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COPYRIGHT ARBITRATION ROYALTY PANEL

(CARP) STRUCTURE AND PROCESS

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JUNE 13, 2002

Serial No. 78

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary

(II)

COMMITTEE ON THE JUDICIARY

F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman

HENRY J. HYDE, Illinois

GEORGE W. GEKAS, Pennsylvania

HOWARD COBLE, North Carolina

LAMAR SMITH, Texas

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia

STEVE CHABOT, Ohio

BOB BARR, Georgia

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOHN N. HOSTETTLER, Indiana

MARK GREEN, Wisconsin

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

JEFF FLAKE, Arizona

MIKE PENCE, Indiana

J. RANDY FORBES, Virginia

JOHN CONYERS, JR., Michigan

BARNEY FRANK, Massachusetts

HOWARD L. BERMAN, California

RICK BOUCHER, Virginia

JERROLD NADLER, New York

ROBERT C. SCOTT, Virginia

MELVIN L. WATT, North Carolina

ZOE LOFGREN, California

SHEILA JACKSON LEE, Texas

MAXINE WATERS, California

MARTIN T. MEEHAN, Massachusetts

WILLIAM D. DELAHUNT, Massachusetts

ROBERT WEXLER, Florida

TAMMY BALDWIN, Wisconsin

ANTHONY D. WEINER, New York

ADAM B. SCHIFF, California

PHILIP G. KIKO, Chief of Staff-General Counsel

PERRY H. APELBAUM, Minority Chief Counsel

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

HOWARD COBLE, North Carolina, Chairman

HENRY J. HYDE, Illinois

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia, Vice Chair

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACHUS, Alabama

JOHN N. HOSTETTLER, Indiana

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

HOWARD L. BERMAN, California

JOHN CONYERS, JR., Michigan

RICK BOUCHER, Virginia

ZOE LOFGREN, California

WILLIAM D. DELAHUNT, Massachusetts

ROBERT WEXLER, Florida

MAXINE WATERS, California

MARTIN T. MEEHAN, Massachusetts

TAMMY BALDWIN, Wisconsin

ANTHONY D. WEINER, New York

BLAINE MERRITT, Chief Counsel

DEBRA ROSE, Counsel

CHRIS J. KATOPIS, Counsel

MELISSA L. MCDONALD, Full Committee Counsel

ALEC FRENCH, Minority Counsel

(III)

C O N T E N T S

JUNE 13, 2002

OPENING STATEMENT

Page

The Honorable Howard Coble, a Representative in Congress From the State

of North Carolina, and Chairman, Subcommittee on Courts, the Internet,

and Intellectual Property .................................................................................... 1

The Honorable Howard L. Berman, a Representative in Congress From the

State of California, and Ranking Member, Subcommittee on Courts, the

Internet, and Intellectual Property .................................................................... 2

The Honorable Rick Boucher, a Representative in Congress From the State

of Virginia ............................................................................................................. 3

The Honorable Chris Cannon, a Representative in Congress From the State

of Utah .................................................................................................................. 4

WITNESSES

Mr. Michael J. Remington, Attorney-at-Law and Partner, Drinker Biddle

& Reath, LLP

Oral Testimony ..................................................................................................... 7

Prepared Statement ............................................................................................. 8

Mr. Robert A. Garrett, Attorney-at-Law and Partner, Arnold & Porter

Oral Testimony ..................................................................................................... 15

Prepared Statement ............................................................................................. 16

Mr. R. Bruce Rich, Attorney-at-Law, Weil, Gotshal & Manges, LLP

Oral Testimony ..................................................................................................... 22

Prepared Statement ............................................................................................. 24

The Honorable Marybeth Peters, Register of Copyrights and Associate Librarian for Copyright Services, Copyright Office of the United States, The

Library of Congress

Oral Testimony ..................................................................................................... 30

Prepared Statement ............................................................................................. 31

APPENDIX

STATEMENTS SUBMITTED FOR THE HEARING RECORD

The Honorable Howard Coble, a Representative in Congress From the State

of North Carolina, and Chairman, Subcommittee on Courts, the Internet,

and Intellectual Property .................................................................................... 49

The Honorable Howard L. Berman, a Representative in Congress From the

State of California, and Ranking Member, Subcommittee on Courts, the

Internet, and Intellectual Property .................................................................... 49

The Honorable John Conyers, Jr., a Representative in Congress From the

State of Michigan and Ranking Member, Committee on the Judiciary .......... 50

The Honorable Rick Boucher, a Representative in Congress From the State

of Virginia ............................................................................................................. 50

The Honorable Chris Cannon, a Representative in Congress From the State

of Utah .................................................................................................................. 52

The Honorable Darrell Issa, a Representative in Congress From the State

of California .......................................................................................................... 53

Statement by the Intercollegiate Broadcasting System ....................................... 55

Statement by Mr. David Mandelbrot, Vice President, Media and Entertainment, Yahoo! Inc. ................................................................................................. 133

Page

IV

MATERIAL SUBMITTED FOR THE HEARING RECORD

Letter from Mr. James C. May, Executive Vice President, Government Relations, National Association of Broadcasters ....................................................... 135

Letter from James J. Popham, Vice President, Statutory License Counsel

of the Motion Picture Association of America, Inc. (MPAA) ............................. 138

Ms. Hilary Rosen, Chairman & Chief Executive Officer of the Recording

Industry Association (RIAA) ............................................................................... 144

Letter from Mr. I Fred Koenigsberg, White & Case LLP and Mr. Marvin

L. Berenson, Senior Vice President & General Counsel at Broadcast Music

Inc. ......................................................................................................................... 154

Letter from Mr. Patrick Collins, Senior Vice President - Licensing, SESAC,

Inc.and Mr. John C Beiter, General Counsel for SESAC, Inc. Loeb & Loeb

LLP ........................................................................................................................ 163

Letter from Mr. Kevin Klose, President and Chief Executive Officer, on behalf

of National Public Radio, Inc. (NPR) and its member station licensees ......... 165

Letter from Mr. William S. Koenig, National Basketball Association, Mr.

Thomas J. Ostertag, Office of the Commissioner of Baseball, Mr. John

Tortora, National Hockey League, Mr. L. Jeffrey Pash, National Football

League, and Mr. Ritchie T. Thomas, counsel for National Collegiate Athletic

Association ............................................................................................................ 170

(1)

COPYRIGHT ARBITRATION ROYALTY PANEL

(CARP) STRUCTURE AND PROCESS

THURSDAY, JUNE 13, 2002

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COURTS, THE INTERNET,

AND INTELLECTUAL PROPERTY,

COMMITTEE ON THE JUDICIARY,

Washington, DC.

The Subcommittee met, pursuant to call, at 2:30 p.m., in Room

2141, Rayburn House Office Building, Hon. Howard Coble [Chairman of the Subcommittee] presiding.

Mr. COBLE. Good afternoon, ladies and gentlemen. The Subcommittee will come to order.

The Founding Fathers understood the importance of copyright to

our Nation. In keeping with this tradition, our Subcommittee has

always worked to support artists by ensuring that they receive fair

compensation for their creative endeavors. Our hearing today will

focus on an arcane but yet important component of the present system that reimburses copyright holders for their work.

By way of background, and as part of the 1976 Copyright Act

amendments, Congress acknowledged the need for Government to

oversee the royalty ratemaking and distribution process by creating

the Copyright Royalty Tribunal, or CRT as it became known. The

need for this entity was especially critical since the 76 amendments

also created 3 new compulsory licenses.

By 1993, Congress, the Copyright Office and ratemaking participants believed that greater efficiencies could be realized under a

different system, which led to the development of our present construct, the Copyright Arbitration Royalty Panel, known to many of

you all as CARP.

Unfortunately, it now appears that history is repeating itself as

the current structure and operation of the CARP system has generated great frustration among those parties required to participate

within its statutory confines. Although some critics have criticized

our efforts to develop a fair and efficient ratemaking and distribution process as disappointing, I am optimistic that we will ultimately prevail in our attempt to build a better copyright mousetrap.

We have an excellent panel of witnesses today who will doubtlessly add to our individual and collective understanding or misunderstanding, hopefully understanding, of the CARP system,

warts and all. I welcome all of you here today and thank them in

advance for sharing their thoughts.

2

Now, as a bit of background, as you all may well know, the arbiters handed down the CARP decision last February, February 21st,

I think. The Copyright Act, as you furthermore know, provides a

90-day period whereby the Copyright Office, which is a part of the

Library of Congress, can advise and counsel with the Librarian as

to his final decision of rejecting or accepting the CARP decision.

The Librarian, handed down his opinion, his rejection, last month,

the 21st or—21st of May, Marybeth tells me.

The Copyright Act furthermore provides an additional 30 days

during which time the Librarian is afforded the right to examine

his thoughts along with the Copyright Office and then submit his

final decision. So we expect to see that on or before 20 June.

[The prepared statement of Mr. Coble follows in the Appendix]

Mr. COBLE. Having said all that, and before I recognize the distinguished gentleman from California, you saw me hand him a

piece of birthday cake. The Chairman of the full Judiciary Committee is having his birthday today, so Mr. Sensenbrenner shared

a couple pieces with Howard and me, and I am sorry the rest of

you can’t have any. If you go back in the back room, there may be

some left.

But I am now pleased to recognize the distinguished gentleman

from California Mr. Berman.

Mr. BERMAN. Thank you, Mr. Chairman. He wins the lottery,

and I get a piece of birthday cake.

Anyhow, thank you very much for holding this hearing on the

Copyright Arbitration Royalty Panel. I am a strong supporter of

marketplace solutions to copyright royalty disputes. I think copyright owners have every economic incentive to capture additional

revenue by licensing their work, their works, and every right to

seek the highest royalties that the market will bear. If they are too

short-sighted to capitalize on opportunities for new revenue, or

they fail to act rationally, as economists would say, the marketplace will punish them. Furthermore, when copyright owners have

engaged in a competitive conduct, the antitrust laws have time

after time proven adequate to remedy this conduct.

Compulsory licenses in CARPs, on the other hand, have proven

to be imperfect, unwieldy, and costly licensing mechanisms at best.

I suspect that many CARP participants would have found a more—

far more satisfactory outcome—I am talking about licensees and

copyright owners—had they chosen to spend their money and effort

negotiating a reasonable settlement in the marketplace rather than

in a CARP.

Compulsory licenses tend to outlive their purpose, and they may

create marketplace dislocations rather than address them. For example, the cable compulsory license was created to help a struggling and entrepreneurial cable industry keep up with the broadcast industry. Today the cable license continues to exist in an era

where the cable industry is able to exercise market power at least

comparable to that of the relevant copyright owners.

While I do not have a fondness for compulsory licenses, I recognize that we must do our best to make the ones we do have work.

The CARP process was catapulted into national awareness this

year because of the controversy of Webcasting CARP. The outcome

of the Webcasting CARP has garnered much attention from the

3

press and public. And I know it is, as the Chairman says, under

consideration at the Copyright Office and with the Librarian of

Congress. What captured our attention about the Webcasting

CARP was not only the royalty rate it set, however, but the process

through which it occurred.

While many of the rating distributions determinations are the

subject of marked disagreement among the participants, the one

thing that even the strongest opponents agree upon is that the

CARP process has serious flaws and warrants improvement. The

expense is the biggest issue. Participants in a CARP bear not only

their own substantial legal fees, but also the cost of the CARP proceeding itself. This is often millions of dollars, sometimes much

more expensive than the royalty claim that the CARP is addressing. I believe Mr. Remington is going to speak particularly to the

situations in which a participant had to pay tens of thousands of

dollars for a CARP to determine the distribution of around $10 in

royalties.

In addition to the problems of cost, I know there are great concerns over the autonomy and independence of the arbitration body,

the burden that it places upon the Copyright Office, and the overall

fairness and consistency of the outcomes. Our witnesses are experienced participants in CARP proceedings and can speak to the problems they have encountered during CARP arbitration.

The issue of CARP performance reform is not new in our Subcommittee. In 1998, Chairman Coble introduced legislation to reform the methods through which the royalty rate is determined.

Ultimately there was not enough support to enact his reform proposals. Given today’s climate, however, I believe there is sufficient

impetus and sufficient interest to seriously consider changes to the

arbitration process, and I anticipate an active discussion today to

determine a model that most efficiently accomplishes the goals of

the CARP process without unduly burdening the participants.

Thank you, Mr. Chairman.

Mr. COBLE. Thank you, Mr. Berman.

Mr. COBLE. Normally I prefer opening statements to be restricted

to the Ranking Member and to me, but we have two gentlemen on

each side of the aisle who are very interested in this issue. And incidentally, folks, the small or the diminished attendance here today

on the part of the Subcommittee I don’t believe reflects their lack

of interest. It is the fact that the final bell rang, and there are no

more votes today, so they are probably going back to their respective districts.

But let me now recognize the distinguished gentleman from Virginia, Mr. Boucher for his opening statement.

Mr. BOUCHER. Mr. Chairman, thank you very much. I appreciate

your indulgence as Mr. Cannon and I contribute to the conversation here in making open statements. I also want to thank you, Mr.

Chairman, for a hearing on a very timely subject.

The CARP process, in my opinion, is badly broken. It should be

replaced with a more efficient, more affordable and fairer system.

In my view, the functions of the CARP should be transferred to a

United States district court.

The problems which beset the CARP are many. While the CARP

process was designed to produce a streamlined procedure, the lack

4

of appropriate discovery mechanisms has prolonged the proceedings, achieving the opposite of what was designed.

The process is also too expensive. It is beyond the ability of many

interested parties to afford. Having private parties pay the fees of

the arbitrator is manifestly unjust to the financially less fortunate

and to the nonprofit entities that have a very large interest in the

proceedings of the CARP.

No body of expertise is developed by the arbitrators that then

could be applied to subsequent proceedings. Starting with a new

arbitrator panel each time will lead to inconsistent judgments and

a constant process of reinventing the wheel, and the standards

which are applied are demonstrably inadequate. In the recent

Webcasting decision, the concept of fairness of the payment was totally absent from the deliberation. Fairness is the standard in

other proceedings. Standard, for example, is fundamental to—fairness is fundamental to the standard under section 801 for royalty

payments for digital music services other than Webcasting. Fairness is also at the heart of the standard under section 119 for royalties that are paid by cable and satellite companies to terrestrial

broadcasters for the rebroadcast of terrestrial broadcast signals.

But fairness is not an element of the standard under section 114

applicable to Webcasters.

However, we address the procedural problems, and as I have said

earlier, I think vetting these rate-setting functions in a U.S. district court is the best approach. We also need to insert fairness of

the payment as the governing standard under section 114. We

must avoid a repeat of the rules like the most recent one through

which a one-size-fits-all approach was adopted, where small

Webcasters that measure their royalties in the tens of thousands

of dollars annually were saddled with royalty fees in the range of

hundreds of thousands of dollars annually. A fairness standard

would have prevented that ruling that threatens to put the young

and the small companies out of business.

Changes must be made, and I welcome this first hearing of our

Subcommittee as we explore the problem, as we hear from a panel

of distinguished witnesses who I want to join with the Chairman

and Ranking Member in welcoming here today and as we consider

this.

Thank you, Mr. Chairman.

Mr. COBLE. I thank the gentleman.

Mr. COBLE. I am pleased now to recognize the distinguished gentleman from Utah, Mr. Cannon for 5 minutes.

Mr. CANNON. I thank the Chairman. I have been sitting here

wondering if the average IQ has gone up or down because some

people left when they could after the last vote earlier today.

I thank you for calling this important hearing on the structural

process of CARP, our royalty-setting panels. I will acknowledge

that I was one of the many Members of the Congress who had concerns about the result created by the latest CARP panel for

Webcasters.

I would like to remark for a moment on the governing standard

by which the CARP determines the royalty rate. In addition to considering CARP structure and procedures, this Committee must also

consider why there are separate rate-setting standards for the

5

sound recording CARPs, for the Webcasters and the satellite TV

CARPs, and all other CARPs including the sound recording CARPs

for industries other than Webcasting.

In particular the satellite TV and all other CARPs have standards that require rates based on fairness, fair market value and

balancing the interest of the participants. The Webcasting CARP

has only the willing buyer/willing seller language, which suggests

that there is a functioning market that results in a fair price. However, if the Congress and this Committee thought the market was

functioning fairly in the context of any compulsory licenses, there

would not be any compulsory licenses as they are needed only

when a market is dysfunctional or inherently one-sided, which this

one clearly is.

Particularly with the nascent industry negotiating against powerful collectives representing content owners such as RIAA, ASCAP

and BMI, there is no leverage on the side of the Webcasters, and

in that case the willing buyer/willing seller standard seems to require the CARP to ratify the results of a single-seller marketplace

that is powered by an industry collective.

I mentioned my concern earlier over the recent CARP rate announced for Webcasters which has been set aside for additional review by Mr. Billington, the Librarian of Congress. It is clear to me

the purpose of Congress in putting in place the compulsory license

for Webcasters in the DMCA was to promote a nascent online industry up to the point it could flourish and add real diversity to

the way the consumers get content delivered. But if the mechanism

we have established sets rates that would be detrimental to that

goal, do we have a responsibility to reexamine the results? I think

the answer is yes when Congress’s expressed intent is violated.

Such actions are not unprecedented. In fact, we did as much fairly

recently when we deemed that the CARP for satellite broadcasting

set a rate that was too high for satellite television distributors and

took actions to overturn the rate.

I know this will be unpopular with some in this room: There

ought to be an acknowledgment today that whatever structure or

process which we have for CARPs now or in the future, if the results produced are expressly against the intent of Congress and

this Committee in establishing a compulsory license in the first

place, then this Committee and Congress have a right and a duty

to consider actions that might overturn such results.

I thank the Chairman and look forward to hearing the witnesses

discuss how we might improve the CARP process and structure so

as to get results that are more consistent with Congress’s goals and

stated intent. Thank you.

Mr. COBLE. I failed to mention this earlier, folks, but I want to

make this clear. It is not my intent for the purpose of this hearing

to influence the Copyright Office or the Librarian in their deliberations regarding the Webcasting CARP or for that matter to reverse

decisions on previous CARPs. Rather, it is my hope that the Subcommittee is simply trying to determine if the current structure

and performance of CARPs are fair and sound, and if not, what

changes or amendments should be forthcoming.

6

You all bear with me each time I do this. I apologize for the

lengthy introductions, but for the benefit of the uninformed in who

don’t know the backgrounds of our witnesses, I think you need to.

Our first witness is Michael J. Remington, who is a partner in

the law firm of Drinker, Biddle & Reath, where he specializes in

intellectual property law, tort reform, government relations and

lobbying. Prior to entering private practice, Mr. Remington held

high-level positions in the three branches of the Federal Government. Most impressively, for a total of 13 years he was chief counsel to our Subcommittee, most impressively to us. We guard this

very jealously, Mike, as you know.

In the judicial branch Mr. Remington served as a law clerk to the

U.S. District Judge John W. Reynolds and Deputy Legislative Affairs Officer to the Judicial Conference of the United States under

Chief Justice Warren Burger. In the executive branch he was a

prosecutor in the Criminal Division of the U.S. Department of Justice, where he specialized in criminal appeals.

A former Fulbright scholar in Paris, and a Peace Corps volunteer

in Africa, Mr. Remington is a graduate of the University of Wisconsin, where he received his law degree in 1973 and was admitted

to practice in the State of Wisconsin and the District of Columbia.

Our next witness is Mr. Robert Garrett, who is a partner in the

law firm of Arnold & Porter. Mr. Garrett has focused on intellectual property and telecommunications matters since joining Arnold

& Porter in 1977. He has practiced extensively before the Federal

Communications Commission, the Copyright Office, the Copyright

Royalty Tribunal, the Copyright Arbitration Royalty Panels and

the Federal courts. He has represented sports leagues, the recording industry, municipal and foreign governments, programming

producers and networks, and others in litigation, arbitration and

administrative proceedings.

Prior to joining Arnold & Porter, Mr. Garrett served as a law

clerk to Justice John Paul Stevens, who was then a judge of the

U.S. Court of Appeals for the Seventh Circuit, and as an assistant

to the General Counsel Office of the Secretary of the Army.

Mr. Garrett earned his J.D. degree from Northwestern University and his B.A. From Northwestern. Mr. Garrett is admitted to

practice in the States of Illinois and the District of Columbia.

Our next witness is Mr. R. Bruce Rich, who is with the law form

of Weil, Gotschal & Manges. He is a nationally recognized expert

in intellectual property law, concentrating on issues pertaining to

communications, publishing, and cable and commercial broadcasting.

Mr. Rich earned his J.D. From the University of Pennsylvania

and is BA magna cum laude from Dartmouth College. Mr. Rich is

adjunct professor at New York law school’s Media Law Institute.

Our final witness today is the Honorable Marybeth Peters, who

is the Register of Copyrights for the United States. Marybeth has

served as Acting General Counsel of Copyright Office and as chief

of both the Examining and Information and Reference Divisions.

She has served as a consultant on copyright law to the World Intellectual Property Organization and authored the General Guide to

the Copyright Act of 1976.

7

Ms. Peters received her undergraduate degree from Rhode Island

College and her law degree with honors from the George Washington University Center. She is a member of the bar of the District of Columbia.

Good to have all of you with us, lady and gentlemen. We have

written statements from each of you, and I ask at this time unanimous consent to submit them into the record in their entirety.

Now, Marybeth has appeared before us several times, and, Mike,

you are familiar with the rule. Folks, as we have previously requested, if you could confine your oral statement to 5 minutes, we

don’t want to muzzle anyone, but in the interest of time, because

we may have a second round of questioning, when you see the red

light illuminate brightly into your face, you will know that your 5

minutes have expired. You will not be keel-hauled at that point,

but you should wrap up shortly.

Mike, why don’t we start with you.

STATEMENT OF MICHAEL J. REMINGTON, ATTORNEY-AT-LAW

AND PARTNER, DRINKER BIDDLE & REATH, LLP

Mr. REMINGTON. Thank you, Mr. Chairman.

Mr. Chairman, Mr. Ranking Minority Member, Members of the

Subcommittee, I am grateful for the opportunity to testify before

you about the subject of CARP structure and process.

Mr. Chairman, there is no greater privilege and prestige than

having worked for this Subcommittee. Last night in preparing for

this hearing, I was reviewing some past Subcommittee hearings. I

read the printed record for a May 1, 1985, hearing on the CRT and

the Copyright Office. Mr. Chairman, you and Mr. Berman and Mr.

Boucher were Members of the Subcommittee at that time. Mr. Kastenmeier set the tone for the hearing, ‘‘I have little doubt that the

tribunal is in dire need of reform. The Subcommittee has had a

classic case of a broken agency on its hands. I do not know whether

the agency is broken beyond repair. I certainly hope not.’’ History

does indeed repeat itself, as you stated, Mr. Chairman, and as was

stated by Mr. Boucher.

I appear on my own behalf as a member of the law firm of Drinker Biddle & Reath. I am authorized to state that my views comport

with my principal client, BMI, for which I serve as counsel. This

Committee is aware that BMI is a performing right organization

representing hundreds of thousands of songwriters, composers and

music publishers in the licensing of the public performing right in

their musical works.

I am experienced in and familiar with the CARP process and

structure. I am also familiar with the CARP’s predecessor, the

CRT. It is my position and that of BMI that conditions and circumstances relating to the CARP structure and process indicate a

clear need for congressional action. Any legislative reform should

minimally incorporate first a structure to promote the stability and

predictability of results; two, procedures for encouraging settlement

and a mechanism for streamlining the resolution of small claims;

and three, cost-reduction measures.

First, how to create a structure to promote stability and predictability of results is a difficult problem. Tough choices must be

made, and constitutional questions about the location, what branch

8

of Government, for example, of any new structure must be considered. Any reform should eliminate the ad hoc nature of the current

process. I prefer the option of a permanent panel of salaried administrative law judges supported by a professional staff, but would

certainly not object to a return of the CRT model. There would be

no appeal to the Librarian of Congress. A direct appeal to the D.C.

Circuit would be permitted.

Second, Congress should enact a mechanism for streamlining the

resolution of small claims. BMI and other music claimants have experienced three such proceedings, two of which I will mention, and

Mr. Berman alluded to these in his opening remarks. In the 1992

through 1994 DART distribution proceedings, two pro se individuals were awarded $11.03 with arbitrator costs of $12,000. In the

1995 through 1998 distribution proceeding, which resulted in a

total award of $6.06 to the same two individuals, arbitrator costs

were in excess of $21,000; that is almost 3,000 times the amount

in controversy. When transaction costs repetitively so greatly exceed the amount of controversy, the CARP system is not an effective dispute resolution mechanism.

As regard to small claims, the Committee should consider three

amendments. Specifically you should consider a uniform filing fee

analogous to the fee for Federal civil action for all claimants

amounts; two, an offer of judgment mechanism analogous to rule

68 of the Federal Rules of Civil Procedure; and three, the elimination of oral hearings.

Third, irrespective of whether Congress legislates these reforms,

further cost-reduction measures should be adopted. Congress

should require the Copyright Office or any new entity to report

cost-deduction information on an annual basis. Moreover, the Office

should be forced to cap by regulation the billing rates of the arbitrators if you opt for that system, because hourly rates combined

with the number of hours worked could still be too costly. The office should also be empowered to cap on a case-by-case basis the

cost of the entire proceeding.

In my written statement I suggested several administrative improvements that would result in further cost reductions.

In conclusion, despite initial optimism about the elimination of

the CRT in 1993 and its replacement by the ad hoc CARPs, the

new process needs legislative reform. Two former Members of this

Subcommittee, both of whom became judges, the Honorable

Charles Wiggins and the Honorable George Danielson, often sounded the refrain, and I am sure many of you sound the same refrain,

‘‘if it ain’t broke, don’t fix it.’’ I am sure that both Judge Wiggins

and Judge Danielson, and I hope the Members on the dais, would

agree that the copyright royalty system is broken.

Mr. Chairman, Members of the Subcommittee, I and my client,

BMI, and indeed a larger group of copyright owners look forward

to working with you on the reform process. Thank you.

Mr. COBLE. Thank you.

[The prepared statement of Mr. Remington follows:]

PREPARED STATEMENT OF MICHAEL J. REMINGTON

Mr. Chairman, Mr. Ranking Minority Member, and Members of the Subcommittee, I appreciate the opportunity to testify before you on the important subject of ‘‘the Copyright Arbitration Royalty Panel (‘CARP’) structure and process.’’

9

The functioning of all institutions of government, including the Copyright Office (the

‘‘Office’’) and the Library of Congress, is critically important. The fact that a governmental operation is funded through user-fees or delegates functions to non-governmental individuals, such as private arbitrators, does not signify a decreased need

for legislative oversight. Vigorous program oversight is every bit as important as institutional, agency oversight.

On April 12, 2002, Mr. Chairman, you wrote a letter to interested parties (including myself) requesting thoughts and opinions about the CARP structure process. As

a base-line starting point for examination, you further requested a review of a Report of the Register of Copyrights on options to improve the process. See Options

to Improve Copyright Royalty Rate Setting and Distribution Decision-Making, A Report of the Register of Copyrights (February 23, 1998) (‘‘Register’s Report’’). You,

however, specified that a Register’s Report is only a template and that comments

need not be restricted to the Report. My statement follows the approach you described in your letter.

I appear on my own behalf but I am also authorized to state that my views comport with those of Broadcast Music, Inc. (‘‘BMI’’), for which I serve as Washington,

D.C. counsel. In my capacity as an attorney representing BMI, which commenced

in 1994, I am experienced in and familiar with the CARP structure and process. I

am also familiar with the CARP’s predecessor, the Copyright Royalty Tribunal

(‘‘CRT’’).

From 1978 to the present, the U.S. performing right organizations (BMI, the

American Society of Composers, Authors and Publishers (‘‘ASCAP’’) and SESAC,

Inc. (‘‘SESAC’’) [hereinafter ‘‘PROs’’]) have been active participants in rate and distribution proceedings, first before the CRT and then the ad hoc CARP system that

is utilized today. Annually, in the past, the PROs have participated as claimants

to cable, satellite and DART royalty funds and, whenever necessary, participate in

distribution proceedings. In the past, they have participated in rate-setting proceedings for cable, satellite, non-commercial educational broadcasting, and jukebox

royalties. While the PROs have a successful history of settling compulsory license

matters prior to litigation, they have occasionally been obliged to litigate distribution and rate controversies. The PROs have experienced three recent CARP royaltydistribution controversies, two in DART and one in cable (within the music category) regarding individual claimants, one section 118 rate-adjustment proceeding

between BMI and ASCAP, acting individually, and the public broadcasting industry

(the first after twenty years of successful settlements), and another rate-adjustment

proceeding between copyright owners and satellite carriers.

For the record, I was a counsel to this Subcommittee for nearly thirteen years.

I served as Counsel from 1977 to 1981, Chief Counsel from 1983 until 1991 and Special Counsel from 1991 to 1992. I also previously served as a prosecutor (in the Attorney General’s Honors Program) in the U.S. Department of Justice and as Deputy

Legislative Affairs Officer in the Administrative Office of the U.S. Courts. I left the

committee staff in early 1992 to become Director of the National Commission on Judicial Discipline and Removal (‘‘National Commission’’) where I served for 18

months; I recently testified before the Subcommittee on ‘‘the operations of federal

judicial misconduct and recusal statutes.’’ Currently, I am a partner in the law firm

of Drinker Biddle & Reath LLP where I am the founding chair of the firm’s intellectual property group. I am also an adjunct faculty member at two local-area law

schools: Catholic University’s Columbus School of Law (where I teach legislation)

and George Mason University School of Law (where I teach copyright). Except for

BMI’s interests, my firm has no other client interests in the matters before the Subcommittee this morning.

As an alumnus of this Subcommittee, I follow its activities very closely. Mr. Chairman, and Mr. Ranking Minority Member, your captaincy of the Subcommittee has

been sterling, as has been the leadership of and commitment to vigorous oversight

by Chairman Sensenbrenner and the full Committee’s Ranking Minority Member,

Mr. Conyers. I would be remiss if I did not commend your able staffs.

I. BACKGROUND

Throughout its history, my client, BMI, has participated willingly in facilitating

congressional oversight, recognizing that Congress needs to monitor not only how

particular copyright laws are being implemented but how government programs are

being administered as well. Effective oversight is very useful for government officials responsible for administering programs (such as the Register of Copyrights) because it gives them an opportunity to explain and justify their decisions and priorities; it also gives them the chance to hear the views, including criticisms, of the

10

public and congressional committees, which control budgets and can rewrite legislation.

I am honored to sit at the witness table with the Register of Copyrights, Marybeth

Peters. I know she agrees with the importance of oversight. As we shall see, she

and her competent and committed lawyers and staff in the General Counsel’s office

have a difficult task administering a flawed statute. Furthermore, the role of the

Office and that of the CARPs, and the Librarian have in recent years become increasingly more difficult. Congress has created new compulsory licenses in complicated and complex areas, delegating issues of first impression to the Office and

the CARPs. As manifested in the recent webcasting proceeding, the responsibility

of an initial rate-setting can be much more onerous than a rate adjustment of a previously-established rate.

It is my position that conditions and circumstances relating to the CARP structure and process indicate the need for legislative action. A mere oversight hearing

will identify problems, but not resolve them.

Some history is in order. In 1993, Congress replaced the CRT, an independent

agency with Presidential-appointed commissioners situated within the legislative

branch that was created in the Copyright Revision Act of 1976, with ad hoc CARPs

within the Library of Congress. See the Copyright Royalty Tribunal Reform Act of

1993, Pub. L. No. 103–198, 107 Stat. 2304 (1993). Today, whenever there is a controversy on the distribution of compulsory copyright royalties or the adjustment of

copyright royalty rates, the Librarian is authorized to convene a three-person CARP.

Administrative responsibilities prior to the declaration of a controversy are assigned

to the Copyright Office. I believe that this is the first oversight hearing conducted

by the Committee specifically on the operations of the CARP structure and process.

In the legislative history that accompanies the Act, this Committee evidenced the

view that ‘‘ad hoc arbitration panels are better suited to handle the functions of the

Tribunal. . . . Testimony of witnesses before both Houses on the proposal supports

this conclusion.’’ H.R. Rep. No. 103–286, at 11 (1993). In light of clear statutory text

and consistent legislative history, one court found that the CARP system was created by Congress and implemented by the Office to facilitate ‘‘expeditious and informal settlement of claims at the administrative level and to discourage resort to formal, protracted and costly judicial processes of resolving disputes.’’ National Ass’n

of Broadcasters v. Librarian of Congress, 146 F. 3d 907, 920 (D.C. Cir. 1998).

Unfortunately, the CARP system has not fulfilled the policy promises of informal,

expeditious and inexpensive dispute resolution of royalty controversies. The Copyright Office itself, which sits at the vortex of the CARP system, recognizes that the

system has suffered from ‘‘major problems.’’ See Register’s Report at 11. In retrospect, it was probably an error for the Congress to have abolished the CRT rather

than modifying or altering it.

Few dispute that the CARP system has proved to be just the opposite: that is,

time-consuming, formal and very expensive. It has not promoted stability and predictability of results. The CARP system does not discourage resort to the costly, formal and protracted process. Settlements are often hard to achieve.

The system should be reformed by Congress, sooner rather than later. Key members of the legislative branch seem to agree. Mr. Chairman, in 1998, shortly after

issuance of the Register’s Report, you introduced legislation to replace the ad hoc

CARP system with a permanent Copyright Royalty Adjudication Board composed of

full-time chief administrative copyright judges, and such part-time administrative

copyright judges as the Librarian upon the recommendation of the Register, finds

necessary. See H.R. 3210, 105th Cong., 2d Sess. (1998). Companion legislation was

introduced in the Senate by Senators Hatch, Leahy, and Kohl. See S. 1720, 105th

Cong., 2d Sess. (1998). Mr. Chairman, on April 12, 2002, you took the further step

(described above) of writing a letter to interested parties soliciting views about the

CARP structure and process.

In my view, any legislative reforms should minimally incorporate: (1) a structure

to promote the stability and predictability of results; (2) procedures for encouraging

settlement of small claims and a mechanism for streamlining the resolution of small

claims; and (3) cost-reduction measures.

II. CONGRESS SHOULD CREATE A STRUCTURE TO PROMOTE THE STABILITY AND

PREDICTABILITY OF RESULTS.

The nature of ad hoc arbitration panels inevitably leads to a lack of stability in

decision-making and a decrease in the predictability of results, thereby eroding confidence in the process. What to do to reform the process is a difficult problem. Tough

choices must be made and constitutional questions about the location (what branch

of government) of any new structure must be considered. Any reform should elimiVerDate 11-MAY-2000 15:52 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\061302\80194.000 HJUD3 PsN: HJUD3
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nate the ad hoc nature of the process either through a standing cadre of administrative copyright judges on salary equipped with a professional staff, a return to the

CRT model (with Presidential appointments and advice and consent of the Senate),

or appointment of a permanent, salaried administrative copyright judge (with parttime, salaried colleagues) supported by a professional staff. Continuity among decision-makers and a certain degree of institutional memory are essential. As a general

proposition, decision-makers should have expertise (or the ability to acquire knowledge through staff) in applicable law, regulations, precedents and subject matter,

and in conducting adjudicatory proceedings.

I prefer a replacement of the CARP system. But if the current system is maintained, the pool of potential CARP members should be expanded. And if the pool

is expanded—particularly to include qualified non-lawyers—each party should be

permitted a specified number of peremptory challenges (to be determined on a caseby-case basis prior to selection) to proposed panel members as is standard practice

in other arbitral fora. Such a rule would reduce the potential for prejudice and continue to ensure that panels consist of qualified, impartial members.

The Register’s Report sets forth five options for reform. Notwithstanding whatever

option is selected by the Congress, the Register recommends that the CARP system

should include eleven features. See Register’s Report at 11–12. I agree with some

of these features, to wit:

• the statutory requirement that CARP panelists have arbitration experience

should be deleted;

• the word ‘‘adjudicator’’ can be substituted for ‘‘arbitrator’’ wherever mentioned

in the law;

• individuals not associated with an arbitration association, but who meet the

qualifications, should be permitted to put their own names into nomination;

• the Office should be statutorily authorized to cap, by regulation, the billing

rate of arbitrators; and

• authorize the assessment of CARP costs on any party that fails to negotiate

a settlement in good faith (akin to Rule 68, Federal Rules of Civil Procedure).

All of these items address the salutary goals of promoting stability, expeditious decision-making, and decreased costs. They, however, may not go far enough. For example, cost-caps on the billing rates of arbitrators would not, standing alone, cap the

overall costs of a proceeding. The Office’s authority to cap costs should be broadened

to cover the entire proceeding.

Three of the Register’s other recommended features are not objectionable:

• Extend the current time limit from 180 days to 270 days per proceeding;

• Extend the current time limit to review CARP decisions from 60 days to 90

days; and

• Provide by law a procedure to petition the CARP for reconsideration of its decision.

Nevertheless, careful heed should be taken to avoid the unintended consequences

of delaying expeditious decision-making and escalating costs.

Stated differently, a minimalist approach to CARP reform, even if the Register’s

features were implemented, would, in my opinion, still be doomed to failure. More

radical surgery is required. That radical surgery should remedy two structural problems in the current statute.

First, the Copyright Office is placed in the schizophrenic situation of being the

intake agency (a clerk of court, of sorts) and the appellate court (as advisor to the

Librarian) for CARP decisions. Such dual responsibility is extremely rare in the

United States and the Office clearly has struggled with balancing its two roles. For

example, in fear of tainting future appellate decisions, the Office often bucks threshold questions to a CARP, refusing to decide them at the stage of the process when

they should be decided. Congress should either eliminate the Office’s intake role or

remove its appellate responsibilities.

Second, in the U.S. justice system, minimal standards of due process dictate one

appeal of right, with a second discretionary appeal (as a safety check on the initial

appeal). This was the practice under the CRT’s statute, and it basically is the practice adopted by the caselaw of the D.C. Circuit (which is the appropriate circuit for

judicial review of copyright arbitration royalty appeals). After determining the appellate role of the Librarian of Congress (and the advisory role of the Copyright Office), this Committee should follow the justice-system standards that have been used

over the years for the U.S. magistrate, bankruptcy court, and Article I court systems.

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III. CONGRESS SHOULD ENACT PROCEDURES FOR ENCOURAGING SETTLEMENT OF SMALL

CLAIMS, AND A MECHANISM FOR STREAMLINING THE RESOLUTION OF SMALL CLAIMS.

The statutory mandate prescribing allocation of CARP costs in a ‘‘distribution proceeding in proportion to the royalty funds awarded to each party’’ has had the unfortunate effect of allowing those with small claims to inflate their claims and force

litigation at the expense of other parties. Abuses of the process have occurred and

the Office has consistently found that it lacks authority either to prevent these

abuses or to expedite decision-making. Arbitrator costs alone far exceed the amountin-controversy. For example;

• the costs of the arbitrators in the 1992–94 Digital Audio Recording Technology (‘DART’’) distribution proceeding, which resulted in an award of $11.03 to two individual claimants were more than $12,000 (more than one thousand

times the amount-in-controversy);

• the costs of the arbitrators in the 1995–98 DART distribution proceeding, which resulted in a total award of $6.06 to the same two individual claimants

($5.04 to one and $1.02 to the second) were in excess of $21,000 (almost three

thousand times the amount-in-controversy); and

• in the 1991 Cable Distribution Proceeding (Phase II), the arbitrators awarded

$63.74 to an individual claimant, yet the costs of the arbitrators were more

than five hundred times that amount.

To make it worse from a cost-perspective, all of these matters, after final disposition by the Librarian of Congress, were appealed to the U.S. Court of Appeals for

the District of Columbia. The appeal in the second matter was withdrawn; the appeals in the first and third matters necessitated the preparation of a record on appeal and the submission of briefs by the U.S. Department of Justice and the parties.

Both appeals were summarily denied. One went even farther because it was subjected to a petition for certiorari in the U.S. Supreme Court and a petition for rehearing before the Court. And, all three proceedings were ‘‘paper’’ proceedings before

the respective CARPs designed to reduce arbitrator costs. The PROs were not the

only institutional parties forced to bear these costs. Additionally, it should be noted

that said costs do not include outside attorneys’ fees, in-house attorneys’ fees and

staff time, Copyright Office cost deductions from the funds and costs to the U.S. Department of Justice. In the two DART proceedings, the PROs were part of a ‘‘settling party’’ team that also included the National Music Publishers’ Association, the

Songwriters Guild of America, the Gospel Music Coalition, and Copyright Management, Inc., with costs borne by their respective individual members and affiliates.

In the cable proceeding, the PROs acted together.

When transaction costs so greatly exceed the amount-in-controversy, the CARP

system is not an efficient and effective dispute-resolution device. In all three proceedings, the individuals rejected repeated attempts to settle for reasonable

amounts. Neither the Office nor the arbitrators paid more than lipservice to settlement—neither took an active role (similar to that performed by U.S. district court

judges or U.S. magistrate judges) to encourage settlements. Claimants with small

claims have been able to use existing CARP rules to prolong CARP proceedings and

derail settlements at virtually no cost to themselves, but at substantial cost to all

other interested parties. In these circumstances, it is abundantly clear that the

CARP system has not met the expectations of its congressional sponsors or the parties who are compelled to litigate their royalty distribution disputes within the confines of this system.

Several of the reforms (particularly those related to small claims) discussed in the

Register’s Report would foster the goal of settling claims at the administrative level,

minimizing costs and encouraging expeditious and efficient resolution of disputes.

To achieve these goals, statutory changes are necessary. Otherwise, the Register

would already have implemented the proposed changes as regulations.

The Committee should consider three amendments to the Copyright Act to cure

statutory defects and misuses of the rules, while at the same time giving due recognition to the rights of those with small, albeit valid, claims to participate in CARP

proceedings. The intent of these proposals is to create an incentive for all parties

to engage in meaningful settlement discussions prior to commencement of CARP

proceedings. The amendments are not designed to injure or threat unfairly small

claimants. Specifically, I propose that there be: (1) a uniform filing fee (analogous

to the filing fee for a federal civil action) for all claimants; (2) an offer of judgment

mechanism analogous to Rule 68 of the Federal Rules of Civil Procedure applicable

to small claims; and (3) the elimination of oral hearings in small claims proceedings.

A. Establishment of a Filing Fee. I propose that all parties in a copyright arbitration royalty distribution or rate proceeding pay a filing fee at the time of filing a

13

notice of intent to participate. The filing fee would be identical to that required for

all litigants filing civil actions in federal district courts (currently $150.00). See 28

U.S.C. § 1914. Because the filing fee would be pegged to a notice of intent to participate, a single fee would be paid for each notice filed. The Office now requires a single notice of intent for both Phase I and II proceedings with respect to cable and

satellite distributions; therefore, only one filing fee would be paid for each proceeding.

Establishment of a filing fee would ensure that all parties share a base-level burden of the costs of the proceeding. The filing fee would be paid before the commencement of a proceeding because such filing fee could very well exceed the ultimate

amount of any award, as it would have in the case of the DART and cable proceedings discussed above.

Moreover, payment of a filing fee—which would be added to the relevant fund or

subfund—could help defray the administrative costs incurred by the Office in connection with these proceedings. As stated above, the administrative costs of some

proceedings are disproportionately high compared with the funds in controversy. A

filing fee would result in a more reasonable relationship between administrative

costs and the amount of the funds in controversy.

Finally, payment of a reasonable filing fee by all parties who file a notice of intent

to participate in a royalty distribution or rate adjustment proceeding would discourage the filing of frivolous claims and create an incentive for all parties, regardless

of the size of their claims, to engage, early on, in meaningful settlement discussions.

This is particularly true with regard to those asserting small claims, who have little

or no incentive to engage in significant settlement discussions under the current

statute and CARP regulations. I would be happy to assist in the drafting process.

B. Offers of Judgment to Small Claimants. An offer of judgment procedure—similar to that found in Rule 68 of the Federal Rules of Civil Procedure—to encourage

settlements and to avoid protracted arbitration proceedings should be enacted. Such

a procedure would apply only in small claims matters where the amount-in-controversy is $15,000 or less (per annual fund) and where the costs of the arbitration

may well significantly exceed the amount-in-controversy.

Rule 68 has the force of statutory law, having been proposed by the U.S. Supreme

Court and permitted to go into effect by the Congress. Application of its concepts

to small claims in copyright arbitration distribution proceedings would encourage

the settlement of small claims, and would promote the imposition of sanctions in

instances of abuse. I would be pleased to assist in the drafting process.

C. Elimination of Oral Hearings in Small Claims Proceedings. Cost savings were

achieved in the three small claims proceedings mentioned above because they were

all adjudicated on the basis of paper (not oral) proceedings. But unnecessary costs

were incurred due to the current unwillingness of the Copyright Office (or lack of

authority therein) to grant motions to proceed on paper documents, deferring this

decision to an as yet unconstituted CARP where the motion is later subjected to oral

arguments. Cases involving small claims (defined statutorily) should automatically

be subjected to a paper proceeding. In matters where no genuine issues of material

fact exist, the Office should be statutorily authorized to make a summary judgment

decision based on facts not in dispute, applicable law and precedents, before the

CARP is empanelled.

IV. CONGRESS SHOULD ENACT OTHER COST-REDUCTION MEASURES.

Creation of a permanent structure with salaried government employees, along

with a small claims process, would inevitably save substantial costs in comparison

to the current CARP system with no decrease in the quality of decision-making. Irrespective of whether Congress legislates these reforms, further cost-reduction

measures can and should be adopted.

Under current law, the Library of Congress and the Office may deduct reasonable

costs from royalty fees deposited or collected. Such deductions are generally made

before royalties are distributed to any copyright claimants. See 17 U.S.C. § 802(h).

These deductions, which are significant, are not readily ascertainable by the public

or to the responsible appropriation and authorization committees in the legislative

branch. All that is known is that costs are paid by copyright owners. The fact that

no costs are at taxpayer expense does not signify the absence of a need for fiscal

accountability. As in the business world, the system would benefit from transparent,

sound and consistent accounting practices. Questions could be answered: Are inquiries posed to the Copyright Office by the general public deducted from royalty funds?

Are congressional inquiries? Are user costs increasing or decreasing? Does the Office

have a mechanism to prevent abuses on its time and resources? Let me make it

clear that there is no evidence of waste or abuse in the Office’s accounting practices.

14

However, if Congress required that the Office (or any new entity) report cost-deduction information on an annual basis to the House and Senate Judiciary Committees,

good government (including cost savings) would be served. Through your oversight

power, the House and Senate Judiciary Committees could then monitor the costs

being shouldered by authors and copyright owners. Without cost data, your ability

to assess the functioning of the CARP process is hobbled. Copyright owners should

know how costly is a system for which they pay. The administrative head of the

CARP process should know how important are fiscal responsibilities.

Moreover, as discussed above, to further reduce costs, the Office should be authorized to cap, by regulation, the billing rates of arbitrators. Currently, there is a wide

disparity in these rates. The Office has not allowed arbitrators to be stricken on the

basis of high-hourly rates. Authorization of a cap on rates, if responsibly implemented by the Office, could solve this problem. Because hourly rates (combined with

the number of hours worked) could still be too costly, the Office should also be empowered to cap on a case-by-case basis the costs of an entire proceeding.

V. ADMINISTRATIVE IMPROVEMENTS COULD BE IMPLEMENTED.

Several improvements could ordinarily be made to the CARP process though

amendments to Office rules and regulations. As a group for the past five years,

copyright owners have made numerous proposals to the Office that have not been

implemented. The Committee should either consider enactment of these proposals

as legislative changes or strongly encourage the Office to take immediate regulatory

action (within a designated time-period with a report back to the Congress):

A. Public Records. Contemporaneous notice of CARP decisions through publication

in the Federal Register is necessary. The Office has made laudable improvements

to its website; these improvements should be expanded to the CARP process.

B. Settlement Period. A formal settlement time-period (with adequate time and

notice to the parties of the names and addresses or other participants) before the

filing of written direct cases should be required.

C. Precedential Rulings. Rulings of the Librarian and the CARPs are to be accorded precedential effect in subsequent proceedings. The Office should establish a

repository readily available to the public electronically and at the Library of Congress, which collects all rulings of the Librarian and the CARPs.

D. Summary Judgment Authority. If there are no genuine issues of material fact

in dispute, the Office should be entitled to make a decision disposing of the matter

prior to an adjudication by a CARP.

A final word about judicial education. The Office should avail itself of judicial education programs that are provided to administrators and judges in the judicial

branch of government, and ALJs in the executive branch. Admittedly, it is rare for

legislative branch official to cross-fertilize with their counterparts in the other two

branches. But, I am confident that a letter from you, Mr. Chairman, to the Director

of the Federal Judicial Center, for example, would suffice to admit Copyright Office

officials to appropriate educational sessions at the Center.

CONCLUSION

Mr. Chairman and Mr. Ranking Member, I again commend you for your leadership on intellectual property issues, and copyright law in general, including the

process in which certain copyright royalties are distributed and royalty rates established. Despite initial optimism after the elimination of the CRT in 1993 and its replacement by the ad hoc CARPs, the new process has proven to be flawed and in

dire need of legislative improvements. Two former Members of this Subcommittee,

both of whom became judges (the Honorable Charles Wiggins and the Honorable

George Danielson) often sounded the refrain: ‘‘If it ain’t broke, don’t fix it.’’ I am

sure that both would conclude, after these hearings, that the CARP system is broken. In sum, Congress should:

• replace the ad hoc nature of the CARP process with a permanent panel of

salaried administrative law judges supported by a professional staff;

• create a small claims process;

• further reduce costs and add fiscal accountability to the process;

• promote various administrative improvements; and

• continue to exercise vigorous oversight.

I look forward to working with you on effectuating these improvements.

Mr. COBLE. Mr. Garrett.

15

STATEMENT OF ROBERT A. GARRETT, ATTORNEY-AT-LAW AND

PARTNER, ARNOLD & PORTER

Mr. GARRETT. Mr. Chairman, Members of the Subcommittee, let

me thank you for inviting me to testify this afternoon. It is an

honor to appear before you and the Subcommittee as well as to be

on a panel with the Register of Copyrights and my colleagues.

Let me summarize my statement with three points. First I believe that all parties here share common objectives, and they want

a system that produces consistent results, they want a system that

produces credible results, but I believe most importantly they also

want a system that produces results at an affordable cost. This is

a concern that everyone shares regardless of whether it is a copyright owner or a copyright user, a small party or a large party.

The existing system, I believe, is too costly. It is a system that

is not affordable for all parties. As you consider the different options and different alternatives before you, I ask that you put foremost in your consideration issues of cost, trying to make this process one that is more affordable, one that is less costly to all of the

participants.

Secondly, Mr. Chairman, you have wisely entitled these hearings

as CARP structure and process. I believe the terms ‘‘structure’’ and ‘‘process’’ encompass the principal issues that are before you. But

in my view, the most important issues here are those that relate

to structure and not to process, and the changes that should be

made here are changes that go to process and not to structure.

When these issues have arisen in the past, the primary focus has

been on structure and trying to determine which decisionmaking

body is the best and most suited for resolving copyright royalty allocations or copyright royalty ratemaking. The thought is that if

you simply get the right body, the right decisionmaking body, that

the problems are going to go away, and I don’t believe that that

is the case, Mr. Chairman. I believe that the problems here, particularly the problems of cost, are ones that relate more to process.

I believe that your specific focus here should be on trying to improve that process.

Thirdly, there are several different process issues that I believe

should be addressed. My written statement highlights two of them,

two that I consider to be the most important at least. These are

the issues that concern the system of evidentiary hearings as well

as discovery before the existing CARPs. I think without a doubt the

two principal cost concerns, the two principal costs of the current

system, are the evidentiary hearings and discovery. I believe that

one should either eliminate or severely restrict the scope of the evidentiary hearings. They are not necessary, they are very costly,

and I don’t think that they produce markedly different results from

a paper proceeding. It is frequently done by administrative agencies in the United States using a paper record, and I would recommend that example as well here.

With respect to discovery, I believe that that, too, should be

eliminated. We have a very different form of discovery in the CARP

proceedings, the hybrid form, and it is not the Federal Rules of

Civil Procedure type of discovery. It is a limited form of discovery,

which is nevertheless one that is very costly, one that breeds uncertainty, and I think that the results of the cases, the results of

16

the different proceedings before the CARPs, would not be materially different if one did eliminate discovery.

Let me just say in conclusion, Mr. Chairman, that there are a

number of difficult issues here. I believe that you have done exactly

the right thing by asking those who are affected by this process to

give their views. I know that my colleagues have views that some— that they probably share generally, and some have different views.

And I look forward to working with you and the Subcommittee in

resolving these different issues.

Mr. COBLE. Thank you, Mr. Garrett.

[The prepared statement of Mr. Garrett follows:]

PREPARED STATEMENT OF ROBERT ALAN GARRETT

Mr. Chairman and members of the Subcommittee, my name is Bob Garrett and

I am a partner in the law firm of Arnold & Porter in Washington, D.C. Thank you

for inviting me to testify as part of your oversight hearing on ‘‘The CARP (Copyright

Arbitration Royalty Panel) Structure and Process.’’ During the past twenty-five

years, I have represented professional and collegiate sports interests and the recording industry in several proceedings before CARPs and their predecessor, the Copyright Royalty Tribunal (‘‘CRT’’). However, I am not testifying today on behalf of

these clients. The views I express are my own and do not necessarily reflect the

views of any other party. I am here to offer my perspective, based upon my experience, concerning the CARP structure and process. Before I do so, I believe it is useful to discuss briefly (1) the nature and history of the CARP system; and (2) the

policy objectives that you may wish to consider in assessing that system.

1. NATURE AND HISTORY OF THE CARP SYSTEM

Twenty years ago, in November of 1982, the CRT issued a decision in which it

set the royalty rate that cable systems must pay when they retransmit certain copyrighted television programming. Ted Turner of Turner Broadcasting, a vocal critic

of the CRT and its rate decision, testified before Congress that ‘‘this CRT decision

puts us out of business’’ because the rate is too high; ‘‘they have knocked us out,

and I didn’t even go talk to them because I didn’t figure that they would put us

out.’’ Cable Copyright and Signal Carriage Act of 1982: Joint Hearing on H.R. 5949

Before the Comm. on Commerce, Science, and Transp. and the Comm. on the Judiciary, 97th Cong. 114 (1982). Senator Long of Louisiana interjected, ‘‘Please excuse

me, but who is this CRT?’’ Mr. Turner responded:

That is a good question. . . . I had never met anybody on it. It is a group. I

knew they existed, but I didn’t know they did anything. . . . [Then they released their decision] on my 44th birthday, 2 ° weeks ago, and I was in shock.

Id. at 114–15.

More recently, the question being asked is, ‘‘Who is this CARP?’’ The simple answer is that nine years ago, in the Copyright Royalty Tribunal Reform Act of 1993,

Congress chose to replace the CRT with a system that relies upon multiple ad hoc

panels of arbitrators called ‘‘CARPs’’—the acronym for ‘‘Copyright Arbitration Royalty Panels.’’ The purpose of CARPs is twofold: (1) to determine royalty rates and

terms for the use of copyrighted works pursuant to compulsory licenses in Sections

111, 112, 114, 115, 116, 118 and 119 of the Copyright Act; and (2) to allocate among

copyright owners compulsory licensing royalties collected pursuant to Sections 111,

116, 119 and 1003 of the Copyright Act. As you know, Mr. Chairman, these compulsory or ‘‘statutory’’ licensing provisions generally compel copyright owners to license

certain uses of their works to different parties who pay the prescribed royalty and

comply with other statutory and regulatory conditions.

Each CARP consists of three private attorneys who are nominated by professional

arbitration associations and appointed by the Librarian of Congress after consultation with the Register of Copyrights and input from the affected parties. A CARP

normally conducts a trial-like evidentiary hearing in which interested parties

present evidence and argument and cross-examine witnesses. These hearings can be

quite extensive; for example, the most recent CARP, that involving the royalty to

be paid by webcasters when they transmit sound recordings over the Internet, consumed 40 days of evidentiary hearings and generated almost 15,000 pages of transcript as well as thousands of additional pages of written testimony and exhibits.

Following the evidentiary hearings, the CARP issues a written report in which it

17

recommends, based upon the record before it and relevant precedent, a royalty rate

or royalty allocation. The Register of Copyrights reviews the CARP’s report and

makes a recommendation as to whether the Librarian of Congress should adopt or

should modify that report. If the Librarian rejects the CARP report in whole or in

part, he must reach his own decision with the advice of the Register. Parties may

seek judicial review of the Librarian’s decision in the U.S. Court of Appeals for the

District of Columbia Circuit. See generally 17 U.S.C. §§ 801 & 802.

As long as compulsory licenses exist, it will be necessary for either Congress or

some other body, like a CARP, to determine the amount of compulsory licensing royalties that copyright owners are entitled to receive. There is, of course, nothing

novel about this concept. The 1710 Statute of Anne—from which copyright law in

the United States is a direct descendant—authorized several different government

officials, including the Archbishop of Canterbury and the Lord Keeper of the Great

Seal, to resolve disputes over whether the cost of a particular book was ‘‘too high

and unreasonable’’ and to set prices that ‘‘according to the best of their judgments

. . . shall seem just and reasonable.’’ 8 Anne C. 19, § 4 (1710), reprinted in 8

Nimmer on Copyright, App. 7–7 to 7–9 (2002). Likewise, the Great State of North

Carolina, following the Articles of Confederation, empowered local courts to determine the price of copyrighted books, maps and charts—in cases where the author

or publisher ‘‘set an unreasonable price on the same, regard being had to the probable labour, expence, and risk of such author and publisher.’’ Laws of the State of

North Carolina, ch. 26, sec. II (1785), reprinted in 8 Nimmer on Copyright, App. 7– 33 (2002). See generally Korman & Koenigsberg, The First Proceeding Before the

Copyright Royalty Tribunal: ASCAP and the Public Broadcasters, 1 Comm. & the

Law 15, 17–18 (1979). The CARP system may thus be viewed as merely the most

current mechanism by which government-set prices replace market-set prices for the

right to use intellectual property in the United States.

2. POLICY OBJECTIVES

Over the years there has been considerable debate concerning the appropriate

structure and process for setting copyright royalty rates and allocating copyright

royalties. As discussed below, that debate has produced a number of different ideas

as to the most appropriate structure and process. It also has identified the principal

policy objectives that the affected parties believe should be achieved in determining

that structure and process. Briefly-stated, there are three such objectives—those

that relate to Cost, to Consistency and to Credibility:

• Cost—copyright owners and copyright users alike are understandably concerned about the costs of rate-setting and royalty allocation proceedings.

These costs can be quite substantial. They take the form of, among other

things, attorney fees, expert witness fees, consultant fees, arbitrator fees,

Copyright Office costs, out-of-pocket expenses and time lost from running

businesses and producing copyrighted works. These costs have the effect of

both decreasing the compulsory licensing royalties that copyright owners receive and increasing the amounts that copyright users must pay for the compulsory license—a result that is inherently antithetical to a principal purpose

of compulsory licensing, i.e., the reduction of transaction costs. The parties affected by compulsory licensing seek a system of ratemaking and royalty allocation that minimizes their costs as much as possible.

• Consistency—the parties also seek a system that fosters predictability and

continuity. It is generally accepted that voluntary settlements among affected

parties to royalty disputes are preferable to having those disputes resolved

through litigation and government intervention. Procedural and substantive

consistency are necessary to provide the parties with the greatest possible degree of certainty in assessing litigation risks and considering prospects for

settlement. Such consistency promotes settlement and reduces cost.

• Credibility—the parties also seek a system with a decision-making process

that they believe is legitimate; they want to feel that the decision-makers understand the issues involved in the cases being decided and that those cases

are decided in a timely and professional manner. The objective here is to ensure that the system is not only fair and reasonable, but that the affected

parties also perceive it as fair and reasonable.

While there may be general agreement as to the principal policy objectives, the

parties do not always agree on whether or to what extent particular structures or

procedures achieve those objectives. Moreover, it is not possible to achieve all these

objectives equally in determining the most appropriate structure and process of

copyright rate-setting and royalty allocation. When choosing among particular strucVerDate 11-MAY-2000 15:52 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\061302\80194.000 HJUD3 PsN: HJUD3
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tural and procedural alternatives, it may be necessary to make trade-offs. A particular procedure, such as requiring full-blown federal court discovery, may enhance

at least perceptions as to the credibility of the decision-making process. But that

procedure may also come at a financial cost and a time-delay that is unacceptable

to all or some of the parties. Each party, and ultimately the Copyright Office and

Congress, must prioritize the above objectives in assessing each of the relevant

structural and process options.

3. STRUCTURAL OPTIONS

When Parliament enacted the Statute of Anne in 1710, it apparently had a difficult time deciding who should be responsible for resolving disputes over the price

of copyrighted books. Accordingly, it gave that responsibility to several different persons. Individuals who thought the market price was too high could choose to seek

relief (1) in a judicial forum (from the Chancellor and the Lord Chief Justices); (2)

in an administrative or quasi-administrative forum (from the Lord Chief Baron of

the Exchequer, the Archbishop of Canterbury and the Lord Keeper of the Great Seal

of Britain); or (3) from private bodies with official sanction (Vice-Chancellors of the

Universities). See 8 Anne C. 19, § 4 (1710); Korman & Koenigsberg, supra at 18.

There also has been no shortage of ideas here in the United States as to the most

appropriate structure for setting compulsory licensing royalty rates and allocating

compulsory licensing royalties.

a. Proposals Leading to CRT Creation

The CRT had its origins in a 1969 Senate bill that comprehensively revised the

Copyright Act of 1909 and provided for various compulsory licenses. That bill entrusted royalty ratemaking and distribution responsibilities to a body it named the

‘‘Copyright Royalty Tribunal.’’ The Tribunal, as envisioned by the Senate bill, was

very different than the CRT that eventually emerged in the Copyright Act of 1976.

Under the Senate version, the Tribunal consisted of ad hoc arbitration panels created by the Register of Copyrights from lists of arbitrators supplied by the American

Arbitration Association or similar organizations—in short, a structure similar to the

current CARP system. The Senate ultimately approved this structure, along with

provisions that subjected Tribunal rate decisions to Congressional veto and limited

judicial review of Tribunal decisions to cases of corruption, fraud, partiality or other

prejudicial misconduct. See CRT Reform and Compulsory Licenses, 1985: Hearings

on H.R. 2752 and H.R. 2784 Before the Subcomm. on Courts, Civil Liberties, and

the Admin. of Justice of the House Comm. on the Judiciary, 99th Cong. 84–85

(1985) (Statement of Donald Curran, Associate Librarian of Congress and Acting

Register of Copyrights) (‘‘Curran Statement’’).

The House changed that structure, in part out of concerns over whether it was

constitutional for an employee in the Legislative Branch, the Register, to appoint

Tribunal members who perform executive branch functions. That concern was

heightened by the then recent decision in Buckley v. Valeo, 424 U.S. 1 (1976). There

the Supreme Court held that persons exercising executive branch functions must be

appointed in accordance with Article II, Section 2, Clause 2 of the Constitution,

which requires appointments by the President, the courts or ‘‘heads of departments.’’

The copyright revision bill that the House passed in 1976 established a permanent ‘‘Copyright Royalty Commission,’’ consisting of three members appointed by the

President for staggered terms of five years. The House bill also expanded judicial

review, and it eliminated the legislative veto of the Commission’s rate determinations. According to the House Report accompanying the copyright revision legislation, such determinations ‘‘were not appropriate subjects for regular review by Congress.’’ H. Rep. No. 94–1476 at 179 (1976).

The conferees generally acceded to the House version—except that they renamed

the Commission the ‘‘Copyright Royalty Tribunal;’’ and they expanded the number

of commissioners to five appointed by the President (and confirmed by the Senate)

for staggered seven-year terms. (The number of CRT commissioners was reduced to

three in 1990). The CRT became an independent agency in the legislative branch

that received administrative support from the Library of Congress but had its decisions reviewed directly by the federal court of appeals. See Conf. Rep. No. 94–1733

at 81–82 (1976).

b. Proposals Leading to CRT Abolition

Although Congress considered significantly different structures for royalty rate

setting and royalty allocation before creating the CRT in the 1976 Act, the affected

parties apparently paid little attention to this issue. Tom Brennan, the first CRT

Chairman (who also served as chief counsel to the Senate Subcommittee on Patents,

Trademarks and Copyrights during its consideration of that legislation) observed:

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Seldom has an entirely new agency of the federal government been created with

so little study, and such limited input and analysis by the private interests

most directly involved.

Brennan, The Copyright Royalty Tribunal—An American Perspective, 34 J. Copyright Soc’y 148 (1986). In the years following its creation, however, the CRT received

considerably more attention. Upset by a 1982 CRT rate decision, the cable industry

called for the abolition of the CRT. Certain CRT commissioners, as they were leaving the Tribunal, also called for its abolition. Concerns were expressed over whether

the workload required several full-time commissioners and whether political appointees, particularly those with no copyright or communications industry experience, were best qualified for making decisions as to copyright rate determinations

and royalty distributions.

During the 1980’s and early 1990’s Congress considered a host of different and

generally conflicting proposals as to the structure that should be established for royalty rate-setting and distribution. These proposals included the following—

• Eliminate the compulsory licenses and allow market negotiations, thereby obviating the need for any ratesetting and royalty allocation mechanism;

• Place the CRT in the Copyright Office;

• Transfer the CRT’s responsibilities to the Copyright Office;

• Place the CRT in the Department of Commerce and vest authority to appoint

Tribunal members in the Secretary of Commerce;

• Place the CRT in a regulatory agency such as the FCC or FTC, which would

assign fact-finding responsibilities to ALJs;

• Vest authority to appoint CRT members in a federal court;

• Reconstitute the CRT as an independent agency in the executive, legislative

or judicial branch;

• Reconstitute the CRT as a part-time commission of experts in communications or copyright law who oversee ad hoc arbitration panels;

• Transfer the CRT’s responsibilities to a federal court or to a newly created

copyright court, which could make use of special masters (similar to the

ASCAP and BMI rate courts);

• Adopt a system of private arbitration (similar to that in some European countries) where collective bargaining units would have the authority to bind all

affected parties, with judicial or administrative review or compulsory arbitration only where the bargaining units are unable to agree;

• Implement a 1981 GAO suggestion of making CRT membership part-time,

with Presidentially-appointed members meeting at the call of the Register of

Copyrights;

• Retain the CRT with only one full-time commissioner and two part-time commissioners who would utilize ALJs to conduct fact-finding and to render initial decisions;

• Set royalty rates in the law with an objective self-adjusting mechanism;

• Require private arbitration under the rules of the American Arbitration Association before arbitrators selected for a term of three years; and

• Transfer the CRT’s responsibilities to panels of ALJs, appointed for terms of

several years, that would operate within the Copyright Office.

In 1993 Congress concluded that there was insufficient work to justify a full-time

agency. See H.R. Rep. No. 103–286, at 9 (1993). It thus enacted the Copyright Royalty Tribunal Reform Act of 1993, which abolished the CRT and replaced it with

the CARP system. As discussed above, the CARP system is comparable to the one

that the Senate had originally approved during its consideration of the Copyright

Act of 1976. One major difference was that the 1993 law contemplated review of

CARP decisions by the Register and Librarian prior to judicial review, while the

Senate version, as also noted above, provided for legislative veto and limited judicial

review.

c. Proposals For CARP Reform

The debate over the proper structure for royalty rate-setting and distribution did

not end with the Copyright Royalty Tribunal Reform Act of 1993. In 1996 Senator

Hatch introduced a bill that would have replaced the CARPs with single ALJs in

a newly-created U.S. Intellectual Property Organization (‘‘USIPO’’). The USIPO

would have consisted of the Copyright Office and the Patent and Trademark Office.

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Under Senator Hatch’s bill, an ALJ’s decision could be appealed to the Commissioner of the USIPO and then to the U.S. Court of Appeals for the Federal Circuit.

In mid-1997 a CARP recommended a royalty rate that the satellite carrier industry considered too high. Accordingly, the satellite carriers urged Congress to reform

the CARP process. In early 1998 the Copyright Office presented Congress with five

options for doing so. Those options, which were comparable to some of the options

that had been discussed during the debates over CRT reform, were:

(1) Retain the CARPs but make certain improvements in the CARP system;

(2) Replace the CARPs with ALJs;

(3) Replace the CARPs with non-ALJ presiding judges; replace the CARPs with

a Copyright Royalty Adjudication Board (‘‘CRAB’’); and replace the CARPs

with a new, independent regulatory agency.

See U.S. Copyright Office, Options to Improve Copyright Royalty Rate Setting And

Distribution Decision-Making (Feb. 23, 1998) (‘‘1998 Register Report’’); Hearing Before the Subcomm. On Courts and Intellectual Property of the House Comm. on the

Judiciary, 105th Cong. 14 (1998) (Prepared Statement of Hon. Marybeth Peters,

Register of Copyrights) (‘‘1998 Register Statement’’).

The Register concluded that the CARP system (a) is too expensive because of the

high costs of the arbitrators; (b) lacks stability and predictability of results; and (c)

places a burden on the Copyright Office and the Library of Congress. 1998 Register

Report at ii. ‘‘Our experience with this system over the past few years,’’ said the

Register, ‘‘has persuaded us that it is burdensome, costly, and inefficient.’’ 1998 Register Statement at 14. The Register thus recommended that Congress replace the

CARPs with CRABs.

The CRAB approach was embodied in your bill, Mr. Chairman, HR 3210, which

you introduced on February 12, 1998; that bill was reported favorably by this Subcommittee on March 18, 1998. HR 3210 would have established a Copyright Royalty

Adjudication Board (‘‘CRAB’’) within the Copyright Office. The CRAB would consist

of one full-time chief administrative copyright judge (‘‘ACJ’’) and two to four parttime ACJs, all of whom would be appointed by the Librarian upon the recommendation of the Register. The chief ACJ, who would be appointed for a term of five years,

would be an attorney with experience in handling administrative hearings or court

trials and demonstrated knowledge of copyright law. The other ACJs, who would be

appointed for different terms of up to five years, would need expertise in the business and economics of industries affected by the CRAB.

Under HR 3210, the CRABs would conduct proceedings in accordance with rules

to be adopted by the Librarian upon the recommendation of the Register and in consultation with the CRAB. The final decisions of the CRAB would be subject to review by the U.S. Court of Appeals for the Federal Circuit, rather than (as is the

case with the CARPs) review by the Register, Librarian and U.S. Court of Appeals

for the District of Columbia Circuit. The Register, however, would have the right

to submit her position to the CRAB on any matter before the CRAB, as well as to

seek reconsideration of any initial decision rendered by the CRAB.

4. PROCESS PROPOSALS

As the above suggests, there have been a number of thoughtful and creative proposals over the years concerning the most appropriate structure for copyright royalty ratemaking and allocation. Each of the proposed structures has its advantages

and disadvantages, as well as its supporters and detractors. While reasonable arguments can be made for choosing one structure over another, I do not believe that

simply changing the structure, once again, will effectively deal with the problems

that exist in the current CARP system; nor will such a change achieve the objectives

that the affected parties wish to achieve in a system of copyright royalty ratemaking

and allocation. The real focus, I believe, should be on process rather than structure.

Simply moving from CARPs to CRABs or some other structure will not address the

very serious cost issues that exist under either system; another move to an entirely

new structure (nine years after abandoning the original structure) will also generate

new problems of consistency and credibility.

Several of the copyright owner counsel who regularly practice before CARPs have

begun discussion on how best to improve the CARP process. What has emerged from

these discussions to date is that there are a variety of process issues that must be

addressed. The issues involve matters such as the implementation of settlements

negotiated by parties to proceedings, the treatment of confidential material in CARP

proceedings, the role of the Copyright Office in providing continuity among various

CARP proceedings, time limits, qualifications of decision-makers, small claims, frivoVerDate 11-MAY-2000 15:52 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\061302\80194.000 HJUD3 PsN: HJUD3
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lous claims and offers of judgment. I would like to highlight two additional issues

that I believe are among the most important issues to be addressed. • Evidentiary Hearings. The single largest cost to clients involved in a CARP proceeding is, typically, the evidentiary hearing. As noted above, the most recent CARP

proceeding involved 40 days of adversarial evidentiary hearings and generated almost 15,000 pages of transcript; while the issues in that case were particularly complex, the likelihood is that future royalty ratemaking and distribution proceedings

also will require the significant time commitments associated with evidentiary hearings. The amount of time that must be devoted to preparing for, participating in

and analyzing (for purposes of briefing) such evidentiary hearings has been and

likely will continue to be enormous. It is my personal view that serious consideration must now be given either to eliminating these hearings entirely or to permitting them only in the exceptional case where good cause is shown. I further believe

that the results of the copyright royalty ratemaking and allocation proceedings

would not be markedly different if they were resolved entirely or primarily on the

basis of written submissions.

There are alternative measures that could achieve some cost savings without

eliminating evidentiary hearings altogether. For instance, arbitrators could request

limited evidentiary hearings solely on issues or witness testimony that they identify

after review of the written cases, or argument from counsel on a limited set of

issues. Evidentiary hearings could also be confined to direct cases alone; under the

current system, evidentiary hearings are conducted on rebuttal cases as well. In addition, hearing time could be reduced by eliminating oral direct testimony and only

allowing cross-examination of all witnesses. While each of these proposals, if adopted, would help reduce costs and should be considered, they would not be as cost effective as eliminating evidentiary hearings altogether. • Discovery. Discovery is another major cost of participation in CARP proceedings.

We currently have a hybrid system that may be the worst of all worlds. On the one

hand, the rules do not provide for the type and breadth of discovery normally permitted in federal civil litigation. See H.R. Rep. No. 103–286, at 13 (1993) (noting

Committee’s contemplation that CARPs would not strictly adhere to the Federal

Rules of Civil Procedure or Evidence). There are no depositions or interrogatories

and the parties are entitled only to documents ‘‘underlying’’ particular statements

made in written testimony rather than all relevant documentation. Moreover, given

the existing timetables for dealing with discovery requests, there is very limited opportunity to make productive use out of the discovery that is available. These limitations are designed to hold down costs and to expedite the proceedings.

On the other hand, the Copyright Office has gradually expanded its view of underlying documents and thus the scope of discovery. Even where the Copyright Office denies a discovery request, a CARP (which may consist of arbitrators more accustomed to the rules prevailing in federal civil court litigation) can effectively reverse that ruling and order the production of documents. While the CARPs (like the

Copyright Office) have no subpoena authority, they do have the power to strike and

to weigh testimony; thus, it is rare that parties do not comply with CARP orders

directing additional discovery—although the CARP may have a more difficult time

obtaining information from third parties. The result is that the nature of discovery

in CARP proceedings has become increasingly more uncertain and with that uncertainty has come increasing costs.

In my view, this hybrid system is becoming much too costly and uncertain, and

serious consideration should be given to eliminating discovery altogether. As an alternative to the current system, I believe the parties should be permitted to choose

how much underlying documentation should accompany (or be produced in connection with) their written testimony, and the amount of support provided for the statements in the testimony would go to the weight afforded that testimony. If a party

chooses not to provide documentation plainly relevant to particular testimony, less

weight or perhaps no weight would be given to the assertions made in that testimony; conversely, the more ‘‘back-up’’ that is provided for particular testimony, the

greater the weight that would be accorded that testimony.

To be sure, replacing the formal hybrid discovery process that currently exists

with a voluntary process with incentives for full disclosure would be a significant

step—and one that may be viewed as undermining to some degree the credibility

of CARP proceedings. But the Government already renders major decisions, producing significant economic and personal consequences, without the benefit of the

type of discovery available under the current Copyright Office/CARP rules. On balance, I do not believe that any added benefits of such discovery warrant the costs

and uncertainties associated with it.

My colleagues who practice before the CARPs will surely have their own views

concerning the need for evidentiary hearings and discovery. I urge you to consider

22

those views as well as the views that we all have concerning the other process

issues. My hope is that we can reach a consensus as to how these issues should best

be resolved because it is in the best interests of all of us and all of our clients to

do so.

CONCLUSION

Seventeen years ago, during the debates on CRT reform, the then-Associate Librarian of Congress and Acting Register of Copyrights, Donald Curran, aptly observed: ‘‘Because the compulsory licenses represent a difficult compromise between

copyright owners and copyright users, it is doubtful that any administrative body

can make all parties happy.’’ Curran Statement at 88 n. 11. I believe that observation holds true today as well. Regardless of which body you choose to decide compulsory licensing rate and allocation issues, it is doubtful that that body will make all

parties happy; indeed, the nature of the system is such that all parties will generally be unhappy. I do not believe that the overriding objectives of cost, consistency

and credibility will be well-served if the structure of the decision-making body is

changed each time that parties express disappointment with a particular result. At

the same time, I believe it is important to continually focus on ways to improve the

process of royalty rate-setting and allocation—in particular, to find ways to reduce

the substantial costs of this process.

Mr. Chairman and members of the Subcommittee, thank you for your time and

attention. I look forward to providing you with whatever assistance I can in addressing these difficult issues.

Mr. COBLE. Mr. Rich.

STATEMENT OF R. BRUCE RICH, ATTORNEY-AT-LAW, WEIL,

GOTSHAL & MANGES, LLP

Mr. RICH. Thank you, Mr. Chairman, Mr. Ranking Member,

Members of the Subcommittee. Thank you for the opportunity to

testify before you today. I appear in my capacity as a partner in

the law firm of Weil, Gotshal & Manges LLP, two of whose principal offices are located New York City and Washington, D.C. For

more than two decades my firm and I have represented a diverse

array of media clients, each of whom are significant users of copyrighted music and work through the thicket of music license issues

that present themselves in securing necessary copyright rights

from the music performing rights organizations, ASCAP, BMI, as

well as from the recording industry. I have litigated so-called rate

court cases under the ASCAP and BMI consent decrees and served

as counsel for a variety of media entities in two CARP rate adjustment proceedings, including the most recent Webcast proceeding.

I should make clear that the views I express today, while shaped

by my experience in representing clients in these various areas, are

my own and do not necessarily reflect those of my clients.

I share the concerns expressed by each of the other witnesses

today that despite the efforts of the Members of this Subcommittee

and of the Copyright Office to create a CARP process that facilitates informal, expeditious, inexpensive, but also fair dispute resolution, the current CARP structure suffers from serious shortcomings which have had quite the opposite effect. In particular I

agree with the views expressed by Mr. Remington in his written

testimony that the CARP structure is in need of radical surgery,

and the goals expressed, although not the recommendations proposed, by Mr. Garrett, that any CARP reform must seek to reduce

costs, foster consistency and increase credibility of the decisions.

My written testimony identifies seven procedural issues which I

urge the Subcommittee and the Copyright Office to address. First,

at least in rate adjustment cases, the overly formalistic rules perVerDate 11-MAY-2000 15:52 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\061302\80194.000 HJUD3 PsN: HJUD3
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taining to case development and presentation need reform. In particular, parties should be entitled to conduct meaningful discovery,

subject to supervision, to prevent abuse prior to having to commit

to their trial positions. Discovery and hearings should be conducted

in accordance with the Federal Rules of Civil Procedure and the

Federal Rules of Evidence.

As things stand now, cases are underdiscovered and overtried.

Moreover, the current lack of meaningful discovery coupled with

the absence of more rigorous rules of evidence currently allow parties to withhold key impeaching documents, blockade access to critical evidence, and load the record instead with unsupportable and

ordinarily inadmissible hearsay.

Second, arbitrator fees and hearing costs have grown exorbitant. The $1.2 million in arbitrator fees charged in the recently concluded section 112, 114 Webcasting proceeding, coupled with the

individual legal fees borne by each of the participants, made the

process inordinately expensive and prevented many companies

from participating in the proceedings. This had the not-incidental

effect of forcing those companies which did participate to shoulder

for entire industries standing to benefit—to shoulder the burden

for entire industries standing to benefit from the statutory license.

Third, the current system tends to generate decisions that neither build meaningfully on prior precedent, nor establish the kinds

of first principles that typify decisions by Federal courts. This creates a lack of predictability that serves no one’s interests.

Fourth, case adjudicators must be afforded subpoena power.

Fifth, the use of three adjudicators is unnecessary and inefficient. One highly skilled and trained jurist whose decision is appealable once to an appropriate reviewing court would be far superior.

Sixth, the 180-day time limit for conducting CARP proceedings

no matter what their complexity is unworkable. Deadlines are

good, but they need to be sensible and extendable as necessary for

good cause shown.

Finally, the time between the section 112 and 114 CARP cycles

should be extended from their current 2-year cycles where they

overlap ludicrously to a period of 5 years.

As explained more fully in my written testimony, I believe, consistent with Mr. Boucher, that, subject to a constitutional analysis,

the identified problems can best be remedied by transferring the

authority to conduct CARP ratemaking procedures to a Federal district court. Experience with the ASCAP, BMI rate courts in the

Southern District of New York, which essentially entail the same

search for a hypothetical willing buyer/willing seller rate as is the

object of many CARP rate-setting proceedings, has shown that particularized copyright-oriented expertise, even if it did repose in the

CARP panels, which it doesn’t, is not as important as other skill

sets. Rate determinations aiming to replicate competitive market

behavior more intensively require a facility with macroeconomics

and the basic principles of antitrust, the ability to assimilate facts

concerning multiple media marketplaces, the ability to evaluate

complex statistical and economic data put forth by the parties’ experts, and the ability to sift through and properly evaluate record

evidence, including making judgments about issues such as witness

24

credibility. Each of these functions, I would suggest to the panel,

is well suited to Federal judicial determination.

In conclusion, I would like to thank the Subcommittee for its continued oversight of these important matters and offer whatever assistance you and the Copyright Office might deem appropriate in

addressing these important issues.

Mr. COBLE. Thank you, Mr. Rich.

[The prepared statement of Mr. Rich follows:]

PREPARED STATEMENT OF R. BRUCE RICH

Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to

testify before you today. I appear today in my capacity as a partner in the law firm

of Weil, Gotshal & Manges LLP. Over the past 24 years, my Firm and I have represented a diverse array of broadcast and cable television, radio broadcasting, background music, new media and webcasting entities in their music license relationships with the music performing rights organizations and, more recently, with the

recording industry. That representation has embraced antitrust counseling and litigation; the rendering of copyright advice; participation in individual and industrywide negotiations over license fees and terms; prosecution of so-called ‘‘rate court’’

cases under the auspices of the ASCAP and BMI government consent decrees; and

serving as counsel for various clients in two CARP rate adjustment proceedings.

That background has afforded me, as both an intellectual property and antitrust

practitioner, with a broad perspective on the workings of the music licensing marketplace. Particularly in respect of performance rights licensing (whether of music

works or sound recordings), I have become intimately familiar with the structure

and degree of competitiveness of these music markets; the challenge facing large

users of copyrighted material in procuring the necessary performance rights on fair,

reasonable, and competitive terms; the operations of the various compulsory license

mechanisms that have been instituted as admittedly imperfect substitutes for markets that would not function competitively without them; and the efficacy of the

compulsory license procedures that implement those mechanisms.

Of particular relevance to today’s hearing, in respect of music performance rights

licensing, our law firm has represented the ABC and CBS Television Networks,

Showtime/The Movie Channel and numerous additional cable television networks,

the nation’s commercial local television broadcasters, the commercial radio industry,

as well as the background music entities Muzak and DMX/AEI, in rate court proceedings conducted in the Federal District Court for the Southern District of New

York, as well as in appeals to the United States Court of Appeals for the Second

Circuit from such proceedings. Those proceedings fundamentally have entailed the

determination of ‘‘reasonable,’’ i.e., competitive-market-approximating, license fees

for public performances of musical works licensed by one or another of ASCAP and

BMI, as well as, in some instances, the determination of the forms such licenses

should take.

In 1998, our Firm and I represented the Public Broadcasting Service (‘‘PBS’’), National Public Radio (‘‘NPR’’), and the stations on whose behalf they sought rates in

the CARP rate adjustment proceedings for the noncommercial educational broadcasting compulsory license available pursuant to Section 118 of the Copyright Act.

See Adjustment of the Rates for Noncommercial Educational Broadcasting Compulsory License, Docket No. 96–6, CARP NCBRA. More recently, our Firm represented

various FCC-licensed broadcasters, as well as some twenty webcasters, in the CARP

to set rates and terms for certain uses of sound recordings pursuant to Sections 112

and 114 of the Copyright Act—a proceeding which is still in its appellate phase. In

this same proceeding, we also represented DMX Music, Inc., the background music

service provider, with respect to its use of ephemeral recordings subject to the § 112

license. See Digital Performance Right in Sound Recordings and Ephemeral Recordings, Docket No. 2000–9, CARP DTRA 1&2 (‘‘§ 112/114 Proceeding’’).

Although my views on issues pertinent to today’s hearings clearly have been

shaped by my experience in representing clients in these various fora, I appear

today solely on my own behalf, and the views which I offer through this testimony

are solely personal ones.

My testimony today (1) outlines the major procedural shortcomings inherent in

the CARP process as it is currently constituted; (2) suggests that, subject to a Constitutional analysis, serious consideration be given to transferring the rate-setting

and distribution functions currently carried out by CARP Panels to a court of law;

25

and (3) comments briefly upon the governing standards for rate-setting under

§§ 112, 114 and 118 of the Copyright Act.

PROCEDURAL SHORTCOMINGS IN THE CARP PROCESS

Despite the commendable efforts of the Panels convened to hear these proceedings

and the Copyright Office attorneys and staff who oversee and facilitate the CARP

process, the CARP structure suffers from serious shortcomings which render the

proceedings inordinately expensive, inefficient, and burdensome, and which frequently lead to rulings that are substantively flawed. Although a principal motivation for establishing an arbitration process to conduct rate-setting and distribution

functions was to streamline the litigation process in order to achieve efficiencies

over what one would expect in a courtroom context, experience has demonstrated

quite the opposite effect.

Case Development and Presentation

The CARP process, as currently structured, imposes formalistic rules regarding

the manner and timing of presentation of cases and the discovery that may be had,

accompanied by a virtual absence of rules of evidence. In combination, these features create a frenetic litigation environment in which cases are underdiscovered

and overtried.

Manner and Timing of Presentation of Cases. Parties are required, at the very

outset of the proceedings, and prior to any discovery, simultaneously to submit and

exchange in written form the direct testimony of each of their witnesses—lay and

expert alike—together with every trial exhibit to be utilized. This places the proverbial cart before the horse—effectively locking in the parties’ trial positions before

anyone has knowledge of anyone else’s factual, economic and legal arguments. The

salutary effects of permitting discovery prior to requiring parties to commit to trial

positions, in terms of narrowing and focusing what is to be tried, are thereby lost.

What is more, during the ensuing hearing phase, material deviation from the

written direct cases is prohibited, so that neither side’s witnesses—most notably,

their experts—are permitted to respond on the stand to the other parties’ written

direct cases. For all of their prolixity, the parties’ governing cases are like ships

passing in the night. Issue is not truly joined until the rebuttal phase of the proceedings, which, instead of being devoted to those few issues that normally remain

open following presentation of cases in chief, entails further voluminous filings in

order to respond to the other side’s direct testimony. This is followed by yet another

round of hearings in which many of the same expert and fact witnesses are recalled

to the stand to respond to that which they were prohibited from testifying about

in their initial testimony. The inefficiency and undue expense of such a process is

manifest.

Discovery and Evidence. CARP discovery, such as it is, is truncated and carried

on under unrealistically short deadlines. Parties to the CARP are not subject to normal rules of discovery such as those found in the Federal Rules of Civil Procedure.

The CARP process does not allow for depositions, requests for admission, interrogatories or any other means by which the parties can test the assertions made by

their opponents prior to the presentation of hearing testimony. Instead, parties are

required to produce solely those documents which ‘‘underlie’’ their written direct or

rebuttal testimony or exhibits. 37 C.F.R. § 251.45. While this is, no doubt, intended

to achieve the laudable goal of reducing expense and alleviating undue burdens on

the parties, these constraints measurably distort and disrupt the litigation process.

The truncated discovery process deprives the parties of the opportunity, prior to

trial cross-examination, to test the assertions made by their opponents. Whereas the

presumption underlying the Federal Rules of Civil Procedure is to shed light on the

parties’ respective positions and thereby reduce surprise and promote the narrowing

of issues for trial, the present CARP discovery rules have the opposite—and perverse—effect of blockading access to relevant evidence, enhancing the element of

surprise, and broadening the scope of what is presented (and cross-examined upon)

at trial. Once again, this is, in the end, costly and wasteful—especially taking account (as I do below) of the arbitration fees incurred with each hour of hearing time.

I am of course aware of the potential for open-ended discovery to spawn abuse

and itself become inordinately expensive. The solution, I would submit, is to have

the supervising jurist (in my proposal below, a federal judge, or his designee) carefully control the discovery process and curtail abuse.

The CARP hearings themselves lack predictable structure and suffer from the absence of more rigorous rules of evidence. Although all witnesses proffer testimony

in written form in advance of their appearances, whether a given witness will rehash his or her testimony on direct examination, merely summarize it in a few minVerDate 11-MAY-2000 15:52 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\061302\80194.000 HJUD3 PsN: HJUD3
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utes, or proceed directly to cross-examination is generally a matter for ad hoc determination, witness by witness, by examining counsel.

More problematic is the absence of meaningful rules of evidence, such as the Federal Rules of Evidence, to control, and make predictable, exactly what evidence will

be admissible. By way of example, in the 1998 PBS/NPR CARP, in which I served

as counsel, hundreds of hearsay documents (website postings, newspaper articles,

and the like) were admitted into the record ‘‘for what they were worth.’’ I would suggest they were worth very little. But they occupied inordinate time, motion practice,

and photocopy expense to contend with.

With generally sophisticated counsel and well-funded parties, there is little reason

inordinately to relax rules of admissibility designed to create a trustworthy record.

This is especially true where, as here, there is so little opportunity to engage in

meaningful discovery of matters pertaining to your adversary’s case. As matters now

stand, key impeaching documents residing in the parties’ files will safely remain

there, immune from disclosure, while the parties are free to lard the record with

what should be inadmissible hearsay.

Finally, the cramped discovery rules virtually require, in certain instances, seatof-the-pants cross-examinations violating the most cardinal rule of cross-examination: don’t ask any question to which you do not already know the answer. The consequence is not merely the risk of eliciting testimony your client would sooner not

have; it is also a prolongation of the process in a fashion that cumulatively wears

on counsel and the Panel alike. Especially in a trial of the magnitude of the justconcluded § 112/114 Proceeding, the impact of such practice on the overall length of

the hearings can be significant.

Costs

The arbitrator fees and hearing costs which must be borne by any party wishing

to participate in a CARP proceeding can be astronomical. Although the Copyright

Royalty Tribunal (‘‘CRT’’) was abolished, in part, in order to reduce the expenses

associated with maintaining a full-time body of adjudicators who were called upon

to hear cases only on a part-time basis, the hourly fees and out of pocket costs

charged by the arbitrators empanelled by the CARP process have proven to be far

costlier. For example, the § 112/114 Proceeding generated more than $1.2 million in

arbitrator fees. Add to this the individual legal expenses associated with a proceeding which consumed 41 hearing days, involved the testimony of 75 witnesses

(49 on direct and 26 in rebuttal testimony), generated a transcript approaching

15,000 pages and many thousands of pages of exhibits and elicited the submission

of over 1000 pages of post-hearing briefs by the parties, and it becomes clear that

participation in the compulsory license rate-setting process is available only to the

well-funded. This presents a double-edged problem. A major ‘‘free-rider’’ burden is

placed on those companies which, for whatever reason, feel compelled to participate

in the rate-setting process. These companies end up shouldering the burden for entire industries standing to benefit from the statutory licenses. From the perspective

of companies which cannot, for financial or other reasons, participate in the CARP

process, these entities (which are no less entitled to the statutory license) must either rely upon the records developed by the participating parties or resort to voluntary negotiations with the copyright owners on terms they may otherwise find objectionable.

Lack of Precedential Value

Because CARP panelists are chosen to participate in a particular case and, potentially, may never participate in another CARP proceeding, there is no expectation

that the panelists will develop any expertise in the subject matter or rate-setting

tasks at hand that will benefit future proceedings. Decisions rendered on this basis

tend to focus on reaching a bottom-line result in the given proceeding rather than

on explicating a thorough and complete analysis of the relevant standards and establishing (and building on existing) industry precedent. In contrast to the typical

body of federal jurisprudence, where ‘‘first principles’’ tend to guide the resolution

of cases, CARP decisions have a sui generis quality which deprives this growing

body of decisions of coherence and affords future litigants little guidance as to the

potential outcome of their cases. These consequences are further magnified by the

fact that, in certain contexts, the rate-setting proceedings recur on a two-year cycle,

which further promotes narrow decision-making.

No Subpoena Power

The problems associated with the lack of normal discovery rules are magnified by

the fact that the Panel has no subpoena power over third parties even if those parties possess information critical to the proceeding. A case in point is the just-concluded § 112/114 Proceeding, in which the linchpin of the recording industry’s case

27

was 26 license agreements reached between the Recording Industry Association of

America and various webcasters. While the Panel and the user-parties to the proceeding were interested in securing testimony from as many of these 26 entities as

possible, the absence of subpoena power left the Panel with no recourse but to ‘‘invite’’ these parties to testify voluntarily. Not surprisingly, while a handful agreed,

most did not.

Inefficiency of Proceedings

The use of three arbitrators to render decisions injects further inefficiencies into

the CARP process. First, the use of multiple arbitrators exponentially increases the

cost of the proceedings based on hourly fees charged alone. Much hearing time is

devoted to bench conferences among Panel members deliberating on evidentiary rulings and the like. Further, the decisions a CARP Panel is tasked with rendering do

not benefit from the inevitable ‘‘split-the-baby’’ compromise that tends to result from

resort to multiple fact-finders. This is perhaps best evidenced by the fact that virtually every CARP Panel merits ruling is appealed by virtually every party. It appears that no one ever perceives that the Panels have reached fair and equitable

results.

Inflexible Statutory Deadlines and Procedures

The statutorily-imposed 180-day timeframe for conducting CARP proceedings,

without regard to their complexity, is wholly unrealistic. Particularly in a proceeding like the § 112/114 Proceeding, which involved four separate communities of

copyright users, participation of a variety of copyright owners, and required rates

and terms to be set for two separate statutory licenses for two separate statutory

periods, the process affords little opportunity for meaningful development of record

facts, even less time for briefing, and equally little time for due deliberation by the

CARP Panel. Expedience is a desirable objective—but not at the expense of adequate hearing preparation and considered decision-making. Moreover, the inflexible

nature of the regulations governing the conduct of the proceeding actually prevented

certain of the parties to the § 112/114 Proceeding from fulfilling the terms of a voluntary settlement which would have eliminated the need to set rates for an entire

class of copyright users and thus would have substantially reduced the costs and

burdens imposed on the parties and the arbitrators, not to mention the Copyright

Office itself.

Too Frequent Statutory Cycles for Rate-Setting

The statutorily imposed two-year cycles for setting rates and terms for the § 112

and § 114 licenses are too frequent. While the two-year cycle for rate-setting for

these licenses may reflect solicitude for the need to readjust rates in new and rapidly-evolving industries, experience in the § 112/114 Proceeding demonstrates that

this cycle is too short, particularly if there is a delay in convening a CARP for a

given cycle. Indeed, the delay in convening the § 112/114 Proceeding resulted not

only in two cycles of proceedings being arbitrated together, but also in the statutorily mandated ‘‘voluntary negotiation period’’ for the upcoming proceeding overlapping with a hotly-contested rate-setting proceeding for the previous cycle. The time

between cycles should be extended to a five-year period.

TRANSFER OF CARP RATESETTING AND DISTRIBUTION FUNCTIONS TO A COURT

The efficacy of the operation and structure of the CARP and of the CRT which

preceded it has been debated innumerable times by this Subcommittee and its predecessors since the concept of a rate-setting and distribution body to administer the

compulsory licenses under the Copyright Act was first conceived. See Copyright Office Oversight Hearing Before the House Judiciary Subc. on Courts and Intellectual

Property, 105th Cong. (July 23, 1998) (statement of Marybeth Peters, Register of

Copyright, U.S. Copyright Office); Copyright Compulsory License Improvement Act,

H.R. 3210, 105th Cong. § 7 (1998) (approved by Subcommittee on Courts and Intellectual Property March 18, 1998) (establishing the Copyright Royalty Adjudication

Board within the Copyright Office, which would consist of administrative copyright

judges); Copyright Clarifications Act of 1996, H.R. 1861, 104th Cong. § 11 (1996) (approved by Subcommittee on Courts and Intellectual Property on Dec. 13, 1995 and

House Judiciary Committee on March 12, 1996) (clarifying the authority of the Librarian of Congress to make procedural and evidentiary rulings with respect to a

CARP proceeding and authorizing (1) payments to arbitrators and other costs to

come from the royalty pool in distribution proceedings and (2) in ratemaking proceedings, dividing such costs 50–50 between copyright owners and users unless otherwise determined by the arbitrators); Copyright Royalty Tribunal Reform Act of

1993 § 2, 17 U.S.C. §§ 801, 803 (1993) (replacing the Copyright Royalty Tribunal

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with Copyright Arbitration Royalty Panels); Copyright Royalty Tribunal Reform and

Miscellaneous Pay Act of 1989, Pub. L. No. 101–319 (1990) (reducing the number

of commissioners on the Copyright Royalty Tribunal), CRT Reform and Compulsory

Licenses Hearings Before the House Judiciary Subc. on Courts, Civil Liberties, and

the Administration of Justice, 99th Cong. (1985) (redesignating the Copyright Royalty Tribunal as the Copyright Royalty Court and transferring such body to the control of the judicial branch).

In reviewing this legislative history in the light of my own experiences participating in the CARP process and litigating rate-setting cases before the ASCAP and

BMI ‘‘rate courts’’ in the Southern District of New York, I have become convinced

that the main responsibilities with which a CARP is tasked—namely, rate-making

and distribution of royalties—do not principally involve matters which require the

particularized, copyright-oriented agency expertise of the Library of Congress. Instead, these tasks require a facility with macroeconomics and with basic principles

of antitrust law, the ability to assimilate facts concerning multiple media marketplaces, the ability to evaluate complex statistical and economic data put forth by the

parties’ experts, and the ability to sift through and properly evaluate record evidence, including making judgments on issues such as witness credibility.

Experience in the rate court context—which essentially entails the same search

for a hypothetical free market, ‘‘willing buyer/willing seller’’ rate as is the object of

many CARP proceedings—has shown that all of these functions are well suited to

federal judicial determination. Indeed, were determinations of statutory license fees

reposed in the federal courts, virtually all of the procedural flaws inherent in the

existing CARP process would be remedied or, at the least, ameliorated. For instance,

a trained jurist (whether a district court judge, a magistrate judge or a special master), working within federal rules of discovery and evidence, would supervise discovery, receive evidence, conduct hearings and, where appropriate, invoke summary

procedures such as trials on paper records or summary judgment disposition. To

keep such proceedings focused and manageable, it could be stipulated that the proceedings must be concluded within a specified period of time (subject to relaxation

by the court for good cause). The trial court decision would be subject to review pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.

Admittedly, transferring the rate-making and royalty distribution functions of

CARP Panels to a federal district court requires careful consideration of Constitutional issues which are beyond the scope of this testimony. For instance, when such

proposals have been considered by this Subcommittee in the past, questions have

been raised, but not resolved, as to whether, because rate-making is not a judicial

function, Article III judges may be tasked with conducting non-Article III functions.

There is nevertheless precedent for resolving rate disputes in district courts. I have

already adverted to the ASCAP and BMI rate court experience. In addition, § 513

of the Copyright Act allows individual proprietors of certain categories of business

establishments to resolve rate disputes with performing rights societies by bringing

such matters before a district court located in the federal circuit in which the proprietor’s establishment is located. To be sure, there are consent decree structures in

place that contemplate such judicial rate-setting in the ASCAP/BMI setting. Such

precedents and procedures, and the experience thereunder, nevertheless provide

useful starting points for consideration of how an analogous rate court could function in lieu of the present CARP procedures.

Without conducting a thorough analysis of the matter, it appears at first blush

that a number of steps could be taken to limit Constitutional concerns. For instance,

one might consider retaining within the Copyright Office the authority to certify the

existence of a rate dispute (e.g., upon the close of the voluntary negotiation period)

and allowing the Copyright Office to issue a certification of dispute notice which

would allow the parties to seek resolution of the case or controversy in the federal

courts when voluntary resolutions are not possible. I would encourage the Subcommittee to solicit the advice of the Congressional Research Service as to whether

any potential Constitutional issues could be overcome; assuming that to be the case,

I commend to the Subcommittee serious consideration of transferring dispute resolution authority in the rate-setting and royalty distribution context to the federal

courts.

Alternatively, the Register of Copyrights has previously suggested establishing a

permanent Board to conduct rate-making and distribution proceedings which would

be housed within the Copyright Office. Under the Register’s formulation, membership on the Board would be established upon recommendation of the Register of

Copyrights. Such a Board could presumably also be housed within another agency,

such as the Department of Commerce, in which the Patent and Trademark Office

(‘‘PTO’’) resides.

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There would seem to be arguments in favor and against such an approach. As the

Copyright Office noted in 1998, establishing a Board within the Copyright Office (or

another agency) would raise the stature of the decision makers and would result in

final agency decisions that could be appealed directly to the courts, thus removing

the intermediate appellate review which currently occurs within the Copyright Office. See Copyright Office Report, supra note 1, at 56. Additionally, the appointment

of a permanent Board could potentially reduce costs to parties participating in the

rate-setting process, especially those of three expensive arbitrators, thereby encouraging wider participation and a fuller factual record on which to base decisions.

Costs would further be reduced by the elimination of the review by the Register of

Copyrights and the Librarian.

A major shortcoming of establishing a permanent Board within an agency is that

such a Board might be viewed to be too political. Furthermore, the efficacy of such

a Board would be greatly dependent upon the procedures established to govern the

orderly presentation of cases. At a minimum, any such Board should be invested

with subpoena power, and rate-setting disputes should be subject to the Federal

Rules of Civil Procedure.

A FEW COMMENTS ON THE SUBSTANTIVE TESTS

EMBODIED IN SECTIONS 112, 114 AND 118 OF THE ACT

Insofar as the Subcommittee is interested in the proper administration of the statutory licenses available under the Copyright Act, a few comments are in order regarding the substantive statutory standards themselves. I am most familiar with

the application of the standards contained in §§ 112, 114 and 118 of the Act, and

therefore confine my comments to those provisions. Pursuant to § 114, CARP Panels

are charged with establishing ‘‘rates and terms that most clearly represent the rates

and terms that would have been negotiated in the marketplace between a willing

buyer and a willing seller.’’ See 17 U.S.C. § 114(f)(2)(B) (2001). The § 118 standard,

incorporated by reference in § 801(b) of the Act (detailing the operation of CARP

Panels), calls for the determination of ‘‘reasonable terms and rates of royalty payments.’’ In reaching these determinations in each case the Panels ‘‘may’’—but are

not required to—give weight to voluntary license agreements reached in lieu of resort to the statutory license. See § 112(e)(4); § 114(f)(2)(B); § 118(b)(3).

Practice under these provisions has spawned lively controversy as to their intended meaning. This is not the forum either to relitigate the various parties’ perspectives, nor, at least for now, definitively to resolve the issue. Nevertheless, I have

considerable concern over the potential misapplication of these provisions to, in effect, rubber stamp selective agreements reached by large and powerful collectives

representing copyright owners (whether ASCAP or BMI, in relation to musical

works performance rights, or the RIAA in relation to digital transmissions of sound

recordings).

With respect to each of these statutory directives, it would seem plain that the

purpose of the exercise is to determine the fees that would have resulted from dealings between willing buyers and willing sellers in a competitive market (i.e., a market undistorted by the concentration of bargaining power in the hands of a collective

society or major industry trade association). Yet, strenuous arguments have been

made (and rejected in the ASCAP rate court setting) that dispositive weight ought

to be given to such license agreements as copyright owners’ collective agents may

have been able to reach with one or more third parties. While I do not suggest that

statutory ratemaking is an easy task, unless it is recognized that the core statutory

objective is to approximate the value a marketplace untainted by undue market

power possessed by copyright owner collectives would produce, no amount of finetuning or refinement of the ratemaking process will generate an economic result

true to the spirit and intent of these statutory license provisions.

I thank the Members of the Subcommittee for their attention to these important

matters and for the opportunity to share my views with you. I would be pleased to

answer questions and elaborate further on this testimony now or later for the

record.

Mr. COBLE. Ms. Peters.

30

STATEMENT OF MARYBETH PETERS, REGISTER OF COPYRIGHTS AND ASSOCIATE LIBRARIAN FOR COPYRIGHT SERVICES, COPYRIGHT OFFICE OF THE UNITED STATES, THE LIBRARY OF CONGRESS

Ms. PETERS. Mr. Chairman, Mr. Ranking Member, distinguished

Members of the Subcommittee, I appreciate the opportunity to testify on the structure and process of the Copyright Arbitration Royalty Panel System. As you know, today’s hearing is to consider how

effective the CARP process has been and how it could be improved.

We have had almost 9 years of experience in working with this

process, and I think we have a little bit to add to the dialogue.

I think, as you know, ad hoc Copyright Arbitration Royalty Panel

deals with statutory licenses which are exceptions to the general

rule in copyright law that the owner of a copyrighted work has exclusive rights which enable him to determine how his work is to

be used. A statutory license allows certain uses of certain copyrighted works under terms and conditions that are specified in the

law. In 1976, the Copyright Act increased the number of statutory

licenses to four, and provided for the adjustment of rates at specified times, and provided a mechanism to settle disputes about the

allocation of royalties that were paid into the Copyright Office.

A new administrative body having responsibility for adjusting

statutory rates and for resolving disputes among the claimants to

the royalty pools for cable retransmissions and performances of

music on jukeboxes was created. Initially the proposal was a threemember panel that would reside in the Copyright Office. Each time

there was a controversy over a distribution of royalties or there

was a need to adjust royalty rates, the Register would convene the

panel.

However, the Supreme Court in its decision in Buckley v. Valeo,

who dealt with the issue of the constitutionality of the methods of

appointing members to a legislative branch agency, led to constitutional concerns over the plan to have the Register, an employee of

the legislative branch, appoint the members of the new tribunal.

Wishing to avoid any constitutional question, Congress basically

chose to create an independent regulatory agency, the Copyright

Royalty Tribunal, whose members would be appointed by the President with the advice and consent of the Senate.

CRT came into existence in November 1977. It was abolished in

December 1993. During those years the role of the CRT expanded

because two compulsory licenses were added to the workload. However, like the CARPs, there were criticisms almost from the beginning with regard to the tribunal. The major concerns seemed to be

that there wasn’t enough work to keep three senior-level Government employees busy. From time to time there was also criticism

concerning the lack of expertise of some of the Commissioners.

Congress reduced the number of Commissioners from five to

three in 1990, and in 1992 it established an ad hoc arbitration

panel to adjust the satellite carrier rates, thereby undercutting the

CRT’s jurisdiction. It got rid of the CRT in 1993, and the CARP

system was created, in the words of the House Judiciary Committee, because the workload of the CRT was episodic and not sufficient to justify three full-time, highly paid Commissioners.

31

From the beginning to the present day, the office has done its

best to make the present system work. However, from the very beginning the office was aware of problems, and as the years passed,

and new statutory and increasingly complex licenses were created,

our list of shortcomings has grown. Of course, we have also heard

the complaints of the parties to the various proceedings.

Two of the shortcomings make it clear that you simply can’t fix

the system. It is broken. Let me hit those two. The first is expertise. Statutory licenses are generally complex. The CARP process is

complex. The amount of money in a number of these proceedings

is considerable. It has been difficult to find arbitrators who have

any familiarity with copyright law let alone the complex statutory

licenses and the unique CARP procedures. Of the 10 CARP reports

which the Librarian has reviewed, only three have been accepted.

Several which were rejected required considerable effort to make a

recommendation to the Librarian on which you could base a final

order.

The second is lack of predictability or consistency in results.

Each panel is selected for one case. Its decision is for that case. The

panelists then go on to other things, and then the next case, a new

panel is convened. So expertise in the adjudicator and consistency

of results are crucial. That is why the system is broken.

There is another shortcoming which probably could be fixed in

the present system, and that is cost. This has been an issue from

the very beginning, the arbitrator’s rates are high. Some of the proceedings are long, complex. Other proceedings involve only small

amounts. Either end of this is a problem.

There have been a number of helpful suggestions on how to address this issue. This is a most important issue. In some cases the

costs preclude people from participating in this. Others copyright

owners pay substantial amounts when the amount in controversy

is extremely small.

In conclusion, I believe that there should be reform, but there is

no consensus on what that reform should consist of. I totally agree

with Bob Garrett; it is important to first look at the process. First

with the CRT and then with the CARP, the emphasis was on the

system; in other words, the body that would oversee the proceedings. But Congress needs to decide the appropriate process and

then determine the structure. The office would be pleased to work

with the Subcommittee to achieve a system that provides the necessary expertise, produces consistent results, is efficient, fair, and

basically reduces costs. Thank you.

Mr. COBLE. Thank you, Ms. Peters.

[The prepared statement of Ms. Peters follows:]

PREPARED STATEMENT OF MARYBETH PETERS

Thank you, Mr. Chairman. I am pleased to appear today before the Subcommittee

and offer testimony on the structure and process of the Copyright Arbitration Royalty Panels (CARPs). As you are aware, the CARPs have been operating under the

auspices of the Copyright Office and the Library of Congress since the Congress

eliminated the Copyright Royalty Tribunal in 1993. Today’s hearing is to consider

how effective the CARP process has been to this point and, as you will hear from

other members of today’s witness panel, ways in which it can be improved.

I am dividing my comments into three sections. First, I will give an overview of

how the statutory licenses of the Copyright Act have been administered since 1978.

Second, I will discuss certain shortcomings of the existing CARP system that have

32

been identified since 1993, and third I will offer some suggestions as to how royalty

distribution and rate adjustment proceedings could be conducted in ways that might

eliminate many of the shortcomings of the current system.

OVERVIEW OF COPYRIGHT STATUTORY LICENSE ROYALTY DISTRIBUTION

AND RATEMAKING

The history of the Copyright Office’s and Library of Congress’s involvement in the

setting and adjusting of royalty rates and making royalty distributions to copyright

owners is linked to the history and evolution of the statutory licenses in the copyright law. The general rule in copyright law is that the owner of a copyrighted work

has the exclusive right to determine how that work is to be used. Anyone other than

the owner wishing to use a copyrighted work must either obtain the owner’s permission, be eligible for a statutory license, or qualify for free use under an exception.

A statutory license allows certain uses of certain copyrighted works provided that

the user pays the royalties and observes the terms that are set forth in the law.

1. The 1909 Copyright Act

There was only one compulsory license in the 1909 Copyright Act. What is generally referred to as the ‘‘mechanical license’’ which allowed a person to make a

sound recording of a song that had been recorded and copies of that recording had

been distributed to the public in the United States, so long as that person paid the

owner of the musical composition 2 cents per copy. The royalty rate was set by statute and was not subject to change. The 2 cents rate lasted from 1909 to 1978.

Because the rate was set by statute, and because the user paid the owner directly,

there was no need for a government agency either to set the mechanical rate or to

engage in a distribution of the mechanical royalties.

2. The 1976 Copyright Act

At the time it was drafting the 1976 Copyright Act, Congress realized that the

mechanical license was flawed because a statutorily-set, never-changing royalty rate

was inflexible and did not provide fair compensation. Furthermore, Congress was

planning to add more statutory licenses to the law. These new statutory licenses

would be in the areas of cable retransmissions of over-the-air broadcast signals,

jukebox performances of music, and the use of published musical works and published pictorial, graphic and sculptural works by noncommercial educational broadcasters. Congress saw that there was a need for an administrative body that would

be able to adjust the rates of these statutory licenses periodically. In addition, Congress saw a need for an administrative body to act as the distributor of the royalties

collected from users in situations where there were many copyright owner claimants

to the same funds and there were controversies as to how much each claimant was

entitled to receive.

The new administrative body would have responsibility for adjusting the cable,

jukebox, mechanical, and noncommercial educational broadcasting royalty rates, and

for distributing the cable and jukebox royalties to the proper claimants. Cable and

jukebox royalties would be deposited with the Copyright Office, subject to the distribution decisions of this new administrative body. Although the Senate and House

copyright subcommittees agreed that they needed to create a new administrative

body, they were not sure of the structure for the new body. At first, the Senate bill

created a tribunal composed of a three-member panel that would reside within the

Copyright Office. The members would be appointed by the Register of Copyrights

from the membership of the American Arbitration Association or a similar organization. The Register would convene the panel each time a controversy was found to

exist concerning the distribution of royalties or the adjustment of royalty rates.

While the Congress was considering the proposed Senate version for the new administrative body, the Supreme Court handed down its decision in Buckley v. Valeo,

424 U.S. 1 (1976). In Buckley, the Court considered, inter alia, the constitutionality

of the method of appointing members to the Federal Election Commission (‘‘FEC’’),

an agency residing in the legislative branch. The law establishing the FEC provided

that the President pro tempore of the Senate and the Speaker of the House would

appoint a majority of members of the FEC. The Supreme Court ruled that this was

unconstitutional because some of the FEC’s functions were executive branch functions and consequently persons exercising those functions ‘‘must be appointed in accordance with article II, sec. 2, clause 2 of the Constitution, the Appointments

Clause.’’ 424 U.S. at 126. The Appointments Clause states that the President shall

nominate, with the Senate’s advice and consent, all ‘‘Officers of the United States,’’

but the Congress may vest the appointment of inferior officers as it deems proper.

When the Buckley opinion was issued, some of the members of Congress expressed

constitutional concerns over the plan to have the Register of Copyrights, an emVerDate 11-MAY-2000 15:52 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\061302\80194.000 HJUD3 PsN: HJUD3
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1 A contingent jurisdiction over public performances by means of jukeboxes remains if private

jukebox licenses expire and no new license agreements are reached.

ployee of the legislative branch, appoint members of the new tribunal. Wishing to

avoid placing the new structure under a constitutional cloud, the members of the

subcommittees of both houses chose instead to create a completely independent regulatory agency, the Copyright Royalty Tribunal, whose members would be appointed

by the President with the advice and consent of the Senate.

3. The Copyright Royalty Tribunal, 1977–1993

The Copyright Royalty Tribunal existed from November, 1977 to December, 1993.

Its jurisdiction changed during those years. In 1988, Congress created a new statutory license to govern retransmission of over-the-air television signals to home satellite dish owners. Also, in 1988, Congress moved to eliminate the jukebox compulsory license in order to comply with the Berne Convention and by 1990, there were

sufficient private license agreements to allow for the elimination of the jukebox compulsory license from the Copyright Act and the Tribunal’s jurisdiction.1 In 1992,

Congress created a statutory royalty obligation for the manufacture and importation

of digital audio recording technology (DART).

Even with these new responsibilities, critics of the Tribunal believed that there

was insufficient work. In 1990, Congress reduced the number of Commissioners

from five to three, after concluding that three Commissioners were sufficient to handle the workload. Copyright Royalty Tribunal Reform and Miscellaneous Pay Act of

1989, Pub.L.No. 101–319, 104 Stat. 290 (1990). Also, Congress established a procedure for adjusting the satellite carrier statutory license rates in 1992 by an ad hoc

arbitration panel, thereby undercutting the Tribunal’s otherwise exclusive jurisdiction over royalty rate adjustment and distribution proceedings.

4. The Copyright Royalty Tribunal Reform Act of 1993

In 1993, Congress passed the Copyright Royalty Tribunal Reform Act, observing

that ‘‘with 15 years’ experience, a clear record of the Tribunal’s workload has been

established. That workload is episodic and not sufficient to justify three full-time

highly paid Commissioners.’’ H.R. Rep. No. 103–286, at 9 (1993).

The House Subcommittee recalled that the original proposal for a government

body to oversee the statutory licenses was for ad hoc arbitration panels convened

by the Register of Copyrights. Id. The Subcommittee noted that the one experience

with arbitrators setting royalty rates, the 1992 adjustment of the satellite carrier

compulsory license rates, was positive. Id. at 11. Therefore, the Subcommittee believed that creating what was originally proposed in 1976—ad hoc arbitration panels—would avoid the apparent waste of having full-time Commissioners perform

part-time work. The Subcommittee also believed that placing ad hoc arbitration

panels under the supervision of the Register of Copyrights and the Librarian of Congress made ‘‘good sense,’’ citing the fact that ‘‘the Copyright Office and the Library

of Congress already have considerable involvement in the administration of the compulsory licenses and in the work of the Tribunal.’’ Id. This ‘‘considerable involvement’’ referred to the Copyright Office’s Licensing Division which receives the payment of cable, satellite and DART royalties, and the Register’s Office which, through

the Register, the General Counsel and the staff of the General Counsel, promulgates

regulations related to the statutory licenses.

The remaining concern was whether establishing arbitration panels in the Library

of Congress was constitutional. Congressman William Hughes, the chairman of the

House Subcommittee, asked the Congressional Research Service (‘‘CRS’’) for its advice. CRS stated that the panels would be constitutional if the person ultimately responsible for the panels’ decision was a presidential appointee or someone who owed

his or her appointment to a presidential appointee. Therefore, the panels could be

established under supervision of the Librarian of Congress, a presidential appointee,

or the Register of Copyrights, a person owing his or her appointment to a presidential appointee. Letter from CRS to the Honorable William Hughes, February 17,

1993, at 9–10.

Although the House Subcommittee received CRS’ opinion that either the Register

or the Librarian could be the supervising official, the House Subcommittee chose to

make the Librarian the supervising official. There is no record as to why this choice

was made. There is also nothing in the record to suggest that Congress saw any

added value in an additional layer of review. The only concern voiced was that a

presidential appointee, or someone who answers to a presidential appointee, needed

to be placed at the head of the CARP system to satisfy the Supreme Court’s ruling

in Buckley v. Valeo.

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2 In one rate adjustment proceeding under 17 U.S.C. 114, the Court of Appeals remanded for

further findings a small portion of the Librarian’s decision concerning the terms of payment of

royalty fees.

5. The Current CARP System

As discussed above, the current CARP system consists of ad hoc arbitration panels that recommend the royalty rates and distribution of royalty fees collected under

certain of the statutory licenses and set some of the terms and conditions of some

of the statutory licenses. Each CARP is selected for a particular proceeding (examples: a rate adjustment for the cable statutory license; a distribution of DART funds)

and has up to 180 days to deliver its recommendation for the rate adjustment or

distribution, as the case may be. The highlights of the CARP system are as follows:

Voluntary Negotiation Period: Once it is determined that a controversy exists

as to the adjustment of royalty rates or the distribution of royalty fees, as the

case may be, the Office designates a period for voluntary negotiation among the

parties to resolve their differences. Those parties unable to reach an agreement

during this period proceed to a CARP.

Direct Cases and Discovery: Every participant in a CARP proceeding must submit a written direct case. The written direct case is the principal piece of evidence put forward by a participating party in that it sets forth all the evidence

and reasons as to what the party believes the rates or distribution should be.

The Office then conducts a limited discovery period during which parties may

request from each other documentation that supports the assertions they make

in their written direct cases.

Selection of the Arbitrators: Once the discovery phase is concluded and the proceeding is ready for hearing, the Librarian selects two arbitrators from a list

of designated arbitrators whose names are obtained from arbitration associations who then select a third arbitrator from the list to serve as their chairperson. If the two arbitrators cannot agree, then the Librarian selects the chairperson (which has never happened).

Testimony and Hearings: Once the arbitrators begin their 180 period, they consider all the testimony submitted by the parties in their written direct cases.

Oral hearings of the written direct cases are typically conducted (although they

are not required), and the parties often submit rebuttal testimony. At the conclusion of the hearings, the parties submit their proposed findings of fact and

conclusions of law wherein they argue to the CARP how it should rule. Often,

the CARP will permit oral argument on the proposed findings of fact and conclusions of law.

The CARP Report: At the conclusion of the 180-day period and after considering

the evidence and testimony presented, the CARP delivers its written recommendation to the Librarian of Congress as to what the royalty rates or the

distribution should be. In making the recommendation, the CARP must articulate the reasons for its recommendations and the evidence that supports its conclusions.

Review of the CARP Report: Upon receipt of the CARP report, the Librarian is

given 90 days in which to either accept the determination of the CARP or to

reject it. The Librarian may reject the recommendation only if he or she determines that it is arbitrary or contrary to the provisions of the Copyright Act. The

Register of Copyrights is directed to advise the Librarian on his or her decision.

If the Librarian rejects the CARP’s recommendation, there is an additional 30

days for the Librarian to issue a final order setting forth the rate adjustment

or distribution, as the case may be.

Appeal of the Librarian’s Order: Any party with an interest in the royalty rates

or distribution determined by the Librarian may appeal the decision within 30

days of its publication in the Federal Register. Appeal must be made in the

United States Court of Appeals for the District of Columbia Circuit.

Since the abolition of the Copyright Royalty Tribunal in 1993, the Copyright Office and the Library have conducted nine full proceedings that have resulted in delivery of CARP reports. Numerous other proceedings have settled at various stages,

and the Office has several more proceedings currently pending. Six of the Librarian’s decisions were appealed and in each instance the Librarian’s determination

was upheld.2

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SHORTCOMINGS OF THE CARP SYSTEM

Mr. Chairman, you will undoubtedly hear testimony from the other witnesses on

today’s panel as to the shortcomings and complaints of the current CARP system.

In this section, I highlight some of the difficulties we have observed in the near decade of administering the system.

1. Costs.

The arbitrators selected to serve on a particular CARP must, of course, be paid.

Arbitrators are typically compensated at between $200 and $400 an hour for their

work which, in a hotly contested proceeding involving many parties and large

amounts of testimony, can add up to considerable sums. In the case of a royalty distribution proceeding, the arbitrators are paid from the royalty funds to be distributed. In the case of a royalty adjustment proceeding where there are no royalties

collected by the Copyright Office, the participants must pay the arbitrators out of

their own pockets. There is no question that in some rate adjustment proceedings,

some interested parties cannot afford the cost of participating. While the Copyright

Office has considered allowing these parties to participate free of charge, this would

certainly draw objections from the participants in the proceeding who would foot the

bill.

On an institutional scale, CARP proceedings are also very costly. They require

considerable amounts of time of Copyright Office and Library personnel who must

conduct various phases of the proceedings, such as discovery relating to the written

direct cases and review of the CARPs’ decisions. In the recent CARP rate-setting

proceeding for webcasting, the cost of the arbitrators alone exceeded the entire annual budget of the Copyright Royalty Tribunal in its last year of existence.

2. Lack of Stability and Predictability of Results

Each panel of arbitrators is selected for one particular case. The decisions they

make are for the purpose of deciding that one case and not for establishing lasting

precedent. Furthermore, although the Librarian attempts to select arbitrators who

have served well on previous panels, the individuals almost always vary from one

panel to the next. Parties who are dissatisfied with one panel are tempted to return

and try a different panel. Therefore, there is a lack of stability and predictability

in the process, and a lack of reliable precedent upon which the parties can base the

settlement of their differences.

3. Institutional Expertise

Although copyright rate setting or adjustment and distribution proceedings often

involve considerable amounts of money, the fact remains that the statutory licenses

and the CARP system occupy an esoteric area of the law. We have found it very

difficult to find arbitrators that have any familiarity with copyright law, let alone

the complex statutory licenses in that law and the unique procedures of the CARPs.

Those that do have some copyright law experience typically cannot be selected due

to a financial or other conflict of interest. The result is that we are forced to select

arbitrators that, while bright and capable, lack knowledge and understanding of the

workings and details of the copyright laws and the CARP system. This lack of expertise puts a considerable burden upon the Register and the Librarian to correct

errors and oversights made by CARPs during the course of the proceeding, a burden

which is exacerbated by the short review period granted the Register and the Librarian by the statute. Of the nine CARP reports which the Librarian has reviewed,

only three have been acceptable. Several of the rejected reports have required considerable effort in preparing a final order.

Because of the ad hoc nature of the CARPs, there is no institutional expertise on

any given panel. As one frequent attorney participant in the CARP process recently

informed the Office, the most scary day of a CARP proceeding is the first day when

one encounters the level of competence of panel members that can be expected for

the next six months.

RECOMMENDATIONS

Mr. Chairman, it is clear that the CARP system is far from perfect. I do believe,

however, that the decision making produced by the current system is superior to

that produced by the Copyright Royalty Tribunal during its tenure. I do not disparage the work of the Tribunal as they did, in most circumstances, the best they could

with the resources available. But I do think that a simple return to the Tribunal

system would be a mistake.

Attached to this written statement is a report prepared four years ago by the

Copyright Office at the request of this Subcommittee. The report offers five different

36

options to improve the manner in which copyright license royalty fees and rates are

resolved. The options are:

Reforming the Current System: The Copyright Office proposed eleven amendments to the Copyright Act to address the CARP’s most serious flaws. They include making the Register the supervising official; lengthening the time of each

proceeding; expanding the use of paper proceedings to reduce the costs of hearings; reducing the number of arbitrators for small claims or having small claims

resolved by staff; and capping the arbitrators’ fees.

Replacing Arbitrators with Administrative Law Judges: Under this option, administrative law judges supplied by the Office of Personnel Management would

handle the royalty ratemaking and distribution cases within the Copyright Office.

Replacing Arbitrators with Presiding Officers: Under this option, arbitrators

would be replaced with presiding officers who, while not administrative law

judges, would perform the same functions. The precise features of this system

would be established by Congress as a stand-alone system administered by the

Register and not the Office of Personnel Management.

Creating a Board Within the Copyright Office: Under this option, a Board would

be established within the Copyright Office that would take on more authority

than presiding officers, be more autonomous, and render final agency decisions.

Creating an Independent Regulatory Agency: Under this option, a new independent regulatory agency, similar to the Copyright Royalty Tribunal but with

some improvements, would be created.

The attached report discusses fully the strengths and weaknesses of each of the five

options.

In 1998, Mr. Chairman, you introduced H.R. 3210, the ‘‘Copyright Compulsory License Improvement Act.’’ The bill would have amended chapter 8 of the Copyright

Act to establish a Copyright Royalty Adjudication Board (‘‘CRAB’’) consisting of one

full-time chief administrative copyright judge and up to four part-time administrative copyright judges selected by the Librarian of Congress. The judges would serve

five year terms and be compensated at a government salary level. The Board, while

within the Copyright Office, would be wholly independent and would have full authority to determine all statutory license rates and royalty distributions. The Copyright Office, however, could present formally its views to the Board on any matter,

which the Board could accept or reject. Appeal of final Board decisions would be to

the United States Court of Appeals for the Federal Circuit.

Although I have concerns about some aspects of the proposals contained in H.R.

3210, it was a positive first step in addressing the issues. The Copyright Office

would be pleased and interested in working with the Subcommittee, and with the

parties for reform of the current system to produce a better model. In reforming the

CARPs, there are several key elements that need to be addressed.

First, the best way to produce well-reasoned decisions is to create a system that

permits the Copyright Office and the Library to hire full-time employees who are

well-versed and experienced in the copyright law, the complexities of the statutory

licenses, and who are experienced at conducting administrative proceedings. As discussed above, while we have hired capable arbitrators in CARP proceedings, it has

been impossible to find arbitrators who are intimate with the details of the copyright law, the statutory licenses and the distribution/rate adjustment process. Having the same full-time decision makers who adjudicate all rate adjustment and distribution proceedings will not only raise the level of institutional expertise, but will

produce balanced and stable results. Placing those decision makers in the agency

with expertise in copyright and the statutory licenses will ensure that their decisions are well-reasoned.

Second, although the responsibilities of rate making and royalty distribution has

risen in recent years due to an increase of compulsory licenses in the Copyright Act,

we recognize that there are still periods of inactivity where no proceedings are being

conducted. One of the criticisms of the Copyright Royalty Tribunal was that Commissioners were still compensated during such periods thereby effectively being paid

for little or no work. Consideration should be given to whether the Register should

have discretion to assign additional copyright work to the Copyright Office-based decision makers during these periods of inactivity.

Third, a new system should permit the Register a substantive role during the

process to address important policy and substantive matters that might arise during

a rate adjustment or royalty distribution. Whether the role is one of having input

into the decision, as was proposed in H.R. 3210, or one of being the final decision

maker is an issue that should be explored.

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Finally, there is the matter of costs. Hiring full-time employees at government

salaries to serve as decision makers will certainly reduce the overall cost of proceedings to the parties, but there remains the question of the source of their funding. Under the current system, for those compulsory licenses for which the Copyright Office collects royalties, the costs of the arbitrators in distribution proceedings

are paid for out of the royalty pool. This is an appropriate system that should be

retained since those benefitting from the distribution are paying for the cost of the

proceeding. However, in those circumstances where the Office does not collect royalties, such as the recent webcasting CARP proceeding, the parties currently pay the

costs of the arbitrators. One of the objections to such a payment scheme is that it

raises a bar to participation for those who cannot afford to pay the arbitrators.

Therefore, I recommend that the salaries of the decision makers in rate adjustments

in the new system, where no royalty fees are collected by the Office, be paid from

appropriated funds. This would require an additional appropriation for that purpose.

The Copyright Office looks forward to working with the Subcommittee and the interested parties on this important matter. Thank you, Mr. Chairman.

Mr. COBLE. Thank you all for complying in the time frame. We

impose the 5-minutes rule against ourselves as well. So I will start.

One criticism of the CARP system is that each panel is comprised of a new set of participants, which results in an absence of

stability and predictability as well as reliable precedent. Ms. Peters, do you agree with this assessment?

Ms. PETERS. Yes.

Mr. COBLE. Does anyone disagree with their assessment?

Mr. Rich, some critics have observed that the rules of the CARP

system are not comparable to the Federal Rules of Evidence, thereby producing a frenetic litigation environment there, which panelists render decisions without access to critical information. And you

touched on this somewhat in your testimony. For example, panelists and the Copyright Office cannot issue subpoenas under CARP

rules. How could we fix this aspect of the CARP system?

Mr. RICH. My broader recommendation, Mr. Chairman, has been

that we move closer to, if not adopt totally, a model of discovery

that is closer to the Federal rules. I think this came home to roost

in the most recent CARP. This is not for purposes of assessing substantive outcome, but anecdotally I think it is useful in identifying

the issue. One of the parties main positions in the case was dependent on agreements that the industry, the record industry, had

reached with third parties, nonparties to the proceeding. They had

settled voluntarily, so they were not before the CARP panel. It was

obvious since this was the underpinning of the case presented by

the record industry that learning everything one could learn about

the circumstances of those agreements would be useful. And the

panel felt it in its bones every bit as much as the other side of the

case did, yet the lack of subpoena power, for example, and the lack

of more robust discovery tools really made it a voluntary exercise.

The panel could at most invite these 26 folks to come on into New

York—come on into Washington at their own expense, be subjected

to what has to be regarded as a generally unpleasant experience

of being examined and cross-examined. Not surprisingly, Mr.

Chairman, very few did.

That is just an example of how we don’t get at the root—at issue

joinder—that these complicated proceedings, I am talking about

now a very large and complicated proceeding, at least, mandate.

I would be the first to suggest that you may want a scaling down

of discovery and of the commensurate burden as the consequences,

38

as the order of magnitude of cases decline. But where you are talking industrywide important precedent, major record labels, major

companies and even nascent companies hoping to get a foothold, it

seems to me we ought not to spare in our use of additional tools

to get to the facts and get at what we elusively call the truth.

Mr. COBLE. Mr. Garrett, I have a two-part question for you.

Some of the proposals submitted to our Subcommittee would increase the scope of discovery and the length of the discovery period.

Would this truly eliminate the cost of participating in a rate-setting? And, B, if these proposals were adopted, but the resulting

CARP structure remained outside the jurisdiction of the Federal

courts, wouldn’t the resulting delays force the effective copyright

owners to wait perhaps even longer to be compensated for the use

of their works?

Mr. GARRETT. Mr. Chairman, I believe that expanding the scope

of discovery, expanding the scope of discovery procedures and

mechanisms available to parties will necessarily have the effect of

increasing the cost of participation in these proceedings. I don’t

think that is an objective that we want to achieve here.

As a truly theoretical technical matter, I mean, I certainly understand what it says here, but let’s move toward a system that is

more comparable to those in the Federal courts. But I don’t believe

that we have that luxury for the kinds of decisions that are being

made here. I don’t think that that kind of luxury is one that is necessarily inherent in ratemaking proceedings.

With respect to the way I approach the issue, Mr. Chairman, I

believe that the cost consideration is the most important consideration here, and if you were going to have that as your principal objective, then you cannot move toward putting these kinds of matters either within the jurisdiction of the Federal courts or else expanding the scope and types of discovery.

Mr. COBLE. Thank you, sir.

Mr. Remington I will get to you later. The red light has not appeared, but the clock did not activate. I am sure my 5 minutes

have elapsed.

Mr. Berman.

Mr. BERMAN. Thank you, Mr. Chairman. This is not a balanced

panel in the sense of people defending the present structure and

process versus people criticizing it. If I wanted to have a balanced

panel here today, where would I have gone to find the people who

would defend the present structure and process? There is no one?

Okay. All right. So something has got to change is the consensus

of the people who participate in the process.

Mr. Rich, why don’t you take the first shot at defending your

suggestion for change; that is, moving to a rate court. Mr. Boucher

has suggested that. Mr. Garrett has said if you want to cut costs

and simplify the process, going to a rate court is not the way to

do it. What is your response to that?

Mr. RICH. Mr. Berman, as I understand Mr. Garrett’s proposal,

at least at the extreme it would apparently entail putting in some

untested affidavits of parties, not having any discovery beneath

those, and then not having the benefit of any hearing or cross-examination to test it even at a trial setting. I think it would, frankly, make a farce—with all due respect to a lawyer I respect a lot—

39

I think it would make a farce of any serious effort to find—whether

under a willing buyer/willing seller test or fairness or reasonableness standard to get at what markets that these compulsory license

systems are trying to replicate would accomplish.

More directly to your question, sir, I have been through about

four ASCAP rate court trial experiences now, and they have ranged

from sloppy and endless and quite expensive, candidly, to extremely efficient and extremely well run. In one example, this

was——

Mr. BERMAN. You have been to four.

Mr. RICH. ASCAP rate-setting processes, excuse me, representing

a variety of clients.

Mr. BERMAN. You have watched the rate court work?

Mr. RICH. I have experienced it firsthand. One example is, and

a favorable example that I mention to the Committee by way of

structural possibility, Judge William Connor in New York, who is

the supervising judge in senior status for the ASCAP consent decree, oversaw a case involving the ABC and CBS television networks involving a fee dispute covering a comparable period of years

to what a typical CARP proceeding entails, from the beginning

through discovery, carefully controlled by Judge Connor. He didn’t

let it get out of hand, brought it to trial in about a year’s time, and

his decision was not appealed. In other words, it went start to finish: we gave the client a budget in that case, anticipating a short

track; we were kept on a short track by the judge; we kept on the

budget, and it worked. We had the Federal Rules of Civil Procedure. We had the benefits of one experienced judge, very commercially savvy. There was the benefit of a developing body of precedent in terms of music performance rights, licensing traditions.

We had, again, the protections of ample discovery and subpoena

power control by the court. We had Federal Rules of Evidence, so

we knew what could come in and what couldn’t, and we had a very

efficient process, I think, with a very bright judge who got to a very

sane result. And while, as usual, some people were happier with

the result than others, I think there was a sense that the matter

proceeded fairly.

And so as I compare that experience and contrast it with my

CARP experiences where all of it just bulges at the seams, and

where nothing seems to work right, you run around frenetically, as

was indicated, and you don’t get discovery. This seems to be a better process.

Mr. BERMAN. One short follow-up question before I—were you or

your client among the people who were more happy with the final

decision than others?

Mr. RICH. In that particular case, yes, although there have been

other cases where the answer in the rate court has been no.

Mr. BERMAN. Now, you had a chance to defend your suggestion

and attack his suggestion. Would you like to defend your suggestion, Mr. Garrett, against his attack, with all due respect for your

high regard for him?

Mr. GARRETT. I have been defending myself against attacks from

Mr. Rich now for 2 years; I have been accustomed to that. As a litigator, I see a great deal of merit in what Mr. Rich says.

40

As a litigator, one wants to have as much discovery as possible.

One wants to be able to know in advance as much information as

is possible. It is a very scary moment in these CARP proceedings

when you walk up to a witness, an expert witness or a fact witness,

and realize that is the first time that you are really going to hear

anything that that witness has had to say. We don’t have depositions.

But I have been doing that for 25 years in these proceedings, and

it is my belief that we would be just as well off without having any

of the limited form of discovery that we do have. And when you

balance that against the considerations of cost——

Mr. BERMAN. What about the fact that now you are not going to

hear and be able to cross-examine that witness under your suggestion; you are just going to be able to read his affidavit and file a

counter-affidavit?

Mr. GARRETT. I think my suggestion goes beyond that, Congressman Berman. But I think that, first of all, it is important to understand that those rules will apply equally to both sides. Both sides

are going to have as little or as much discovery, or as little or as

much right to discovery. There is an equalization factor there that

I think comes into play.

I also think that those who participate in these proceedings and

simply do nothing but put in an affidavit and say, if you adopt this

royalty rate you are going to put us out of business, that affidavits

like that will be given if little credibility, little weight by the arbitrators, whoever is going to make the decision in that case. I think

people—in order to put forth a compelling, credible case, they are

going to have to engage in voluntary discovery. They are going to

have to put in more than an affidavit saying, you are going to put

me out of business. They are going to have to turn over their financial documents either as part of their direct case or testimony or

some other kind of discovery.

I would use a carrot, as opposed to a stick, here; and I think it

is useful because it does achieve the—what I believe to be the primary objective, which should be the primary objective of cutting

costs so that all parties can participate in an affordable process.

Mr. BERMAN. Thank you, Mr. Chairman. And I think my time

has expired.

Mr. COBLE. Mr. Cannon.

Mr. CANNON. Thank you, Mr. Chairman. And I would like to

thank the panel for the very enlightening testimony we have had

thus far. And while we have my favorite witness, Ms. Peters here,

if you wouldn’t mind, I would like to ask a question about a related

matter on instrumental music and ask you to clarify two points

with regard to your DMCA, section 104, report that was issued last

August.

Footnote 434 of the 104 report states that you would favor repeal

of section 112(e) of the Copyright Act and the adoption of an appropriately crafted, ephemeral recording exemption that would essentially permit on-line music services to make server copies of sound

recordings and compositions that facilitate authorized uses of those

works without permission from or obligation to the copyright

owner.

41

After the hearing in response to my written follow-up question,

you reiterated that as you stated in the report, you would favor repeal of 112(e) and adoption of an ephemeral recording exemption.

Do you still favor those statutory changes and would you recommend that this Subcommittee consider them?

Ms. PETERS. With regard to the 104 report, it really wasn’t in the

scope of the 104 report, so it wasn’t really a formal recommendation.

What we said in the footnote we do stand by. We would favor replacing the statutory license in 112(e) with an exemption.

What we said and we stand by is, we don’t see any justification

for the imposition of a royalty obligation under statutory license to

make copies that have no independent economic value and are solely to enable another use that is permitted under a separate compulsory license. But in the 104 report, we have two recommendations of things that we believe in that don’t become part of the formal recommendation, because we thought they were out of scope.

Mr. CANNON. That is that the scope of your report, but still within the scope of what this Committee probably needs to do.

The 104 report also concludes that public performances incidental to licensed music downloads shall result in no performance

right liability. Again, in response to one of my written follow-up

questions, you stated that it would be appropriate for Congress to

enact legislation precluding any liability arising from the assertion

of a copyright owner’s public performance right with respect to any

technical performance that may take place as a necessary byproduct of an authorized download so long as no audible performance

actually takes place simultaneously with the download.

Again, for clarification, do you still support legislation that would

make this statutory change as you stated in the 104 report?

Ms. PETERS. Again, it is the same thing as before. It wasn’t within the scope of the report, so not part of the formal recommendations; but we stand by our analysis and what we said.

Mr. CANNON. Thank you. I understand your office is working

with Chairman Coble’s staff and Mr. Berman’s staff to develop legislation that reflects the copyright officer’s recommendations associated with the 104 report and recognizing the scope of the report

and our obligations here. And I look forward to reviewing these

provisions in that draft bill, and thank you very much for being

here.

And Mr. Chairman, I yield back.

Mr. COBLE. Thank you. Mr. Cannon, unless I missed something,

you weren’t charting a CARP course, were you? What you—and I

am not admonishing you for that, but was I missing something?

Mr. CANNON. No, sir. This is slightly peripheral to the testimony

that has happened thus far today. But the ever-capable Ms. Peters

was very much with these issues, and I appreciate that information.

Mr. COBLE. The gentleman from Virginia.

Mr. BOUCHER. Thank you, Mr. Chairman. I want to join with

others in thanking this panel for illuminating our Subcommittee

today on questions relating to the CARP proceedings.

I think that in response to Mr. Berman’s questions, we have

rather thoroughly covered the terrain of the potential of using the

42

U.S. District Court in the alternative to CARPs. That is a subject

in which I have some interest and intend to have further discussions concerning, but I believe we have given this panel an adequate opportunity to express its views on that question.

I think we have also covered, in response to Mr. Berman’s questions, rather thoroughly the potential need and the pros and cons

on moving to more advanced discovery. I happen to think that that

would be salutary. I understand Mr. Garrett does not think so. And

that also, I think, is a fruitful subject for further conversation.

I am going to take the time of these questions today to focus on

the standards. There are three standards that have come to my attention that are applied by CARPs:

Section 801 applied to music distribution services, digital music

distribution services other than Webcasting, and the concept of

fairness of the payment is inherent in that standard;

The section 119 standard relating to the payments that are made

by cable and satellite retransmitters for terrestrial television rebroadcasting, and the concept of fairness of the payment is inherent in that standard;

Applied recently by the CARP was the section 114 standard that

applies only to Webcasters, and the concept of fairness of the payment is not present in the standards that were applied in that decision.

A result was reached, which I, frankly, find very troubling. I

think Mr. Billington also found it troubling. I think he took the

step of setting that decision aside, and we are awaiting his decision

on his more thorough consideration of the matter.

But what troubles me greatly is that in setting this rate, the consequence of the rate to the new and emerging and young and perhaps struggling Webcasters who are just getting on their feet and

who measure their revenues in the tens of thousands of dollars per

year was not considered. By having a one-size-fits-all approach and

setting a rate of 14 cents per song played that applies to everybody,

no matter what their revenues, the young companies and the small

companies were severely threatened. They would have royalties

alone measuring in the hundreds of thousands of dollars annually,

and that strikes me as fundamentally unfair.

I think an element of what we ought to be doing as we evaluate

this overall subject is to consider whether or not the standards that

are being applied by the CARPs are reasonable and fair.

Now, I don’t know whether you came today prepared to respond

to this question or not, but I would like your opinion on the question of whether or not the standards are adequate. And specifically,

do you believe that in making general revisions with regard to the

CARP that we ought to be inserting the element of fairness of the

payment in this section 114 standard as it is currently found in the

other two standards? And who would like to respond?

Mr. Rich.

Mr. RICH. I would be glad to take a stab at it, Mr. Boucher.

First observation, and a spin on what Ms. Peters and Mr. Garrett suggested, while process is important, I think if process doesn’t

lead to—isn’t buttressed by a substantive standard that makes

sense—the process is wasteful and the efforts of this Subcommittee

43

therefore would be wasted; and I don’t think anybody wants to see

that.

I think this is a more complicated issue than the 112, 114 setting, as follows. You have a willing-buyer and willing-seller standard which is subject to various interpretations as to what it means.

But one interpretation which doesn’t strike me as a bad one is, it

means if you had a freely competitive marketplace and you saw

what even nascent Webcasters would spend in that marketplace, if

you could approximate what would come out of that process and

you are asking a panel to do it, it wouldn’t be so bad.

I think where this has gone off the rails potentially is that there

is, for example, in section 114(e) of the act an antitrust exemption

which was designed to encourage negotiated resolutions by allowing collective negotiations to occur, whether through trade organizations like the RIAA or, for that matter, through collectives like

ASCAP and BMI. And the result is that, acting on that statutory

authority and that antitrust exemption, the collectives went out

and did and tried to do what you would expect they would do,

which was to obtain license fees at the best rates they could obtain

from, as it turned out, a variety of generally small—with one or

two exceptions—Webcasters, and then came into the CARP process

and said, ‘‘Here they are; you should accept these as market approximating.’’ The problem is, they were the fruits of the antitrust exemption;

they did reflect the product of market power. And, therefore, to assume, as I think the panel slipped into error, that simply because

these were, quote, ‘‘willing buyers’’ and ‘‘willing sellers’’ in the

sense that literally deals were struck, there must be some kernel

of arms-length, fair result in it, I think led to the problem. And I

think if you are dealing with new industries, with a particularly inherent imbalance in power, unless there is a clearer vision of what

‘‘willing buyer,’’ ‘‘willing seller’’ means, than I think this panel understood, I would favor a return to something closer to the 801(b)

standard—which, after all, the record industry itself benefits from

in other compulsory license settings like 115, where they get the

benefit of the 801(b) standard as a, quote, ‘‘user.’’ .

Why not have that as a level playing field for everyone, which

explicitly recognizes the nascent nature of industries the need to

encourage new players and the like, and inject back the element

of fairness, if you will?

Mr. BOUCHER. Mr. Garrett, I know you want to respond to this.

Mr. COBLE. Mr. Garrett, move along quickly because the 5 minutes have elapsed and we are going to start a second round.

Mr. GARRETT. The standard that is in 114 is the same standard

that is in 119. Both statutes use the term a ‘‘willing buyer, willing

seller.’’ both statutes use the term ‘‘willing buyer, willing seller.’’ .

The term ‘‘willing buyer willing seller’’ has historically meant in

our jurisprudence a fair market value standard—119 has fair market value; 114 has fair market value. And in my view, I see no reason, no justification, for requiring the licensing of copyrighted

works at anything less than fair market value. Fair market value

has an inherent concept of fairness in it, and I think it was one

that was considered during the recent CARP proceeding.

Mr. COBLE. We will start a second round now.

44

Mr. Remington, I believe that we all agree that participation

should not be limited to just, quote, ‘‘the big players,’’ close quote.

There are those who would argue that participation in CARP is

cost prohibitive for individuals and small entities.

That said, I am also informed that individuals with small claims

have invoked existing CARP rules to prolong proceedings and derail settlements at virtually no cost to themselves, but substantial

costs to other parties. Could we correct this inequity by splitting

CARP fees among parties in proportion to their participation rather

than on a pro rata basis? And if not, what would you suggest?

Mr. REMINGTON. Thank you, Mr. Chairman.

I would suggest, as I stated in my written statement, that there be a much lower-cost, more expeditious system which for the $5 or

$10 claim obviously wouldn’t come in under that cost—that would

be a sheer impossibility—but paper proceeding, summary judgment, aggressive pursuit of settlement not only by the parties, but

by the people who—like a U.S. Magistrate would do, or a Federal

district judge—by the person or entity that controls the process.

We are not arguing that individuals should not have access to

this process. They should. If they are a bona fide songwriter and

composer, under the DART statute they have access to that process. But it is downright silly to allow people to expend tens of thousands of dollars in pursuit of a claim under $10 where the Copyright Office doesn’t even have authority to cut a check to pay off

that amount of money.

Mr. COBLE. I concur.

CARP assists in the distribution of proceeds under a compulsory

license must prescribe rates and terms that are representative of

those that would have been negotiated in the marketplace, again

between a willing buyer and a willing seller.

Having said that, A, since the CARP represents the failure of

marketplace negotiations, how do you all determine marketplace

standards by which a rate may be set, A? And, B, if the same static

rate is revived in subsequent CARPs, why should any CARP be

convened?

Ms. Peters, why don’t you start if you are comfortable starting?

Ms. PETERS. It is better that they start.

Mr. COBLE. Who wants to put their oar in the water initially?

All right, Mr. Garrett.

Mr. GARRETT. Mr. Chairman, again the notion of willing buyer,

willing seller is one that is fundamentally ingrained in our system

of American jurisprudence here.

The question, what is appropriate value, that is how fair market

is defined; it is willing buyer, willing seller. So the issue of how you

in any particular case define or come up with a willing-buyer or

willing-seller rate is one that has been confronted over and over

again in a wide variety of contexts. If you are talking about eminent domain cases or talking about these CARP proceedings or

Government compulsory licensing of patents and copyrights, it is a

standard that has been applied over and over again.

Having said that, the recent Webcaster proceedings is a good example of where one can spend hours and hours and tens of thousands of pages arguing about what does a willing-buyer, willingseller rate mean in the context of any particular situation.

45

But that same kind of thing goes on in other cases, as well, when

you have to determine fair market value; and I believe that that

is an appropriate standard here for judging the value of copyrighted works.

If you are going to compel—and we are talking about compulsory

licenses here—if you are going to compel copyright owners to license their works to different types of technologies, at the very

least they should be entitled to fair market value for the use of

their works.

Mr. COBLE. Does anyone want to add to that?

Mr. REMINGTON. To the extent it is obviously your prerogative to

create compulsory licenses; but to the extent that you set subsidy

rates at lower than fair market value, you are transferring wealth

from one group of people to another in our society. And that is one

of the problems in several of the compulsory licenses that do not

have the willing buyer, willing seller, standard.

Now, in the political sense, many people would like those types

of compulsory licenses because they get a rate that is under what

they would pay in the marketplace. You just have to be careful and

be knowledgeable of that fact.

Mr. COBLE. Ms. Peters, I let you off early. I am going to impose

on you again.

Ms. PETERS. That is good because the terms and conditions are

what we are actually really considering right now in the

Webcasting proceeding, so it would be inappropriate to answer.

Mr. COBLE. That is why I was quick to recognize that.

Would eliminating all statutory licenses resolve the litany of

problems which have been broached today?

Ms. PETERS. I would say hallelujah; and the answer is, yes, it

would.

But my knowledge of where we are going: I think we are more

likely to see more, not less; and more complex, not less complex.

So it would be great because we wouldn’t have to deal with what

to do about the failure of the CARP system. But I think you are

going to have to come and deal with it.

Mr. COBLE. I see that annoying red light looking at me now, so

I recognize the gentleman from California.

Mr. BERMAN. Thank you, Mr. Chairman. Just taking off on what

Mr. Rich said earlier in criticizing the willing-buyer, willing-seller

standard, you talked about this example of taking some agreements between the RIAA, and I guess, what, individual DEMA

members.

Mr. RICH. Individual Webcasters.

Mr. BERMAN. Individual Webcasters, and that becoming a rate.

But I am told that, in fact, the CARP throughout 25 of the 26

agreements reached during that process and only left the agreement between YAHOO and—not exactly a small Webcaster—and

the RIAA and then said, but even so, that rate would not be the

appropriate rate and reduce that.

Mr. Garrett, am I right about that?

Mr. GARRETT. I think you have it right, Mr. Berman.

Mr. BERMAN. So it wasn’t looking at 25 unbalanced negotiations

in that sense and then concluding that is the willing-buyer, willingVerDate 11-MAY-2000 15:52 Jul 31, 2002 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\061302\80194.000 HJUD3 PsN: HJUD3
46

seller rate derived from sort of a nonmarketplace situation because

of the antitrust exemption?

Well, anyhow, I guess, Mr. Remington and Ms. Peters, you

hadn’t spoken yet on the issue of court versus continued administrative or arbitration process. Do you have any thoughts on that?

Mr. REMINGTON. Yes, I do.

I think, fortuitously, this is the Courts Subcommittee, so this decision could not be made in a better environment. But Bruce Rich,

being a good lawyer, did recognize a deep-seated constitutional

question which he said he hadn’t analyzed.

I would hazard a guess that this is of very dubious constitutionality because there is no case or controversy. You would have

to create a cause of action of sorts in order to invoke the litigation

process and the powers of the Federal judiciary. In the BMI or

ASCAP rate court context, there is a case or controversy which

emanates from the administration of the consent decrees.

Second, I agree with Bob Garrett that everything that has been

criticized about the defects in the CARP process, primarily costs

would be exacerbated in this process; this would be more expensive

and slower.

Third—and I grabbed my long-range plan for the Federal

courts—the Federal judiciary from a policy perspective, as you well

know, vigorously opposes the creation of specialized courts unless

there is a huge societal problem at hand, something akin to maybe

even to homeland security. But to create a court for copyright arbitration royalty proceedings, as a policy matter, I don’t think would

receive the approval of the Judicial Conference.

Ms. PETERS. I am not a constitutional scholar, so I accept Mike’s

questions. I really don’t have a preference one way or the other.

Maybe that is not true; there is a question that is raised—— Mr. BERMAN. Your life would be easier.

Ms. PETERS. Right, absolutely, and I am trying to make that happen.

A couple of countries actually have judges involved in their tribunal-type proceedings, but it is not the same as giving it to the

district court. In Australia and Canada, they really have one judge

who is—part of his duty for a certain period of time is to be like

the equivalent of ‘‘chairman of the proceedings,’’ if any are necessary, and then deal with stable members, who are named, whether they are from an agency like the copyright office or their equivalent of ALJs. But it does bring the adjudicator knowledge of the

courts.

Now, I don’t know how that kind of a system plays in with regard to our constitutional requirements. But I know that the countries that have that system seem to like that system.

Mr. BERMAN. Well, I think that does it, Mr. Chairman, for me.

Thank you.

Mr. COBLE. Thank you, Mr. Berman.

Mr. Remington, I cut you off when Mr. Boucher’s time expired.

I will now recognize you for that comment, or have you made it?

Mr. REMINGTON. I just wanted to make a clarification. I thought

I heard twice that BMI and ASCAP were part of the proceedings,

and they were not. For the record, we were not part of the recent

webcasting proceeding.

47

Mr. COBLE. Okay.

Let me put this to you, Ms. Peters, in conclusion. It has been

suggested today—let me say good-bye to Howard before he leaves.

Ms. Peters, it has been suggested here today that a possible,

quote, ‘‘fix,’’ close quote, of the CARP structure and process is going

directly to the Federal court system.

How would you, as Madam Register—speaking for the copyright

office, how would you feel, in essence, not having to deal with the

CARP system anymore?

Ms. PETERS. Let me put it this way——

Mr. COBLE. Strike that.

How would you feel about not dealing with the CARP system, A

and B? What do you think about going directly to the court system?

Ms. PETERS. I am not sure about going directly to the court system. I probably don’t support that.

With regard to dealing with the CARP system, I think the system that is in place right now and the work that is done by the

copyright office in the review of what the panels do is not necessary, that there is a better structure.

I am not opposing it remaining at the Copyright Office. I am just

saying it has got to work better and it has got to meet the criticisms and the shortcomings that we have identified. We are not opposed to having it at the Copyright Office if that is where—when

you address all of these issues, that is where the consensus seems

to coalesce.

Mr. COBLE. Well, ladies and gentlemen, lady and gentlemen, we

thank you all and thank those in the audience for having expressed

your interest by your continued presence here. And let me conclude

by thinking aloud.

If it is the consensus that we enact a bill to change the CARP

system and if everyone agrees just, to some extent, to that point,

it may well be helpful—again, thinking aloud—if the Copyright Office and/or our Subcommittee conducted round tables or discussions

or jaw-boning with interested parties on the subject in advance of

possible legislative action. I don’t see that that could do any harm.

Ms. PETERS. We would be delighted to do that.

Mr. COBLE. I didn’t hear you.

Ms. PETERS. We are doing very good at round tables.

Mr. COBLE. It may end up wasting time, but we always do from

time to time. But you all think about that and so will I.

In conclusion, does anyone have any nagging ideas you want to

bounce off before we drop the hook?

Well, again, we appreciate, folks, your testimony and your presence today. This concludes the oversight hearing on CARP, the

Copyright Arbitration Royalty Panel structure and process. The

record will remain open for 1 week, so if you have additional information or if anyone has additional information, the record will be

open for 1 week.

Thank you again for your cooperation and attendance; and the

Subcommittee stands adjourned.

[Whereupon, at 4 p.m., the Subcommittee was adjourned.]

(49)

A P P E N D I X

STATMENTS SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE HOWARD COBLE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NORTH CAROLINA

Good afternoon. The Subcommittee will come to order.

The Founding Founders understood the importance of copyright to our nation. In

keeping with this tradition, our Subcommittee has always worked to support artists

by ensuring that they receive fair compensation for their creative endeavors.

Our hearing today will focus on an arcane but important component of the

present system that reimburses copyright holders for their work. By way of background, and as part of the 1976 Copyright Act Amendments, Congress acknowledged the need for government to oversee the royalty rate-making and distribution

process by creating the Copyright Royalty Tribunal, or CRT. The need for this entity

was especially critical since the ’76 Amendments also created three new compulsory

licenses.

By 1993, Congress, the Copyright Office, and rate-making participants believed

that greater efficiencies could be realized under a different system, which led to the

development of our present construct, the Copyright Arbitration Royalty Panel, or

CARP.

Unfortunately, it now appears that history is repeating itself, as the current structure and operation of the CARP system has generated great frustration among those

parties required to participate within its statutory confines.

Although some critics have characterized our efforts to develop a fair and efficient

rate-making and distribution process as ‘‘disappointing,’’ I am optimistic that we

will ultimately prevail in our attempt to build a better copyright mousetrap.

We have an excellent panel of witnesses today who will doubtlessly add to our

individual and collective understanding of the CARP system, warts and all. I welcome them here today and thank them in advance of sharing their thoughts.

I now turn to the Ranking Member, Mr. Berman, for his statement.

PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman,

Thank you for holding this hearing on the Copyright Arbitration Royalty Panel.

I am a strong supporter of marketplace solutions to copyright royalty disputes.

Copyright owners have every economic incentive to capture additional revenue by

licensing their works, and have every right to seek the highest royalties the market

will bear. If they are too short-sighted to capitalize on opportunities for new revenue—or fail to act rationally, as economists would say—the marketplace will punish them. Furthermore, when copyright owners have engaged in anti-competitive

conduct, the antitrust laws have, time after time, proven adequate to remedy this

conduct.

Compulsory licenses and CARPs, on the other hand, have proven to be imperfect,

unwieldy and costly licensing mechanisms, at best. I suspect that many CARP participants, both licensees and copyright owners, would have found a far more satisfactory outcome had they chosen to spend their money and effort negotiating a reasonable settlement in the marketplace rather than in a CARP. Furthermore, compulsory licenses tend to outlive their purpose, and thus may create marketplace dislocations rather than address them. For example, the cable compulsory license was

created to help a struggling and entrepreneurial cable industry compete with the

broadcast industry. Today, the cable license continues to exist in an era where the

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cable industry is able to exercise market power at least comparable to that of the

relevant copyright owners.

While I do not have a fondness for compulsory licenses, I recognize that we must

do our best to make the ones we do have work.

The CARP process was catapulted into national awareness this year because of

the controversial webcasting CARP, which determined the royalty rate for internet

radio. The outcome of the webcasting CARP—which still is under consideration by

the Librarian of Congress and the Copyright Office—has garnered much attention

from the press and the public.

What captured our attention about the webcasting CARP was not only the royalty

rate it set, however, but the process through which it occurred. While many of the

rate and distribution determinations are the subject of marked disagreement among

the participants, the one thing that even the strongest opponents agree upon is that

the CARP process has serious flaws and warrants improvement.

In particular, the overwhelming problem that is repeatedly voiced is the expense

of the proceedings. Participants in a CARP bear not only their own substantial legal

fees, but also the cost of the CARP proceeding itself. This is often millions of dollars—sometimes much more expensive than the royalty claim that the CARP is addressing. For instance, I believe Mr. Remington can address particularly egregious

situations in which a participant had to pay tens of thousands of dollars for a CARP

to determine the distribution of around ten dollars in royalties.

In addition to the problems of cost to the participants, I know there are great concerns over the autonomy and independence of the arbitration body, the burden it

places upon the Copyright Office, and the overall fairness and consistency of the

outcomes. I hope these are issues we can explore today, and begin to develop strategies to improve the royalty arbitration process. Our witnesses are experienced participants in CARP proceedings, and can speak to the problems they have encountered during CARP arbitration, along with potential solutions.

The issue of CARP reform is not new to our subcommittee. In 1998, Chairman

Coble introduced legislation to reform the methods through which the royalty rate

is determined. Ultimately there was not enough support to enact his reform proposals. Given today’s climate, however, I believe there is sufficient impetus and sufficient interest to seriously consider changes to the arbitration process. I anticipate

an active discussion today to determine a model that most efficiently accomplishes

the goals of the CARP process without unduly burdening the participants.

PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN

I agree we need to reform how licensing rates for copyrighted works are set. Everyone agrees that the current system is too expensive, time-consuming, and inefficient.

At the same time, this will be at least the third time we’ve changed how the rates

are set. I’m all for good government, but I feel like we’re playing Goldilocks here.

The first system, the tribunal, was too bureaucratic. The second system, the panels

we have now, are too unwieldy. So it seems like we have to find what’s just right

and that’s what this hearing is for.

While we are discussing we should make the changes, however, it is important

that any reforms made do not affect the actual rates that are set. I say this because

there have been ideas—in guise of procedural reform—that really would make it

harder for content owners to receive a fair price for their work.

That is something we should not do because the very incentive for the creative

works that are being licensed is the financial reward promised in the copyright

laws. The reforms made to the panels must be procedural in nature and no more.

PREPARED STATEMENT OF THE HONORABLE RICK BOUCHER, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF VIRGINIA

Thank you Mr. Chairman for a timely hearing on the CARP process.

The CARP process is badly broken. It should be replaced with a more efficient,

more affordable and fairer system. In my view the functions of the CARP should

be transferred to a U.S. District Court.

The problems which beset the CARP are many.

While the CARP process was designed to produce a streamlined procedure, the

lack of appropriate discovery mechanisms has prolonged the proceedings, achieving

the opposite of the intended outcome.

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The process is too expensive. It is beyond the ability of many interested parties

to afford. Having private parties pay the fees of the arbitrators is manifestly unjust

to the financially less fortunate.

No body of expertise is developed by the arbitrators which could be applied in subsequent proceedings. Starting with a new arbitrator panel each time will lead to inconsistent judgements and a constant process of reinventing the wheel.

And the standards which are applied are demonstrably inadequate. In the recent

webcasting decision, the concept of fairness of the payment was totally absent from

the deliberation.

Fairness is the standard under Section 801 (b) (1) proceedings for royalty payments for digital music services other than webcasting.

Fairness is the standard under Section 119 (c) (3) (B) for royalties paid by cable

and satellite companies to terrestrial broadcasters for terrestrial broadcast retransmissions.

But fairness is not an element of the standard under Section 114 applicable to

webcasters. However we address the procedural problems, and I believe vesting this

rate setting function in a U.S. District Court is the best approach. We also need to

invest fairness of the payment as the governing standard under all CARP proceedings.

We must avoid a repeat of rulings like the most recent one, through which a onesize fits all approach was adopted, and small webcasters that measure annual revenues in the tens of thousands of dollars were saddled with royalty fees in the hundreds of thousands. A fairness standard would have prevented a ruling which

threatened to put the young and small companies out of business.

Changes must be made, and I welcome this first hearing as we explore the problem and consider a new course.

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PREPARED STATEMENT OF THE HONORABLE CHRIS CANNON, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF UTAH

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PREPARED STATEMENT OF THE HONORABLE DARRELL ISSA, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Thank you, Chairman Coble and Ranking Member Berman, for holding this hearing on the process and structure of the CARP (Copyright Arbitration Royalty Panel).

With the existence of compulsory licenses, agreements are needed in order to determine the amount of licensing royalties copyright owners are entitled to receive.

Unfortunately, Congress has created a flawed process in which royalty decisions are

handed down. My specific concerns are directed at the exorbitant costs for arbitrators, the restrictive discovery process and the different standards for setting rates.

The CARP forces parties to participate in laborious proceedings that result often

in disputed decisions and additional lawsuits. The existing CARP process can cost

both parties a high price, with attorney fees, arbitrator fees, Copyright office fees

and consultant fees listed as expenses. Without reform, the current model will continue to be costly for all sides. The discovery aspect of the CARP proceedings is restrictive, because the CARP has no subpoena powers. The scope of the discovery is

limited to the written testimony, with access to official documents not available to

shed more light on a particular issue, thereby ensuring the system in place remains

ineffective and backwards, compared to a traditional court case.

My last area of concern involves the Copyright Act and the three different standards for setting royalty rates. I have attached to my opening statement a side-byside display of the three standards, which are found in Sections 801, 119 and 114

of the Copyright Act. The first of these standards requires rates to be the product

of a four-factor balancing test, and requires rates to be ‘‘fair’’ and minimally disruptive of the relevant industries. The second standard requires the rates to represent

54

the ‘‘fair market value’’ of the relevant activity. The third standard, which applies

only to Internet radio services, lacks a fairness requirement, and only requires the

arbitrators to ratify prices that would be negotiated by willing buyers and sellers

in ‘‘the marketplace.’’

I believe we should consider the feasibility of a single standard, which could lead

to providing assurances that the rates the CARP set are fair and reasonable for both

the copyright owners and the user, and provide the Copyright office a basis in which

to set future royalty rates.

Shedding light on the problems will require greater inquiry in to what is deficient

with the current system and what could be done to ensure fair decisions are rendered.

Thank you again for holding this hearing. I look forward to hearing the testimony

from the panel of witnesses.

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PREPARED STATEMENT OF DAVID MANDELBROT

Yahoo is a leading provider of comprehensive online products and services to consumers and businesses worldwide. Yahoo reaches more than 237 million individuals

worldwide each month.

Between March 2000 and August 2000, I was personally responsible on behalf of

Yahoo for the negotiation and execution with representatives of the Recording Industry Association of America of the voluntary ‘‘Webcasting Performance and

Ephemeral License Agreement’’ for Yahoo’s public performance of sound recordings

by noninteractive nonsubscription webcasting.

In July 1999, Yahoo had acquired broadcast.com inc., a publicly traded company

specializing in broadcasting audio and video over the Web. Broadcast.com was a

leading aggregator of streaming audio and video, making available from its Website

thousands of special events, several hundred local radio stations, local television stations and video networks, concerts, and Internet-only music channels. Over the two

years following the acquisition of broadcast.com, Yahoo integrated the broadcast.com

services into the Yahoo network.

With the acquisition of broadcast.com, Yahoo also became an aggregator of music

programming created by third parties. Specifically, Yahoo offered its audience the

opportunity to listen to music performances in two ways. First, radio stations transmitted their signals by phone line to Yahoo servers, which servers then originated

the retransmission of those radio station signals to the Internet. Second, programmers created Internet-only channels or Internet-only programming, which was not

transmitted over ordinary radio station signals and which Yahoo also made available to the public. At that time, radio retransmissions constituted approximately 90

percent of Yahoo’s performances that were covered by the statutory license; Yahoo’s

Internet-only performances constituted the remaining 10 percent.

As of the time when Yahoo completed its acquisition of broadcast.com, Yahoo had

several reasons for considering a voluntary license rather than taking advantage of

the statutory license available following arbitration:

First, it would enable Yahoo to offer certainty of a negotiated RIAA license to

Yahoo customers. By entering into a license agreement with the RIAA, Yahoo could

offer a service to our radio station and third party music programming entities by

saving them the expense and burden of arbitration or independent negotiation with

the RIAA.

Second, Yahoo would avoid the costs of arbitration. As one of the largest Internet

webcast transmission services, we would incur very high litigation costs if we were

to participate in the arbitration. In addition, litigation would drain time and resources from Yahoo personnel whose efforts would bring much greater value if directed toward development and execution of our site-wide streaming media implementation. Moreover, Yahoo was aware that these arbitrations could repeat every

two years. In light of these factors, Yahoo was willing to enter into a voluntary license in order to avoid these litigation burdens and costs. Yahoo ultimately decided

that we would much rather invest fewer resources settling than invest more resources arbitrating.

Third, Yahoo would avoid the uncertainty of the CARP rate. By negotiating a voluntary license, Yahoo could potentially quantify and control its costs. We were concerned that an unacceptably high royalty rate arrived at by the CARP could force

us to stop offering particular types of content. Negotiating the fee reduced the risk

of an adverse judgment inherent in any arbitration or litigation. In addition, given

that radio retransmissions constituted approximately 90 percent of Yahoo’s music

performances, we believed that our interests were different from the other participants in the CARP; and we wanted to establish a separate and lower rate for radio

retransmissions.

Fourth, Yahoo wanted to build goodwill with the record labels. We believed that

by settling early, we would engender goodwill with RIAA member recording companies. We hoped that this goodwill would lead to better revenue opportunities in the

future.

In light of these factors, our primary concern was the overall cost of the license,

that is, the ‘‘effective rate’’ that we would pay for all performances based on our mix

of radio retransmissions and Internet-only performances. Based on what we projected as the ratio of retransmissions to Internet-only transmissions, the radio retransmission fee was a much more significant factor to us.

Although we were aware that our license could be used as a precedent prospectively, our main interest was in striking a deal that had an acceptable bottom line

impact for the term of the agreement. To the extent that an arbitration resulted in

lower fees going forward, we would be able to avail ourselves of that lower rate in

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the renewal periods or following the expiration of our Agreement with RIAA. If our

license was deemed to be an industry precedent and the arbitration resulted in the

same rates, we would be on an even plane with our competitors, and the Internetonly rate was not of great concern to us at that time. Either way, we looked to the

costs we would save by not participating in the arbitration in agreeing to our license.

Not surprisingly, our interest was in doing what was best for our business and

our business model. At that time, because of our mix of 90 percent radio retransmissions and 10 percent Internet-only transmissions, we were hoping to achieve a

lower rate for radio retransmissions which would produce a lower effective rate and

have a far greater financial impact on our business than the rate for Internet-only

transmissions.

The fees ultimately set by the CARP in its recent report were considerably higher

than any fair market outcome or any reasonable construction of the economics of

the Yahoo-RIAA Agreement. The Panel did not appropriately address the unique

facts and circumstances surrounding the Yahoo-RIAA Agreement, yet the Panel explicitly used certain terms of that Agreement as a benchmark for industry rate-setting. The result is that a single specific agreement based upon the unique situation

of an individual company whose business model was atypical of Internet webcasters

in general, has been misapplied to set excessive rates for an entire industry.

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