Statement of Marybeth Peters
The Register of Copyrights
before the
Subcommittee on Courts, the Internet, and Intellectual Property
Committee on the Judiciary

United States House of Representatives
107th Congress, 2nd Session

June 13, 2002

CARP (Copyright Arbitration Royalty Panel) Structure and Process

Thank you, Mr. Chairman. I am pleased to appear today before the Subcommittee and offer testimony on the structure and process of the Copyright Arbitration Royalty Panels (CARPs). As you are aware, the CARPs have been operating under the auspices of the Copyright Office and the Library of Congress since the Congress eliminated the Copyright Royalty Tribunal in 1993. Today's hearing is to consider how effective the CARP process has been to this point and, as you will hear from other members of today's witness panel, ways in which it can be improved.

I am dividing my comments into three sections. First, I will give an overview of how the statutory licenses of the Copyright Act have been administered since 1978. Second, I will discuss certain shortcomings of the existing CARP system that have been identified since 1993, and third I will offer some suggestions as to how royalty distribution and rate adjustment proceedings could be conducted in ways that might eliminate many of the shortcomings of the current system.

Overview of Copyright Statutory License Royalty Distribution And Ratemaking

The history of the Copyright Office's and Library of Congress's involvement in the setting and adjusting of royalty rates and making royalty distributions to copyright owners is linked to the history and evolution of the statutory licenses in the copyright law. The general rule in copyright law is that the owner of a copyrighted work has the exclusive right to determine how that work is to be used. Anyone other than the owner wishing to use a copyrighted work must either obtain the owner's permission, be eligible for a statutory license, or qualify for free use under an exception. A statutory license allows certain uses of certain copyrighted works provided that the user pays the royalties and observes the terms that are set forth in the law.

1. The 1909 Copyright Act

There was only one compulsory license in the 1909 Copyright Act. What is generally referred to as the "mechanical license" which allowed a person to make a sound recording of a song that had been recorded and copies of that recording had been distributed to the public in the United States, so long as that person paid the owner of the musical composition 2 cents per copy. The royalty rate was set by statute and was not subject to change. The 2 cents rate lasted from 1909 to 1978.

Because the rate was set by statute, and because the user paid the owner directly, there was no need for a government agency either to set the mechanical rate or to engage in a distribution of the mechanical royalties.

2. The 1976 Copyright Act

At the time it was drafting the 1976 Copyright Act, Congress realized that the mechanical license was flawed because a statutorily-set, never-changing royalty rate was inflexible and did not provide fair compensation. Furthermore, Congress was planning to add more statutory licenses to the law. These new statutory licenses would be in the areas of cable retransmissions of over-the-air broadcast signals, jukebox performances of music, and the use of published musical works and published pictorial, graphic and sculptural works by noncommercial educational broadcasters. Congress saw that there was a need for an administrative body that would be able to adjust the rates of these statutory licenses periodically. In addition, Congress saw a need for an administrative body to act as the distributor of the royalties collected from users in situations where there were many copyright owner claimants to the same funds and there were controversies as to how much each claimant was entitled to receive.

The new administrative body would have responsibility for adjusting the cable, jukebox, mechanical, and noncommercial educational broadcasting royalty rates, and for distributing the cable and jukebox royalties to the proper claimants. Cable and jukebox royalties would be deposited with the Copyright Office, subject to the distribution decisions of this new administrative body. Although the Senate and House copyright subcommittees agreed that they needed to create a new administrative body, they were not sure of the structure for the new body. At first, the Senate bill created a tribunal composed of a three-member panel that would reside within the Copyright Office. The members would be appointed by the Register of Copyrights from the membership of the American Arbitration Association or a similar organization. The Register would convene the panel each time a controversy was found to exist concerning the distribution of royalties or the adjustment of royalty rates.

While the Congress was considering the proposed Senate version for the new administrative body, the Supreme Court handed down its decision in Buckley v. Valeo, 424 U.S. 1 (1976). In Buckley, the Court considered, inter alia, the constitutionality of the method of appointing members to the Federal Election Commission ("FEC"), an agency residing in the legislative branch. The law establishing the FEC provided that the President pro tempore of the Senate and the Speaker of the House would appoint a majority of members of the FEC. The Supreme Court ruled that this was unconstitutional because some of the FEC's functions were executive branch functions and consequently persons exercising those functions "must be appointed in accordance with article II, sec. 2, clause 2 of the Constitution, the Appointments Clause." 424 U.S. at 126. The Appointments Clause states that the President shall nominate, with the Senate's advice and consent, all "Officers of the United States," but the Congress may vest the appointment of inferior officers as it deems proper. When the Buckley opinion was issued, some of the members of Congress expressed constitutional concerns over the plan to have the Register of Copyrights, an employee of the legislative branch, appoint members of the new tribunal. Wishing to avoid placing the new structure under a constitutional cloud, the members of the subcommittees of both houses chose instead to create a completely independent regulatory agency, the Copyright Royalty Tribunal, whose members would be appointed by the President with the advice and consent of the Senate.

3. The Copyright Royalty Tribunal, 1977-1993

The Copyright Royalty Tribunal existed from November, 1977 to December, 1993. Its jurisdiction changed during those years. In 1988, Congress created a new statutory license to govern retransmission of over-the-air television signals to home satellite dish owners. Also, in 1988, Congress moved to eliminate the jukebox compulsory license in order to comply with the Berne Convention and by 1990, there were sufficient private license agreements to allow for the elimination of the jukebox compulsory license from the Copyright Act and the Tribunal's jurisdiction. 1

In 1992, Congress created a statutory royalty obligation for the manufacture and importation of digital audio recording technology (DART).

Even with these new responsibilities, critics of the Tribunal believed that there was insufficient work. In 1990, Congress reduced the number of Commissioners from five to three, after concluding that three Commissioners were sufficient to handle the workload. Copyright Royalty Tribunal Reform and Miscellaneous Pay Act of 1989, Pub.L.No. 101-319, 104 Stat. 290 (1990). Also, Congress established a procedure for adjusting the satellite carrier statutory license rates in 1992 by an ad hoc arbitration panel, thereby undercutting the Tribunal's otherwise exclusive jurisdiction over royalty rate adjustment and distribution proceedings.

4. The Copyright Royalty Tribunal Reform Act of 1993

In 1993, Congress passed the Copyright Royalty Tribunal Reform Act, observing that "with 15 years' experience, a clear record of the Tribunal's workload has been established. That workload is episodic and not sufficient to justify three full-time highly paid Commissioners." H.R. Rep. No. 103-286, at 9 (1993).

The House Subcommittee recalled that the original proposal for a government body to oversee the statutory licenses was for ad hoc arbitration panels convened by the Register of Copyrights. Id. The Subcommittee noted that the one experience with arbitrators setting royalty rates, the 1992 adjustment of the satellite carrier compulsory license rates, was positive. Id. at 11. Therefore, the Subcommittee believed that creating what was originally proposed in 1976-ad hoc arbitration panels-would avoid the apparent waste of having full-time Commissioners perform part-time work. The Subcommittee also believed that placing ad hoc arbitration panels under the supervision of the Register of Copyrights and the Librarian of Congress made "good sense," citing the fact that "the Copyright Office and the Library of Congress already have considerable involvement in the administration of the compulsory licenses and in the work of the Tribunal." Id. This "considerable involvement" referred to the Copyright Office's Licensing Division which receives the payment of cable, satellite and DART royalties, and the Register's Office which, through the Register, the General Counsel and the staff of the General Counsel, promulgates regulations related to the statutory licenses.

The remaining concern was whether establishing arbitration panels in the Library of Congress was constitutional. Congressman William Hughes, the chairman of the House Subcommittee, asked the Congressional Research Service ("CRS") for its advice. CRS stated that the panels would be constitutional if the person ultimately responsible for the panels' decision was a presidential appointee or someone who owed his or her appointment to a presidential appointee. Therefore, the panels could be established under supervision of the Librarian of Congress, a presidential appointee, or the Register of Copyrights, a person owing his or her appointment to a presidential appointee. Letter from CRS to the Honorable William Hughes, February 17, 1993, at 9-10.

Although the House Subcommittee received CRS' opinion that either the Register or the Librarian could be the supervising official, the House Subcommittee chose to make the Librarian the supervising official. There is no record as to why this choice was made. There is also nothing in the record to suggest that Congress saw any added value in an additional layer of review. The only concern voiced was that a presidential appointee, or someone who answers to a presidential appointee, needed to be placed at the head of the CARP system to satisfy the Supreme Court's ruling in Buckley v. Valeo.

5. The Current CARP System

As discussed above, the current CARP system consists of ad hoc arbitration panels that recommend the royalty rates and distribution of royalty fees collected under certain of the statutory licenses and set some of the terms and conditions of some of the statutory licenses. Each CARP is selected for a particular proceeding (examples: a rate adjustment for the cable statutory license; a distribution of DART funds) and has up to 180 days to deliver its recommendation for the rate adjustment or distribution, as the case may be. The highlights of the CARP system are as follows:

Voluntary Negotiation Period: Once it is determined that a controversy exists as to the adjustment of royalty rates or the distribution of royalty fees, as the case may be, the Office designates a period for voluntary negotiation among the parties to resolve their differences. Those parties unable to reach an agreement during this period proceed to a CARP.

Direct Cases and Discovery: Every participant in a CARP proceeding must submit a written direct case. The written direct case is the principal piece of evidence put forward by a participating party in that it sets forth all the evidence and reasons as to what the party believes the rates or distribution should be. The Office then conducts a limited discovery period during which parties may request from each other documentation that supports the assertions they make in their written direct cases.

Selection of the Arbitrators: Once the discovery phase is concluded and the proceeding is ready for hearing, the Librarian selects two arbitrators from a list of designated arbitrators whose names are obtained from arbitration associations who then select a third arbitrator from the list to serve as their chairperson. If the two arbitrators cannot agree, then the Librarian selects the chairperson (which has never happened).

Testimony and Hearings: Once the arbitrators begin their 180 period, they consider all the testimony submitted by the parties in their written direct cases. Oral hearings of the written direct cases are typically conducted (although they are not required), and the parties often submit rebuttal testimony. At the conclusion of the hearings, the parties submit their proposed findings of fact and conclusions of law wherein they argue to the CARP how it should rule. Often, the CARP will permit oral argument on the proposed findings of fact and conclusions of law.

The CARP Report: At the conclusion of the 180-day period and after considering the evidence and testimony presented, the CARP delivers its written recommendation to the Librarian of Congress as to what the royalty rates or the distribution should be. In making the recommendation, the CARP must articulate the reasons for its recommendations and the evidence that supports its conclusions.

Review of the CARP Report: Upon receipt of the CARP report, the Librarian is given 90 days in which to either accept the determination of the CARP or to reject it. The Librarian may reject the recommendation only if he or she determines that it is arbitrary or contrary to the provisions of the Copyright Act. The Register of Copyrights is directed to advise the Librarian on his or her decision. If the Librarian rejects the CARP's recommendation, there is an additional 30 days for the Librarian to issue a final order setting forth the rate adjustment or distribution, as the case may be.

Appeal of the Librarian's Order: Any party with an interest in the royalty rates or distribution determined by the Librarian may appeal the decision within 30 days of its publication in the Federal Register. Appeal must be made in the United States Court of Appeals for the District of Columbia Circuit.

Since the abolition of the Copyright Royalty Tribunal in 1993, the Copyright Office and the Library have conducted nine full proceedings that have resulted in delivery of CARP reports. Numerous other proceedings have settled at various stages, and the Office has several more proceedings currently pending. Six of the Librarian's decisions were appealed and in each instance the Librarian's determination was upheld. 2

Shortcomings of the Carp System

Mr. Chairman, you will undoubtedly hear testimony from the other witnesses on today's panel as to the shortcomings and complaints of the current CARP system. In this section, I highlight some of the difficulties we have observed in the near decade of administering the system.

1. Costs.

The arbitrators selected to serve on a particular CARP must, of course, be paid. Arbitrators are typically compensated at between $200 and $400 an hour for their work which, in a hotly contested proceeding involving many parties and large amounts of testimony, can add up to considerable sums. In the case of a royalty distribution proceeding, the arbitrators are paid from the royalty funds to be distributed. In the case of a royalty adjustment proceeding where there are no royalties collected by the Copyright Office, the participants must pay the arbitrators out of their own pockets. There is no question that in some rate adjustment proceedings, some interested parties cannot afford the cost of participating. While the Copyright Office has considered allowing these parties to participate free of charge, this would certainly draw objections from the participants in the proceeding who would foot the bill.

On an institutional scale, CARP proceedings are also very costly. They require considerable amounts of time of Copyright Office and Library personnel who must conduct various phases of the proceedings, such as discovery relating to the written direct cases and review of the CARPs' decisions. In the recent CARP rate-setting proceeding for webcasting, the cost of the arbitrators alone exceeded the entire annual budget of the Copyright Royalty Tribunal in its last year of existence.

2. Lack of Stability and Predictability of Results

Each panel of arbitrators is selected for one particular case. The decisions they make are for the purpose of deciding that one case and not for establishing lasting precedent. Furthermore, although the Librarian attempts to select arbitrators who have served well on previous panels, the individuals almost always vary from one panel to the next. Parties who are dissatisfied with one panel are tempted to return and try a different panel. Therefore, there is a lack of stability and predictability in the process, and a lack of reliable precedent upon which the parties can base the settlement of their differences.

3. Institutional Expertise

Although copyright rate setting or adjustment and distribution proceedings often involve considerable amounts of money, the fact remains that the statutory licenses and the CARP system occupy an esoteric area of the law. We have found it very difficult to find arbitrators that have any familiarity with copyright law, let alone the complex statutory licenses in that law and the unique procedures of the CARPs. Those that do have some copyright law experience typically cannot be selected due to a financial or other conflict of interest. The result is that we are forced to select arbitrators that, while bright and capable, lack knowledge and understanding of the workings and details of the copyright laws and the CARP system. This lack of expertise puts a considerable burden upon the Register and the Librarian to correct errors and oversights made by CARPs during the course of the proceeding, a burden which is exacerbated by the short review period granted the Register and the Librarian by the statute. Of the nine CARP reports which the Librarian has reviewed, only three have been acceptable. Several of the rejected reports have required considerable effort in preparing a final order.

Because of the ad hoc nature of the CARPs, there is no institutional expertise on any given panel. As one frequent attorney participant in the CARP process recently informed the Office, the most scary day of a CARP proceeding is the first day when one encounters the level of competence of panel members that can be expected for the next six months.

Recommendations

Mr. Chairman, it is clear that the CARP system is far from perfect. I do believe, however, that the decision making produced by the current system is superior to that produced by the Copyright Royalty Tribunal during its tenure. I do not disparage the work of the Tribunal as they did, in most circumstances, the best they could with the resources available. But I do think that a simple return to the Tribunal system would be a mistake.

Attached to this written statement is a report prepared four years ago by the Copyright Office at the request of this Subcommittee. The report offers five different options to improve the manner in which copyright license royalty fees and rates are resolved. The options are:

Reforming the Current System: The Copyright Office proposed eleven amendments to the Copyright Act to address the CARP's most serious flaws. They include making the Register the supervising official; lengthening the time of each proceeding; expanding the use of paper proceedings to reduce the costs of hearings; reducing the number of arbitrators for small claims or having small claims resolved by staff; and capping the arbitrators' fees.

Replacing Arbitrators with Administrative Law Judges: Under this option, administrative law judges supplied by the Office of Personnel Management would handle the royalty ratemaking and distribution cases within the Copyright Office.

Replacing Arbitrators with Presiding Officers: Under this option, arbitrators would be replaced with presiding officers who, while not administrative law judges, would perform the same functions. The precise features of this system would be established by Congress as a stand-alone system administered by the Register and not the Office of Personnel Management.

Creating a Board Within the Copyright Office: Under this option, a Board would be established within the Copyright Office that would take on more authority than presiding officers, be more autonomous, and render final agency decisions.

Creating an Independent Regulatory Agency: Under this option, a new independent regulatory agency, similar to the Copyright Royalty Tribunal but with some improvements, would be created.

The attached report discusses fully the strengths and weaknesses of each of the five options.

In 1998, Mr. Chairman, you introduced H.R. 3210, the "Copyright Compulsory License Improvement Act." The bill would have amended chapter 8 of the Copyright Act to establish a Copyright Royalty Adjudication Board ("CRAB") consisting of one full-time chief administrative copyright judge and up to four part-time administrative copyright judges selected by the Librarian of Congress. The judges would serve five year terms and be compensated at a government salary level. The Board, while within the Copyright Office, would be wholly independent and would have full authority to determine all statutory license rates and royalty distributions. The Copyright Office, however, could present formally its views to the Board on any matter, which the Board could accept or reject. Appeal of final Board decisions would be to the United States Court of Appeals for the Federal Circuit.

Although I have concerns about some aspects of the proposals contained in H.R. 3210, it was a positive first step in addressing the issues. The Copyright Office would be pleased and interested in working with the Subcommittee, and with the parties for reform of the current system to produce a better model. In reforming the CARPs, there are several key elements that need to be addressed. First, the best way to produce well-reasoned decisions is to create a system that permits the Copyright Office and the Library to hire full-time employees who are well-versed and experienced in the copyright law, the complexities of the statutory licenses, and who are experienced at conducting administrative proceedings. As discussed above, while we have hired capable arbitrators in CARP proceedings, it has been impossible to find arbitrators who are intimate with the details of the copyright law, the statutory licenses and the distribution/rate adjustment process. Having the same full-time decision makers who adjudicate all rate adjustment and distribution proceedings will not only raise the level of institutional expertise, but will produce balanced and stable results. Placing those decision makers in the agency with expertise in copyright and the statutory licenses will ensure that their decisions are well-reasoned.

Second, although the responsibilities of rate making and royalty distribution has risen in recent years due to an increase of compulsory licenses in the Copyright Act, we recognize that there are still periods of inactivity where no proceedings are being conducted. One of the criticisms of the Copyright Royalty Tribunal was that Commissioners were still compensated during such periods thereby effectively being paid for little or no work. Consideration should be given to whether the Register should have discretion to assign additional copyright work to the Copyright Office-based decision makers during these periods of inactivity.

Third, a new system should permit the Register a substantive role during the process to address important policy and substantive matters that might arise during a rate adjustment or royalty distribution. Whether the role is one of having input into the decision, as was proposed in H.R. 3210, or one of being the final decision maker is an issue that should be explored.

Finally, there is the matter of costs. Hiring full-time employees at government salaries to serve as decision makers will certainly reduce the overall cost of proceedings to the parties, but there remains the question of the source of their funding. Under the current system, for those compulsory licenses for which the Copyright Office collects royalties, the costs of the arbitrators in distribution proceedings are paid for out of the royalty pool. This is an appropriate system that should be retained since those benefitting from the distribution are paying for the cost of the proceeding. However, in those circumstances where the Office does not collect royalties, such as the recent webcasting CARP proceeding, the parties currently pay the costs of the arbitrators. One of the objections to such a payment scheme is that it raises a bar to participation for those who cannot afford to pay the arbitrators. Therefore, I recommend that the salaries of the decision makers in rate adjustments in the new system, where no royalty fees are collected by the Office, be paid from appropriated funds. This would require an additional appropriation for that purpose.

The Copyright Office looks forward to working with the Subcommittee and the interested parties on this important matter. Thank you, Mr. Chairman.

1 A contingent jurisdiction over public performances by means of jukeboxes remains if private jukebox licenses expire and no new license agreements are reached.

2 In one rate adjustment proceeding under 17 U.S.C. 114, the Court of Appeals remanded for further findings a small portion of the Librarian's decision concerning the terms of payment of royalty fees.