# Senate Report 102-294

102nd Congress
Senate Report 102-294
102 S. Rpt. 294
AUDIO HOME RECORDING ACT OF 1991
June 9, 1992. Ordered to be printed
(To accompany S. 1623)
The Committee on the Judiciary, to which was referred the bill S. 1623, which would amend title 17, United States Code, having considered the same, reports favorably thereon with an amendment in the nature of a substitute, and recommends that the bill do pass. The amendment is as follows: Strike all after the enacting clause and insert the following: SECTION 1. SHORT TITLE.
SEC. 2. IMPORTATION, MANUFACTURE, AND DISTRIBUTION OF DIGITAL AUDIO RECORDING DEVICES AND MEDIA.
CHAPTER 10 DIGITAL AUDIO RECORDING DEVICES AND MEDIA SUBCHAPTER A DEFINITIONS, PROHIBITION OF CERTAIN INFRINGEMENT ACTIONS, AND RULES OF CONSTRUCTION "1001. Definitions. "1002. Prohibition on certain infringement actions. "1003. Effect on other rights and remedies with respect to private home copying or otherwise. Subchapter B ROYALTY PAYMENTS "1011. Obligation to make royalty payments. "1012. Royalty payments. "1013. Deposit of royalty payments and deduction of expenses. "1014. Entitlement to royalty payments. "1015. Procedures for distributing royalty payments. "1016. Negotiated collection and distribution arrangements. Subchapter C THE SERIAL COPY MANAGEMENT SYSTEM "1021. Incorporation of the serial copy management system. "1022. Implementing the serial copy management system. Subchapter D REMEDIES "1031. Civil remedies. "1032. Binding arbitration. Subchapter A DEFINITIONS, PROHIBITION OF CERTAIN INFRINGEMENT ACTIONS, AND RULES OF CONSTRUCTION " 1001. Definitions
SUBCHAPTER B ROYALTY PAYMENTS
within two years following the date royalties are paid on such devices or media.
Subchapter C THE SERIAL COPY MANAGEMENT SYSTEM
SEC. 3. TECHNICAL AMENDMENTS.
SEC. 4. EFFECTIVE DATE.
SEC. 5. TECHNICAL REFERENCE DOCUMENT FOR AUDIO HOME RECORDING ACT OF 1991. SEC. 6. REPEAL OF SECTION 5.
Introduction
Part I. Implementation of SCMS in Digital Audio Interface Formats
Particular devices within each product group defined above shall be assigned specific Category Codes in accordance with IEC 958. Manufacturers of any device that is capable of supplying a digital audio input to a DAR device must use the most specific Category Code applicable to that particular device. However, digital signal processing or digital signal mixing products in Category Code product group "010XXXXL" shall issue the Category Code for Present A/D converters where all the input signals have the Category Code for a Present A/D converter. Similarly, sampling rate converters in Category Code "0101100L" and digital sound samplers in Category Code "0100010L" shall issue the Category Code for Present A/D converters where the input signal comes from a Present A/D converter.
Part II. Serial Copy Management System for DAR Devices and Nonprofessional Model DAT Recorders
Part III. Application of SCMS In DAT Recorders Implementing the IEC 958 Interface
(PLEASE REFER TO ORIGINAL SOURCE) I. Purpose of the Legislation The purpose of S. 1623 is to ensure the right of consumers to make analog or digital audio recordings of copyrighted music for their private, noncommercial use. Moreover, S. 1623 contains a royalty payment system that provides modest compensation to the various elements of the music industry for the digital home recordings of copyrighted music. In addition, the bill contains a serial copy management system that would prohibit the digital serial copying of copyrighted music. II. Legislative History The advances made in the area of audio recording technology in recent years have made the private copying of prerecorded music a greater concern to the music industry than ever before. With the advent of digital audio recording technologies, the possibility of copies retaining the sound quality of the original has become a reality.
Although musical works have long been copyrightable, sound recordings became copyrightable for the first time in February 1972 under the 1971 Sound Recording Act. However, there has been a longstanding controversy surrounding the home taping of prerecorded music.
the betamax decision In 1981, the Ninth Circuit Court of Appeals issued its decision in the case of Universal City Studios, Inc. v Sony Corp., also known as the Betamax decision, finding that the noncommercial private video taping of broadcast television shows constituted copyright infringement. Senator DeConcini introduced legislation to overturn the decision to ensure that consumers had the right to tape copyrighted material for their own use. In 1983, Senator Mathias introduced legislation to create a royalty system for home taping.
In 1984, the Supreme Court reviewed the Betamax decision and decided that private home taping of television broadcasts for the purpose of time shifting constituted a fair use of the copyrighted programming. The precedential impact of the Betamax decision has been as hotly debated as the case itself. Although the Betamax case revolved around video taping, the case has been utilized by all parties to the audio home recording dispute.
The electronics industry has maintained that the Betamax decision applied to virtually all home taping while songwriters, music publishers, performers, and recording companies have insisted that the decision applies to a very limited set of facts, i.e. home video taping for time-shifting purposes. Consequently the controversy has continued and in fact, has been exacerbated by the increasing refinement of audio recording technology. Seeking a legislative solution Since the Court issued the Betamax decision Congress has considered several legislative solutions. The recording industry has attempted to persuade the electronics industry to voluntarily install within their products, devices which would prevent unauthorized copying. The recording industry has also asked Congress to require the installation of such devices. By 1987, a number of hypothetical technological copy prevention systems had been discussed but none had been developed. On February 5, 1987, Senator Gore introduced S. 506. Shortly thereafter, on March 3, Representative Waxman introduced H.R. 1384. Both bills required digital audio recording equipment to contain a copyguard system prior to distribution in this country.
On April 2, 1987, Congress held joint hearings on digital audio taping. CBS Records developed a system which was designed to prevent all digital audio copying. This system, commonly known as "Copycode," would indicate that a prerecorded work was protected by copyright by removing a narrow band of frequencies from the audio signal. A chip installed in each recording device would "read" this signal and prevent the copying of that copyrighted recording. The sound quality of the "Copycode" system and its effectiveness were challenged at the hearing. In an effort to resolve the growing uncertainty about the adequacy of the "Copycode" system, the two subcommittees requested the National Bureau of Standards (hereinafter, NBS) to test the "Copycode" system. NBS found that the copy prevention system did not adequately resolve the problem. One of the problems NBS found with the system was that the encoding process produced "false positives", and thus failed to permit the recording of unencoded material. NBS also found that the system altered the audio signal, which some listeners claimed resulted in a degradation of the sound quality. 0 1
Following the rejection of the "Copycode" system, the Serial Copy Management System (hereinafter, SCMS) was developed. The SCMS permits a digital audio recorder to make unlimited first generation copies from prerecorded material, but prohibits the copying of those first generation copies of copyrighted material. While the SCMS was based largely upon the same principles as "Copycode", it was more flexible in terms of application and had no effect on sound quality.
In April 1990, Senator DeConcini introduced S. 2358, a bill to require the installation of the SCMS in all digital audio tape recorders imported into or manufactured in the United States. The legislation reflected a consensus between the recording industry and the consumer electronics industry. It was however, staunchly opposed by the songwriters and music publishers, because it failed to establish a system to compensate copyright owners and creators for sales displaced by home taping of copyrighted music.
Hearings were held on S. 2358 in June 1990, shortly after the announcement of the development of the Digital Compact Cassette recorder (hereinafter DCC), a new type of digital audio recorder. There was disagreement among the proponents of the bill as to whether the bill encompassed the new DCC technology in addition to existing Digital Audio Tape recorders (hereinafter DAT). After the hearings Senator DeConcini and members of the Senate Commerce Committee urged the parties to work out a compromise to this longstanding dispute. No further action was taken on S. 2358.
The prospect of any compromise seemed unlikely on July 9, 1990, when songwriters and music publishers filed a lawsuit against Sony Corporation claiming that unauthorized home taping on DAT recorders would displace record sales, costing the plaintiffs the royalties to which they were entitled under United States copyright law. The plaintiffs sought a ban on the import of Sony DAT recorders and blank cassettes on the grounds of contributory copyright infringement. However, in June 1991, a historic compromise was reached by all of the parties to the audio home taping dispute.
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The Audio Home Recording Act of 1991 On August 1, 1991, S. 1623, the Audio Home Recording Act was introduced by Senator DeConcini. S. 1623 embodies the compromise reached between the audio hardware industry and the various segments of the music industry. A similar bill was introduced in the House of Representatives.
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S. 1623 was referred to the Judiciary Subcommittee on Patents, Copyrights and Trademarks and hearings were held on October 29, 1991. While the bill was in the subcommittee, Senator DeConcini substituted the term (and definition of) "audiogram" for the term (and definition of) "phonorecord" and amended some administrative procedures, which are discussed further in the section-by-section analysis. An amendment in the nature of a substitute to the bill was polled out of subcommittee on November 20, 1991.
The committee passed the substitute by unanimous consent, including the following provisions offered by Senator Metzenbaum.
III. Discussion background Bolstered by the fears that recently developed digital audio recording technology would lead to unprecedented home audio copying of sound recordings, the conflict between the music and consumer electronics industries has intensified. This longstanding dispute has impeded the introduction of digital audio recording technology into the American marketplace. However, the competing interests have, through negotiation and compromise, reached an agreement which all parties involved feel is equitable. S. 1623 reflects this agreement. the effect of home taping The music industry has long been fearful of the negative effect home taping of its products would have on the growth of the industry. It has been estimated that only 15 percent of all recordings released recoup their costs. In essence these "hits" subsidize any new artist development that a company may seek to undertake. Recording industry estimates of the damage caused by home taping puts annual losses at nearly $1 billion.
Numerous reports have been completed which seek to quantify the exact effect home taping has upon the music industry. One study, entitled "Copyright and Home Copying: Technology Challenges the Law,"
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The second report, which was commissioned by the (c) Copyright Coalition, a coalition of music publisher and songwriter interests, and completed by the Roper Organization, Inc., was entitled, "Report on Home Audio Taping and Projected DAT Use (hereinafter, the Roper Report). This report was submitted to the Senate Subcommittee on Communications of the Committee on Commerce, Science and Transportation during hearings the Digital Audio Tape Recorder Act of 1990. This telephone survey of respondents 14 years of age and older, found that 37 percent of those surveyed did in fact tape prerecorded music. Furthermore, nearly 50 percent of those surveyed between the ages of 14 and 49 taped music at home. Those persons surveyed felt that they would copy more prerecorded music if the equipment they owned had DAT capability.
The Roper Report focused its analysis on the projected loss of sales. Of those surveyed, 34 percent said that if they could not tape they would not purchase the recordings they would have taped. The Roper Report found that the remaining tapers would have purchased recordings, which would have worked out, on average, to seven additional recordings per taper annually. In estimated lost sales, this equals approximately 322,500,000 recordings. Half of those who expressed a desire to own DAT technology said they would make tapes with that equipment. Forty-one percent stated they would make more tapes than they currently do. The Roper Report concludes that this "indicates that DAT technology will encourage a portion of the people who are currently non-tapers of prerecorded music to become prerecorded music tapers." Supra, note 25 at 8. Id. Id., at 14. Senator DeConcini, on July 25, 1990, requested that the Copyright Office conduct a study on the copyright implications of digitial audio broadcasts. The Copyright Offices Report
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THE ADVENT OF "AUDIOGRAM" It is the intention of the committee that this legislation is technologically neutral. In attempting to achieve this neutrality, the term "audiogram" was created. The term "phonorecord" was used in S. 1623 because the term is used elsewhere in the Copyright Act. However, Senator DeConcini expressed concern that in attempting to craft legislation that is technologically neutral, the bill as introduced may inadvertently encompass some form of technology that was not intended. After consultation with the computer and telecommunications industries it became apparent that the term "phonorecord" and its attendant definitions might be overly broad. For example, many computer programs currently generate sound during their operation. This will become more prevalent as technology continues to advance. According to the Computer and Business Equipment Manufacturers Association (hereinafter CBEMA):
S. 1623 sets forth a new term for a material object embodying works in an effort to distinguish clearly between the devices and media which the bill affects, and those it does not. Specifically, the committee replaced the word "phonorecord" with the new term "audiogram". As defined in S. 1623, "audiogram" is a material object in which are fixed only sounds, and material, statements or instructions incidental to those sounds, and from which the sounds and material can be perceived, reproduced, or communicated, either directly, or with the aid of a machine or device. "Audiogram" is intended to cover those objects commonly understood to embody sound recordings and their underlying works. Excluded from the definition are video, multimedia and other non-audio products.
The use of the new term "audiogram" avoids the possible ambiguities associated with "phonorecord" while preserving the intended function of the bill as being broad enough to cover many different types of digital audio recording equipment and media, as is the committees intent. The use of "audiogram" will benefit those affected by the bill as well as eliminate unnecessary litigation to determine the intended scope of this legislation. The use of this new term will also preclude Congress from having to revisit this issue almost annually in order to keep pace with the rapidly changing technological world. the serial copy management system Two substantial obstacles have hampered the enactment of digital audio recording legislation. One was the development of an equitable royalty system, and the other was the development of a proper technological remedy for the problem of unlimited taping. S. 38 1623 addresses the second obstacle by requiring use of the Serial Copy Management System (SCMS), which is a far superior method of protecting copyrighted material than previous copy-restriction technology.
SCMS is required only in digital audio recorders and interface devices. SCMS will allow copying but only in a limited circumstance. The system places limitations on "serial" copying, or making copies of copies. One can make an unlimited number of copies from the original, but one cannot copy the copy. The SCMS coding is placed in the digital subcode. the SCMS limits copying to one copy, or no copies, or permits unlimited copies. A simple numbers code is utilized to trigger the system. The input signal is categorized and materials which are identified as copyright protected are "flagged." The recording device then responds accordingly depending upon the code found in the recording. SCMS also limits the number of generations of digital copies that can be made from analog source material. Current technology will not allow copyright identification in the analog domain. Two generations of digital copies can be made of material recorded through the analog inputs to a digital audio recorder. The second generation copy, however, can not be copied further on a digital audio recorder.
In summary, there are four important facets of the SCMS system: (1) SCMS controls copying done on digital recorders and has no effect on analog recorder operation; (2) SCMS limits second generation copying of copyrighted source material and not first generation copying of the original source; (3) SCMS will allow only one copy of a copy (two generations) made from an analog source to be recorded; (4) the code which triggers the SCMS device is not stored in the same location as the sound signals. Thus, unlike "Copycode,"
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The functional specifications for SCMS are contained in a technical reference document which according to S. 1623, as introduced, was to be published in the Senate Committee Report and incorporated by reference into S. 1623. Section 1022(b) allows for the Secretary of Commerce to approve additional technical standards which meet the functional requirements set forth in the technical reference document in order to make the legislation more flexible. At the markup the committee incorporated the technical reference document within the text of the bill. An additional provision was also included to require the National Institute of Standards and Technology (hereinafter, NIST) to review the technical reference document and certify that the document sets forth standards and specifications that adequately incorporate the intended functional characteristics to regulate serial copying, and are not incompatible with existing international digital audio interface standards or existing digital audio technology. This certification is contained below in a letter from the Director of NIST, and provides the necessary assurance that the specifications are not unduly restrictive so as to prohibit competition.
Dear Senator DeConcini: This letter responds to your request of February 3, 1992, pursuant to the terms of S. 1623, the Audio Home Recording Act of 1991, for a technical review and certification by the National Institute of Standards and Technology of the technical reference document incorporated into S. 1623. Members of our technical staff have reviewed the technical reference document in light of present digital audio technology and standards. We find: 1. The technical reference document incorporates the intended functional characteristic to regulate serial copying of audio materials in a digital format. 2. We are not aware of any existing international standards which are incompatible with the standards and specifications set forth in the technical reference document. 3. We are not aware of any existing digital audio technology which is incompatible with the standards and specifications set forth in the technical reference document. This letter addresses only our technical review of the technical reference document. The Administration is planning to submit its views on the substance of the bill at a later date. Sincerely,
Although the development of a workable copy limitation system was essential to the success of this legislation, it only resolved half of the problem. The design of an equitable royalty system which compensated the creators and copyright owners while also protecting the consumer and the consumer electronics industry was required before a compromise could be reached. equitable royalties, distribution and negotiated agreements
In testimony before the Senate Judiciary Subcommittee on Patents, Copyrights and Trademarks, John V. Roach, chairman of the Board of Tandy Corporation, summarized the effect the dispute over the home taping issue, and in turn the delayed introduction of digital audio recording technology, had on his industry during the eighties:
See, "Statement of John V. Roach Before the Senate Judiciary Subcommittee on Patents, Copyrights and Trademarks on S. 1623," 102d Cong., 1st sess. (Oct. 29, 1991). The lack of an agreement among the parties affected by this legislation was detrimental to all concerned. The music industry received no royalties, the threat of legal action precluded the electronics industry from introducing new products, and the consumer was therefore deprived of the latest technology. At the behest of Senator DeConcini and the Senate Commerce Committee, all interested parties were encouraged to reach an agreement. Subchapter B of S. 1623 establishes an equitable royalty system that has been agreed to and supported by all parties involved. B. An equitable royalty system Importers and manufacturers will bear the cost of royalty fees. The royalty rate is 2 percent of the "transfer price" for digital audio recording devices and will be borne only by " * * * the first person to manufacture and distribute or import and distribute such (recording) device * * * " The same guidelines apply to the 3 percent of transfer price royalty for "digital audio recording media."
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Single deck recording devices will be statutorily subjected to a per unit ceiling of $8 and a floor of $1. Dual port recorders
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Administration of the royalty system is the dual responsibility of the Copyright Office and the CRT. The Copyright Office collects the money generated by the royalty payments and deposits it with the Treasury of the United States, and also reports to the CRT on a quarterly basis. During the subcommittee markup, at the behest of the Register of Copyrights, the reporting schedule was altered so that the fourth quarterly report was incorporated into the annual statement of account, rather than having four quarterly reports and then an annual report. The CRT adjusts the royalty caps and distributes the money pursuant to pre-set allocations among the music creators and copyright owners.
This system has received the endorsement of each of the groups which it affects. Speaking on behalf of the National Consumers League, Linda F. Golodner, executive director, felt that S. 1623 was sound:
Representing the recording industry, Jason S. Berman, president of the Recording Industry Association of America, testified that,
On behalf of music publishers and songwriter interests, Edward P. Murphy, president of the National Music Publishers Association and Chairman of the (c) Copyright Coalition, testified that:
Finally, the consumer electronics industry hails the bill as the resolution to a difficult problem which has slowed the advent of technological advances on the American electronics market. John V. Roach of the Tandy Corporation stated,
Thus, support of the royalty system embodied within S. 1623 is widespread. More importantly, the system will allow all interested parties to benefit from its implementation. C. Distribution of royalties Subchapter B of S. 1623 includes two provisions which establish a statutory method of royalty distribution and guidelines for interested parties to negotiate separate collection and distribution arrangements. Section 1014 enumerates those interested copyright parties which are entitled to royalty proceeds. The committee intends the beneficiaries to consist of individual record companies, writers, music publishers and performers. Under this section, royalty receipts will initially be divided into two funds from which royalty allocations will be made. The two funds are the Sound Recordings Fund and the Musical Works Fund. 66.6 percent of royalty receipts will go to the Sound Recordings Fund and will then be distributed pursuant to the guidelines of subsection (b). The remaining 33.3 percent will go to the Musical Works Fund for distribution. The total royalties collected will be allocated as follows: record companies 38.41 percent; featured artists 25.6 percent; songwriters and music publishers 16.66 percent each; the American Federation of Musicians for the benefit of nonfeatured musicians who have performed on sound recordings 1.75 percent; and the American Federation of Television and Radio Artists, for the benefit of nonfeatured vocalists who have performed on sound recordings .92 percent. Additionally, subsection (c) establishes the method by which the CRT will resolve disputes as to distribution within a group of claimants. Section 1015 calls for interested copyright parties to file a claim for payments for royalties received in the preceding year. The Register of Copyrights suggested, and the subcommittee accepted, an amendment allowing the CRT 60 days to distribute funds as to which there is no controversy. Section 1015 may be superseded by the establishment of a negotiated arrangement pursuant to sec. 1016. D. Negotiated arrangements Section 1016 allows interested copyright parties, if two-thirds of the members of each group agree, to negotiate and establish, among themselves or with interested manufacturing parties, a private system for distribution, verification and/or collection of royalties. The two-thirds threshold is to be calculated by reference to the proportion of the market accounted for by the individual record companies, music publishers, and writers measured by annual retail sales of audiograms rather than by counting the number of individual record companies, music publishers, and writers that wish to participate in the private arrangement. For these purposes, an organization representing one of the three categories of interested copyright parties identified above (e.g., an association of music publishers) is presumed to represent the requisite two-thirds of that category if the membership of, or other participation in, that organization accounts for at least two-thirds of annual retail sales of audiograms. The fact that a particular organization meets this two-thirds requirement does not, however, give the organization any power or authority to force its members into a negotiated arrangement. Rather, the committee envisions that organizations that may wish to carry out a representative role with respect to the establishment or implementation of a negotiated arrangement will seek advance authorization from their members for this purpose. If such authorization is not given, or is withdrawn at anytime (either before or after the negotiated arrangement goes into effect), by an individual record company, music publisher, or writer, that person or entity has recourse to the full set of protections available under sec. 1016 to parties that choose not to participate in a negotiated arrangement. The committee recognized that, absent appropriate safeguards, a negotiated arrangement that is not entered into unanimously could work to the detriment of parties that do not wish to participate. Accordingly, the committee strengthened language in the bill that is designed to protect the interests of those parties who choose not to enter into a negotiated arrangement. The legislation provides that no negotiated arrangement can go into effect without the approval of the CRT. The CRT must determine that the conditions set forth in sec. 1016(b) are met before a negotiated arrangement can be approved. Language contained in subsections (b) and (c) ensures that both interested manufacturing parties and interested copyright parties who choose not to participate in a negotiated arrangement will not be adversely affected by the arrangement. A manufacturer or importer may fully satisfy its obligations by depositing appropriate royalty payments with the Copyright Office and otherwise complying with the provisions of secs. 1011 and 1012. In order to protect the rights of nonparticipating interested copyright parties, the CRT, prior to approval of a negotiated arrangement, must ensure that the arrangement includes any necessary safeguards to ensure their receipt of proper royalty payments. In particular, the CRT must ensure that any negotiated arrangement does not reduce the amount of money that nonparticipating interested copyright parties would receive in the absence of such an arrangement. In order to achieve this end, the Tribunal may require such safeguards as accounting procedures, reports, and any other information required to ensure and verify that royalty payments have been properly collected and distributed. The legislation establishes antitrust immunity for good-faith negotiation and voluntary implementation of a negotiated arrangement. The "good faith" and "voluntary" language was included to address competing objectives in connection with the negotiation and implementation of these private arrangements. The first objective was to ensure that the participants would be free to negotiate vigorously and ultimately to implement a negotiated arrangement absent the fear of frivolous antitrust claims by potentially disgruntled participants or nonparticipants. The second objective was to ensure that, in an industry such as this where there are some relatively powerful participants, there would be some protection against their imposing their will on less powerful participants by the use of coercive acts in the negotiation or implementation of a negotiated arrangement. For example, despite the fact that there are over 2,600 record companies in the United States, 6 record distribution companies distribute sound recordings from their own labels, as well as from numerous independent labels, which combined account for over two-thirds of all annual retail record sales. The committee believed that appropriate safeguards should be included in the legislation to ensure that any negotiated arrangements agreed to by larger entities do not prejudice the rights of smaller record companies, or for that matter, songwriters, composers, and music publishers that choose not to participate. The language of the legislation strikes a balance between these concerns by providing antitrust immunity for the good faith negotiation and implementation of these private arrangements, but not for group boycotts, concerted refusals to deal, illegal tying or similar coercive actions (including threats to take such acts) in the negotiation or implementation of a negotiated arrangement (for example, a group boycott designed to force parties to participate in the arrangement). The committee intends that, where a private arrangement has been authorized that provides for direct collection of royalty payments from one or more participating interested manufacturing parties, the administering entity for the private arrangement shall set aside a portion of the payments it has collected sufficient to settle likely claims against such payments by those interested copyright parties that have chosen not to participate in the private arrangement. Depending on the procedures that the CRT approves, the funds that are set aside may either be retained in a separate account pending the Tribunals annual claims resolution process or they may be paid over periodically to the Copyright Office. If the funds are retained until completion of the annual claims resolution process, a set-off procedure could be implemented to settle the claims that nonparticipants may have against those funds on the one hand, and the claims participants may have against the government-collected royalty pool on the other hand. However, any funds that are set aside for nonparticipants but retained by the private administering entity pending the CRTs annual claims resolution process must accumulate interest, for the benefit of such nonparticipants, as provided under sec. 1013. After a private arrangement goes into effect, the CRT is directed to hear and address any objections to the arrangement and to ensure that alternative collection and distribution procedures remain available to, and are working properly for, interested manufacturing parties and interested copyright parties that are not participating in the arrangement. The CRTs responsibility includes ensuring that interested copyright parties who are not participants in the negotiated arrangement continue to receive the royalty payments to which they would be entitled in the absence of the arrangement. The CRTs responsibility also includes responding to objections from participants that the arrangement is no longer operating as a fair and effective alternative to the collection, distribution and/or verification procedures otherwise provided under chapter 10. In order to ensure the necessary powers to carry out these responsibilities, the CRT is empowered to seek injunctive relief in an appropriate U.S. district court. The committee anticipates that the CRT will make use of these powers as necessary to protect the interests of those who have chosen not to participate in the negotiated arrangement, and to ensure that the arrangement continues to function as a fair and effective alternative to the procedures provided under chapter 10. The committee also anticipates, however, that the parties to the arrangement are likely to agree upon binding arbitration or other means to resolve disputes that may arise within the arrangement. Except to the extent necessary to protect nonparticipants and to ensure compliance with the provisions of sec. 1016, the committee does not intend for the CRTs oversight authority to be used to intervene in matters which are subject to arbitration, or to dictate the internal functioning of the private arrangement. In short, the royalty system of S. 1623 is an equitable resolution of a long-standing problem which benefits all parties. The oversight provisions are established to ensure that all interests, and not just the interests of the majority, are protected. Together, the royalty system and oversight regulations will allow the United States to join the growing number of countries which afford their creators and copyright owners royalties for home taping of musical works and sound recordings. Development of an international copyright protection plan Currently, 17 countries provide home taping royalties to creators and copyright holders for private home copying by statute. Australia was the first English-speaking nation to provide for a blank tape royalty. The royalty, or levy, is between 20 and 50 Australian cents per 60-minute cassette.
The exact method of attaching the royalty to products differs from nation to nation. Nations such as France and Sweden place the royalty on blank tapes. Others, such as Germany, Italy, Norway, and Spain, place the royalty on both blank tapes and equipment. The method and amount of royalties distributed also vary from country to country.
In addition to the United States, other nations are considering legislation. The Japanese are contemplating adopting a royalty plan for digital hardware by 1992. Review of international movement in the area is important in terms of S. 1623 for two reasons. First, because the problems created by home copying are being addressed on a national level in other countries, it is appropriate that the problem be addressed domestically in the United States as well. Second, and perhaps more importantly, there is a movement on the international stage to develop a system which provides creators and copyright owners with royalties for foreign taping.
While many nations have established private copying levies for domestic rightsholders, very few have expanded those protections beyond their own borders. A major drawback which currently plagues the international royalty payment systems is the requirement of reciprocity. Under such a reciprocity requirement a country will only permit U.S. copyright holders to receive compensation from home taping royalty pools if the United States has a home taping royalty system that allows payments to that countrys rightsholders. Such a reciprocity requirement already exists in Australia, Finland, and Iceland, and poses a growing threat. While American music is enjoyed around the world, no American creators or copyright owners can receive royalties for home taping in these countries because the United States has not adopted a domestic method of providing royalties for home taping. Given that U.S. songwriters, composers, musicians, and record companies produce approximately half of the recordings listened to and copied around the world, it is critical that we address this problem and ensure that U.S. creators share in the revenue produced through the use of their works.
Until such time as America adopts a workable home taping royalty scheme, artists, record companies, composers, music publishers, consumers, and the electronics industry of this nation will remain at least one step behind. The adoption of S. 1623 will not only benefit the aforementioned groups, it will allow the United States to take an active role in developing a feasible international system. A leadership role in developing an international scheme would serve to insure that the tremendously popular music of this country attains the best possible protection abroad. IV. Vote of the Committee On November 21, 1991, with a quorum present, by unanimous consent, the Committee on the Judiciary ordered the bill as an amendment in the nature of a substitute favorably reported. V. Section-By-Section Analysis Section 1 Short Title. This section sets forth the title of the Act, the "Audio Home Recording Act of 1991." Section 2 Importation, Manufacture, and Distribution of Digital Audio Recording Devices and Media. This section adds a new chapter to the Copyright Act, as described below. SUBCHAPTER A DEFINITIONS, PROHIBITION OF CERTAIN INFRINGEMENT ACTIONS, AND RULES OF CONSTRUCTION
This section contains definitions of certain terms used in chapter 10. The definitions are carefully tailored so as to limit the effect of the new chapter to audio recording. For convenience, the definitions are set forth in alphabetical order in section 1001. For clearity of discussion in this report, however, the definitions are grouped below by subject matter. Several of the definitions identify the digital audio recording technology and products to which the chapter applies: Section 1001 establishes a new type of material object embodying works an "audiogram" in order to delineate clearly the types of devices and media subject to chapter 10, and to ensure that devices dedicated to the recording of motion pictures, television programs or multimedia works are not covered by the chapter. An "audiogram" is defined as a material object in which are fixed only sounds, and material, statements or instructions incidental to those sounds, and from which the sounds and material can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The intention is for the term "audiogram" to cover objects commonly understood to embody sound recordings and their underlying works, such as recorded compact discs (CDs), digital audio tapes (DATs), audio cassettes and long-playing albums (LPs), and in the near future, digital compact cassettes (DCCs) and mini-discs (MDs); conversely, the term is intended to exclude objects such as recorded videocassettes and multimedia products (i.e., unitary products which integrate several prominent components such as text, video clips, computer graphics, speech and music). As noted above, the definition of audiogram focuses on objects in which only sounds are fixed, but the sounds may be accompanied by incidental "material, statements or instructions." The term "material" is intended to include such items as the textual and graphic materials commonly embodied on (or inserted inside) album covers, CD boxes and audio cassette packages, such as title and artist information, biographies and still photos of the performers, and lyrics of the musical works. The phrase "statements or instructions" is intended to refer to such items as the data or executable code that may accompany the fixed sounds for purposes of providing functional information or instructions for the operation of the machine on which the "audiogram" is played. Thus, for example, commercially released compact discs generally contain, in addition to the data representing the fixed sounds, data providing track and timing information so that the CD player can locate a particular track of a sound recording. Compact discs also contain subcode information such as that used in the Serial Copy Management System. Such material, statements or instructions are "incidental to" the fixed sounds because they are related to and relatively minor as compared with the sounds. On the other hand, if the material object contains computer programs or data bases that are not incidental to the fixed sounds, then the material object would not qualify as an "audiogram." The committee decided to create the new term "audiogram" rather than to use the term "phonorecord," which is defined in section 101 of title 17, to avoid any possible ambiguities concerning the scope of the definition of "phonorecord." In creating the new term "audiogram" for purposes of this chapter, the committee intends to preserve the existing balance of rights under title 17 between rightsholders in musical works and record companies with respect to works (including any "incidental" material) that may be incorporated in "audiograms." A "digital audio copied recording" is defined as a reproduction in a digital format of an audiogram, regardless of whether that reproduction is made directly from the audiogram or indirectly from a transmission (e.g., a radio broadcast of a commercially released audio cassette), and regardless of whether the material is reproduced from a digital or analog source. Thus, a digital audio recording made from a commercially released compact disc or audio cassette, or from a radio broadcast of a commercially released compact disc or audio cassette, would be a "digital audio copied recording." Because a live performance, such as a concert, is not an "audiogram," a reproduction made of such a live performance would not be a "digital audio copied recording." A "digital audio recording device" is defined as "any machine or device, now known or later developed, of a type commonly distributed to individuals for use by individuals, whether or not included with or as part of some other machine or device, the recording function of which is designed or marketed for the primary purpose of, and that is capable of, making a digital audio copied recording for private use." The definition specifically excludes "professional model products," as well as "dictation machines, answering machines, and other audio recording equipment that is designed and marketed primarily for the creation of sound recordings resulting from the fixation of non-musical sounds." Machines that are predominantly for the recording of speech, including voice mail, are thus excluded. The indicia that should be used to determine whether a machine is "designed and marketed primarily for the creation of sound recordings resulting from the fixation of non-musical sounds" as contrasted with musical sounds include such factors as the machines technical features and capabilities, advertising and distribution channels. The definition makes clear that the focus of chapter 10 is on machines or devices "of a type commonly distributed to individuals for use by individuals," where the primary purpose of the recording function is recording audio works "for private use." Thus for example, machines or devices designed for use in a telephone company facility as part of its integrated service network would not qualify as digital audio recording devices even though they make digital recordings of audio information. Similarly, machines or devices for the authorized manufacture of audiograms for distribution and sale by legitimate record companies would be excluded from the definition of "digital audio recording devices." The definition also makes clear that a "digital audio recording device" must be a machine or device that has a recording function that is designed or marketed for the primary purpose of making a digital audio copied recording for private use. In determining whether a machine with both recording and playback functions qualifies as a "digital audio recording device," the primary purpose test is applied only to the "recording function" of the machine, and not to all of the features of the machine taken together. In using the phrase "primary purpose," the committee contemplates a purpose that exceeds 50 percent of all purposes. If the "primary purpose" of the recording function is to make objects other than digital audio copied recordings, then the machine or device is not a "digital audio recording device," even if the machine or device is technically capable of making such recordings. Thus, a digital videocassette recorder though capable of making digital audio copied recordings would not qualify as a "digital audio recording device" because the primary purpose of the recording function of the device is not to make "digital audio copied recordings," but rather to make digital video recordings. Similarly, neither a personal computer whose recording function is designed and marketed primarily for the recording of data and computer programs, nor a machine whose recording function is designed and marketed for the primary purpose of copying multimedia products, would qualify as a "digital audio recording device." Although the typical personal computer would not fall within the definition of "digital audio recording device," a separate peripheral device with an independent recording function would be a "digital audio recording device" if the recording function was designed or marketed for the primary purpose of making digital audio capied recordings for private use. In that case, only the peripheral device would be subject to the royalty payment requirements of subchapter B. A "professional model product" is defined essentially as an audio recording device that has professionally oriented characteristics such that it should be considered to be designed or marketed primarily for professional use. Standards and protocols in the consumer electronics industry commonly identify certain codes to be included in electronic signals communicated between machines that identify the nature or type of device sending the signals. To qualify as a "professional model product," an audio recording device that utilizes an interface format with discrete professional and non-professional modes must be capable of sending such a digital audio interface signal in which the channel status block flag is set at "professional." In addition, a "professional model product" must be clearly, prominently, and permanently marked with the letter "P" or the word "professional" on the outside of its packaging and in all published advertising, promotional, and descriptive literature. In this regard, it is the committees intention that the inadvertent omission of the letter "P" or the word "professional" from a de minimis portion of a products literature shall not automatically disqualify a device from being a "professional model product." To qualify as a "professional model product," an audio recording device must also be designed, manufactured, marketed, and intended for use by recording professionals in the ordinary course of a lawful business. In this regard, the definition of "professional model product" lists eight factors that bear on the distinction between a "professional model product" and a "digital audio recording device." The committee does not intend that the presence or absence of any single factor should create a presumption as to whether or not a device is a professional model product. The factors include such criteria as the nature of the advertising and distribution channels used to market the device; the occupations of the ultimate purchasers of the device; and the uses to which it is put. A "digital audio interface device" is defined as any machine or device that supplies a digital audio signal through a "nonprofessional interface," regardless of whether the machine or device is now known or later developed and regardless of whether it is incorporated as part of another machine or device. The term "digital audio recording medium" refers to a material object, now known or later developed, that may be used as a storage medium for sound recordings. For media products to come within the definition of "digital audio recording medium," they must be "in a form commonly distributed for ultimate sale to individuals for use by individuals" and they must be "primarily marketed or most commonly used by consumers for the purpose of making digital audio copied recordings by use of a digital audio recording device." The phrase "primarily marketed" means more than 50 percent of the marketing; the phrase "most commonly used" refers to the use which is greatest (i.e, the use which is largest among all uses, regardless of whether it constitutes more or less than 50 percent of all uses). Media products that are distributed in intermediate configuration would not come within the definition of "digital audio recording medium." For example, digital audio tape that is distributed to record manufacturers in "pancake" form i.e., as a large reel of tape that has not yet been packed into individual cassettes is neither "in a form commonly distributed * * * for use by individuals" nor "primarily marketed or most commonly used by consumers" for the requisite purpose. The conversion of such a "pancake" into individual blank cassettes would constitute "manufacture" within the meaning of section 1001(9), and, assuming the elements of the definition are met, then such media products would be "digital audio recording media." Examples of types of current or anticipated "digital audio recording media" are magnetic digital audio tape cassettes, optical discs, and magneto-optical discs. Other types of media may be developed in the future that will come within the definition. Excluded from the definition, however, is any material object that embodies a sound recording at the time it is first distributed by the manufacturer or importer of the object, unless the sound recording was added in order to evade the royalty payment obligations imposed by chapter 10. Also expressly excluded from the definition are media primarily marketed and most commonly used by consumers for copying motion pictures, other audiovisual works, or non-musical literary works such as computer programs and data bases. Likewise, media products that are primarily marketed for and most commonly used by professionals in recording studios would not be a "digital audio recording medium" and therefore would not be subject to the royalty obligation. In connection with any disputes concerning whether media products are primarily marketed for and most commonly used by professionals in recording studios or come within the definition of "digital audio recording medium," reference should be made to the factors that govern whether a device constitutes a "professional model product" to the extent such factors are applicable to media products. Other factors to be considered include whether the media products are permanently marked to indicate that they are not intended for retail sale, the absence of retail bar codes on the packaging, and the use of separate model numbers for the products. In the particular case of a media product that meets the definition of "digital audio recording medium" in other respects, it shall be incumbent on the manufacturer or importer to demonstrate that the royalty obligation does not apply because the media product is primarily marketed for and most commonly used by professional in recording studios. Persons to which important rights and obligations apply are identified in the definitions of "interested manufacturing party" and "interested copyright party." The definition of "interested copyright party" is intended to include record companies, music publishers, songwriters, and their respective industry associations, including organizations that present writers and/or publishers in licensing rights in musical works. Key obligations under chapter 10 are tied to the distribution of digital audio recording devices, media, and interface devices. To "distribute" means to sell, resell, lease, or assign a product to consumers in the United States or for ultimate transfer to consumers in the United States. The definition is intended to encompass all means by which products may be transferred through the distribution chain for ultimate transfer to consumers in the United States, whether through third parties or intermediaries or within a vertically integrated manufacturing and distribution operation. The definition of "distribute" is intended to include transfers between related entities or within a single entity. However, before a "distribution" can take place, activities that normally constitute part of the manufacture or importation of a product should first have been concluded. For example, the packaging of a product is customarily considered part of the manufacturing operation. Therefore, transfer of a product from a manufacturers assembly line to its packaging department would not be considered a "distribution." In addition, a "distribution" should not be considered to occur within a single entity at a point earlier than the point at which the entity has established a bona fide internal transfer price for purposes other than this legislation. When viewed in combination with sections 1012 (a) and (b), it is clear that there are to be no double royalty payments for the same digital audio recording device or medium, even where there is more than one distribution (i.e., consecutive distributions). Rather, it is intended that a royalty payment will be made by the first distributor of each digital audio recording device or medium. The royalty payment required by subchapter B is calculated based on the "transfer price" of a digital audio recording device or medium. While the formulae for calculating the royalty are set forth in section 1012, the "transfer price" is defined in section 1001 as (1) in the case of an imported product, the actual entered value of the product at U.S. Customs (exclusive of any freight, insurance, and applicable duty), and (2) in the case of a domestic product, the manufacturers transfer price (FOB the manufacturer, and exclusive of any direct sales taxes or excise taxes incurred in connection with the sale). Where the transferor and transferee are related entities (such as a parent and subsidiary) or are within a single entity (such as units within the same corporation), the transfer price must be used in connection either with a manufacturers bona fide "distribution" (as explained above) or with importation, and is not to be less than a reasonable arms-length price as determined in accordance with the principles of the regulations adopted pursuant to the Internal Revenue Code, title 26 U.S.C. 482, or any successor provision to section 482. Sections 1002 and 1003. Prohibition on certain infringement actions and effect on other rights and remedies The copyright law implications of private audio recording for noncommercial use have been the subject of longstanding debate. Since 1981, there have been successive legislative attempts to resolve the issue. In the absence of legislative resolution, the distribution of consumer digital audio recording technologies has been subject to challenge in the courts based on claims of contributory copyright infringement. See, e.g., Cahn v. Sony Corp. (S.D.N.Y., filed July 9, 1990, dismissed without prejudice, July 10, 1991). A central purpose of the Audio Home Recording Act of 1991 is conclusively to resolve this debate, both in the analog and digital areas, thereby creating an atmosphere of certainty to pave the way for the development and availability to consumers of new digital recording technologies and new musical recordings. To address the uncertainty that has plagued this issue, section 1002 prohibits certain copyright infringement actions. Subsection (a) provides that no action may be brought under title 17 of the United States Code or under section 337 of title 19, chapter 4, the Tariff Act of 1930, alleging infringement of copyright based on the manufacture, importation, or distribution of (i) a digital audio recording device or medium or (ii) an analog audio recording device or medium. The subsection also extends protection to users of such audio recording devices and media by prohibiting copyright infringement actions based on the use of such devices or media for making audiograms; however, the protection against copyright infringement actions does not extend to infringement claims by virtue of the making of one or more audiograms, or other material objects in which works are fixed, for direct or indirect commercial advantage. As stated earlier, a key purpose of S. 1623 is to insure the right of consumers to make analog or digital audio recordings of copyrighted music for private, noncommercial use. Section 1002(a)(2) states that the copying of an audiogram by a consumer for private, noncommercial use is not for direct or indirect commercial advantage and is therefore not actionable. Thus, for purposes of illustration, the making of an audiogram by a consumer for use in his or her home, car, or portable tape player, or for a family member, is protected by the prohibition against copyright infringement actions contained in this legislation. In determining whether the making of audiograms is for "direct or indirect commercial advantage," the relevant inquiry is whether a person makes audiograms for the purpose of commercial advantage, rather than whether the person making them acquires devices, media, or music from a commercial enterprise or in a commercial transaction. For example, a person who makes multiple copies of a particular audiogram and sells those copies to others would not be protected by the prohibition against copyright infringement actions contained in this legislation. Such a person would have, however, the full range of defenses to such an infringement action available under current law. The foregoing examples, of course, are merely illustrative of the meaning of "direct or indirect commercial advantage" in the context of section 1002 only. As is clearly indicated by section 1003, the new chapter 10 created by S. 1623 is intended to address audio recording, and only audio recording, and is not intended to establish principles of copyright law applicable to other types of works or interpretations applicable to other provisions of title 17. The reference to actions "alleging infringement of copyright" includes actions under section 1337 of title 19 for unfair methods of competition and unfair acts in the importation of articles based on copyright infringement. The prohibition on actions under section 1002 is not dependent upon compliance with other requirements under this chapter. Thus, for example, the protection granted by section 1002 applies to all digital audio recording devices and media regardless of whether applicable royalty payments have been made for a device or medium or whether a device includes SCMS. The Committee believes that the remedies provided by subchapter D are sufficient to ensure compliance with the royalty and SCMS provisions of this chapter, and it would be unfair to subject a consumer to potential infringement litigation merely because provisions of chapter 10 were violated somewhere in the distribution chain. Subsection (b) makes clear that the prohibition on certain infringement actions in subsection (a) is not intended, by negative implication or otherwise, to create any new cause of action for copyright infringement, to expand any existing cause of action for copyright infringement, or to limit any defense that may be available to a copyright infringement action under title 17 of the United States Code or section 337 of the Tariff Act. In crafting this legislation, the committee intends to address the longstanding issue of audio recording, and only audio recording. There is no intention to establish generally applicable principles of copyright law. The committee has been careful to make clear that this legislation is limited to this issue and to avoid affecting other technologies or other interests even by implication. This intent is manifest in several provisions of the bill. For example, section 1002 provides only that certain copyright infringement actions are precluded. The section does not purport to resolve, nor does it resolve, whether the underlying conduct is or is not infringement. The committee intends the immunity from lawsuits to provide full protection against the specified types of copyright infringement actions, but it has not addressed the underlying copyright infringement issue in order to minimize the chances that a resolution of that issue might be interpreted to have applicability with respect to other conduct or other technologies. Similarly, section 1003 specifically provides that, except as expressly provided in chapter 10 with respect to audio recording devices and media, nothing in chapter 10, or the fact of its enactment, is intended to have any effect on any persons rights or remedies under chapters 1 through 9 of title 17. For example, nothing in chapter 10 should be construed to authorize unlawful access to a transmission from which a reproduction may be made. Finally, the committee wishes to express its view that neither the restriction on copyright infringement actions in section 1002 nor the provision for royalty payments under subchapter B obviates the need for, or the importance of, the phonorecord rental restrictions contained in section 109(b) of title 17 (the so-called "Record Rental Amendment"). Twice before in 1983, when this committee approved the Record Rental Amendment, and again in 1988, when the Record Rental Amendment was extended until 1977 this committee has considered the question of commercial phonorecord rental, and has determined that the Record Rental Amendment is necessary and appropriate. Neither the enactment of chapter 10 nor the language used in any of its provisions is intended to undercut in any way the committees prior findings or conclusions with respect to the issue of commercial phonorecord rental and problems posed by this practice. The use of the new term "audiogram" in chapter 10 is not intended to diminish, enlarge, or otherwise affect the scope of the term "phonorecord" as it is used in section 109 of title 17, or elsewhere in title 17. subchapter B royalty payments Section 1011. Obligation to make royalty payments Subsection (a) sets forth the basic obligations to file notices, statements of account, and royalty payments in order to import into and distribute in the United States, or to manufacture and distribute in the United States, any digital audio recording device or medium. The three basic filings the initial notice filing, the quarterly statements of account, and the annual statement of account are described in detail in subsections (b) through (d). Subsections (e) through (h) address verification procedures and the confidentiality of information. Since each of the filing requirements (including the royalty payment obligation) is tied to "distribution" of a digital audio recording device or medium, manufacture or importation by itself would not trigger these obligations under section 1011. The importation of a digital audio recording device or medium as part of the personal baggage of any person arriving from outside the United States, for use and not for sale, would not trigger any obligations under section 1011. Subsection (b) requires an importer or manufacturer to file a notice with the Register within 45 days following first distribution within the United States of a digital audio recording device or medium that falls within a product category or utilizes a technology for which no notice has previously been filed by that importer or manufacturer. However, no notice shall be required with respect to any distribution occurring prior to the effective date of this chapter. The committee intends "product category" to refer to products with substantially the same use in substantially the same environment. For example, product categories would include categories such as: hand held portable integrated combination units (e.g., "boomboxes"); portable personal recorders; stand-alone home recorders (e.g., "tape decks"); home combination systems (e.g., "rack systems"); automobile recorders; configurations of tape media such as standard cassettes or microcassettes; and configurations of disc media such as 2 1/26", 36", 56" discs. The committee intends "technology" to include such technology-based distinctions as: DAT, DCC, MD, and other recording technologies. The notice must set forth the product category and technology of the device or medium, the manufacturers or importers identity and address, and the trademarks, trade names or other indicia of origin that will be associated with the product. Products need not be identified by model number, and notices need not be submitted for different models within a single product category or product technology. Provided that the requisite information is provided by product category and technology, the committee intends that multiple product categories and technologies may be included on a single notice (e.g., home tape decks and "boomboxes" using DCC and DAT technology). Subsection (c) requires that each importer and manufacturer of digital audio recording devices or media file with the Register a quarterly statement of account for each quarter in which that importer or manufacturer distributed such a device or medium. Thus, there is no obligation to file for any quarter in which no digital audio recording device or medium was distributed. The quarterly statement must specify, by product category, technology and model, the quantity and transfer price of all such devices and media distributed in the applicable quarter. Except with respect to the fourth quarter of each calendar or fiscal year, the statement must be filed with the Register no later than 45 days after the close of the quarter. The quarterly statement for the final quarter of any calendar or fiscal year is to be incorporated into the annual statement of account required under subsection (d). In order to ease the transition following the effective date of this chapter, no quarterly statement is required for the calendar or fiscal quarter within which the effective date of this chapter falls. However, the first quarterly statement of account shall cover the entire period since the effective date of this chapter. Each quarterly statement of account must be certified as accurate by an authorized officer (in the case of a corporation) or principal (in the case of a proprietorship or partnership) of the importer or manufacturer. The statement must be accompanied by the total royalty payment due, as calculated under section 1012. Each manufacturer or importer has the option to file the required quarterly statements on either a calendar or fiscal year basis. However, once a filing choice has been made, the Committee does not envision that it will be changed except on the basis of important fiscal or accounting considerations (such as a change in the filing entitys fiscal year). Subsection (d) requires that each importer or manufacturer of digital audio recording devices or media file an annual statement of account for each calendar or fiscal year (as elected) in which that importer or manufacturer distributed such a device or medium. Thus, there is no obligation to file for any year in the absence of a distribution of a digital audio recording device or medium. The annual statement is to be filed with the Register no later than 60 days after the close of the calendar or fiscal year. The statement must be certified as accurate by an authorized officer or principal of the importer or manufacturer, and must be reviewed and certified by an independent certified public accountant pursuant to generally accepted auditing standards. The annual statement of account must also be accompanied by any royalty payment due under section 1012 that was not previously paid under subsection (c) of this section, including the royalty payment due for the fourth quarter and any shortfalls in the royalty payments made for the first three quarters that may be discovered during the preparation and certification of the statement. On the other hand, if the preparation and certification of the annual statement reveals that the manufacturer or importer has overpaid for the first three quarters, such overpayment may be deducted from the royalty payment for the fourth quarter. To the extent such deduction is not sufficient to recover such overpayment, the committee intends that the unrecovered amount may be carried forward and credited against future royalty payment obligations, or, at the election of the manufacturer or importer, shall be refunded to said manufacturer or importer upon written request to the Register, in such form as the Register shall prescribe by regulation. Subsections (b), (c), and (d) authorize the Register to prescribe by regulation the form of the required notices and statements of account. As indicated above, the content of the notices and statements of account is set forth in those subsections. Subsection (e) provides for the promulgation of regulations pursuant to which interested copyright parties may, through independent certified public accountants who meet certain criteria, audit the statements of account filed by importers and manufacturers to verify the accuracy of the information contained therein. The Register is directed, after consulting with interested copyright parties and interested manufacturing parties, to issue regulations defining the scope of such verification audits and establishing a procedure for coordination of the audits to ensure that no importer or manufacturer is audited more than one per year. The regulations shall also ensure that verification audits will be conducted only at reasonable times, with reasonable advance notice, and will be no broader in scope than is reasonably necessary to carry out the verification audit function. The results of each verification audit are to be certified by the independent certified public accountant pursuant to generally accepted auditing standards. The certification and the results of the audit are to be filed with the Register. In the event that a verification audit leads to a dispute concerning the amount of royalty payment due from a manufacturer or importer, the approved representatives of interested copyright parties and the audited party (and its authorized representatives) shall have access to all documents upon which the review and audit results under subsections (d) and (e), respectively, were based. This access shall be limited, in the case of representatives of interested copyright parties, to only such representatives who have been approved by the Register under subsection (h)(2) to have access to confidential information, and who have complied with the procedural requirements of subsection (h)(2). Subsection (f) specifies that the party initiating a verification audit under subsection (e) must, in the first instance and unless otherwise agreed among interested copyright parties, bear the cost of the audit. However, in the event the verification audit leads ultimately to the recovery of an amount greater than or equal to five percent of the audited partys actual royalty payments for the year subject to audit, the audited party shall provide reimbursement for the reasonable costs of the audit. Any recovery of royalty underpayments resulting from the audit shall be used first to provide reimbursement for the reasonable costs of the audit, to the extent those costs have not otherwise been reimbursed by the audited party. The remainder of any such recovery shall be deposited with either the Register or, where the audited party has been making deposits under a negotiated arrangement pursuant to section 1016, with the administering entity for that arrangement, for distribution to interested copyright parties as though such funds were royalty payments made by the audited party under section 1011 for the year subject to audit. For any dispute between an audited party and one or more interested copyright parties concerning reimbursement for the reasonable costs of a verification audit, the committee encourages use of the dispute resolution procedures under subchapter D. Subsection (g) is intended to ensure the fairness and independence of the accountants used to conduct the annual reviews required by subsection (d) and the verification audits permitted under subsection (e). Each accountant used by interested manufacturing parties or interested copyright parties must be in good professional standing and must not be financially dependent on interested manufacturing parties (in the aggregate) or interested copyright parties (in the aggregate), respectively. In light of the commercially sensitive nature of information contained in the quarterly and annual statements of account and in the reports concerning verification audits, subsection (h) sharply restricts the disclosure of, and public access to, that information, which is expressly presumed to contain confidential trade secrets. Access to the information is limited to (i) Copyright Office and Tribunal personnel who require access as part of their official duties under chapter 10, and (ii) representatives of interested copyright parties and interested manufacturing parties who have been approved pursuant to procedures to be established by the Register, for the sole purpose of conducting verification functions and resolving resulting disputes. In establishing these procedures, the Copyright Office should take account of such factors as the sensitivity of the information, competition between interested manufacturing parties, and possible relationships between interested copyright parties and interested manufacturing parties. In addition, the regulations should make clear that parties to whom confidential information is disclosed will in good faith cooperate in obtaining appropriate protective orders to preserve confidentiality in the course of enforcement actions. Subsection (h) also provides, however, that any manufacturer or importer is always entitled to access to all documents filed with the Register as the result of a verification audit of that manufacturer or importer. Moreover, nothing in subsection (h) authorizes the withholding of information from Congress. In addition, the importer and manufacturer notices filed under section 1011(b) will be available for public inspection, and the Register and Tribunal may disclose aggregate information based on account statements and audit results so long as no company-specific information is revealed either directly or indirectly. Section 1012. Royalty payments Section 1012 sets forth the basis for determining the royalty payments due under chapter 10 for digital audio recording devices and media. Royalty payments are calculated as a percentage of the "transfer price" defined in section 1001(15). Pursuant to subsection (a), the royalty payment for each digital audio recording device is 2 percent of the transfer price of the device, subject to a cap, a floor and special rules for digital audio recording devices first distributed in combination with one or more other devices. Pursuant to subsection (b), the royalty payment for each digital audio recording medium is 3 percent of the transfer price of the medium. Only one royalty payment is due for each device or medium, and it is due only from the first person to manufacture and distribute or to import and distribute the device or medium. Paragraph 1012(a)(2) sets forth the method of calculating the royalty for digital audio recording devices first distributed in combination with one or more other devices, whether physically integrated (e.g., a "boombox") or distributed together with other physically separate components (e.g., a "rack system"). If the digital audio recording device is first distributed as part of a physically integrated unit, the royalty payment for the device shall be two percent of the transfer price of the physically integrated unit (but shall be reduced by the amount of any royalty previously paid on any other digital audio recording device included in the unit that was not first distributed in the unit). If all digital audio recording devices included in the unit were first distributed prior to inclusion in the unit, no further royalty would be due, because no digital audio recording device would be "first distributed" as part of the unit. On the other hand, if a digital audio recording device is first distributed in combination with one or more other devices (e.g., stereo components) with which it is not physically integrated, calculation of the royalty payment depends on whether substantially similar digital audio recording devices have been distributed separately (i.e., not as part of a combination) during the preceding year. If so, the royalty payment shall be 2 percednt of the average transfer price of the similar devices during the prior year. If not, the royalty payment will be 2 percent of a constructed price that reflects the proportional value of the digital audio recording device to the combination as a whole. The amount of the royalty payment on each digital audio recording device or physically integrated unit containing such a device is subject to a statutory floor of $1.00 and a statutory cap of $8.00. However, where a physically integrated unit contains two or more digital audio recording devices, the cap for the unit is $12.00 rather than $8.00. The statutory floor is fixed, but the caps are subject to upward adjustment, upon petition of any interested copyright party to the Tribunal, during the sixth year after the effective date, and not more than once per year thereafter. If the Tribunal finds that more than 20 percent of the royalty payments are hitting the relevant cap (i.e., $12.00 in the case of physically integrated units containing two or more digital audio recording devices, and $8.00 in other cases), then the Tribunal is directed to increase prospectively the relevant cap with the goal of having no more than 10 percent of such payments hit the new cap. The committee intends that the Tribunal shall attempt to set the new cap as close to the 10 percent goal as possible without exceeding 10 percent. However, the percentage increase in the relevant cap may not exceed the percentage increase in the CPI during the period since the last adjustment of that cap by the Tribunal or, in the case of the first such adjustment, the period since the effective date of chapter 10. Unless the Tribunal finds that more than 20 percent of the royalty payments are hitting the relevant cap, it shall not increase the cap. Subsection (c) provides for importers and manufacturers to take a credit for royalty payments already made on devices or media that, within two years after the date on which the applicable royalties were paid, (i) are returned to the manufacturer or importer as unsold or defective merchandise, or (ii) despite having been distributed in the United States, are subsequently exported by the manufacturer, importer or a related entity. Any such credit is to be deducted from the royalty payments covering the period in which the device or medium was returned or exported, except that any credit that is not fully used during a given quarter may be carried forward. If the manufacturer or importer subsequently distributes any returned or exported merchandise for which a credit has been taken, a new royalty payment will be made based on the transfer price and cap applicable to the new distribution. Section 1013. Deposit of royalty payments and deduction of expenses In a manner similar to other sections of the Copyright Act that involve the pooling of royalty payments, chapter 10 establishes a basic system of depositing royalty payments with the Register for ultimate distribution by the Tribunal. Section 1013 provides that royalty payments are to be initially deposited with the Register, who is to deduct the reasonable expenses of the Copyright Office in connection with its duties under chapter 10, and then deposit the remaining sums in the U.S. Treasury in such manner as the Secretary of the Treasury directs. The Secretary of the Treasury is to invest such funds in interest-bearing U.S. Government securities for later distribution with interest pursuant to other sections of chapter 10. The Register is directed to provide the Tribunal with monthly financial statements reporting the amount of royalties available for distribution. Although the committee acknowledges the basic fairness of distributing late royalty payments (e.g., those resulting from litigation) as if they had been deposited during or shortly after the year to which they relate, the committee also recognizes the potential administrative difficulties associated with keeping royalty payment accounts for each calendar year open indefinitely. As a consequence, section 1013 authorizes the Register to close out the royalty payments account for any calendar year after 4 years have passed, and to treat any funds remaining in that account and any subsequent deposits that would otherwise be attributable to that calendar year as attributable to the next succeeding calendar year. The Tribunal would then distribute such funds accordingly. Section 1014. Entitlement to royalty payments Section 1014 identifies the parties who are entitled to receive royalty payments and sets forth the basic allocations of royalty payments among such parties. Subsection (a) provides that a portion of the royalty payments for a given period are to be distributed to any "interested copyright party" (as defined in section 1001(7)) who has filed a timely claim, provided that the interested copyright partys musical work or sound recording has been (i) embodied in lawfully made audiograms that have been distributed to the public, and (ii) either distributed to the public in the form of audiograms or disseminated to the public in transmissions during the period to which such payments pertain. The committee intends the pool of claimants to consist of individual record companies, writers, and music publishers, although representative associations or other organizations may act on behalf of such claimants to the extent they have been so authorized. Subsection (b) designates two separate funds into which the royalty payments will initially be divided, and then provides for the secondary allocation of the funds among various groups and organizations. The first fund, the Sound Recordings Fund, will receive 66 2/3 percent of the total royalty payments. The Tribunal will distribute the sums allocated to the Sound Recordings Fund as follows:
The second fund, the Musical Works Fund, will receive 33 1/3 percent of the total royalty payments. The Tribunal will evenly divide the funds in the Musical Works Fund into two separate royalty payment pools, one of which shall be dedicated exclusively to writer claimants and the other of which shall be dedicated exclusively to music publisher claimants. Individual writers and music publishers that receive distributions from these two royalty payment pools are entitled to the full sum of money received, notwithstanding any contractual obligations to the contrary. The interested copyright parties that are entitled to receive payments from each fund or pool shall attempt in good faith to negotiate a voluntary division of the funds within each group specified in subsection (b): namely, (i) within the group of owners of copyright in sound recordings specified in section 1001(7)(A) (such as record companies), (ii) within the group of music publishers and (iii) within the group of writers. Subsection (c) provides that, in the absence of a voluntary agreement covering all interested copyright parties within such a group, the Tribunal will resolve the dispute within that group pursuant to the procedures specified in section 1015(c). Subsection (c) also specifies that, where such disputes occur, the Tribunal will allocate royalty payments as follows: (1) where the dispute is among owners of copyright in sound recordings, the Tribunal will look to the extent to which each sound recording was distributed to the public in the form of audiograms (e.g., retail record sales); and (2) where the dispute is among music publishers or among writers, the Tribunal will look to the extent to which each musical work was (i) distributed to the public in the form of audiograms or (ii) disseminated to the public in transmissions (e.g., airplay time). For disputes among music publishers and among writers, the Tribunal has discretion to decide what respective weight to assign each of the two factors listed (i.e., audiogram sales and transmissions). Section 1015. Procedures for distributing royalty payments Section 1015 specifies the mechanism by which royalty payments are distributed to interested copyright parties, except to the extent elements of such mechanism are superseded by a negotiated arrangement that has entered into effect pursuant to section 1016. Subsection (a) requires that all interested copyright parties who wish to receive a share of the royalty payments file a claim with the Tribunal before March 1 of each year with respect to the payments collected for the preceding calendar year. In order to keep administrative costs and delays to a minimum, interested copyright parties within each group specified in section 1014(b) are encouraged to reach agreement among themselves as to the division of royalty payments within the group, and to combine their claims either in a joint filing or by designating a common agent to receive payment on their behalf (e.g., an organization acting on behalf of record companies, music publishers, or writers). As is the case for similar activities under other provisions of the Copyright Act that address the need to divide royalty pools, activities related to the distribution of royalty payments are exempted from the antitrust laws. However, no agreement among claimants may vary the basic allocation of royalties set forth in section 1014(b) (e.g., the basic 50-50 split between music publishers and writers). Under subsection (b), the Tribunal must determine by March 30 of each year whether or not there exists a controversy concerning the division of royalty payments among claimants within any of the groups of interested copyright parties. If not, the Tribunal is directed to authorize the distribution of all royalty payments (along with accumulated interest) in the manner agreed to by the claimants under subsection (a), after deducting its reasonable administrative expenses. Subsection (c) provides that, if the Tribunal determines that a controversy exists within one or more of the groups of interested copyright parties, it must conduct a proceeding to resolve the dispute. Notwithstanding the pendency of a proceeding, the Tribunal is directed, to the extent feasible, to distribute any amounts that are not in controversy (including, at a minimum, the amounts due to those groups of interested copyright parties within which no dispute exists). Section 1016. Negotiated collection and distribution arrangements Section 1016 authorizes interested copyright parties to negotiate among themselves or with interested manufacturing parties in order to establish a private system for the distribution, verification, and/or collection of royalty payments. The establishment of such a private system is subject to approval by the Copyright Royalty Tribunal, and only one private system can be in place at a time. A private system can be narrow in scope (e.g., covering only verification activities), or can broadly cover collection, distribution, and verification functions under chapter 10. Thus, subject to the safeguards provided under section 1016, a broad version of such a system could assume many of the collection functions of the Copyright Office and distribution functions of the Tribunal. Subsection (a) provides, however, that a negotiated private arrangement may not alter certain key elements of collection and distribution under chapter 10: namely, the requirements related to (i) the obligation of manufacturers and importers to file royalty payments and statements of account (section 1011(a)); (ii) the obligation of manufacturers and importers to file notices with the Copyright Office (section 1011(b)); (iii) Congressional access to information (section 1011(h)(4)); (iv) royalty payment amounts for digital audio recording devices and media (sections 1012(a)-(b)); (v) entitlement to royalty payments (section 1014(a)); and (vi) allocation of royalty payments among groups (section 1014(b)). Other requirements of subchapter B, including the frequency of filing royalty payments and statements of account, the frequency of distributions, and the verification procedures, may be altered for those parties who choose to participate in the negotiated private arrangement. Such an arrangement also may provide that specified types of disputes among the parties to the arrangement (e.g., regarding distribution of royalty payments) are to be resolved by binding arbitration or other agreed upon means of dispute resolution. Section 1016 allows interested copyright parties, if two-thirds of the members of each group agree, to negotiate and establish, among themselves or with interested manufacturing parties, a private system for distribution, verification and/or collection of royalties. The two-thirds threshold is to be calculated by reference to the proportion of the market accounted for by the individual record companies, music publishers, and writers measured by annual retail sales of audiograms rather than by counting the number of individual record companies, music publishers, and writers that wish to participate in the private arrangement. For these purposes, an organization representing one of the three categories of interested copyright parties identified above (e.g., an association of music publishers) is presumed to represent the requisite two-thirds of that category if the membership of, or other participation in, that organization accounts for at least two-thirds of annual retail sales of audiograms. The fact that a particular organization meets this two-thirds requirement does not, however, give the organization any power or authority to force its members into a negotiated arrangement. Rather, the committee envisions that organizations that may wish to carry out a representative role with respect to the establishment or implementation of a negotiated arrangement will seek advance authorization from their members for this purpose. If such authorization is not given, or is withdrawn at any time (either before or after the negotiated arrangement goes into effect), by an individual record company, music publisher, or writer, that person or entity has recourse to the full set of protections available under section 1016 to parties that choose not to participate in a negotiated arrangement. The committee recognized that, absent appropriate safeguards, a negotiated arrangement that is not entered into unanimously could work to the detriment of parties that do not wish to participate. Accordingly, the committee strengthened language in the bill that is designed to protect the interests of those parties who choose not to enter into a negotiated arrangement. The legislation provides that no negotiated arrangement can go into effect without the approval of the CRT. The CRT must determine that the conditions set forth in section 1016(b) are met before a negotiated arrangement can be approved. Language contained in subsections (b) and (c) ensures that both interested manufacturing parties and interested copyright parties who choose not to participate in a negotiated arrangement will not be adversely affected by the arrangement. A manufacturer or importer may fully satisfy its obligations by depositing appropriate royalty payments with the Copyright Office and otherwise complying with the provisions of sections 1011 and 1012. In order to protect the rights of nonparticipating interested copyright parties, the CRT, prior to approval of a negotiated arrangement, must ensure that the arrangement includes any necessary safeguards to ensure their receipt of proper royalty payments. In particular, the CRT must ensure that any negotiated arrangement does not reduce the amount of money that non-participating interested copyright parties would receive in the absence of such an arrangement. In order to achieve this end, the Tribunal may require such safeguards as accounting procedures, reports, and any other information required to ensure and verify that royalty paments have been properly collected and distributed. The legislation establishes antitrust immunity for good-faith negotiation and voluntary implementation of a negotiated arrangement. The "good faith" and "voluntary" language was included to address competing objectives in connection with the negotiation and implementation of these private arrangements. The first objective was to ensure that the participants would be free to negotiate vigorously and ultimately to implement a negotiated arrangement absent the fear of frivolous antitrust claims by potentially disgruntled participants or nonparticipants. The second objective was to ensure that, in an industry such as this where there are some relatively powerful participants, there would be some protection against their imposing their will on less powerful participants by the use of coercive acts in the negotiation or implementation of a negotiated arrangement. For example, despite the fact that there are over 2600 record companies in the United States, six record distribution companies distribute sound recordings from their own labels, as well as from numerous independent labels, which combined account for over two-thirds of all annual retail record sales. The committee believed that appropriate safeguards should be included in the legislation to assure that any negotiated arrangements agreed to by larger entities do not prejudice the rights of smaller record companies, or for that matter, songwriters, composers and music publishers that choose not to participate. The language of the legislation strikes a balance between these concerns by providing antitrust immunity for the good-faith negotiation and implementation of these private arrangements, but not for group boycotts, concerted refusals to deal, illegal tying or similar coercive acts (including threats to take such acts) in the negotiation or implementation of a negotiated arrangement (for example, a group boycott designed to force parties to participate in the arrangement). The committee intends that, where a private arrangement has been authorized that provides for direct collection of royalty payments from one or more participating interested manufacturing parties, the administering entity for the private arrangement shall set asisde a portion of the payments it has collected sufficient to settle likely claims against such payments by those interested copyright parties that have chosen not to participate in the private arrangement. Depending on the procedures that the CRT approves, the funds that are set aside may either be retained in a separate account pending the Tribunals annual claims resolution process or they may be paid over periodically to the Copyright Office. If the funds are retained until completion of the annual claims resolution process, a setoff procedure could be implemented to settle the claims that nonparticipants may have against those funds on the one hand, and the claims participants may have against the government-collected royalty pool on the other hand. However, any funds that are set aside for nonparticipants but retained by the prviate administering entity pending the CRTs annual claims resolution proces must accumlate interest, for the benefit of such nonparticipants, as provided under section 1013. After a private arrangement goes into effect, the CRT is directed to hear and address any objections to the arrangement and to ensure that alternative collection and distribution procedures remain available to, and are working properly for, interested manufacturing parties and interested copyright parties that are not participating in the arrangement. The CRTs responsibility includes ensuring that interested copyright parties who are not participants in the negotiated arrangement continue to receive the royalty payments to which they would be entitled in the absence of the arrangement. The CRTs responsibility also includes responding to objections from participants that the arrangement is no longer operating as a fair and effective alternative to the collection, distribution and/or verification procedures otherwise provided under chapter 10. In order to ensure the necessary powers to carry out these responsibilities, the CRT is enpowered to seek injunctive relief in an appropriate U.S. district court. The committee anticipates that the CRT will make use of these powers as necessary to protect the interests of those who have chosen not to participate in the negotiated arrangement, and to ensure that the arrangement continues to function as a fair and effective alternative to the procedures provided under chapter 10. The committee also anticipates, however, that the parties to the arrangement are likely to agree upon binding arbitration or other means to resolve disputes that may arise within the arrangement. Except to the extent necessary to protect nonparticipants and to ensure compliance with the provisions of section 1016, the committee does not intend for the CRTs oversight authority to be used to intervene in matters which are subject to arbitration, or to dictate the internal functioning of the private arrangement. In short, the royalty system of S. 1623 is an equitable resolution of a longstanding problem which benefits all parties. The oversight provisions are established to insure that all interests, and not just the interests of the majority, are protected. Together, the royalty system and the oversight regulations will allow the United States to join the growing number of countries which afford their creators and copyright owners royalties for home taping of musical works and sound recordings. SUBCHAPTER C THE SERIAL COPY MANAGEMENT SYSTEM Section 1021. Incorporation of the Serial Copy Management System Section 1021 prohibits any person from importing, manufacturing or distributing any digital audio recording device or digital audio interface device that does not conform to the standards and specifications to implement the Serial Copy Management System ("SCMS"). The fundamental elements of SCMS are simple. SCMS will not restrict the copying of digital source material that has been encoded so as not to assert copyright protection over the sound recording and the underlying musical work. Where the digital source material has been encoded to assert such copyright protection, SCMS will not prevent the making of one or more first generation digital audio copied recordings. However, SCMS will prevent the making of second generation digital copies from such first generation digital copies. Thus, digital copies can be made directly from a commercially released compact disc or digital tape containing copyrighted material, but a second generation of digital copies cannot be made from the first generation copies. The standards and specifications for implementing SCMS under the act are set forth in the technical reference document published in this report, which will also be published in the Federal Register by the Secretary of Commerce pursuant to section 1022(a). In a letter reprinted in this report, which is also to be published in the Federal Register, the National Institute of Standards and Technology ("NIST") has certified that the technical reference document sets forth standards and specifications (i) that adequately incorporate the intended functional characteristics to regulate serial copying, and (ii) that are not incompatible with existing international digital audio interface standards and existing digital audio technology. Section 1021(a)(1) provides that digital audio recording devices and digital audio interface devices must conform to the SCMS standards and specifications by one of three methods. First, under subsection (a)(1)(A), such devices may conform to the standards and specifications set forth in the technical reference document. Second, under subsection (a)(1)(B), such devices may conform to standards and specifications set forth in an order of the Secretary of Commerce issued pursuant to standards set forth in section 1022(b), in cases where a particular device does not conform to the standards and specifications set forth in the technical reference document and does not meet the requirements of subsection (a)(1)(C). Third, under subsection (a)(1)(C), digital audio recording devices other than those defined in part II of the technical reference document can comply with SCMS standards and specifications established by a manufacturer or an owner of a proprietary technology so long as those standards and specifications achieve the same functional characteristics with respect to the regulation of serial copying and are compatible with the prevailing method for implementing SCMS. Such functional characteristics are set forth in parts I-A and II-A of the technical reference document. In order for the SCMS system in a digital audio recording device to be compatible with the prevailing method for implementing SCMS, the device must accurately receive and act upon the SCMS information contained in a digital audio signal so as to correctly implement the level of SCMS protection indicated in the signal. Thus, a "compatible" SCMS system need not be implemented in exactly the same way, "bit-for-bit," in every digital audio interface device and digital audio recording device, so long as the proper functional characteristics are achieved. Subsection (b) prohibits the importation, manufacture, or distribution of any device, or the offering or performing of any service, whose primary purpose or effect is the deactivation or other circumvention of an SCMS program or circuit in a digital audio recording device or digital audio interface device. Subsection (c) prohibits any person from encoding an audiogram with inaccurate information relating to the category code, copyright status, or generation status of the source material so as to affect improperly the operation of SCMS. For example, a manufacturer of audiograms cannot encode noncopyrighted musical works and sound recordings as copyrighted. Subsection (c) also makes clear, however, that nothing in subchapter C obligates those who make audiograms to encode them so as to assert copyright protection. Subsection (d) provides that a person who transmits or otherwise communicates to the public a sound recording in a digital format is not required also to transmit or otherwise communicate the SCMS information indicating whether copyright is being asserted over the sound recording or underlying musical work. This provision is designed to minimize any adverse impact on digital transmission services. Subsection (d) makes clear, however, that any person who elects to transmit or otherwise communicate such copyright status information must do so accurately. As set forth in the technical reference document, digital receivers will be programmed to treat digital audio transmissions without such SCMS information as the equivalent of copyrighted, commercially released CDs or other digital originals; as a result, digital broadcast and cable transmissions generally will be recordable by consumers, but second generation digital copies will not be able to be made from those first generation copies. Section 1022. Implementing the Serial Copy Management System Subsection (a) requires the Secretary of Commerce, within 10 days of enactment of chapter 10, to publish in the Federal Register the technical reference document along with the certification from NIST referred to above, both of which are set forth in this report. Parts I-A and II-A of the technical reference document provide standards and specifications for implementing SCMS in digital audio interface devices and digital audio recording devices, respectively. These parts of the technical reference document are intended to lay out broad rules for SCMS so that SCMS can be implemented in different ways and the development and introduction of new digital audio technologies will not be hindered. Part I B-C of the technical reference document describes and mandates the implementation of SCMS in a particular interface format, known as the IEC-958 nonprofessional digital audio interface, which has been in use for several years in various digital audio devices. Part II B-D of the technical reference document describes and mandates the implementation of SCMS in a particular digital audio recording device, the DAT recorder, which also has been available commercially for several years. These parts draw from voluntary standards developed for the International Electrotechnical Commission ("IEC"), an international engineering standards organization, and make mandatory under U.S. law only those elements necessary to the implementation of SCMS. Any future changes to the IEC standard will have no force under U.S. law, but may be considered by the Secretary of Commerce in issuing orders under subsection (b)(2). Subsection (b) authorizes the Secretary of Commerce, at the request of an interested manufacturing party or an interested copyright party, and after consultation with the Register, to issue orders permitting the importation, manufacture and distribution of digital audio recording and interface devices that do not conform to standards and specifications set forth in the technical reference document. Such orders enable the Secretary, subject to specified restrictions, to address the need for (i) allowing exceptions for digital audio recording or interface devices for which application of all relevant standards and specifications in the technical reference document is unnecessary to achieve the goals of SCMS; (ii) authorizing the distribution of digital audio recording or interface devices that conform to new or revised general standards and specifications; and (iii) ensuring that any standards and specifications established by a manufacturer or proprietor under section 1021(a)(1)(C) meet the requirements of that provision. For each type of order, the Secretary is required to ensure that all digital audio recording and interface devices continue to possess the same functional characteristics with respect to the regulation of serial copying as devices that meet the standards and specifications set forth in the technical reference document. The Secretary also may issue an order under subsection (b) regarding proposed methods to regulate the ability of digital audio recording devices to make serial digital copies of analog audio source material. Existing analog recordings and transmissions do not identify, in the audio signal itself, whether the sound recordings or musical works are protected by copyright. Because of this limitation, the technical reference document currently permits the making of two generations of digital audio copied recordings from analog audio source material. If, in the future, a technical method becomes available to effectuate, in digital audio recording devices, the functional characteristics of SCMS for analog source material, the Secretary may issue an order directing the implementation of such method. Differences in technology among types of digital audio recording devices, of course, may require more than one order to approve implementation of different technical methods for implementing in such devices SCMS for analog audio source material. Subsection (b)(4)(A) requires that the new analog-to-digital method must regulate serial copying "in a manner equivalent to source material input in the digital format." Pursuant to subsection (b)(4)(B), implementation of such method (combined with the implementation of digital-to-digital SCMS) in a type of device may not impose on manufacturers a cost in excess of 125 percent of the cost of implementing digital-to-digital SCMS alone in that type of device. Pursuant to subsection (b)(4) (A) and (C), the Secretary shall publish a notice in the Federal Register requesting public comment on a particular method of implementing SCMS for analog audio source material, and shall consider other reasoned objections to the proposed method from interested copyright parties and interested manufacturing parties for example, claims that the proposed system is unreliable or has an adverse impact on sonic quality). Finally, any order issued by the Secretary under subsection (b)(4) shall affect the recording of analog or digital source material on analog recording equipment, and shall not affect devices other than digital audio interface devices and digital audio recording devices. subchapter d remedies Section 1031. Civil remedies Section 1031 establishes civil remedies for violations of sections 1011 and 1021. Subsection (a) provides that any interested copyright party or any interested manufacturing party that has been or would be injured by a violation of section 1011 or 1021 may bring a civil action against any person for such violation in an appropriate U.S. district court. Subsection (a) also provides that the Attorney General may bring a civil action against any person based on a violation of section 1011 or 1021. Subsection (b) identifies the types of relief that a district court may award in an action under subsection (a) (including damages and injunctive relief). Subsection (c) provides that, in addition to awarding damages under subsection (d), the court shall direct the payment of unpaid royalties plus interest in cases where the court finds a violation of section 1011 involving underpayment or nonpayment of royalties. Subsection (d) sets forth the types of damages to be awarded for violations of sections 1011 and 1021. Actual and statutory damages can be awarded for violations of section 1021; only statutory damages, and not actual damages, can be awarded for violations of section 1011. The specified damage awards are as follows:
Subsection (e) prohibits certain multiple actions and multiple damage awards. Only one action may be brought against any party and only one award of statutory damages may be made under subsection (d) (regardless of the number of complaining parties electing statutory damages)
The committee has used the phrase "digital audio recording devices and digital audio interface devices of the same model" in order to restrict multiple lawsuits against the same manufacturer or importer raising the same SCMS issues; this language is not intended to change the basic method of assessing statutory damages under section 1021 namely, on a per device basis. Because of these tight restrictions on multiple actions, subsection (e) requires any party that brings a civil action under section 1031 to serve a copy of the complaint upon the Register of Copyrights within 10 days after the complaining partys service of a summons upon the defendant. The Register is in turn directed, within 10 days after receipt of the complaint, to publish notice of the action in the Federal Register. Any other interested copyright party or interested manufacturing party that would be entitled to bring the action may then intervene in the pending lawsuit by filing a motion with the court within 30 days of the publication of the notice. Under subsection (e), a court may generally award actual damages for a violation of section 1021 to each complaining party that elects to recover actual damages, subject to the $1 million limitation and any adjustment for innocent or willful violations referred to above. However, only one award of the violators profits may be made, which the court shall divide as it considers just. In addition, if one or more complaining interested copyright parties elects to recover statutory damages for violations of section 1021 while one or more other complaining interested copyright parties elects to recover actual damages for the same violations, the award of actual damages is to be deducted from the statutory damages awarded to interested copyright parties for such violations. Subsection (f) addresses the distribution of damage awards. The court may divide an award of damages under subsection (d) between or among complaining parties as it deems just. Any award of damages to an interested copyright party under subsection (d) and any award of overdue royalties plus interest under subsection (c) shall be deposited with the Register pursuant to section 1013, or as may otherwise be provided pursuant to a negotiated arrangement authorized under section 1016, for distribution to interested copyright parties as though such funds were royalty payments paid pursuant to section 1011. Thus, all sums awarded to interested copyright parties under section 1031 (including actual damages) are to become part of the royalty pool rather than to be distributed to those interested copyright parties that happen to be parties to the court action. Subsection (g) provides that, at any time while an action under section 1031 is pending, the court may order the impounding, on such terms as it deems reasonable, of any digital audio recording device, digital audio interface device, audiogram, or SCMS-circumventing device where (i) the article is in the custody or control of the alleged violator and (ii) the court has reasonable cause to believe that the article does not comply with, or was involved in a violation of, section 1021. Subsection (h) provides that a court may not issue a temporary or preliminary injunction barring the distribution of a type of digital audio recording device which the relevant manufacturer or importer believes to be either (i) a professional model product or (ii) a type of audio recording equipment designed and marketed primarily for the creation of sound recordings resulting from the fixation of non-musical sounds (such as a dictation machine), unless the court finds that the manufacturers or importers belief is without a reasonable basis or not in good faith. Subsection (i) provides that the court, as part of a final judgment finding a violation of section 1021, shall order the remedial modification or, if modification is not possible, the destruction, of any digital audio recording device, digital audio interface device, audiogram, or SCMS-circumventing device where (i) the article does not comply with, or was involved in a violation of, section 1021, and (ii) the article is either in the custody or control of the violator or has been impounded under subsection (g). Subsection (j) provides guidance concerning the meaning of the terms "complaining party" and "device" for purposes of section 1031.Section 1032. Binding arbitration Section 1032 reflects the intention of the committee to encourage the arbitration of disputes concerning the rights and obligations of interested copyright parties and interested manufacturing parties. Except as provided in subsection (a)(2) or (b)(1), however, the decision whether to request or agree to binding arbitration rests solely with the parties to the dispute. Thus, where a dispute is ultimately brought before a court under section 1031, a prior refusal by an interested manufacturing party or by interested copyright parties, where such refusal is discretionary under section 1032(a), to resolve a dispute by means of arbitration should not be a factor in determining the amount of damages to be awarded for violations of section 1011 or 1021. Subsection (a) provides that any dispute between an interested copyright party and an interested manufacturing party shall be resolved through binding arbitration if (i) the parties mutually agree or (ii) before the date of first distribution of a product in the United States, an interested manufacturing party or an interested copyright party requests arbitration concerning (a) whether or not such product is a digital audio recording device, a digital audio recording medium, or a digital audio interface device, or (b) the basis on which royalty payments are to be made with respect to such product. Thus, an interested manufacturing party or interested copyright party can ensure the resolution of such a dispute through binding arbitration (rather than through court action) so long as the party requests arbitration before a product is first distributed in the United States. Subsection (b) sets forth the basic procedures governing binding arbitration under section 1032. Given the large number of interested copyright parties that is likely to have an interest in the outcome of any arbitration proceeding, the Register is directed, after consultation with such parties, to issue regulations governing the coordination of each decision to engage in arbitration of a dispute and the representation interested copyright parties in the proceeding. No interested copyright party may initiate or, except as an intervening party under subsection (c), participate in binding arbitration under section 1032 unless that party has been authorized to do so pursuant to those regulations. In providing the Register with this authority, the committee contemplates that it will be used solely to ensure the smooth functioning of the arbitral mechanism. In particular, the committee does not intend that such authority be used to assess the merits of the dispute, or to restrict the availability of arbitration to a party entitled to arbitration under subsection (a). Subsection (b) also provides that, except as otherwise agreed by the parties to the dispute, the arbitration panel shall be composed of three people, with one arbitrator selected by each of the two sides and the third arbitrator selected by agreement of the first two arbitrators. The final decision of the arbitral panel must be a written opinion with supporting rationale, and the decision must be issued and sent to the Register within 120 days of the selection of the final arbitrator. The Register is to publish the final opinion in the Federal Register within 10 days of receipt thereof. Finally, subsection (b) addresses the applicability of the Arbitration Act (title 9 of the United States Code) to the arbitration proceedings conducted under section 1032. Except as otherwise provided in section 1032, these arbitration proceedings are to be conducted in the same manner, subject to the same limitations, carried out with the same powers (including the power to summon witnesses), and enforced in the courts of the United States as an arbitration proceeding under title 9. Subsection (b) also requires, however, that each arbitral panel take into account any prior arbitral decisions under section 1032 that address identical or similar issues. The failure of a panel to take account of such prior arbitral decisions may be considered "imperfect execution of arbitral powers" under 9 U.S.C. 10(a)(4), and may thereby form the basis for a judicial decision to overturn the panels decision. The committees intention here is to encourage the creation of a consistent, rather than ad hoc, body of jurisprudence on the matters covered by section 1032; the arbitral panel is not bound to adhere to prior arbitral decisions, however, where it can provide a reasoned explanation for not doing so. Subsection (c) outlines procedures similar to those governing civil actions under 1031(e), including public notice of an arbitral proceeding and opportunity for interested parties to intervene. Subsection (d) sets forth the authority of an arbitral panel to order specified types of relief. Because of the harm that might be associated with the release of proprietary information used in the arbitral proceeding, the panel is directed to issue appropriate protective orders to safeguard a partys proprietary technology and other proprietary information, including provision for injunctive relief. In addition, the panel shall terminate a proceeding if the panel finds that the issues raised are not ripe for decision or that the proceeding was commenced in bad faith by a competitor in order to gain access to proprietary information. Further, the panel shall direct a party whose devices or media are found to be subject to a royalty payment obligation to make such royalty payments, plus interest, as are due through the date of the arbitral decision. Except as provided in subsection (d), the arbitral panel has no power to award monetary or injunctive relief. Subsection (e) limits the ability of any party to bring a civil action under section 1031 to resolve the same dispute that has already been addressed by, or is pending before, an arbitral panel under section 1032. Specifically, subsection (e) provides that no civil action may be brought or relief granted under section 1031 against any party to an ongoing or completed arbitration proceeding under section 1032 where the action or relief involves devices or media that are or were the subject of the arbitration proceeding. However, given the harm that could be associated with the distribution of merchandise or provision of services that violate the SCMS requirements of section 1021, subsection (e) does not bar a party from bringing a civil action for injunctive relief at any time based on a violation of that section. In addition, subsection (e) does not bar an action or any relief with respect to those devices or media distributed by the manufacturer or importer after the conclusion of the arbitral proceeding or, if so stipulated by the parties to the proceeding, prior to the commencement of such proceeding. In the latter regard, there may be situations in which a manufacturer or importer wishes to take advantage of the arbitration procedures under section 1032 after having begun distribution of a type of device or medium, and in whichn the manufacturer or importer is prepared to accept the possibility of a court later imposing statutory or actual damages with respect to those devices or media already distributed in order to obtain agreement from interested copyright parties to resolve the dispute under those arbitration procedures. On the other hand, interested copyright parties may elect to pursue arbitration rather than litigation in the absence of such agreement from the interested manufacturing party, in which case the full bar of subsection (e) would apply. Subsection (f) addresses the allocation of costs for the arbitral proceeding. Section 3 Technical amendments. This section makes certain technical amendments to other chapters of title 17, including amendments to chapter 8 to reflect the new duties assigned to the Copyright Royalty Tribunal under chapter 10. Section 4 Effective date. This section provides that the effective date of the act is the date of enactment or January 1, 1992, whichever date is later. Section 5 Technical reference document for Audio Home Recording Act of 1991. This section sets forth the technical reference document. Section 6 Repeal of section 5. This section provides for the repeal of section 5 upon publication of the technical reference document in the Federal Register, which is required within 10 days after the date of enactment of the act.VI. Cost Estimate In accordance with paragraph 11(a), rule XXVI, of the Standing Rules of the Senate, the committee offers the report of the Congressional Budget Office:
Dear Mr. Chairman: The Congressional Budget Office has prepared the attached cost estimate for S. 1623, the Audio Home Recording Act of 1991, as reported by the Senate Committee on the Judiciary on November 27, 1991, and reflecting floor amendments proposed by the Committee. Because this bill would affect spending and revenues, it would be subject to pay-as-you-go procedures under section 252 of the Balanced Budget and Emergency Deficit Control Act of 1985. If you wish further details on this estimate, we will be pleased to provide them. Sincerely,
congressional budget office cost estimate 1. Bill number: S. 1623. 2. Bill title: The Audio Home Recording Act of 1991. 3. Bill status: As reported by the Senate Committee on the Judiciary on November 27, 1991, and reflecting floor amendments proposed by the Committee. 4. Bill purpose: S. 1623 would protect manufacturers, importers, and distributors of digital audio recorders and blank media from lawsuits claiming copyright infringement. The bill would require importers and manufacturers to pay royalties, which would be collected by the Copyright Office and deposited as offsetting receipts into two funds in the Treasury, a Sound Recording Fund and a Musical Works Fund. The amounts in these funds would then be allocated among persons and groups whose audio works had been distributed to the public. S. 1623 would designate those entitled to a share of the funds. The bill would establish a formula for dividing the royalty payments between the funds and for distributing the amounts in the funds. It also would establish a schedule of damages to be paid by those who violate requirements of the act. Finally, S. 1623 would direct the Copyright Office to oversee payments into the funds and the Copyright Royalty Tribunal (CRT) to administer their distribution. (PLEASE REFER TO ORIGINAL SOURCE) The costs of this bill fall within budget function 370. Basis of estimate: Estimates of royalty payments are based on information provided by the Copyright Office and on an assumed enactment date late in fiscal year 1992. Payments for each quarter would be deposited into the funds within 45 days of the end of the quarter, would be recorded as offsetting receipts (that is, negative budget authority and outlays), and would accrue interest until disbursed. (Under the reported bill, royalty collections by the government would be categorized as federal revenues; the Committees floor amendments would specify that they be deposited as offsetting receipts to the Treasury.) Royalty payments into the funds are estimated to be $73 million in fiscal year 1993, $105 million in 1994, and larger amounts in subsequent years. Disbursements to interested parties would be mandatory and would count as direct spending, as would amounts paid to the Copyright Office and the CRT to cover costs associated with administration of the funds. We assume that distributors would begin marketing digital audio recording devices and tapes in the first quarter of fiscal year 1993; therefore, we expect the Treasury to begin receiving royalty payments in February 1993. Disbursements to interested parties would be based on royalties accrued over the previous calendar year. Thus, while receipts would accrue over the entire 1993 fiscal year, disbursements in that year would include only the $23 million in copyright payments accrued in calendar year 1992 (i.e., the first quarter of fiscal year 1993). As a result, receipts in fiscal year 1993 would exceed disbursements by about $50 million. In later years, receipts and disbursements would both include amounts for an entire year. Based on information from the CRT and the Copyright Office, implementing S.1623 would cost the federal government approximately $1.15 million over the next five years. Of this amount, $115,000 would not be recovered from payments to the funds. While the bill would provide that the Copyright Office and the CRT can recover costs associated with administering the funds, the Copyright Office would incur some unrecoverable costs in establishing the funds. The CRT, as specified in appropriations bills, recovers only costs associated with fund distribution, which in 1992 is approximately 85 percent of total costs. CBO assumes that the Congress will appropriate the full amounts authorized. We estimate accrued interest consistent with CBO baseline assumptions. Outlay estimates are based on historical spending patterns for similar activities. 6. Pay-as-you-go considerations: The Budget Enforcement Act of 1990 sets up pay-as-you-go procedures for legislation affecting direct spending or receipts through 1995. Enacting S. 1623 would affect direct spending, and the bill would therefore be subject to pay-as-you-go procedures. The following table summarizes the estimated pay-as-you-go impact of this bill. Royalty payments paid into the funds would be counted as offsetting receipts, which are shown as negative outlays. Payments to interested parties would be mandatory and would count as direct spending, as would amounts paid to the Copyright Office and the CRT to cover costs associated with administration of the funds. CBO estimates that the impact of this bill for pay-as-you-go purposes would be a net decrease in the deficit of $50 million in 1993 and smaller amounts in subsequent years. 7. Estimated cost to State and local governments: None. 8. Estimate comparison: None. 9. Previous CBO estimate: None. 10. Estimate prepared by: John Webb. 11. Estimate approved by: C.G. Nuckols, Assistant Director for Budget Analysis.
VII. Regulatory Impact Statement In compliance with paragraph 11(b)(1), rule XXVI of the Standing Rules of the Senate, it is hereby stated that the committee anticipates that the bill will have no additional direct regulatory impact.
VIII. Changes in Existing Law The committee has determined that it is necessary, in order to expedite the business of the Senate, to dispense with the requirements of rule XXVI, paragraph 12, of the Standing Rules of the Senate, with respect to this legislation.
This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
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