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[Federal Register Volume 78, Number 74 (Wednesday, April 17, 2013)]
[Notices]
[Pages 22913-22915]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09005]

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LIBRARY OF CONGRESS

Copyright Office

[Docket No. 2013-4]

Review of Copyright Royalty Judges Determination

AGENCY: U.S. Copyright Office, Library of Congress.

ACTION: Notice.

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SUMMARY: The Register of Copyrights issues the following decision 
identifying and correcting an erroneous resolution of a material 
question of substantive law under title 17 that underlies or is 
contained in the Copyright Royalty Judges' final determination of rates 
and terms of royalty payments for the use of sound recordings in 
transmissions made by Preexisting Subscription Services.

FOR FURTHER INFORMATION CONTACT: Jacqueline C. Charlesworth, Senior 
Counsel to the Register, or Stephen Ruwe, Attorney Advisor Copyright 
GC/I&R, P.O. Box 70400, Washington, DC 20024. Telephone: (202) 707-
8380. Telefax: (202) 707-8366.

SUPPLEMENTARY INFORMATION: 

Background

    The Copyright Royalty Judges (``CRJs''), who constitute the 
Copyright Royalty Board (``CRB''), are required by 17 U.S.C. 803(b) to 
issue determinations of rates and terms for royalty payments due for 
the public performance of sound recordings in certain digital 
transmissions by licensees, including Preexisting Subscription Services 
(``PSS'') and Satellite Digital Audio Radio Services (``SDARS''), in 
accordance with the provisions of 17 U.S.C. 114 and 112(e). Pursuant to 
17 U.S.C. 801(b)(1), the rates applicable to PSS and SDARS are to be 
reasonable and shall be calculated by the CRJs 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.
    (D) To minimize any disruptive impact on the structure of the 
industries involved and on generally prevailing industry practices.

17 U.S.C. 801(b)(1); see also 17 U.S.C. 114(f)(1)(B) (specifying that 
CRJs shall consider factors set forth in section 801(b)(1) in 
establishing rates for PSS and SDARS).
    On February 14, 2013, the CRJs issued a final determination of 
rates and terms of royalty payments for the use of sound recordings in 
transmissions made by PSS and SDARS (``Final Determination''). For PSS, 
for the period 2013 through the end of 2017, the CRJs established a 
phased-in royalty rate commencing at 8.0% of gross revenues and rising 
to 8.5% in 2014. For SDARS, the CRJs established a phased-in rate 
commencing at 9.0% gross revenues and escalating to 11.0% by 2017.
    Under 17 U.S.C. 802(f)(1)(D), the Register of Copyrights may review 
for legal error the resolution by the CRJs of a material question of 
substantive law under title 17 that underlies or is contained in a 
final determination of the CRJs. If the Register of Copyrights 
concludes, after taking into consideration the views of the 
participants in the proceeding, that any resolution reached by the CRJs 
was in material error, the Register of Copyrights shall issue a written 
decision correcting such legal error. 17 U.S.C. 802(f)(1)(D). The 
Register's correction, which must specifically identify the legal 
conclusion of the CRJs determined to be erroneous, is to be published 
in the Federal Register along with the CRJs' final determination. Id. 
``As to conclusions of substantive law involving an interpretation of 
the statutory provisions of [title 17], the decision of the Register of 
Copyrights shall be binding as precedent upon the Copyright Royalty 
Judges in subsequent proceedings * * *.'' Id.
    The Register concludes that the CRJs' determination of rates for 
royalty payments to be paid by PSS pursuant to 17 U.S.C. 114 for the 
use of sound recordings did not properly consider the four statutory 
factors as required under 17 U.S.C. 801(b)(1). The CRJs' 
misinterpretation of the applicable statutory standard constitutes an 
erroneous resolution of a material question of substantive law under 
title 17 that underlies or is contained in the final determination.

Copyright Royalty Judges' Determination Setting Rates and Terms for 
Preexisting Subscription Services

    On January 5, 2011, the CRJs announced the commencement of 
proceeding 2011-1 CRB PSS/Satellite II (``PSS SDARS II'') to determine 
the reasonable rates and terms applicable to PSS and SDARS for the 
period January 1, 2013 through December 31, 2017. 76 FR 591, Jan. 5, 
2011. Pursuant to 17 U.S.C. 804(b)(3)(B), the CRJs gave notice of a 
request for petitions to participate. Id. By the time of the 
commencement of the PSS SDARS hearing, of the original participants, 
only Music Choice, Sound Exchange, and Sirius XM remained as non-
settling participants in the proceeding. Final Determination at 2. On 
May 25, 2012, these participants submitted a stipulation to the CRJs in 
which they agreed to Sec.  112 license rates and terms, and the 
proceeding continued with respect to the Sec.  114 rates and terms. Id. 
at 2. On December 14, 2012, the CRJs issued their Initial Determination 
in the proceeding. Id. at 3. SoundExchange and Sirius XM filed motions 
for a rehearing asserting various errors of fact and law, both of which 
were denied on January 30, 2013. Order Denying Motions for Rehearing, 
Docket No. 2011-1 CRB PSS/Satellite II (Jan. 30, 2013). On February 14, 
2013, the

[[Page 22914]]

CRJs issued their Final Determination of rates and terms for PSS and 
SDARS.\1\
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    \1\ The Final Determination reflected the views of two of the 
three CRJs. The third CRJ, Judge Roberts, filed a separate opinion 
concurring in part and dissenting in part. In referencing the 
``CRJs'' in the course of discussing the majority opinion, the 
Register is referring to the two majority judges.
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    This review concerns the CRJs' interpretation and application of 
the statutory criteria of Sec.  801(b)(1) in establishing rates for 
PSS, which involved the participants Music Choice and SoundExchange.\2\ 
As set forth above, under 17 U.S.C. 801(b)(1), the rates established 
for PSS under section 114(f)(1)(B) are to be reasonable and calculated 
to achieve each of four statutory objectives. 17 U.S.C. 801(b)(1); see 
also 17 U.S.C. 114(f)(1)(B) (specifying that CRJs shall consider 
factors set forth in Sec.  801(b)(1) in establishing rates for PSS and 
SDARS); accord SoundExchange, Inc. v. Librarian of Congress, 571 F.3d 
1220, 1222 (D.C. Cir. 2009) (setting forth statutory standard).
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    \2\ Sirius XM participated in proceeding only with respect to 
rates for SDARS.
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    In the proceeding, Music Choice proposed a PSS royalty rate of 2.6% 
of gross revenues. Final Determination at 9. SoundExchange, for its 
part, proposed a rate of 15% of gross revenues for the first year of 
the licensing period, increasing to 45% by 2017. Id. The CRJs concluded 
that these proposals ``were so far apart, and so far from the current 
rate, that they cannot even be said to describe a `zone of 
reasonableness.' '' Id. at 16. In light of this assessment, the CRJs 
determined that ``[t]he only remaining guidance the Judges have upon 
which to base the new rates is the current royalty rate of 7.5% of PSS 
Gross Revenues. This rate approximates the middle of the wide spectrum 
proposed by the parties. It is the rate against which the Judges will 
test the section 801(b) policy factors.'' Id. at 16-17.\3\
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    \3\ At a different point in the opinion, the CRJs observed that 
the benchmark evidence submitted by the PSS parties in support of 
their proposals, which included licensing agreements with various 
third parties and expert analysis thereof, ``failed to provide the 
means for determining a reasonable rate for the PSS, other than, 
perhaps to indicate the extreme ends of the range of reasonable 
rates.'' Final Determination at 20. This statement appears to 
contradict somewhat the CRJs' earlier conclusion, described above, 
that the parties had failed to establish any zone of reasonableness 
whatsoever. What is clear, however, is that in applying the Sec.  
801(b)(1) factors, the CRJs did not consider a range of 2.6% to 15%, 
or any other range of possible rates, but instead assessed only the 
singular rate of 7.5% under each of the four statutory factors. See 
Id. at 20-29.
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    This approach stands in contrast to the CRJs' methodology in the 
previous PSS SDARS proceeding (``PSS SDARS I''), as well as in the 
SDARS portion of the instant proceeding, pursuant to which the CRJs 
applied the statutory factors to a range of potentially applicable 
rates determined to lie within the ``zone of reasonableness'' in order 
to ascertain which rates among those considered should be adopted. See 
73 FR 4080, 4094-98, Jan. 24, 2008 (identifying 2.35% to 13% as the 
zone of reasonableness and applying the statutory factors to adopt 
rates within that zone); Final Determination at 49-62 (analyzing SDARS 
rates within a ``zone of reasonableness'').\4\ As this process has been 
explained by the Court of Appeals for the D.C. Circuit, `` `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 v. Librarian of Congress, 608 F.3d 861, 865 (D.C. Cir. 
2010) (alterations in original).\5\
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    \4\ In its motion for rehearing, SoundExchange took issue with 
the way in which the CRJs defined the zone of reasonable rates for 
SDARS, as the Final Determination appears to suggest two possible 
ranges. Compare Final Determination at 48-49 (suggesting zone was 7% 
to 22.32%), with Final Determination at 61 (suggesting 12%-13% as 
the top of the zone of reasonableness). In rejecting SoundExchange's 
motion, the CRJs stated that ``the Judges determined that the zone 
of reasonableness had a floor of 7% * * * and an upper bound `that 
can be no more than 22.32%.''' Order Denying Motions for Rehearing 
at 3. The rates established by the CRJs for SDARS after considering 
the statutory factors fell within both possible zones. Final 
Determination at 68.
    \5\ The Register does not mean to suggest that there is only one 
conceivable approach to satisfy the statutory criteria, but merely 
to point out an established methodology for testing potential rates 
against the section 801(b)(1) factors. Cf. Mechanical and Digital 
Phonorecord Rate Determination Proceeding, 74 FR 4510, 4522-26, Jan. 
26, 2009 (considering specific penny rates for the reproduction and 
distribution of musical works under section 801(b)(1) and finding 
that such rates satisfied all four factors without any need for 
adjustment).
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    Here, instead of analyzing a range of potentially acceptable rates 
for PSS under the section 801(b)(1) factors, the CRJs instead chose to 
apply the four statutory objectives to only the existing statutory rate 
of 7.5%. In the case of the first section 801(b) factor--maximizing the 
availability of creative works--the CRJs determined that ``the policy 
goal of maximizing creative works to the public is reasonably reflected 
in the current rate and, therefore, no adjustment is necessary.'' Final 
Determination at 22. With respect to the second factor, however--
affording fair return/fair income to copyright owners and users--the 
CRJs concluded, in light of a prospective increase in Music Choice's 
usage of sound recordings, that ``a 1% upward adjustment of the 
benchmark (from 7.5% to 8.5% of Gross Revenues), phased in during the 
early part of the licensing period, is appropriate to serve the policy 
of fair return/fair income.'' Id. at 25. Turning to the third factor--
the relative roles of copyright owners and users--the CRJs reverted to 
the 7.5% rate, opining that ``[u]pon careful weighing of the evidence * 
* * no adjustment [to the current 7.5% rate] is warranted.'' Id. at 27. 
With respect to the fourth factor--minimizing disruptive impact--``the 
Judges [were] not persuaded by the record testimony or the arguments of 
the parties that the current PSS rate [of 7.5%] is disruptive to a 
degree that would warrant an adjustment, either up or down.'' Id. at 
29.
    In sum, the CRJs' analysis yielded conflicting results. An upward 
adjustment to the current 7.5% rate was found to be warranted under 
factor two, while factors one, three and four indicated that the rate 
should remain the same. Following this mixed review of the 7.5% rate 
under the statutory factors, the CRJs--without any explanation of how 
these disparate results might be reconciled--chose to adopt a ``phased-
in'' rate structure starting at 8.0% in 2013, and increasing to 8.5% 
for the years 2014 through 2017. Id.\6\
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    \6\ The phase-in was designed to ``moderate any potential 
negative impact the rate increase might have on the PSS.'' Final 
Determination at 29.
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    On March 15, 2013, the Copyright Office issued a Notice of Review 
for Legal Error in Docket No. 2011-1 CRB (``Notice''). In the Notice, 
the Office sought comments, inter alia, on whether the PSS rates in the 
final determination ``were properly evaluated under each of the four 
statutory objectives as required by 17 U.S.C. 801(b)(1).'' Notice at 2; 
17 U.S.C. 802(f)(l)(D) (in conducting review for legal error, Register 
is to take into account the views of the participants).\7\
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    \7\ The Register's Notice posed additional questions to the 
participants. With regard to those additional questions, the 
Register has closed her review for legal error without reaching any 
conclusions. No inferences or precedential value shall be drawn from 
the Register's decision to not to express any conclusions on those 
questions.
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    The Office received responses to this question from the two 
interested parties, Music Choice and SoundExchange.\8\ In its comments, 
Music Choice asserted that because the CRJs had erroneously selected 
7.5% from the PSS SDARS I determination as the benchmark rate for their 
consideration, the evaluation of the four policy objectives based on 
this

[[Page 22915]]

selection was also necessarily erroneous. Letter from Paul M. Fakler to 
Office of the General Counsel at 12 (Mar. 22, 2013). Music Choice 
observed that ``[i]n taking this approach, the Judges departed from 
longstanding precedent, in which a range of reasonable rates is 
established and then a rate is selected from within that range by 
balancing the four policy objectives * * *.'' Id. (citing Librarian's 
PSS Determination, 63 FR 25394, 25405-06, May 8, 1998).
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    \8\ Sirius XM responded to the Notice but did not weigh in on 
the PSS issue.
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    In similar fashion, SoundExchange argued that applying the 
statutory factors to the ``incorrect starting point'' of the 7.5% rate 
established in PSS SDARS I was ``utterly meaningless.'' Letter from 
Michael B. DeSanctis to Office of the General Counsel at 5 (Mar. 25, 
2013). As expressed by SoundExchange: ``Simply put, it is a clearly 
erroneous application of the section 801(b)(1) factors to apply them as 
adjustments to a rate that is not a marketplace rate and that is wholly 
unsupported by the record evidence.'' Id.\9\
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    \9\ Although in their comments the responding parties expressed 
significant concern about the CRJs' selection of the PSS statutory 
rate generated by PSS SDARS I as the relevant benchmark for PSS 
SDARS II, the Register does not mean to suggest any view on this 
aspect of the proceeding, or on the merits of the rates ultimately 
selected by the CRJs.
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Review of Copyright Royalty Judges' Determination

    Section 801(b)(1) provides that the rates adopted by the CRJs 
``shall be calculated to achieve'' the four statutory objectives. Under 
a plain reading of the statutory provision, the rates selected by the 
CRJs must be determined to satisfy each of the four criteria in order 
to fulfill the statutory purpose.
    As interpreted by the Court of Appeals for the District of Columbia 
Circuit, ``the natural reading of the language of section 801(b)(1) is 
that the royalty rate is to be `calculated to achieve the following 
objectives' in the sense of being designed or adapted for the 
achievement of those objectives * * *.'' Recording Indus. Ass'n. v. 
Copyright Royalty Tribunal, 662 F.2d 1, 8 n.19 (D.C. Cir. 1981). That 
court has further explained that ``[t]he statutory factors pull in 
opposing directions, and reconciliation of these objectives is 
committed to the Tribunal [now CRB] as part of its mandate to determine 
`reasonable' royalty rates.'' Id at 9.; see also Recording Indus. Ass'n 
v. Librarian of Congress, 608 F.3d at 864 (``When establishing terms 
and rates * * * the Copyright Act requires the Board to balance four 
general and sometimes conflicting policy objectives.''); Recording 
Indus. Ass'n v. Librarian of Congress, 176 F.3d 528, 533 (D.C. Cir. 
1999) (```[R]easonable rates' are those that are calculated with 
reference to the four statutory criteria.'').
    Accordingly, in prior rate proceedings governed by section 
801(b)(1), the CRJs (and their predecessor ratesetting bodies, the 
Copyright Royalty Tribunal and the copyright arbitration royalty 
panels) have assessed potentially applicable rates including the 
ultimately selected rates under each of the four statutory factors to 
ensure that the chosen rates would achieve the four policy objectives. 
See, e.g., Determination of Rates and Terms for Preexisting 
Subscription Services and Satellite Digital Audio Radio Services, 73 FR 
4094-4098, Jan. 24, 2008; Determination of Reasonable Rates and Terms 
for the Digital Performance of Sound Recordings, 63 FR 25405-09, May 8, 
1998; Adjustment of Royalty Payable Under Compulsory License for Making 
and Distributing Phonorecords 46 FR 10466, 10479-81, Feb. 3, 1981; 
Adjustment of the Royalty Rate for Coin-Operated Phonorecord Players, 
46 FR 884, 889, Jan. 5, 1981.
    In this case the CRJs did not do this.\10\ Rather, in the instant 
proceeding, the existing statutory rate of 7.5% for PSS was found by 
the CRJs to meet the factors set forth in Sec.  801(b)(1)(A), (C) and 
(D), with no adjustment warranted. But the CRJs also determined that 
the 7.5% rate should be adjusted upward for the period in question 
(initially to 8.0% and later to 8.5%) in light of the fair return/fair 
income factor set forth in section 801(b)(1)(B). Thus, the CRJs did not 
consider the ultimately selected rates of 8.0% and 8.5% against the 
policy goals of section 801(b)(1)(A), (C) or (D), or determine that the 
chosen rates in fact fulfill these three policy objectives.
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    \10\ Under the statutory framework, the CRJs are required to 
``act in accordance with regulations issued by the Copyright Royalty 
Judges and the Librarian of Congress, and on the basis of a written 
record, prior determinations and interpretations of the Copyright 
Royalty Tribunal, Librarian of Congress, the Register of Copyrights, 
copyright arbitration royalty panels (to the extent those 
determinations are not inconsistent with a decision of the Librarian 
of Congress or the Register of Copyrights), and the Copyright 
Royalty Judges (to the extent those determinations are not 
inconsistent with a decision of the Register of Copyrights that was 
timely delivered to the Copyright Royalty Judges pursuant to section 
802(f)(1)(A) or (B), or with a decision of the Register of 
Copyrights pursuant to section 802 (f)(1)(D)) * * * and decisions of 
the court of appeals * * * .'' 17 U.S.C. 803(a)(1).
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    Proper consideration of the four statutory criteria set forth in 
section 801(b)(1) lies at the heart of the process for establishing 
reasonable rates according to Congress' design. The Register therefore 
concludes that the CRJs' misinterpretation of section 801(b)(1), and 
consequent failure to evaluate the actual rates chosen for PSS under 
each of the section 801(b)(1) factors, constitutes a material error of 
substantive law.

CRJs' Continuing Jurisdiction

    The Register notes that the CRJs enjoy continuing jurisdiction to 
amend their final determination. Under section 803(c)(4), ``The 
Copyright Royalty Judges may issue an amendment to a written 
determination to correct any technical or clerical errors in the 
determination or to modify the terms, but not the rates, of royalty 
payments in response to unforeseen circumstances that would frustrate 
the proper implementation of such determination. Such amendment shall 
be set forth in a written addendum to the determination that shall be 
distributed to the participants of the proceeding and shall be 
published in the Federal Register.'' The Register encourages the CRJs 
to consider whether the error identified herein is amenable to 
correction pursuant to their continuing jurisdiction.

Conclusion

    Having reviewed the resolution by the Copyright Royalty Judges for 
legal error, the Register of Copyrights hereby concludes that the rates 
set for royalty payments for the use of sound recordings in 
transmissions made by PSS must be found to satisfy all of the section 
801(b)(1) factors. The CRJs' failure to determine that the selected 
rates fulfill each of the four statutory objectives constitutes legal 
error. This decision shall be binding as precedent upon the CRJs.

    Dated: April 9, 2013.
Maria A Pallante,
Register of Copyrights.
[FR Doc. 2013-09005 Filed 4-16-13; 8:45 am]
BILLING CODE 1410-30-P
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