Soundexchange, Inc. v. Muzak LLC

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

SOUNDEXCHANGE, INC.,
Plaintiff,
Vv. ) Case 15-cv-0476-RCL
MUZAK, LLC,
Defendant. )
)
MEMORANDUM OPINION

Before the Court is Muzak’s motion to compel discovery of documents and
communications related to’ its unclean hands affirmative defense. In its August 21, 2018
memorandum opinion, the Court granted summary judgment as to SoundExchange’s prima facie
case, but it denied the motion in relation to Muzak’s affirmative defense. The Court concluded
that it would be premature and unjust to consider a motion for summary judgment on Muzak’s
remaining affirmative defense when the discovery process might yield additional facts that would
guide the Court’s decision as to the merits of the affirmative defense. !

In the months that followed, the parties continued the discovery process until they hit the
present roadblock. Muzak sought—and continues to seek—any documents related to Music
Choice’s total royalties paid to SoundExchange, the possible discontinuation of any entity’s

payments of preexisting subscription service (“PSS”) rates, and SoundExchange’s audits of Music

' The Court assumes familiarity with this case’s factual background and procedural posture up until the current
discovery dispute. See SoundExchange, Inc. v. Muzak, LLC, 322 F. Supp. 3d 72, 73-75 (D.D.C. 2018) (providing
background information and context).
Choice, as well as other pre-2014 documents. For the reasons that follow, the Court will grant in
part and deny in part Muzak’s motion to compel discovery.

Also before the Court is SoundExchange’s motion for summary judgment. Because the
Court will compel additional discovery related to Muzak’s affirmative defense, SoundExchange’s
motion is not yet ripe. Accordingly, the Court will deny the motion for summary judgment without
prejudice.

I. Confidential Royalty Payment Documents

Muzak argues that documents related to Music Choice’s royalty payments to
SoundExchange are both relevant and not protected from disclosure by federal regulations. Def.’s
Am. Mot. 7-8, ECF No. 61-1. Muzak’s unclean hands affirmative defense “turns on
SoundExchange’s treatment of Music Choice,” so’ Muzak believes that these documents could
provide evidence of favorable treatment of Music Choice. Id. at 7. Specifically, Muzak seeks this
information to determine whether SoundExchange was aware of any changes to Music Choice’s
services that would have made Music Choice ineligible to keep paying PSS royalty rates. Def.’s
Reply 9, ECF No. 65.

SoundExchange argues that Music Choice’s royalty payment documentation and the
documentation related to Music Choice’s PSS rates are confidential and protected by 37 C.F.R.
§§ 370.3(g) and 382.6(b)-(c). Pl.’s Mem. Opp. 15, ECF No. 79. SoundExchange also expresses
concern that Muzak is abusing the discovery process to bypass regulatory restrictions and
improperly gain access to a competitor’s confidential information. Jd. at 16. With respect to
relevance, SoundExchange argues that Music Choice’s royalty payment documentation will not
produce information relevant to Muzak’s defense because SoundExchange does not collect

information on royalties broken down by a distribution system, as sought by Muzak. Jd. at 13
n.14. Furthermore, SoundExchange argues that this request would be overly burdensome,
disproportionate to the needs of the case, and is not likely to yield helpful results. Jd. at 14.

Turning to the regulations first, 37 C.F.R. § 370.3(g) states that a Collective, such as
SoundExchange, “shall not disseminate information in the Reports of Use to any persons not
entitled to it, nor utilize the information for purposes other than royalty collection and distribution,
and determining compliance with statutory license requirements, without express consent of the
preexisting subscription service providing the Report of Use.” SoundExchange reads the
regulation to lack any exception for parties seeking documents through discovery. Pl.’s Mem.
Opp. 15. Muzak denies that it is a “person[] not entitled to [the documents]” under the regulation
because being an adverse party in litigation entitles it to those documents by virtue of the discovery
process’ demands on the parties involved. Def.’s Am. Mot. 8. The Court disagrees with Muzak’s
reading of the regulation because 37 C.F.R. § 382.6(c) provides further support for
SoundExchange’s reading of it.

SoundExchange first cites 37 C.F.R. § 382.6(b) in support of its argument against
disclosure. Pl.’s Mem. Opp. 15. The regulation prohibits SoundExchange from “us[ing] any
Confidential Information for any purpose other than royalty collection and distribution and
activities related directly thereto.” Jd §382.6(b). But the dispute here is not over
SoundExchange’s use of the royalty documents—rather, the issue is whether the regulations permit
SoundExchange to disseminate the royalty documents without Music Choice’s consent to an

adverse party seeking discovery.

? For purposes of the regulation, “Confidential Information” is defined as “the Statements of Account and any
information contained therein, including the amount of royalty payments and any information pertaining to the
Statements of Account reasonably designated as confidential by the party submitting the statement.” 37 C.F.R.
§ 382.6(a).
SoundExchange also cites § 382.6(c), which deals with disclosure of confidential
information, in support of its argument. SoundExchange reads § 382.6(c) to mean that “access to
information in Statements of Account is limited to SoundExchange, independent auditors who are
authorized to act on behalf of copyright owners, and the copyright owners and performers whose
works have been used.” PI.’s Mem. Opp. 15 n.17. SoundExchange’s reading of the regulation
omits any mention of subsection (c)(4), which states that a Collective may also disclose
confidential information to “[a]ttorneys and other authorized agents of parties to proceedings under
17 U.S.C. 112 or 114, acting under an appropriate protective order.” 37 C.F.R. § 382.6(c)(4).
Although the present case contemplates issues stemming from 17 U.S.C. § 114, it is not a
“proceeding” within the meaning of the regulation? As such, § 382.6(c) restricts
SoundExchange’s ability to disclose royalty payment documents to Muzak’s outside counsel, ’
regardless of whether a protective order shields the documents.

Reading 37 C.F.R. §§ 370.3(g) and 382.6(c) together, the Court holds that Muzak is not
entitled to SoundExchange’s royalty payment documents.* Accordingly, the Court need not
evaluate their relevance and will deny Muzak’s motion to compel all documents showing Music
Choice’s total royalty payments to SoundExchange.

II. Audit Documents

Muzak also seeks SoundExchange’s audits of Music Choice’s royalty payments because

the audits relate to SoundExchange’s treatment of Music Choice, the very center of Muzak’s

unclean hands affirmative defense. Def.’s Am. Mot. 6. Before considering the parties’ arguments

3 The regulation is referring to proceedings before Copyright Royalty Judges pursuant to 17 U.S.C. § 801 ef seq. See
17 U.S.C. §§ 112(e)(3), 114(C1)(A).

“ The Court also considers documents pertaining to the discontinuation of PSS rates (Request Number 6) to be shielded
from discovery if they contain confidential royalty payment information. But the discoverability of documents
concerning the rationale for discontinuation that do not contain confidential royalty payment information (i.e.
concerning PSS eligibility) will be discussed in Section HI.

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concerning relevance, need, and privilege, the Court can deny Muzak’s motion to compel the audit
documents for the reasons stated in the previous section.

As SoundExchange notes, the purpose of an audit is to “examine the licensee’s records to
verify the information reported on its Statements of Account.” P]l.’s Mem. Opp. 17. These records,
and the resulting analyses of them, fall under the 37 C.F.R. § 382.6(a) definition of “Confidential
Information.” That definition not only includes all information contained in the Statements of
Account, but also “any information pertaining to the Statements of Account reasonably designated
as confidential by the party submitting the statement.” Jd. The audit documents, which directly
pertain to the Statements of Account, would reveal even more confidential information about
Music Choice’s royalty payments than the statements themselves, so § 382.6(c) protects them from
disclosure as well. Accordingly, the Court will deny Muzak’s motion to compel the audit
documents.

TH. Pre-2014 Documents

Finally, Muzak moves to compel the production of various documents predating 2014.
Def.’s Am. Mot. 10. Muzak seeks (1) documents or communications related to SoundExchange’s
evaluation of any entity’s eligibility to pay PSS rates, (2) communications concerning license rates
or terms with sound recording companies that own or have owned an interest in Music Choice,
and (3) documents related to SoundExchange’s interpretation of “preexisting service subscription”
and “preexisting satellite digital audio radio service,” including any analyses concerning which
services could be altered without losing PSS eligibility. Jd Muzak argues that these documents
are relevant to its affirmative defense because they would shed light on SoundExchange’s
comparative treatment of Muzak and Music Choice as PSS eligible entities. Jd Without waiving

any of its objections, SoundExchange searched its records for responsive documents but did not
use Muzak’s preferred search terms.° Pl.’s Mem. Opp. 12. SoundExchange has not revealed which
search terms it used, so Muzak moved to compel SoundExchange to perform the search again with
Muzak’s preferred search terms. Def.’s Am. Mot. 10.

SoundExchange argues that the motion to compel pre-2014 documents would force it to
search for documents that likely do not exist and would require it to unnecessarily expend even
more resources on a fruitless search. Pl.’s Mem. Opp. 10. SoundExchange maintains that the
expansive time span of the request, which goes back to the passage of the Digital Millennium
Copyright Act in 1998, is too burdensome, especially because SoundExchange has only existed
since 2003. Jd. at 9. Because Muzak paid royalties as low as or lower than its competitors without
being challenged by SoundExchange until 2014, SoundExchange argues that Muzak cannot make
a case for compelling discovery prior to ‘that point. Jd. Finally, SoundExchange contends ‘that
Muzak is not entitled to dictate search terms under Rule 26. /d. at 12.

There is a broad presumption in favor of discovery, but the presumption is bounded by
certain limitations, as articulated in Federal Rule of Civil Procedure 26(b)(1). See Friedman v.
Bache Halsey Stuart Shields, Inc., 738 F.2d 1336, 1349 (D.C. Cir. 1984). Muzak is entitled to any
nonprivileged documents or communications relevant to its affirmative defense and proportional
to the needs of the case, considering also whether the burden or expense of the proposed discovery
outweighs its likely benefit. See Fed. R. Civ. P. 26(b)(1). Rule 26 vests the Court with “broad
discretion to tailor discovery narrowly.” Crawford-El v. Britton, 523 U.S. 574, 598 (1998).

As the D.C. Circuit noted, relevance in discovery “can be viewed as a showing of need.”
Friedman, 738 F.2d at 1341. Muzak argues that it needs these documents in order to make a case

that it was treated differently than Music Choice. As stated earlier, SoundExchange rejects that

5 According to SoundExchange, the search turned up “only a handful of responsive documents, all of which were
privileged.” Pl.’s Mem. Opp. 5.
Muzak needs pre-2014 documents because Muzak paid royalties as low as or lower than its
competitors without being challenged by SoundExchange until 2014. The Court agrees with
Muzak on this issue. Muzak is entitled to documents or communications that could shed light on
SoundExchange’s historical treatment of Music Choice compared to Muzak. If at any point, either
before or after 2014, SoundExchange discovered information about Music Choice that would have
invalidated Music Choice’s ability to pay PSS rates, yet SoundExchange did nothing about it,
documents or communications regarding that treatment would be both relevant and proportional
to the needs of the case.

Many of SoundExchange’s other arguments delve into the merits of Muzak’s affirmative
defense, but doing so is not proper at this phase. If Muzak’s affirmative defense is meritless, as
SoundExchange suggests, then it will be dealt with at the summary judgment phase. But Muzak
must have a full and fair opportunity to obtain relevant evidence to put forward its best arguments
possible in support of its affirmative defense. And SoundExchange has not provided enough
evidence to convince the Court that its second search of these documents would be so burdensome
that it outweighs any benefit Muzak would receive from the documents.° As such, the Court will
compel SoundExchange to search for the pre-2014 documenits in accordance with Muzak’s
preferred search terms, with some exceptions.

SoundExchange’s objection to Muzak’s demand for documents dating all the way back to
the passage of the Digital Millennium Copyright Act in 1998 is a valid one. SoundExchange was
founded in 2003, so the Court will not compel SoundExchange to search for documents before it
even existed. This cutoff is not an arbitrary one because Muzak’s affirmative defense is based on

SoundExchange’s comparative treatment of Muzak and Music Choice. Searching for documents

6 The fact that SoundExchange has already performed a pre-2014 search, albeit with different search terms, is further
evidence that its second search will not be a Herculean task.

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that predate SoundExchange’s existence will not produce evidence related to SoundExchange’s
treatment of either entity.

Furthermore, should any responsive documents or communications reveal confidential
royalty payment information as defined in 37 C.F.R. § 382.6(a), that information must at least be
redacted. If the only responsive portions of those documents or communications are that
confidential information, then SoundExchange may withhold them. Any responsive documents
or communications that reveal competitive business information that are not protected by
§ 382.6(c) must be submitted pursuant to the protective order so that it cannot be abused.

IV. Summary Judgment

Because the Court is ordering additional discovery, SoundExchange’s motion for summary
judgment is not yet ripe. The parties should have the opportunity to brief the importance, or lack
thereof, of whatever evidence comes from the additional discovery. Accordingly, the Court will
deny the motion for summary judgment without prejudice. Once discovery has ended, the parties
may elect to submit summary judgment motions, at their discretion.

V. Conclusion
The Court will grant in part and deny in part Muzak’s motion to compel discovery and

deny SoundExchange’s motion for summary judgment. A separate order follows.

Date: August 23 , 2019 “Cos o Fort

cs

Royce C. Lamberth
United States District Judge