[Federal Register: May 8, 1998 (Volume 63, Number 89)]
[Rules and Regulations]
[Page 25394-25415]
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LIBRARY OF CONGRESS
Copyright Office
37 CFR Part 260
[Docket No. 96-5 CARP DSTRA]
Determination of Reasonable Rates and Terms for the Digital
Performance of Sound Recordings
AGENCY: Copyright Office, Library of Congress.
ACTION: Final rule and order.
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SUMMARY: The Librarian of Congress, upon recommendation of the Register
of Copyrights, is announcing the determination of the reasonable rates
and terms for the compulsory license permitting certain digital
performances of sound recordings.
EFFECTIVE DATE: May 8, 1998.
ADDRESS(ES): The full text of the public version of the Copyright
Arbitration Royalty Panel's report to the Librarian of Congress is
available for inspection and copying during normal working hours in the
Office of the General Counsel, James Madison Building, Room LM-403,
First and Independence Avenue, SE., Washington, DC, 20540.
FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or
Tanya Sandros, Attorney Advisor, Copyright Arbitration Royalty Panel
(CARP), PO Box 70977, Southwest Station, Washington, D.C. 20024.
Telephone (202) 707-8380. Telefax: (202) 707-8366.
SUPPLEMENTARY INFORMATION:
I. Background
The Digital Performance Right in Sound Recordings Act of 1995
(DPRSRA), Public Law 104-39, 109 Stat. 336, amended section 106 of the
Copyright Act, title 17 of the United States Code, to give sound
recording copyright owners an exclusive right, subject to certain
limitations, to perform publicly sound recordings by digital audio
transmissions. 17 U.S.C. 114. The bill affords certain digital
transmission
[[Page 25395]]
services a compulsory license to perform digital sound recordings
publicly. The purpose of the bill is ``to provide copyright holders of
sound recordings with the ability to control the distribution of their
product by digital transmissions, without hampering the arrival of new
technologies, and without imposing new and unreasonable burdens on
radio and television broadcasters.'' S. Rep. No. 104-128, at 15 (1995).
All non-exempt digital subscription transmission services are
eligible for the statutory license, provided that they are non-
interactive and comply with the terms of the license. The statute
requires that the service not violate the ``sound recording performance
complement,'' <SUP>1</SUP> not publish in advance a schedule of the
programming to be performed, not cause any receiving device to switch
from one program channel to another, include in each transmission
certain identifying information encoded in each sound recording, pay
the royalty fees and comply with the associated terms, and comply with
any recordkeeping requirements promulgated by the Copyright Office.
<SUP>2</SUP> 17 U.S.C. 114(d)(2)(A)-(E) and 114(f)(2)-(5).
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\1\ (7) The ``sound recording performance complement'' is the
transmission during any 3-hour period, on a particular channel used
by a transmitting entity, of no more than--
(A) 3 different selections of sound recordings from any one
phonorecord lawfully distributed for public performance or sale in
the United States, if no more than 2 such selections are transmitted
consecutively; or
(B) 4 different selections of sound recordings--
(i) By the same featured recording artist; or
(ii) From any set or compilation of phonorecords lawfully
distributed together as a unit for public performance or sale in the
United States, if no more than three such selections are transmitted
consecutively: Provided, That the transmission of selections in
excess of the numerical limits provided for in clauses (A) and (B)
from multiple phonorecords shall nonetheless qualify as a sound
recording performance complement if the programming of the multiple
phonorecords was not willfully intended to avoid the numerical
limitations prescribed in such clauses.
17 U.S.C. 114(j)(7).
\2\ See Notice of Proposed Rulemaking, 61 FR 22004 (May 13,
1996); Notice of Proposed Rulemaking, 62 FR 34035 (June 24, 1997).
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The reasonable terms and rates of the section 114 statutory license
are determined by voluntary negotiations among the parties and, where
necessary, compulsory arbitration conducted under chapter 8 of the
Copyright Act, title 17. 17 U.S.C. 114(f).
II. The CARP Proceeding To Set Reasonable Rates and Terms
On December 1, 1995, the Librarian of Congress (Librarian)
initiated the statutorily mandated six month negotiation period within
30 days of the enactment of the DPRSRA, pursuant to section 114(f)(1)
of the Copyright Act, with the publication of a notice initiating the
voluntary negotiation process for determining reasonable terms and
rates of royalty payments. See 60 FR 61655 (December 1, 1995). In the
notice, the Library instructed those parties with a significant
interest in the establishment of the reasonable terms and rates for the
section 114 license to file a petition with the Copyright Office no
later than August 1, 1996, in the event that the interested parties
were unable to negotiate an agreement. Id.
Accordingly, the Recording Industry Association of America (RIAA)
filed a petition with the Copyright Office in which it asked the Office
to initiate an arbitration proceeding pursuant to chapter 8 of the
Copyright Act. After making a determination that the petitioner RIAA
had a significant interest in the proposed CARP proceeding, the
Librarian published a notice setting the schedule for the 45-day
precontroversy discovery period and announcing the date for the
initiation of the 180-day arbitration period. 61 FR 40464 (August 2,
1996). The exchange of documents during the precontroversy discovery
period did not proceed smoothly, requiring the Office to reschedule
portions of the discovery period and vacate the scheduled date for the
initiation of the CARP. See Order in Docket No. 96-5 CARP DSTRA
(September 18, 1996); Order in Docket No. 96-5 CARP DSTRA (November 27,
1996). The Librarian announced the initiation of the 180-day
arbitration period following the conclusion of the discovery period and
the resolution of all pending motions. 62 FR 29742 (June 2, 1997).
The Parties
There are four parties to this proceeding: three digital audio
subscription services (the Services) and the Recording Industry
Association of America (RIAA).
1. The Recording Industry Association of America, Inc. (RIAA)--RIAA
represents a collective, consisting of more than 275 record labels,
established for the express purpose of administering the rights of
these sound recording copyright owners. RIAA represents the interests
of its members who are the copyright owners of more than 90% of all
legitimate sound recordings sold in the United States. Record companies
own the copyrights in the sound recordings.
2. Digital Cable Radio Associates (DCR)--A digital audio service
established in the United States in 1987 by the Jerrold Communications
Division of General Instrument Corporation. Current partners include
Warner Music, Sony Corporation, EMI, Time Warner Cable, Continental
Cablevision, Comcast Cable, Cox Cable, and Adelphia Cable.
3. Digital Music Express, Inc. (DMX)--A digital music subscription
service established in 1986 as International Cablecasting Technologies,
Inc. In 1997, DMX merged into TCI Music, Inc., a publicly traded
company with approximately 80% of its shares held by TCI, Inc.
4. Muzak, L.P.--With roots dating back to 1922, Muzak is America's
oldest background music provider for businesses. In the 1920s and
1930s, Muzak was part of the consumer music market until driven out of
that market by the growing popularity of radio. Muzak remained out of
the market until March, 1996, when it began providing 27 channels of
digital music under the name DiSHCD, as part of Echostar's satellite-
based DiSH Network.
The Position of the Parties at the Commencement of the Proceeding
RIAA, representing the interests of the sound recording copyright
owners, requested a royalty rate set at 41.5% of a Service's gross
revenues resulting from U.S. residential subscribers, or in some
circumstances, a flat rate minimum fee. Report of the Copyright
Arbitration Royalty Panel (Report) para. 33. RIAA also agreed to be
named the single entity to collect, administer, and distribute the
royalty fees. Report para. 184. RIAA proposed additional terms
concerning the timing of payments, statements of accounts, retention of
records, and audits. Report para. 33.
The three digital audio subscription services requested a royalty
rate ranging from a low of 0.5% to a high of 2.0% of gross revenues
resulting from U.S. residential subscribers, and unanimously opposed a
flat rate minimum fee. Report Paras. 34-36, 172. The Services proposed
that a single private entity or a government agency be named for
purposes of administering the royalty fees, but proposed submitting
payments on a quarterly basis rather than a monthly basis. Report Paras.
184-185. In addition, the Services proposed terms concerning
recordkeeping and audits, confidentiality of business records, and
payment terms for distributing license fees among featured artists and
nonfeatured musicians and vocalists.
[[Page 25396]]
The Panel's Determination of a Reasonable Rate
The Panel evaluated the four statutory objectives, <SUP>3</SUP> and
their component parts, in light of the evidence and determined that the
digital audio subscription services should pay a royalty fee of 5% of
gross revenues resulting from U.S. residential subscribers. Report Paras.
196, 200. This rate represents the midpoint of the range of possible
license rates that the Panel considered appropriate (but not the
midpoint of the parties' proposals). The Panel further concluded that
there was no reason to impose a minimum license fee on the Services at
this point, and consequently, it rejected RIAA's proposal to set a
minimum fee based on a flat rate. Report para. 204.
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\3\ (1) to make determinations concerning the adjustment of
reasonable copyright royalty rates as provided in sections 114, 115,
and 116, and to make determinations as to reasonable terms and rates
of royalty payments as provided in section 118. The rates applicable
under section 114, 115, and 116 shall be calculated to achieve the
following objectives:
(A) To maximize the availability of creative works to the
public;
(B) To afford the copyright owner a fair return for his creative
work and the copyright user a fair income under existing economic
conditions;
(C) To reflect the relative roles of the copyright owner and the
copyright user in the product made available to the public with
respect to relative creative contribution, technological
contribution, capital investment, cost, risk, and contribution to
the opening of new markets for creative expression and media for
their communication;
(D) To minimize any disruptive impact on the structure of the
industries involved and on generally prevailing industry practices.
17 U.S.C. 801(b)(1).
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In making this determination, the Panel followed the precedent set
in prior rate adjustment proceedings conducted by the former Copyright
Royalty Tribunal and other CARP panels which, as a first step,
determined a range of possible rates after considering different
proposed rates based on negotiated licenses or analogous marketplace
models. Report para. 123. See also, 1980 Adjustment of the Royalty Rate
for Coin-Operated Phonorecord Players, 46 FR 884 (January 5, 1981), and
the 1997 Rate Adjustment of the Satellite Carrier Compulsory License
Fees, 62 FR 55742 (October 28, 1997). Each party offering a
``benchmark'' rate contends that the rate it offers represents the cost
for similar products in analogous markets. The Panel considered three
benchmarks, weighing each in light of the record evidence to determine
whether the proposed models shed light on how the marketplace would
value a performance license in sound recordings. Once the Panel
identified the useful models, it used the corresponding rate
information to craft a range of potential royalty rates for the section
114 license, then chose the rate within the range which would further
the stated statutory objectives.
RIAA and the Services proposed rates based on three distinct
marketplace models in which rates are set through arms-length
negotiations. Report para. 124. The Services proposed two benchmarks
for consideration by the Panel: Negotiated license fees for a sound
recording performance right and the license fees the Services pay the
performing rights organizations for use of the underlying musical
works. RIAA put forth a single model for the Panel's consideration:
Cable television network license fees. The Panel found the Services'
models helpful in setting the rate for the digital performance right,
but rejected the RIAA model for the reasons stated herein.
Both RIAA and the Services seemed to agree that the best proxy for
reasonable compensation is a marketplace rate. The Panel, however,
noted that the DPRSRA instructs the CARP to set reasonable rates, which
need not be the same as rates set in a marketplace unconstrained by a
compulsory license. In support of its interpretation, the Panel cited
the statutory factors which must be considered in setting the rate. See
Report Paras. 10, 124.
The Panel's Evaluation of the RIAA Benchmark
The benchmark proposed by the recording industry analogizes the
cost of programming for cable television networks with the cost of
procuring the right to perform the sound recordings. The analogy,
however, did not withstand scrutiny by the Panel, which reasonably
found that the cable television network license fees model did not
represent rates for an analogous product in a comparable marketplace.
Its conclusion rested on a number of findings which described
analytical deficiencies in the two studies offered in support of the
41.5% proposed royalty rate. Report Paras. 126-150.
The RIAA model proposed using the purchase price of programming for
cable television networks to determine the price the Services would pay
for the right to publicly perform sound recordings, if negotiated in a
free market. RIAA's Proposed Findings of Fact and Conclusions of Law
(PF) para. 62; RIAA Proposed Conclusions (PC) para. 18. RIAA presented
two studies that illustrate the amount of money cable television
networks pay for their programming: (1) The Kagan study,<SUP>4</SUP>
and (2) the Wilkofsky Gruen Associates <SUP>5</SUP> study. RIAA
Exhibits (Exs.) 14 and 15, respectively. Both studies argued that the
analogy between cable television networks and the digital audio
services was apt because the digital audio services and the cable
television networks compete head-to-head for carriage on cable and DBS
systems, and for consumer time and discretionary income. Report para.
130.
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\4\ The Kagan study was prepared by Paul Kagan Associates, a
media research company that tracks and publishes financial data
concerning the media and entertainment industries.
\5\ Wilkofsky Gruen Associates is an economic consulting firm
that specializes in the communications and entertainment industries.
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The Kagan study analyzed data concerning the revenues and
programming expenses of 31 basic cable television networks from the
1985-96 period. It concluded that a cable television network spends, on
average, approximately 40% of its gross revenues for programming. RIAA
Exhibit (Ex.) 14 at 7. The Panel, however, discounted the 40% figure
because it represented the costs of license fees to all copyright
owners, and it included the costs of programming during the start-up
years, when a new cable television network may pay more than 100% of
its revenues in programming costs. Report Paras. 127, 129, 149. Failure
to adjust for these factors made it impossible for the Panel to assess
the costs for the right to publicly perform the sound recordings apart
from the costs of the other copyrighted works which make up the
program.
Their second study, prepared by Wilkofsky Gruen Associates (WGA),
analyzed only cable movie networks because Wilkofsky, the expert for
the study, claimed that the ``pricing characteristics and dynamics'' of
the cable movie networks were comparable in three fundamental ways: The
lack of commercials, the generation of revenues through subscriptions,
and the purchase of programming from third parties. Wilkofsky Written
Direct Testimony (W.D.T.) at 3-5. This study concluded that the cable
movie networks pay a weighted average of 41.5 % of their revenues for
programming that they acquire from outside sources and by analogy, the
Services should pay the same. Id. at 3.
The Panel rejected the conclusion of the WGA study because it
ignored the following fundamental differences in market demand and cost
characteristics between the cable movie networks and the digital audio
services. Report Paras. 133-145.
[[Page 25397]]
1. The study provided no evidence to show that any of the movie
networks directly compete with digital audio services. In fact, when
people watch a movie, they devote their entire attention to the film
for a period of time, and generally, do not repeat the experience with
the same movie. On the other hand, subscribers to digital audio
services choose to listen to the same music again and again while
engaged in other activities. In other words, the subscriber chooses
each service for different reasons, and therefore, they do not
represent choices in the same market. Report Paras. 143, citing
Rosenthal Written Rubuttal Testimony (W.R.T). at 13, Transcript (Tr).
1251 (Rubinstein).
2. The cable movie networks compete against other cable and
broadcast stations for exclusive rights to motion pictures. Exclusive
rights are highly prized, and consequently, command a premium price,
but they are not implicated in the market for digital audio
transmissions. Consequently, the Panel found that RIAA's failure to
adjust for this aspect grossly overstated the value of programming
costs in its cable movie network analogy. Report Paras. 137-142.
3. The Panel further discounted the analogy because RIAA ignored
the promotional benefit that flows to the record companies from the
constant airplay of their sound recordings. Report Paras. 144-145. See
also discussion infra.
The Panel's Determination of Reasonable Terms
In addition to establishing a reasonable rate for the sound
recording performance license, the Panel must also establish reasonable
terms for implementing the license. The Senate Committee Report makes
clear that terms include ``such details as how payments are to be made,
when, and other accounting matters.'' S. Rep. No. 104-128, at 30
(1995).
RIAA and the Services proposed specific terms concerning minimal
fees, payment schedules, late fees, statements of account, and audits.
From these, the Panel adopted the following terms:
1. RIAA shall have sole responsibility for the distribution of the
royalty fees to all copyright holders. Report Paras. 184, 205.
2. The license fee payments shall be due on the twentieth day after
the end of each month, beginning with the month succeeding the month in
which the royalty fees are set. Report Paras. 185, 206.
3. The Services shall make back payments over a 30-month period.
The first back payment, 1/30th of the total arrearage, shall be delayed
for six months. Report Paras. 187, 206(a).
4. A Service shall be subject to copyright liability if it fails to
make timely payments. Liability for copyright infringement shall only
come about for knowing and willful acts which materially breach the
statutory license terms. Report Paras. 188, 206(b).
5. A late fee of 1.5% per month or the highest lawful rate,
whichever is lower, will be imposed from the due date until payment is
received. Report Paras. 189, 206(a).
6. Services shall submit monthly statements of accounts and payment
to RIAA. Only information to verify the royalty payments need be
provided on the monthly statements of account. Report Paras. 190, 205,
207.
7. Safeguards must be established to protect against disclosure of
confidential financial and business information, which includes the
amount of the royalty payment. Access to this information shall be
limited to employees of RIAA, who are not employees or officers of the
copyright owners or the recording artists, for the purpose of
performing their assigned duties during the ordinary course of
employment, and to independent auditors acting on behalf of RIAA.
Report Paras. 191, 208.
8. The digital audio services shall maintain accurate records on
matters directly related to the payment of the license fees for a
period of three years. Report Paras. 192, 209.
9. Interested parties may conduct only one audit of a digital audio
service during any given year. Report Paras. 193, 210(c).
<bullet> Interested parties must file a Notice of Intent to Conduct
an Audit with the Copyright Office. Such notice shall be published in
the Federal Register. Report Paras. 193, 210(a)-(b).
<bullet> RIAA must retain an auditor's report for a period of three
years. Report Paras. 193, 210(d).
<bullet> An audit, including underlying paperwork, which was
performed in the ordinary course of business according to generally
accepted auditing standards by an independent auditor, may serve as an
audit for all interested parties. Report Paras. 194, 210(e).
<bullet> Interested parties shall pay for the cost of the audit,
unless an independent auditor concludes that there was an underpayment
of five (5) percent or more. Report Paras. 195, 210(f).
The Panel chose not to adopt RIAA's minimum fee proposal and the
Services' proposed payment schedule for the distribution of royalties
to the featured artists and the nonfeatured musicians and vocalists.
The Panel found that the timing of payments to the performing artists
was not within the scope of the proceeding. Report Sec. 204; Report at
56 n.21.
The Panel's Evaluation of the RIAA Proposal To Adopt a Minimum Fee
RIAA proposed the imposition of a minimum fee as a means to insure
a fair return to the copyright owners in light of business practices
that might erode the value of the statutory license fee. RIAA PF
Paras. 126-147. Specifically, RIAA sought a minimum fee to minimize the
effect of discounts or credits, to address shifts in business models,
and to avoid diluting the value of the sound recording when audio
digital services add new channels to their offerings. Id. The Panel
ultimately rejected this suggestion because it found that the rationale
for a minimum fee was based on unsupported speculation about the
business structure of the Services. Report para. 204.
III. The Parties' Reaction to the Determination of the Panel
The regulations governing the CARP proceedings allow parties to
file petitions to modify or set aside the determination of the Panel
within 14 days of its filing date. The petition must state the reasons
for the petition, including relevant references to the parties'
proposed findings of fact and conclusions of law. Parties who wish to
file replies to a petition may do so within 14 days of the filing of
such petition. See 37 CFR 251.55(a), (b).
Accordingly, on December 12, 1997, RIAA filed a Petition to Reject
the Report of the CARP (Petition), contending that the Panel acted both
contrary to the Copyright Act and arbitrarily in reaching its
determination. In its petition, RIAA requests the Librarian to set
aside the Panel's determination and set a new rate that should not be
less than double the Services' 1996-2001 payments for the public
performance of the underlying musical works.
RIAA contends that the Panel's determination was arbitrary and
contrary to law for the following reasons:
1. The Panel disregarded precedent set by the former Copyright
Royalty Tribunal (CRT or Tribunal) in applying the statutory criteria
for determining a reasonable rate for the public performance right.
Petition at 6, 14-15.
2. The Panel used the rates set in a corporate partnership
agreement as a benchmark for establishing the new compulsory license
rate. This was inappropriate because the public performance in sound
recordings
[[Page 25398]]
license agreement was not negotiated independently, but as part of a
larger complex agreement. Id. at 20-27.
3. When the Services publicly perform a sound recording, two groups
of copyright owners receive royalties: The copyright owners in the
underlying musical works, and for the first time, the record companies
and performers. The Panel determined that the record companies and
performers were not entitled to more royalties for their public
performance right than those received by the copyright owners in the
underlying musical works for the public performance of their works.
RIAA contends that CRT precedent supports a determination that just the
reverse is true. Id. at 14-15.
4. The compulsory license allows the Services to perform sound
recordings publicly without infringing copyright prior to the setting
of the royalty rate, so long as the Services agree to pay their
accumulated royalty obligation once the rates are determined. The Panel
created a payment schedule that allows the Services to pay these fees
over a three year period. RIAA contends that this payment schedule is
contrary to law. Id. at 7 n.1.
5. RIAA also contends that the CARP failed to provide a reasoned
explanation for proper review, made conclusions inconsistent with its
findings, made findings without record support, and failed to make
findings in support of conclusions. Id. at 2.
RIAA, however, does not suggest that the Librarian disregard all
the findings of the Panel. Instead, it recommends adopting the Panel's
approach ``to determine a reasonable rate--provided that the Librarian
makes the necessary adjustments to account for the precedent and
considerations that the Panel ignored.'' Petition at 51-52. RIAA
further allows that the Librarian need not consider the cable network
benchmark in its analysis, since the Panel's analysis of the remaining
benchmarks supports an upward adjustment of the 5% rate of gross
revenues set by the CARP. Petition at 52 n.9.
On December 29, 1997, in response to the RIAA petition to reject
the CARP report, the Services filed a reply to RIAA's Petition to
Reject the CARP Report (Reply to Petition). The crux of the Services'
argument in support of adopting the Panel's report is that ``[w]hen
examined as a whole, the Panel's Report is eminently reasonable and
amply supported by the record.'' Reply to Petition at 12. Specific
arguments of the Services in support of the Panel's report are
discussed below in conjunction with RIAA's arguments to reject the
report.
IV. The Librarian's Scope of Review of the Panel's Report
The Copyright Royalty Tribunal Reform Act of 1993 (the Reform Act),
Public Law 103-198, 107 Stat. 2304, created a unique system of review
of a CARP's determination. Typically, an arbitrator's decision is not
reviewable, but the Reform Act created two layers of review that result
in final orders: the Librarian of Congress (Librarian) and the United
States Court of Appeals for the District of Columbia Circuit. Section
802(f) of title 17 directs the Librarian either to accept the decision
of the CARP or to reject it. If the Librarian rejects it, he must
substitute his own determination ``after full examination of the record
created in the arbitration proceeding.'' 17 U.S.C. 802(f). If the
Librarian accepts it, then the determination of the CARP becomes the
determination of the Librarian. In either case, through issuance of the
Librarian's Order, it is his decision that will be subject to review by
the Court of Appeals. 17 U.S.C. 802(g).
The review process has been thoroughly discussed in prior
recommendations of the Register of Copyrights (Register) concerning
rate adjustments and royalty distribution proceedings. Nevertheless,
the discussion merits repetition because of its importance in reviewing
each CARP decision.
Section 802(f) of the Copyright Act directs that the Librarian
shall adopt the report of the CARP ``unless the Librarian finds that
the determination is arbitrary or contrary to the applicable provisions
of this title.'' Neither the Reform Act nor its legislative history
indicates what is meant specifically by ``arbitrary,'' but there is no
reason to conclude that the use of the term is any different from the
``arbitrary'' standard described in the Administrative Procedure Act
(APA), 5 U.S.C. 706(2)(A).
Review of the case law applying the APA ``arbitrary'' standard
reveals six factors or circumstances under which a court is likely to
find that an agency acted arbitrarily. An agency action is generally
considered to be arbitrary when:
1. It relies on factors that Congress did not intend it to
consider;
2. It fails to consider entirely an important aspect of the problem
that it was solving;
3. It offers an explanation for its decision that runs counter to
the evidence presented before it;
4. It issues a decision that is so implausible that it cannot be
explained as a product of agency expertise or a difference of
viewpoint;
5. It fails to examine the data and articulate a satisfactory
explanation for its action including a rational connection between the
facts found and the choice made; and
6. Its action entails the unexplained discrimination or disparate
treatment of similarly situated parties.
Motor Vehicle Mfrs. Ass'n. State Farm Mutual Auto. Insurance Co.,
463 U.S. 29 (1983);
Celcom Communications Corp. v. FCC, 789 F.2d 67 (D.C. Cir. 1986);
Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985).
Given these guidelines for determining when a determination is
``arbitrary,'' prior decisions of the District of Columbia Circuit
reviewing the determinations of the former CRT have been consulted. The
decisions of the Tribunal were reviewed under the ``arbitrary and
capricious'' standard of 5 U.S.C. 706(2)(A) which, as noted above,
appears to be applicable to the Librarian's review of the CARP's
decision.
Review of judicial decisions regarding Tribunal actions reveals a
consistent theme: while the Tribunal was granted a relatively wide
``zone of reasonableness,'' it was required to articulate clearly the
rationale for its award of royalties to each claimant. See National
Ass'n of Broadcasters v. Copyright Royalty Tribunal, 772 F.2d 922 (D.C.
Cir. 1985), cert. denied, 475 U.S. 1035 (1986) (NAB v. CRT); Christian
Broadcasting Network v. Copyright Royalty Tribunal, 720 F.2d 1295 (D.C.
Cir. 1983) (Christian Broadcasting v. CRT); National Cable Television
Ass'n v. Copyright Royalty Tribunal, 689 F.2d 1077 (D.C. Cir. 1982)
(NCTA v. CRT); Recording Indus. Ass'n of America v. Copyright Royalty
Tribunal, 662 F.2d 1 (D.C. Cir. 1981) (RIAA v. CRT). As the D.C.
Circuit succinctly noted:
We wish to emphasize * * * that precisely because of the
technical and discretionary nature of the Tribunal's work, we must
especially insist that it weigh all the relevant considerations and
that it set out its conclusions in a form that permits us to
determine whether it has exercised its responsibilities lawfully * *
*.
Christian Broadcasting v. CRT, 720 F.2d at 1319 (D.C. Cir. 1983),
quoting NCTA v. CRT, 689 F.2d at 1091 (D.C. Cir. 1982).
Because the Librarian is reviewing the CARP decision under the same
``arbitrary'' standard used by the courts to review the Tribunal, he
must be presented by the CARP with a rational analysis of its decision,
setting forth
[[Page 25399]]
specific findings of fact and conclusions of law. This requirement of
every CARP report is confirmed by the legislative history to the Reform
Act which notes that a ``clear report setting forth the panel's
reasoning and findings will greatly assist the Librarian of Congress.''
H.R. Rep. No. 103-286, at 13 (1993). This goal cannot be reached by
``attempt(ing) to distinguish apparently inconsistent awards with
simple, undifferentiated allusions to a 10,000 page record.'' Christian
Broadcasting v. CRT, 720 F.2d at 1319.
It is the task of the Register to review the report and make her
recommendation to the Librarian as to whether it is arbitrary or
contrary to the provisions of the Copyright Act and, if so, whether,
and in what manner, the Librarian should substitute his own
determination. 17 U.S.C. 802(f).
V. Review and Recommendation of the Register of Copyrights
The law gives the Register the responsibility to review the CARP
report and make recommendations to the Librarian whether to adopt or
reject the Panel's determination. In doing so, she reviews the Panel's
report, the parties' post-panel motions, and the record evidence.
After carefully reviewing the Panel's report and the record in this
proceeding, the Register finds that the Panel's adoption of the DCR
negotiated license fee as the starting point for making its
determination is arbitrary. This conclusion compels the Register to set
aside the Panel's final determination and reevaluate the record
evidence before making a recommendation to the Librarian.
Section 802(f) states that ``(i)f the Librarian rejects the
determination of the arbitration panel, the Librarian shall, before the
end of that 60-day period, and after full examination of the record
created in the arbitration proceeding, issue an order setting the
royalty fee or distribution of fees, as the case may be.'' During that
60-day period, the Register reviewed the Panel's report and made a
recommendation to the Librarian not to accept the Panel's report, for
the reasons cited herein. The Librarian accepted this recommendation,
and on January 27, 1998, issued an order stating that the Panel's
report was still under review. See Order, Docket No. 96-5 CARP DSTRA
(January 27, 1998).
The full review of the Register and her corresponding
recommendations is presented herein. Within the limited scope of the
Librarian's review of this proceeding, ``the Librarian will not second
guess a CARP's balance and consideration of the evidence, unless its
decision runs completely counter to the evidence presented to it.''
Rate Adjustment for the Satellite Carrier Compulsory License, 62 FR
55757 (1997), citing 61 FR 55663 (October 28, 1996) (Distribution of
1990, 1991 and 1992 Cable Royalties). Accordingly, the Register accepts
the Panel's weighing of the evidence and will not question findings and
conclusions which proceed directly from the arbitrators' consideration
of factual evidence.
The Register also adopts the Panel's approach in setting reasonable
rates and terms for the digital performance license in sound recordings
pursuant to 17 U.S.C. 114(f)(2), but sets aside those findings and
conclusions that are arbitrary or contrary to law.
a. Methodology for Making Rate Determination
Use of a Marketplace Standard in Setting the Royalty Rate
The standard for setting the royalty rate for the performance of a
sound recording by a digital audio subscription service is not fair
market value, although CARPs and the Copyright Royalty Tribunal (CRT or
Tribunal) in prior rate adjustment proceedings under sections 115 and
116 considered comparable rates negotiated under marketplace conditions
when making their determinations.
In light of this practice, the Panel followed the same approach
established in prior rate adjustment proceedings conducted by the
Tribunal and the CARPs in making its determination. Namely, the Panel
considered the parties' presentations of different rates negotiated in
comparable marketplace transactions and first determined whether the
proposed models mirrored the potential market transactions which would
take place to set rates for the digital performance of sound
recordings. Report para. 123. These benchmarks were then evaluated in
light of the statutory objectives to determine a reasonable royalty
rate. Id.
The Panel noted that RIAA and the Services ``seem to agree that the
best proxy for reasonable compensation is to look to marketplace
rates.'' Report para. 124. The parties also agreed that the rates
should be based on gross revenues and further agreed on the definition
of ``gross revenues.'' Report para. 125; RIAA PF para. 55; Services
Joint Reply to RIAA's Proposed Findings of Fact and Conclusions of Law
(Services' RF) para. 51.
While the Panel agreed with the parties on these two points, it
noted that the statute requires the Panel to adopt reasonable rates and
terms, and that reasonable rates and terms are not synonymous with
marketplace rates. Report para. 124. Unlike a marketplace rate which
represents the negotiated price a willing buyer will pay a willing
seller, see Rate Adjustment for the Satellite Carrier Compulsory
License, 62 FR 55742 (1997) (applying a fair market standard, as set
forth at 17 U.S.C. 119(c)(3)(D), in setting royalty rates for the
retransmission of broadcast signals by satellite carriers), reasonable
rates are determined based on policy considerations. See RIAA v. CRT,
662 F.2d 1.<SUP>6</SUP> Congress granted the record companies a limited
performance right in sound recordings in order to ``provide [them] with
the ability to control the distribution of their product by digital
transmissions,'' but it did so with the understanding that the
emergence of new technologies would not be hampered. S. Rep. No. 104-
128, at 15 (1995). Consequently, Congress specified that the terms were
to be reasonable and calculated to achieve the following four specific
policy objectives:
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\6\ In reviewing how the Tribunal analyzed the statutory
criteria, the court noted that ``other statutory criteria invite the
Tribunal to exercise a legislative discretion in determining
copyright policy in order to achieve an equitable division of music
industry profits between the copyright owners and users.'' Id. at 8.
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1. To maximize the availability of creative works to the public;
2. To afford the copyright owner a fair return for his creative
work and the copyright user a fair income under existing economic
conditions;
3. To reflect the relative roles of the copyright owner and the
copyright user in the product made available to the public with respect
to relative creative contribution, technological contribution, capital
investment, cost, risk, and contribution to the opening of new markets
for creative expression and media for their communication; and
4. To minimize any disruptive impact on the structure of the
industries involved and on generally prevailing industry practices. 17
U.S.C. 114(f)(2) and 801(b)(1).
RIAA takes exception to this interpretation and argues that the
Panel failed to follow CRT precedent that ``interpreted the Section
801(b)(1) factors as requiring it to establish a market rate.''
Petition at 33. In support of its position, RIAA relies upon the 1982
CRT rate adjustment proceeding to determine reasonable rates and terms
for the statutory noncommercial broadcasting license, 17 U.S.C. 118,
where the CRT stated:
The Tribunal has consistently held that the Copyright Act does
not contemplate the Tribunal establishing rates below the
[[Page 25400]]
reasonable market value of the copyrighted works subject to a
compulsory license.
1982 Adjustment of Royalty Schedule for Use of Certain Copyrighted
Works in Connection with Noncommercial Broadcasting: Terms and Rates of
Royalty Payments, 47 FR 57924 (December 29, 1982). RIAA further
contends that the Panel not only ignored the CRT precedent requiring it
to set marketplace rates, but improperly shifted the emphasis to ensure
the financial viability of the copyright users. Petition at 33.
In response, the Services contend that the Panel's analysis
comports with CRT precedent on both points, noting that the CRT did
consider evidence on how a proposed rate would affect the user industry
in its proceedings to set rates under sections 111 and 116. Reply to
Petition at 26. For example, in the 1980 rate adjustment proceeding to
set the royalty rate for jukeboxes, the CRT considered the evidence and
found ``only that marginal jukebox owners would be threatened by the
new rate.'' Id. In fact, the Tribunal stated that it was ``satisfied
that adequate attention (had) been given to the small operator, * * *
(and adopted) an amendment to the proposed fee schedule that was
proposed for the benefit of such (small) operators.'' 1980 Adjustment
of the Royalty Rate for Coin-Operated Phonorecord Players, 46 FR 888
(1981).
The Register finds that the Panel correctly analyzed how to
determine a reasonable rate under section 114. Section 801(b)(1) states
that one function of a CARP is to determine reasonable rates ``as
provided in sections 114, 115, and 116, and to make determinations as
to reasonable terms and rates of royalty payments as provided in
section 118.'' The provision further states that the CARP must
determine the rates under sections 114, 115, and 116 to achieve the
four statutory objectives. The law does not state that these objectives
are applicable in a rate adjustment proceeding to determine rates under
sections 111 or 118. Therefore, RIAA's reliance on CRT precedents for
setting rates under section 118 is without merit. Furthermore, the
Panel's analysis is consistent with the prior CRT determinations
establishing rates for the section 115 and 116 licenses.
In the 1980 jukebox rate adjustment proceeding, the CRT set the
rate ``[o]n the basis of the marketplace analogies presented during the
proceeding, taking the record as a whole, and with regard for the
statutory criteria. * * * That rate takes account both of what is paid
for music elsewhere under similar circumstances and, since it is a flat
rate, of the Tribunal's concern for the smaller, less profitable
operators.'' 46 FR 889 (1981). To recognize that this rate was not a
negotiated marketplace value, one need only read Commissioner James's
dissent admonishing the majority for setting a rate on ``an ability to
pay theory.'' He characterized the majority's actions as follows:
In essence, the majority reached a conclusion on the premise
that a true market value would result in too large an increase in
fees. The majority was set on course by what they deemed were the
guiding standards of the statute which referred to minimizing the
disruptive impact on the economic structure of the industries
involved. It was the majority view and opinion that a large increase
in fees would be oppressive to the industry and would ``impact on
small operators.''
Id. at 891 (footnote omitted).
The Court of Appeals upheld the Tribunal's approach in its 1980
jukebox rate adjustment proceeding, stating that:
In its decision, the Tribunal acknowledged that the rate which
it approved could not be directly linked to marketplace parallels,
but it found that such parallels served as appropriate points of
reference to be weighed together with the entire record and the
statutory criteria. Although we agree with ASCAP that the analogous
marketplace evidence is significant, we do not believe that the
Tribunal was bound by that evidence to select a fee rate within the
$70-$140 ``zone'' which, according to ASCAP, governs this case. The
Tribunal carefully weighed the evidence derived from the marketplace
analogies and other evidence specifically in light of the four
statutory criteria of section 801(b) and arrived at a royalty rate
for coin-operated phonorecord players of $50 per machine.
Amusement and Music Operators Ass'n v. Copyright Royalty Tribunal, 676
F.2d 1144, 1157 (7th Cir. 1982), cert. denied, 459 U.S. 907 (1982)
(AMOA v. CRT). The D.C. Court of Appeals engaged in a similar analysis
when it considered the Tribunal's determination to raise the royalty
rate for making and distributing phonorecords of copyrighted musical
works from 2 cents to 4 cents. In that case, the copyright owners
argued that Congress intended the Tribunal to set a high royalty rate
under a bargaining room theory, which would create a rate ceiling for
stimulating future negotiations outside the license. The D.C. Circuit
found that while Congress had considered this possibility, it chose not
to codify this approach, but rather to express its will through
specific statutory criteria and allow the Tribunal to interpret and
apply these objectives to the record evidence in a rate adjustment
proceeding. RIAA v. CRT, 662 F.2d at 8-9. Furthermore, the Court
ascertained that Congress did not rank the criteria in order of
importance so that the Tribunal, and subsequently, the CARP, could:
To the extent that the statutory objectives determine a range of
reasonable royalty rates that would serve all these objectives
adequately but to differing degrees, * * * choose among those rates,
and courts are without authority to set aside the particular rate
chosen by the Tribunal if it lies within a ``zone of
reasonableness.''
Id. at 9. See also Permian Basin Area Rate Cases, 390 U.S. 747, 767
(1968); Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S.
575, 585-586 (1942); Hercules, Inc. v. Environmental Protection Agency,
598 F.2d 91, 107 (D.C. Cir. 1978).
b. Benchmarks
The Panel's Disposition of the Proposed Benchmarks
The Register has reviewed the analysis of the Panel and its
disposition of the three benchmarks and finds that the Panel's primary
reliance on and manipulation of the DCR negotiated license fee was
arbitrary. The Register also finds that the record evidence does not
support the Panel's calculation of a specific range of fees for the
public performance of the musical compositions. These flaws compel the
Register to reexamine the record evidence and propose a rate based on
her analysis while providing deference, where appropriate, to the
findings of the Panel.
The Register, however, did not evaluate further the record evidence
concerning either the cable television network fee or the proposed
minimum fee in her deliberations to determine the appropriate rate
because no party to the proceeding challenged either of these findings
or continued to rely upon these matters in presenting its arguments to
the Librarian.<SUP>7</SUP> Therefore, the Register forgoes a review of
the Panel's analysis in these areas. This does not mean, however, that
the Register and the Librarian will always forego an independent review
of a Panel's actions. See, e.g. Distribution of the 1992, 1993, and
1994 Musical Works Funds, 62 FR 6558 (February 12, 1997)
[[Page 25401]]
(recommending an upward adjustment to one party's award, although no
party made a request for the adjustment); Rate Adjustment for the
Satellite Carrier Compulsory License, 62 FR 55742 (1997) (recommending
the adoption of a zero rate for local retransmission of network signals
to unserved households).
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\7\ ``RIAA strongly disagrees with the CARP's conclusion that
the Services should devote a smaller percentage of their revenues to
license fees than do other cable networks. While the range of
percentages is large, there are no cable networks that consistently
spend as little as 5 percent. Nevertheless, RIAA has not challenged
the CARP's decision to reject the cable network analogy.'' Petition
at 52 n.9 (citations omitted). Furthermore, RIAA did not raise any
challenge to the Panel's decision not to grant a minimum fee.
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The Panel's Adoption of the DCR Negotiated License Fee and its
Subsequent Manipulations of This Rate to Establish a Range of Potential
Royalty Rates was Arbitrary <SUP>8</SUP>
---------------------------------------------------------------------------
\8\ Negotiated license fees and certain business information,
which the Register has considered throughout her review, are not
being published in the Register's review because the information is
subject to a protective order. See Order Docket No. 96-5 CARP DSTRA
(September 18, 1996).
---------------------------------------------------------------------------
The Panel found that the digital performance license negotiated as
part of a larger partnership agreement between DCR and its two record
company partners, Warner Music and Sony Music, was a useful benchmark
for determining the section 114 royalty fee because it provided a
``useful precedent,'' although there were problems with using the rate
for this license fee since only 60% of the industry engaged in the
negotiations setting the rate.<SUP>9</SUP> Report Paras. 166, 200. To
address this problem the panel adjusted the figure upward to reach a
base rate figure arguably applicable to 100% of the recording industry
market. Id. The Panel then doubled this number to account for the
statutory provision which requires an equal distribution of the
royalties collected pursuant to the compulsory license between the
record companies and the recording artists. Id.; also 17 U.S.C. 114(g).
While recognizing that a pure doubling of the base rate was
inappropriate, the Panel determined that these manipulations of a
``freely negotiated rate'' set a reasonable range of rates for further
consideration in light of the statutory criteria. Id.
---------------------------------------------------------------------------
\9\ Sony Music and Warner Music signed a partnership agreement
with DCR in January 1993. A third record company, EMI, joined the
partnership in April 1994, under substantially the same terms.
Report para. 164.
---------------------------------------------------------------------------
RIAA opposes the use of the negotiated license fee as a benchmark
for setting the compulsory license fee for the following reasons: (1)
It was merely one provision in a complex transaction involving eleven
interrelated agreements, RIAA PF para. 92; Petition at 22; Wildman
<SUP>10</SUP> W.R.T. at 12-15; Transcript (Tr.) 2213-14 (Wildman); (2)
the record companies interested in investing in the digital audio
service would share the cost of a higher rate, thereby creating a
strong incentive to create a low rate; (3) the license fee was not for
the right to perform sound recordings publicly, but for the
acknowledgement that a right should exist, RIAA PF para. 84; Tr. 2102
(Vidich); <SUP>11</SUP> (4) the record companies never viewed the
established rate as precedential, citing the license provision that the
rate will be superseded if Congress establishes a performance right in
sound recordings, DCR Exs. 7, 8 & 15 at para. 9; Vidich W.R.T. at 7;
Tr. 2106-2107 (Vidich); Del Beccaro <SUP>12</SUP> W.D.T. at 9, and the
most favored nations clause, DCR Exs. 7, 8 & 15 at para. 6; (5) the
record companies did not enjoy the degree of leverage in setting the
rate that the Services imply in their proposed findings; (6) the fee
did not represent an industry-wide agreement on the value of the
performance right; instead, only three record companies, ``collectively
responsible for only about 35% of the sound recordings performed by
DCR,'' negotiated the rates, RIAA's Reply to Proposed Findings and
Conclusions of Law (RIAA RPF) ] 39; Tr. 1014 (McCarthy); <SUP>13</SUP>
and (7) the DCR digital performance license differed in significant
ways from the statutory license. For example, the DCR license requires
the company to pay royalties on its revenues from international sources
which are not recoverable under the DPRSRA, RIAA PF para. 83; Tr. 965
(Del Beccaro); Tr. 1014 (McCarthy); Tr. 2137 (Vidich), and it did not
contemplate a distribution of a portion of the royalties to recording
artists as required under the new law, RIAA PF para. 82.
---------------------------------------------------------------------------
\10\ Associate Professor of Communications Studies at
Northwestern University and Director of Northwestern's program in
Telecommunications Studies, Management, and Policy.
\11\ Senior Vice-President of Strategic Planning and Business
Development at Warner Music Group and a member of the Board of
Directors of Digital Cable Radio Associates.
\12\ President and Chief Executive Officer of Digital Cable
Radio Associates.
\13\ Senior Vice-President and Chief Financial Officer of
Digital Cable Radio Associates.
---------------------------------------------------------------------------
In response, the Services assert that the Panel ``did not rely on
the DCR license rate in isolation,'' and argue that its determination
was informed by testimony from the parties who participated in the
negotiations. Reply to Petition at 20. More specifically, the Services
argue that the inclusion of the performance license within a larger,
complex commercial agreement makes it more meaningful, because DCR did
not purchase a license for the public performance of sound recordings.
Rather, in exchange for a partnership agreement, DCR acknowledged that
the right should exist for a particular rate. The Services neglect,
however, to discuss why this observation is important in their initial
findings. Services RF para. 75-77. Later, the Services argue that the
Panel's decision to use the DCR license fee as an appropriate benchmark
rested on a weighing of the evidence and invoke the Panel's discretion
to evaluate the testimony and fashion its decision accordingly. Reply
to Petition at 20-21. The Services, however, fail to address RIAA's
additional concerns about the negotiated license, except to note that
the partner record companies never operated a joint advertising venture
nor took advantage of the provisions which gave them some measure of
control over programming. Services RF Paras. 80-81.
While the Register agrees with the Services that the Panel
carefully considered the rationale for and the circumstances
surrounding the negotiations setting the DCR license rate, she finds
the Panel's adoption of this benchmark and its subsequent adjustments
arbitrary. In the first instance, the benchmark offered by the Services
cannot represent a license for a right to perform sound recordings,
because no such legal right existed at the time of the negotiations.
Woodbury <SUP>14</SUP> W.D.T. at 12; RIAA PF ] 84; Tr. 2102 (Vidich).
DCR allowed that, in fact, it did not negotiate for a performance
license in sound recordings; and instead, characterized the transaction
as selling ``to its record company partners the recognition they sought
`that the right existed for a particular rate.' '' Services PF para.
102. To underscore this distinction, DCR insisted on a clause which
stated that the United States law did not require DCR to pay a fee or
royalty for the public performance of any sound recording, even though
DCR agreed, as part of a complex commercial transaction, to pay its
partner record companies what it calls a public performance license
fee. Services PF Paras. 111, 136. An article in the press announcing
the deal echoed this distinction. It noted that not only did the
transaction allow DCR use of the record companies' repertoire, it also
required DCR to support a performance right in sound recordings. DCR
Ex. 27 (Paul Verna, Time Warner Breaks New Cable Ground; Enters Cable
Radio Venture With Sony, Billboard, Feb. 6, 1996, at 1).
---------------------------------------------------------------------------
\14\ A vice-president at the economic consulting firm of Charles
River Associates, Inc.
---------------------------------------------------------------------------
Consequently, the Register rejects the Panel's premise that the
rate set for a nonexistent right would represent accurately the value
of the performance right once it came into existence, especially where
the parties
[[Page 25402]]
acknowledge that the agreement encompassed more than the purported
value of the coveted right, namely the recognition from the audio
service that a performance right in sound recordings should exist. RIAA
PF Paras. 94-95; Tr. 2209-12 (Wildman); Wildman W.R.T. at 9-12.
Arguably, that recognition was more valuable consideration to the
record companies than the license fee itself.
The conclusion that the DCR license fee may serve as the benchmark
for setting the section 114 rates is undermined further by the very
nature of the partnership agreement. All parties agree that the
agreement concerning the performance right was merely one of eleven
interdependent co-equal agreements which together constituted the
partnership agreement between DCR and the record companies. Such strong
ties between provisions in a negotiated document raise the question of
how much give-and-take occurred in negotiating the final terms. Courts
recognize that complex transactions encourage tradeoffs among the
various provisions and lead to results that most likely differ from
those that would result from a separately negotiated
transaction.<SUP>15</SUP> While DCR freely entered into the partnership
agreement, the record contains no evidence that it would have freely
entered into a separate performance license for sound recordings. To
the contrary, the Service's own witness admits that it is unlikely that
a stand-alone performance license would have been negotiated. Woodbury
W.D.T. at 15. Accordingly, the Register concludes that it was arbitrary
for the Panel to rely on a single provision extracted from a complex
agreement where the evidence demonstrates that the provision would not
exist but for the entire agreement. Under similar circumstances, the
Southern District Court of New York found that ``plucking one term out
of the contract is likely to yield a fairly arbitrary result.''
American Society of Composers Authors and Publishers v. Showtime/The
Movie Channel, Inc. (ASCAP), published at 912 F.2d 572, 590 (S.D.N.Y.
December 20, 1989) (No. 13-95 (WCC)) (rejecting proposal to rely upon
provisions in guild agreement concerning payment of revenues where such
provisions were part of a set of terms governing compensation,
benefits, and working conditions). <SUP>16</SUP>
---------------------------------------------------------------------------
\15\ For example, in resolving a dispute between ASCAP and
Showtime/The Movie Channel, Inc. over the fee for a ``blanket''
license, the Southern District Court of New York stated that:
it is fair to assume that in any negotiation that encompasses as
many disparate issues as do the guild agreements, the negotiators
will agree to tradeoffs, among the various negotiated items, ... The
process of negotiation is thus likely to yield a complex pattern of
results, most of which would have been different if the individual
issue had been negotiated entirely separately from the others.
Accordingly, plucking one term out of the contract is likely to
yield a fairly arbitrary result.
ASCAP v. Showtime/The Movie Channel, Inc., published at 912 F.2d
572, 590 (S.D.N.Y. Dec. 20, 1989) (Civ. No. 13-95 (WCC) (footnote
omitted).
\16\ This is not to say that in any case in which a CARP relied
on a license fee that was part of a larger agreement containing a
number of provisions unrelated to the license fee, such reliance
would necessarily be arbitrary. But in light of the other
deficiencies in the CARP's reliance on the DCR license, discussed
herein, and especially in light of the fact that the license fee was
for the exercise of a nonexistent right, the Register is compelled
to conclude that in this case, the CARP's reliance on the DCR
license fee as its exclusive benchmark was arbitrary.
---------------------------------------------------------------------------
Another problem with adopting the DCR license fee is that it is not
an industry-wide agreement, but rather the product of negotiations
among only three record companies, which together account for
approximately 35% of the sound recordings performed by DCR. RIAA PF
para. 82; RIAA RPF para. 39. The arbitrators understood the limited
nature of the negotiations and made an adjustment to the license fee
based on the mistaken assumption that the DCR license fee represented
the value of the sound recordings owned by the three record companies
party to the agreement, which purportedly represented 60% of the record
industry. Report Paras. 166, 200. This assumption arose from a
statement made by the Services in the summary statement contained in
the Services' joint reply to RIAA's proposed findings.<SUP>17</SUP> The
statement, however, has no support in the record. See Petition at 21
n.3; Reply to Petition at 21-22. Consequently, the Panel's upward
adjustment of the base figure on the merits of this assertion was
arbitrary.
---------------------------------------------------------------------------
\17\ ``DCR entered into a performance license with three record
companies that represent approximately 60% of all recorded music
sold in the United States.'' Services RF at 2.
---------------------------------------------------------------------------
This is not to say that the fact that the DCR license fee was
negotiated with companies owning rights to only 35% of the relevant
works renders that license fee irrelevant. It is, however, a further
deficiency which in combination with the other deficiencies discussed
herein, renders the Panel's reliance on the DCR license fee as its
exclusive benchmark inappropriate.
Furthermore, the Panel's decision to rely on the DCR license fee
deviates from CRT precedent where that agency refused to adopt, as an
industry-wide rate, a set of rates negotiated by only certain of the
affected parties as part of a general understanding involving issues in
addition to the rate of compensation. Use of Certain Copyrighted Works
in Connection with Noncommercial Broadcasting, 43 FR 25068 (June 8,
1978). While no Panel need slavishly adhere to the past practices of
the CRT, it must articulate a reasoned explanation for its deviation
from past precedent. Distribution of 1990, 1991, and 1992 Cable
Royalties, 61 FR 55653, 55659 (October 28, 1996). Otherwise, its
actions may be construed as arbitrary or contrary to law.<SUP>18</SUP>
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\18\ Section 802(c), of the Copyright Act, directs the CARP to
``act on the basis of a fully documented written record, prior
decisions of the Copyright Royalty Tribunal, prior copyright
arbitration panel determinations, and rulings by the Librarian of
Congress under section 801(c).''
---------------------------------------------------------------------------
The Register also finds that even if the 60% figure had record
support, it would be arbitrary to adjust a negotiated license fee that
purports to represent the market value of the digital performance right
in sound recordings. Under the license agreement, DCR agreed to pay a
percentage of its gross revenues for the right to perform sound
recordings digitally, but only a portion of these fees were paid to
each of DCR's three record company partners, allocated on the basis of
the DCR playlist.<SUP>19</SUP> Tr. 2123-24 (Vidich); Services PF para.
111. Therefore, the license fee--to the extent that it was a license
fee--already accounted for all copyright fees owed to the record
industry, and it was inappropriate for the Panel to make any further
adjustment. The Services seem to realize the Panel's error in this
respect and note that the Panel was under no obligation to make an
upward adjustment, since the license fee reflected the value of the
sound recording and not the sum of the percentage amount each partner
record company negotiated for use of its works. Reply to Petition at
22.
---------------------------------------------------------------------------
\19\ For example, if the DCR license fee had been 5% of gross
receipts (equaling $100,000) and 40% of the sound recordings on
DCR's playlist were owned by DCR's record company partners, then DCR
would pay 40% of the license fees ($40,000) on a prorata basis to
these partners. The remaining 60% ($60,000) represents the value of
the digital performance of works owned by non-partnership record
companies performed during the relevant time period--a sum that DCR
would not actually pay under the terms of its license agreement.
The 5% license fee value does not represent the actual value of
the negotiated fee because this information is subject to a
protective order. See n.8 supra.
---------------------------------------------------------------------------
Furthermore, the Register finds that the Panel's conclusion that
the DCR license fee ``provides a useful precedent for setting a royalty
rate in this proceeding'' was arbitrary. Report para. 200. The only
support for this finding was Woodbury's testimony that the trade
article announcing the deal between DCR and its new record company
partners, Sony and Warner, illustrated its precedential value, at least
for the record companies. Woodbury W.D.T. at
[[Page 25403]]
16. Mr. Woodbury's statements on the precedential value of the
agreement, however, are full of qualifications, and he readily
acknowledged that ``a successful negotiation may have required that
Warner and Sony compensate Music Choice for including the performance
rights payments as part of the partnership agreement. The effect of
this compensation may have restrained Warner and Sony in their choice
of a higher fee level.'' Id.
In addition, the partnership agreement itself fails to support the
Panel's finding. It includes material redacted subject to the
protective order, DCR Exs. 7, 8 & 15 at para. 6, and a provision that
the rate will be superseded if Congress establishes a performance right
in sound recordings. DCR Exs. 7, 8, & 15 at para. 9. Vidich W.R.T. at
7; Tr. 2106-2107 (Vidich); Del Beccaro W.D.T. at 9. Because the
partnership agreement included language that undermined any
precedential value of the digital performance license included therein,
the Register finds that the Panel's reliance on the DCR license fee as
precedent was an arbitrary action. See Motor Vehicle Mfrs. Ass'n v.
State Farm Mutual Auto. Insurance Co., 463 U.S. 29 (1983) (agency
action is arbitrary where the agency offers an explanation for its
decision that runs counter to the record evidence).
In setting a range of possible rates for the section 114 license,
the Panel made further adjustments to the base figure to account for
the payments to the recording artists. Under the DPRSRA, recording
artists are entitled to half of the royalties collected under the
compulsory license. 17 U.S.C. 114(g). RIAA argues that the DCR license
fee must be adjusted to account for this provision in the law that
entitles recording artists to a share of the royalties, because the
record companies were under no obligation to share the royalties. RIAA
RPF para. 40; Petition at 28. RIAA also argued for additional upward
adjustments of the benchmark to compensate the record companies for
certain differences between the DCR license and the compulsory license,
including compensation for loss of royalties generated from foreign and
commercial subscribers, and loss of revenue due to a shift in how the
Services offer their product to subscribers.
RIAA anchors its arguments for these requested adjustments on the
presumption that the responsibility of the Panel was ``to determine the
royalty [rate] that would be produced through free market negotiations,
absent the compulsory license.'' RIAA RPF para. 41. This presumption,
however, misrepresents the Panel's duty, which is to establish
reasonable rates and terms. See discussion supra concerning the use of
a marketplace standard in setting the royalty rate. While RIAA may have
a reasonable expectation that a Panel would make appropriate
adjustments to a marketplace benchmark that the Panel adopts for
further consideration in light of the statutory objectives, and that is
not to say that the requested adjustments are appropriate, there is no
justification for making the adjustments where the benchmark value does
not fulfill that function. Therefore, having found that the DCR license
fee does not represent the marketplace value of sound recordings, the
Register need not consider further arguments on adjusting the rate.
For the reasons cited above, the Register finds that the Panel was
arbitrary in relying on the DCR license fee for the purpose of
establishing an accurate evaluation of the marketplace value for the
performance right.
The Panel's Determination of a Specific Range of Fees for the Public
Performance of the Musical Compositions Was Arbitrary
The Services pay separate license fees to Broadcast Music, Inc.
(BMI), the American Society of Composers, Authors, and Publishers
(ASCAP), and SESAC, Inc. for the public performance of the underlying
musical works in the sound recordings. The Services introduced evidence
on what they pay the performing rights organizations for the public
performance of the musical works to illustrate the industry practice
that ``licensing rates ordinarily paid in the recording and music
industries for the use of copyrighted works are far less than 41.5%,
and generally are within the low single digit range for use of
copyrighted music and sound recordings.'' Rosenthal <SUP>20</SUP>
W.R.T. at 3; Tr. 1646, 1669-70, 1674 (Massarsky).<SUP>21</SUP>
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\20\ An attorney with the law firm of Berliner, Corcoran & Rowe,
L.L.P., in Washington, D.C., who represents recording artists,
writers, production companies, record companies, and multimedia
companies.
\21\ An economic consultant with the firm of Barry M. Massarsky
Consulting, Inc.
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Using the license fees DMX and DCR <SUP>22</SUP> pay for the right
to perform musical compositions in the BMI and SESAC repertories and
the anticipated payments that ASCAP will receive upon resolution of a
rate dispute between itself and the Services, and not the interim rates
that the Services currently pay ASCAP, which are usually lower than the
final determination of the rate court, the Panel set an upper limit on
the value of the performance right for the musical compositions. Report
Paras. 167(B)-(G). In making this determination, the Panel accepted
Massarsky's testimony that ASCAP license fees are ``generally greater
than, but at least no less than, BMI license fees,'' and made its
calculations accordingly. Report para. 167(E); see also RIAA PF
Paras. 106-108.<SUP>23</SUP> In addition to setting an upper limit on
the amount the Services would pay for these performance licenses, the
Panel announced a lower limit for this benchmark but provided no
discussion on how it arrived at this figure.
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\22\ The Services pay an interim rate set in 1989 to ASCAP for
the performance of the musical works in its repertoire. Tr. 1029
(McCarthy); Tr. 1656 (Massarsky). DCR also pays an interim rate to
BMI. These rate disputes are currently the subject of adjudication
before the ``rate court'' in the Southern District of New York.
Services RF Paras. 52-53; 100-105. Pending the outcome of the rate
cases, DCR has agreed to pay BMI the same contractual rate that DMX
pays for the musical works performance license. Tr. 1653
(Massarsky).
\23\ CRT and judicial precedent supports the Panel's premise
that ASCAP usually receives slightly higher royalty fees for the
public performance of its works than does BMI. In American Society
of Composers, Authors, and Publishers v. Showtime/The Movie Channel,
912 F.2d 563 (2nd Cir. 1990), the court affirmed the rate court
decision that a ``blanket'' license rate for use of ASCAP works
should be set slightly higher than the rate the cable network pays
for a BMI license. This result reflected the agreed upon 55-45 ratio
that ASCAP and BMI adopted in dividing their share of the royalties
for compulsory licenses paid by cable system operators for
retransmissions of broadcast signals. See also 1978 Cable Royalty
Distribution Determination, 45 FR 63026 (Sept. 23, 1980) (CRT
determined that of the 4.5% royalty share awarded to the music
claimants' group in the 1978 cable distribution proceeding, ASCAP
would receive 54%, BMI, 43%, and SESAC, 3% of the royalties.); 1987
Cable Royalty Distribution Proceeding, 55 FR 11988 (March 30, 1990)
(CRT again adjusted the distribution percentages for cable royalties
so that ASCAP received a 58% share of the disputed royalties and BMI
received the remaining 42% share).
---------------------------------------------------------------------------
RIAA accepts the Panel's determination for an upper limit valuation
for the performance right in musical works, but challenges the Panel's
determination of the lower limit of this value. Petition at 16-20. RIAA
contends that because the Panel had actual figures upon which to base
its calculation, it was arbitrary to set a lower limit. Id. at 17.
From an examination of the record, the Register cannot determine
how the Panel derived the lower limit figure, but she has identified at
least one way that the Panel could have settled upon the lower figure.
It entails the use of the interim rates which the Services pay ASCAP
currently, instead of relying on a figure equal to or greater than the
rate paid to BMI. Tr. 1669 (Massarsky), Tr. 1028-1029 (McCarthy). Use
of such an approach, however, is expressly
[[Page 25404]]
disavowed by two of the Services' own expert witnesses who agree that
it is inappropriate to rely on interim rates to determine competitive
market rates. Woodbury W.R.T. at 19 n.70; Tr. 2710-2711 (Woodbury); Tr.
1029 (McCarthy). The Register concurs with these witnesses's
assertions, and therefore rejects any figure which uses an interim rate
in calculating a value when specific evidence exists in the record
discounting this methodology and nothing supports its use.
Nor could the Panel consider just the individual license fees which
the Services pay to a single performing rights organization in setting
the lower limit, having rejected a similar argument when the Services
initially proposed making this comparison. Report para. 168. A single
license fee covers only those musical works under the control of the
individual performing rights organization granting the license.
Therefore, a Service must obtain a ``blanket'' license from every
performing rights organization in order to have the freedom to play
virtually any musical composition without infringing its copyright.
Hence, the total value attached to the performance of the underlying
musical works would be the sum of the license fees paid to each of the
performing rights organizations, just as the value of the digital
performance right in sound recordings would be the fees paid to all
record companies. See Report para. 168.
The Register perceives no rational connection between the Panel's
factual conclusions and its decision to set a lower limit for this
benchmark. Where the record provides clear evidence of what the
Services actually pay for the performance licenses, and the witnesses
agree that the interim rates which are currently being paid represent
de minimis value for these licenses, the Panel need not look beyond
this information to determine the value of the benchmark. For the
reasons discussed above, the Register does not consider the Panel's
lower limit on the performance license fees for musical compositions
when proposing a royalty rate for the section 114 license.
Use of Benchmarks Approximating Marketplace Value in Setting the
Section 114 Rate
A benchmark is a marketplace point of reference, and as such, it
need not be perfect in order to be considered in a rate setting
proceeding. In the 1980 rate adjustment proceeding for coin-operated
phonorecord players, the Tribunal considered different marketplace
models and found that each analogy had distinguishing characteristics,
but nevertheless considered them in conjunction with the record
evidence and the statutory objectives. 1980 Adjustment of the Royalty
Rate for Coin-Operated Phonorecord Players, 46 FR 884, 888 (1981)
(``While acknowledging that our rate cannot be directly linked to
marketplace parallels, we find that they serve as an appropriate
benchmark to be weighed together with the entire record and the
statutory criteria''). The U.S. Court of Appeals for the Seventh
Circuit approved the Tribunal's approach, stating that:
We think that the Tribunal could properly take cognizance of the
marketplace analogies while appraising them to reflect the
differences in both the respective markets (e.g., with respect to
volume and industry structure) and the regulatory environment. It is
quite appropriate and normal in this administrative rate
determination process to find distinguishing features among various
analogous situations affecting the weight and appropriate thrust of
evidence rather than its admissibility. No authority cited by AMOA
would require the Tribunal to reject the ASCAP/SESAC analogies.
Comparable rate analogies have been repeatedly endorsed as
appropriate ratemaking devices.
AMOA v. CRT, 676 F.2d at 1157. See also San Antonio v. United
States, 631 F.2d 831, 836-37 (D.C. Cir. 1980), clarified, 655 F.2d 1341
(D.C. Cir. 1981); Burlington Northern, Inc. v. United States, 555 F.2d
637, 641-43 (8th Cir. 1977).
When setting the rates for the statutory performance license in
sound recordings, the benchmarks are merely the starting point for
establishing an appropriate rate. The deciding body uses the
appropriate marketplace analogies,<SUP>24</SUP> in conjunction with
record evidence, and with regard for the statutory criteria, to set a
reasonable rate.
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\24\ A Panel is free to reject a proposed benchmark that does
not reflect accurately the characteristics and dynamics of the
industries subject to the proposed rate. See e.g., Use of Certain
Copyrighted Works in Connection with Noncommercial Broadcasting, 43
FR 25068-69 (1978) (CRT found voluntary license between BMI, Inc.
and the public broadcasters, Public Broadcasting System and National
Public Radio, of no assistance in setting rate for use of ASCAP
repertoire); Adjustment of the Royalty Rate for Cable Systems;
Federal Communications Commission's Deregulation of the Cable
Industry, 47 FR 52146 (November 12, 1982).
---------------------------------------------------------------------------
In this proceeding, the Register finds that both the negotiated DCR
license fee and the marketplace license fee for the performance of the
musical works are useful at least in circumscribing the possible range
of values under consideration for the statutory performance license in
sound recordings. While the DCR license fee purports to represent a
negotiated value for a right to which, by law, the record companies
were not entitled (in addition to the recognition that the right should
exist), the Register acknowledges that the value of the DCR license
provides minimal information as to the value of the performance right
ultimately granted in the DPRSRA, although it does provide some
guidance for assessing the proposed rate. See Adjustment of Royalty
Payable Under Compulsory License for Making and Distributing
Phonorecords; Rates and Adjustment of Rates (115 Rate Adjustment
Proceeding), 46 FR 10466, 10483 (Feb. 3, 1981) (``We find that the
foreign experience is relevant--because it provides one measure of
whether copyright owners in the United States are being afforded a fair
return'').
On the other hand, the second reference point--the negotiated
license fees for the performance of music embodied in the sound
recordings--offers specific information on what the Services actually
pay for the already-established performance right of one component of
the sound recording. The Panel recognized this reference point's
usefulness and used it to further support its choice of a royalty rate.
Report para. 201. The question, however, is whether this reference
point is determinative of the marketplace value of the performance
right in sound recordings; and, as the Panel determined, the answer is
no. Report Paras. 169, 201.
Initially, neither the Services nor RIAA placed much weight on this
marketplace reference point, although RIAA has consistently argued that
the value of the performance right in sound recordings is greater than
the value of the performance right in the underlying musical works.
RIAA RPF para. 16, Petition at 10-16. On the one hand, the Services
argue that the musical composition is the key to a successful
recording, Services RF para. 10-12, citing Tr. 1664 (Massarsky), and on
the other hand, RIAA contends that a song lacks feeling until the
recording artist breathes life into the song. Morris <SUP>25</SUP>
W.D.T. at 1-2; Petition at 12-13. Because neither side presented
conclusive evidence on this point, the Panel observed only that both
groups are ``parents of the music.'' Report para. 169.
---------------------------------------------------------------------------
\25\ A country music artist who has recorded 14 albums,
including five number one songs.
---------------------------------------------------------------------------
RIAA faults the Panel for its lack of discussion on the question of
whose rights in the phonorecord are more valuable. Petition at 10-16.
While the Register agrees that the Panel did not make specific
citations to record evidence, its finding that ``[t]here was
insufficient and conflicting evidence to make a determination that the
[[Page 25405]]
performers and record companies deserve a larger percentage from the
Services than granted to the music works,'' was supported by the record
evidence. Report para. 169.
To make its point, RIAA presented an analysis of revenues from
record sales in support of its argument that the marketplace values the
contributions of the record companies and the performing artists more
than it values the contributions of the copyright owners in the musical
compositions. RIAA's PF Paras. 112-120; Petition at 10-16. This
evidence showed that copyright owners of the musical composition
receive between 5-20% of the wholesale price for the sound recordings
based on sales of CDs and cassette tapes--approximately 5% from the
average wholesale price for an average CD and 12% from an average
cassette.<SUP>26</SUP> RIAA PF Paras. 115, 119. Recording artists, on
the other hand, receive 7-10% of the average wholesale price for a
typical CD and 15-20% for a typical cassette, leaving approximately
between 56-88% of the revenues from sales for the record companies.
RIAA para. PF 116.
---------------------------------------------------------------------------
\26\ Interested parties are free to negotiate a rate below the
statutory rate for the mechanical license and often do. Tr. 1660
(Massarsky).
---------------------------------------------------------------------------
The Services disagreed with RIAA's interpretation of the
marketplace data, contending that the reason the ``(r)ecord companies
receive a bigger percentage of revenues from the sale of sound
recordings (is) because they have a bigger monetary investment in the
record production costs, as well as the leverage to minimize the
royalties paid to songwriters, music publishers, and recording
artists.'' Services RF Paras. 118-120. They also oppose RIAA's
implication that the record companies should receive more value from
the performance right in sound recordings than the songwriters receive
for a similar right because the record companies garner more revenue
from the use of the mechanical license than do the songwriters and
composers.
The Services accurately note that the mechanical license and the
digital performance license represent different and distinct rights to
the copyright holders under the law, and they make no attempt to tie
the value of the rights associated with the mechanical license to the
value of the digital performance right, a right newly recognized with
the passage of the DPRSRA. Even RIAA, the proponent of the assertion,
fails to explain why the relative value of the mechanical license to
the various owners and users has any application to the determination
of the value of a digital performance license in sound recordings.
Consequently, where no clear nexus exists between the values of
different rights, the model serves no practical purpose in computing
the value of the digital performance right.
Hence, RIAA's contention that the data supports its assertion that
the marketplace places a higher value on the contributions of the
record companies and the recording artists in the creation of the
phonorecord fails, because it does not discuss the constraining effect
the mechanical license has on the copyright owners in setting a value
on their reproduction and distribution right. Record companies pay the
copyright owners of the musical compositions no more than the statutory
rate for the right to reproduce and distribute the musical composition
in a phonorecord. The record company then, in turn, sells the
phonorecord at a fair market price. Because both groups do not share
equal power to set rates in an unfettered marketplace, it is
unreasonable to compare the value of the reproduction and distribution
right of musical compositions--a rate set by the government at a level
to achieve certain statutory goals--with the revenues flowing to record
companies from a price set in the marketplace according to the laws of
supply and demand, and then to declare that the marketplace values the
sound recording more than the underlying musical composition.
Consequently, RIAA's evidence sheds no light on the relative value of
the sound recording performance right and the musical works performance
right.<SUP>27</SUP>
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\27\ Even if there was some value to the comparison, RIAA does
not appear to factor into its calculations the value of the sound
recordings in those phonorecords that do not show a profit.
According to the record, ``approximately 85 percent of all sound
recordings do not recoup the costs that are spent to make and to
market those recordings. Indeed, over two-thirds of all sound
recordings sell less than 1,000 copies.'' Report para. 105.
---------------------------------------------------------------------------
In addition to the foregoing discussion, the Register notes that
Congress did not intend for the license fees paid under the new digital
performance license to ``diminish in any respect the royalties payable
to copyright owners of musical works for the public performance of
their works.'' S. Rep. No. 104-128, at 33 (1995) (emphasis added). See
also 17 U.S.C. 114(i). Although this statement does not express
Congress' intent that the license be set below the value of the public
performance right in the musical works, it indicates that Congress
considered the possibility that such would be the outcome, and sought
through express legislation to protect the current value of the
performance right in musical works.
Based on a review of the record evidence, the Register concurs with
the Panel's conclusion that there was insufficient evidence to
determine that the performers and record companies deserve a larger
percentage from the Services than that received by the copyright
holders in the musical works. That being so, the Register finds no
basis for making an upward adjustment to the musical works performance
license fees to establish a broader range of potential rates.
c. Statutory Objectives
Section 801(b)(1) of the Copyright Act states that the rates for
the section 114 license shall be calculated to achieve certain
statutory objectives. The Panel evaluated each statutory objective and
made a finding as to whether the Services or RIAA furthered that
objective. If the Services contributed more to furthering the
objective, the Panel gave more consideration to setting a rate at the
lower end of the possible range, and conversely, if the record
companies made the more significant contribution, the Panel found this
to favor a rate toward the upper end. Report para. 19((A)-(D).
The Panel's analysis led it to set a rate toward the low end of its
range, because a rate set toward the high end would thwart the
statutory objectives under current market conditions. Id. The Panel
expressly noted that a future Panel may reach an entirely different
result based on the then-current economic state of the industry and new
information on the Services' impact on the marketplace. Report para.
202.
RIAA contends that the Panel's findings that all factors favor
setting a low rate is contrary to CRT precedent. Petition at 32. This
contention relies on a statement from the D.C. Court of Appeals, which
upon reviewing the CRT's 1980 Mechanical Rate Adjustment Proceeding
concluded that the factors ``pull in opposing directions.'' Id., citing
RIAA v. CRT, 662 F.2d at 9. But in making this statement, the court
merely made an observation that the statutory objectives required the
Tribunal to weigh opposing factors in determining how best to achieve
each objective. It went on to say that the Tribunal had the
responsibility of reconciling these factors in setting a reasonable
rate, but the court did not preclude the possibility that the Tribunal
might find that the application of the factors to the evidence
consistently supported either a high rate or a low rate. RIAA v. CRT,
662 F.2d at 9.
[[Page 25406]]
The Register approves the Panel's basic approach in utilizing the
factors to determine its rate for the digital performance right and
adopts the Panel's findings where the evidence supports its
conclusions.
The Panel's determination that the statutory objectives supported
setting a rate favoring the Services was not arbitrary
The Panel's ultimate conclusion that the best way to achieve the
four statutory objectives was to set a low rate favoring the Services
is supported by the evidence presented in this proceeding. How much
weight to accord each objective is within the discretion of the Panel,
which may accord more weight to one objective over the others so long
as all objectives are served adequately. See RIAA v. CRT, 662 F.2d at
9. In RIAA v. CRT, the court reviewed the Tribunal's decision to raise
the rate for making and distributing phonorecords from two cents to
four cents. It found the copyright users' argument that the Tribunal
failed to give adequate consideration to certain factors over others
unavailing. In discussing the impact of the statutory objectives on the
ratemaking process, the court stated:
(T)he Tribunal was not told which factors should receive higher
priorities. To the extent that the statutory objectives determine a
range of reasonable royalty rates that would serve all these
objectives adequately but to differing degrees, the Tribunal is free
to choose among those rates, and courts are without authority to set
aside the particular rate chosen by the Tribunal if it lies within a
``zone of reasonableness.''
Id. at 9 (citations omitted). Hence, the Panel was free to find that a
rate on the low end was reasonable so long as that rate fell within the
``zone,'' and the ``zone'' was calculated to achieve the statutory
objectives.
The Panel's analysis and application of the statutory objectives,
however, are not without problems. The Register finds that on occasion,
the Panel either did not perceive or misinterpreted the precedential
underpinnings of the statutory objective.
A full discussion of the Panel's deliberations and the parties'
responses concerning the evaluation and application of the four
statutory objectives follows.
A. Maximize the Availability of Works. (17 U.S.C.801(b)(1)(A)).
The Panel found that the digital audio services ``substantially
increase the availability of recordings by providing many channels of
uninterrupted music of different genres,'' noting the diversity of the
music offered by the Services. Report Paras. 121-122. Based on this
finding, the Panel concluded at the end of its report that ``[t]o
maximize the availability of creative works to the public * * * the
rate should be set on the low side. A lower rate will hopefully ensure
the Services' continued existence and encourage competition so that the
greatest number of recordings will be exposed to the consumers.'' Id.
para. 198(A).
RIAA alleges that the Panel misinterpreted this statutory objective
because it focused on ``whether the Services promote the sale of sound
recordings,'' rather than ``whether the proposed rate will maximize the
availability of sound recordings.'' RIAA RPF para. 43; Petition at 37-
41. In support of its position, RIAA recalls the 1980 jukebox rate
adjustment proceeding, where the CRT concluded, in its discussion of
section 801(b)(1)(A), that jukeboxes were not crucial to assuring the
public of the availability of creative works. 1980 Adjustment of the
Royalty Rate for Coin-Operated Phonorecord Players, 46 FR 884, 889
(1981). The Tribunal, however, did find that ``reasonable payment for
jukebox performances will add incrementally to the encouragement of
creation by songwriters and exploitation by music publishers, and so
maximize availability of musical works to the public.'' Id. On the
strength of past CRT precedent and the courts' recurring observation
that compensation to the author or artist stimulates the creative
force, <SUP>28</SUP> RIAA disputes the Panel's conclusion, contending
that the best way to maximize the availability to the public is to
ensure that copyright owners receive fair compensation for their works.
Petition at 38.
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\28\ Sony Corp. of America v. Universal City Studios, Inc., 464
U.S. 417, 429 (1984), quoting United States v. Paramount Pictures,
334 U.S. 131, 158 (1948). (```[R]eward to the author or artist
serves to induce release to the public of the products of his
creative genius.'''); Twentieth Century Music Corp. v. Aiken, 422
U.S. 151, 156 (1975) (compensating authors ``serve[s] the cause of
promoting broad public availability of literature, music, and the
other arts''); 115 Rate Adjustment Proceeding, 46 FR 10479 (1981)
(In discussing section 801(b)(1)(A), the CRT looked to the purpose
of the section 115 license which was ``intended to encourage the
creation and dissemination of musical compositions.'' Therefore, the
Tribunal set the rate to ``afford songwriters a financial and not
merely a psychic reward for their creative efforts'' as a way to
maximize the availability of creative works).
---------------------------------------------------------------------------
The Services support the Panel's findings and conclusion but offer
no legal support for their position except to note that ``[t]he Courts
have long held that under copyright law, reward to copyright owners is
a `secondary consideration' that ultimately serves the cause of
promoting public availability of copyrighted works.'' Reply to Petition
at 27 (citations omitted). The Services assert rightfully that the
primary rationale for the copyright law is to stimulate the creation of
artistic works for the benefit of the public. Twentieth Century Music
v. Aiken, 422 U.S. 151, 156 (1975), citing Fox Film Corp. v. Doyal, 286
U.S. 123, 127 (1932) (``The sole interest of the United States and the
primary object in conferring this monopoly * * * lie in the general
benefits derived by the public from the labors of authors''). But in
underscoring the primary purpose for the copyright law, the Court in
Aiken acknowledges that this aim is achieved by allowing the copyright
owners to receive a fair return for their labor, the position advanced
by RIAA. ld. (``The immediate effect of our copyright law is to secure
a fair return for an `author's' creative labor. But the ultimate aim
is, by this incentive, to stimulate artistic creativity for the general
public good''). See also Sony Corp. America v. Universal City Studios,
Inc., 464 U.S. 417 (1984); United States v. Paramount Pictures, 334
U.S. 131 (1948). The positive interplay between compensation and
creation is a basic tenet of copyright law, and as such, its
contribution to stimulating the creation of additional works cannot be
set aside lightly.
In such matters where the Panel failed to discuss any relevant case
law or past precedent construing the statutory objective before
rendering its determination, the Register finds the Panel acted in an
arbitrary manner. The finding is based on the Panel's failure to
consider CRT precedent and to provide a rational basis for its
departure from prior proceedings construing the same statutory
objective. See Pontchartrain Broad. v. FCC, 15 F.3d 183, 185 (D.C. Cir.
1994) (``an unexplained departure from Commission precedent would have
to be overturned as arbitrary and capricious''). Motor Vehicle Mfrs.
Ass'n v. State Farm Mutual Auto. Insurance Co., 463 U.S. 29 (1983);
Celcom Communications Corp. v. FCC, 789 F.2d 67 (D.C. Cir. 1986);
Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985).
There is no record evidence to support a conclusion that the
existence of the digital transmission services stimulates the creative
process. Instead, the Panel made observations concerning the
development of another method for disseminating creative works to the
public--a valid and vital consideration addressed in the statutory
objective concerning relative contributions from each party--but fails
to discuss how the creation of a new mode of distribution will itself
stimulate the creation of additional works.
[[Page 25407]]
Because the Panel failed to reconcile its determination with past
CRT precedent and case law, the Register rejects both the Panel's
findings and conclusions on this point as arbitrary. Instead, the
Register concludes that the record companies and the performers make
the greater contribution in maximizing the availability of the creative
works to the public, a conclusion consistent with past CRT precedent.
B. Relative Roles of the Copyright Owners and the Copyright Users
in Making Product Available to the Public. (17 U.S.C. 801(b)(1)(C)).
The statutory objective addressing the relative roles of the
parties contains five different factors, which the Panel evaluated
independently. In analyzing the first component of this objective, the
relative creative contribution, the Panel found that both the recording
companies and the performers make substantial creative contributions to
the release of a sound recording. Report para. 87. Its determination
credited the performers and the record companies for their work in
making the musical work come alive. Id. Paras. 81-83. The Services were
found to make no such significant contribution to the creation of the
sound recording. Instead, their contribution was seen as more limited,
since it merely enhanced the presentation of the final work through
unique programming concepts. Id. Paras. 84-86. On balance, the Panel
found ``that the artists and the record companies provide greater
creative contributions to the release of sound recordings to the public
than do the Services,'' id. para. 87, a finding supported by CRT
precedent. <SUP>29</SUP>
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\29\ The CRT refused to award broadcasters a share of the cable
royalties for their role in formatting radio stations. The Tribunal
construed the claim as one for compilation which had a de minimis
value. The U.S. Court of Appeals for the D.C. Circuit upheld the
Tribunal's determination. NAB v. CRT, 772 F.2d at 931.
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The Panel continued its consideration of the relative contribution
of the owners vis-a-vis the users in making the product available to
the public and determined that the Services made the greater
contribution with respect to the four remaining factors: technological
contributions, capital investment, costs and risks to industry, and the
opening of new markets. Report Paras. 88, 93, 94, 97, 98, and 109.
In making this determination, the Panel focused on the
technological developments made by the Services in opening a new avenue
for transmitting sound recordings to a larger and more diverse
audience, including the creation of technology to uplink the signals to
satellites and transmit them via cable; technology to identify the name
of the sound recording and the artist during the performance; and
technology for programming, encryption, and transmission of the sound
recording. Id. Paras. 89-92. In contrast, the Panel found that the
record companies made no contributions in these areas. Id. para. 93.
The Panel also weighed the evidence presented in support of the
parties' relative roles in making capital investments in equipment and
technology, the third factor. The Panel determined that the Services
made a substantial showing of their $10 million investment in equipment
and technology, Report para. 95 and cites therein, whereas RIAA did not
suggest that any capital investment was required on its part. Id. para.
97.
And finally, the Panel found that the fourth factor, the relative
costs and risks incurred by the parties in making the product available
to the public, was greater for the Services than for the record
companies and the performing artists, even though the record companies
do incur substantial costs and risks in producing the product used by
the Services. Id. Paras. 98-108. In making its determination, the Panel
balanced the costs and risks involved in producing the sound recordings
against the cost and risks associated with bringing the creative
product to market in a new and novel way. Id. Paras. 99-107. In support
of its findings, the Panel noted that the Services have invested
significant start-up costs and are currently undergoing a shift in how
they market their services. Id. Paras. 55, 73-78, 99, and 102. In
addition, the Services contend, and the Panel agrees, that the Services
face new competition from the internet and digital radio. Consequently,
it is far from clear whether the Services can survive. Id. Paras. 72,
99.
The Panel also found that record companies face tremendous risks
when producing new sound recordings, citing the record companies'
submissions showing that record companies fail to recover the
production costs for approximately 85% of sound recordings, much less
show a profit. Id. para. 105. The Panel, however, went on to find that
the record companies have adapted to the vagaries of the music
business, and as an industry, have shown consistent growth in units
shipped and dollar value of records, CDs, and music videos from 1982-
1996. Id. para. 108.
The Panel's key finding from its analysis of the third objective
was that the Services contribute more to the opening of new markets for
creative expression through the development of the digital audio
services. Id. para. 109. The Panel credited the Services with opening
new markets for creative expression because they expose the public to a
broader range of music than does traditional over-the-air radio. Unlike
traditional radio, the Services offer multiple channels for classical,
jazz, traditional, alternative, and ethnic formats. Id. para. 110.
Because subscribers frequently purchase new music heard for the first
time on the service, the Panel found that record companies arguably
benefit directly from the expanded musical formats offered by the
Services. Id. para. 112. The Panel also found that the Services' future
plans to offer subscribers an opportunity to purchase the sound
recordings directly will ``undoubtedly'' open new markets for the
record companies. Id. Paras. 114-115.
The record companies do not accept the Panel's findings concerning
this statutory objective, and once again, take issue with the Panel's
interpretation, positing that the Panel impermissively focused on
``whether recording companies had made a particular contribution to the
Services operations--and wholly ignored the contributions that the
recording industry had made to the sound recordings themselves.''
Petition at 45-46. RIAA's predicate for its argument is its
interpretation that the statutory phrase, ``in the product made
available to the public,'' 17 U.S.C. 801(b)(1)(C), refers only to the
creation of the sound recordings and not to the Services' creation of a
new means for bringing the sound recordings to the listener. Petition
at 46.
In addition to this alleged fundamental flaw in interpretation,
RIAA contends that the Panel ``improperly collapsed (its cost/risk
analysis) into a risk only (analysis)'' and ignored empirical evidence
in the record discounting the promotional value of the Services'
offerings. Id. at 47-48. RIAA, however, fails to note that the Panel
did acknowledge that the record companies incur significant costs and
risks in their business. Report Paras. 105-107. But the Panel also
found that the Services presented no additional risk to the record
companies ``unless the customers of the Services record the sound
transmissions in lieu of purchasing these products at a retail store.''
Report para. 107 (emphasis added). Because the record companies
introduced no evidence showing decreased overall sales of records and
CDs, the Panel reasonably found that the record companies did not incur
additional risk from lost sales due to the Services' activities. Report
Paras. 107, 111.
[[Page 25408]]
If anything, the Panel believed that the Services decreased the
risk to the recording companies because the digital audio services have
substantial promotional value. The promotional value comes from the
constant airplay of new types of music not readily accessible in the
marketplace, which in turn stimulates record sales. Report para. 110.
In making this finding, the Panel relied on Simon's and Rubinstein's
testimony that ``subscribers frequently purchase new music precisely
because they heard it on one of the Services,'' Report para. 112 citing
Simon <SUP>30</SUP> W.D.T. at 1; Rubinstein W.D.T. at 34; Tr. 1442
(Rubinstein), and on the record industries' practice of supplying
complimentary copies of their products to the Services for use on the
air to promote the sales of an album. Tr. 1291 (Rubinstein); Tr. 1182-
83, 1201 (Talley) <SUP>31</SUP>; DMX Ex. 3. See also Tr. 2248 (Wildman)
(``Is there a benefit to the record company from getting music exposed
that might become a hit that wouldn't get exposed otherwise? Of course
there is'').
---------------------------------------------------------------------------
\30\ Senior Vice-President of Programming at Digital Cable Radio
Associates.
\31\ Executive Vice-President and Chief Technical Officer of
Digital Music Express who oversees research and development, and
technical operations worldwide.
---------------------------------------------------------------------------
Furthermore, RIAA's reliance on the preliminary DCR survey for the
proposition that the Services do not promote sound recording sales is
untenable where the record clearly shows that the record companies
provide promotional copies to the Services. In fact, RIAA's own expert
acknowledges ``there (are) promotional benefits to recording companies
from having their music played on radio stations or the digital music
services.'' Tr. 2220 (Wildman).
In contrast to RIAA's fundamental objection to the Panel's
interpretation of this statutory objective, the Services contend that
the Panel made a reasonable determination that the phrase, ``the
product made available to the public,'' applied to both the sound
recordings and the entire digital music service. Reply to Petition at
29. This finding is consistent with the 1980 rate adjustment proceeding
for the mechanical license, where the CRT credited the record
companies, the users of the musical compositions for purposes of the
mechanical license, with developing new markets through technological
innovations, and through the creation of record clubs, mail order
sales, and television advertising campaigns. 46 FR 10480-81 (1981).
In making her determination on this point, the Register reflects on
the statutory responsibilities of the Panel which is to set reasonable
rates and terms for the public performance of sound recordings by
certain digital audio services. (emphasis added). ``In deciding to
grant a new exclusive right to perform copyrighted sound recordings
publicly by means of digital audio transmission, the Committee was
mindful of the need to strike a balance among all of the interests
affected thereby.'' S. Rep. No. 104-128, at 15-16 (1995). By its very
nature, the section 114 license contemplates weighing the contributions
of the users in creating and expanding the market for the performance
of the sound recording in a digital technological environment. Without
dispute, the evidence reveals a large investment of capital by the
Services to create a new industry that expands the offerings of the
types of music beyond that which one receives over the radio, through
live performances, and other traditional means of public performance.
Report Paras. 44, 49, 52, 99, 102-104, 110, 113; Simon W.D.T. at 3-4;
Rubinstein W.D.T. at 13-14; Tr. 853-54 (Del Beccaro); Tr. 1237-40
(Rubinstein); Tr. 1476-78 (Funkhouser); DMX Ex. 32. Conversely, the
record companies offered little or no evidence on their contributions
relating to the key factors. Report Paras. 93, 97, 111.
From the foregoing analysis, the Panel concluded that the record
companies contributed more in only one of the five areas under
consideration in evaluating this statutory objective, and consequently,
the rate should be set at a minimum level in favor of the Services.
Report para. 198(C).
C. To Minimize Any Disruptive Impact on the Structure of the
Industries Involved. (17 U.S.C. 801(b)(1)(D)).
The Panel determined that a rate set too high could cause one or
all of the Services to abandon the business. Report Paras. 117-118;
Troxel <SUP>32</SUP> W.R.T. 1, 5-6; Tr. 2553-2554; DMX Ex. 49(b). The
Panel considered the nature of the Services' business, noting its need
to increase its subscriber base just to reach a break-even point
without the added obligation of paying an additional fee for a digital
performance right. Id. Paras. 119(a)-(d). The Panel also calculated
that the record companies would receive substantially less than a 1%
increase in their gross revenues even if the rate were set at the
highest proposed level (41.5% of gross revenues), underscoring the
lesser impact of the license fees on the record industry. Id. para.
119.
---------------------------------------------------------------------------
\32\ Chief Executive Officer and President of Digital Music
Express since July 1997.
---------------------------------------------------------------------------
RIAA implies that a low statutory rate for the digital performance
right will have a negative impact on their future negotiations with
other digital services. RIAA RPF Paras. 58, 105; Petition at 43. They
also object to the Panel's constant reference to revenues generated
from the distribution and reproduction rights and its alleged lack of
consideration of CRT precedent. Petition at 43-44.
In support of the Panel's evaluation, the Services note that RIAA
failed to introduce any evidence concerning the impact a low rate would
have on the record companies and performing artists, in direct contrast
to the abundance of financial information submitted by the Services in
support of their assertion that a high rate could devastate the
industry. Reply to Petition at 28.
While RIAA correctly states that the Panel considered the record
companies' revenues generated from the exercise of other rights granted
to them under the Copyright Act, the Panel's purpose was merely to
demonstrate the financial health of the industries. The Panel never
implied that the record companies should receive anything less than
reasonable compensation under the DPRSRA, nor that their revenues from
the exercise of the distribution and reproduction rights are meant to
compensate them for the use of their creative works under the new
statutory license. Rather, it determined that a reasonable rate for the
digital performance right should be set at a level to allow the three
companies currently doing business to continue to do so. This balance
in favor of the Services supports both the statutory objective to
consider the impact on the industries and Congressional intent not to
hamper the arrival of new technologies. S. Rep. No. 104-128, at 15-16
(1995). The law requires the Panel, and ultimately the Librarian, to
set a reasonable rate that minimizes the disruptive impact on the
industry. It does not require that the rate insure the survival of
every company. See 115 Rate Adjustment Proceeding, 46 FR 10486 (1981)
(``We conclude that while the Tribunal must seek to minimize disruptive
impacts, in trying to set a rate that provides a fair return it is not
required to avoid all impacts whatsoever'').
The Register acknowledges RIAA's uneasiness with the possibility
that the rate which is ultimately adopted may have precedential value
for their negotiations with other digital services, but such concern is
misplaced. The rate under consideration applies only to the non-
interactive digital audio subscription services, provided, of
[[Page 25409]]
course, that they are eligible under the law and comply with all legal
requirements. See 17 U.S.C. 114(d)(2). Congress, fully recognizing the
threat that interactive services pose to the record companies, crafted
the law so that they were ineligible for the compulsory license. The
result of this decision is that record companies have an opportunity to
negotiate an appropriate marketplace rate for a digital performance
license with these services.
Interactive services, which allow listeners to receive sound
recordings ``on-demand,'' pose the greatest threat to traditional
record sales, as to which sound recording copyright owners (of sound
recordings) must have the right to negotiate the terms of licenses
granted to interactive services.
S. Rep. No. 104-128, at 24 (1995). Congress also included provisions in
the DPRSRA to establish different rates for different types of digital
audio subscription services. Section 114(f)(1) states that ``(s)uch
terms and rates shall distinguish among the different types of digital
audio transmissions then in operation.'' This language gives the Panel
and the parties broad discretion in setting rates for different types
of digital audio services, when such distinction is warranted. Nor must
the record companies accept the final rate from this determination for
a new type of digital audio service which emerges before the next
regularly scheduled rate adjustment proceeding. The law expressly
allows for another rate-setting proceeding upon the filing of a
petition. 17 U.S.C. 114(f)(4)(A)(i). Together, these provisions provide
an opportunity to the record companies to make their case for a higher
rate, where circumstances support such a determination.
In addition, as the market conditions change and the industry shows
significant growth and profitability, another Panel will have an
opportunity to make adjustments to the rate, and may well find that the
changed circumstances favor an upward adjustment. In any event, the
Register must make her recommendation based on the evidence in the
current record before the Panel, which supports the Panel's
determination that the best way to minimize the disruptive impact on
the structure of the industries is to adopt a rate from the low range
of possibilities. Report para. 198(D).
D. To afford the copyright owner a fair return for his creative
work and the copyright user a fair income under existing economic
conditions. (17 U.S.C. 801(b)(1)(B)).
Usually this balance is struck in the marketplace through arms-
length negotiations; and even in the case of a statutory license,
Congress encourages interested parties to negotiate among themselves
and set a reasonable rate which inevitably affords fair compensation to
all parties. 17 U.S.C. 114(f)(1), (4); 115(c)(3); 116(b); 118(b); and
119(c). A statutory rate, however, need not mirror a freely negotiated
marketplace rate--and rarely does--because it is a mechanism whereby
Congress implements policy considerations which are not normally part
of the calculus of a marketplace rate. See 115 Rate Adjustment
Proceeding, 46 FR 10466 (1981) (determining that the mechanical license
regulates the price of music to lower the entry barriers for potential
users of that music).
The creation of the digital performance right embodied similar
considerations. It affords the copyright owners some control over the
distribution of their creative works through digital transmissions,
then balances the owners' right to compensation against the users' need
for access to the works at a price that would not hamper their growth.
In the current proceeding, the Panel considered proposed
marketplace benchmarks, including all the economic data, and weighed
the record evidence in light of the statutory objectives. This process
is structured so that it affords the copyright owners reasonable
compensation and the users a fair income--the purpose of the second
statutory objective. See 17 U.S.C. 801(b)(1)(B). Accordingly, a
recommended rate so calculated achieves this final statutory objective,
in that it reflects the balance between fair compensation for the
owners and a fair return to the users. As fully discussed above, the
Register supports the Panel's methodology in reaching its determination
(although she rejects as arbitrary the Panel's application of that
methodology in some respects) and has adopted the Panel's overall
approach in making her recommendation to the Librarian.
d. The Register's Recommended Rate
Rate setting is not a precise science. National Cable Television
Assoc. Inc., 724 F.2d 176, 182 (D.C. Cir. 1983). (``Ratemaking
generally `is an intensely practical affair.' The Tribunal's work
particularly, in both ratemaking and royalty distributions, necessarily
involves estimates and approximations. There has never been any
pretense that the CRT's rulings rest on precise mathematical
calculations; it suffices that they lie within a `zone of
reasonableness' ''). It requires evaluating the marketplace points of
reference and tempering the choice of any proposed rate with the policy
considerations underpinning the objectives of Congress in creating the
license. Because this process requires the consideration of numerous
factors, the CARPs, as the Tribunal before them, have considerable
discretion in setting rates designed to achieve specific statutory
objectives. See RIAA v. CRT, 662 F.2d at 9 (``To the extent that the
statutory objectives determine a range of reasonable royalty rates that
would serve all these objectives adequately but to differing degrees,
the Tribunal is free to choose among those rates, and courts are
without authority to set aside the particular rate chosen by the
Tribunal if it lies within a `zone of reasonableness' '').
Discretion in setting rates, however, assumes that the underlying
rationale for making a determination is sound--a finding which the
Register could not make in this proceeding because the Panel's undue
reliance on the rate in the DCR license agreement, and its subsequent
manipulation of the license fee, were arbitrary actions. See Permian
Basin Area Rate Cases, 390 U.S. 747 (1968) (Rate setting agency allowed
to use a variety of regulatory methods in setting rates provided that
the result is not arbitrary or unreasonable). Consequently, the
Register recommended that the Librarian reject the Panel's
determination, which he did, and set a new rate.
In formulating her recommendation as to the appropriate rate for
the digital performance license, the Register, like the Panel,
considered the relevant marketplace points of reference offered into
evidence.<SUP>33</SUP> These reference points guided the Register in
her task of setting a reasonable rate for the performance of digital
sound recordings. But unlike the Panel, the Register gave more
consideration to the rates paid for the performance right in the
musical compositions, because these rates represent an actual
marketplace value for a public performance right in the digital arena,
albeit not the digital performance right in sound recordings. The
Register took this approach after finding that the DCR negotiated
license fee could not reflect accurately the
[[Page 25410]]
marketplace value of the digital performance right since no such legal
right existed at the time the rate was negotiated, and the negotiating
parties were unwilling to enter a licensing agreement for the digital
performance right absent a partnership agreement.
---------------------------------------------------------------------------
\33\ The values of the relevant marketplace reference points,
the DCR negotiated license fee and the license fee for the
performance of the musical works, are subject to a protective order,
and hence, their numerical values have been omitted. Nevertheless,
the values of the performance rights embodied in these licenses
figure prominently in the determination of the value for the digital
performance right in sound recordings. In fact, the sum of these
license fees establishes the outer boundary of the ``zone of
reasonableness'' for this proceeding.
---------------------------------------------------------------------------
Nevertheless, the Register did take into account the negotiated
value of the digital performance right in the DCR license in making her
determination that the statutory rate should be less than the value of
the performance rights of the musical compositions. This determination
followed from a review of the evidence on the relative value of the
sound recording component and the musical works component of a
phonorecord, which failed to support the record industry's assertion
that the marketplace valued the sound recording component more than the
musical works component. This being so, the Register evaluated the only
other relevant marketplace point of reference, the negotiated DCR
license fee. Because this fee is considerably lower than the total
value of the marketplace license fees which each Service pays for the
right to publicly perform the musical works, and while not a true
marker for the value of the digital performance right, it supports a
determination that the value of the performance right in the sound
recording does not exceed the value of the performance right in the
musical works.
In addition to these factors, the Register considered the statutory
criteria and Congress' intent in creating the license. Unlike the
Panel, which found that all four factors support a low rate, the
Register found that the copyright owners did more ``[t]o maximize the
availability of creative works to the public,'' see 17 U.S.C.
801(b)(1)(A), and should receive fair compensation for their
contributions in this area. However, the three remaining factors,
especially the fourth factor, which requires that the rate be set
``[t]o minimize any disruptive impact on the structure of the
industries involved,'' see 17 U.S.C. 801(b)(1)(D), compels the Register
to consider the economic health of the digital audio transmission
industry.
The evidence clearly shows that the Services have been facing an
uphill battle in their struggle to achieve profitability. At this time,
the digital audio industry is still struggling to create a sustainable
subscriber base, and as yet, no digital audio transmission service has
shown a profit nor does any service expect to reach profitability in
the near future. Unfortunately, the actual state of financial health
within the industry is difficult to ascertain from the projected
budgets put forward by the Services. Nevertheless, the 5% rate proposed
by the Panel did not draw an objection from the Services, indicating a
reasonable state of financial health to absorb at least a rate set at
this level.
For the foregoing reasons, the Register recommends a rate that will
not harm the industry at this critical point in its development and
finds that a 6.5% rate achieves this aim and meets all other statutory
objectives. This rate reflects the deference the Register accorded the
value of the performance right in the musical works, the consideration
of the financial health of the industry, and the recognition that
copyright owners contribute the lion share's to the creation of new
works for the public's enjoyment.
e. Terms
On June 2, 1997, the Services submitted general comments concerning
proposed terms and conditions for the digital performance license
pursuant to the March 28, 1997, Order of the Copyright Office. They
later proposed specific terms concerning how the Services would make
payment, how often they would pay, and procedures for verifying the
accuracy of those payments, including terms on confidentiality,
recordkeeping, and audits. Services PF Paras. 122-128; 284-304.
Included in their submissions were proposed terms establishing a
payment schedule for the distribution of royalties to the featured
artists and the nonfeatured musicians and vocalists. Services PF Paras.
287-289. The Panel refused to adopt these terms because the Services
failed to present any evidence or testimony to support their proposal,
but more importantly, because the Panel found that ``the issue of the
timing of payments from the RIAA Collective to artists and other
performers is not within the scope of this proceeding.'' Report at 56
n.21.
RIAA made similar proposals on how to administer the royalty
payments, but offered two additional considerations, a minimum fee
``equivalent to the rate adopted in this proceeding'' and a late fee
for untimely payments. RIAA PF Paras. 125-160. The Panel rejected the
proposal to impose a minimum fee, see discussion supra, but accepted
the RIAA proposal to impose a 1.5% late fee.
The Register supports and adopts the Panel's decision to reject the
Services' proposed terms concerning further distribution of royalties
to certain copyright owners by RIAA on the grounds that no evidence was
introduced in support of the terms. Because this is a sufficient ground
on which to reject the Services' proposed term, the Register need not
address the Panel's determination that it lacked the authority to
consider a payment schedule for the performing artists. The Register
also need not address the Panel's rejection of the minimum fee because
no party chose to challenge the Panel's decision. See n. 7, supra.
The parties' reactions to the terms adopted by the Panel
The Services did not file a post-panel motion to modify or set
aside the Panel's determination, thereby signaling their acceptance of
the Panel's resolution of any conflict between the parties concerning
the terms. However, RIAA has raised two key items for further review by
the Librarian: The adoption of a term which defines when copyright
infringement occurs for purposes of the statutory digital performance
license and the creation of a payment schedule that allows the Services
to spread out their payment for the performances made between February
1996, the effective date of the Act, and November 1997, the month the
Panel filed its report with the Librarian of Congress.<SUP>34</SUP>
Petition at 7 n. 1.
---------------------------------------------------------------------------
\34\ RIAA did not object to the Panel's refusal to grant its
request for a minimum fee in its petition, nor does the Register
find any reason to question the Panel's determination. As discussed
supra, the Register finds the Panel's disposition on this issue to
be well reasoned and supported by the evidence.
---------------------------------------------------------------------------
The Panel's adoption of two of its terms was either arbitrary or
contrary to law
The Register has determined that the Panel had no authority to set
terms which attempt to delineate the scope of copyright infringement
for the digital performance license, or alter a payment schedule
already set by law. See Report Paras. 187-189, 206(a), (b).
1. Payment of arrears. The Panel adopted a term which allowed the
Services to make back payments over a 30-month period for use of the
sound recordings between February 1, 1996, and the end of the month in
which the royalty rate is set and to delay the first payment for six
months. Report Paras. 187, 206(a). The Register has determined,
however, that adoption of this term is contrary to law.
Section 114(f)(5)(B) of the Copyright Act states that ``(a)ny
royalty payments in arrears shall be made on or before the twentieth
day of the month next succeeding the month in which the royalty fees
are set.'' The ``arrears'' referenced in the statute refers to the
copyright liability that accrued to the Services for those performances
made since February 1, 1996, the effective date of the Act, and the end
of the month in which the royalty rate is set.
[[Page 25411]]
In spite of the express statutory language, the Panel fashioned a
payment schedule to ease the burden on the Services in meeting this
obligation.
The Panel found support for its action in the 1980 jukebox rate
adjustment proceeding, in which the CRT raised the rate from $8 to $50,
but did so in a progressive fashion. Report para. 186. The
determination required the jukebox operators to make the first
increased payment of $25 per jukebox per year on January 1, 1982, and a
second $25 annual payment the following year. The CRT did not require
the full $50 annual rate to be paid until January 1, 1984,
approximately three years after setting the rate. 46 FR 884, 888, 890
(1981). The Tribunal adopted the phase-in payment schedule relying on
its duty to set rates in accordance with the statutory objectives. It
found that the gradual increase in payments furthered the objective
concerned with minimizing the disruptive impact on the industries. Id.
at 889. The Panel relied upon this CRT decision in adopting its phase-
in program for payment of the arrears over a 30-month period.
The Services embrace the Panel's reliance on past CRT precedent for
the inclusion of the phase-in payment term and claim that RIAA also
agreed to allow the Services to make the ``back payments'' over a
period of time. Reply to Petition at 14 n. 5. This assertion, however,
is inaccurate. RIAA agreed that a phase-in schedule would be
appropriate for the minimum fee, but never posited such a payment
schedule for the arrears. See Tr. 2829 (RIAA closing argument). By
comparing RIAA's statement on the proposal for making payments of a
minimal fee,
The recording industry proposes that the minimum fee be phased
in to help minimize any disruptive effect from the fact that, for
the first time, the services are going to be paying a fair fee--in
fact, any fee at all for the performance of sound recordings,
Id. at 2829, see also RIAA PF Paras. 150-152, with its statement
concerning the timing of the payment of arrears,
In terms of the timing of the back payment, the statute leaves
absolutely no question as to when the back payment from the services
is due for the period from the Act's effective date through the date
on which the Panel issues its decision.
Section 114(f)(5)(B) says that ``any royalty payment in arrears
shall be made on or before the 20th day of the month next succeeding
the month in which the royalty fees are set.''
Id. at 2829-2830, see also RIAA PF para. 157, it is absolutely
clear that RIAA never agreed to a payment scheme for the arrears that
would allow the Services to make partial payments over a 30-month
period.
In another attempt to support the Panel's conclusion, the Services
construe the statutory provision broadly and argue that arrears refers
to ``any royalty payment in arrears'' and ``does not specifically cover
the back payment for the extended period between the 1995 Act's
February 1, 1996, effective date and the time the Panel sets the
performance rate.'' Services RF para. 157. This assertion, however, is
inconsistent with the legislative history and the plain language of the
statute.
Thus, the Panel had no authority to create a graded payment
schedule for the payment of the arrears because the statute expressly
stated when payment was to occur. Section 114(f)(5)(B) states, without
qualification, that ``[a]ny royalty payments in arrears shall be made
on or before the twentieth day of the month next succeeding the month
in which the royalty fees are set.'' (emphasis added). It is a well-
established principle that, in interpreting the meaning of a statute,
the language of the law is the best evidence of its meaning. United
States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989); Norman
S. Singer, Sutherland Statutory Construction sec. 46.01 (5th ed. 1992
rev.) Because the statutory language is clear on its face, the Register
finds that the Panel's and the Services' reliance on the CRT 1980
jukebox decision is arbitrary and contrary to well-established
principles of law. And even if the statutory language were ambiguous,
the legislative history supports the Register's and RIAA's
interpretation of section 114(f)(5)(B).<SUP>35</SUP>
---------------------------------------------------------------------------
\35\ S. Rep. No. 104-128, at 30 (1995) (``If the royalty fees
have not been set at the time of performance, the performing entity
must agree to pay the royalty fee to be determined under this
subsection by the twentieth day of the month following the month in
which the rates are set'').
---------------------------------------------------------------------------
Because the Panel's action exceeded its authority, the Register
recommends that the Librarian reject the proposed term because its
adoption would be contrary to law.
2. Copyright infringement. The Panel adopted a term which stated
that ``[i]f a Service fails to make timely payments, it will be subject
to liability for copyright infringement. Such liability will only come
about, however, for knowing and willful acts which materially breach
the statutory license terms.'' Report para. 206(b). The Register has
determined that this term is contrary to law.
RIAA contends that the Panel ``usurped the authority of Article III
courts by attempting to define the circumstances where the Services are
liable for copyright infringement.'' Petition at 7 n.1. In response,
the Services argue that the DPRSRA supports the Panel's suggestion that
minor technical violations should not result in an infringement action.
Services Reply to Petition at 14 n.5. Specifically, the Services point
to section 114(j)(7)(B) which limits complement to the performance of
sound recordings from a single album, which Congress included ``[t]o
avoid imposing liability for programming that unintentionally may
exceed the complement.'' S. Rep. No. 104-128, at 35 (1995).
The Register acknowledges that Congress made provisions to protect
users from copyright liability for programming that unintentionally
exceeds the complement, see 17 U.S.C. 114(j)(7), but she finds it
impermissible to expand a particular provision of the copyright law
which limits copyright liability under one set of circumstances to
include additional limitations not contemplated by Congress. Fame
Publishing Co. v. Alabama Custom Tape, Inc., 507 F.2d 667, 670 (5th
Cir.) cert. denied, 423 U.S. 841 (1975) (``We begin by noting that the
compulsory license provision is a limited exception to the copyright
holder's exclusive right to decide who shall make use of his
composition. As such, it must be construed narrowly, lest the exception
destroy, rather than prove, the rule. Thus we should neither expand the
scope of the compulsory license provision beyond what Congress intended
in 1909, nor interpret it in such a way as to frustrate that
purpose'').<SUP>36</SUP>
---------------------------------------------------------------------------
\36\ Congress defined the scope of the digital performance right
granted to the copyright owner and under what circumstances a
digital audio service infringes that right. See, e.g., 17 U.S.C. 114
(d) and (e)(5).
---------------------------------------------------------------------------
But more importantly, in examining the legislative history, it is
clear that Congress meant for the CARP to have limited authority in
adopting reasonable terms.
By terms, the Committee means generally such details as how
payments are to be made, when, and other accounting matters (such as
are prescribed in section 115). In addition, the Librarian is to
establish related terms under section 114(f)(2). Should additional
terms be necessary to effectively implement the statutory license,
the parties may negotiate such provisions or the CARPs may prescribe
them.
S. Rep. No. 104-128, at 30 (1995). This language clearly indicates that
the CARP had authority to set reasonable terms only so far as those
terms insured the smooth administration of the license. There is no
indication in the statutory language or in the legislative history that
the scope of the terms should go
[[Page 25412]]
beyond the creation of a workable administrative system and reach
substantive issues, such as defining the scope of copyright
infringement for those availing themselves of the statutory license.
Congress carefully delineated the scope of the digital performance
right and the limitations on that right within the provisions of the
statute. Section 114(d), entitled ``Limitations on Exclusive Right,''
states with specificity when a performance by means of a digital audio
transmissions is not an infringement, just as section 114(f)(5) defines
when a public performance of a sound recording by means of a nonexempt
subscription digital transmission is not an infringement. For the Panel
to fashion a term further delineating the issue of copyright
infringement when Congress has already acted is an improper exercise of
authority beyond that granted under the statute.
Accordingly, the Register finds that the Panel had no authority to
set a term construing the meaning of copyright infringement for
purposes of section 114. See Report Paras. 188, 206(b). Because the
Panel's action exceeded its authority, the Register recommends that the
Librarian reject the proposed term because its adoption would be
contrary to law.
f. Other Issues
1. Effective date. Section 114(f)(5)(B) states that payments in
arrears for the performance of sound recordings prior to the setting of
a royalty rate are due on a date certain in the month following the
month in which the rate is set. Both the Panel and RIAA assume that the
``date the royalty rate is set'' is the date the Panel submits its
report to the Librarian of Congress. See Report para. 186; Petition at
7 n.1. The Register disagrees with this assessment.
Section 802(g) governs judicial review of the Librarian's decision
with respect to CARP determinations. The section allows an aggrieved
party 30 days to file an appeal with the United States Court of Appeals
for the District of Columbia Circuit, but does not relieve a party of
his or her obligation to make royalty payments during the pendency of
the appeal. In the event that no appeal is taken, the section states
that ``the decision of the Librarian is final, and the royalty fee * *
* shall take effect as set forth in the decision.'' 17 U.S.C. 802(g).
Neither section 114 nor chapter 8 makes further reference to the
possible effective date of royalty rates.
As discussed in an earlier order setting a rate for the satellite
compulsory license, 17 U.S.C. 119, the Register interprets the decision
referenced in section 802(g) ``to mean the decision of the Librarian,
and not the decision of the CARP, since section 802(g) only refers to
the decision of the Librarian. Consequently, the Register concludes
that only the Librarian of Congress has the authority to set the
effective dates of the royalty rates in this proceeding.'' Rate
Adjustment for the Satellite Carrier Compulsory License, 62 FR 55754
(1997). See also RIAA v. CRT, 662 F.2d at 14 (``When the statute
authorizing agency action fails to specify a timetable for
effectiveness of decisions, the agency normally retains considerable
discretion to choose an effective date'') (footnote omitted). This
reasoning applies equally to the current proceeding, since no other
guidance for setting the effective date is to be found in the statute
or the legislative history.
The Register has pondered the question of an appropriate effective
date and believes that the Panel's concern with minimizing the
disruptive impact on the structure of the industries involved was well
founded. See discussion supra concerning the economic health of the
Services. Consequently, the Register proposes an effective date of June
1, 1998, which would require the Services to make full payment of the
arrears on July 20, 1998, in addition to the payment for the month of
June 1998, with subsequent payments to RIAA on the 20th day of each
subsequent month. This date provides the Services with a measured
amount of time to provide for any necessary adjustments in their
business operations to meet their copyright obligations.
The Tribunal took a similar course when it set the effective date
for implementing the rate increase for making and distributing
phonorecords approximately six months after publication of its final
rule. Section 115 Rate Adjustment Proceeding, 46 FR 10486 (1981). The
Tribunal chose not to implement the rate change immediately in order to
minimize the effect of the upward adjustment on the copyright users.
The United States Court of Appeals for the District of Columbia Circuit
upheld the Tribunal's decision to postpone the effective date because:
The Tribunal's opinion demonstrates its concern ``to minimize
disruptive impacts'' on the recording industry, and its view that
the effective date of a royalty adjustment should be arranged so as
to be ``less disruptive to the industries.'' Although the Tribunal
concluded that a single increase to the full four-cent rate would
not be unduly disruptive, it was within the Tribunal's discretion to
give the industry adequate lead time to prepare for the increase.
RIAA v. CRT, 662 F.2d at 14 (citations omitted).
2. Value of an individual performance of a sound recording.
The Register notes that the Panel stopped prematurely in its
consideration of the value of the public performance of a sound
recording. Its entire inquiry focused on the value of the ``blanket
license'' for the right to perform the sound recording, without once
considering the value of the individual performance--a value which must
be established in order for the collecting entity to perform its
function not only to collect, but also to distribute royalties.
Consequently, the Register has made a determination that each
performance of each sound recording is of equal value and has included
a term that incorporates this determination.
To do otherwise requires the parties to establish criteria for
establishing differential values for individual sound recordings or
various categories of sound recordings. Neither the Services nor RIAA
proposed any methodology for assigning different values to different
sound recordings. In the absence of an alternative method for assessing
the value of the performance of the sound recording, the Register has
no alternative but to find that the value of each performance of a
sound recording has equal value. Furthermore, the structure of the
statute contemplates direct payment of royalty fees to individual
copyright owners when negotiated license agreements exist between one
or more copyright owner and one or more digital audio service. To
accommodate this structure in the absence of any statutory language or
legislative intent to the contrary, each performance of each sound
recording must be afforded equal value.
This determination does not alter the statutory provision that
specifies how the copyright owner of the right to publicly perform the
sound recording must allocate the statutory fees among the recording
artists. See 17 U.S.C. 114(f)(2).
3. Audit of the designated collective. Although the membership of
the collective represented by RIAA includes over 275 record labels
which create more than 90 percent of all legitimate sound recordings
sold in the United States, it does not represent the record companies
responsible for the creation of the remaining 10% of the sound
recordings. Report para. 20. Nevertheless, the Panel found, and the
Register concurs, that the parties' suggestion to designate a single
entity to collect and to distribute the royalty fees creates an
efficient administrative mechanism. Report para. 184.
[[Page 25413]]
It is common practice, however, for the government body making such
designations to implement safeguards to monitor the functions of the
collective.<SUP>37</SUP> To this end, the Register recommends new terms
that afford the copyright holders a right to audit the collective's
practices in handling the royalty fees. The Register takes this step to
insure copyright holders access to the records of the organization
charged with the fiduciary responsibility of making an equitable
distribution among those entitled to receive a portion of the funds,
while at the same time preserving the confidentiality of the
organization's business records. These terms mirror those formulated by
the parties and adopted by the Panel which allow the collective to
audit the business records of the Services to insure proper payment of
the royalties.
---------------------------------------------------------------------------
\37\ A government's general policy toward the regulation of
collective administration should be to limit government intervention
to only ``that which is necessary to facilitate the effective
operations of the collective administration organization, consistent
with the private character of the rights involved, while checking
possible abuses by that collective in the least intrusive manner
possible within'' the overall context of the society involved. David
Sinacore-Guinn, Collective Administration of Copyrights and
Neighboring Rights, 544 (1993).
---------------------------------------------------------------------------
4. Deduction of administrative costs. Neither the parties nor the
Panel gave any consideration to the manner in which the collecting
entity would deduct from payments to copyright owners its costs of
administering the funds it receives and disburses. Nevertheless, the
Panel should have addressed this key term of the compulsory license.
Therefore, the Register finds it necessary to establish an additional
term that permits the collecting entity to deduct from the royalties it
pays to copyright owners the costs it incurs in administering the
funds, so long as the costs deducted are reasonable and are no more
than the actual costs incurred by the collecting entity.
5. Unknown copyright owners. The digital audio services will pay
royalties on all sound recording performances without regard to the
further disbursement of these fees to the numerous copyright holders.
The collective will have little difficulty in identifying and locating
the overwhelming majority of the copyright holders entitled to receive
a portion of the fees, since the membership of the collective
represents the interests of the copyright holders in over 90% of all
sound recordings. Problems may arise, however, as RIAA attempts to
identify and locate the copyright holders to the remaining 10% of the
sound recordings. In anticipation of the likelihood that RIAA will not
be able to locate all copyright holders, the Register recommends the
adoption of a term that segregates the fees for unknown copyright
owners into a separate trust account for future distribution to the
rightful owner, or in the event that the owner is not found, allows the
collective to use the funds after a period of three years, see 17
U.S.C. 507(b), to offset its administrative costs associated only with
the collection and distribution of royalty fees collected under the
statutory license.
6. Rates for other types of digital audio services. The rates and
terms announced in this notice apply to DCR, DMX, and Muzak, the three
digital audio transmission services participating in this proceeding,
and to any other digital audio transmission service that avails itself
of the compulsory license, provided that the service is of the same
type. The Register raises this point to avoid any confusion over the
Panel's statement which implies that the rates and terms set in this
proceeding ``shall be binding on all copyright owners of sound
recordings and entities performing sound recording[s].'' Report para.
1, citing 17 U.S.C. 114(f)(2). A general provision, however, must be
read in conjunction with more specific statutory language; in this
case, section 114(f)(4)(A), which provides for additional rate
adjustment proceedings upon petition from any copyright owner or entity
performing sound recordings when a new type of digital audio
transmission becomes or is about to become operational.
VI. Conclusion
In considering the evidence in the record, the contentions of the
parties, and the statutory objectives, the Register of Copyrights
recommends that the Librarian adopt a statutory rate for the digital
performance of sound recordings, pursuant to 17 U.S.C. 114, of 6.5% of
gross revenues from subscribers residing within the United States.
In addition, the Register recommends that the Librarian adopt the
reasonable terms propounded by the Panel except for those terms
concerning the payment schedule for arrears and potential limitations
on the scope of copyright infringement. The Register also recommends
setting June 1, 1998, as the effective date for implementing the new
rate and terms in order to ease the burden on each Service on meeting
its initial obligations under the statutory license.
VII. The Order of the Librarian of Congress
Having duly considered the recommendations of the Register of
Copyrights regarding the Report of the Copyright Arbitration Royalty
Panel in the matter to set reasonable terms and rates for the digital
performance right in sound recordings, 17 U.S.C. 114, the Librarian of
Congress fully endorses and adopts her recommendation to set the rate
for the statutory license at 6.5% of gross revenues from U.S.
residential subscribers. This rate shall apply to those digital audio
services represented in this proceeding and any other eligible digital
audio service of the same type that subsequently enters the market and
makes use of the statutory license. The Librarian of Congress also
adopts the Register's recommendation to reject the terms concerning
potential limits on what constitutes copyright infringement and the
proposed schedule for the payment of the arrears.
For the reasons stated in the Register's recommendation, the
Librarian is exercising his authority under 17 U.S.C. 802(f) and is
issuing this order which adopts new Copyright Office regulations
setting reasonable terms and rates for the digital performance right in
sound recordings.
List of Subjects in 37 CFR Part 260
Copyright, Digital Audio Transmissions, Performance Right, Sound
Recordings
Final Regulation
In consideration of the foregoing, part 260 of 37 CFR is added to
read as follows:
PART 260--USE OF SOUND RECORDINGS IN A DIGITAL PERFORMANCE
Sec.
260.1 General.
260.2 Royalty fees for the digital performance of sound recordings.
260.3 Terms for making payment of royalty fees.
260.4 Confidential information and statements of account.
260.5 Verification of statements of account.
260.6 Verification of royalty payments.
260.7 Unknown copyright owners.
Authority: 17 U.S.C. 114, 801(b)(1).
Sec. 260.1 General.
(a) This part 260 establishes terms and rates of royalty payments
for the public performance of sound recordings by nonexempt
subscription digital transmission services in accordance with the
provisions of 17 U.S.C. 114 and 801(b)(1).
[[Page 25414]]
(b) Upon compliance with 17 U.S.C. 114 and the terms and rates of
this part, a nonexempt subscription digital transmission service may
engage in the activities set forth in 17 U.S.C. 114.
Sec. 260.2 Royalty fees for the digital performance of sound
recordings.
(a) Commencing June 1, 1998, the royalty fee for the digital
performance of sound recordings by nonexempt subscription digital
services shall be 6.5% of gross revenues resulting from residential
services in the United States.
(b) A nonexempt subscription digital transmission service (the
``Licensee'') shall pay a late fee of 1.5% per month, or the highest
lawful rate, whichever is lower, for any payment received after the due
date. Late fees shall accrue from the due date until payment is
received.
(c)(1) For purposes of this section, gross revenues shall mean all
monies derived from the operation of the programming service of the
Licensee and shall be comprised of the following:
(i) Monies received by Licensee from Licensee's carriers and
directly from residential U.S. subscribers for Licensee's programming
service;
(ii) Licensee's advertising revenues (as billed), or other monies
received from sponsors if any, less advertising agency commissions not
to exceed 15% of those fees incurred to recognized advertising agency
not owned or controlled by Licensee;
(iii) Monies received for the provision of time on the Programming
Service to any third party;
(iv) Monies received from the sale of time to providers of paid
programming such as infomercials;
(v) Where merchandise or anything or service of value is received
by licensee in lieu of cash consideration for the use of Licensee's
programming service, the fair market value thereof or Licensee's
prevailing published rate, whichever is less;
(vi) Monies or other consideration received by Licensee from
Licensee's carriers, but not including monies received by Licensee's
carriers from others and not accounted for by Licensee's carriers to
Licensee, for the provision of hardware by anyone and used in
connection with the Programming Service;
(vii) Monies or other consideration received for any references to
or inclusion of any product or service on the programming service; and
(viii) Bad debts recovered regarding paragraphs (c)(1) (i) through
(vii) of this section.
(2)Gross revenues shall include such payments as are in paragraphs
(c)(1) (i) through (viii) of this section to which Licensee is entitled
but which are paid to a parent, subsidiary, division, or affiliate of
Licensee, in lieu of payment to Licensee but not including payments to
Licensee's carriers for the programming service. Licensee shall be
allowed a deduction from ``gross revenues'' as defined in paragraph
(c)(1) of this section for affiliate revenue returned during the
reporting period and for bad debts actually written off during
reporting period.
(d) During any given payment period, the value of each performance
of each digital sound recording shall be the same.
Sec. 260.3 Terms for making payment of royalty fees.
(a) All royalty payments shall be made to a designated agent(s), to
be determined by the parties through voluntary license agreements or by
a duly appointed Copyright Arbitration Royalty Panel pursuant to the
procedures set forth in subchapter B of 37 CFR, part 251.
(b) Payment shall be made on the twentieth day after the end of
each month for that month, commencing with the month succeeding the
month in which the royalty fees are set.
(c) The agent designated to receive the royalty payments and the
statements of account shall have the responsibility of making further
distribution of these fees to those parties entitled to receive such
payment according to the provisions set forth at 17 U.S.C. 114(g).
(d) The designated agent may deduct reasonable costs incurred in
the administration of the distribution of the royalties, so long as the
reasonable costs do not exceed the actual costs incurred by the
collecting entity.
(e) Commencing June 1, 1998, and until such time as a new
designation is made, the Recording Industry Association of America,
Inc. shall be the agent receiving royalty payments and statements of
accounts.
Sec. 260.4 Confidential information and statements of account.
(a) For purposes of this part, confidential information shall
include statements of account and any information pertaining to the
statements of account designated as confidential by the nonexempt
subscription digital transmission service filing the statement.
Confidential information shall also include any information so
designated in a confidentiality agreement which has been duly executed
between a nonexempt subscription digital transmission service and an
interested party, or between one or more interested parties; Provided
that all such information shall be made available, for the verification
proceedings provided for in Secs. 260.5 and 260.6 of this part.
(b) Nonexempt subscription digital transmission services shall
submit monthly statements of account on a form provided by the agent
designated to collect such forms and the monthly royalty payments.
(c) A statement of account shall include only such information as
is necessary to verify the accompanying royalty payment. Additional
information beyond that which is sufficient to verify the calculation
of the royalty fees shall not be included on the statement of account.
(d) Access to the confidential information pertaining to the
royalty payments shall be limited to:
(1) Those employees of the designated agent who are not also
employees or officers of a sound recording copyright owner or
performing artist, and who, for the purpose of performing their
assigned duties during the ordinary course of business, require access
to the records; and
(2) An independent and qualified auditor who is not an employee or
officer of a sound recording copyright owner or performing artist, but
is authorized to act on behalf of the interested copyright owners with
respect to the verification of the royalty payments.
(e) The designated agent shall implement procedures to safeguard
all confidential financial and business information, including but not
limited to royalty payments, submitted as part of the statements of
account. Confidential information shall be maintained in locked files.
(f) Books and records relating to the payment of the license fees
shall be kept in accordance with generally accepted accounting
principles for a period of three years. These records shall include,
but are not limited to, the statements of account, records documenting
an interested party's share of the royalty fees, and the records
pertaining to the administration of the collection process and the
further distribution of the royalty fees to those interested parties
entitled to receive such fees.
Sec. 260.5 Verification of statements of account.
(a) General. This section prescribes general rules pertaining to
the verification of the statements of account by interested parties
according to terms promulgated by a duly appointed copyright
arbitration royalty panel, under its authority to set reasonable terms
and rates pursuant to 17 U.S.C.
[[Page 25415]]
114 and 801(b)(1), and the Librarian of Congress under his authority
pursuant to 17 U.S.C. 802(f).
(b) Frequency of verification. Interested parties may conduct a
single audit of a nonexempt subscription digital transmission service
during any given calendar year.
(c) Notice of intent to audit. Interested parties must submit a
notice of intent to audit a particular service with the Copyright
Office, which shall publish in the Federal Register a notice announcing
the receipt of the notice of intent to audit within 30 days of the
filing of the interested parties' notice. Such notification of intent
to audit shall also be served at the same time on the party to be
audited.
(d) Retention of records. The party requesting the verification
procedure shall retain the report of the verification for a period of
three years.
(e) Acceptable verification procedure. An audit, including
underlying paperwork, which was performed in the ordinary course of
business according to generally accepted auditing standards by an
independent auditor, shall serve as an acceptable verification
procedure for all parties.
(f) Costs of the verification procedure. The interested parties
requesting the verification procedure shall pay for the cost of the
verification procedure, unless an independent auditor concludes that
there was an underpayment of five (5) percent or more; in which case,
the service which made the underpayment shall bear the costs of the
verification procedure.
(g) Interested parties. For purposes of this section, interested
parties are those copyright owners who are entitled to receive royalty
fees pursuant to 17 U.S.C. 114(g), their designated agents, or the
entity designated by the copyright arbitration royalty panel in 37 CFR
260.3 to receive and to distribute the royalty fees.
Sec. 260.6 Verification of royalty payments.
(a) General. This section prescribes general rules pertaining to
the verification of the payment of royalty fees to those parties
entitled to receive such fees, according to terms promulgated by a duly
appointed copyright arbitration royalty panel, under its authority to
set reasonable terms and rates pursuant to 17 U.S.C. 114 and 801(b)(1),
and the Librarian of Congress under his authority pursuant to 17 U.S.C.
802(f).
(b) Frequency of verification. Interested parties may conduct a
single audit of the entity making the royalty payment during any given
calendar year.
(c) Notice of intent to audit. Interested parties must submit a
notice of intent to audit the entity making the royalty payment with
the Copyright Office, which shall publish in the Federal Register a
notice announcing the receipt of the notice of intent to audit within
30 days of the filing of the interested parties' notice. Such
notification of interest shall also be served at the same time on the
party to be audited.
(d) Retention of records. The party requesting the verification
procedure shall retain the report of the verification for a period of
three years.
(e) Acceptable verification procedure. An audit, including
underlying paperwork, which was performed in the ordinary course of
business according to generally accepted auditing standards by an
independent auditor, shall serve as an acceptable verification
procedure for all parties.
(f) Costs of the verification procedure. The interested parties
requesting the verification procedure shall pay for the cost of the
verification procedure, unless an independent auditor concludes that
there was an underpayment of five (5) percent or more; in which case,
the entity which made the underpayment shall bear the costs of the
verification procedure.
(g) Interested parties. For purposes of this section, interested
parties are those copyright owners who are entitled to receive royalty
fees pursuant to 17 U.S.C. 114(g), or their designated agents.
Sec. 260.7 Unknown copyright owners.
If the designated collecting agent is unable to identify or locate
a copyright owner who is entitled to receive a royalty payment under
this part, the collecting agent shall retain the required payment in a
segregated trust account for a period of three years from the date of
payment. No claim to such payment shall be valid after the expiration
of the three year period. After the expiration of this period, the
collecting agent may use the unclaimed funds to offset the cost of the
administration of the collection and distribution of the royalty fees.
Dated: April 17, 1998.
Marybeth Peters,
Register of Copyrights.
James H. Billington,
The Librarian of Congress.
[FR Doc. 98-12266 Filed 5-7-98; 8:45 am]
BILLING CODE 1410-33-U
***5/25/98***