Statement of the United States Copyright Office
before the
Subcommittee on Courts,
the Internet, and Intellectual Property,
Committee on the Judiciary

United States House of Representatives
109th Congress, 2nd Session

May 16, 2006

Section 115 Reform Act (SIRA) of 2006

The Copyright Office appreciates the opportunity to submit these comments to the Subcommittee regarding the progress that appears to have been made towards reforming section 115 of the Copyright Act, which governs the licensing of the reproduction and distribution rights for nondramatic musical works. As the Subcommittee has heard at a number of hearings, the existing section 115 does not comport with the realities of the digital environment in which music creators, distributors and users now operate. The draft Section 115 Reform Act of 2006 (“SIRA”) represents a significant advancement towards modernizing the Copyright Act to facilitate digital audio transmissions of music while balancing the interests of songwriters, music publishers, and online music services, as well as the consuming public.

Overview

The draft legislation reflects an understanding and appreciation of the many difficulties facing the music industry today with respect to the digital environment.⁽¹⁾ The most critical and time-sensitive issue is the current unavailability of an efficient and reliable mechanism whereby legitimate music services are able to clear all of the rights they need to make large numbers of musical works quickly available by an ever-evolving number of digital means while ensuring that the copyright holders are fairly compensated. During the years of negotiations that have ensued to explore a possible statutory mechanism via section 115, the various interested parties have voiced concerns regarding numerous additional issues that face the music industry as well, some of which the Office understands may be addressed by other legislation. Although these additional issues are no doubt legitimate, the sheer number and complexity of them ultimately render a holistic solution improbable, if not impossible, and the immediate benefit that the SIRA could bring to the music industry should not be delayed pending resolution of the other issues or bills, nor should the fate of the SIRA be tied to that of other legislation.

The SIRA appropriately focuses on those issues absolutely necessary to establish a functional licensing structure to enable legitimate music services to provide, and the consuming public to enjoy, vast quantities and varieties of music through the digital delivery of music online. It is also appropriate that the SIRA leaves undisturbed the structure established by section 115 for the reproduction and distribution of nondramatic musical works in physical formats (e.g., compact discs, vinyl records and cassette tapes), a structure that has worked well for that marketplace.⁽²⁾ Finally, the Office understands that the SIRA has received initial support and input from a variety of interested parties, which is crucial for its success.⁽³⁾ As the past few years of negotiations have demonstrated, the field of music licensing is a highly complex architecture supported in part by relationships, split rights, side agreements and historical antiquities that are inextricably woven into current business models. Therefore, for any legislation to benefit and foster the industry, it must take these realities into account.

The SIRA addresses three principal concepts - blanket licensing, designated agents and royalty rates — each of which is separately addressed below. We caution that given the complexity of these issues and the interrelatedness of the various copyrights implicated in the digital delivery of one song, our comments today focus only on concepts. The Office has not had the opportunity to conduct a careful review of the draft legislative language, but will do so and provide further advice to the Subcommittee within the next several days.

Blanket Licensing

The Copyright Office commends this Subcommittee for adopting a blanket licensing approach to the digital reproduction and distribution of musical works, and believes that such an approach is necessary for successful reformation of section 115. Speed is the hallmark of the digital age. If legitimate music services are not able to clear rapidly and relatively easily the rights to the music that they wish to distribute and the consuming public wishes to obtain online, then consumer demand for prompt access to music upon its release will likely encourage and sustain unauthorized distribution. The blanket licensing proposed in the SIRA attacks this problem in two ways.

First, by simply filing one license application—or in the case of multiple designated agents or a change in digital uses, a limited number of applications—a legitimate music service can obtain a license to utilize all musical works⁽⁴⁾ in the digital environment, rather than having to locate the various copyright owners of those works and clear the rights with each of them. Requiring the license to be available to all comers and deeming it to be automatically granted upon the filing of a proper application makes this licensing processing as instantaneous as possible. A key component is that the new compulsory license governs all nondramatic musical works and does not permit copyright owners to opt-out, which would otherwise jeopardize the efficiency of the entire blanket licensing structure. Additionally, we note that the SIRA appropriately does not preclude a copyright owner from entering into a direct licensing agreement with a particular digital music service, thus preserving multiple licensing options for copyright owners and licensees.

Second, the proposed blanket license covers all intermediate copies (e.g., server, cache and buffer copies) necessary to facilitate the digital delivery of music and applies to streaming and limited downloads.⁽⁵⁾ Presently, there exists much confusion and controversy as to whether these copies and uses must be separately licensed, which the Office understands can result in protracted negotiations and delays. By resolving these issues, the SIRA clears the way for the legitimate music services to focus on rapidly delivering music to the consuming public and developing new technologies to make delivery even faster, regardless of whether such technologies involve additional intermediate copies or not.

Based on the foregoing and our involvement in discussions on these issues over the past several years, we anticipate that the blanket licensing approach would be welcomed by, or at least be acceptable to, the various interested parties. Furthermore, we note that blanket licensing has proven successful with respect to the section 114 compulsory license for sound recordings, and would expect it to function similarly in the section 115 context.

However, the Copyright Office strongly urges that the SIRA not characterize streaming as a distribution or as a form of “digital phonorecord delivery,” or DPD. A stream, whether interactive or noninteractive, is predominantly a public performance, although the various reproductions such a transmission requires makes it appropriate to address in section 115. A stream does not, however, constitute a “distribution,” the object of which is to deliver a usable copy of the work to the recipient; the buffer and other intermediate copies or portions of copies that may temporarily exist on a recipient’s computer to facilitate the stream and are for all practical purposes useless (apart from their role in facilitating the single performance) and most likely unknown to the recipient simply do not qualify. Similarly, a stream should not be considered a DPD as that term is presently defined by 17 U.S.C. 115(d), because it most likely does not result in “a specifically identifiable reproduction by or for any transmission recipient of a phonorecord.” The Office recognizes that the SIRA proposes to amend the definition of DPD to specifically incorporate streaming, but such an amendment is problematic because a DPD is generally understood—and should be understood—to be a distribution in and of itself. Characterizing streaming as a form of distribution is factually and legally incorrect and can only lead to confusion in an environment where the concept of distribution by means of digital transmission is already the subject of misguided attacks.⁽⁶⁾ The Office therefore suggests that the SIRA’s proposed section 115(e) apply to both digital phonorecord deliveries (which would not include streaming) and streaming (as a form of transmission distinct from digital phonorecord deliveries), and that the definition of “stream” be reexamined in light of the foregoing discussion. The Office does, however, support the SIRA’s conforming amendment to subparagraphs 115(c)(3)(C) and (D) that deletes the reference to reproductions or distributions of phonorecords “incidental” to a transmission. This undefined term which lacks any legislative explanation has been the source of much confusion and has prevented the establishment of rates for these actions.

Additionally, we note that the SIRA resolves complaints by online music services about what they characterize as “double-dipping” in one context, providing for a royalty-free license for intermediate copies in the context of noninteractive streaming, but does not resolve other situations involving arguably duplicative payments demanded by copyright holders’ representatives for both the performance as well as the reproduction and distribution rights when a musical work is delivered by a mechanism which is not clearly solely a distribution or a performance. Although these other situations involve important issues, it is not necessary to resolve them at this time to make the SIRA an effective piece of legislation. Its absence from the SIRA may even prompt the interested parties to resolve it on their own. In fact, because the resolution of that issue is so difficult due to the positions taken by music publishers and performing rights organizations, it is actually a virtue of the SIRA that it defers resolution of that intractable issue to another day.

Designated Agents

1. Conceptually

As the Register of Copyrights has previously testified, collective administration of the copyrights in musical works has proven successful both domestically in the context of the American Society of Composers, Authors and Publishers (“ASCAP”), Broadcast Music, Inc. (“BMI”) and SESAC, Inc.’s administration of performance rights, and internationally for both performance as well as reproduction and distribution rights.⁽⁷⁾ The three domestic performing rights societies collectively are able to license public performances of virtually all nondramatic musical works and do so on a blanket basis. Currently, no similar mechanism exists with respect to the reproduction and distribution of phonorecords of nondramatic musical works, because the main licensing agent for these rights—the Harry Fox Agency, Inc. (“HFA”)—is unable to license a significant percentage of these works.

The SIRA creates this type of collective licensing structure for online music services to obtain the digital reproduction and distribution rights for musical works through the use of designated agents. It relieves licensees of the difficulties in locating someone who is authorized to license the reproduction and distribution of a particular song. The Office supports this licensing structure, and notes the following features that will help ensure its effectiveness.

Digital music services need to be able to obtain licenses to cover all the musical works that they wish to make available. The SIRA addresses this issue by including a default provision that grants statutory authority to the General Designated Agent (“GDA”) to license any works not specifically represented by an additional designated agent. Since each agent is required to make available a list of the musical works it is authorized to license for digital uses and any works not affirmatively identified may be presumed to be covered by the GDA’s license, a licensee is not only assured that it has the ability to secure rights to all musical works, but it also has the necessary information to determine from whom to secure rights for a particular work as well.

It is also important that a licensee should not have to secure licenses from an unmanageable multiplicity of designated agents in order to make available all of the works it desires; otherwise the efficiency of the blanket licensing approach is undercut. By limiting additional designated agents to those who represent at least a significant percentage of relevant market share, the SIRA avoids the potential for the proliferation of designated agents.

2. Logistical Issues

The creation and administration of designated agents necessarily raises a number of logistical issues, including: the process by which to select the General Designated Agent; funding sources for the designated agents and their databases; copyright owners’ selection of a designated agent to administer the digital reproduction and distribution rights for their works; designated agents’ communication to potential licensees of their available catalogues and licensing procedures; licensees’ use of the agents’ databases; royalty reporting and compliance procedures; disclosure and use of royalty data; the default administration procedures should any designated agent cease operations; royalty dispute resolution; and disposition of unclaimed royalty funds.⁽⁸⁾ In order to create a licensing structure that can remain sufficiently flexible to adapt to changing technologies and the necessary conforming changes to business platforms, it would be helpful for the legislation to focus on the legal rights of various parties, and leave the majority of the logistical issues to regulatory action.

Additionally, the Copyright Office has some concerns regarding designated agents’ authority to collect and expend administrative fees. The SIRA appears to give designated agents too much discretion to use these fees - and even royalties collected under the license - to inappropriately fund tangential activities. The Office believes that the designated agents should be permitted to use such moneys only for activities directly related to licensing music works under section 115 and the collection and distribution of royalty fees. Administrative fees collected from licensees should not be used for other purposes, such as “industry negotiations, rate setting proceedings, litigation, and legislative efforts,” as provided in proposed subparagraph115(e)(9)(D), and it is also questionable whether it is appropriate to apply royalty collections to those activities, rather than simply distribute those royalties to copyright owners after deducting the actual costs of collecting and distributing the royalties.⁽⁹⁾ Consideration should be given to limiting the use of the administrative fees, and perhaps the royalties as well, for “licensing administrative costs” as defined in proposed subparagraph 115(e)(15)(G). Moreover, while we understand the reasons why licensees might be expected to share in the costs of establishing the General Designated Agent’s infrastructure for licensing and royalty collection and distribution, we do not understand the rationale for the SIRA’s apparent requirement that licensees pay for the establishment and maintenance of additional designated agents as well. See proposed subparagraph 115(e)(12). Furthermore, we have some concerns that the designated agents seem to be the sole judges with respect to the auditing of whether a licensee has underpaid an agent. If a designated agent determines that a licensee has underpaid royalties by 10 percent or more, the licensee must bear the cost of the designated agent’s royalty compliance examination. There are obvious problems with an arrangement that give the designated agent the sole discretion to make such a determination. The regulatory provisions with respect to other compulsory licenses entrust those determinations to independent auditors, which seems to be a more appropriate structure. As part of the refining of the draft SIRA, the Office would suggest that the issues of cost sharing. administrative fees and auditing either be more fully fleshed out in the legislation or be subject to a regulatory process and oversight.

Royalty Rates

The SIRA establishes a royalty-free rate for the making of server and other intermediate copies necessary to facilitate noninteractive webcasting. As the Register of Copyrights has previously testified,⁽¹⁰⁾ intermediate copies made in the course of streaming a licensed public performance of a musical work should be subject either to an exemption or to a statutory license. The Office believes that the SIRA’s proposal to create a royalty-free compulsory license to address this situation is a major step in the right direction, primarily because we understand that several of the interested parties have preliminarily agreed to this term and we believe it is a reasonable solution which resolves the “double-dipping” scenario at least in this context. However, we believe that a less burdensome and equally effective approach would be to grant a statutory exemption for this activity. Establishing an administrative apparatus and charging an administrative fee for the issuance of a royalty-free license would offer little or no benefit over an exemption, while creating costs and burdens for both licensees and the designated agent.

The SIRA appropriately assigns responsibility for rate setting to the Copyright Royalty Board (“CRB”). It is important that both the SIRA and the parties recognize that the CRB has discretion to determine that some statutorily licensed uses, such as the reproduction of intermediate copies for interactive streaming, may have a value of zero depending on the given context and evidence presented. Similarly, the CRB should be at liberty to establish different rates for various digital uses of works licensed pursuant to this new compulsory license.

Another key component to ensure the effectiveness of any legislation is to make the acquisition of a compulsory license independent of the status of rate setting proceedings. In other words, even if an interim or final rate for a particular digital use of musical works has not been established, the music services must be able to obtain a license and the corresponding legal certainty for that use if they are to compete effectively with illegal distribution. By providing that a license shall be effective upon the filing of an application, while also providing for the setting of interim rates and for retroactive adjustments once a final rate has been set, the SIRA accommodates the needs of music services and music publishers.

Finally, the SIRA appears to omit a provision governing one of the most significant and necessary aspects of any blanket licensing scheme: there is no provision that addresses how royalties are to be distributed by designated agents to copyright owners.⁽¹¹⁾ Clearly, a designated agent should not have unfettered discretion to determine how the royalties it collects should be allocated among copyright owners. The statute should prescribe guidelines to ensure that royalties are distributed in a fair and equitable fashion, giving each copyright owner the royalties to which it is entitled based on the uses licensees make of that copyright owner’s works. It may be appropriate to delegate responsibility for crafting such guidelines to the Register of Copyrights or the Copyright Royalty Board, but the statute should address this issue in some respect. We note that the statutory license in section 114 also offers no guidance as to how royalties should be distributed among copyright owners, and as a result, the Librarian of Congress had to issue regulations, as part of the Copyright Arbitration Royalty Panel rate-setting process, governing SoundExchange’s distribution of royalties.⁽¹²⁾

Conclusion

From the information the Copyright Office has received thus far, the SIRA appears to be a productive step forward in modernizing section 115 of the Copyright Act for the digital age. Although there are undoubtedly many drafting subtleties to be vetted and logistical issues to be addressed or referred to the regulatory process, the Office supports the fundamental concepts on which the SIRA is based. We are especially encouraged that the SIRA is based upon principles agreed to by both music publishers and online music services, and we commend both sides for the progress they have made in overcoming what once seemed to be insuperable obstacles to reaching a workable and beneficial solution. While we understand that some obstacles to complete agreement remain, we encourage the parties to resolve all outstanding differences and we encourage the Subcommittee to complete the process of crafting legislation based on the working draft of SIRA that will make fair and efficient licensing of musical works for online services a reality.

As always, the Copyright Office welcomes the opportunity to assist this Subcommittee as it completes its work on this important issue.

1. For a detailed account of these difficulties as well as a comprehensive history of the section 115 compulsory license, please refer to the Register of Copyrights’ written statements to this Subcommittee on June 21, 2005 and March 11, 2004. See Oversight Hearing on “Copyright Office Views on Music Licensing Reform”: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the House Comm. on the Judiciary, 109th Cong. (2005) (statement of Marybeth Peters, Register of Copyrights) (available at http://www.copyright.gov/docs/regstat062105.html); Section 115 of the Copyright Act: In Need of an Update?: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the House Comm. on the Judiciary, 108th Cong. (2004) (statement of Marybeth Peters, Register of Copyrights) (available at http://www.copyright.gov/docs/regstat031104.html). See also Music Licensing Reform: Hearing Before the Subcomm. on Intellectual Prop of the Senate Comm. on the Judiciary, 109th Cong. (2005) (statement of Marybeth Peters, Register of Copyrights) (available at http://www.copyright.gov/docs/regstat071205.html). These statements also describe the Copyright Office’s involvement with inter-party negotiations on these matters.

2. We are aware that the recording industry has expressed an interest in amending section 115 to address issues relating to licensing of musical works in physical formats. Whether or not the amendments sought by the recording industry are worthy of consideration, it would be a mistake to jeopardize the progress that has been made in resolving issues relating to online music licensing by tying it to the unresolved issues relating to physical formats.

3. Specifically, we understand that the draft SIRA is based on concepts discussed and tentatively agreed to by the National Music Publishers’ Association (“NMPA”) and the Digital Media Association (“DiMA”). However, we recognize that because these organizations have apparently not reached agreement on all relevant issues and others have yet to provide their input, it may be premature to conclude that the SIRA represents a solution acceptable to all stakeholders.

4. That is, all musical works that have been distributed in the form of phonorecords to the public in the United States under the authority of the copyright owner. The SIRA would not alter the current provision in section 115 that limits the scope of the compulsory license to musical works that have already been recorded and released.

5. As defined in SIRA, a “limited download” is “a digital phonorecord delivery of a sound recording of a musical work that is only available for listening for (i) a definite period of time (including a period of time defined by ongoing subscription payments made by an end user); or (ii) a specified number of times.”

6. See, e.g., Brief of Amici Curiae Computer & Communications Industry Association and US Internet Industry Association in connection with Defendant's Motion to Dismiss the Complaint, Elektra Entertainment Group, Inc. v. Barker, No. 05 CV 7340 (S.D.N.Y., filed Feb. 24, 2006).

7. Collective administration has also proven successful with respect to the section 114 statutory license for sound recordings. The section 114 license is slightly different from the proposed section 115(e) license in that the former is a true statutory license wherein SoundExchange simply administers all royalties paid for this license, and the latter would be a compulsory license whereby the statute grants the authority to and mandates designated agents to issue the relevant licenses, albeit subject to statutory requirements and rates set by the Copyright Royalty Board.

8. In the current draft of the SIRA, it is unclear whether the “reasonably diligent” search a designated agent must make for copyright owners of unclaimed funds, see proposed subparagraph 115(e)(11)(B)(i), would require more than “reasonably diligent efforts to publicize the existence of the unclaimed funds and the procedures by which copyright owners may claim such funds from the designated agent.” See proposed subparagraph 115(e)(11)(B)(ii)(I). As the Subcommittee knows, current discussions regarding possible legislation addressing orphan works would require users of orphan works to engage in a reasonably diligent search in good faith to locate the owner of the infringed copyright in order to enjoy the benefit of the proposed limitation on remedies. It may not be unreasonable to impose a similar requirement on designated agents who have collected royalties belonging to unlocatable copyright owners.

9. It is also unclear what relationship, if any, there is between the activities provided in proposed subparagraph 115(e)(9)(D) and the “other administrative costs” defined in proposed subparagraph 115(e)(15)(J). It is possible that proposed subparagraph 115(e)(15)(A) means that the fees charged to licensees might be used in part to fund those “other administrative costs.”

10. Section 115 of the Copyright Act: In Need of an Update?: Hearing Before the Subcomm. on Courts, the Internet, and Intellectual Property of the House Comm. on the Judiciary, 108th Cong. 22 (2004) (statement of Marybeth Peters, Register of Copyrights) (available at http://www.copyright.gov/docs/regstat031104.html).

11. It is also unclear how a licensee would allocate royalty payments among designated agents, if additional designated agents are certified under proposed subparagraph 115(e)(9)(C). While the mechanism for allocation might be simple if royalties continue to be calculated as a “penny rate”—e.g., the current royalty for each phonorecord delivered is 9.1 cents—the method of allocation would be unclear if royalties are set on a basis such as a percentage of the music service’s revenues, a basis that both the current section 115 and the proposed revision to section 115 appear to (and ought to) permit. If a digital music service is required to pay a royalty of x percent of its revenues, how would it determine what percentage of that royalty is to be paid to each designated agent?

12. See Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings, 63 Fed. Reg. 25394, 25412, 25414 (May 8, 1998); see also Recording Indus. of Am. v. Librarian of Congress, 176 F.3d 528, 531, 535 (D.C. Cir. 1999). Not only does section 114 not set forth any guidelines regarding allocation of royalties by the collective that receives the royalties, it is also silent with respect to how royalties are to be collected and distributed to copyright owners. The mechanism of one or more collectives to receive royalty payments and disburse them to copyright owners was a necessary creation of the regulatory process in the Copyright Office and the Library of Congress.