Federal Register / Vol. 78, No. 90 / Thursday, May 9, 2013 / Proposed Rules 27137 

1The petition was filed on behalf of Program 

Suppliers (commercial entertainment 

programming), Joint Sports Claimants (professional 

and college sports programming), Commercial 

Television Claimants (local commercial television 

programming), Music Claimants (musical works 

included in television programming), Public 

Television Claimants (noncommercial television 

programming), Canadian Claimants (Canadian 

television programming), National Public Radio 

(noncommercial radio programming), Broadcaster 

Claimants Group (U.S. commercial television 

stations), and Devotional Claimants (religious 

television programming). A copy of the petition has 

been posted on the Copyright Office Web site at 

http://www.copyright.gov/docs/soaaudit/soa-auditpetition.pdf. 

2The National Cable & Telecommunications 

Association (‘‘NCTA’’) and the American Cable 

Association (‘‘ACA’’) filed comments on behalf of 

cable operators. 

3The NCTA is a trade association that represents 

cable operators. The Joint Sports Claimants 

represent copyright owners that produce 

professional and college sports programming. The 

Program Suppliers represent copyright owners that 

Continued 

Dated: May 1, 2013. 

Rachel Jacobson, 

Principal Deputy Assistant Secretary for Fish 

and Wildlife and Parks. 

[FR Doc. 2013–10979 Filed 5–8–13; 8:45 am] 

BILLING CODE 4312–EJ–P 

LIBRARY OF CONGRESS 

U.S. Copyright Office 

37 CFR Part 201 

[Docket No. 2012–5] 

Verification of Statements of Account 

Submitted by Cable Operators and 

Satellite Carriers 

AGENCY: U.S. Copyright Office, Library 

of Congress. 

ACTION: Notice of proposed rulemaking; 

request for comments. 

SUMMARY: On June 14, 2012, the United 

States Copyright Office published a 

notice of proposed rulemaking and 

request for comments concerning a new 

regulation that will allow copyright 

owners to audit the Statements of 

Account and royalty fees that cable 

operators and satellite carriers deposit 

with the Copyright Office for secondary 

transmissions of broadcast programming 

made pursuant to statutory licenses. The 

Copyright Office has revised the 

proposed regulation based on comments 

that it received from copyright owners, 

cable operators, and satellite carriers. 

The Copyright Office seeks comments 

on the revised proposal before it is 

adopted as a final rule. 

DATES: Comments on the revised 

proposal must be received in the Office 

of the General Counsel of the Copyright 

Office no later than 5 p.m. Eastern 

Daylight Time (EDT) on June 10, 2013. 

Reply comments must be received in the 

Office of the General Counsel no later 

than 5 p.m. EDT on June 24, 2013. 

ADDRESSES: The Copyright Office 

strongly prefers that comments be 

submitted electronically. A comment 

submission page is posted on the 

Copyright Office Web site at 

www.copyright.gov/docs/soaaudit/ 

comments/submission/. The Web site 

interface requires submitters to 

complete a form specifying name and 

other required information, and to 

upload comments as an attachment. To 

meet accessibility standards, all 

comments must be uploaded in a single 

file in either the Portable Document 

Format (PDF) that contains searchable, 

accessible text (not an image); Microsoft 

Word; WordPerfect; Rich Text Format 

(RTF); or ASCII text file format (not a 

scanned document). The maximum file 

size is 6 megabytes (MB). The name of 

the submitter and organization should 

appear on both the form and the face of 

the comments. All comments will be 

posted publicly on the Copyright Office 

Web site exactly as they are received, 

along with names and organizations if 

provided. If electronic submission of 

comments is not feasible, please contact 

the Copyright Office at (202) 707–8380 

for special instructions. 

FOR FURTHER INFORMATION CONTACT: Erik 

Bertin, Attorney Advisor, Copyright GC/ 

I&R, P.O. Box 70400, Washington, DC 

20024. Telephone: (202) 707–8380. 

Telefax: (202) 707–8366. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Sections 111 and 119 of the Copyright 

Act (‘‘Act’’), title 17 of the United States 

Code, allow cable operators and satellite 

carriers to retransmit the performance or 

display of works embodied in a primary 

transmission made by a broadcast 

station licensed by the Federal 

Communications Commission. In order 

to use the statutory licenses, cable 

operators and satellite carriers are 

required to file Statements of Account 

and deposit royalty fees with the 

Copyright Office (‘‘Office’’) on a semiannual basis. The Office invests these 

royalties in United States Treasury 

securities pending distribution of the 

funds to copyright owners who are 

entitled to receive a share of the 

royalties. 

In 2010, Congress enacted the 

Satellite Television Extension and 

Localism Act of 2010 (‘‘STELA’’), Public 

Law 111–175 which, inter alia, directed 

the Register of Copyrights to develop a 

new procedure for verifying the 

Statements of Account and royalty fees 

that cable operators and satellite carriers 

deposit with the Office. Specifically, 

section 119(b)(2) directed the Register to 

‘‘issue regulations to permit interested 

parties to verify and audit the 

statements of account and royalty fees 

submitted by satellite carriers under 

[that] subsection.’’ Similarly, section 

111(d)(6) directed the Register to ‘‘issue 

regulations to provide for the 

confidential verification by copyright 

owners whose works were embodied in 

the secondary transmissions of primary 

transmissions pursuant to [section 111] 

of the information reported on the 

semiannual statements of account filed 

under this subsection for accounting 

periods beginning on or after January 1, 

2010, in order that the auditor 

designated under subparagraph 

[111(d)(6)(A)] is able to confirm the 

correctness of the calculations and 

royalty payments reported therein.’’ 

On June 14, 2012, the Office 

published a Notice of Proposed 

Rulemaking and Request for Comments 

on a regulation that would implement 

sections 111(d)(6) and 119(b)(2) of the 

Copyright Act. See 77 FR 35643, June 

14, 2012. The proposed regulation was 

based on similar regulations that the 

Office developed for parties that make 

ephemeral recordings or transmit digital 

sound recordings under 17 U.S.C. 112(e) 

and 114(f), respectively, or manufacture, 

import, and distribute digital audio 

recording devices under 17 U.S.C. 

chapter 10. See id. at 35644. The Office 

also considered a Petition for 

Rulemaking, which offered proposals 

from a group of copyright owners who 

are the beneficiaries of the royalties paid 

under the statutory licenses (‘‘Copyright 

Owners’’).1

The Office received comments on the 

proposed regulation from groups 

representing copyright owners, cable 

operators,2 and individual companies 

that retransmit broadcast programming 

under section 111 or 119 of the Act, 

namely, AT&T, Inc., DIRECTV, LLC 

(‘‘DTV’’), and DISH Network L.L.C. 

(‘‘DISH’’). While the parties agreed on 

the overall framework that the Office 

proposed for the verification procedure, 

they strongly disagreed on a number of 

key issues, such as the procedures for 

selecting an auditor, for expanding the 

scope of the audit, and for allocating the 

cost of the verification procedure. 

On August 24, 2012 and again on 

September 26, 2012, the National Cable 

& Telecommunications Association 

(‘‘NCTA’’), the Joint Sports Claimants, 

and the Program Suppliers submitted a 

joint motion to extend the deadline for 

submitting reply comments.3 They 


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produce and/or syndicate movies, programs, and 

specials that are broadcast by television stations. 

4This group includes the Program Suppliers, 

Joint Sports Claimants, Public Television 

Claimants, Canadian Claimants Group, Devotional 

Claimants, National Public Radio, and Music 

Claimants. The Commercial Television Claimants 

and the Broadcaster Claimants Group did not join 

their fellow copyright owners in submitting this 

proposal. 

5A copy of the Joint Stakeholders’ Proposal has 

been posted on the Copyright Office Web site at 

http://www.copyright.gov/docs/soaaudit/ 

comments/reply/joint_stakeholders.pdf. It includes 

a redline showing the differences between the Joint 

Stakeholders’ Proposal and the proposed regulation 

set forth in the Notice of Proposed Rulemaking 

published on June 14, 2012. 

6All of the comments and reply comments have 

been posted on the Copyright Office Web site at 

http://www.copyright.gov/docs/soaaudit/ 

comments/index.html. 

explained that there might be common 

ground among the moving parties 

concerning certain aspects of the 

proposed regulation. If so, the moving 

parties stated that they might be able to 

narrow the issues that they discuss in 

their reply comments, which in turn, 

might narrow the issues that need to be 

resolved in this rulemaking. The Office 

granted these motions, making reply 

comments due by October 24, 2012. See 

77 FR 55783, Sept. 11, 2012; 77 FR 

60334, Oct. 3, 2012. In lieu of reply 

comments, NCTA, DIRECTV, and a 

group representing certain copyright 

owners 4 submitted a joint proposal for 

revising the proposed regulation 

(hereinafter the ‘‘Joint Stakeholders’ 

Proposal’’).5 The Joint Stakeholders 

stated that their Proposal adopts ‘‘the 

general framework’’ set forth in the 

Notice of Proposed Rulemaking and in 

other verification procedures that the 

Office has adopted in the past. They 

also stated that their Proposal has been 

‘‘carefully tailored’’ to reflect ‘‘the 

unique characteristics of the cable and 

satellite compulsory licenses,’’ and 

reflects ‘‘significant compromises by all 

parties with the objective of securing a 

workable set of audit procedures 

consistent with STELA.’’ (Joint 

Stakeholders Reply at 2.) 

The Office also received reply 

comments from AT&T. Although it was 

aware of the Joint Stakeholders’ 

negotiations and the areas of agreement 

among the parties, AT&T explained that 

it was not in a position to endorse the 

Joint Stakeholders’ Proposal, because it 

was not given a sufficient amount of 

time for ‘‘meaningful engagement’’ with 

the group. (AT&T Reply at 1.) Therefore, 

AT&T urged the Office to publish the 

Joint Stakeholders’ Proposal ‘‘for further 

comment by other interested parties 

who were not parties to the agreement.’’ 

Id. 

The Office carefully reviewed all of 

the comments and reply comments that 

were submitted in this proceeding, 

including the Joint Stakeholders’ 

Proposal.6 The Joint Stakeholders’ 

Proposal addresses most of the concerns 

that the parties raised in their initial 

comments, and for the most part, it 

balances those concerns in an 

appropriate manner. Therefore, the 

Office has incorporated most of the Joint 

Stakeholders’ suggestions into the 

proposed regulation, which is referred 

to herein as the ‘‘Revised Proposal.’’ 

The Office recognizes that ACA, 

AT&T, DISH, the Broadcaster Claimants 

Group, the Commercial Television 

Claimants, and other interested parties 

did not participate in the Joint 

Stakeholders’ negotiations. Because the 

Revised Proposal includes proposed 

changes offered by the Joint 

Stakeholders, the Office concludes that 

other interested parties should be given 

an opportunity to comment on the 

proposed regulation before the Office 

adopts a final rule. The Office also 

welcomes reply comments on the 

Revised Proposal from the Joint 

Stakeholders or other interested parties. 

Commenters should limit their remarks 

to issues raised by the Revised Proposal 

which were not discussed in the initial 

comments, the reply comments, or this 

Federal Register notice, while reply 

commenters should limit their remarks 

to the issues or concerns presented in 

the follow-up comments. 

II. Areas of Common Agreement Among 

the Parties 

Generally speaking, the parties agreed 

with the overall framework that the 

Office proposed for the audit regulation. 

They agreed that the Office should 

create a single verification procedure 

applicable to cable operators and 

satellite carriers alike. (See Copyright 

Owners at 3, 4, 8; DTV at 1–2.) They 

agreed that copyright owners should 

initiate a verification procedure by filing 

a notice of intent to audit with the 

Office, and that the notice must be 

received within three years after the last 

day of the year in which the licensee 

filed its Statements of Account. They 

agreed that the verification should be 

conducted by a certified public 

accountant, and that a single auditor 

should conduct the audit on behalf of 

all copyright owners (regardless of 

whether they decide to join the audit or 

not). (See AT&T at 2, 3; DISH at 8–9.) 

They agreed that satellite carriers and 

cable operators that own a single system 

should be subject to no more than one 

audit per year. They agreed that an audit 

involving a multiple system operator 

should be limited to a sampling of the 

systems owned by that entity. (See 

NCTA at 6.) They agreed that 30 days 

would be a sufficient amount of time for 

the auditor to consult with the statutory 

licensee’s designee concerning the 

conclusions set forth in the initial draft 

of the auditor’s report. They agreed that 

the auditor should be allowed to deliver 

his or her final report to the copyright 

owners without consulting with the 

statutory licensee if the auditor suspects 

that the licensee has engaged in fraud. 

They also agreed that statutory licensees 

should be required to retain records 

needed to confirm the correctness of the 

calculations and royalty payments 

reported in a Statement of Account for 

at least three and a half years after the 

last day of the year in which the 

Statement was filed with the Office. 

(See DISH at 7.) 

III. Retroactivity 

A. Comments 

As discussed above, the Office 

received a Petition for Rulemaking on 

January 31, 2012, which was filed on 

behalf of groups that represent copyright 

owners (collectively ‘‘the Petitioners’’). 

Among other things, the Petitioners 

urged the Office to establish separate 

procedures for verifying Statements of 

Account filed under section 111 and 

119, and they provided the Office with 

draft regulations for audits involving 

cable operators and satellite carriers. 

The Office did not adopt this 

approach in its Notice of Proposed 

Rulemaking. If the Office followed the 

Petitioners’ recommendation, the 

regulation for cable operators would 

apply to Statements of Account for 

accounting periods beginning on or after 

January 1, 2010 (i.e., the semiannual 

accounting period that was in effect 

when the President signed STELA into 

law on May 27, 2010), while the 

regulation for satellite carriers would 

apply to any Statement of Account, even 

if the Statement was filed before STELA 

was enacted. In other words, the 

regulation for satellite carriers would 

apply retroactively, while the regulation 

for cable operators would apply on a 

prospective basis only. See 77 FR 35645, 

June 14, 2012. 

DTV agreed that the Office should 

‘‘harmonize’’ the procedures for cable 

operators and satellite carriers, and 

noted that ‘‘there are strong policy 

reasons not to apply laws retroactively.’’ 

(DTV at 2.) DISH agreed that the 

regulation should not apply to 

Statements of Account for accounting 

periods that pre-date STELA, and 

further asserted that the proposed 

regulation should apply only to 


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7The cases cited by DISH are distinguishable 

because they involve situations where ‘‘an agency 

completely reversed the status quo ante.’’ See Nat’l 

Petrochemical & Refiners Ass’n, 630 F.3d at 160 

(distinguishing Bowen v. Georgetown Univ. Hosp., 

488 U.S. 204 (1988) and Nat’l Mining Ass’n v. Dep’t 

of Labor, 292 F.3d 849 (D.C. Cir. 2002)). For 

example, in Bowen the agency required a party to 

return or forfeit money that it had received from the 

government. In Marrie v. SEC, 374 F.2d 1196 (D.C. 

Cir. 2004), the agency changed the legal standard 

needed to establish professional misconduct, and 

then applied that standard to conduct that occurred 

before the rule was adopted. 

8These parties are defined in the Revised 

Proposal as the ‘‘participating copyright owner(s).’’ 

Statements of Account filed on or after 

the date that the final rule goes into 

effect. (DISH at 3.) While the Copyright 

Owners agreed that the Office should 

adopt a uniform procedure for both 

cable operators and satellite carriers, 

they contended that a regulation 

allowing for the verification of pre-2010 

Statements of Account would not 

constitute a retroactive obligation. 

(Copyright Owners at 4.) 

B. Discussion 

The Revised Proposal would allow 

copyright owners to audit Statements of 

Account filed by cable operators and 

satellite carriers for accounting periods 

beginning on or after January 1, 2010. 

The Office has concluded that this 

would not be a retroactive regulation, 

even though it would apply to 

Statements for the 2010, 2011, and 2012 

accounting periods. 

A regulation is retroactive if it ‘‘takes 

away or impairs vested rights acquired 

under existing law, or creates a new 

obligation, imposes a new duty, or 

attaches a new disability in respect to 

transactions or considerations already 

past.’’ National Mining Ass’n v. Dep’t of 

Labor, 292 F.3d 849, 859 (D.C. Cir. 

2002). The fact that the regulation 

establishes a procedure for verifying 

Statements of Account filed before the 

date that the final rule goes into effect 

does not mean it is retroactive. See 

Landgraf v. USI Film Prods., 511 U.S. 

244, 269–70 (1994) (a law is not 

considered retroactive ‘‘merely because 

it is applied in ‘a case arising from 

conduct antedating the statute’s 

enactment’’). Instead, ‘‘the operative 

inquiry is ‘whether the new provision 

attaches new legal consequences to 

events completed before its enactment.’’ 

Id. 

Neither DISH nor any other party has 

identified any aspect of the proposed 

regulation that changes the legal 

landscape for satellite carriers or cable 

operators. The regulation creates a 

framework for audits that will be 

conducted in the future, but it does not 

change the ‘‘past legal consequences of 

past actions’’ for a statutory licensee 

who may be subject to the verification 

procedure. See National Petrochemical 

& Refiners Ass’n v. EPA, 630 F.3d. 145, 

161 (D.C. Cir. 2010). The regulation 

states that the auditor will review a 

Statement of Account to determine 

whether the licensee correctly 

calculated, reported, and paid the 

amount which was due. If the auditor 

discovers an error or underpayment, the 

licensee would be subject to the same 

legal obligations which would apply if 

the error had been discovered when the 

Statement was filed.7 Moreover, cable 

operators and satellite carriers that use 

the statutory license knew that 

copyright owners would be entitled to 

audit Statements of Account following 

the enactment of STELA, and as such, 

were on notice that Statements filed on 

or after the effective date might be 

subject to this procedure. Indeed, some 

of the parties who submitted comments 

in this proceeding stated that they were 

‘‘intimately’’ and ‘‘directly’’ involved in 

the negotiations that preceded the 

drafting of STELA. See DTV at 1–2; 

Refunds Under the Cable Statutory 

License, Docket No. RM–2010–3, 

Comments of National Cable & 

Telecommunications Association at 3 

(available at http://www.copyright.gov/ 

docs/stela/comments/ncta-11–03– 

10.pdf). 

IV. Initiation of an Audit 

A. Comments 

In the Notice of Proposed Rulemaking 

the Office explained that a copyright 

owner could initiate an audit procedure 

by filing a notice with the Office, which 

would be published in the Federal 

Register. The copyright owner would be 

required to identify the Statement(s) of 

Account and accounting period(s) that 

would be included in the audit, and the 

statutory licensee that filed those 

Statement(s) with the Office. In 

addition, the notice would have to 

provide contact information for the 

copyright owner filing the notice, and a 

brief statement establishing that it owns 

at least one work that was embodied in 

a secondary transmission made by that 

licensee. A notice of intent to audit a 

particular Statement of Account would 

be considered timely if it is received 

within three years after the last day of 

the year in which that Statement was 

filed. 

Any other copyright owner that 

wishes to participate in the audit would 

have to notify both the copyright owner 

that filed the notice of intent to audit 

and the statutory licensee who would be 

subject to the audit within 30 days after 

the notice was published in the Federal 

Register. Copyright owners that join in 

the audit would be entitled to 

participate in the selection of the 

auditor, they would be entitled to 

receive a copy of the auditor’s report, 

and they would usually be required to 

pay for the auditor for his or her work 

in connection with the audit.8 However, 

a copyright owner that failed to join the 

audit within the time allowed would 

not be permitted to participate in the 

selection of the auditor and would not 

be entitled to receive a copy of the 

auditor’s report. Moreover, a copyright 

owner that failed to join the audit would 

not be permitted to conduct its own 

audit of the semiannual Statement(s) of 

Account identified in the Federal 

Register notice at a later time. 

All of the parties agreed with this 

approach, although the Copyright 

Owners suggested that a group 

representing multiple copyright owners 

should be permitted to file a notice of 

intent to audit on behalf of the members 

of that group. (Copyright Owners at 4– 

5.) 

B. Discussion 

Generally speaking, the Revised 

Proposal follows the same approach for 

initiating an audit that the Office 

proposed in its Notice of Proposed 

Rulemaking. As the Copyright Owners 

suggested, the term ‘‘copyright owners’’ 

is defined to mean ‘‘a person or entity 

that owns the copyright in a work 

embodied in a secondary transmission 

made by a statutory licensee’’ or ‘‘a 

designated agent or representative of 

such person or entity.’’ This will allow 

groups representing multiple copyright 

owners to file a notice of intent to audit, 

provided that the groups represent at 

least one party who owns a work which 

was embodied in a secondary 

transmission made by the statutory 

licensee during one or more of the 

accounting periods specified in the 

notice. It will also allow groups 

representing multiple copyright owners 

to prepare a list of qualified and 

independent auditors who may be 

selected to conduct the audit, to expand 

the scope of the audit if the auditor 

discovers an underpayment that exceeds 

a certain threshold, to prepare an 

itemized report documenting the cost of 

the audit, among other activities 

contemplated by the Revised Proposal. 

V. Designation of the Auditor 

A. Comments 

In the Notice of Proposed 

Rulemaking, the Office suggested that 

the copyright owners should be solely 

responsible for selecting a qualified and 

independent auditor to conduct the 


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9The Revised Proposal differs from the Joint 

Stakeholders’ Proposal by clarifying that the auditor 

would initially only be authorized to verify the 

Statement(s) of Account which were listed in the 

notice of intent to audit. As discussed in section 

VIII(B), if the auditor discovers an underpayment 

that meets or exceeds a certain threshold, the 

auditor would be permitted to expand the scope of 

the audit to include other Statements which were 

not mentioned in the initial notice. 

10The licensing requirements for a CPA are set 

and enforced by the Board of Accountancy for the 

jurisdiction(s) where the CPA practices (rather than 

the AICPA). However, CPAs who join the AICPA 

agree to abide by the Code of Professional Conduct 

and Bylaws (the ‘‘Code’’) that have been adopted by 

the organization. ‘‘The bylaws provide a structure 

for enforcement of the Code by the Institute’s 

Professional Ethics Division. When allegations 

come to the attention of the Ethics Division 

regarding a violation of the Code, the division 

investigates the matter, under due process 

procedures, and depending upon the facts found in 

the investigation, may take a confidential 

disciplinary action, settle the matter with 

suspension or revocation of membership rights, or 

refer the matter to a panel of the Trial Board 

Division for a hearing.’’ See AICPA, FAQs—Become 

a CPA, available at http://www.aicpa.org/ 

BecomeACPA/FAQs/Pages/FAQs.aspx. 

11According to the AICPA, 47 states and 

jurisdictions allow CPAs to accept contingency fees, 

except in situations where the CPA audits or 

reviews a financial statement or prepares an 

original tax return. See AICPA Code of Professional 

Conduct, Rule 302—Contingent Fees, available at 

http://www.aicpa.org/research/standards/ 

codeofconduct/pages/et_302.aspx; see also AICPA, 

Commissions and Contingent Fees, available at 

http://www.aicpa.org/Advocacy/State/Pages/ 

CommissionsandContingentFees.aspx 

12To be clear, an auditor who has been subject 

to a disciplinary inquiry or proceeding at some 

point in the past would not necessarily be 

disqualified from conducting an audit under this 

procedure. 

verification, and that any disputes 

concerning the auditor’s qualifications 

or independence should be resolved by 

the Professional Ethics Division of the 

American Institute of Certified Public 

Accountants (‘‘AICPA’’) or the State 

Board of Accountancy that licensed the 

auditor while the audit is underway. 

Many of the parties disagreed with this 

approach. 

The Copyright Owners predicted that 

this would lead to needless delay and 

expense. They stated that a statutory 

licensee should be required to raise any 

concerns about the auditor in a prompt 

manner, and that if the parties are 

unable to resolve their differences 

within 30 days, the auditor should be 

allowed to proceed with the 

verification. (Copyright Owners at 5.) 

AT&T agreed that any disputes 

concerning the qualifications or 

independence of the auditor should be 

resolved before the audit begins, and 

further stated that if the auditor is not 

qualified or independent, the statutory 

licensee should not be subject to any 

audits until the following year. (AT&T 

at 4; AT&T Reply at 2.) The NCTA 

stated that an auditor selected by the 

copyright owners could be biased in 

favor of his or her clients. To address 

these concerns, the NCTA suggested 

that both the copyright owners and the 

statutory licensee should designate a 

certified independent accountant, who, 

in turn, would select a neutral auditor 

to conduct the verification procedure. 

(NCTA at 4–5.) 

Regarding the auditor’s qualifications, 

AT&T agreed that the audit should be 

conducted by a certified public 

accountant who is in good standing 

with the AICPA. AT&T stated that the 

auditor should not be subject to any 

disciplinary inquiry or proceeding, that 

the auditor should not be allowed to 

collect a contingency fee based on the 

results of the audit, and that the auditor 

should be required to file a certification 

with the Office confirming his or her 

qualifications and independence before 

the audit begins. (AT&T at 3–4; AT&T 

Reply at 2.) 

B. Discussion 

The Revised Proposal addresses the 

parties’ concerns regarding the selection 

of the auditor. Copyright owners who 

wish to participate in the audit would 

provide the statutory licensee with a list 

of three independent and qualified 

auditors, along with information that 

would be reasonably sufficient for the 

licensee to evaluate the independence 

and qualifications of each individual. 

Specifically, the copyright owners 

would provide the licensee with a copy 

of the auditor’s curriculum vitae, a copy 

of the engagement letter that would 

govern his or her performance of the 

audit, and a list of any other audits that 

the auditor has conducted under this 

regulation. They would also provide a 

brief description of any other work that 

the auditor has performed for any of the 

participating copyright owners within 

the previous two calendar years, along 

with a list of the participating copyright 

owners who have engaged the auditor’s 

firm within the previous two calendar 

years. 

Within five (5) business days after 

receiving this information, the statutory 

licensee would be required to select one 

of these auditors. That individual would 

audit the licensee’s Statements of 

Account on behalf of all copyright 

owners who own a work that was 

embodied in a secondary transmission 

made by that licensee during the 

accounting period(s) subject to the 

audit.9 To ensure that the auditor 

maintains his or her independence 

during the audit, the Revised Proposal 

explains that there may be no ex parte 

communications between the auditor 

and the participating copyright owners 

or their representatives until the auditor 

has issued his or her final report. 

However, there are two exceptions to 

this rule. The auditor may communicate 

directly with the copyright owners if he 

or she has a reasonable basis to suspect 

that the statutory licensee has 

committed fraud, or if the auditor gives 

the licensee an opportunity to 

participate in the communication and 

the licensee declines to do so. 

In response to AT&T’s concerns, the 

Revised Proposal states that the auditor 

must be a member in good standing 

with the AICPA and the relevant 

licensing authority for the jurisdiction(s) 

where the auditor practices,10 and it 

states that the auditor must be 

compensated with a flat fee or based on 

an hourly rate, rather than a 

contingency fee.11

The Office declined to adopt AT&T’s 

suggestion that the auditor should not 

be subject to ‘‘any disciplinary inquiry 

or proceeding.’’ (AT&T at 3, emphasis 

added.) It is implicit that the auditor is 

not currently subject to a disciplinary 

inquiry or proceeding, because the 

regulation requires that the auditor must 

be a member in good standing with the 

relevant licensing authority and 

professional association for certified 

public accountants. In any event, it 

seems unlikely that the copyright 

owners would invite a ‘‘peremptory 

challenge’’ by nominating an accountant 

who is currently suspended or subject to 

a pending disciplinary inquiry or 

proceeding.12 Likewise, the Office does 

not believe that the auditor should be 

required to file a certification with the 

Office concerning his or her 

qualifications and independence, 

because the Revised Proposal already 

directs the copyright owners to provide 

the statutory licensee with information 

that it reasonably needs to evaluate each 

auditor. 

VI. Scope of the Audit and Time Period 

for Conducting an Audit 

A. Comments 

The Notice of Proposed Rulemaking 

did not specify a precise deadline for 

when the audit should begin or when 

the audit should be completed, because 

the Office expects that the issues 

presented in each audit will vary 

depending on the number and 

complexity of the Statements of 

Account that will be subject to review. 

For the same reason, the Office did not 

specify the precise issues that the 

auditor should consider in each audit. 

Instead, the Notice of Proposed 

Rulemaking simply stated that the audit 

should be performed in accordance with 

generally accepted auditing standards. 


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13The primary difference is that the Revised 

Proposal would impose this requirement on 

satellite carriers, cable systems, and MSOs alike, 

while the provision in the Joint Stakeholders’ 

Proposal only applied to cable operators and MSOs. 

14 In other words, satellite carriers could suspend 

an audit from January 1st through January 30th and 

from July 1st through July 30th, while cable 

operators could suspend an audit from January 28th 

through February 28th (in a non-leap year) and from 

July 31st through August 29th. 

15This limitation is discussed in more detail in 

section IX(B). 

See 77 FR 35647, June 14, 2012. Many 

of the parties criticized this approach. 

In order to avoid ‘‘needless delay and 

added expense,’’ the Copyright Owners 

contended that the statutory licensee 

should be given a 30 to 90 day deadline 

to provide the auditor with the 

information he or she needs to conduct 

the verification procedure. (Copyright 

Owners at 6.) DISH predicted that the 

statutory licensee would have to 

‘‘devote certain resources to ensuring 

compliance with the auditor’s needs,’’ 

and that the ‘‘longer the auditing 

process is stretched out, the greater the 

resource strain.’’ Therefore, DISH said 

that the auditor should be given a 

precise deadline for completing the 

verification process. (DISH at 6.) 

DISH also contended that the auditor 

should not conduct a deep and 

burdensome ‘‘inquiry into the cable or 

satellite carrier’s business operations or 

processes.’’ Instead, he or she should 

simply confirm that the licensee 

correctly identified the network and 

non-network transmissions carried by 

that licensee during the relevant time 

period and confirm that the licensee 

correctly multiplied the number of 

subscribers who receive each 

transmission by the applicable royalty 

rate. (DISH at 5–6.) AT&T expressed a 

similar concern. Citing the Office’s audit 

regulations for digital audio recording 

devices, it asserted that the auditor 

should review the information that the 

statutory licensee provides in its 

Statement of Account, but should not 

consider any discrepancies that appear 

on the face of each Statement or any 

aspect of the Statement that is reviewed 

by the Licensing Division, such as the 

classification of stations as distant, 

local, permitted, or non-permitted. 

AT&T also contended that statutory 

licensees should not be required to 

provide the auditor with information 

concerning individual subscribers. 

(AT&T at 3, 4; AT&T Reply at 4.) 

Both AT&T and the NCTA stated that 

the audit should be conducted during 

normal business hours in order to 

expedite the audit process and to 

minimize the disruption to the statutory 

licensee’s business. (AT&T at 9; NCTA 

at 8.) In addition, AT&T contended that 

the statutory licensee should be given 

60 days to respond to the auditor’s 

request for information, and that the 

licensee should not be required to 

respond to such requests within 75 days 

before the due date for a semiannual 

Statement of Account ‘‘when 

individuals with the most knowledge 

are fully occupied with meeting filing 

requirements.’’ (AT&T at 9.) 

B. Discussion 

The Revised Proposal addresses the 

parties’ concerns regarding the scope 

and duration of the audit. The statutory 

licensee would be given more than two 

months notice to identify and collect 

information that may be relevant to the 

audit. Specifically, the copyright owner 

would be required to serve a notice of 

intent to audit on the licensee that 

identifies the Statements of Account 

that will be reviewed by the auditor. At 

least 30 days would pass before other 

participating copyright owners would 

be required to notify the licensee of 

their intent to join the audit. The 

licensee would be given at least 5 

business days to select the auditor who 

would conduct the verification 

procedure and another 30 days 

thereafter to provide the auditor with a 

list of the broadcast signals that the 

licensee retransmitted during the 

accounting period(s) at issue in the 

audit. So as a practical matter, the 

licensee would have at least 65 days to 

prepare before the audit gets underway. 

After the auditor has been selected, 

the licensee would be required to 

provide the auditor and a representative 

of the participating copyright owners 

with a certified list of the broadcast 

signals retransmitted under each 

Statement of Account that is at issue in 

the audit, including the call sign for 

each broadcast signal and each 

multicast signal. In addition, cable 

systems and multiple system operators 

(‘‘MSOs’’) would be required to identify 

the classification of each signal on a 

community by community basis 

pursuant to §§ 201.17(e)(9)(iv)–(v) and 

201.17(h) of the regulations. 

The Joint Stakeholders included 

similar language in their proposal,13 and 

the Office assumes that this provision is 

intended to respond to the Copyright 

Owners’ request that statutory licensees 

be given a precise deadline for 

providing information that the auditor 

needs to conduct the verification 

procedure. However, the Office notes 

that statutory licensees already provide 

this information in the Statements of 

Account that they file with the 

Licensing Division, and that the person 

signing the Statement must certify, 

under penalty of law pursuant to title 18 

of the U.S. Code, that this information 

is true, correct, and complete. Although 

the Office included this requirement in 

the Revised Proposal, the Office seeks 

comment on whether there is any 

benefit in requiring licensees to provide 

information that should be apparent 

from the face of their Statements of 

Account. 

The Revised Proposal would allow 

the statutory licensee to suspend an 

audit for up to 30 days before the due 

date for filing a semiannual Statement of 

Account,14 although the licensee would 

not be allowed to exercise this option 

once the auditor has delivered the 

initial draft of his or her report to the 

licensee.15 At the same time, the 

Revised Proposal protects the interests 

of the copyright owners by requiring the 

licensee to execute an agreement tolling 

the statute of limitations for no more 

than 30 days if the copyright owners 

believe in good faith that the suspension 

could prevent the auditor from 

delivering his or her final report before 

the statute of limitations expires. 

The Revised Proposal differs from the 

Joint Stakeholders’ proposal insofar as 

the Joint Stakeholders would have 

allowed the statutory licensee to 

suspend the audit for up to 60 days 

before the deadline for filing a 

semiannual Statement of Account. 

Given that the copyright owners may 

conduct only one audit per year, the 

Office believes that it would be unduly 

restrictive to impose a ‘‘blackout 

period’’ on the auditor for up to four 

months of the year. 

DISH contended that the auditor 

should be given a precise deadline for 

completing the audit, but this does not 

appear to be necessary. As discussed in 

section VIII(B), a statutory licensee 

would be subject to no more than one 

audit per calendar year. In other words, 

if the copyright owners launched an 

audit on January 1, 2014 and if that 

audit was still ongoing as of January 1, 

2015, the copyright owners would not 

be allowed to conduct another audit of 

that licensee until January 1, 2016. As 

a result, the copyright owners would 

have a strong incentive to complete each 

audit before the end of the calendar 

year. 

The Revised Proposal specifically 

states that the statutory licensee must 

provide the auditor with reasonable 

access to the licensee’s books, records, 

or other information that the auditor 

needs in order to conduct the audit. The 

Revised Proposal protects the licensees’ 

interests by providing that the audit 

must be conducted during normal 


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27142 Federal Register / Vol. 78, No. 90 / Thursday, May 9, 2013 / Proposed Rules 

business hours at a location designated 

by the licensee, that consideration must 

be ‘‘given to minimizing the costs and 

burdens associated with the audit,’’ and 

that the licensee is only required to 

provide the auditor with information 

that he or she ‘‘reasonably requests’’ 

(emphasis added). This should address 

DISH’s concern that the verification 

procedure might lead to a ‘‘deep and 

burdensome inquiry’’ into a licensee’s 

business operations or processes. (DISH 

at 5–6.) The Revised Proposal also 

requires the auditor to safeguard any 

confidential information that he or she 

may receive from the licensee. This 

should address AT&T’s concern that 

cable operators might be asked to 

provide the auditor with information 

concerning individual subscribers. 

Finally, AT&T contended that the 

auditor should review the information 

that the licensee provided in its 

Statement of Account, but should not 

consider any discrepancies that appear 

on the face of the Statement or any 

aspect of the Statement that is reviewed 

by the Licensing Division, such as the 

classification of stations as distant, 

local, permitted, or non-permitted, or 

other discrepancies. The Revised 

Proposal addresses this concern by 

requiring that the auditor verify ‘‘all 

information reported on the Statements 

of Account subject to the audit in order 

to confirm the correctness of 

calculations and royalty payments 

reported therein.’’ However, the auditor 

shall not determine whether a cable 

system properly classified any broadcast 

signal under §§ 201.17(e)(9)(iv)–(v) and 

201.17(h) of the regulations or whether 

a satellite carrier properly determined 

that any subscriber or group of 

subscribers is eligible to receive 

broadcast signals under section 119(a) of 

the Act. 

VII. Retention of Records 

A. Comments 

The Notice of Proposed Rulemaking 

explained that a statutory licensee 

would be required to retain any records 

needed to confirm the correctness of the 

calculations and royalty payments 

reported in its Statements of Account 

for at least three and a half years after 

the last day of the year in which the 

Statement was filed with the Office. The 

Office also explained that a licensee 

who has been subject to an audit would 

be required to retain those records for at 

least three years after the date that the 

auditor delivers his or her final report 

to the copyright owners who decided to 

participate in the audit. 

Generally speaking, the parties did 

not object to this proposal. The 

Copyright Owners opined that when a 

statutory licensee files an amended 

Statement of Account, the deadline for 

maintaining records should be 

calculated from the date that the 

amendment is filed rather than the date 

of the initial Statement. (Copyright 

Owners at 6.) DISH stated that if the 

auditor determines that the statutory 

licensee correctly reported the royalties 

due on a particular Statement of 

Account the licensee should not be 

required to retain its records concerning 

that Statement once the auditor has 

delivered his or her final report to the 

copyright owners. (DISH at 7–8.) 

B. Discussion 

In response to the Copyright Owners’ 

concerns, the Revised Proposal specifies 

that the deadline for maintaining 

records for an amended Statement of 

Account should be calculated from the 

date that the amendment was filed 

rather than the filing date for the initial 

Statement. 

The Office is concerned that the oneyear retention period proposed by the 

Joint Stakeholders would deprive 

copyright owners of the benefits of the 

three-year statute of limitations and it 

would create confusion for statutory 

licensees (with a one year retention 

period for Statements of Account that 

have been audited, and a three year 

retention period for Statements that 

could potentially be subject to an audit). 

Therefore, the proposed regulation 

states that a licensee who has been 

subject to an audit would be required to 

retain any records needed to confirm the 

correctness of the calculations and 

royalty payments reported in a 

Statement of Account for at least three 

years after the date that the auditor 

delivers his or her final report to the 

copyright owners. The Office weighed 

DISH’s concerns, but concluded that a 

licensee should be required to retain its 

records even if the auditor finds no 

discrepancies in the Statements of 

Account, to ensure that the licensee 

does not discard its records before the 

copyright owners have had an 

opportunity to review the auditor’s 

report. 

VIII. Frequency of the Audit Procedure 

A. Comments 

In its Notice of Proposed Rulemaking, 

the Office suggested that a satellite 

carrier or a cable operator that owns one 

cable system should be subject to no 

more than one audit per year. By 

contrast, an operator that owns more 

than one system would be subject to no 

more than three audits per year. In order 

to protect the interests of multiple 

system operators, the Office explained 

that the auditor would review a 

sampling of the systems owned by each 

MSO. To protect the interests of 

copyright owners, the Office explained 

that if the auditor discovers an 

underpayment of 5 percent or more in 

a Statement of Account filed by an 

MSO, the size of the sample could be 

expanded to include any and all of the 

systems owned by that operator. 

The Office explained that the Notice 

of Proposed Rulemaking was merely a 

starting point for further discussion on 

these issues, and invited comment from 

interested parties concerning the limit 

on the total number of audits that an 

MSO should be required to undergo in 

a single year. See 77 FR 35647, June 14, 

2012. The Office invited comments on 

whether an audit involving 50 percent 

of the systems owned by a particular 

operator would be likely to produce a 

statistically significant result. It also 

invited comments on whether a 50 

percent threshold would be unduly 

burdensome for MSOs and, if so, what 

percentage would be appropriate. See id 

at 35648. 

The Copyright Owners did not object 

to the proposed limit on the number of 

audits that an MSO would be required 

to undergo, but recommended that the 

Office define the term ‘‘multiple system 

operator’’ to avoid any confusion about 

which systems would be covered by this 

aspect of the regulation. (Copyright 

Owners at 7.) AT&T stated that an MSO 

should be subject to no more than one 

audit per year and that each audit 

should be limited to no more than two 

Statements of Account, noting that this 

would be consistent with verification 

procedures that the Office has adopted 

in the past. (AT&T at 2.) The NCTA 

expressed the same view, but stated that 

each audit should be limited to no more 

than one Statement of Account. (NCTA 

at 6, 7.) 

The NCTA and AT&T agreed that an 

audit involving an MSO should be 

based on a reasonable sampling of the 

systems owned by that entity. (AT&T at 

3; NCTA at 6.) AT&T explained that an 

audit involving 50 percent of its systems 

‘‘would cause substantial burden and 

disruption’’ and stated that the accuracy 

of its Statements of Account could be 

determined based on a ‘‘substantially 

smaller sample.’’ (AT&T at 3.) While 

AT&T did not propose a specific 

number or percentage of systems that 

should be included in each audit, the 

NCTA stated that a representative 

sample of 10 percent or less would be 

consistent with audit practices and 

‘‘should be more than sufficient to 

determine whether an MSO’s SOAs 


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16As the Office explained in its Notice of 

Proposed Rulemaking, ‘‘if a copyright owner filed 

a notice of intent to audit a particular Statement of 

Account or a particular statutory licensee in 

calendar year 2013 and if that audit was still 

ongoing as of January 1, 2014, the Office would 

accept a notice of intent to audit filed in calendar 

year [2013 or] 2014 concerning other Statements 

filed by that same licensee.’’ See 77 FR 35645 n.3, 

June 14, 2012,. 

17Copyright owners may have an incentive to 

audit the licensee’s two most recent Statements of 

Account before auditing the licensee’s earlier 

Statements, given that an underpayment in the most 

recent Statements would give the copyright owners 

an opportunity to audit all of the Statements that 

the licensee submitted for the previous six 

accounting periods. 

18The Office did not adopt the Joint Stakeholders’ 

Proposal, which stated that the expanded audit 

could be conducted ‘‘immediately’’ without 

specifying a precise procedure for when and how 

the expanded audit would begin. 

19Under the Joint Stakeholders’ Proposal, the 

copyright owners would be allowed to use the same 

auditor in another audit involving an MSO, but they 

would not be allowed to use the same auditor two 

years in a row. The Office fails to see the 

justification for this limitation. 

suffer from any systemic problems.’’ 

(NCTA at 6.) 

The Copyright Owners agreed that if 

the auditor discovers an underpayment 

of 5 percent or more in an audit of an 

MSO, the auditor should be allowed to 

expand the scope of the audit to include 

all of the systems owned by that 

operator. (Copyright Owners at 7.) 

AT&T did not object to the idea of 

expanding the number of systems 

subject to the audit, but stated that an 

expanded audit should require a 

showing of good cause. Specifically, 

AT&T stated that the amount of the 

underpayment should exceed a 

minimum threshold and a minimum 

percentage in order to trigger an 

expanded audit, and that discrepancies 

that appear on the face of a Statement 

of Account or discrepancies based on 

‘‘reasonable disagreements about issues 

of law, construction of regulations, or 

accounting procedures’’ should not be 

included in this calculation. In addition, 

AT&T stated that the Office should 

create a separate procedure for resolving 

good faith disputes over legal, 

regulatory, and accounting issues before 

the copyright owners are allowed to 

expand the scope of an audit. (AT&T at 

8, 9.) 

The NCTA categorically opposed the 

idea of expanding the scope of an audit 

involving an MSO. It asserted that there 

is no need to audit more than 10 percent 

of the systems owned by an MSO, 

because a sample of 10 percent of those 

systems should disclose any systemic 

problems in the operator’s royalty 

calculations. The NCTA also asserted 

that it would be unreasonable to allow 

an ‘‘isolated underpayment’’ in a single 

Statement of Account to trigger an audit 

of all of the systems owned by that 

operator. (NCTA at 6–7.) 

B. Discussion 

The Revised Proposal states that 

statutory licensees would be subject to 

no more than one audit per calendar 

year (regardless of the number of cable 

systems that they own) and the audit of 

a particular satellite carrier or cable 

system would be limited to no more 

than two of the Statements of Account 

submitted by that licensee. 

In response to the concerns expressed 

by AT&T and the NCTA, the Revised 

Proposal explains that an audit 

involving an MSO would be limited to 

a sampling of the systems owned by that 

entity. Specifically, the auditor would 

be permitted to verify the Statements of 

Account filed by no more than 10 

percent of the Form 2 and 10 percent of 

the Form 3 systems owned by an MSO. 

In order to avoid any confusion about 

which systems would be subject to this 

procedure, the Revised Proposal 

explains that the term MSO means ‘‘an 

entity that owns, controls, or operates 

more than one cable system.’’ 

If the Office has published a notice of 

intent to audit a particular Statement of 

Account in the Federal Register, the 

Office would not accept another notice 

of intent to audit that Statement. Once 

the auditor has begun to audit a 

particular satellite carrier, a particular 

cable system, or a particular MSO, 

copyright owners would not be 

permitted to conduct another audit of 

that licensee until the following 

calendar year. 

For example, if the auditor started to 

review a licensee’s Statement of 

Account for the 2010/1 accounting 

period on August 1, 2013 and if the 

auditor delivered his or her final report 

the copyright owners by December 31, 

2013, the copyright owners would be 

allowed to audit other Statements filed 

by that licensee beginning on January 1, 

2014. However, if the auditor delivered 

his or her final report on March 1, 2014, 

the licensee would not be subject to any 

other audits in calendar year 2013 or 

2014. 

The copyright owners could lay the 

initial groundwork for other audits 

involving this licensee at any time. For 

example, the copyright owners could 

file a notice of intent to audit the 

licensee’s Statement of Account for the 

2011/2 accounting period on October 1, 

2013, even if the auditor was still 

reviewing the licensee’s Statement for 

the 2010/1 accounting period as of that 

date. Other participating copyright 

owners would then be required to notify 

the copyright owner and the licensee of 

their intent to audit the 2011/2 

Statement within 30 days thereafter.16

However, the participating copyright 

owners could not propose a list of 

qualified and independent auditors to 

review the 2011/2 Statement until 30 

days after the final report concerning 

the 2010/1 Statement has been delivered 

to the participating copyright owners 

and the licensee. 

In order to protect the interests of 

copyright owners, the Revised Proposal 

provides an exception to these rules. In 

the event that the auditor discovers an 

underpayment in his or her review of a 

satellite carrier or a particular cable 

system, the copyright owners would be 

permitted to audit all of the Statements 

of Account filed by that particular cable 

system or satellite carrier during the 

previous six accounting periods 

(including a cable system that is owned 

by an MSO). Consistent with the Federal 

Rule of Civil Procedure, the copyright 

owners should exclude the Statements 

of Account listed in the notice of intent 

to audit when identifying the ‘‘previous 

six’’ accounting periods that will be 

included in the expanded audit.17 See 

Fed. R. Civ. P. 6(a)(1)(A). In addition, if 

the auditor discovers an underpayment 

in his or her review of an MSO, the 

copyright owners would be permitted to 

audit a larger sample of the cable 

systems owned by that operator. 

Specifically, the copyright owners 

would be permitted to audit 30 percent 

of the Form 2 and 30 percent of the 

Form 3 systems owned by that operator. 

Generally speaking, the expanded 

audit would be considered an extension 

of the initial audit. However, the 

copyright owners would be required to 

file another notice of intent to audit 

with the Copyright Office, given that the 

expanded audit would include 

Statements of Account and/or cable 

systems not listed in the initial notice. 

Doing so would give other copyright 

owners an opportunity to join in the 

expanded audit and it would put them 

on notice that a subsequent audit of the 

Statements identified in the notice will 

not be permitted. In addition, it would 

provide the statutory licensee with 

advance notice of the Statements of 

Account and/or cable systems that 

would be included within the expanded 

audit.18

The Revised Proposal explains that 

the expanded audit may be conducted 

by the same auditor who conducted the 

initial audit, provided that the copyright 

owners supply the licensee with 

information sufficient to show that there 

has been no material change in the 

auditor’s independence and 

qualifications.19 If the copyright owners 


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27144 Federal Register / Vol. 78, No. 90 / Thursday, May 9, 2013 / Proposed Rules 

20As discussed in section VII(B), the licensee 

would be required to retain any records needed to 

confirm the correctness of the calculations and 

royalty payments reported in these Statements for 

at least three years after the last day of the year in 

which the Statement were filed with the Office. 

Once the licensee has received a notice of intent to 

audit those Statements, the licensee would be 

required to retain its records for three years after the 

auditor delivers his or her final report. 

21The Revised Proposal differs from the Joint 

Stakeholders’ Proposal by clarifying that the 

copyright owners would be allowed to conduct an 

expanded audit if the auditor discovers an 

underpayment that is 5 percent or more of the 

amount reported on the Statements of Account at 

issue in the audit, as opposed to requiring a net 

aggregate underpayment of exactly 5 percent. In 

making this calculation the auditor would be 

required to subtract the total amount of any 

overpayments reflected on the Statements at issue 

in the audit from any underpayments reflected on 

those Statements. 

22The Copyright Owners said that the Office 

should provide ‘‘a hard deadline for issuing the 

final report’’ (Copyright Owners at 9), but in fact, 

the deadline that they recommended in their 

comments is precisely the same as the deadline 

specified in the Notice of Proposed Rulemaking. 

prefer to use a different auditor or if the 

previous auditor is no longer qualified 

or independent within the meaning of 

the regulation, a new auditor may be 

selected using the procedure discussed 

in section V(B) above. 

Because an expanded audit would be 

an extension of the initial audit, the 

copyright owners could proceed with an 

audit of a satellite carrier or a particular 

cable system at any time (including a 

cable operator that is owned by an 

MSO). For example, if the copyright 

owners audited a cable operator’s 

Statement for the 2013/1 accounting 

period in June 2014 and if the auditor 

discovered an underpayment on that 

Statement, the copyright owners would 

be permitted to audit any or all of the 

operator’s Statements for the 2010/1 

through 2012/2 accounting periods in 

calendar year 2014.20 If the auditor 

delivered his or her final report to the 

copyright owners by December 31, 2014, 

the copyright owners would be allowed 

to audit other Statements filed by that 

operator beginning on January 1, 2015. 

However, if the auditor delivered his or 

her report on the 2013/1 Statement on 

or after January 1, 2015, then the 

operator would not be subject to any 

other audits in calendar year 2015. 

In order to protect the interests of 

MSOs, the Revised Proposal provides a 

limited exception to this rule. As 

discussed above, the copyright owners 

would be allowed to audit a larger 

sample of the cable systems owned by 

an MSO if the auditor discovered an 

underpayment during the initial audit. 

However, the expanded audit could not 

be conducted until the following 

calendar year. For example, if the 

auditor discovered an underpayment in 

the 2013/1 and 2013/2 Statements of 

Account for one of the Form 2 and four 

of the Form 3 systems owned by an 

MSO, the copyright owners would be 

permitted to audit any or all of the 

Statements filed by those systems for 

the 2010/1 through 2012/2 accounting 

periods. If the auditor delivered his or 

her report to the copyright owners on 

July 1, 2014, the copyright owners could 

proceed with this expanded audit in 

calendar year 2014. In addition, the 

copyright owners would be allowed to 

audit the Statements filed by 30 percent 

of the Form 2 and 30 percent of the 

Form 3 systems owned by that operator. 

However, those systems could not be 

audited until January 1, 2015, and the 

copyright owners would not be allowed 

to audit any other cable systems owned 

by that MSO in calendar year 2015. 

In all cases, the copyright owners 

would only be allowed to conduct an 

expanded audit if the auditor discovers 

a ‘‘net aggregate underpayment’’ of 5 

percent or more on all of the Statements 

listed in the notice of intent to audit.21

This addresses AT&T’s concern that the 

underpayment should exceed a 

minimum percentage in order to trigger 

an expanded audit, and the NCTA’s 

concern that an isolated underpayment 

in a single Statement of Account should 

not trigger an audit of all of the systems 

owned by an MSO. 

The Office assumes that the amount of 

underpayments and overpayments that 

may be discovered in an audit may vary 

depending on the size of the statutory 

licensee and the amount of its royalty 

obligations. Therefore, the Office is not 

inclined to set a minimum monetary 

threshold needed to trigger an expanded 

audit (as AT&T recommended). Nor is 

the Office inclined to create a separate 

procedure for resolving disagreements 

over legal, regulatory, or accounting 

issues before an audit is expanded (as 

AT&T suggested). The Office believes 

that the consultation between the 

auditor and the statutory licensee, and 

the opportunity to prepare a written 

response to the auditor’s conclusions 

should provide the parties with an 

adequate opportunity to air their 

differences concerning the auditor’s 

conclusions. 

IX. Disputing the Facts and Conclusions 

Set Forth in the Auditor’s Report 

A. Comments 

The Notice of Proposed Rulemaking 

proposed that the auditor prepare a 

written report setting forth his or her 

conclusions and deliver a copy of that 

report to the statutory licensee before it 

is delivered to any of the copyright 

owner(s) that elected to participate in 

the audit. If the statutory licensee 

disagrees with any of the facts or 

conclusions set forth in the auditor’s 

report, the licensee’s designee should 

raise those issues during the initial 

consultation with the auditor. If the 

auditor agrees that a mistake has been 

made, the auditor should correct those 

errors before the final report is delivered 

to the copyright owners. If the facts or 

conclusions set forth in the auditor’s 

report remain in dispute after the 

consultation period has ended, the 

licensee would have the opportunity to 

provide the auditor with a written 

response setting forth its views within 

two weeks (e.g., 14 calendar days) after 

the date of the initial consultation 

between the auditor and the licensee’s 

representative. The auditor would be 

required to include that response as an 

attachment to his or her final report, 

which would have to be delivered to the 

copyright owners and the statutory 

licensee within 60 days after the date 

that the auditor delivered the initial 

draft of his or her report to the 

licensee.22

The Office invited comment on 

whether the regulation should provide a 

precise amount of time for the auditor 

to discuss his or her report with the 

statutory licensee’s designee, and if so, 

whether 30 days would be a sufficient 

amount of time. AT&T stated that the 

licensee should be given 45 days to 

review the initial report before the 

consultation period begins; none of the 

other parties commented on this aspect 

of the proposal. 

The Office also invited comment on 

whether 14 days would be a sufficient 

amount of time for the statutory licensee 

to prepare a written response to the 

auditor’s report, and whether 60 days 

would be a sufficient amount of time for 

the auditor to prepare his or her final 

report for the copyright owners. ACA 

stated that a 14 day deadline would 

‘‘increase administrative burdens’’ for 

smaller cable operators, and that they 

should be given ‘‘flexibility to respond 

within a reasonable amount of time.’’ 

(ACA at 8.) AT&T agreed that 14 days 

would be ‘‘wholly inadequate’’ and that 

a statutory licensee should be given 60 

days to prepare a written response to the 

auditor’s report. AT&T also contended 

that a licensee should be allowed to 

extend the response period for another 

30 days if the 60-day period falls within 

75 days before the due date for 

submitting a semiannual Statement of 

Account. (AT&T at 9–10.) The NCTA 

expressed the same view, stating that 

the 14 day deadline for preparing a 

written response to the auditor and the 

60 day deadline for completing the final 


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report would be ‘‘unreasonably short.’’ 

(NCTA at 9.) 

B. Discussion 

The Notice of Proposed Rulemaking 

and the Revised Proposal follow the 

same approach for disputing the facts 

and conclusions set forth in the 

auditor’s report. The only difference is 

that the Revised Proposal would require 

the auditor to deliver his or her final 

report to the copyright owners within 5 

business days after the statutory 

licensee’s deadline for delivering its 

written response to that report. 

AT&T stated that the statutory 

licensee should be given 45 days to 

review the initial draft of the auditor’s 

report before the consultation period 

begins, and AT&T, the ACA, and the 

NCTA predicted that cable operators 

would need more than 14 days to 

prepare a written response to that 

report. However, none of the parties 

offered any evidence to support these 

claims, and the Office continues to 

believe that 44 days (i.e., 30 days for the 

consultation period plus another 14 

days to prepare a written response) is a 

reasonable amount of time for the 

licensee to review and respond to the 

auditor’s report. 

Under the Joint Stakeholders’ 

proposal, the auditor would be required 

to send his or her report to both the 

participating copyright owners and the 

licensee even if the auditor has reason 

to suspect that the licensee has 

committed fraud and that disclosing his 

or her conclusions to the licensee would 

prejudice further investigation of that 

fraud. The Office is concerned that 

sending the report to both parties may 

defeat the purpose of withholding the 

auditor’s suspicions from the licensee. 

Therefore, the Revised Proposal states 

that the auditor may send a copy of his 

or her report to the copyright owners in 

this situation without providing a 

complete copy to the licensee. However, 

the Office is also concerned that the 

licensee would be denied the 

opportunity to consult with the auditor 

and to remedy any errors or disputed 

facts or conclusions set forth in the 

auditor’s report, as required by section 

111(6)(C) of the Act. Therefore, the 

Revised Proposal would allow the 

auditor to deliver an abridged version of 

the report to the licensee that contains 

all of the facts and conclusions set forth 

in his or her report to the copyright 

owners except for the auditor’s ultimate 

conclusion that the licensee has 

committed fraud. 

The Revised Proposal also differs 

from the Joint Stakeholder’ proposal for 

suspending the audit in the period prior 

to the deadline for filing semiannual 

Statements of Account. As discussed 

above, the Revised Proposal would 

allow the licensee to suspend the audit 

for up to 30 days before the deadline for 

filing its semiannual Statement of 

Account, but the licensee would not be 

allowed to exercise this option once the 

auditor has delivered the initial draft of 

his or her report to the licensee. DISH 

predicted that a licensee may need to 

devote ‘‘certain resources’’ in order to 

respond to the auditor’s ‘‘inquiries’’ 

(DISH at 6), but neither DISH nor any 

other party offered any evidence to 

suggest that the time needed to consult 

with the auditor or to prepare a written 

response to the auditor’s report would 

prevent a licensee from filing its 

semiannual Statement of Account in a 

timely manner. Nor is the Office aware 

of such problems in the audit 

procedures for statements of account 

filed under the section 112 and 114 

licenses or under chapter 10. 

X. Correcting Errors and Curing 

Underpayments Identified in the 

Auditor’s Report 

A. Comments 

The Notice of Proposed Rulemaking 

explained that if the auditor concludes 

that the information in a Statement of 

Account is incorrect or incomplete, that 

the calculation of the royalty fee was 

incorrect, or that the statutory licensee 

failed to deposit the royalties owed with 

the Office, the licensee may correct 

those errors by filing an amended 

Statement of Account and/or by 

submitting supplemental royalty 

payments to the Office. To do so, the 

licensee should follow the procedures 

set forth in 37 CFR 201.11(h)(1) and 

201.17(m)(3), including the obligation to 

pay interest on any underpayment that 

may be due and the requisite 

amendment fee. The Office invited 

comment on whether statutory licensees 

should be given a deadline for 

correcting errors in their Statements of 

Account and for making supplemental 

royalty payments, and if so, whether 30 

days would be a sufficient amount of 

time. 

The Copyright Owners contended that 

if an independent auditor determines 

that a statutory licensee failed to pay the 

correct amount of royalties, the licensee 

should be required to file an amended 

Statement of Account and to correct the 

underpayment within 30 days after the 

auditor delivers his or her final report. 

Otherwise, the licensee would have a 

‘‘perverse incentive’’ to ignore the 

auditor’s conclusions ‘‘until either the 

statute of limitation runs or a copyright 

owner drafts an infringement 

complaint.’’ (Copyright Owners at 8–9.) 

In the NCTA’s view, the statutory 

license should be allowed to amend its 

Statement of Account and to make any 

supplemental royalty payments after the 

consultation period has ended but 

before the auditor has delivered his or 

her final report to the copyright owners. 

(NCTA at 10.) AT&T contended that the 

licensee should be given an opportunity 

to cure any alleged underpayments 

within 60 days after the consultation 

period has ended. In addition, AT&T 

said that ‘‘[t]he regulation should make 

clear that such remediation and cure 

does not constitute [the] licensee’s 

admission that the prior reports and 

payments were wrong.’’ (AT&T at 9–10.) 

While the Notice of Proposed 

Rulemaking gave statutory licensees an 

opportunity to correct any 

underpayments in their Statements of 

Account at any time, it did not allow 

licensees to request a refund from the 

Office in the event that the auditor 

discovered an overpayment. In DTV’s 

view, a licensee should be allowed to 

request a refund in this situation, or in 

the alternative, to deduct the 

overpayment from a future Statement of 

Account. (DTV at 2–3.) The NCTA 

agreed that cable operators should be 

allowed to request refunds for any 

overpayments discovered during the 

course of an audit. (NCTA at 14–15.) 

B. Discussion 

Generally speaking, the Notice of 

Proposed Rulemaking and the Revised 

Proposal give the statutory licensee the 

opportunity to correct any errors or 

underpayments reported in a Statement 

of Account. The primary difference is 

that the Revised Proposal would give 

the licensee a precise deadline for 

exercising this option. It states that the 

licensee may file an amended Statement 

of Account and may submit 

supplemental royalty fees within 60 

days after the auditor delivers his or her 

final report to the copyright owners and 

the statutory licensee or within 90 days 

after that date in the case of an audit 

involving an MSO. In addition, the 

Revised Proposal would allow the 

licensee to request a refund from the 

Office if the auditor discovered an 

overpayment on any of the Statements 

of Account at issue in the audit. 

The Office will issue a refund under 

its current regulations if a request to 

amend a Statement of Account is 

received within 30 to 60 days after the 

last day of the accounting period for that 

Statement or within 30 to 60 days after 

the overpayment was received in the 


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23The deadline for satellite carriers is 30 days, 

while the deadline for cable operators is 60 days. 24 DTV took no position on this issue. 

Office,23 whichever is longer, or if the 

Office discovers a legitimate 

overpayment in its examination of an 

initial Statement or amended Statement. 

See 37 CFR 201.11(h)(1); 

201.11(h)(3)(i)–(vi); 201.17(m)(3)(i)–(vi). 

STELA directed the Office to establish 

a mechanism for correcting ‘‘any 

underpayment identified’’ in the 

auditor’s report, but it did not mention 

overpayments or refunds. See section 

111(d)(6)(C)(ii). Nevertheless, the Office 

does have the authority to prescribe 

regulations concerning the Statements 

of Account that cable operators and 

satellite carriers file with the Office, 17 

U.S.C. 111(d)(1); 119(b)(1), and the 

Office agrees that a regulation 

authorizing refunds for overpayments 

discovered in the course of a 

verification procedure would be 

consistent with ‘‘the administration of 

the functions and duties made the 

responsibility of the Register’’ under 

title 17 of the U.S. Code. 17 U.S.C. 702. 

Under the Revised Proposal the 

statutory licensee may request a refund 

for an overpayment that is discovered 

during an audit by following the 

procedures set forth in §§ 201.17(m)(3) 

or 201.11(h)(3) of the regulations. The 

refund request must be received in the 

Office within 30 days after the auditor 

has delivered his or her final report to 

the licensee. The Joint Stakeholders’ 

proposal would have given the licensee 

60 days to request a refund, but the 

Office concluded that 30 days would be 

more appropriate, given that the amount 

of the overpayment and the basis for the 

refund request would be apparent from 

the auditor’s report. 

When the Office receives a notice of 

intent to audit a particular Statement of 

Account and until the conclusion of that 

audit, the Office will retain sufficient 

royalties to ensure that funds are 

available in the event that the licensee 

subsequently requests a refund. The 

Office does not need a copy of the 

auditor’s final report, but it would be 

helpful to know when the audit has 

been completed. Therefore, the Revised 

Proposal directs a representative of the 

participating copyright owners to notify 

the Office when the auditor has 

delivered his or her final report and to 

state whether the auditor discovered an 

overpayment on any of the Statements 

at issue in the audit. If the auditor did 

not discover any overpayments, the 

royalties will be made available for 

distribution to the copyright owners at 

the appropriate time. 

XI. Cost of the Audit Procedure 

A. Comments 

The Notice of Proposed Rulemaking 

explained that the copyright owner(s) 

who selected the auditor would be 

expected to pay the auditor for his or 

her work in connection with the audit, 

unless the auditor were to determine 

that there was an underpayment of 5 

percent or more reported in any 

Statement of Account that is subject to 

the audit. If so, the statutory licensee 

would be expected to pay the auditor’s 

fee. If the auditor’s determination is 

subsequently rejected by a court, then 

the copyright owners would have to 

reimburse the statutory licensee for the 

cost of the auditor’s services. The Office 

invited comment on whether the 

regulation should include a cost-shifting 

provision, and if so, whether the 

percentage of underpayment needed to 

trigger this provision should be more or 

less than 5 percent. See 77 FR 35649, 

June 14, 2012. 

This proved to be the most 

controversial aspect of the proposed 

regulation. The Copyright Owners 

supported the proposal, noting that it 

would be consistent with the 

verification procedures that the Office 

has issued for other statutory licensees. 

(Copyright Owners at 9–10.) AT&T, 

DISH, ACA, and the NCTA strongly 

opposed the idea.24

AT&T contended that the Office does 

not have the legal authority to shift the 

costs of the audit from the copyright 

owners to the statutory licensee. AT&T 

stated that ‘‘the absence of any 

provision relating to cost-shifting . . . 

confirms that Congress did not intend 

for the Register to authorize costshifting,’’ and the fact that the statute 

indicates ‘‘that the auditor is working on 

behalf of copyright owners’’ suggests 

that the cost of the audit should be paid 

by the copyright owners. (AT&T at 5–6.) 

AT&T also suggested that the costshifting provision ‘‘would implicate due 

process and delegation concerns,’’ 

because it ‘‘effectively grants an 

interested private party the authority to 

regulate ‘private persons whose interests 

may be and often are adverse.’ ’’ AT&T 

contended that this represents ‘‘ ‘an 

intolerable and unconstitutional 

interference with personal liberty and 

private property,’ ’’ that it is ‘‘ ‘clearly 

arbitrary,’ ’’ and that it constitutes ‘‘ ‘a 

denial of rights safeguarded by the due 

process clause of the Fifth 

Amendment.’ ’’ (AT&T at 7, quoting 

Carter v. Coal Co., 298 U.S. 238 (1936)). 

AT&T, the ACA, the NCTA, and DISH 

contended that cost-shifting would be 

unfair to the statutory licensee. They 

predicted that statutory licensees would 

expend substantial resources in 

responding to the audit, they noted that 

licensees would not be able to recover 

any of their costs from the copyright 

owners, nor would licensees receive any 

financial benefit from the verification 

procedure that might offset these costs. 

By contrast, the copyright owners could 

decline to participate in the audit if they 

do not wish to pay for the auditor’s 

services, and if they decide to join the 

audit they could split the cost of the 

audit amongst themselves. (ACA at 3; 

DISH at 9; NCTA at 13.) 

ACA worried that a 5 percent 

underpayment threshold could result in 

a relatively small underpayment giving 

rise ‘‘to an audit bill several orders of 

magnitude larger.’’ (ACA at 1, 3.) AT&T 

and DISH predicted that this would 

encourage the auditor to look for 

‘‘discrepancies even where they do not 

exist’’ and ‘‘to raise as many issues as 

possible, whatever their merit.’’ (AT&T 

at 6; DISH at 9.) AT&T also predicted 

that a cost-shifting provision would 

discourage licensees from correcting the 

underpayments reported on their 

Statements of Account, because a 

supplementary payment could be 

viewed as an admission that the 

auditor’s calculations are correct. (AT&T 

at 6.) In order to avoid this result, AT&T 

urged the Office to create a separate 

‘‘process for resolving disputes or for 

determining how much a system 

operator has underpaid.’’ (AT&T at 7.) 

Although they strongly opposed the 

Office’s cost-shifting proposal, the ACA, 

the NCTA, and AT&T offered several 

suggestions for improving the costshifting provision. ACA stated that the 

underpayment threshold should be set 

significantly higher than 5 percent, that 

the underpayment should surpass a 

minimum dollar amount in order to 

trigger a cost-shifting, and that the 

Office should provide additional relief 

for small cable operators. (ACA at 1, 3, 

4.) AT&T and the NCTA expressed a 

similar view. AT&T stated that the cost 

of the audit should only be shifted if the 

auditor discovers an underpayment of 

$10,000 or more. (AT&T at 7–8.) In 

addition, AT&T and the NCTA agreed 

that the cost of the audit should only be 

shifted if the auditor finds an 

underpayment of 10 percent or more, 

noting that a 10 percent threshold 

would be consistent with the trigger that 

the Office has adopted in its other audit 

regulations. (AT&T at 7–8; AT&T Reply 

at 3; NCTA at 13.) 

In determining whether the minimum 

threshold has been met, both AT&T and 

the NCTA said that the auditor should 

consider the total amount of royalties 


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25See Defense Logistics Agency v. Federal Labor 

Relations Authority, 754 F.2d 1003, 1008 (DC Cir. 

1985) (noting that a House Committee report on an 

earlier version of a statutory provision provided 

‘‘some support’’ for the agency’s interpretation of 

the provision which was subsequently enacted by 

Congress); Crooker v. Bureau of Alcohol, Tobacco 

& Firearms, 670 F.2d 1051, 1074 n.59 (DC Cir. 1981) 

(noting that ‘‘[t]o the extent that the legislative 

history of earlier bills is useful,’’ it tended to 

support the court’s interpretation of the legislation 

that Congress subsequently enacted). 

26The bill was passed by the House on December 

3, 2009. The bill was read twice in the Senate and 

referred to the Committee on the Judiciary. 

27As the Office stated in the Notice of Proposed 

Rulemaking, the Office included a cost-shifting 

provision in its regulations concerning the audit of 

Statements of Account and royalty payments made 

under section 112, section 114, and chapter 10. See 

77 FR 35649, June 14, 2012. 

28See Defense Logistics Agency, 754 F.2d at 1008 

(explaining that it would be ‘‘unwise to place great 

weight’’ on the legislative history for a prior version 

of a bill where the legislation ‘‘was altered 

significantly before adoption’’). 

29 In support of this argument AT&T cited two 

cases from the Great Depression, which are clearly 

distinguishable. In Schechter Poultry Corp. v. 

United States, 295 U.S. 495 (1935) the Supreme 

Court held the National Industrial Recovery Act of 

1933 to be unconstitutional, because it allowed 

poultry producers—rather than the government—to 

establish ‘‘codes of fair competition’’ for the poultry 

industry. Likewise, in Carter v. Coal Co., 298 U.S. 

238 (1936), the Court held the Bituminous Coal 

Conservation Act of 1935 to be unconstitutional, 

because it stated that if the companies that produce 

more than two-thirds of the nation’s annual 

production of coal negotiated a labor agreement 

with more than half of their workers, then the 

minimum wages and maximum work hours 

specified in those contracts would be binding upon 

other coal mining companies. Unlike the laws at 

issue in these cases, STELA authorizes an auditor 

to confirm the correctness of the calculations and 

royalty payments reported on a particular Statement 

of Account, but the auditor’s determination would 

not be binding upon any other statutory licensee or 

any other Statements that are not included within 

that audit. 

reported by all of the cable systems and 

reflected on all of the Statements of 

Account that are at issue in the audit. 

The NCTA stated that the auditor 

should consider both overpayments and 

underpayments in making this 

calculation. However, AT&T stated that 

the auditor should not consider 

‘‘underpayments attributable to 

reasonable disagreements on issues of 

law, constructions of regulations, or 

accounting procedures’’ or other issues 

‘‘about which reasonable minds may 

differ.’’ (AT&T at 7–8; NCTA at 13.) 

Both AT&T and the NCTA stated that 

the costs of the audit must be 

reasonable, and that in no event, should 

the licensee be required to pay for costs 

that exceed the amount of the 

underpayment. (AT&T Reply at 3; 

NCTA at 13, 14.) They stated that the 

statutory licensee should not be 

required to pay for an audit unless a 

court determines that the licensee failed 

to report the correct amount of royalties, 

noting that requiring a final judicial 

determination would be consistent with 

the cost-shifting procedures set forth in 

the Office’s other audit regulations. 

(AT&T at 7–8; AT&T Reply at 3; NCTA 

at 14.) In addition, AT&T stated that if 

the auditor discovers an overpayment of 

10 percent or more, the copyright 

owners should be required to reimburse 

the licensee for the costs that it incurred 

in responding to the audit. AT&T 

contended that this would discourage 

copyright owners from abusing the 

verification procedure. (AT&T at 7–8.) 

As discussed above, the Notice of 

Proposed Rulemaking would allow 

copyright owners to expand the scope of 

the audit to include other systems 

owned by an MSO if the auditor 

discovers an underpayment in an audit 

of its systems. (AT&T at 7.) AT&T stated 

that the statutory licensee should not be 

required to pay for the cost of an 

expanded audit based solely on the fact 

that the auditor discovered an 

underpayment in the initial audit. 

(AT&T at 8.) 

B. Discussion 

1. The Office Has the Authority To 

Include a Cost-Shifting Provision in Its 

Audit Regulations 

Section 702 of the Act states that ‘‘The 

Register of Copyrights is authorized to 

establish regulations not inconsistent 

with law for the administration of the 

functions and duties made the 

responsibility of the Register under this 

title.’’ 17 U.S.C. 702. This includes the 

authority to prescribe regulations 

concerning the Statements of Account 

that cable operators and satellite carriers 

file with the Office, and the authority to 

prescribe regulations concerning the 

verification of those Statements. See 17 

U.S.C. 111(d)(1); 111(d)(6); 119(b)(1), 

119(b)(2). The Office has concluded that 

a regulation authorizing cost-shifting for 

underpayments discovered in the course 

of a verification procedure would be 

consistent with ‘‘the administration of 

the functions and duties made the 

responsibility of the Register’’ under 

title 17 of the U.S. Code. 17 U.S.C. 702. 

Moreover, the Office is not aware of any 

provision in sections 111(d)(6), 

119(b)(2), or elsewhere in the Act that 

precludes the Office from adopting 

regulations that allocate the cost of a 

verification procedure among the 

participants. 

While there is no legislative history 

for STELA, the legislative history for a 

prior iteration of the legislation lends 

some additional support for the Office’s 

conclusion.25 Sections 102(f)(4) and 

104(c)(6) of the earlier bill directed the 

Register to issue regulations to allow 

copyright owners to verify the 

Statements of Account and royalty fees 

that cable operators and satellite carriers 

deposit with the Office. Like sections 

111(d)(6) and 119(b)(2) of the current 

statute, the earlier bill did not indicate 

whether the regulations should include 

a cost-shifting provision or whether 

those costs should be paid by the 

copyright owners or by the statutory 

licensee, or both. See Satellite Home 

Viewer Reauthorization Act of 2009, 

H.R. 3570, 111th Cong. §§ 102(f)(4), 

104(c)(6) (2009).26 However, the House 

Report for the earlier bill stated that 

‘‘[t]he rules adopted by the Office shall 

include procedures allocating 

responsibility for the cost of audits 

consistent with such procedures in 

other audit provisions in its rules.’’ See 

H.R. Rep. No. 111–319, at 10 (2009). 

The House was aware that the Office 

has established verification procedures 

in the past and that the Office has 

included a cost-shifting provision in 

those regulations.27 The fact that the 

House directed the Office to ‘‘include 

procedures allocating responsibility for 

the costs of audits’’—despite the fact 

that the earlier bill did not explicitly 

mention this issue—indicates that the 

House expected the Office to include a 

cost-shifting provision in this regulation 

consistent with its long-standing 

practice of allocating costs among 

stakeholders on a reasonable basis. 

While the House Report tends to 

support the conclusion that the Office 

has the authority to create a cost-shifting 

procedure, the Office recognizes that the 

value of the House Committee’s remarks 

is limited, given that Congress made 

significant changes to the provision 

concerning the verification procedure 

for cable operators before it was enacted 

in STELA (although the provision 

concerning the verification procedure 

for satellite carriers remained 

unchanged).28

AT&T contended that the cost-shifting 

provision would be unconstitutional, 

because it would impose ‘‘costs on the 

system operator based on the judgment 

of a private party’’ and it would allow 

the auditor to be ‘‘prosecutor, judge, and 

jury’’ if there is a dispute concerning the 

auditor’s calculations.29 (AT&T at 7.) 

AT&T did not contend that it would be 

a violation of due process or the 

delegation doctrine to allow an auditor 

to verify the information provided in a 

Statement of Account or to use the 

auditor’s determination as the 

appropriate baseline for curing 

underpayments, requesting refunds, or 

expanding the scope of the audit to 

include other Statements filed by the 

statutory licensee. Nor does AT&T 

explain why the cost-shifting provision 


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30This term is defined and discussed in section 

VIII(B) above. 

would be unconstitutional, while these 

other aspects of the regulation would 

not. 

In any event, the cost-shifting 

provision is not a violation of due 

process, because inter alia, the statutory 

licensee would be given an opportunity 

to meet and confer with the auditor 

report, to identify errors or mistakes in 

the initial draft of the auditor’s report, 

and to prepare a written response to the 

auditor’s conclusions before he or she 

delivers the final report to the copyright 

owners. If the licensee disagrees with 

the auditor’s conclusion, the licensee 

could ask a court of competent 

jurisdiction to review that decision, and 

if the court agrees that the 

underpayment did not meet the 

threshold set forth in the proposed 

regulation, the copyright owners would 

be required to reimburse the licensee for 

the amount that it contributed to the 

cost of the audit. Likewise, the proposed 

regulation is not a violation of the 

delegation doctrine, because STELA 

expressly directs the Office—not the 

private industry—to develop a 

procedure for the verification of 

Statements of Account and royalty 

payments (although the Office has 

received valuable input on the proposed 

regulation from the Joint Stakeholders 

and other interested parties). See 

Sunshine Anthracite Coal Co. v. Adkins, 

310 U.S. 381, 398 (1940) (‘‘Since lawmaking is not entrusted to the industry, 

this statutory scheme is unquestionably 

valid.’’). 

AT&T, the ACA, and DISH predicted 

that the proposed regulation would be 

unduly burdensome for the statutory 

licensee. The Office weighed these 

concerns, but believes that they have 

been adequately addressed in the 

Revised Proposal. The Office also notes 

that cost-shifting provisions are 

commonly used in private agreements 

that provide a contractual right to audit 

another party’s books or records, and 

the Office assumes that agreements 

negotiated by members of the copyright, 

cable, and satellite industries are no 

exception. 

AT&T, the ACA, and DISH contended 

that statutory licensees should not be 

required to pay for the costs of an audit, 

because they would incur significant 

costs in responding to an audit. They 

also contended that licensees would not 

be able to recover any of their costs from 

the copyright owners (even if the 

auditor discovered an overpayment), 

nor would they receive any financial 

benefit from the verification procedure 

that could be used to offset their costs. 

The cable and satellite industries 

receive a substantial benefit from the 

statutory licensing system, insofar as it 

provides a mechanism for licensing the 

public performance and display of 

broadcast content without having to 

negotiate with the owners of that 

content. Moreover, the Congressional 

Budget Office estimated that the cost of 

responding to an audit ‘‘would be 

minimal,’’ because the auditor would be 

verifying information that ‘‘is already 

collected and maintained by satellite 

and cable carriers’’ as a condition for 

using the statutory license. See H.R. 

Rep. No. 111–319, at 20 (2009). While 

the cost of complying with the 

verification procedure may be a new 

obligation, this is simply a cost of doing 

business under the statutory licensing 

system, much like the obligation to pay 

royalties and the recordkeeping and 

reporting requirements. 

2. The Revised Proposal 

AT&T, the ACA, and the NCTA 

offered several suggestions for 

improving the cost-shifting procedure, 

and most of those suggestions have been 

included in the Revised Proposal. If the 

auditor discovers a net aggregate 

underpayment 30 of more than 10 

percent on the Statements of Account at 

issue in the audit, then the statutory 

licensee would be required to reimburse 

the copyright owners for the cost of the 

audit. If the licensee prepared a written 

response to the auditor’s report and if 

the methodology set forth in that 

response indicates that there was a net 

aggregate underpayment between 5 

percent and 10 percent of the amount 

reported on the Statements of Account, 

then the cost of the audit would be split 

evenly between the copyright owners 

and the licensee. However, if the net 

aggregate underpayment is less than 5 

percent or if the auditor discovers an 

overpayment rather than an 

underpayment, then the participating 

copyright owner(s) would be required to 

pay for the auditor’s services. 

The Office did not adopt the 

methodology proposed by the Joint 

Stakeholders, because it may impose an 

unfair burden on small cable operators. 

Specifically, the Joint Stakeholders 

would require the licensee to pay for 

half the cost of the audit if the auditor 

discovered a net aggregate 

underpayment of 10 percent or less— 

even if the underpayment was as low as 

.001 percent of the amount reported on 

the Statements of Account. In other 

words, the licensee could potentially be 

required to pay a portion of the auditor’s 

costs whenever there is an 

underpayment, regardless of the amount 

of that underpayment. 

In determining whether the minimum 

threshold has been met, the auditor 

would consider the total amount of 

royalties reported on all of the 

Statements at issue in the audit, 

including any overpayments or 

underpayments. This addresses the 

ACA’s and the NCTA’s concern that 

audit costs might be shifted to the 

statutory licensee based on a minor 

discrepancy on a single Statement of 

Account. If the auditor discovers a net 

aggregate underpayment in an audit of 

an MSO, then as discussed above, the 

copyright owners would be allowed to 

expand the scope of the audit to include 

other Statements filed by the systems at 

issue in that audit and/or other systems 

owned by that MSO. Although the 

expanded audit would be considered an 

extension of the initial audit, the 

licensee would not be required to pay 

for the cost of the expanded audit unless 

the auditor discovered a net aggregate 

underpayment on the Statements at 

issue in the expanded audit (even if the 

same auditor conducted both the initial 

audit and the expanded audit). 

Consistent with AT&T’s and the 

NCTA’s recommendation, the statutory 

licensee would not be required to pay 

for any portion of the auditor’s costs 

that exceed the amount of the net 

aggregate underpayment reported on its 

Statements of Account. This would 

appear to address the ACA’s request for 

special relief for small cable operators 

(although the cap on audit costs would 

apply to large and small statutory 

licensees alike). For example, if the 

auditor discovered net aggregate 

underpayment of $3,000 and if that 

amount was more than 10 percent of the 

amount reported on all of the 

Statements of Account at issue in the 

audit, then the licensee would be given 

an opportunity to amend its Statements 

of Account and to deposit $3,000 (plus 

any applicable interest on that amount) 

with the Office to cover the deficiency 

in its initial filings. If the auditor 

charged $2,500 for his or her work on 

the audit, the licensee would be 

required to pay another $2,500 to a 

representative of the participating 

copyright owners to cover the cost of the 

audit. However, if the auditor charged 

$3,300 for his or her services, then 

licensee would be required to pay the 

copyright owners no more than $3,000 

for the cost of the audit, and the 

participating copyright owners would 

be expected to pay the auditor $300 to 

cover the remaining amount. 

The Office is not inclined to create a 

separate procedure for resolving 

disagreements over legal, regulatory, or 

accounting issues before the costshifting provision would be triggered (as 


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31Both the Notice of Proposed Rulemaking and 

the Joint Stakeholders’ proposal took this same 

approach. 

32The Office’s regulation on digital audio 

recording devices is the only procedure that 

specifically requires a ‘‘judicial determination’’ in 

order to shift costs from the copyright owners to the 

statutory licensee. See 37 CFR 201.30(i). The 

regulation on ephemeral recordings and the digital 

transmission of sound recordings states that the cost 

of the audit should be paid by the licensee if an 

independent auditor concludes that there was an 

underpayment of 5 percent or more. See 37 CFR. 

260.5(f); 260.6(f). The rest of the regulations state 

that the costs should be shifted if it is ‘‘finally 

determined that there was an underpayment,’’ 

without specifying whether the determination 

should be made by the auditor or in a judicial 

proceeding. See 37 CFR 261.6(g); 261.7(g); 262.6(g); 

262.7(g). 

AT&T suggested). The Revised Proposal 

already protects statutory licensees by 

giving them an opportunity to meet and 

confer with the auditor, to identify 

errors or discrepancies in the initial 

draft of the auditor’s report, and to 

prepare a written response to the 

auditor’s conclusions before the auditor 

delivers his or her final report to the 

copyright owners. At the same time, it 

protects the interests of the copyright 

owners by giving the statutory licensee 

a precise deadline for reimbursing the 

participating copyright owners for the 

licensee’s share of the audit costs. 

The Joint Stakeholders’ proposal 

would require the auditor to provide the 

participating copyright owners and the 

licensee with an itemized statement by 

the 15th of each month specifying the 

costs incurred by the auditor in the 

preceding month. The Office agrees that 

the participating copyright owners 

should provide the licensee with an 

itemized statement at the conclusion of 

the audit specifying the total costs 

incurred by the auditor. However, 

requiring the auditor to provide 

monthly statements could be used as an 

excuse for harassing the auditor and 

interfering with his or her conduct of 

the audit. The participating copyright 

owners could agree to provide the 

licensee with copies of the auditor’s 

billing statements in the auditor’s 

engagement letter or in a side agreement 

with the licensee, but the Office is not 

inclined to require this type of micromanagement in the regulation. 

As discussed above, the amount of 

underpayments and overpayments that 

may be discovered in an audit may vary 

depending on the size of the statutory 

licensee, the amount of its royalty 

obligations, and the accuracy of its 

accounting procedures. Therefore, the 

Office is not inclined to specify a 

minimum dollar amount that would be 

needed to shift costs from the copyright 

owners to the statutory licensee (as 

AT&T and the ACA suggested). 

AT&T and DISH worried that the costshifting provision would encourage the 

auditor to look for discrepancies even 

where they do not exist. This does not 

appear to be a valid concern, because 

the auditor would not be entitled to 

collect a contingency fee based on the 

results of the audit. Instead, the auditor 

would be paid a flat fee or an hourly 

rate regardless of whether he or she 

discovers an underpayment or an 

overpayment on the Statements of 

Account. Moreover, the requirement 

that the auditor be a qualified and an 

independent certified public accountant 

subject to the Code of Professional 

Conduct of the American Institute of 

Certified Public Accountants should 

diminish significantly any concerns that 

the auditor would perform unnecessary 

procedures beyond those needed to 

conduct an accurate and thorough audit. 

AT&T contended that the copyright 

owners should be required to reimburse 

the licensee for the costs that it incurred 

in responding to the audit if the auditor 

discovers an overpayment on a 

Statement of Account. The Office is not 

inclined to accept this proposal, because 

as discussed above, the Congressional 

Budget Office has estimated that the 

cost of responding to an audit request 

would be minimal. Moreover, the 

Revised Proposal contains a number of 

provisions that should deter copyright 

owners from abusing the verification 

procedure, such as the limit on the 

number of audits that may be conducted 

per year, the limit on the topics that the 

auditor may review, and the fact that the 

copyright owners would be required to 

pay for the entire cost of the audit if the 

auditor discovers that the licensee 

overpaid rather than underpaid. 

AT&T also predicted that the costshifting provision would discourage the 

licensee from curing its underpayment, 

because making a supplemental 

payment could be viewed as a 

concession that the licensee failed to 

report the correct amount on its 

Statement of Account. That is a non 

sequitur. The Revised Proposal states 

that if the auditor discovers an 

underpayment on a Statement of 

Account, the licensee ‘‘may’’ cure that 

underpayment by submitting additional 

royalty payments, although the licensee 

is not required to do so.31 Thus, the fact 

that the licensee may be required to 

reimburse the copyright owners for the 

cost of the audit would not appear to be 

an admission of liability, particularly if 

the licensee prepares a written response 

expressing its disagreement with the 

auditor’s conclusions and declines to 

amend its Statement of Account or 

submit any supplemental payments 

within the time allowed. 

Finally, AT&T stated that the licensee 

should not be required to pay for the 

cost of the audit unless a court 

determines that the licensee failed to 

report the correct amount on its 

Statement of Account.32 The Office 

believes that the Revised Proposal 

strikes a more appropriate balance 

between the interests of the 

participating copyright owners and the 

statutory licensees. If the auditor 

determines that the licensee failed to 

pay and report the correct amount on its 

Statements of Account and if the 

underpayment was more than 10 

percent of the total amount reported on 

those Statements, then the licensee 

would be required to pay for the cost of 

the audit. If the licensee disagrees with 

that assessment, the licensee could seek 

a declaratory judgment of noninfringement and an order directing the 

copyright owners to reimburse the 

licensee for the cost of the audit. 

Conversely, if the auditor determines 

that the licensee failed to pay the correct 

amount and if the licensee fails to 

deposit any additional royalties with the 

Office within the time allowed, the 

copyright owners could file an 

infringement action seeking damages 

and an injunction. In other words, both 

parties would need to take legal action 

at the conclusion of the audit if the 

other party disagrees with the auditor’s 

conclusions, and the prevailing party in 

that dispute would be reimbursed under 

the Revised Proposal, regardless of 

whether the case is filed by the 

copyright owners or the licensee. 

XII. Confidentiality 

A. Comments 

The Notice of Proposed Rulemaking 

explained that the auditor should be 

permitted to review confidential 

information in the course of the 

verification procedure, and that the 

auditor should be permitted to share 

that information with his or her 

employees, agents, consultants, and 

independent contractors, provided that 

they are not employees, officers, or 

agents of a copyright owner, and 

provided that those individuals enter 

into an appropriate confidentiality 

agreement governing their use of that 

material. See 77 FR 35650, June 14, 

2012. 

AT&T and the NCTA contended that 

these restrictions are insufficient. 

Specifically, the NCTA stated that if the 

auditor includes any supporting 

documentation in his or her final report 

to the copyright owners, that 

information should be presented in a 

separate appendix and it should be 

redacted to protect any confidential 


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information contained therein. (NCTA 

at 11–12.) AT&T contended that the 

auditor should be required to enter into 

a confidentiality agreement with the 

statutory licensee, and that an auditor 

who breaches his or her obligations 

under that agreement should be subject 

to monetary damages and injunctive 

relief and should be barred from 

conducting any additional audits for at 

least three years. AT&T agreed that the 

copyright owners should not be given 

access to any confidential information, 

but it contended that this prohibition 

should also apply to the copyright 

owners’ affiliates as well as the 

employees, officers, and agents of any 

other statutory licensee that retransmits 

broadcast programming under sections 

111 or 119. (AT&T at 10.) The Copyright 

Owners generally agreed that any party 

that is owned or controlled by another 

statutory licensee should not be 

permitted to review confidential 

information that may be produced 

during the course of an audit. 

(Copyright Owners at 10.) 

B. Discussion 

The Revised Proposal explains that 

access to confidential information 

should be limited to the auditor who 

conducts the verification procedure and 

a discrete class of persons who are listed 

in paragraph (m)(2)(ii) of the regulation. 

Specifically, the auditor would be 

allowed to share confidential 

information with his or her employees, 

agents, consultants, and independent 

contractors who need access to the 

information in order to perform their 

duties in connection with the audit. In 

addition, the auditor would be allowed 

to share confidential information with 

outside counsel for the participating 

copyright owners (including any third 

party consultants retained by outside 

counsel). Neither the auditor nor the 

auditor’s employees, agents, 

consultants, and independent 

contractors could be employees, 

officers, or agents of a copyright owner 

for any purpose other than the audit, 

and any other person who receives 

confidential information during the 

course of an audit would have to 

implement procedures to safeguard that 

information. 

If the auditor includes any supporting 

documentation in his or her final report 

to the copyright owners, the auditor 

would have to redact any confidential 

information contained therein, because 

the auditor is never allowed to share 

confidential information with the 

copyright owners. However, the auditor 

could provide an unredacted copy of the 

report to outside counsel for the 

participating copyright owners. 

Likewise, the auditor would not be 

allowed to share confidential 

information with the copyright owners’ 

affiliates or with the employees, officers, 

and agents of any other statutory 

licensee, because those parties are not 

expressly mentioned in the class of 

persons who may be given access to 

confidential information under 

paragraph (m)(2) of the Revised 

Proposal. 

While outside counsel and the 

auditor’s employees, agents, 

consultants, and independent 

contractors would be required to enter 

into an appropriate confidentiality 

agreement governing the use of the 

confidential information, the auditor 

would not be subject to the same 

requirement (as AT&T suggested). The 

Office does not believe that this is 

necessary given that the rules of 

professional conduct for certified public 

accountants already prohibit the 

disclosure of confidential information. 

XIII. Conclusion 

The Office seeks comment from the 

public on the subjects discussed above 

related to the implementation of the 

audit provisions adopted by Congress 

with the passage of the Satellite 

Television Extension and Localism Act 

of 2010. 

List of Subjects in 37 CFR Part 201 

Copyright, General Provisions. 

Proposed Regulation 

In consideration of the foregoing, the 

Copyright Office proposes to amend part 

201 of 37 CFR, Chapter II, as follows: 

PART 201—GENERAL PROVISIONS 

[AMENDED] 

■ 1. The authority citation for this part 

reads as follows: 

Authority: 17 U.S.C. 702, 17 U.S.C. 

111(d)(6), and 17 U.S.C. 119(b)(2). 

■ 2. Add § 201.16 to read as follows: 

§ 201.16 Verification of a Statement of 

Account and royalty fee payments for 

secondary transmissions made by cable 

systems and satellite carriers. 

(a) General. This section prescribes 

general rules pertaining to the 

verification of a Statement of Account 

and royalty fees filed with the Copyright 

Office pursuant to sections 111(d)(1) 

and 119(b)(1) of title 17 of the United 

States Code, as amended by Public Law 

111–175. 

(b) Definitions. 

(1) The term cable system has the 

meaning set forth in § 201.17(b)(2) of 

this part. 

(2) MSO means an entity that owns, 

controls, or operates more than one 

cable system. 

(3) Copyright owner means any person 

or entity that owns the copyright in a 

work embodied in a secondary 

transmission made by a statutory 

licensee that filed a Statement of 

Account with the Copyright Office for 

an accounting period beginning on or 

after January 1, 2010, or a designated 

agent or representative of such person or 

entity. 

(4) Generally accepted auditing 

standards (GAAS) means the auditing 

standards promulgated by the American 

Institute of Certified Public Accountants 

(AICPA). 

(5) Net aggregate underpayment 

means the aggregate amount of 

underpayments found by the auditor 

less the aggregate amount of any 

overpayments found by the auditor, as 

measured against the total amount of 

royalties reflected on the Statements of 

Account examined by the auditor. 

(6) Participating copyright owner 

means a copyright owner that has filed 

a notice of intent to audit a particular 

Statement of Account pursuant to 

paragraph (c) of this section and any 

other copyright owner that has given 

notice of its intent to participate in such 

audit pursuant to paragraph (d) of this 

section. 

(7) The term satellite carrier has the 

meaning set forth in section 119(d)(6) of 

title 17 of the United States Code. 

(8) The term secondary transmission 

has the meaning set forth in section 

111(f)(2) of title 17 of the United States 

Code, as amended by Public Law 111– 

175. 

(9) Statement of Account or Statement 

means a semiannual Statement of 

Account filed with the Copyright Office 

under section 111(d)(1) or 119(b)(1) of 

title 17 of the United States Code, as 

amended by Public Law 111–175, or an 

amended Statement of Account filed 

with the Office pursuant to §§ 201.11(h) 

or 201.17(m) of this part. 

(10) Statutory licensee or licensee 

means a cable system or satellite carrier 

that filed a Statement of Account with 

the Office under section 111(d)(1) or 

119(b)(1) of title 17 of the United States 

Code, as amended by Public Law 111– 

175. 

(c) Notice of intent to audit. Any 

copyright owner that intends to audit a 

Statement of Account for an accounting 

period beginning on or after January 1, 

2010 must notify the Register of 

Copyrights no later than three years 

after the last day of the year in which 

the Statement was filed with the Office. 

The notice of intent to audit may be 

filed by a copyright owner or a 


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designated agent that represents a group 

or multiple groups of copyright owners. 

The notice shall identify the statutory 

licensee that filed the Statement(s) with 

the Copyright Office, the Statement(s) 

and accounting period(s) that will be 

subject to the audit, and the party that 

filed the notice, including its name, 

address, telephone number, facsimile 

number, and email address, if any. In 

addition, the notice shall include a 

statement that the party owns, or 

represents one or more copyright 

owners who own, a work that was 

embodied in a secondary transmission 

made by the statutory licensee during 

one or more of the accounting period(s) 

specified in the Statement(s) of Account 

that will be subject to the audit. The 

notice of intent to audit shall be served 

on the statutory licensee on the same 

day that the notice is filed with the 

Copyright Office. Within 30 days after 

the notice has been received in the 

Office, the Office will publish a notice 

in the Federal Register announcing the 

receipt of the notice of intent to audit. 

(d) Participation by other copyright 

owners. Within 30 days after a notice of 

intent to audit a Statement of Account 

is published in the Federal Register 

pursuant to paragraph (c) of this section, 

any other copyright owner who owns a 

work that was embodied in a secondary 

transmission made by that statutory 

licensee during an accounting period 

covered by the Statement(s) of Account 

referenced in the Federal Register 

notice and who wishes to participate in 

the audit of such Statement(s) must give 

written notice of such participation to 

the statutory licensee and to the party 

that filed the notice of intent to audit. 

The notice given pursuant to this 

paragraph may be filed by a copyright 

owner or a designated agent that 

represents a group or multiple groups of 

copyright owners, and it shall include 

all of the information specified in 

paragraph (c) of this section. 

(e) Selection of the auditor and 

communications with auditor during the 

course of the audit. (1) The participating 

copyright owner(s) shall provide to the 

statutory licensee a list of three 

independent and qualified auditors, 

along with information reasonably 

sufficient for the statutory licensee to 

evaluate the proposed auditors’ 

independence and qualifications 

including: 

(i) The auditor’s curriculum vitae and 

a list of audits that the auditor has 

conducted pursuant to section 111(d)(6) 

or 119(b)(2) of title 17 of the United 

States Code; 

(ii) A list and, subject to any 

confidentiality or other legal 

restrictions, a brief description of any 

other work the auditor has performed 

for any of the participating copyright 

owners during the prior two calendar 

years; 

(iii) A list identifying the participating 

copyright owners for whom the 

auditor’s firm has been engaged during 

the prior two calendar years; and, 

(iv) A copy of the engagement letter 

that would govern the auditor’s 

performance of the audit and that 

provides for the auditor to be 

compensated on a non-contingent flat 

fee or hourly basis that does not take 

into account the results of the audit. 

(2) The statutory licensee shall select 

one of the proposed auditors within five 

business days of receiving the list of 

auditors from the participating 

copyright owners. That auditor shall 

conduct the audit on behalf of all 

copyright owners who own a work that 

was embodied in a secondary 

transmission made by the statutory 

licensee during the accounting period(s) 

specified in the Statement(s) of Account 

identified in the notice of intent to 

audit. 

(3) The auditor shall be qualified and 

independent as defined in this section. 

An auditor shall be considered qualified 

and independent if: 

(i) He or she is a certified public 

accountant and a member in good 

standing with the AICPA and the 

licensing authority for the jurisdiction(s) 

where the auditor is licensed to 

practice; 

(ii) He or she is not, for any purpose 

other than the audit, an officer, 

employee, or agent of any participating 

copyright owner; 

(iii) He or she is independent as that 

term is used in the Code of Professional 

Conduct of the AICPA, including the 

Principles, Rules, and Interpretations of 

such Code applicable generally to attest 

engagements; and 

(iv) He or she is independent as that 

term is used in the Statements on 

Auditing Standards promulgated by the 

Auditing Standards Board of the AICPA 

and Interpretations thereof issued by the 

Auditing Standards Division of the 

AICPA. 

(4) Following the selection of the 

auditor and until the distribution of the 

auditor’s report to the participating 

copyright owner(s) pursuant to 

paragraph (h) of this section, there may 

be no ex parte communications 

regarding the audit between the selected 

auditor and the participating copyright 

owner(s) or their representatives 

provided, however, that the auditor may 

engage in such ex parte 

communications where either: 

(i) The auditor has a reasonable basis 

to suspect fraud and that participation 

by the statutory licensee in 

communications regarding the 

suspected fraud would, in the 

reasonable opinion of the auditor, 

prejudice the investigation of such 

suspected fraud; or 

(ii) The auditor provides the licensee 

with a reasonable opportunity to 

participate in communications with the 

participating copyright owner(s) or their 

representatives and the licensee 

declines to do so. 

(5) Following the selection of the 

auditor and until 30 days after the 

distribution of the auditor’s report to the 

participating copyright owner(s) and the 

statutory licensee pursuant to paragraph 

(h) of this section, the participating 

copyright owners may not propose a list 

of auditors to conduct an audit 

involving any other Statement of 

Account filed by the licensee. 

(f) Scope of the audit. The auditor 

shall have exclusive authority to verify 

all of the information reported on the 

Statements of Account subject to the 

audit in order to confirm the correctness 

of the calculations and royalty payments 

reported therein; provided, however, 

that the auditor shall not determine 

whether any cable system properly 

classified any broadcast signal as 

required by § 201.17(e)(9)(iv) and (v) 

and (h) of this part or whether a satellite 

carrier properly determined that any 

subscriber or group of subscribers is 

eligible to receive any broadcast signals 

under section 119(a) of title 17 of the 

United States Code, as amended by 

Public Law 111–175. The auditor may 

verify the carriage of the broadcast 

signals on each Statement of Account 

after reviewing the certified list of 

broadcast signals provided by the 

statutory licensee pursuant to paragraph 

(g)(1) of this section. The audit shall be 

performed in accordance with GAAS 

and with consideration given to 

minimizing the costs and burdens 

associated with the audit. 

(g) Obligations of the Statutory 

Licensee. (1) Within 30 days of the 

auditor’s selection by the statutory 

licensee pursuant to paragraph (e)(2) of 

this section, the licensee shall provide 

the auditor and a representative of the 

participating copyright owner(s) with a 

certified list of all broadcast signals 

retransmitted pursuant to the statutory 

license in each community covered by 

each of the Statements of Account 

subject to the audit, including the call 

sign for each broadcast signal and each 

multicast signal. In the case of an audit 

involving a cable system or MSO, the 

list must include the classification of 

each signal on a community by 

community basis pursuant to 


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27152 Federal Register / Vol. 78, No. 90 / Thursday, May 9, 2013 / Proposed Rules 

§ 201.17(e)(9)(iv) and (v) and (h) of this 

chapter. 

(2) The statutory licensee shall 

provide the auditor with reasonable 

access to the licensee’s books and 

records and any other information that, 

consistent with GAAS, the auditor 

needs in order to conduct his or her 

audit, and the statutory licensee shall 

provide the auditor with any 

information the auditor reasonably 

requests promptly after receiving such a 

request. 

(3) The audit will be conducted 

during regular business hours at a 

location designated by the statutory 

licensee. If the auditor and statutory 

licensee agree, the audit may be 

conducted in whole or in part by means 

of electronic communication. 

(4) The statutory licensee may 

suspend the audit within 30 days before 

the semi-annual due dates for filing 

Statements of Account by providing 

prompt written notice to the 

participating copyright owner(s) and the 

auditor; provided, however, that audit 

may be suspended for no more than 30 

days, the licensee may not exercise this 

option if the auditor has delivered his 

or her report to the statutory licensee 

pursuant to paragraph (h)(1) of this 

section, and if the participating 

copyright owner(s) notify the licensee 

within 10 days of receiving the notice of 

suspension of their good faith belief that 

suspension of the audit could prevent 

the auditor from delivering his or her 

final report to the participating 

copyright owner(s) before the statute of 

limitations expires on any claims under 

the Copyright Act related to a Statement 

of Account covered by that audit, the 

statutory licensee may not suspend the 

audit unless it first executes a tolling 

agreement to extend the statute of 

limitations by a period of time equal to 

the period of time during which the 

audit would be suspended. 

(h) Audit report. (1) Upon completion 

of the audit, the auditor shall prepare a 

written report setting forth his or her 

findings and conclusions. Prior to 

delivering the report to any 

participating copyright owner, the 

auditor shall deliver a copy of that 

report to the statutory licensee and 

consult with a designee of the licensee 

regarding the findings and conclusions 

set forth in the report for a period not 

to exceed 30 days. However, if the 

auditor has a reasonable basis to suspect 

fraud and that disclosure would, in the 

reasonable opinion of the auditor, 

prejudice investigation of such 

suspected fraud, the auditor may deliver 

a copy of the report to the participating 

copyright owner(s) and an abridged 

copy to the licensee that omits the 

auditor’s allegation that the licensee has 

committed fraud. 

(2) If, upon consulting with the 

licensee, the auditor agrees that there 

are errors in the report, the auditor shall 

correct those errors before delivering the 

report to the participating copyright 

owner(s). If the statutory licensee 

disagrees with any of the findings or 

conclusions set forth in the report, the 

licensee may provide the auditor with a 

written explanation of its good faith 

objections within 14 days after the last 

day of the consultation period. 

(3) Within five business days 

following the last date on which the 

statutory licensee may provide the 

auditor with a written response to the 

report pursuant to paragraph (h)(2) of 

this section, and subject to the 

confidentiality provisions set forth in 

paragraph (m) of this section, the 

auditor shall deliver a final report to the 

participating copyright owner(s) and to 

the statutory licensee, along with a copy 

of the statutory licensee’s written 

response (if any). A representative of the 

participating copyright owners shall 

promptly notify the Office that the audit 

has been completed and shall state 

whether the auditor discovered an 

overpayment on any of the Statements 

of Account at issue in the audit. 

(i) Corrections, supplemental 

payments, and refund. (1) Where the 

final auditor’s report concludes that any 

of the information reported on a 

Statement of Account is incorrect or 

incomplete, that the calculation of the 

royalty fee payable for a particular 

accounting period was incorrect, or that 

the amount deposited in the Copyright 

Office for that period was too low, a 

statutory licensee may, within 60 days 

of the delivery of the final report to the 

participating copyright owners and the 

statutory licensee, or within 90 days of 

the delivery of such report in the case 

of an audit of an MSO, cure such 

incorrect or incomplete information or 

underpayment by filing an amendment 

to the Statement of Account and by 

depositing supplemental royalty fee 

payments utilizing the procedures set 

forth in § 201.11(h) or § 201.17(m) of 

this chapter. 

(2) Notwithstanding §§ 201.17(m)(3)(i) 

and 201.11(h)(3)(i) of this chapter, 

where the final report reveals an 

overpayment by the statutory licensee 

for a particular Statement of Account, 

the licensee may request a refund of 

such overpayments within 30 days of 

the delivery of the final report to the 

participating copyright owners and the 

licensee by utilizing the procedures set 

forth in § 201.11(h)(3) or § 201.17(m)(3) 

of this chapter. 

(j) Costs of the audit. (1) Except as 

provided in this paragraph, the 

participating copyright owner(s) shall 

pay for the full costs of the auditor. If 

the auditor concludes that there was a 

net aggregate underpayment of more 

than 10 percent on the Statements of 

Account at issue in an audit or an 

expanded audit, the statutory licensee 

shall pay the auditor’s costs associated 

with that audit. If the statutory licensee 

provides the auditor with a written 

explanation of its good faith objections 

to the auditor’s report pursuant to 

paragraph (h)(2) of this section and the 

net aggregate underpayment made by 

the statutory licensee on the basis of 

that explanation is not more than 10 

percent and not less than 5 percent, the 

costs of the auditor shall be split evenly 

between the statutory licensee and the 

participating copyright owner(s); 

provided, however, that if a court, in a 

final judgment (i.e., after all appeals 

have been exhausted) concludes there 

was a net aggregate underpayment 

exceeding 10 percent, the statutory 

licensee shall, subject to paragraph (j)(3) 

of this section, reimburse the 

participating copyright owner(s), within 

60 days of that final judgment, for any 

costs of the auditor that the 

participating copyright owners have 

paid. 

(2) If a statutory licensee is 

responsible for any portion of the costs 

of the auditor, a representative of the 

participating copyright owner(s) will 

provide the statutory licensee with an 

itemized accounting of the auditor’s 

total costs and the statutory licensee 

shall reimburse such representative for 

the appropriate share of those costs 

within 30 days of the statutory 

licensee’s payment of supplemental 

royalties (if applicable) or within 90 

days of the delivery to the participating 

copyright owners and the statutory 

licensee of the final report, whichever is 

later. Notwithstanding the foregoing, if 

a court, in a final judgment (i.e., after all 

appeals have been exhausted) concludes 

that the statutory licensee’s net 

aggregate underpayment, if any, was 10 

percent or less, the participating 

copyright owner(s) shall reimburse the 

licensee, within 60 days of the final 

judgment, for any costs of the auditor 

that the licensee has paid. 

(3) No portion of the auditor’s costs 

that exceed the amount of the net 

aggregate underpayment may be 

recovered from the statutory licensee. 

(k) Frequency of verification. (1) 

Except as provided in paragraph (k)(3) 

of this section, no cable system, MSO, 

or satellite carrier shall be subject to 

more than one audit per calendar year 

and the audit of a particular cable 


tkelley on DSK3SPTVN1PROD with PROPOSALS
Federal Register / Vol. 78, No. 90 / Thursday, May 9, 2013 / Proposed Rules 27153 

system or satellite carrier shall include 

no more than two of the Statements of 

Account from the previous six 

accounting periods submitted by that 

cable system or satellite carrier. 

(2) Once a notice of intent to audit a 

Statement of Account has been received 

by the Office, a notice of intent to audit 

that same Statement will not be 

accepted for publication in the Federal 

Register. 

(3) If the final auditor’s report 

concludes that there has been a net 

aggregate underpayment of five percent 

or more on the audited Statements of 

Account of a particular cable system or 

satellite carrier, the participating 

copyright owners may audit all of the 

Statements of Account filed by that 

particular cable system or satellite 

carrier during the previous six 

accounting periods by complying with 

the procedures set forth in paragraphs 

(c) and (d) of this section. The expanded 

audit may be conducted by the same 

auditor that performed the initial audit, 

provided that the participating 

copyright owner(s) provide the statutory 

licensee with updated information 

reasonably sufficient to allow the 

licensee to determine that there has 

been no material change in the auditor’s 

independence and qualifications. In the 

alternative, the expanded audit may be 

conducted by an auditor selected by the 

licensee pursuant to the procedures set 

forth in paragraph (e) of this section. 

(4) An audit of an MSO shall be 

limited to a sample of no more than 10 

percent of the MSO’s Form 3 cable 

systems and no more than 10 percent of 

the MSO’s Form 2 systems, except that 

if the auditor concludes that there was 

a net aggregate underpayment of five 

percent or more on the Statements of 

Account at issue in an audit: 

(i) The number of Statements of 

Account of a particular cable system 

subject to audit in a calendar year may 

be expanded in accordance with 

paragraph (k)(3) of this section; and 

(ii) The sample of cable systems that 

may be audited in a calendar year may 

be expanded in the following calendar 

year to include a sample of 30 percent 

of the MSO’s Form 3 cable systems and 

30 percent of the MSO’s Form 2 cable 

systems. 

(l) Retention of records. For each 

Statement of Account that a statutory 

licensee files with the Copyright Office 

for accounting periods beginning on or 

after January 1, 2010, the statutory 

licensee shall maintain all records 

necessary to confirm the correctness of 

the calculations and royalty payments 

reported in each Statement for at least 

three and one-half years after the last 

day of the year in which that Statement 

or an amendment of that Statement was 

filed with the Office and, in the event 

that such Statement or amendment is 

the subject of an audit conducted 

pursuant to this section, for three years 

after the auditor delivers the final report 

to the participating copyright owner(s) 

and the statutory licensee. 

(m) Confidentiality. (1) For purposes 

of this section, confidential information 

shall include any non-public financial 

or business information pertaining to a 

Statement of Account that has been 

subjected to an audit under section 

111(d)(6) or 119(b)(2) of title 17 of the 

United States Code, as amended by 

Public Law 111–175. 

(2) Access to confidential information 

under this section shall be limited to: 

(i) The auditor; and 

(ii) Subject to executing a reasonable 

confidentiality agreement, outside 

counsel for the participating copyright 

owners and any third party consultants 

retained by outside counsel, and any 

employees, agents, consultants, or 

independent contractors of the auditor 

who are not employees, officers, or 

agents of a participating copyright 

owner for any purpose other than the 

audit, who are engaged in the audit of 

a Statement of Account or activities 

directly related hereto, and who require 

access to the confidential information 

for the purpose of performing such 

duties during the ordinary course of 

their employment; 

(3) The auditor and any person 

identified in paragraph (m)(2)(ii) of this 

section shall implement procedures to 

safeguard all confidential information 

received from any third party in 

connection with an audit, using a 

reasonable standard of care, but no less 

than the same degree of security used to 

protect confidential financial and 

business information or similarly 

sensitive information belonging to the 

auditor or such person. 

Dated: May 2, 2013. 

Maria A. Pallante, 

Register of Copyrights. 

[FR Doc. 2013–11020 Filed 5–8–13; 8:45 am] 

BILLING CODE 1410–30–P 

DEPARTMENT OF VETERANS 

AFFAIRS 

38 CFR Part 17 

RIN 2900–AO25 

Duty Periods for Establishing 

Eligibility for Health Care 

AGENCY: Department of Veterans Affairs. 

ACTION: Proposed rule. 

SUMMARY: The Department of Veterans 

Affairs (VA) is proposing to amend its 

medical regulations concerning 

eligibility for health care to re-establish 

the definitions of ‘‘active military, 

naval, or air service,’’ ‘‘active duty,’’ and 

‘‘active duty for training.’’ These 

definitions were deleted in 1996; 

however, we believe that all duty 

periods should be defined in part 17 of 

the Code of Federal Regulations (CFR) to 

ensure proper determination of 

eligibility for VA health care. We would 

also provide a more complete definition 

of ‘‘inactive duty training.’’ 

DATES: Comments must be received by 

VA on or before July 8, 2013. 

ADDRESSES: Written comments may be 

submitted through http:// 

www.Regulations.gov; by mail or hand 

delivery to the Director, Regulation 

Policy and Management (02REG), 

Department of Veterans Affairs, 810 

Vermont Ave. NW., Room 1068, 

Washington, DC 20420; or by fax to 

(202) 273–9026. Comments should 

indicate that they are submitted in 

response to ‘‘RIN 2900–AO25—Duty 

Periods for Establishing Eligibility for 

Health Care.’’ Copies of comments 

received will be available for public 

inspection in the Office of Regulation 

Policy and Management, Room 1063B, 

between the hours of 8 a.m. and 4:30 

p.m., Monday through Friday (except 

holidays). Please call (202) 461–4902 for 

an appointment. (This is not a toll-free 

number.) In addition, during the 

comment period, comments may be 

viewed online through the Federal 

Docket Management System at http:// 

www.Regulations.gov. 

FOR FURTHER INFORMATION CONTACT: 

Kristin J. Cunningham, Director 

Business Policy, Chief Business Office 

(10NB6), Department of Veterans 

Affairs, 810 Vermont Ave. NW., 

Washington, DC 20420; (202) 461–1599. 

(This is not a toll-free number.) 

SUPPLEMENTARY INFORMATION: Under 38 

U.S.C. 1710 and 1705, VA provides 

health care to certain veterans. Section 

101(2) of title 38, U.S.C., defines the 

term ‘‘veteran’’ to mean ‘‘a person who 

served in the active military, naval, or 

air service, and who was discharged or 

released therefrom under conditions 

other than dishonorable.’’ ‘‘Active 

military, naval, or air service’’ includes 

‘‘active duty’’ and certain periods of 

‘‘active duty for training’’ and ‘‘inactive 

duty training,’’ which are all defined in 

38 U.S.C. 101. See 38 U.S.C. 101(21)– 

(24). These terms prescribe the type of 

service an individual needs to have had 

in order to be eligible for VA health care 

benefits. We would incorporate the full 

definitions of these terms found in 38 


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