Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-13-01183/USCOURTS-caDC-13-01183-0/pdf.json

Parties Involved:
Copyright Royalty Board
Appellee
Music Choice
Intervenor for Appellee
Sirius XM Radio Inc.
Intervenor for Appellee
SoundExchange, Inc.
Appellant

Document Text:

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 15, 2014 Decided December 19, 2014

No. 13-1174

MUSIC CHOICE,

APPELLANT

v.

COPYRIGHT ROYALTY BOARD,

APPELLEE

SIRIUS XM RADIO INC. AND SOUNDEXCHANGE, INC.,

INTERVENORS

Consolidated with 13-1183

On Appeals From a Final Determination 

of the Copyright Royalty Judges

Matthew S. Hellman argued the cause for appellant 

SoundExchange, Inc. With him on the briefs were David A. 

Handzo, Michael B. DeSanctis, and Erica L. Ross. 

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Paul M. Fakler argued the cause for appellant Music 

Choice. With him on the briefs was Martin F. Cunniff.

Sonia K. McNeil, Attorney, U.S. Department of Justice, 

argued the cause for appellee. With her on the brief were 

Stuart F. Delery, Assistant Attorney General, and Mark R. 

Freeman, Attorney. Scott R. McIntosh, Attorney, entered an 

appearance. 

Todd D. Larson argued the cause for intervenor Sirius 

XM Radio Inc. With him on the brief was R. Bruce Rich.

Paul M. Fakler and Martin F. Cunniff were on the brief 

for intervenor Music Choice in support of appellee. 

Matthew S. Hellman, David A. Handzo, Michael B. 

DeSanctis, and Erica L. Ross were on the brief for intervenor 

SoundExchange, Inc. in support of appellee. 

Before: SRINIVASAN, Circuit Judge, EDWARDS and 

SENTELLE, Senior Circuit Judges.

Opinion for the Court filed by Senior Circuit Judge

SENTELLE.

SENTELLE, Senior Circuit Judge: In 2013, the Judges of 

the Copyright Royalty Board issued a determination setting 

royalty rates and defining terms for statutorily defined 

satellite digital audio radio services (SDARS) and preexisting 

subscription services (PSS). SoundExchange, an organization 

that collects and distributes royalties to copyright owners, 

appeals the Judges’ determination, arguing that the Judges 

arbitrarily set SDARS and PSS rates too low. 

SoundExchange also contends that the Judges erred in 

defining “Gross Revenues” and eligible deductions for 

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SDARS. Music Choice, a PSS that provides music-only 

television channels, also appeals the determination, arguing 

that the Judges arbitrarily set PSS rates too high. Concluding 

that the Judges acted within their broad discretion and on a 

sufficient record, we affirm the Copyright Royalty Judges’ 

determination of royalty rates and terms for both SDARS and 

PSS.

I. BACKGROUND

A. Statutory and Regulatory Framework

Statutory law creates two types of copyrights in musical 

recordings. First, 17 U.S.C. § 106(4) covers the underlying 

“musical work” and protects the owner’s exclusive right to 

perform the work in public. See SoundExchange, Inc. v. 

Librarian of Congress, 571 F.3d 1220, 1222 (D.C. Cir. 2009) 

(citing 17 U.S.C. § 106(4)). Broadcast of a musical work is a 

performance of the work and therefore requires a license from 

the copyright owner. Id. Second, since 1972, the law has also 

protected a limited copyright in a “sound recording,” the 

musical work as preserved in a recording medium. The law, 

however, did not recognize an exclusive right in the public 

performance of a sound recording until 1995. Id. As we 

noted in SoundExchange, the 1995 amendments to the

Copyright Act afford the owner of a copyright of a sound 

recording “the narrow but exclusive right ‘to perform the 

copyrighted work publicly by means of a digital audio 

transmission.’” Id. (quoting §§ 106(6), 114(d)). When 

Congress recognized this exclusive right, it also enacted a 

detailed statutory scheme providing for the administration of 

this protected right, codified in Title 17 of the United States 

Code. See 17 U.S.C. §§ 114, 801–804. The statutory scheme 

requires “certain digital music services . . . to pay recording 

companies and recording artists when they transmit[] sound 

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recordings.” Recording Industry Ass’n of America v. 

Librarian of Congress (“R.I.A.A.”), 176 F.3d 528, 530 (D.C. 

Cir. 1999).

The statute provides for the appointment of three 

Copyright Royalty Judges by the Librarian of Congress. 17 

U.S.C. § 801(a). If the owners of sound recording copyrights 

are unable to negotiate a mutually acceptable royalty with 

digital music services, the statute empowers the Judges to set 

“reasonable rates and terms of royalty payments.” Id.

§ 114(f)(1)(A).

The statute mandates that the rates “shall be calculated to 

achieve the following objectives”:

(A) To maximize the availability of creative 

works to the public.

(B) To afford the copyright owner a fair return 

for his or her creative work and the 

copyright user a fair income under existing 

economic conditions.

(C) To reflect the relative roles of the 

copyright owner and the copyright user in 

the product made available to the public 

with respect to relative creative 

contribution, technological contribution, 

capital investment, cost, risk, and 

contribution to the opening of new markets 

for creative expression and media for their 

communication.

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(D) To minimize any disruptive impact on the 

structure of the industries involved and on 

generally prevailing industry practices.

Id. § 801(b)(1). 

The statute includes a special compulsory statutory 

license for the benefit of preexisting subscription services and 

preexisting satellite digital audio radio services to protect the 

investment of noninteractive services that had come into 

existence before the recognition of the digital performance 

right. Id. § 114(f)(1); see also H.R. Rep. No. 105-796, at 80–

81 (Conf. Rep.). The statute directs the Copyright Royalty 

Judges to “make determinations and adjustments of 

reasonable terms and rates” for preexisting services based on 

the enumerated policy factors set forth above. 17 U.S.C. 

§ 801(b)(1). As to newer noninteractive services, the Judges 

are to determine rates that “most clearly represent the rates 

and terms that would have been negotiated in the marketplace 

between a willing buyer and a willing seller.” Id.

§ 114(f)(2)(B); see also R.I.A.A., 176 F.3d at 533 (discussing 

difference between statutory licenses for preexisting services 

and newer noninteractive services).

B. The Proceedings Below

Then-current SDARS and PSS rates were scheduled to 

expire in 2013. In January 2011, the Copyright Royalty 

Board scheduled a proceeding to establish PSS and SDARS 

royalty rates and terms for the years 2013 through 2017. See 

Determination of Rates and Terms for Preexisting 

Subscription Services and Satellite Digital Audio Radio 

Services, 78 Fed. Reg. 23,054, 23,054 (Apr. 17, 2013) (“Final 

Determination”), as corrected, 78 Fed. Reg. 31,842 (May 28, 

2013) (codified at 37 C.F.R. § 382.1 et seq.). 

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SoundExchange, Music Choice, and Sirius XM successfully 

petitioned to participate. Thirteen months of discovery and 

motion practice culminated in a 19-day administrative trial, at 

which the Judges heard from 32 fact and expert witnesses. In 

April 2013, the Judges issued their Final Determination.

1. Setting the SDARS Rate

At the time of the proceeding, the current SDARS rate 

was 8% of gross revenues, established by the Judges in the 

last preceding ratemaking and affirmed by this court against 

challenge by SoundExchange. SoundExchange, 571 F.3d at 

1223–25. In the current proceeding, SoundExchange 

proposed rates beginning at 12% in 2013, rising to 20% in 

2017. Sirius XM, the only satellite provider currently subject 

to the rate, proposed rates in the 5% to 7% range. Final 

Determination, 78 Fed. Reg. at 23,061. 

In proceedings to determine rates for the digital 

performance of sound recordings, the parties unsurprisingly 

introduced evidence of royalty agreements covering 

analogous services such as webcasting, interactive 

subscription rates, or non-preexisting, noninteractive services. 

Sirius XM supported its rate proposal with evidence of direct 

license agreements between Sirius XM and independent 

record labels for the performance of sound recordings. Final 

Determination, 78 Fed. Reg. at 23,061–62.

 

SoundExchange based its rate proposal on its expert 

witness’s analysis of interactive streaming agreements. 

Interactive services, in contrast to satellite radio and 

preexisting subscription services, allow an end user to hear a 

particular song on demand, and do not benefit from a 

compulsory license. See 17 U.S.C. §§ 114(d)(2)–(3); H.R. 

Rep. No. 105-796, at 87–88 (Conf. Rep.). SoundExchange’s 

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expert witness, Dr. Janusz Ordover, examined “seven market 

agreements for digital music between certain interactive 

subscription services that stream music over the Internet and 

each of the four major record labels” which included royalty 

rates ranging from 50% to 70%. Final Determination, 78 

Fed. Reg. at 23,062. Ordover then adjusted these rates to 

account for “the fact that the Sirius XM satellite radio service 

. . . transmits both music and non-music content,” as well as 

the differences between satellite radio and interactive 

subscription services. Id. at 23,063. These adjustments

yielded a rate of 22.23%. Id.

The Judges found Sirius XM’s direct license agreements 

to be comparable to a degree, but after identifying certain 

weaknesses, concluded that the top range of those 

benchmarks (7%) set the lower bound of reasonable rates. Id. 

at 23,063–65. The Judges found SoundExchange’s 

benchmarks less helpful. They were not persuaded that Dr. 

Ordover properly accounted for the differences between the 

benchmark agreements and the rights and parties at issue in 

the SDARS proceeding. They were also concerned by the 

“yawning gap,” id. at 23,066, between the current SDARS 

rate and the interactive services benchmarks. The Judges 

concluded that SoundExchange’s adjusted benchmark of 

22.23% “can be viewed as no more than the upper bound of 

the zone of reasonableness, although it is a bound that the 

Judges have little confidence in.” Id. 

Left with a large divide between Sirius XM’s 7% and 

SoundExchange’s 22.23%, the Judges considered three 

interim “guideposts” to help determine the reasonable rate. 

The Judges looked at SoundExchange’s proposed statutory 

SDARS rates, which began at 12%; the prevailing SDARS 

rate of 8%; and the unadjusted benchmark rate of 13% 

determined in the prior round of ratemaking. The Judges then 

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analyzed the parties’ benchmarks and the interim guideposts 

in light of the Section 801(b) factors. The Judges found a 

downward adjustment appropriate to account for Sirius XM’s 

investment in satellite infrastructure. Id. at 23,068–71. Based 

on this analysis, the Judges arrived at an SDARS rate of 11%. 

In order to avoid disruption, the Judges adopted a staggered 

schedule beginning at 9% in 2013 and increasing by .5% 

annually until achievement of 11% in 2017. Id. at 23,071.

2. Defining “Gross Revenues” and Eligible 

Deductions for SDARS

In the same proceedings, the Judges considered the 

definition of “Gross Revenues” and deductions applicable to 

the SDARS. Final Determination, 78 Fed. Reg. at 23,071–

75. The Copyright Act employs a percentage-of-revenue 

metric for calculating licensing fees. “Gross Revenues” 

represents the revenue base against which the percentage rate 

is applied in order to calculate the total royalty obligation. 

The Copyright Royalty Judges promulgate regulations to 

define the scope of “Gross Revenues” for each type of 

service. See 37 C.F.R. § 382.11. The copyright user may also 

take deductions from its total royalty obligation to offset 

separate payments and non-compensable revenue. For 

example, a copyright user may deduct from its total payments 

the cost of separate direct-licensing agreements, such as the 

direct licenses Sirius XM had reached with independent 

labels. See Final Determination, 78 Fed. Reg. at 23,071–73.

In defining “Gross Revenues,” the Judges allowed Sirius 

XM to exclude revenues received for “[c]hannels, 

programming, products and/or other services offered for a 

separate charge where such channels use only incidental 

performances of sound recordings.” 37 C.F.R. § 382.11. 

Sirius XM offers several subscription packages, including a 

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bundled “Select” package with music and non-music 

channels, and a “talk-only” package with exclusively nonmusic channels. The Judges allowed Sirius XM to exclude 

from its royalty base revenue from talk-only packages and 

advertising on non-music channels. Final Determination, 78 

Fed. Reg. at 23,071–72.

The Judges also allowed Sirius XM, after calculation of 

its total revenue royalty obligations including deduction of the

above items from Gross Revenues, to then deduct revenues 

attributable to its use of sound recordings created on or before 

February 14, 1972. The Judges reasoned that since federal 

copyright protection does not extend to pre-1972 sound 

recordings, such recordings are outside the federal statutory 

license and revenue associated with such recordings may be 

deducted. Final Determination, 78 Fed. Reg. at 23,073.

3. Setting the PSS Rates

Both parties requested PSS rates that would drastically 

depart from the then-prevailing rate of 7.5%. SoundExchange 

requested rates that would begin at 15% in 2013, and rise to 

45% in 2017. Id. at 23,056. SoundExchange based its rate 

proposal on its analysis of “over 2,000 marketplace 

agreements, representing a variety of rights licensed.” Id. at 

23,057. Music Choice requested a rate of 2.6%, which it 

based on the rates it pays performing rights societies (such as 

ASCAP and BMI) for the use of copyrighted musical works. 

Id. at 23,056–57.

The Judges “conclude[d] that neither Music Choice’s nor 

SoundExchange’s proffered rate guidance provide[d] a 

satisfactory benchmark upon which they [could] rely to 

determine the sound recording performance rates for” PSS. 

Id. at 23,058. Lacking guidance from the parties, the Judges 

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considered the then-current 7.5% rate, which had been 

determined by settlement negotiation, in light of the record 

and the Section 801(b) factors. The Judges concluded that 

“nothing in the record persuade[d] [them] that 7.5% . . . is too 

high, too low or otherwise inappropriate.” Id. The Judges 

ultimately set PSS rates at 8.5%, with an upward adjustment 

to account for Music Choice’s planned channel expansion. 

The rate would start at 8% in 2013 and increase to 8.5% for 

2014 through 2017. Id. at 23,061.

II. ANALYSIS

Our review of the decisions of the Copyright Royalty 

Judges is deferential. 17 U.S.C. § 803(d)(3) expressly adopts 

the standard of review set forth in the Administrative 

Procedure Act, 5 U.S.C. § 706. We are to hold unlawful and 

set aside a decision of the Copyright Royalty Judges “only if 

it is ‘arbitrary, capricious, an abuse of discretion, or otherwise 

not in accordance with law,’ or if the facts relied upon by the 

[Judges] have no basis in the record.” SoundExchange, 571 

F.3d at 1223 (internal citations omitted) (quoting 5 U.S.C. 

§ 706(2)(A)). Further, we have previously noted that we are 

especially deferential to the Judges of the Copyright Royalty 

Board for three distinct reasons:

First, the [Board] is required “to estimate the 

effect of the royalty rate on the future of the 

music industry,” which requires a “forecast of 

the direction in which the future public interest 

lies . . . based on the expert knowledge of the 

agency.” Second, the agency has “legislative 

discretion in determining copyright policy in 

order to achieve an equitable division of music 

industry profits between the copyright owners 

and users.” Finally, “the statutory factors pull 

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in opposing directions, and reconciliation of 

these objectives is committed to the [agency] 

as part of its mandate to determine 

‘reasonable’ royalty rates.” [S]ee Fresno 

Mobile Radio, Inc. v. FCC, 165 F.3d 965, 971 

(D.C. Cir. 1999) (“When an agency must 

balance a number of potentially conflicting 

objectives . . . judicial review is limited to 

determining whether the agency’s decision 

reasonably advances at least one of those 

objectives and its decisionmaking process was 

regular[.]”).

Id. at 1223–24 (quoting R.I.A.A., 662 F.2d at 8–9) (other 

citations omitted). Applying that standard to our review of 

the record before us, we find no basis to set aside the decision 

of the Copyright Royalty Board.

A. SoundExchange’s Challenge to the

Copyright Royalty Judges’ Final 

Determination

SoundExchange appeals from the Judges’ setting of 

royalty rates and terms for both satellite digital audio radio 

services and preexisting subscription services, contending that 

the Judges’ action was arbitrary and capricious and resulted in 

unlawfully low rates for both services. Upon review, we 

uphold the rates as to both categories.

1. The SDARS Royalty Rate

SoundExchange argues that the Copyright Royalty 

Judges’ setting of rates for satellite digital audio radio 

services was arbitrary, capricious, and not supported by the 

written record. SoundExchange primarily challenges the 

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Judges’ rejection of SoundExchange’s proposed benchmarks 

and the Judges’ subsequent reliance on interim guideposts to 

help determine the reasonable rate. We hold that the Judges

acted within their broad discretion, and on the basis of a 

sufficient record, when they discounted SoundExchange’s 

benchmarks and considered interim guideposts. The Judges 

could properly consider the then-current 8% rate as an interim 

guidepost. The Copyright Act directs the Judges to make 

“adjustments” to the prevailing rate, 17 U.S.C. § 801(b)(1), 

and allows them to consider “prior determinations,” id. 

§ 803(a)(1). The Judges could also consider the lowest of 

SoundExchange’s proposed royalty rates (12%) as a rate, in 

the record of the current proceeding, that could fall within the 

zone of reasonableness. The 13% guidepost warrants greater 

discussion. 

a. Reliance on 13% Rate as “ExtraRecord”

In contending that the Copyright Royalty Judges acted 

arbitrarily and capriciously, and failed to make a 

determination supported by the record, SoundExchange 

focuses on the Judges’ use of the 13% rate. During the last 

round of ratemaking, the Judges looked to “comparable 

marketplace royalty rates as ‘benchmarks,’ indicative of the 

prices that prevail for services purchasing similar music 

inputs for use in digital programming.” Determination of 

Rates and Terms for Preexisting Subscription Services and 

Satellite Digital Audio Radio Services (“SDARS-I”), 73 Fed. 

Reg. 4080, 4088 (Jan. 24, 2008). In that prior determination, 

the Judges “considered the record evidence reflecting various 

experts’ opinions and concluded that a rate equal to 13% of 

[satellite radio] gross revenue, as proposed by 

SoundExchange, ‘marks the upper boundary for a zone of 

reasonableness for potential marketplace benchmarks from 

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which to identify a rate that satisfies’ the objectives in § 801.” 

SoundExchange, 571 F.3d at 1222–23 (quoting SDARS-I, 73 

Fed. Reg. at 4094). After considering the Section 801(b) 

factors, the Judges set the SDARS rate at 8%. SDARS-I, 73 

Fed. Reg. at 4097–98. 

SoundExchange characterizes the 13% rate as an obsolete 

benchmark divorced from the proceedings below, and argues 

that considering the 13% rate violated the Copyright Act’s 

requirement that the record support the determination. 17 

U.S.C. §§ 803(a)(1), (c)(3). SoundExchange states that 

“[t]here is no dispute that the 13% benchmark was not part of 

the record in this proceeding,” SoundExchange’s Opening 

Brief (“SX Br.”) 18, and that the Judges’ unexpected reliance 

on the 13% rate deprived SoundExchange of “the chance to 

respond to material central to the tribunal’s decision,” id. at 

20 (emphasis in original). 

SoundExchange’s argument is unpersuasive. The Judges 

did not consider the 13% rate as a current marketplace 

benchmark. Rather, they considered it as one of several 

guideposts in light of the fact that the Judges had previously 

derived “the prevailing statutory rate of 8%” by “adjust[ing] 

down from a 13% rate . . . based on the fourth Section 801(b) 

factor.” Final Determination, 78 Fed. Reg. at 23,066 

(explaining prior ratemaking). Thus, the 13% rate did not 

represent an extra-record market rate, but represented a 

component of a prior determination. Consideration of the 

13% rate as a guidepost is consistent with the Copyright Act’s 

contemplation that the Judges would make “adjustments” to 

prevailing rates, and that they could consider “prior 

determinations.” 17 U.S.C. §§ 801(b)(1), 803(a)(1). The 

Copyright Act permitted the Judges to consider the 13% rate, 

and there was no undue surprise resulting from the Judges’ 

consideration of it.

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b. Reliance on 13% Rate as “Stale” 

and “Obsolete”

SoundExchange also argues that the Judges erroneously 

rejected current benchmark data in favor of a “stale” and 

“obsolete” benchmark. SX Br. 20–23. In addition to 

contending that the 13% rate was not a part of the record, 

SoundExchange contends that reliance on the old 13% 

benchmark was arbitrary “given that the Judges were 

presented with current data,” i.e., Ordover’s benchmark 

analysis. Id. at 21 (emphasis in original).

We hold that the Judges did not err in relying on the 13% 

rate, and that the 13% rate did not represent a “stale,” 

“outdated,” or “obsolete” benchmark. SoundExchange’s 

argument rests on the erroneous assertion that the Judges 

treated the 13% rate as a current market benchmark. See SX 

Br. 30–33. As we stated above, the Judges did not consider 

the 13% rate as a current benchmark. Instead, they 

considered the 13% rate as a component of a prior 

determination, in order to bridge the gap between Sirius XM’s 

highest benchmark and SoundExchange’s lowest benchmark. 

See Final Determination, 78 Fed. Reg. at 23,066. Thus, the 

Judges did not reject a current benchmark in favor of a “stale” 

benchmark. They found serious problems with 

SoundExchange’s benchmark, partially credited it, and used 

permissible indicia of reasonableness to help fix the rate 

between 7% and 22.23%.

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c. Rejection of SoundExchange’s 

Benchmarks

SoundExchange further contends that the Judges 

arbitrarily rejected Ordover’s benchmark analysis, SX. Br. 

25–33, and “if the Judges were not fully persuaded by the 

current benchmarks, they should have adjusted those 

benchmarks based on record evidence,” id. at 24. We 

disagree. The Judges were within their broad discretion to 

discount Ordover’s benchmarks and look elsewhere for 

guidance. The Judges adequately considered, and explained 

their dissatisfaction with, the proposed benchmarks. Final 

Determination, 78 Fed. Reg. at 23,062–71. While the Judges 

might have made further adjustments to Ordover’s 

benchmarks to render them useful, see id. at 23,090–92 

(dissenting opinion of Copyright Royalty Judge Roberts), the 

Judges were not required to do so. The mandate to issue 

determinations “supported by the written record,” 17 U.S.C. 

§ 803(c)(3), does not hamstring the Judges when neither party 

proposes reasonable or comparable benchmarks. The Act 

expressly allows the Judges also to consider prevailing rates 

and prior determinations. Id. at §§ 801(b)(1), 803(a)(1). 

Having considered and discounted SoundExchange’s 

proposed benchmarks, the Judges did not act arbitrarily when 

they looked to the 13% unadjusted benchmark from the prior 

determination as an interim guidepost.

SoundExchange also maintains that, despite the Judges’ 

references to SoundExchange’s adjusted benchmark rate of 

22.23% as representing the top end of reasonable rates, the 

13% rate arbitrarily capped the zone of reasonableness. SX 

Br. 30–33. We disagree. Even if the 13% rate marked the 

top end of a “zone of reasonableness,” this is no reason to 

overturn the Judges’ determination. Nothing requires the 

Judges, if they choose to use a zone of reasonableness, only to 

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use market benchmarks to set the upper and lower boundaries. 

The Copyright Act permits, but does not require, the Judges to 

use market rates to help determine reasonable rates. See 

SoundExchange, 571 F.3d at 1224 (“[T]he agency [is] under 

no obligation to choose a rate derived from a market-based 

approach.”); R.I.A.A., 176 F.3d at 532–33 (“RIAA’s claim 

that the statute clearly requires the use of ‘market rates’ is 

simply wrong.” (emphasis in original)). Other potentially

reasonable rates, such as the prevailing statutory rate, may 

also bound the zone. Having explained their dissatisfaction 

with SoundExchange’s benchmarks, and free to consider the 

13% rate as a component of a prior determination, the Judges 

would not have erred had they used the 13% rate to cap the 

top end of a zone of reasonable rates.

The Judges acted within their discretion when, after 

identifying weaknesses with the proposed benchmarks, they 

employed interim guideposts to determine a reasonable rate. 

Thus, we affirm the Judges’ determination of Section 114 

rates for satellite digital audio radio services.

2. SoundExchange’s Challenge to the 

Definition of “Gross Revenues” and 

Allowance for Deductions for SDARS

SoundExchange contends that the Judges acted arbitrarily 

by allowing Sirius XM to exclude from “Gross Revenues” 

revenue attributable to non-music programming, and deduct 

from its total royalty obligations revenue attributable to pre1972 sound recordings. We will uphold the Judges’ definition 

of “Gross Revenues” and allowance for a pre-1972 sound 

recording deduction as reasonable exercises of the Judges’ 

broad discretion.

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a. Exclusion for Non-Music 

Programming

SoundExchange argues that the Judges’ definition of 

“Gross Revenues” arbitrarily double discounted for the value 

of non-music programming. SX Br. 33–34. SoundExchange 

contends that the benchmarks offered by Sirius XM and 

SoundExchange, and the resulting statutory royalty rate, 

already discounted for the value of Sirius XM’s non-music 

programming. SoundExchange maintains that since the 

royalty percentage rate fully discounts for the value of Sirius 

XM’s non-music programming, allowing a separate deduction 

from the royalty base effectively gives Sirius XM the same 

discount twice. 

We disagree. There was no such double discounting. 

The Judges “agree[d] with Sirius XM’s counter argument that 

Dr. Ordover’s modeling allocated revenues for both the music 

and non-music programming for Sirius XM’s standard 

‘Select’ package, but that allocation in no way relates to the 

separately priced non-music packages offered by Sirius XM 

that are the subject of the exemption.” Final Determination, 

78 Fed. Reg. at 23,072 n.45 (internal quotation marks 

omitted). Under this reasonable interpretation of the 

evidence, neither the benchmarks nor the Judges’ royalty rate 

took into account revenue from separately priced non-music 

packages. Instead, the benchmarks and percentage rate 

accounted for the value of non-music programming within 

Sirius XM’s bundled “music and talk” packages. It was 

perfectly reasonable, then, for the Judges to define “Gross 

Revenues” to exclude revenue solely attributable to nonmusic programming.

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b. Deduction for Pre-1972 

Performances

SoundExchange argues that the Judges arbitrarily 

allowed Sirius XM to deduct from its royalty obligations 

revenue attributable to the use of pre-1972 sound recordings. 

While there is no federal copyright protection for the 

performance of sound recordings created on or before 

February 14, 1972, see Sound Recording Amendment, Public 

Law 92-140, 85 Stat. 391 (1971), the extent of state law 

protection is the subject of ongoing litigation, see, e.g., Order 

Granting Pl.’s Mot. Sum. J., Flo & Eddie Inc. v. Sirius XM 

Radio, Inc., No. CV 13-5693, 2014 WL 4725382 (C.D. Cal. 

Sept. 22, 2014). 

SoundExchange presents two alternative arguments, 

depending on whether there is state law protection for pre1972 recordings. First, SoundExchange maintains that if 

there is no state law protection for pre-1972 recordings, the 

benchmark rates already account for the diminished value of 

those recordings. In the agreements SoundExchange cited, 

the buyers purchased rights to play all of the record labels’ 

sound recordings; the agreements did not distinguish between 

pre-1972 and post-1971 recordings when determining the 

percentage rate or royalty base. SoundExchange argues that 

the market takes pre-1972 recordings into account when 

setting royalty rates; reducing the royalty base, then, would be 

redundant. SX Br. 38. 

This first argument is unavailing. The agreements cited 

by SoundExchange were either discounted by the Judges or 

not moved into evidence before them. See Final 

Determination, 78 Fed. Reg. at 23,064 (eschewing reliance on 

Last.FM agreement, which SoundExchange cites to support 

its argument regarding pre-1972 recordings (SX Br. 38)). In 

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contrast, the direct license agreements Sirius XM entered into 

evidence allow Sirius XM to adjust its revenue base

downward to account for the use of pre-1972 recordings. See

Sirius XM Dir. Ex. 7 at ¶ 2(a)(ii)(F)(4). The record evidence 

does not compel the conclusion that the benchmark rates, or 

the Judges’ statutory royalty rate, already took into account 

the copyright status of pre-1972 recordings. Thus, the Judges 

did not arbitrarily “double discount” for pre-1972 recordings.

Alternatively, SoundExchange argues that if there is state 

law protection for pre-1972 recordings, there is no need for a 

separate deduction. In such a case, Sirius XM would need to 

directly license those performances from rights holders. The 

existing direct license carve out would allow Sirius XM to 

deduct the costs of these state rights licenses. 

SoundExchange maintains that any separate deduction would 

be superfluous, as the direct licensing deduction would 

account for any revenue associated with the use of pre-1972 

recordings. SX Br. 38–40. 

This alternative argument is also unavailing. The 

amendments to the Copyright Act say nothing about state

level rights. Accordingly, we need not determine whether the 

Judges could have designated the direct licensing deduction as 

the vehicle for excluding revenues associated with pre-1972 

works, rather than creating a separate deduction as they did. 

It is clear, however, that the Copyright Act does not mandate 

SoundExchange’s preferred system for accounting for pre1972 works. Furthermore, there is no specter of “double

deducting.” There is no indication that under the system 

established by the Judges, Sirius XM could take the deduction 

for pre-1972 recordings, and then take a second deduction for 

the direct licensing of state level rights. Thus, the pre-1972 

deduction is not “redundant” or “superfluous.” Instead, the 

deduction is simply not SoundExchange’s preferred method 

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for dealing with pre-1972 works. The Judges acted within 

their broad discretion when permitting a separate deduction 

for revenues associated with the use of pre-1972 works.

3. SoundExchange’s Challenge to the 

PSS Royalty Rate

SoundExchange argues that the Copyright Royalty 

Judges’ setting of rates for preexisting subscription services 

was arbitrary, capricious, and not supported by the written 

record. Upon review, we will uphold the Judges’ setting of 

PSS rates.

a. Reliance on the Prevailing 

Settlement Rate

SoundExchange claims that the Judges acted arbitrarily, 

and failed to issue a determination supported by the record, by 

rejecting record evidence and relying on the existing 7.5% 

rate—a rate, SoundExchange contends, for which no party 

advocated and no evidence supports. SoundExchange notes 

that this rate “‘is the product of settlement negotiations that 

occurred in SDARS I between Music Choice and 

SoundExchange.’” SX Br. 41 (quoting Final Determination, 

78 Fed. Reg. at 23,058). In support of this proposition, 

SoundExchange notes that it submitted as benchmarks “over 

2,000 marketplace agreements, representing a variety of rights 

licensed.” Final Determination, 78 Fed. Reg. at 23,057. 

SoundExchange argues that the Judges arbitrarily rejected 

these more recent data points in favor of the “outdated” 

settlement rate. It maintains that the Judges conceded that the 

prevailing rate had limited value, as the settlement rate “was 

negotiated in the shadow of the statutory licensing system and 

USCA Case #13-1183 Document #1528212 Filed: 12/19/2014 Page 20 of 29
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cannot properly be said to be a market benchmark rate.” Id. at 

23,058. The statute requires the Judges to issue 

determinations “supported by the written record.” 17 U.S.C. 

§ 803(c)(3). SoundExchange also argues that simply reciting 

that “nothing in the record persuades the Judges” that the 

prevailing rate is unreasonable, id., does not show that 7.5% is

reasonable, or that it is supported by the written record. 

SoundExchange’s argument is unavailing. First, whether 

the prevailing rate represents a “market benchmark” is not 

determinative. As we explained above, nothing in the statute 

requires the Judges to rely on market rates or agreements 

when setting Section 114 rates. See SoundExchange, 571 

F.3d at 1224; R.I.A.A., 176 F.3d at 532–34. The Judges acted 

within their broad discretion when they rejected Music Choice 

and SoundExchange’s benchmarks. The Judges did not reject 

the proposed benchmarks without any consideration, but 

offered a reasoned explanation as to why the kinds of rights 

covered by the benchmark agreements were not sufficiently 

comparable to the digital performance rights covered by 

Section 114. Final Determination, 78 Fed. Reg. at 23,057–

59. The Judges were under no obligation to salvage 

benchmarks they found to have fundamental problems. 

Further, given the lack of creditable benchmarks in the 

record, the Judges did not err when they used the prevailing 

rate as the starting point of their Section 801(b) analysis. The 

Copyright Act contemplates that the Judges would make 

“adjustments” to the prevailing rate, 17 U.S.C. § 801(b)(1), 

and consider “prior determinations,” id. § 803(a)(1), and rates 

established “under voluntary license agreements,” id. 

§ 114(f)(1)(B). The Judges sufficiently explained their 

rejection of the parties’ benchmarks and how the prevailing 

rate was reasonable given the Section 801(b) factors. Final 

Determination, 78 Fed. Reg. at 23,058–59. The Copyright 

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Royalty Judges’ use of the 7.5% rate as a starting point in its 

analysis was not arbitrary or capricious.

b. Agency Precedent

SoundExchange also argues that the Judges violated 

agency precedent. SoundExchange contends that agency 

precedent required the Judges to follow a two-step process: 

First, the judges should set a range of reasonable rates based 

on marketplace benchmarks; second, they should find the 

proper rate from within that range (or make adjustments to 

those benchmarks) by applying the Section 801(b) factors. 

SX Br. 40–42. 

This argument is unpersuasive. We have previously 

rejected the notion that the rate-maker “must first determine 

the range of market rates that are appropriate and then select a 

rate from within the range of fair market rates that meets the 

objectives of § 801(b)(1)(A)–(D).” R.I.A.A., 176 F.3d at 532–

33. The Copyright Act does not “clearly require[] the use of 

‘market rates.’” Id. at 533 (emphasis in original). Instead, 

“‘reasonable rates’ are those that are calculated with reference 

to the four statutory criteria.” Id. As we have made clear 

both above and in an earlier decision, in a Section 114 

proceeding, “the agency [is] under no obligation to choose a 

rate derived from a market-based approach.” 

SoundExchange, 571 F.3d at 1224. We thus hold that 

SoundExchange’s agency precedent argument fails.

B. Music Choice’s Challenge to the Copyright 

Royalty Judges’ Final Determination

Music Choice also argues that the Copyright Royalty 

Judges’ setting of PSS rates was arbitrary, capricious, and not 

supported by the written record. Music Choice argues that the 

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Judges set PSS rates too high. In support of its request for a 

PSS rate of 2.6%, Music Choice introduced agreements that it 

had reached with ASCAP and BMI, leading performance 

rights organizations, for the use of copyrighted musical works 

and compositions in its residential audio service. Music 

Choice represented that it pays ASCAP and BMI each 2.5% 

of Gross Revenues. Music Choice then introduced evidence 

that international jurisdictions value sound recordings and 

musical works similarly. Final Determination, 78 Fed. Reg. 

at 23,055–58.

1. Rejection of the Musical Works 

Benchmark

Music Choice argues that the Judges’ rejection of the 

musical works benchmark was contrary to precedent, and that 

the Judges had not adequately explained their reasons for 

departing from this precedent. The Copyright Act requires 

the Judges to follow enumerated precedent, including prior 

determinations and interpretations of the Librarian of 

Congress. 17 U.S.C. § 803(a)(1). Music Choice contends 

that in the initial PSS rate determination, the Librarian held 

that the musical works rates set the upper bound of reasonable 

rates for PSS.1

 Music Choice’s Opening Brief (“MC Br.”) 

19–22; Determination of Reasonable Rates and Terms for the 

Digital Performance of Sound Recordings, 63 Fed. Reg. 

25,394 (May 8, 1998). Music Choice maintains that the 

Judges violated the precedent, established by the Librarian in 

the first PSS ratemaking, when they did not rely on musical 

works rates as persuasive benchmarks. We disagree.

 1 At that time, the Copyright Act conferred ultimate authority on 

the Librarian of Congress to set rates and terms (based on 

recommendations made by copyright arbitration royalty panels and 

the Registrar of Copyrights). See R.I.A.A., 176 F.3d at 530–31.

USCA Case #13-1183 Document #1528212 Filed: 12/19/2014 Page 23 of 29
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The Librarian did not determine, as a matter of law, that 

future rate-makers must begin with the musical works rate. 

See Final Determination, 78 Fed. Reg. at 23,055. To the 

extent the PSS determination is precedential, the Judges have 

adequately explained their departure. Cf. Intercollegiate 

Broad. Sys., Inc. v. Copyright Royalty Bd., 574 F.3d 748, 762 

(D.C. Cir. 2009) (“The Judges are free to depart from 

precedent if they provide reasoned explanations for their 

departures.”). The Judges stated that Music Choice “fail[ed] 

to place” the initial PSS determination “in its historical 

context.” Final Determination, 78 Fed. Reg. at 23,055. “The 

Librarian had before him for consideration only the musical 

works fees and the Music Choice partnership license 

agreement. The Judges have more evidence in this 

proceeding upon which to base a decision.” Id. Thus, the 

Judges properly distinguished the Librarian’s initial PSS 

determination from the proceedings below.

Music Choice maintains that even if the Librarian’s PSS 

determination is not binding precedent, the Judges erred when 

they rejected the musical works rate evidence in the record. 

MC Br. 28–31. We disagree. The Judges acted well within 

their broad discretion when they eschewed reliance on the 

musical works rates. The Judges explained that the “musical 

works market involves different sellers (performing rights 

societies versus record companies) selling different rights” 

than the sound recording rights at issue in this case. Final 

Determination, 78 Fed. Reg. at 23,058. The Judges cited 

other instances where the agency rate-maker rejected reliance 

on musical works benchmarks. See id. at 23,058 n.16. The 

Judges did not err when they found Music Choice’s evidence 

from foreign jurisdictions unpersuasive. The Judges noted 

that in an earlier proceeding, they discounted the significance 

of how foreign jurisdictions treat different types of rights, 

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finding that “comparability is a much more complex 

undertaking in an international setting than in a domestic one. 

There are a myriad of potential structural and regulatory 

differences whose impact has to be addressed in order to 

produce a meaningful comparison.” Mechanical and Digital 

Phonorecord Delivery Rate Determination Proceeding, 74 

Fed. Reg. 4510, 4522 (Jan. 26, 2009) (quoted in Final 

Determination, 78 Fed. Reg. at 23,058). Music Choice failed 

to address those differences, and thus failed to make the 

foreign jurisdictions’ treatment of musical works meaningful. 

The Judges did not summarily reject Music Choice’s 

proffered musical works rates, but offered a reasoned 

explanation for finding them not comparable and 

unpersuasive. 

2. Reliance on the Prevailing Settlement 

Rate

Music Choice also argues that the Judges erred in relying 

on the prevailing 7.5% settlement rate. For the reasons 

discussed above, in connection with SoundExchange’s similar 

contention, this argument fails. Music Choice raises the 

additional point that the then-prevailing rate was “driven 

solely by the disparate impact of rate litigation costs on a 

small company like Music Choice.” MC Br. 36. Music 

Choice maintains that it did not settle because it thought that 

7.5% resembled a hypothetical market rate, or was otherwise 

fair. Instead, it agreed to the rate entirely to avoid the 

overbearing expenses of rate litigation, expenses that a wellfunded entity like SoundExchange could bear much better. 

Id. at 36–38.

We hold that the Judges did not err when relying on the 

settlement rate. The Judges conceded that the settlement rate 

does not represent a market rate. Final Determination, 78 

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Fed. Reg. at 23,058. But again, the relevant portion of the 

Copyright Act “does not use the term ‘market rates,’ nor does 

it require that the term ‘reasonable rates’ be defined as market 

rates.” R.I.A.A., 176 F.3d at 533. The Act authorizes the 

Judges to consider rates set “under voluntary license 

agreements.” 17 U.S.C. § 114(f)(1)(B). Music Choice 

complains that it agreed to a higher rate to avoid litigation 

costs, but has not introduced evidence that the settlement was 

involuntary or otherwise unreasonable. It was not arbitrary, 

then, for the Judges to consider the voluntary settlement rate.

3. Application of Section 801(b) Factors

Music Choice argues that the Judges erroneously failed to 

make several downward adjustments based on faulty 

interpretations and applications of the Section 801(b) factors. 

MC Br. 43–53. Given the very broad discretion afforded to 

the Judges in weighing these predictive and policy-laden 

factors, see SoundExchange, 571 F.3d at 1223–24, we 

conclude that the Judges did not exercise their discretion in an 

arbitrary or capricious manner. The Judges’ upward 

adjustment, based on Music Choice’s planned channel 

expansion from 46 to 300 channels, warrants greater attention. 

Under the second Section 801(b) factor, providing fair return 

and fair income, the Judges found a 1% upward adjustment 

appropriate to compensate for an expected increased use of 

copyrighted works. Final Determination, 78 Fed. Reg. at 

23,059–60. 

Music Choice argues that there was no record evidence 

that an upward adjustment was warranted based on Music 

Choice’s planned channel expansion. MC Br. 40–42. Music 

Choice maintains that the Section 114 license is a public 

performance license, not a use license, and that mere 

transmission without a corresponding listener does not 

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constitute a performance. MC Reply 20 (citing United States 

v. ASCAP, 627 F.3d 64, 73 (2nd Cir. 2010)). Thus, Music 

Choice argues, the fact that it will transmit additional 

channels does not necessarily mean that there will be 

additional performances of sound recordings. Music Choice 

posits a scenario in which the channel expansion does not 

draw in additional listeners; there could be the same number 

of listeners, but spread among more channels. Music Choice 

argues that the Judges lacked any evidence that the channel 

expansion would lead to increased listenership, and thus erred 

when they adjusted the rate upward based on this 

consideration. MC Br. 40–42; MC Reply 19–23.

Music Choice’s argument fails. The Judges acted 

reasonably when they inferred that the channel expansion 

would lead to increased performances of copyrighted works. 

The Copyright Act empowers the Judges to “predict the future 

course of the music industry.” SoundExchange, 571 F.3d at 

1225. “The ‘arbitrary and capricious’ standard is particularly 

deferential in matters implicating predictive judgments.” 

Rural Cellular Ass’n v. F.C.C., 588 F.3d 1095, 1105 (D.C. 

Cir. 2009). Given the broad discretion afforded to the Judges 

in making predictive judgments, the Judges acted on 

sufficient evidence, and not arbitrarily, when they determined 

that Music Choice’s planned channel expansion warranted an 

upward adjustment.

We also question Music Choice’s reliance on U.S. v. 

ASCAP, 627 F.3d 64 (2nd Cir. 2010), for the proposition that 

there cannot be proof of additional performances without 

proof of additional listeners. U.S. v. ASCAP concerned 

“whether a download of a digital file containing a musical 

work constitutes a public performance of that musical work.” 

Id. at 68. The Second Circuit held that digital downloads are 

not such a performance because downloads “are not . . . 

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contemporaneously perceived by the listener.” Id. at 73. 

“The downloaded songs are not performed in any perceptible 

manner during the transfers; the user must take some further 

action to play the songs after they are downloaded.” Id. The 

Second Circuit distinguished downloads from radio 

broadcasts and digital streaming transmissions; in the latter 

group, there is a performance “because there is a playing of 

the song that is perceived simultaneously with the 

transmission.” Id. at 74. Music Choice’s service is analogous 

to radio and streaming broadcasts, as the listener 

contemporaneously perceives the playing of a song while 

Music Choice transmits it. Music Choice has not persuaded 

us, through its citation to U.S. v. ASCAP, that the Copyright 

Royalty Judges, in making their predictive judgment, required 

proof of additional listeners and could not consider an upward 

adjustment based on Music Choice’s planned channel 

expansion.

Concluding that the Copyright Royalty Judges’ Final 

Determination is supported by the record, and is neither 

arbitrary nor capricious, we affirm the Judges’ determination 

of Section 114 royalty rates and terms for preexisting 

subscription services.

III. CONCLUSION

We have repeatedly recognized that the Copyright Act 

gives the Judges of the Copyright Royalty Board broad 

discretion to set rates and terms for compulsory licenses of the 

digital performance of sound recordings. See, e.g., 

SoundExchange, 571 F.3d at 1223–24. The Act requires the 

Judges to weigh competing, policy-laden, and forwardlooking factors when determining reasonable rates. Id. We 

hold that the Copyright Royalty Judges did not exercise their 

broad discretion in an arbitrary or capricious manner when 

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setting royalty rates and terms for satellite digital audio radio 

services and preexisting subscription services. The Judges 

reasonably explained their determinations, and based those 

determinations on substantial evidence. The Judges did not 

rely on impermissible or “extra-record” factors. The 

determination of the Judges of the Copyright Royalty Board 

as to royalty rates and terms for satellite digital audio radio 

services and preexisting subscription services is therefore 

affirmed.

So ordered.

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