Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-09-01205/USCOURTS-caDC-09-01205-0/pdf.json

Parties Involved:
Librarian of Congress
Appellee
Recording Industry Association of America, Inc.
Appellant

Document Text:

United States Court of Appeals 

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 12, 2010 Decided June 22, 2010 

No. 09-1075 

RECORDING INDUSTRY ASSOCIATION OF AMERICA, INC., 

APPELLANT

v. 

LIBRARIAN OF CONGRESS, 

APPELLEE

NATIONAL MUSIC PUBLISHERS’ ASSOCIATION, INC.,

SONGWRITERS GUILD OF AMERICA, AND NASHVILLE 

SONGWRITERS ASSOCIATION INTERNATIONAL, 

INTERVENORS

Consolidated with 09-1205 

On Appeal of an Order of the Copyright Royalty Board 

Paul M. Smith argued the cause for appellant. With him 

on the briefs were Steven R. Englund, Jared O. Freedman, 

Lindsay C. Harrison, Steven M. Marks, Susan B. Chertkof, 

and Scott A. Zebrak. David A. Handzo entered an appearance. 

Kelsi Brown Corkran, U.S. Department of Justice, argued 

the cause for appellee. With her on the brief were Tony West, 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 1 of 19
2 

Assistant Attorney General, and Scott R. McIntosh, Attorney. 

Sarang V. Damle, Attorney, entered an appearance. 

Jay Cohen argued the cause for intervenors National 

Music Publishers’ Association, Inc., et al. With him on the 

brief were Lynn B. Bayard, David W. Brown, Jay Rosenthal, 

Senior Vice-President & General Counsel, National Music 

Publishers’ Association, Inc., Kathryn E. Wagner, Vice 

President & Counsel, National Music Publishers’ Association, 

Inc., Charles J. Sanders, Special Counsel, Songwriters Guild 

of America, and Carl W. Hampe. 

Before: GARLAND and KAVANAUGH, Circuit Judges, and 

RANDOLPH, Senior Circuit Judge. 

Opinion for the Court filed by Circuit Judge

KAVANAUGH. 

KAVANAUGH, Circuit Judge: By law, the Copyright 

Royalty Board sets the terms and rates for copyright royalties 

when copyright owners and licensees fail to negotiate terms 

and rates themselves. As part of its statutory mandate, the 

Board sets royalty terms and rates for what is known as the § 

115 statutory license. That license allows individuals to make 

their own recordings of copyrighted musical works for 

distribution to the public without the consent of the copyright 

owner. 

In carrying out its statutory responsibilities under 17 

U.S.C. § 115, the Board instituted a 1.5 percent per month late 

fee for late royalty payments. It also implemented a pennyrate royalty structure for cell phone ringtones, under which 

copyright owners receive 24 cents for every ringtone sold 

using their copyrighted work. 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 2 of 19
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The Recording Industry Association of America 

challenges those two aspects of the Board’s decision, arguing 

that they were arbitrary and capricious for purposes of the 

Administrative Procedure Act. We conclude that the Board’s 

decision was reasonable and reasonably explained. We 

therefore affirm the Board’s determination. 

I 

A 

 Most songs played on the radio, sold on CDs in music 

stores, or digitally available on the Internet through services 

like iTunes embody two distinct copyrights – a copyright in 

the “musical work” and a copyright in the “sound recording.” 

See 17 U.S.C. § 102. The musical work is the musical 

composition – the notes and lyrics of the song as they appear 

on sheet music. The sound recording is the recorded musical 

work performed by a specific artist. 

Although almost always intermingled in a single song, 

those two copyrights are legally distinct and may be owned 

and licensed separately. One party might own the copyright 

in the words and musical arrangement of a song, and another 

party might own the copyright in a particular artist’s 

recording of those words and musical notes. 

 This case involves licenses in a limited category of 

copyrighted musical works – as opposed to sound recordings. 

Section 115 of the Copyright Act allows an individual to 

make and distribute phonorecords (that is, sound recordings) 

of a copyrighted musical work without reaching any kind of 

agreement with the copyright owner. That right does not 

include authorization to make exact copies of an existing 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 3 of 19
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sound recording and distribute it; if a musical work has been 

recorded and copyrighted by another artist, a licensee “may 

exercise his rights under the [§ 115] license only by 

assembling his own musicians, singers, recording engineers 

and equipment, etc. for the purpose of recording anew the 

musical work that is the subject of the [§ 115] license.” 2 

MELVILLE B. NIMMER & DAVID NIMMER, NIMMER ON 

COPYRIGHT § 8.04[A], at 8-58.5 (2009). For example, a § 115 

licensee could pull together a group of musicians to record 

and sell a cover version of Bruce Springsteen’s 1975 hit Born 

to Run, but that licensee could not make copies of 

Springsteen’s recording of that song and sell them. 

 The § 115 licensing regime operates in a fairly 

straightforward manner. When a copyright owner distributes 

work “to the public,” § 115’s provisions are triggered. 17 

U.S.C. § 115(a)(1). Once that occurs, anyone may “obtain a 

compulsory license to make and distribute phonorecords of 

the work” under § 115 so long as the “primary purpose in 

making [the] phonorecords is to distribute them to the public 

for private use.” Id. Assuming the copyright has been 

registered with the Copyright Office, the licensee owes the 

copyright owner a royalty for every phonorecord “made and 

distributed in accordance with the [§ 115] license.” Id. § 

115(c)(2). For purposes of the Copyright Act, a phonorecord 

is “distributed” – and an obligation to pay the copyright 

owner a royalty created – when “the person exercising the [§ 

115] license has voluntarily and permanently parted with” the 

phonorecord. Id. In other words, the licensee’s sale of its 

recording of the copyright owner’s work triggers the royalty 

payment obligation. See NIMMER § 8.04[H][1], at 8-77. 

Because the § 115 license issues without any agreement 

between the copyright owner and the licensee, the system 

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needs a mechanism to figure out how much the licensee owes 

the copyright owner and what the terms for paying that rate 

should be. Although that mechanism has changed over time, 

the Copyright Royalty Board currently serves as the 

rulemaking body for this system. See generally Procedural 

Regulations for the Copyright Royalty Board, 70 Fed. Reg. 

30,901 (May 31, 2005) (discussing the history of royalty 

ratemaking). The Board is a three-person panel appointed by 

the Librarian of Congress and removable only for cause by 

the Librarian.1

 The Board sets the terms and rates for 

copyright royalties when copyright owners and licensees fail 

to negotiate terms and rates themselves. See NIMMER § 

7.27[C], at 7-243. 

As relevant here, the Copyright Act requires the Board to 

set “reasonable terms and rates” for royalty payments made 

under the § 115 license when the parties to the license fail to 

do so. 17 U.S.C. § 801(b)(1). When establishing terms and 

rates under that license, the Copyright Act requires the Board 

to balance four general and sometimes conflicting policy 

objectives: (1) maximizing the availability of creative works 

to the public; (2) providing copyright owners a fair return for 

their creative works and copyright users a fair income; (3) 

recognizing the relative roles of the copyright owners and 

users; and (4) minimizing any disruptive impact on the 

industries involved. Id. § 801(b)(1)(A)-(D). 

 

 1

 RIAA has not raised a constitutional challenge to the method 

of appointment of the members of the Copyright Royalty Board. 

Cf. Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., 574 

F.3d 748, 755-56 (D.C. Cir. 2009); SoundExchange, Inc. v. 

Librarian of Congress, 571 F.3d 1220, 1226-27 (D.C. Cir. 2009) 

(Kavanaugh, J., concurring). 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 5 of 19
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At specified intervals, the Board holds ratemaking 

proceedings for licenses issued under the Copyright Act. 

Section 115 ratemaking proceedings can occur every five 

years “or at such other times as the parties have agreed.” Id. § 

804(b)(4). 

B 

In 1996, the parties with an interest in the § 115 license 

(such as the Recording Industry Association of America, the 

Songwriter’s Guild of America, and the National Music 

Publishers’ Association) agreed on various terms and rates for 

the compulsory license. They also agreed that the settlement 

with respect to those terms and rates would expire 10 years 

later. In 2006, after the parties found they could not reach a 

new compromise, the Board instituted proceedings to set 

certain terms and rates governing the operation of the § 115 

license. The process was long and complicated, involving 28 

days of live testimony, more than 140 exhibits, and more than 

340 pleadings, motions, and orders. See Mechanical and 

Digital Phonorecord Delivery Rate Determination Proceeding, 

74 Fed. Reg. 4510, 4511 (Jan. 26, 2009). 

When the Board published its final determination from 

those proceedings in 2009, it announced one new § 115 

licensing term and two new § 115 royalty rates. First, the 

Board instituted a late payment of 1.5 percent per month for 

overdue royalties, measured from the date payment is due. 

Second, it established a royalty rate for cellular phone 

ringtones – a sound cell phones can make when they ring that 

often samples a popular song. It set the rate at 24 cents per 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 6 of 19
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ringtone sold.2 Third, with respect to physical phonorecords 

(like CDs) and permanent digital downloads (like those 

purchased from iTunes), the Board set the § 115 royalty rate 

at the greater of 9.1 cents per song or 1.75 cents per minute of 

playing time. 

The Recording Industry Association of America, known 

as RIAA, is a trade association representing companies that 

create, manufacture, and distribute sound recordings. It 

participated as a party in the § 115 licensing proceedings. 

After the Board issued its determination, RIAA filed a motion 

for rehearing. The Board denied the motion. 

RIAA now appeals two aspects of the Board’s ruling: (1) 

the imposition of a 1.5 percent per month late fee and (2) the 

imposition of a penny-rate royalty structure for ringtones at 

24 cents per ringtone sold. 

RIAA does not contend that the Board contravened any 

specific statutory limit. In other words, this is a State Farm 

case, not a Chevron case. The Board’s rulings are subject to 

review in this Court under the arbitrary and capricious 

standard of the Administrative Procedure Act. 17 U.S.C. § 

803(d)(3); see 5 U.S.C. § 706(2)(A). As a general matter, our 

review under that standard is deferential. See FCC v. Fox 

Television Stations, 129 S. Ct. 1800, 1810 (2009); Motor 

Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 

U.S. 29, 43 (1983). And we give “substantial deference” to 

the ratemaking decisions of the Board because Congress 

 2

 In 2006, the Register of Copyrights ruled that ringtones are 

phonorecords that fall within the scope of the § 115 license. 

Mechanical and Digital Phonorecord Delivery Rate Adjustment 

Proceedings, 71 Fed. Reg. 64,303 (Nov. 1, 2006). 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 7 of 19
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expressly tasked it with balancing the conflicting statutory 

objectives enumerated in the Copyright Act. SoundExchange, 

Inc. v. Librarian of Congress, 571 F.3d 1220, 1225 (D.C. Cir. 

2009). “To the extent that the statutory objectives determine 

a range of reasonable royalty rates that would serve all [the] 

objectives adequately but to differing degrees, the [Board] is 

free to choose among those rates, and courts are without 

authority to set aside the particular rate chosen by the [Board] 

if it lies within a zone of reasonableness.” Recording Indus. 

Ass’n of America v. Copyright Royalty Tribunal, 662 F.2d 1, 9 

(D.C. Cir. 1981) (internal quotation marks omitted). 

II 

We first consider RIAA’s challenge to the 1.5 percent 

late fee. 

The Copyright Act authorizes the Board to impose a late 

fee for § 115 royalty payments: “A determination of the 

Copyright Royalty [Board] may include terms with respect to 

late payment, but in no way shall such terms prevent the 

copyright holder from asserting other rights or remedies 

provided under this title.” 17 U.S.C. § 803(c)(7). 

The factors listed in § 801(b)(1) of the Copyright Act 

govern the Board’s decision to impose a late fee, as well as its 

determination of the amount of that fee. Recall that those 

factors include: (1) maximizing the availability of creative 

works to the public; (2) providing copyright owners a fair 

return for their creative works and copyright users a fair 

income; (3) recognizing the relative roles of the copyright 

owners and users; and (4) minimizing any disruptive impact 

on the industries involved. Applying those broad and rather 

amorphous factors, the Board concluded that the 1.5 percent 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 8 of 19
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late fee comports with the statutory objectives because it 

strikes a balance “between providing an effective incentive to 

the licensee to make payments timely on the one hand and not 

making the fee so high that it is punitive on the other hand.” 

Mechanical and Digital Phonorecord Delivery Rate 

Determination Proceeding, 74 Fed. Reg. 4510, 4528 (Jan. 26, 

2009) (internal quotation marks omitted). 

RIAA levies several challenges to the late fee. First, 

RIAA argues that the Board must set royalty terms and rates 

that track those found in the marketplace and that the Board 

failed to do so here. Second, RIAA asserts that the late fee is 

unnecessary in the § 115 licensing context because copyright 

owners possess a termination right that can be invoked when 

payments are late. Third, RIAA contends that a late fee is 

inappropriate because the lateness of payments results in large 

part from uncertainty about the appropriate division of 

royalties among joint copyright owners. RIAA suggests that 

this problem is the fault of the copyright owners themselves. 

Fourth, RIAA relatedly submits that the Board failed to 

adequately address its argument about the problems presented 

by co-copyright owners. We will consider each of those 

objections in turn.

A 

RIAA argues that the late fee must be tethered to late fees 

that can be found in the existing market for voluntary 

licenses. By RIAA’s account, there are no late fees in the 

voluntary market for the copyrights that § 115 covers. As a 

result, RIAA contends the Board should not be able to impose 

a late fee in this compulsory license setting. 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 9 of 19
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 The Copyright Act provides that the Board “may 

consider rates and terms under voluntary license agreements” 

in addition to the mandatory “objectives set forth in section 

801(b)(1)” when setting the terms of the § 115 license. 17 

U.S.C. § 115(c)(3)(D). As this Court explained in Recording 

Industry Association of America v. Librarian of Congress, the 

Librarian has interpreted a Seventh Circuit “precedent to 

mean that marketplace analogies, along with other evidence, 

must be considered,” which we held to be “a reasonable 

interpretation of the precedent.” 176 F.3d 528, 534 (D.C. Cir. 

1999). At most, then, the Board must “consider[]” the 

existing market for voluntary licenses. 

The Board did so here, explaining that a late fee would 

correspond with the practices in other similar markets – in 

particular, the closely related webcasting and satellite digital 

radio industries. 74 Fed. Reg. at 4527; see Determination of 

Rates and Terms for Preexisting Subscription Services and 

Satellite Digital Audio Radio Services, 73 Fed. Reg. 4080, 

4099 (Jan. 24, 2008); Digital Performance Right in Sound 

Recordings and Ephemeral Recordings, 72 Fed. Reg. 24,084, 

24,107 (May 1, 2007). The copyright owners presented 

evidence during the proceedings – considered by the Board – 

that the major record labels have late fee clauses in their 

royalty contracts with digital music services like iTunes. J.A. 

523-24. And RIAA acknowledged that at least a handful of 

royalty agreements provide copyright owners with late-fee 

protection. J.A. 618-19. 

The Board also considered other relevant market metrics. 

Copyright owners presented evidence indicating that 

payments were frequently made to copyright owners after 

they were due. Some of the evidence in the record suggested 

that from January 2000 to September 2007, over 41,000 

USCA Case #09-1205 Document #1251076 Filed: 06/22/2010 Page 10 of 19
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payments totaling more than $2.1 billion arrived after their 

due dates. J.A. 433. Though RIAA disputed the magnitude 

of the problem, none of the parties to the proceeding claimed 

the problem was non-existent. 74 Fed. Reg. at 4527 n.50. 

And although the Board considers market conditions 

when setting terms and rates, they are not required to choose a 

late fee that exactly matches a market rate. Such a rule 

would, in effect, nullify the congressional authorization for 

late fees. 

In short, the Board appropriately took market evidence 

into account when imposing the late fee. 

B 

The Copyright Act authorizes copyright owners to 

terminate § 115 licenses for nonpayment. 17 U.S.C. § 

115(c)(6). RIAA argues that the presence of that provision 

renders a late fee unnecessary. 

But the Copyright Act itself refutes this either-or 

argument. The statute both grants the copyright owners a 

termination right and authorizes the Board to impose a late 

fee. Moreover, by the terms of the statute, that late fee “in no 

way shall . . . prevent the copyright holder from asserting 

other rights or remedies provided” by the Copyright Act. Id.

§ 803(c)(7). The congressional scheme clearly contemplates 

both a termination right and a late fee. 

The congressional framework makes good sense because 

the incentive to make timely payments in order to avoid § 115 

license termination is rather weak, if any such incentive exists 

at all. Under the terms of the statute, a copyright owner must 

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give a licensee 30 days to cure any nonpayment before 

terminating the license. Id. § 115(c)(6). As the Government 

persuasively points out, the termination provision “cannot 

possibly serve as an incentive to make timely royalty 

payments, because the licensee can avoid any consequences 

of withholding payment by simply waiting until the copyright 

owner initiates termination and then making the payment 

before the 30-day notice period has expired.” Government’s 

Br. at 40. 

 In short, a copyright owner’s ability to terminate a § 115 

license in no ways bars the imposition of a late fee. 

C 

 RIAA also asserts that it was unreasonable for the Board 

to impose a late fee benefiting copyright owners because, it 

says, copyright owners are often the source of the problems 

that cause late payment. By RIAA’s account, when more than 

one party owns a copyright in a work, those joint copyright 

owners often fail to decide who is entitled to what share of the 

royalties. RIAA contends that uncertainty about what amount 

is owed to individual copyright owners when a copyright is 

jointly held is often the underlying reason that payments are 

late. 

That argument is unpersuasive. Even if it were true that 

divided interests in a copyright made it difficult to make 

timely payments to each copyright owner, that fact would in 

no way counsel against the imposition of a late fee. The 

regulations governing the operation of the § 115 license 

contemplate that scenario and set forth a solution. A licensee 

can satisfy its obligation to pay a royalty by paying any one

copyright owner – even when many individuals have a stake 

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in a copyright. See 37 C.F.R. § 201.18(a)(5) (“For the 

purposes of this section, the term copyright owner, in the case 

of any work having more than one copyright owner, means 

any one of the co-owners.”) (emphasis omitted); id. § 

201.18(a)(6) (“In the case where the work has more than one 

copyright owner, the service of the Notice on any one of the 

co-owners . . . shall be sufficient with respect to all coowners.”); id. § 201.19(a)(5) (“In the case where the work has 

more than one copyright owner, the service of the Statement 

of Account on one co-owner . . . shall be sufficient with 

respect to all co-owners.”). 

We therefore reject this argument as a basis for upsetting 

the Board’s imposition of a late fee. 

D 

 RIAA relatedly argues that the Board failed to adequately 

consider RIAA’s assertion that a late fee was unreasonable 

because of the uncertainties caused by split payments. But 

both the Board’s final determination and the order denying 

RIAA’s motion for a rehearing specifically addressed that 

argument. And as we have already discussed, the problem 

presented by jointly held copyrights is really no problem at 

all; a licensee can meet its § 115 licensing obligation by 

paying any one owner of a jointly owned copyright. 

In sum, RIAA has failed to raise any argument that would 

justify our overturning the Board’s 1.5 percent per month late 

fee. 

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III 

We next consider RIAA’s challenge to the royalty rates 

for cell phone ringtones.3

As part of the § 115 licensing proceedings, the Board 

established what is known as a penny-rate royalty structure 

for ringtones. Under that rate, copyright owners receive 24 

cents for every ringtone sold using their copyrighted work. 

 

In the proceeding before the Board, RIAA argued for a 

percentage-of-revenue royalty structure under which 

copyright owners would receive 15 percent of the wholesale 

revenue derived from the sale of a ringtone. As a less 

preferred alternative, RIAA sought a penny-rate royalty 

structure in which copyright owners would receive 18 cents 

per ringtone sold.4

 

 3

 The Government and intervenors argue that waiver, estoppel, 

or a lack of standing bars RIAA from challenging the Board’s 

imposition of a penny-rate royalty structure for ringtones. Though 

varying in flavor, these arguments all follow the same essential 

form: Because RIAA endorsed a penny-rate structure as a less 

preferred alternative to a percentage-of-revenue structure before the 

Board, it waived its right to challenge (or is estopped from 

challenging, or lacks standing to challenge) the imposition of the 

penny-rate royalty in this Court. Not so. This Court’s case law 

indicates that a party can appeal an agency’s adoption of a rate 

proposed by that party when it was proffered as a second-best 

option. Cf. Southern Natural Gas Co. v. FERC, 877 F.2d 1066, 

1070-71 (D.C. Cir. 1989). 

4

 Other parties to the proceeding offered competing rates. For 

example, the copyright owners endorsed a rate structure in which 

they would receive the greater of (1) 15 percent of all revenue 

associated with the ringtone, (2) 33.3 percent of the cost that would 

have been paid for the mechanical rights to the equivalent musical 

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Applying the § 801(b)(1) criteria, the Board settled on a 

penny-rate royalty structure of 24 cents per ringtone sold. 

With respect to the first statutory criterion it had to consider – 

maximizing the availability of creative work – the Board 

concluded that a “nominal rate[] for ringtones” supports that 

objective. Mechanical and Digital Phonorecord Delivery Rate 

Determination Proceeding, 74 Fed. Reg. 4510, 4524 (Jan. 26, 

2009). As to the second criterion – affording the copyright 

owner a fair return – the Board found that the new rates did 

not deprive copyright owners of a fair return on their creative 

works. Id. The Board also found that the penny rate met the 

third statutory criterion – respecting the relative roles of the 

copyright owner and user. Id. at 4525. And under the fourth 

criterion – minimizing disruptive impact on the industry – the 

Board found that the rate structure it chose was reasonable 

and already in place in many parts of the market, minimizing 

any disruptive impact. Id. 

On two separate grounds, RIAA now challenges the 

structure of the ringtone royalty rate imposed by the Board – 

specifically, the fact that it is a penny rate rather than a 

percentage-of-revenue rate. First, using an argument similar 

to the one it lodged against the 1.5 percent late fee, RIAA 

alleges that the penny-rate royalty structure inappropriately 

departs from market analogies for voluntary licenses. Second, 

RIAA contends that a penny rate is unreasonable in light of 

falling ringtone prices. 

 

composition and sound recordings, and (3) 15 cents per ringtone, 

subject to periodic inflation adjustments. Mechanical and Digital 

Phonorecord Delivery Rate Determination Proceeding, 74 Fed. 

Reg. 4510, 4515 (Jan. 26, 2009). 

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A 

As previously discussed, although existing market rates 

for voluntary licenses do not bind the Board when making its 

determinations, the Board considered those rates when 

selecting the penny-rate royalty structure. 

The Board expressly recognized that marketplace 

ringtone contracts typically provide for royalty payments at 

the greater of (1) a penny rate ranging from 10 to 25 cents; (2) 

a percentage of retail revenue ranging from 10 to 15 percent; 

and (3) a percentage of gross revenue ranging from 9 to 20 

percent. 74 Fed. Reg. at 4518. 

After weighing the costs and benefits of the parties’ 

proposals and taking into account relevant market practices, 

the Board concluded that a penny rate was superior to a 

percentage-of-revenue rate for several reasons. 

First, the Board determined that a penny rate was more in 

line with reimbursing copyright owners for the use of their 

works. Under the Board’s determination, every copyright 

owner will receive 24 cents every time a ringtone using their 

work is sold. By contrast, under a percentage-of-revenue 

system, the royalty paid to copyright owners would vary 

based on factors in addition to the number of ringtones sold, 

such as the price charged to the end consumer. This Court 

has validated the Board’s preference for a royalty system 

based on the number of copyrighted works sold – like the 

penny rate – as being more directly tied to the nature of the 

right being licensed than a percentage-of-revenue rate. See 

Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., 574 

F.3d 748, 760-61 (D.C. Cir. 2009). 

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Second, when looking to market analogies, the Board 

determined that many of the concerns driving the adoption of 

a percentage-of-revenue royalty structure in other instances 

were absent here. For example, the Board had previously 

concluded that a percentage-of-revenue royalty structure 

made sense in the satellite digital radio context because it 

would be difficult to measure how much a given work was 

actually used. See Determination of Rates and Terms for 

Preexisting Subscription Services and Satellite Digital Audio 

Radio Services, 73 Fed. Reg. 4080, 4086 (Jan. 24, 2008). In 

the case of ringtones, “measuring the quantity of 

reproductions presents no such problems.” 74 Fed. Reg. at 

4516. In a market based on the sale of individual copyrighted 

works (like the ringtone market) as opposed to a market 

where copyrighted works are bundled and sold as a service to 

consumers (like satellite radio) figuring out how many times a 

copyrighted work is used (i.e., sold) is much easier. 

Third, the Board found that the simplicity of using a 

penny-rate royalty structure supported its adoption: “No 

proxies need be formulated to establish the number of such 

reproductions,” which are “readily calculable as the number 

of units in transactions between the parties.” 74 Fed. Reg. at 

4516. That simplicity contrasts sharply with the “salient 

difficulties” presented by RIAA’s proposed percentage-ofrevenue royalty structure. Id. As the Board recognized, not 

least among these difficulties were definitional problems such 

as disagreements about what constituted “revenues.” Id. 

Tying all of those strands together, the Board ultimately 

concluded “that a single penny-rate structure is best applied to 

ringtones as well as physical phonorecords and digital 

permanent downloads” because of “the efficiency of 

administration gained from a single structure when spread 

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over the much larger number of musical works reproduced” 

under the § 115 licensing regime. 74 Fed. Reg. at 4517 n.21. 

In the Board’s view, the penny rate provided “the most 

efficient mechanism for capturing the value of the 

reproduction and distribution rights at issue.” 74 Fed. Reg. at 

4515. 

We find nothing unreasonable about the Board’s 

preference for a penny-rate royalty structure. 

B 

RIAA also argues that plummeting ringtone prices render 

the penny rate inherently unreasonable. The Board 

considered and rejected this argument, stating: “RIAA’s shrill 

contention that a penny-rate structure ‘would be disruptive as 

consumer prices continue to decline’ and should, therefore, be 

replaced by a percentage rate system in order to satisfy 801(b) 

policy considerations . . . is not supported by the record of 

evidence in this proceeding. . . . RIAA [does not] offer any 

persuasive evidence that would in any way quantify any 

claimed adverse impact on projected future revenues 

stemming from the continued application of a penny-rate 

structure . . . .” 74 Fed. Reg. at 4516. 

Although the Board concluded that falling ringtone prices 

were not relevant to the choice of a penny-rate royalty as 

opposed to a percentage-of-revenue royalty, it did find 

information about declining prices useful in structuring the 

terms of the penny rate it chose. See 74 Fed. Reg. at 4523. 

For example, the Board referenced concerns about reduced 

revenues when rejecting the copyright owners’ request that 

selected rates be adjusted annually for inflation. Id.

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The Board examined the relevant data and determined 

that there was no meaningful link between the selection of a 

penny-rate royalty structure for ringtones and future ringtone 

revenues. RIAA has failed to present any basis for us to 

overturn that conclusion. 

* * * 

 We affirm the Copyright Royalty Board’s determination. 

So ordered. 

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