its attempts to secure a bigger cut of Pandora’s $75 million. It insists that its use of MFNs is entirely legitimate, and totally different from the e-book sector most favoured nation clauses that resulted in the DoJ investigation.

Says Sony in its filing responding to Rdio’s allegations: “The MFN in the Sony Music/Rdio agreement requires Rdio (the buyer) to give Sony Music (the seller) an overall deal that is at least as good as it offers anyone else. Debtor has not cited a single case finding that this type of MFN leads to anticompetitive collusion. And for good reason: This type of MFN cannot prevent any record company from providing Rdio or any other audio subscription streaming service a lower price”.

Sony has offered to provide Rdio with copies of its deals with the other streaming services, and possibly correspondence between the major’s licensing execs and the digital firm. But Rdio is demanding much more, including communications between Sony and its competitors, and with various record industry trade groups. It also wants to see any documentation relating to any communication between Sony and competition regulators in the US or Europe on the way streaming services are licensed.

Complying with all of Rdio’s requests for documentation, argues Sony, would require a massive investment of time and legal counsel, resulting in potentially multi-million dollar bills, which would add insult to injury given the millions the major could already lose depending on how the courts decide to distribute the aforementioned $75 million of Pandora loot. And all that work simply isn’t justified for anti-trust claims based on “nothing but speculation and conjecture”, adds the major.

It remains to be seen whether the bankruptcy judge allows Rdio to proceed with its bid to build an anti-trust case against its former content partner.