The Story Behind Sony’s Suit Against Rdio

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Sony Music EntertainmentRdio, Inc.Sony Music has filed a lawsuit in federal court alleging fraud and misrepresentation against the former executives of Rdio.


The company claims the now-defunct streaming service is owed over $5 million, we learn from court filings obtained by RBR+TVBR. {lock}

Sony Music Entertainment, the second-largest recording company in the world, has sued Rdio’s former CEO Anthony Bay, General Counsel Elliott Peters and SVP Content Licensing Jim Rondinelli in federal District Court in New York. Peters remains GC and Bay and Rondinelli are no longer with the company, asserts Sony.

Pandora purchased Rdio for $75 million after Rdio filed for bankruptcy. Sony tells the court Rdio and Pandora had planned the purchase since at least June 2015.

Bay was and remains, according to Sony, an owner, executive officer and director of Pulsar Media, which owned 79% of Rdio and held 98% of the secured debt issued by Rdio, so if Rdio declared bankruptcy, “Pulsar and Bay expected to be first in line to recover whatever value remained in Rdio,” says Sony in the complaint.

Before it stopped operations Rdio offered consumers the ability to stream more than 20 million songs onto their computers and mobile devices — songs owned and controlled by Sony, which negotiated a content distribution deal with Rdio. Sony extended the deal several times, providing Rdio “continued access” to Sony recordings — and allowing “Rdio to avoid paying $5.5 million that was originally due” by December 31, 2014.

Sony says Rdio acknowledged its service “was not sustainable” without access to Sony content. “A loss of access to SME’s content would have been devastating to Rdio’s business, and would have led many of its key employees — including Rdio’s team of skilled, mobile software engineers — to leave the company for other opportunities. That would have diminished the value of Rdio’s business to Pandora, which was interested largely in acquiring these employees’ contracts, and would have put at risk defendants’ jobs an and the ability of Pulser and Bay to recover their investments,” says Sony in court documents.

However, Sony didn’t realize while Rdio was negotiating contracts with Sony, it was simultaneously negotiating its deal with Pandora “under which Rdio would file for bankruptcy; Pandora would buy Rdio’s assets out of bankruptcy; defendant Bay (as part-owner, executive officer, and director of Rdio’s secured creditor) would expect to be first in line to receive proceeds of the Pandora deal; and SME (as an unsecured creditor) would receive pennies on the dollar for the amounts owed to it under the amended Content Agreement.”

The defendants knew if Sony learned about the Pandora talks, Sony would have demanded payment of its $5.5 million and refused to grant Rdio further access to Sony content. That would have diminished Rdio’s value to Pandora, and that’s why Rdio executives hid their negotiations from Sony, the music company alleges.

Sony says Bay signed a renewal agreement Sept. 30, 2015, however what Sony didn’t know at the time was the day before that, he signed a letter of intent with Pandora concerning the intended bankruptcy filing, which would prevent Rdio from paying what it owed to Sony. “Rdio never intended to fulfill the commitments” to Sony, the company is alleging.

Rdio was supposed to make a $2 million prepayment the day after the renewal agreement was executed. Rather than jeopardizing the Pandora deal by paying, or risk not continuing to access Sony content by not paying, Rdio executives lied, making “false statements” designed to induce Sony to extend the due date, the company asserts. That’s why it’s alleging fraud.

Sony learned of the Rdio bankruptcy and sale to Pandora in mid-November 2015 and was never paid for its content. It claims the defendants were “enriched by fraud” at Sony’s expense, noting the defendants benefitted from the sale proceeds with funds that should have gone to Sony.

Sony is demanding a jury trial. The defendants have not yet responded to the suit.

 

 


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