[Federal Register Volume 63, Number 89 (Friday, May 8, 1998)]
[Rules and Regulations]
[Pages 25394-25415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12266]


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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 260

[Docket No. 96-5 CARP DSTRA]


Determination of Reasonable Rates and Terms for the Digital 
Performance of Sound Recordings

AGENCY: Copyright Office, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Librarian of Congress, upon recommendation of the Register 
of Copyrights, is announcing the determination of the reasonable rates 
and terms for the compulsory license permitting certain digital 
performances of sound recordings.

EFFECTIVE DATE: May 8, 1998.

ADDRESS(ES): The full text of the public version of the Copyright 
Arbitration Royalty Panel's report to the Librarian of Congress is 
available for inspection and copying during normal working hours in the 
Office of the General Counsel, James Madison Building, Room LM-403, 
First and Independence Avenue, SE., Washington, DC, 20540.

FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or 
Tanya Sandros, Attorney Advisor, Copyright Arbitration Royalty Panel 
(CARP), PO Box 70977, Southwest Station, Washington, D.C. 20024. 
Telephone (202) 707-8380. Telefax: (202) 707-8366.

SUPPLEMENTARY INFORMATION:

I. Background

    The Digital Performance Right in Sound Recordings Act of 1995 
(DPRSRA), Public Law 104-39, 109 Stat. 336, amended section 106 of the 
Copyright Act, title 17 of the United States Code, to give sound 
recording copyright owners an exclusive right, subject to certain 
limitations, to perform publicly sound recordings by digital audio 
transmissions. 17 U.S.C. 114. The bill affords certain digital 
transmission

[[Page 25395]]

services a compulsory license to perform digital sound recordings 
publicly. The purpose of the bill is ``to provide copyright holders of 
sound recordings with the ability to control the distribution of their 
product by digital transmissions, without hampering the arrival of new 
technologies, and without imposing new and unreasonable burdens on 
radio and television broadcasters.'' S. Rep. No. 104-128, at 15 (1995).
    All non-exempt digital subscription transmission services are 
eligible for the statutory license, provided that they are non-
interactive and comply with the terms of the license. The statute 
requires that the service not violate the ``sound recording performance 
complement,'' <SUP>1</SUP> not publish in advance a schedule of the 
programming to be performed, not cause any receiving device to switch 
from one program channel to another, include in each transmission 
certain identifying information encoded in each sound recording, pay 
the royalty fees and comply with the associated terms, and comply with 
any recordkeeping requirements promulgated by the Copyright Office. 
<SUP>2</SUP> 17 U.S.C. 114(d)(2)(A)-(E) and 114(f)(2)-(5).
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    \1\ (7) The ``sound recording performance complement'' is the 
transmission during any 3-hour period, on a particular channel used 
by a transmitting entity, of no more than--
    (A) 3 different selections of sound recordings from any one 
phonorecord lawfully distributed for public performance or sale in 
the United States, if no more than 2 such selections are transmitted 
consecutively; or
    (B) 4 different selections of sound recordings--
    (i) By the same featured recording artist; or
    (ii) From any set or compilation of phonorecords lawfully 
distributed together as a unit for public performance or sale in the 
United States, if no more than three such selections are transmitted 
consecutively: Provided, That the transmission of selections in 
excess of the numerical limits provided for in clauses (A) and (B) 
from multiple phonorecords shall nonetheless qualify as a sound 
recording performance complement if the programming of the multiple 
phonorecords was not willfully intended to avoid the numerical 
limitations prescribed in such clauses.
    17 U.S.C. 114(j)(7).
    \2\ See Notice of Proposed Rulemaking, 61 FR 22004 (May 13, 
1996); Notice of Proposed Rulemaking, 62 FR 34035 (June 24, 1997).
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    The reasonable terms and rates of the section 114 statutory license 
are determined by voluntary negotiations among the parties and, where 
necessary, compulsory arbitration conducted under chapter 8 of the 
Copyright Act, title 17. 17 U.S.C. 114(f).

II. The CARP Proceeding To Set Reasonable Rates and Terms

    On December 1, 1995, the Librarian of Congress (Librarian) 
initiated the statutorily mandated six month negotiation period within 
30 days of the enactment of the DPRSRA, pursuant to section 114(f)(1) 
of the Copyright Act, with the publication of a notice initiating the 
voluntary negotiation process for determining reasonable terms and 
rates of royalty payments. See 60 FR 61655 (December 1, 1995). In the 
notice, the Library instructed those parties with a significant 
interest in the establishment of the reasonable terms and rates for the 
section 114 license to file a petition with the Copyright Office no 
later than August 1, 1996, in the event that the interested parties 
were unable to negotiate an agreement. Id. 
    Accordingly, the Recording Industry Association of America (RIAA) 
filed a petition with the Copyright Office in which it asked the Office 
to initiate an arbitration proceeding pursuant to chapter 8 of the 
Copyright Act. After making a determination that the petitioner RIAA 
had a significant interest in the proposed CARP proceeding, the 
Librarian published a notice setting the schedule for the 45-day 
precontroversy discovery period and announcing the date for the 
initiation of the 180-day arbitration period. 61 FR 40464 (August 2, 
1996). The exchange of documents during the precontroversy discovery 
period did not proceed smoothly, requiring the Office to reschedule 
portions of the discovery period and vacate the scheduled date for the 
initiation of the CARP. See Order in Docket No. 96-5 CARP DSTRA 
(September 18, 1996); Order in Docket No. 96-5 CARP DSTRA (November 27, 
1996). The Librarian announced the initiation of the 180-day 
arbitration period following the conclusion of the discovery period and 
the resolution of all pending motions. 62 FR 29742 (June 2, 1997).

The Parties

    There are four parties to this proceeding: three digital audio 
subscription services (the Services) and the Recording Industry 
Association of America (RIAA).
    1. The Recording Industry Association of America, Inc. (RIAA)--RIAA 
represents a collective, consisting of more than 275 record labels, 
established for the express purpose of administering the rights of 
these sound recording copyright owners. RIAA represents the interests 
of its members who are the copyright owners of more than 90% of all 
legitimate sound recordings sold in the United States. Record companies 
own the copyrights in the sound recordings.
    2. Digital Cable Radio Associates (DCR)--A digital audio service 
established in the United States in 1987 by the Jerrold Communications 
Division of General Instrument Corporation. Current partners include 
Warner Music, Sony Corporation, EMI, Time Warner Cable, Continental 
Cablevision, Comcast Cable, Cox Cable, and Adelphia Cable.
    3. Digital Music Express, Inc. (DMX)--A digital music subscription 
service established in 1986 as International Cablecasting Technologies, 
Inc. In 1997, DMX merged into TCI Music, Inc., a publicly traded 
company with approximately 80% of its shares held by TCI, Inc.
    4. Muzak, L.P.--With roots dating back to 1922, Muzak is America's 
oldest background music provider for businesses. In the 1920s and 
1930s, Muzak was part of the consumer music market until driven out of 
that market by the growing popularity of radio. Muzak remained out of 
the market until March, 1996, when it began providing 27 channels of 
digital music under the name DiSHCD, as part of Echostar's satellite-
based DiSH Network.

The Position of the Parties at the Commencement of the Proceeding

    RIAA, representing the interests of the sound recording copyright 
owners, requested a royalty rate set at 41.5% of a Service's gross 
revenues resulting from U.S. residential subscribers, or in some 
circumstances, a flat rate minimum fee. Report of the Copyright 
Arbitration Royalty Panel (Report) para. 33. RIAA also agreed to be 
named the single entity to collect, administer, and distribute the 
royalty fees. Report para. 184. RIAA proposed additional terms 
concerning the timing of payments, statements of accounts, retention of 
records, and audits. Report para. 33.
    The three digital audio subscription services requested a royalty 
rate ranging from a low of 0.5% to a high of 2.0% of gross revenues 
resulting from U.S. residential subscribers, and unanimously opposed a 
flat rate minimum fee. Report Paras.  34-36, 172. The Services proposed 
that a single private entity or a government agency be named for 
purposes of administering the royalty fees, but proposed submitting 
payments on a quarterly basis rather than a monthly basis. Report Paras.  
184-185. In addition, the Services proposed terms concerning 
recordkeeping and audits, confidentiality of business records, and 
payment terms for distributing license fees among featured artists and 
nonfeatured musicians and vocalists.

[[Page 25396]]

The Panel's Determination of a Reasonable Rate

    The Panel evaluated the four statutory objectives, <SUP>3</SUP> and 
their component parts, in light of the evidence and determined that the 
digital audio subscription services should pay a royalty fee of 5% of 
gross revenues resulting from U.S. residential subscribers. Report Paras.  
196, 200. This rate represents the midpoint of the range of possible 
license rates that the Panel considered appropriate (but not the 
midpoint of the parties' proposals). The Panel further concluded that 
there was no reason to impose a minimum license fee on the Services at 
this point, and consequently, it rejected RIAA's proposal to set a 
minimum fee based on a flat rate. Report para. 204.
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    \3\ (1) to make determinations concerning the adjustment of 
reasonable copyright royalty rates as provided in sections 114, 115, 
and 116, and to make determinations as to reasonable terms and rates 
of royalty payments as provided in section 118. The rates applicable 
under section 114, 115, and 116 shall be calculated to achieve the 
following objectives:
    (A) To maximize the availability of creative works to the 
public;
    (B) To afford the copyright owner a fair return for his creative 
work and the copyright user a fair income under existing economic 
conditions;
    (C) To reflect the relative roles of the copyright owner and the 
copyright user in the product made available to the public with 
respect to relative creative contribution, technological 
contribution, capital investment, cost, risk, and contribution to 
the opening of new markets for creative expression and media for 
their communication;
    (D) To minimize any disruptive impact on the structure of the 
industries involved and on generally prevailing industry practices.
    17 U.S.C. 801(b)(1).
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    In making this determination, the Panel followed the precedent set 
in prior rate adjustment proceedings conducted by the former Copyright 
Royalty Tribunal and other CARP panels which, as a first step, 
determined a range of possible rates after considering different 
proposed rates based on negotiated licenses or analogous marketplace 
models. Report para. 123. See also, 1980 Adjustment of the Royalty Rate 
for Coin-Operated Phonorecord Players, 46 FR 884 (January 5, 1981), and 
the 1997 Rate Adjustment of the Satellite Carrier Compulsory License 
Fees, 62 FR 55742 (October 28, 1997). Each party offering a 
``benchmark'' rate contends that the rate it offers represents the cost 
for similar products in analogous markets. The Panel considered three 
benchmarks, weighing each in light of the record evidence to determine 
whether the proposed models shed light on how the marketplace would 
value a performance license in sound recordings. Once the Panel 
identified the useful models, it used the corresponding rate 
information to craft a range of potential royalty rates for the section 
114 license, then chose the rate within the range which would further 
the stated statutory objectives.
    RIAA and the Services proposed rates based on three distinct 
marketplace models in which rates are set through arms-length 
negotiations. Report para. 124. The Services proposed two benchmarks 
for consideration by the Panel: Negotiated license fees for a sound 
recording performance right and the license fees the Services pay the 
performing rights organizations for use of the underlying musical 
works. RIAA put forth a single model for the Panel's consideration: 
Cable television network license fees. The Panel found the Services' 
models helpful in setting the rate for the digital performance right, 
but rejected the RIAA model for the reasons stated herein.
    Both RIAA and the Services seemed to agree that the best proxy for 
reasonable compensation is a marketplace rate. The Panel, however, 
noted that the DPRSRA instructs the CARP to set reasonable rates, which 
need not be the same as rates set in a marketplace unconstrained by a 
compulsory license. In support of its interpretation, the Panel cited 
the statutory factors which must be considered in setting the rate. See 
Report Paras.  10, 124.

The Panel's Evaluation of the RIAA Benchmark

    The benchmark proposed by the recording industry analogizes the 
cost of programming for cable television networks with the cost of 
procuring the right to perform the sound recordings. The analogy, 
however, did not withstand scrutiny by the Panel, which reasonably 
found that the cable television network license fees model did not 
represent rates for an analogous product in a comparable marketplace. 
Its conclusion rested on a number of findings which described 
analytical deficiencies in the two studies offered in support of the 
41.5% proposed royalty rate. Report Paras.  126-150.
    The RIAA model proposed using the purchase price of programming for 
cable television networks to determine the price the Services would pay 
for the right to publicly perform sound recordings, if negotiated in a 
free market. RIAA's Proposed Findings of Fact and Conclusions of Law 
(PF) para. 62; RIAA Proposed Conclusions (PC) para. 18. RIAA presented 
two studies that illustrate the amount of money cable television 
networks pay for their programming: (1) The Kagan study,<SUP>4</SUP> 
and (2) the Wilkofsky Gruen Associates <SUP>5</SUP> study. RIAA 
Exhibits (Exs.) 14 and 15, respectively. Both studies argued that the 
analogy between cable television networks and the digital audio 
services was apt because the digital audio services and the cable 
television networks compete head-to-head for carriage on cable and DBS 
systems, and for consumer time and discretionary income. Report para. 
130.
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    \4\ The Kagan study was prepared by Paul Kagan Associates, a 
media research company that tracks and publishes financial data 
concerning the media and entertainment industries.
    \5\ Wilkofsky Gruen Associates is an economic consulting firm 
that specializes in the communications and entertainment industries.
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    The Kagan study analyzed data concerning the revenues and 
programming expenses of 31 basic cable television networks from the 
1985-96 period. It concluded that a cable television network spends, on 
average, approximately 40% of its gross revenues for programming. RIAA 
Exhibit (Ex.) 14 at 7. The Panel, however, discounted the 40% figure 
because it represented the costs of license fees to all copyright 
owners, and it included the costs of programming during the start-up 
years, when a new cable television network may pay more than 100% of 
its revenues in programming costs. Report Paras. 127, 129, 149. Failure 
to adjust for these factors made it impossible for the Panel to assess 
the costs for the right to publicly perform the sound recordings apart 
from the costs of the other copyrighted works which make up the 
program.
    Their second study, prepared by Wilkofsky Gruen Associates (WGA), 
analyzed only cable movie networks because Wilkofsky, the expert for 
the study, claimed that the ``pricing characteristics and dynamics'' of 
the cable movie networks were comparable in three fundamental ways: The 
lack of commercials, the generation of revenues through subscriptions, 
and the purchase of programming from third parties. Wilkofsky Written 
Direct Testimony (W.D.T.) at 3-5. This study concluded that the cable 
movie networks pay a weighted average of 41.5 % of their revenues for 
programming that they acquire from outside sources and by analogy, the 
Services should pay the same. Id. at 3.
    The Panel rejected the conclusion of the WGA study because it 
ignored the following fundamental differences in market demand and cost 
characteristics between the cable movie networks and the digital audio 
services. Report Paras. 133-145.

[[Page 25397]]

    1. The study provided no evidence to show that any of the movie 
networks directly compete with digital audio services. In fact, when 
people watch a movie, they devote their entire attention to the film 
for a period of time, and generally, do not repeat the experience with 
the same movie. On the other hand, subscribers to digital audio 
services choose to listen to the same music again and again while 
engaged in other activities. In other words, the subscriber chooses 
each service for different reasons, and therefore, they do not 
represent choices in the same market. Report Paras. 143, citing 
Rosenthal Written Rubuttal Testimony (W.R.T). at 13, Transcript (Tr). 
1251 (Rubinstein).
    2. The cable movie networks compete against other cable and 
broadcast stations for exclusive rights to motion pictures. Exclusive 
rights are highly prized, and consequently, command a premium price, 
but they are not implicated in the market for digital audio 
transmissions. Consequently, the Panel found that RIAA's failure to 
adjust for this aspect grossly overstated the value of programming 
costs in its cable movie network analogy. Report Paras. 137-142.
    3. The Panel further discounted the analogy because RIAA ignored 
the promotional benefit that flows to the record companies from the 
constant airplay of their sound recordings. Report Paras. 144-145. See 
also discussion infra.

The Panel's Determination of Reasonable Terms

    In addition to establishing a reasonable rate for the sound 
recording performance license, the Panel must also establish reasonable 
terms for implementing the license. The Senate Committee Report makes 
clear that terms include ``such details as how payments are to be made, 
when, and other accounting matters.'' S. Rep. No. 104-128, at 30 
(1995).
    RIAA and the Services proposed specific terms concerning minimal 
fees, payment schedules, late fees, statements of account, and audits. 
From these, the Panel adopted the following terms:
    1. RIAA shall have sole responsibility for the distribution of the 
royalty fees to all copyright holders. Report Paras. 184, 205.
    2. The license fee payments shall be due on the twentieth day after 
the end of each month, beginning with the month succeeding the month in 
which the royalty fees are set. Report Paras. 185, 206.
    3. The Services shall make back payments over a 30-month period. 
The first back payment, 1/30th of the total arrearage, shall be delayed 
for six months. Report Paras. 187, 206(a).
    4. A Service shall be subject to copyright liability if it fails to 
make timely payments. Liability for copyright infringement shall only 
come about for knowing and willful acts which materially breach the 
statutory license terms. Report Paras. 188, 206(b).
    5. A late fee of 1.5% per month or the highest lawful rate, 
whichever is lower, will be imposed from the due date until payment is 
received. Report Paras. 189, 206(a).
    6. Services shall submit monthly statements of accounts and payment 
to RIAA. Only information to verify the royalty payments need be 
provided on the monthly statements of account. Report Paras. 190, 205, 
207.
    7. Safeguards must be established to protect against disclosure of 
confidential financial and business information, which includes the 
amount of the royalty payment. Access to this information shall be 
limited to employees of RIAA, who are not employees or officers of the 
copyright owners or the recording artists, for the purpose of 
performing their assigned duties during the ordinary course of 
employment, and to independent auditors acting on behalf of RIAA. 
Report Paras. 191, 208.
    8. The digital audio services shall maintain accurate records on 
matters directly related to the payment of the license fees for a 
period of three years. Report Paras. 192, 209.
    9. Interested parties may conduct only one audit of a digital audio 
service during any given year. Report Paras. 193, 210(c).
    <bullet> Interested parties must file a Notice of Intent to Conduct 
an Audit with the Copyright Office. Such notice shall be published in 
the Federal Register. Report Paras. 193, 210(a)-(b).
    <bullet> RIAA must retain an auditor's report for a period of three 
years. Report Paras. 193, 210(d).
    <bullet> An audit, including underlying paperwork, which was 
performed in the ordinary course of business according to generally 
accepted auditing standards by an independent auditor, may serve as an 
audit for all interested parties. Report Paras. 194, 210(e).
    <bullet> Interested parties shall pay for the cost of the audit, 
unless an independent auditor concludes that there was an underpayment 
of five (5) percent or more. Report Paras. 195, 210(f).
    The Panel chose not to adopt RIAA's minimum fee proposal and the 
Services' proposed payment schedule for the distribution of royalties 
to the featured artists and the nonfeatured musicians and vocalists. 
The Panel found that the timing of payments to the performing artists 
was not within the scope of the proceeding. Report Sec. 204; Report at 
56 n.21.

The Panel's Evaluation of the RIAA Proposal To Adopt a Minimum Fee

    RIAA proposed the imposition of a minimum fee as a means to insure 
a fair return to the copyright owners in light of business practices 
that might erode the value of the statutory license fee. RIAA PF 
Paras. 126-147. Specifically, RIAA sought a minimum fee to minimize the 
effect of discounts or credits, to address shifts in business models, 
and to avoid diluting the value of the sound recording when audio 
digital services add new channels to their offerings. Id. The Panel 
ultimately rejected this suggestion because it found that the rationale 
for a minimum fee was based on unsupported speculation about the 
business structure of the Services. Report para. 204.

III. The Parties' Reaction to the Determination of the Panel

    The regulations governing the CARP proceedings allow parties to 
file petitions to modify or set aside the determination of the Panel 
within 14 days of its filing date. The petition must state the reasons 
for the petition, including relevant references to the parties' 
proposed findings of fact and conclusions of law. Parties who wish to 
file replies to a petition may do so within 14 days of the filing of 
such petition. See 37 CFR 251.55(a), (b).
    Accordingly, on December 12, 1997, RIAA filed a Petition to Reject 
the Report of the CARP (Petition), contending that the Panel acted both 
contrary to the Copyright Act and arbitrarily in reaching its 
determination. In its petition, RIAA requests the Librarian to set 
aside the Panel's determination and set a new rate that should not be 
less than double the Services' 1996-2001 payments for the public 
performance of the underlying musical works.
    RIAA contends that the Panel's determination was arbitrary and 
contrary to law for the following reasons:
    1. The Panel disregarded precedent set by the former Copyright 
Royalty Tribunal (CRT or Tribunal) in applying the statutory criteria 
for determining a reasonable rate for the public performance right. 
Petition at 6, 14-15.
    2. The Panel used the rates set in a corporate partnership 
agreement as a benchmark for establishing the new compulsory license 
rate. This was inappropriate because the public performance in sound 
recordings

[[Page 25398]]

license agreement was not negotiated independently, but as part of a 
larger complex agreement. Id. at 20-27.
    3. When the Services publicly perform a sound recording, two groups 
of copyright owners receive royalties: The copyright owners in the 
underlying musical works, and for the first time, the record companies 
and performers. The Panel determined that the record companies and 
performers were not entitled to more royalties for their public 
performance right than those received by the copyright owners in the 
underlying musical works for the public performance of their works. 
RIAA contends that CRT precedent supports a determination that just the 
reverse is true. Id. at 14-15.
    4. The compulsory license allows the Services to perform sound 
recordings publicly without infringing copyright prior to the setting 
of the royalty rate, so long as the Services agree to pay their 
accumulated royalty obligation once the rates are determined. The Panel 
created a payment schedule that allows the Services to pay these fees 
over a three year period. RIAA contends that this payment schedule is 
contrary to law. Id. at 7 n.1.
    5. RIAA also contends that the CARP failed to provide a reasoned 
explanation for proper review, made conclusions inconsistent with its 
findings, made findings without record support, and failed to make 
findings in support of conclusions. Id. at 2.
    RIAA, however, does not suggest that the Librarian disregard all 
the findings of the Panel. Instead, it recommends adopting the Panel's 
approach ``to determine a reasonable rate--provided that the Librarian 
makes the necessary adjustments to account for the precedent and 
considerations that the Panel ignored.'' Petition at 51-52. RIAA 
further allows that the Librarian need not consider the cable network 
benchmark in its analysis, since the Panel's analysis of the remaining 
benchmarks supports an upward adjustment of the 5% rate of gross 
revenues set by the CARP. Petition at 52 n.9.
    On December 29, 1997, in response to the RIAA petition to reject 
the CARP report, the Services filed a reply to RIAA's Petition to 
Reject the CARP Report (Reply to Petition). The crux of the Services' 
argument in support of adopting the Panel's report is that ``[w]hen 
examined as a whole, the Panel's Report is eminently reasonable and 
amply supported by the record.'' Reply to Petition at 12. Specific 
arguments of the Services in support of the Panel's report are 
discussed below in conjunction with RIAA's arguments to reject the 
report.

IV. The Librarian's Scope of Review of the Panel's Report

    The Copyright Royalty Tribunal Reform Act of 1993 (the Reform Act), 
Public Law 103-198, 107 Stat. 2304, created a unique system of review 
of a CARP's determination. Typically, an arbitrator's decision is not 
reviewable, but the Reform Act created two layers of review that result 
in final orders: the Librarian of Congress (Librarian) and the United 
States Court of Appeals for the District of Columbia Circuit. Section 
802(f) of title 17 directs the Librarian either to accept the decision 
of the CARP or to reject it. If the Librarian rejects it, he must 
substitute his own determination ``after full examination of the record 
created in the arbitration proceeding.'' 17 U.S.C. 802(f). If the 
Librarian accepts it, then the determination of the CARP becomes the 
determination of the Librarian. In either case, through issuance of the 
Librarian's Order, it is his decision that will be subject to review by 
the Court of Appeals. 17 U.S.C. 802(g).
    The review process has been thoroughly discussed in prior 
recommendations of the Register of Copyrights (Register) concerning 
rate adjustments and royalty distribution proceedings. Nevertheless, 
the discussion merits repetition because of its importance in reviewing 
each CARP decision.
    Section 802(f) of the Copyright Act directs that the Librarian 
shall adopt the report of the CARP ``unless the Librarian finds that 
the determination is arbitrary or contrary to the applicable provisions 
of this title.'' Neither the Reform Act nor its legislative history 
indicates what is meant specifically by ``arbitrary,'' but there is no 
reason to conclude that the use of the term is any different from the 
``arbitrary'' standard described in the Administrative Procedure Act 
(APA), 5 U.S.C. 706(2)(A).
    Review of the case law applying the APA ``arbitrary'' standard 
reveals six factors or circumstances under which a court is likely to 
find that an agency acted arbitrarily. An agency action is generally 
considered to be arbitrary when:
    1. It relies on factors that Congress did not intend it to 
consider;
    2. It fails to consider entirely an important aspect of the problem 
that it was solving;
    3. It offers an explanation for its decision that runs counter to 
the evidence presented before it;
    4. It issues a decision that is so implausible that it cannot be 
explained as a product of agency expertise or a difference of 
viewpoint;
    5. It fails to examine the data and articulate a satisfactory 
explanation for its action including a rational connection between the 
facts found and the choice made; and
    6. Its action entails the unexplained discrimination or disparate 
treatment of similarly situated parties.
    Motor Vehicle Mfrs. Ass'n. State Farm Mutual Auto. Insurance Co., 
463 U.S. 29 (1983);
    Celcom Communications Corp. v. FCC, 789 F.2d 67 (D.C. Cir. 1986); 
Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985).
    Given these guidelines for determining when a determination is 
``arbitrary,'' prior decisions of the District of Columbia Circuit 
reviewing the determinations of the former CRT have been consulted. The 
decisions of the Tribunal were reviewed under the ``arbitrary and 
capricious'' standard of 5 U.S.C. 706(2)(A) which, as noted above, 
appears to be applicable to the Librarian's review of the CARP's 
decision.
    Review of judicial decisions regarding Tribunal actions reveals a 
consistent theme: while the Tribunal was granted a relatively wide 
``zone of reasonableness,'' it was required to articulate clearly the 
rationale for its award of royalties to each claimant. See National 
Ass'n of Broadcasters v. Copyright Royalty Tribunal, 772 F.2d 922 (D.C. 
Cir. 1985), cert. denied, 475 U.S. 1035 (1986) (NAB v. CRT); Christian 
Broadcasting Network v. Copyright Royalty Tribunal, 720 F.2d 1295 (D.C. 
Cir. 1983) (Christian Broadcasting v. CRT); National Cable Television 
Ass'n v. Copyright Royalty Tribunal, 689 F.2d 1077 (D.C. Cir. 1982) 
(NCTA v. CRT); Recording Indus. Ass'n of America v. Copyright Royalty 
Tribunal, 662 F.2d 1 (D.C. Cir. 1981) (RIAA v. CRT). As the D.C. 
Circuit succinctly noted:

    We wish to emphasize * * * that precisely because of the 
technical and discretionary nature of the Tribunal's work, we must 
especially insist that it weigh all the relevant considerations and 
that it set out its conclusions in a form that permits us to 
determine whether it has exercised its responsibilities lawfully * * 
*.

Christian Broadcasting v. CRT, 720 F.2d at 1319 (D.C. Cir. 1983), 
quoting NCTA v. CRT, 689 F.2d at 1091 (D.C. Cir. 1982).
    Because the Librarian is reviewing the CARP decision under the same 
``arbitrary'' standard used by the courts to review the Tribunal, he 
must be presented by the CARP with a rational analysis of its decision, 
setting forth

[[Page 25399]]

specific findings of fact and conclusions of law. This requirement of 
every CARP report is confirmed by the legislative history to the Reform 
Act which notes that a ``clear report setting forth the panel's 
reasoning and findings will greatly assist the Librarian of Congress.'' 
H.R. Rep. No. 103-286, at 13 (1993). This goal cannot be reached by 
``attempt(ing) to distinguish apparently inconsistent awards with 
simple, undifferentiated allusions to a 10,000 page record.'' Christian 
Broadcasting v. CRT, 720 F.2d at 1319.
    It is the task of the Register to review the report and make her 
recommendation to the Librarian as to whether it is arbitrary or 
contrary to the provisions of the Copyright Act and, if so, whether, 
and in what manner, the Librarian should substitute his own 
determination. 17 U.S.C. 802(f).

V. Review and Recommendation of the Register of Copyrights

    The law gives the Register the responsibility to review the CARP 
report and make recommendations to the Librarian whether to adopt or 
reject the Panel's determination. In doing so, she reviews the Panel's 
report, the parties' post-panel motions, and the record evidence.
    After carefully reviewing the Panel's report and the record in this 
proceeding, the Register finds that the Panel's adoption of the DCR 
negotiated license fee as the starting point for making its 
determination is arbitrary. This conclusion compels the Register to set 
aside the Panel's final determination and reevaluate the record 
evidence before making a recommendation to the Librarian.
    Section 802(f) states that ``(i)f the Librarian rejects the 
determination of the arbitration panel, the Librarian shall, before the 
end of that 60-day period, and after full examination of the record 
created in the arbitration proceeding, issue an order setting the 
royalty fee or distribution of fees, as the case may be.'' During that 
60-day period, the Register reviewed the Panel's report and made a 
recommendation to the Librarian not to accept the Panel's report, for 
the reasons cited herein. The Librarian accepted this recommendation, 
and on January 27, 1998, issued an order stating that the Panel's 
report was still under review. See Order, Docket No. 96-5 CARP DSTRA 
(January 27, 1998).
    The full review of the Register and her corresponding 
recommendations is presented herein. Within the limited scope of the 
Librarian's review of this proceeding, ``the Librarian will not second 
guess a CARP's balance and consideration of the evidence, unless its 
decision runs completely counter to the evidence presented to it.'' 
Rate Adjustment for the Satellite Carrier Compulsory License, 62 FR 
55757 (1997), citing 61 FR 55663 (October 28, 1996) (Distribution of 
1990, 1991 and 1992 Cable Royalties). Accordingly, the Register accepts 
the Panel's weighing of the evidence and will not question findings and 
conclusions which proceed directly from the arbitrators' consideration 
of factual evidence.
    The Register also adopts the Panel's approach in setting reasonable 
rates and terms for the digital performance license in sound recordings 
pursuant to 17 U.S.C. 114(f)(2), but sets aside those findings and 
conclusions that are arbitrary or contrary to law.

a. Methodology for Making Rate Determination

Use of a Marketplace Standard in Setting the Royalty Rate
    The standard for setting the royalty rate for the performance of a 
sound recording by a digital audio subscription service is not fair 
market value, although CARPs and the Copyright Royalty Tribunal (CRT or 
Tribunal) in prior rate adjustment proceedings under sections 115 and 
116 considered comparable rates negotiated under marketplace conditions 
when making their determinations.
    In light of this practice, the Panel followed the same approach 
established in prior rate adjustment proceedings conducted by the 
Tribunal and the CARPs in making its determination. Namely, the Panel 
considered the parties' presentations of different rates negotiated in 
comparable marketplace transactions and first determined whether the 
proposed models mirrored the potential market transactions which would 
take place to set rates for the digital performance of sound 
recordings. Report para. 123. These benchmarks were then evaluated in 
light of the statutory objectives to determine a reasonable royalty 
rate. Id. 
    The Panel noted that RIAA and the Services ``seem to agree that the 
best proxy for reasonable compensation is to look to marketplace 
rates.'' Report para. 124. The parties also agreed that the rates 
should be based on gross revenues and further agreed on the definition 
of ``gross revenues.'' Report para. 125; RIAA PF para. 55; Services 
Joint Reply to RIAA's Proposed Findings of Fact and Conclusions of Law 
(Services' RF) para. 51.
    While the Panel agreed with the parties on these two points, it 
noted that the statute requires the Panel to adopt reasonable rates and 
terms, and that reasonable rates and terms are not synonymous with 
marketplace rates. Report para. 124. Unlike a marketplace rate which 
represents the negotiated price a willing buyer will pay a willing 
seller, see Rate Adjustment for the Satellite Carrier Compulsory 
License, 62 FR 55742 (1997) (applying a fair market standard, as set 
forth at 17 U.S.C. 119(c)(3)(D), in setting royalty rates for the 
retransmission of broadcast signals by satellite carriers), reasonable 
rates are determined based on policy considerations. See RIAA v. CRT, 
662 F.2d 1.<SUP>6</SUP> Congress granted the record companies a limited 
performance right in sound recordings in order to ``provide [them] with 
the ability to control the distribution of their product by digital 
transmissions,'' but it did so with the understanding that the 
emergence of new technologies would not be hampered. S. Rep. No. 104-
128, at 15 (1995). Consequently, Congress specified that the terms were 
to be reasonable and calculated to achieve the following four specific 
policy objectives:
---------------------------------------------------------------------------

    \6\ In reviewing how the Tribunal analyzed the statutory 
criteria, the court noted that ``other statutory criteria invite the 
Tribunal to exercise a legislative discretion in determining 
copyright policy in order to achieve an equitable division of music 
industry profits between the copyright owners and users.'' Id. at 8.
---------------------------------------------------------------------------

    1. To maximize the availability of creative works to the public;
    2. To afford the copyright owner a fair return for his creative 
work and the copyright user a fair income under existing economic 
conditions;
    3. To reflect the relative roles of the copyright owner and the 
copyright user in the product made available to the public with respect 
to relative creative contribution, technological contribution, capital 
investment, cost, risk, and contribution to the opening of new markets 
for creative expression and media for their communication; and
    4. To minimize any disruptive impact on the structure of the 
industries involved and on generally prevailing industry practices. 17 
U.S.C. 114(f)(2) and 801(b)(1).
    RIAA takes exception to this interpretation and argues that the 
Panel failed to follow CRT precedent that ``interpreted the Section 
801(b)(1) factors as requiring it to establish a market rate.'' 
Petition at 33. In support of its position, RIAA relies upon the 1982 
CRT rate adjustment proceeding to determine reasonable rates and terms 
for the statutory noncommercial broadcasting license, 17 U.S.C. 118, 
where the CRT stated:

    The Tribunal has consistently held that the Copyright Act does 
not contemplate the Tribunal establishing rates below the

[[Page 25400]]

reasonable market value of the copyrighted works subject to a 
compulsory license.

1982 Adjustment of Royalty Schedule for Use of Certain Copyrighted 
Works in Connection with Noncommercial Broadcasting: Terms and Rates of 
Royalty Payments, 47 FR 57924 (December 29, 1982). RIAA further 
contends that the Panel not only ignored the CRT precedent requiring it 
to set marketplace rates, but improperly shifted the emphasis to ensure 
the financial viability of the copyright users. Petition at 33.
    In response, the Services contend that the Panel's analysis 
comports with CRT precedent on both points, noting that the CRT did 
consider evidence on how a proposed rate would affect the user industry 
in its proceedings to set rates under sections 111 and 116. Reply to 
Petition at 26. For example, in the 1980 rate adjustment proceeding to 
set the royalty rate for jukeboxes, the CRT considered the evidence and 
found ``only that marginal jukebox owners would be threatened by the 
new rate.'' Id. In fact, the Tribunal stated that it was ``satisfied 
that adequate attention (had) been given to the small operator, * * * 
(and adopted) an amendment to the proposed fee schedule that was 
proposed for the benefit of such (small) operators.'' 1980 Adjustment 
of the Royalty Rate for Coin-Operated Phonorecord Players, 46 FR 888 
(1981).
    The Register finds that the Panel correctly analyzed how to 
determine a reasonable rate under section 114. Section 801(b)(1) states 
that one function of a CARP is to determine reasonable rates ``as 
provided in sections 114, 115, and 116, and to make determinations as 
to reasonable terms and rates of royalty payments as provided in 
section 118.'' The provision further states that the CARP must 
determine the rates under sections 114, 115, and 116 to achieve the 
four statutory objectives. The law does not state that these objectives 
are applicable in a rate adjustment proceeding to determine rates under 
sections 111 or 118. Therefore, RIAA's reliance on CRT precedents for 
setting rates under section 118 is without merit. Furthermore, the 
Panel's analysis is consistent with the prior CRT determinations 
establishing rates for the section 115 and 116 licenses.
    In the 1980 jukebox rate adjustment proceeding, the CRT set the 
rate ``[o]n the basis of the marketplace analogies presented during the 
proceeding, taking the record as a whole, and with regard for the 
statutory criteria. * * * That rate takes account both of what is paid 
for music elsewhere under similar circumstances and, since it is a flat 
rate, of the Tribunal's concern for the smaller, less profitable 
operators.'' 46 FR 889 (1981). To recognize that this rate was not a 
negotiated marketplace value, one need only read Commissioner James's 
dissent admonishing the majority for setting a rate on ``an ability to 
pay theory.'' He characterized the majority's actions as follows:

    In essence, the majority reached a conclusion on the premise 
that a true market value would result in too large an increase in 
fees. The majority was set on course by what they deemed were the 
guiding standards of the statute which referred to minimizing the 
disruptive impact on the economic structure of the industries 
involved. It was the majority view and opinion that a large increase 
in fees would be oppressive to the industry and would ``impact on 
small operators.''

Id. at 891 (footnote omitted).
    The Court of Appeals upheld the Tribunal's approach in its 1980 
jukebox rate adjustment proceeding, stating that:

    In its decision, the Tribunal acknowledged that the rate which 
it approved could not be directly linked to marketplace parallels, 
but it found that such parallels served as appropriate points of 
reference to be weighed together with the entire record and the 
statutory criteria. Although we agree with ASCAP that the analogous 
marketplace evidence is significant, we do not believe that the 
Tribunal was bound by that evidence to select a fee rate within the 
$70-$140 ``zone'' which, according to ASCAP, governs this case. The 
Tribunal carefully weighed the evidence derived from the marketplace 
analogies and other evidence specifically in light of the four 
statutory criteria of section 801(b) and arrived at a royalty rate 
for coin-operated phonorecord players of $50 per machine.

Amusement and Music Operators Ass'n v. Copyright Royalty Tribunal, 676 
F.2d 1144, 1157 (7th Cir. 1982), cert. denied, 459 U.S. 907 (1982) 
(AMOA v. CRT). The D.C. Court of Appeals engaged in a similar analysis 
when it considered the Tribunal's determination to raise the royalty 
rate for making and distributing phonorecords of copyrighted musical 
works from 2 cents to 4 cents. In that case, the copyright owners 
argued that Congress intended the Tribunal to set a high royalty rate 
under a bargaining room theory, which would create a rate ceiling for 
stimulating future negotiations outside the license. The D.C. Circuit 
found that while Congress had considered this possibility, it chose not 
to codify this approach, but rather to express its will through 
specific statutory criteria and allow the Tribunal to interpret and 
apply these objectives to the record evidence in a rate adjustment 
proceeding. RIAA v. CRT, 662 F.2d at 8-9. Furthermore, the Court 
ascertained that Congress did not rank the criteria in order of 
importance so that the Tribunal, and subsequently, the CARP, could:

    To the extent that the statutory objectives determine a range of 
reasonable royalty rates that would serve all these objectives 
adequately but to differing degrees, * * * choose among those rates, 
and courts are without authority to set aside the particular rate 
chosen by the Tribunal if it lies within a ``zone of 
reasonableness.''

Id. at 9. See also Permian Basin Area Rate Cases, 390 U.S. 747, 767 
(1968); Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S. 
575, 585-586 (1942); Hercules, Inc. v. Environmental Protection Agency, 
598 F.2d 91, 107 (D.C. Cir. 1978).

b. Benchmarks

The Panel's Disposition of the Proposed Benchmarks
    The Register has reviewed the analysis of the Panel and its 
disposition of the three benchmarks and finds that the Panel's primary 
reliance on and manipulation of the DCR negotiated license fee was 
arbitrary. The Register also finds that the record evidence does not 
support the Panel's calculation of a specific range of fees for the 
public performance of the musical compositions. These flaws compel the 
Register to reexamine the record evidence and propose a rate based on 
her analysis while providing deference, where appropriate, to the 
findings of the Panel.
    The Register, however, did not evaluate further the record evidence 
concerning either the cable television network fee or the proposed 
minimum fee in her deliberations to determine the appropriate rate 
because no party to the proceeding challenged either of these findings 
or continued to rely upon these matters in presenting its arguments to 
the Librarian.<SUP>7</SUP> Therefore, the Register forgoes a review of 
the Panel's analysis in these areas. This does not mean, however, that 
the Register and the Librarian will always forego an independent review 
of a Panel's actions. See, e.g. Distribution of the 1992, 1993, and 
1994 Musical Works Funds, 62 FR 6558 (February 12, 1997)

[[Page 25401]]

(recommending an upward adjustment to one party's award, although no 
party made a request for the adjustment); Rate Adjustment for the 
Satellite Carrier Compulsory License, 62 FR 55742 (1997) (recommending 
the adoption of a zero rate for local retransmission of network signals 
to unserved households).
---------------------------------------------------------------------------

    \7\ ``RIAA strongly disagrees with the CARP's conclusion that 
the Services should devote a smaller percentage of their revenues to 
license fees than do other cable networks. While the range of 
percentages is large, there are no cable networks that consistently 
spend as little as 5 percent. Nevertheless, RIAA has not challenged 
the CARP's decision to reject the cable network analogy.'' Petition 
at 52 n.9 (citations omitted). Furthermore, RIAA did not raise any 
challenge to the Panel's decision not to grant a minimum fee.
---------------------------------------------------------------------------

The Panel's Adoption of the DCR Negotiated License Fee and its 
Subsequent Manipulations of This Rate to Establish a Range of Potential 
Royalty Rates was Arbitrary <SUP>8</SUP>
---------------------------------------------------------------------------

    \8\ Negotiated license fees and certain business information, 
which the Register has considered throughout her review, are not 
being published in the Register's review because the information is 
subject to a protective order. See Order Docket No. 96-5 CARP DSTRA 
(September 18, 1996).
---------------------------------------------------------------------------

    The Panel found that the digital performance license negotiated as 
part of a larger partnership agreement between DCR and its two record 
company partners, Warner Music and Sony Music, was a useful benchmark 
for determining the section 114 royalty fee because it provided a 
``useful precedent,'' although there were problems with using the rate 
for this license fee since only 60% of the industry engaged in the 
negotiations setting the rate.<SUP>9</SUP> Report Paras. 166, 200. To 
address this problem the panel adjusted the figure upward to reach a 
base rate figure arguably applicable to 100% of the recording industry 
market. Id. The Panel then doubled this number to account for the 
statutory provision which requires an equal distribution of the 
royalties collected pursuant to the compulsory license between the 
record companies and the recording artists. Id.; also 17 U.S.C. 114(g). 
While recognizing that a pure doubling of the base rate was 
inappropriate, the Panel determined that these manipulations of a 
``freely negotiated rate'' set a reasonable range of rates for further 
consideration in light of the statutory criteria. Id.
---------------------------------------------------------------------------

    \9\ Sony Music and Warner Music signed a partnership agreement 
with DCR in January 1993. A third record company, EMI, joined the 
partnership in April 1994, under substantially the same terms. 
Report para. 164.
---------------------------------------------------------------------------

    RIAA opposes the use of the negotiated license fee as a benchmark 
for setting the compulsory license fee for the following reasons: (1) 
It was merely one provision in a complex transaction involving eleven 
interrelated agreements, RIAA PF para. 92; Petition at 22; Wildman 
<SUP>10</SUP> W.R.T. at 12-15; Transcript (Tr.) 2213-14 (Wildman); (2) 
the record companies interested in investing in the digital audio 
service would share the cost of a higher rate, thereby creating a 
strong incentive to create a low rate; (3) the license fee was not for 
the right to perform sound recordings publicly, but for the 
acknowledgement that a right should exist, RIAA PF para. 84; Tr. 2102 
(Vidich); <SUP>11</SUP> (4) the record companies never viewed the 
established rate as precedential, citing the license provision that the 
rate will be superseded if Congress establishes a performance right in 
sound recordings, DCR Exs. 7, 8 & 15 at para. 9; Vidich W.R.T. at 7; 
Tr. 2106-2107 (Vidich); Del Beccaro <SUP>12</SUP> W.D.T. at 9, and the 
most favored nations clause, DCR Exs. 7, 8 & 15 at para. 6; (5) the 
record companies did not enjoy the degree of leverage in setting the 
rate that the Services imply in their proposed findings; (6) the fee 
did not represent an industry-wide agreement on the value of the 
performance right; instead, only three record companies, ``collectively 
responsible for only about 35% of the sound recordings performed by 
DCR,'' negotiated the rates, RIAA's Reply to Proposed Findings and 
Conclusions of Law (RIAA RPF) ] 39; Tr. 1014 (McCarthy); <SUP>13</SUP> 
and (7) the DCR digital performance license differed in significant 
ways from the statutory license. For example, the DCR license requires 
the company to pay royalties on its revenues from international sources 
which are not recoverable under the DPRSRA, RIAA PF para. 83; Tr. 965 
(Del Beccaro); Tr. 1014 (McCarthy); Tr. 2137 (Vidich), and it did not 
contemplate a distribution of a portion of the royalties to recording 
artists as required under the new law, RIAA PF para. 82.
---------------------------------------------------------------------------

    \10\ Associate Professor of Communications Studies at 
Northwestern University and Director of Northwestern's program in 
Telecommunications Studies, Management, and Policy.
    \11\ Senior Vice-President of Strategic Planning and Business 
Development at Warner Music Group and a member of the Board of 
Directors of Digital Cable Radio Associates.
    \12\ President and Chief Executive Officer of Digital Cable 
Radio Associates.
    \13\ Senior Vice-President and Chief Financial Officer of 
Digital Cable Radio Associates.
---------------------------------------------------------------------------

    In response, the Services assert that the Panel ``did not rely on 
the DCR license rate in isolation,'' and argue that its determination 
was informed by testimony from the parties who participated in the 
negotiations. Reply to Petition at 20. More specifically, the Services 
argue that the inclusion of the performance license within a larger, 
complex commercial agreement makes it more meaningful, because DCR did 
not purchase a license for the public performance of sound recordings. 
Rather, in exchange for a partnership agreement, DCR acknowledged that 
the right should exist for a particular rate. The Services neglect, 
however, to discuss why this observation is important in their initial 
findings. Services RF para. 75-77. Later, the Services argue that the 
Panel's decision to use the DCR license fee as an appropriate benchmark 
rested on a weighing of the evidence and invoke the Panel's discretion 
to evaluate the testimony and fashion its decision accordingly. Reply 
to Petition at 20-21. The Services, however, fail to address RIAA's 
additional concerns about the negotiated license, except to note that 
the partner record companies never operated a joint advertising venture 
nor took advantage of the provisions which gave them some measure of 
control over programming. Services RF Paras. 80-81.
    While the Register agrees with the Services that the Panel 
carefully considered the rationale for and the circumstances 
surrounding the negotiations setting the DCR license rate, she finds 
the Panel's adoption of this benchmark and its subsequent adjustments 
arbitrary. In the first instance, the benchmark offered by the Services 
cannot represent a license for a right to perform sound recordings, 
because no such legal right existed at the time of the negotiations. 
Woodbury <SUP>14</SUP> W.D.T. at 12; RIAA PF ] 84; Tr. 2102 (Vidich). 
DCR allowed that, in fact, it did not negotiate for a performance 
license in sound recordings; and instead, characterized the transaction 
as selling ``to its record company partners the recognition they sought 
`that the right existed for a particular rate.' '' Services PF para. 
102. To underscore this distinction, DCR insisted on a clause which 
stated that the United States law did not require DCR to pay a fee or 
royalty for the public performance of any sound recording, even though 
DCR agreed, as part of a complex commercial transaction, to pay its 
partner record companies what it calls a public performance license 
fee. Services PF Paras. 111, 136. An article in the press announcing 
the deal echoed this distinction. It noted that not only did the 
transaction allow DCR use of the record companies' repertoire, it also 
required DCR to support a performance right in sound recordings. DCR 
Ex. 27 (Paul Verna, Time Warner Breaks New Cable Ground; Enters Cable 
Radio Venture With Sony, Billboard, Feb. 6, 1996, at 1).
---------------------------------------------------------------------------

    \14\ A vice-president at the economic consulting firm of Charles 
River Associates, Inc.
---------------------------------------------------------------------------

    Consequently, the Register rejects the Panel's premise that the 
rate set for a nonexistent right would represent accurately the value 
of the performance right once it came into existence, especially where 
the parties

[[Page 25402]]

acknowledge that the agreement encompassed more than the purported 
value of the coveted right, namely the recognition from the audio 
service that a performance right in sound recordings should exist. RIAA 
PF Paras. 94-95; Tr. 2209-12 (Wildman); Wildman W.R.T. at 9-12. 
Arguably, that recognition was more valuable consideration to the 
record companies than the license fee itself.
    The conclusion that the DCR license fee may serve as the benchmark 
for setting the section 114 rates is undermined further by the very 
nature of the partnership agreement. All parties agree that the 
agreement concerning the performance right was merely one of eleven 
interdependent co-equal agreements which together constituted the 
partnership agreement between DCR and the record companies. Such strong 
ties between provisions in a negotiated document raise the question of 
how much give-and-take occurred in negotiating the final terms. Courts 
recognize that complex transactions encourage tradeoffs among the 
various provisions and lead to results that most likely differ from 
those that would result from a separately negotiated 
transaction.<SUP>15</SUP> While DCR freely entered into the partnership 
agreement, the record contains no evidence that it would have freely 
entered into a separate performance license for sound recordings. To 
the contrary, the Service's own witness admits that it is unlikely that 
a stand-alone performance license would have been negotiated. Woodbury 
W.D.T. at 15. Accordingly, the Register concludes that it was arbitrary 
for the Panel to rely on a single provision extracted from a complex 
agreement where the evidence demonstrates that the provision would not 
exist but for the entire agreement. Under similar circumstances, the 
Southern District Court of New York found that ``plucking one term out 
of the contract is likely to yield a fairly arbitrary result.'' 
American Society of Composers Authors and Publishers v. Showtime/The 
Movie Channel, Inc. (ASCAP), published at 912 F.2d 572, 590 (S.D.N.Y. 
December 20, 1989) (No. 13-95 (WCC)) (rejecting proposal to rely upon 
provisions in guild agreement concerning payment of revenues where such 
provisions were part of a set of terms governing compensation, 
benefits, and working conditions). <SUP>16</SUP>
---------------------------------------------------------------------------

    \15\ For example, in resolving a dispute between ASCAP and 
Showtime/The Movie Channel, Inc. over the fee for a ``blanket'' 
license, the Southern District Court of New York stated that:
    it is fair to assume that in any negotiation that encompasses as 
many disparate issues as do the guild agreements, the negotiators 
will agree to tradeoffs, among the various negotiated items, ... The 
process of negotiation is thus likely to yield a complex pattern of 
results, most of which would have been different if the individual 
issue had been negotiated entirely separately from the others. 
Accordingly, plucking one term out of the contract is likely to 
yield a fairly arbitrary result.
    ASCAP v. Showtime/The Movie Channel, Inc., published at 912 F.2d 
572, 590 (S.D.N.Y. Dec. 20, 1989) (Civ. No. 13-95 (WCC) (footnote 
omitted).
    \16\ This is not to say that in any case in which a CARP relied 
on a license fee that was part of a larger agreement containing a 
number of provisions unrelated to the license fee, such reliance 
would necessarily be arbitrary. But in light of the other 
deficiencies in the CARP's reliance on the DCR license, discussed 
herein, and especially in light of the fact that the license fee was 
for the exercise of a nonexistent right, the Register is compelled 
to conclude that in this case, the CARP's reliance on the DCR 
license fee as its exclusive benchmark was arbitrary.
---------------------------------------------------------------------------

    Another problem with adopting the DCR license fee is that it is not 
an industry-wide agreement, but rather the product of negotiations 
among only three record companies, which together account for 
approximately 35% of the sound recordings performed by DCR. RIAA PF 
para. 82; RIAA RPF para. 39. The arbitrators understood the limited 
nature of the negotiations and made an adjustment to the license fee 
based on the mistaken assumption that the DCR license fee represented 
the value of the sound recordings owned by the three record companies 
party to the agreement, which purportedly represented 60% of the record 
industry. Report Paras. 166, 200. This assumption arose from a 
statement made by the Services in the summary statement contained in 
the Services' joint reply to RIAA's proposed findings.<SUP>17</SUP> The 
statement, however, has no support in the record. See Petition at 21 
n.3; Reply to Petition at 21-22. Consequently, the Panel's upward 
adjustment of the base figure on the merits of this assertion was 
arbitrary.
---------------------------------------------------------------------------

    \17\ ``DCR entered into a performance license with three record 
companies that represent approximately 60% of all recorded music 
sold in the United States.'' Services RF at 2.
---------------------------------------------------------------------------

    This is not to say that the fact that the DCR license fee was 
negotiated with companies owning rights to only 35% of the relevant 
works renders that license fee irrelevant. It is, however, a further 
deficiency which in combination with the other deficiencies discussed 
herein, renders the Panel's reliance on the DCR license fee as its 
exclusive benchmark inappropriate.
    Furthermore, the Panel's decision to rely on the DCR license fee 
deviates from CRT precedent where that agency refused to adopt, as an 
industry-wide rate, a set of rates negotiated by only certain of the 
affected parties as part of a general understanding involving issues in 
addition to the rate of compensation. Use of Certain Copyrighted Works 
in Connection with Noncommercial Broadcasting, 43 FR 25068 (June 8, 
1978). While no Panel need slavishly adhere to the past practices of 
the CRT, it must articulate a reasoned explanation for its deviation 
from past precedent. Distribution of 1990, 1991, and 1992 Cable 
Royalties, 61 FR 55653, 55659 (October 28, 1996). Otherwise, its 
actions may be construed as arbitrary or contrary to law.<SUP>18</SUP>
---------------------------------------------------------------------------

    \18\ Section 802(c), of the Copyright Act, directs the CARP to 
``act on the basis of a fully documented written record, prior 
decisions of the Copyright Royalty Tribunal, prior copyright 
arbitration panel determinations, and rulings by the Librarian of 
Congress under section 801(c).''
---------------------------------------------------------------------------

    The Register also finds that even if the 60% figure had record 
support, it would be arbitrary to adjust a negotiated license fee that 
purports to represent the market value of the digital performance right 
in sound recordings. Under the license agreement, DCR agreed to pay a 
percentage of its gross revenues for the right to perform sound 
recordings digitally, but only a portion of these fees were paid to 
each of DCR's three record company partners, allocated on the basis of 
the DCR playlist.<SUP>19</SUP> Tr. 2123-24 (Vidich); Services PF para. 
111. Therefore, the license fee--to the extent that it was a license 
fee--already accounted for all copyright fees owed to the record 
industry, and it was inappropriate for the Panel to make any further 
adjustment. The Services seem to realize the Panel's error in this 
respect and note that the Panel was under no obligation to make an 
upward adjustment, since the license fee reflected the value of the 
sound recording and not the sum of the percentage amount each partner 
record company negotiated for use of its works. Reply to Petition at 
22.
---------------------------------------------------------------------------

    \19\ For example, if the DCR license fee had been 5% of gross 
receipts (equaling $100,000) and 40% of the sound recordings on 
DCR's playlist were owned by DCR's record company partners, then DCR 
would pay 40% of the license fees ($40,000) on a prorata basis to 
these partners. The remaining 60% ($60,000) represents the value of 
the digital performance of works owned by non-partnership record 
companies performed during the relevant time period--a sum that DCR 
would not actually pay under the terms of its license agreement.
    The 5% license fee value does not represent the actual value of 
the negotiated fee because this information is subject to a 
protective order. See n.8 supra.
---------------------------------------------------------------------------

    Furthermore, the Register finds that the Panel's conclusion that 
the DCR license fee ``provides a useful precedent for setting a royalty 
rate in this proceeding'' was arbitrary. Report para. 200. The only 
support for this finding was Woodbury's testimony that the trade 
article announcing the deal between DCR and its new record company 
partners, Sony and Warner, illustrated its precedential value, at least 
for the record companies. Woodbury W.D.T. at

[[Page 25403]]

16. Mr. Woodbury's statements on the precedential value of the 
agreement, however, are full of qualifications, and he readily 
acknowledged that ``a successful negotiation may have required that 
Warner and Sony compensate Music Choice for including the performance 
rights payments as part of the partnership agreement. The effect of 
this compensation may have restrained Warner and Sony in their choice 
of a higher fee level.'' Id.
    In addition, the partnership agreement itself fails to support the 
Panel's finding. It includes material redacted subject to the 
protective order, DCR Exs. 7, 8 & 15 at para. 6, and a provision that 
the rate will be superseded if Congress establishes a performance right 
in sound recordings. DCR Exs. 7, 8, & 15 at para. 9. Vidich W.R.T. at 
7; Tr. 2106-2107 (Vidich); Del Beccaro W.D.T. at 9. Because the 
partnership agreement included language that undermined any 
precedential value of the digital performance license included therein, 
the Register finds that the Panel's reliance on the DCR license fee as 
precedent was an arbitrary action. See Motor Vehicle Mfrs. Ass'n v. 
State Farm Mutual Auto. Insurance Co., 463 U.S. 29 (1983) (agency 
action is arbitrary where the agency offers an explanation for its 
decision that runs counter to the record evidence).
    In setting a range of possible rates for the section 114 license, 
the Panel made further adjustments to the base figure to account for 
the payments to the recording artists. Under the DPRSRA, recording 
artists are entitled to half of the royalties collected under the 
compulsory license. 17 U.S.C. 114(g). RIAA argues that the DCR license 
fee must be adjusted to account for this provision in the law that 
entitles recording artists to a share of the royalties, because the 
record companies were under no obligation to share the royalties. RIAA 
RPF para. 40; Petition at 28. RIAA also argued for additional upward 
adjustments of the benchmark to compensate the record companies for 
certain differences between the DCR license and the compulsory license, 
including compensation for loss of royalties generated from foreign and 
commercial subscribers, and loss of revenue due to a shift in how the 
Services offer their product to subscribers.
    RIAA anchors its arguments for these requested adjustments on the 
presumption that the responsibility of the Panel was ``to determine the 
royalty [rate] that would be produced through free market negotiations, 
absent the compulsory license.'' RIAA RPF para. 41. This presumption, 
however, misrepresents the Panel's duty, which is to establish 
reasonable rates and terms. See discussion supra concerning the use of 
a marketplace standard in setting the royalty rate. While RIAA may have 
a reasonable expectation that a Panel would make appropriate 
adjustments to a marketplace benchmark that the Panel adopts for 
further consideration in light of the statutory objectives, and that is 
not to say that the requested adjustments are appropriate, there is no 
justification for making the adjustments where the benchmark value does 
not fulfill that function. Therefore, having found that the DCR license 
fee does not represent the marketplace value of sound recordings, the 
Register need not consider further arguments on adjusting the rate.
    For the reasons cited above, the Register finds that the Panel was 
arbitrary in relying on the DCR license fee for the purpose of 
establishing an accurate evaluation of the marketplace value for the 
performance right.
The Panel's Determination of a Specific Range of Fees for the Public 
Performance of the Musical Compositions Was Arbitrary
    The Services pay separate license fees to Broadcast Music, Inc. 
(BMI), the American Society of Composers, Authors, and Publishers 
(ASCAP), and SESAC, Inc. for the public performance of the underlying 
musical works in the sound recordings. The Services introduced evidence 
on what they pay the performing rights organizations for the public 
performance of the musical works to illustrate the industry practice 
that ``licensing rates ordinarily paid in the recording and music 
industries for the use of copyrighted works are far less than 41.5%, 
and generally are within the low single digit range for use of 
copyrighted music and sound recordings.'' Rosenthal <SUP>20</SUP> 
W.R.T. at 3; Tr. 1646, 1669-70, 1674 (Massarsky).<SUP>21</SUP>
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    \20\ An attorney with the law firm of Berliner, Corcoran & Rowe, 
L.L.P., in Washington, D.C., who represents recording artists, 
writers, production companies, record companies, and multimedia 
companies.
    \21\ An economic consultant with the firm of Barry M. Massarsky 
Consulting, Inc.
---------------------------------------------------------------------------

    Using the license fees DMX and DCR <SUP>22</SUP> pay for the right 
to perform musical compositions in the BMI and SESAC repertories and 
the anticipated payments that ASCAP will receive upon resolution of a 
rate dispute between itself and the Services, and not the interim rates 
that the Services currently pay ASCAP, which are usually lower than the 
final determination of the rate court, the Panel set an upper limit on 
the value of the performance right for the musical compositions. Report 
Paras. 167(B)-(G). In making this determination, the Panel accepted 
Massarsky's testimony that ASCAP license fees are ``generally greater 
than, but at least no less than, BMI license fees,'' and made its 
calculations accordingly. Report para. 167(E); see also RIAA PF 
Paras. 106-108.<SUP>23</SUP> In addition to setting an upper limit on 
the amount the Services would pay for these performance licenses, the 
Panel announced a lower limit for this benchmark but provided no 
discussion on how it arrived at this figure.
---------------------------------------------------------------------------

    \22\ The Services pay an interim rate set in 1989 to ASCAP for 
the performance of the musical works in its repertoire. Tr. 1029 
(McCarthy); Tr. 1656 (Massarsky). DCR also pays an interim rate to 
BMI. These rate disputes are currently the subject of adjudication 
before the ``rate court'' in the Southern District of New York. 
Services RF Paras. 52-53; 100-105. Pending the outcome of the rate 
cases, DCR has agreed to pay BMI the same contractual rate that DMX 
pays for the musical works performance license. Tr. 1653 
(Massarsky).
    \23\ CRT and judicial precedent supports the Panel's premise 
that ASCAP usually receives slightly higher royalty fees for the 
public performance of its works than does BMI. In American Society 
of Composers, Authors, and Publishers v. Showtime/The Movie Channel, 
912 F.2d 563 (2nd Cir. 1990), the court affirmed the rate court 
decision that a ``blanket'' license rate for use of ASCAP works 
should be set slightly higher than the rate the cable network pays 
for a BMI license. This result reflected the agreed upon 55-45 ratio 
that ASCAP and BMI adopted in dividing their share of the royalties 
for compulsory licenses paid by cable system operators for 
retransmissions of broadcast signals. See also 1978 Cable Royalty 
Distribution Determination, 45 FR 63026 (Sept. 23, 1980) (CRT 
determined that of the 4.5% royalty share awarded to the music 
claimants' group in the 1978 cable distribution proceeding, ASCAP 
would receive 54%, BMI, 43%, and SESAC, 3% of the royalties.); 1987 
Cable Royalty Distribution Proceeding, 55 FR 11988 (March 30, 1990) 
(CRT again adjusted the distribution percentages for cable royalties 
so that ASCAP received a 58% share of the disputed royalties and BMI 
received the remaining 42% share).
---------------------------------------------------------------------------

    RIAA accepts the Panel's determination for an upper limit valuation 
for the performance right in musical works, but challenges the Panel's 
determination of the lower limit of this value. Petition at 16-20. RIAA 
contends that because the Panel had actual figures upon which to base 
its calculation, it was arbitrary to set a lower limit. Id. at 17.
    From an examination of the record, the Register cannot determine 
how the Panel derived the lower limit figure, but she has identified at 
least one way that the Panel could have settled upon the lower figure. 
It entails the use of the interim rates which the Services pay ASCAP 
currently, instead of relying on a figure equal to or greater than the 
rate paid to BMI. Tr. 1669 (Massarsky), Tr. 1028-1029 (McCarthy). Use 
of such an approach, however, is expressly

[[Page 25404]]

disavowed by two of the Services' own expert witnesses who agree that 
it is inappropriate to rely on interim rates to determine competitive 
market rates. Woodbury W.R.T. at 19 n.70; Tr. 2710-2711 (Woodbury); Tr. 
1029 (McCarthy). The Register concurs with these witnesses's 
assertions, and therefore rejects any figure which uses an interim rate 
in calculating a value when specific evidence exists in the record 
discounting this methodology and nothing supports its use.
    Nor could the Panel consider just the individual license fees which 
the Services pay to a single performing rights organization in setting 
the lower limit, having rejected a similar argument when the Services 
initially proposed making this comparison. Report para. 168. A single 
license fee covers only those musical works under the control of the 
individual performing rights organization granting the license. 
Therefore, a Service must obtain a ``blanket'' license from every 
performing rights organization in order to have the freedom to play 
virtually any musical composition without infringing its copyright. 
Hence, the total value attached to the performance of the underlying 
musical works would be the sum of the license fees paid to each of the 
performing rights organizations, just as the value of the digital 
performance right in sound recordings would be the fees paid to all 
record companies. See Report para. 168.
    The Register perceives no rational connection between the Panel's 
factual conclusions and its decision to set a lower limit for this 
benchmark. Where the record provides clear evidence of what the 
Services actually pay for the performance licenses, and the witnesses 
agree that the interim rates which are currently being paid represent 
de minimis value for these licenses, the Panel need not look beyond 
this information to determine the value of the benchmark. For the 
reasons discussed above, the Register does not consider the Panel's 
lower limit on the performance license fees for musical compositions 
when proposing a royalty rate for the section 114 license.
Use of Benchmarks Approximating Marketplace Value in Setting the 
Section 114 Rate
    A benchmark is a marketplace point of reference, and as such, it 
need not be perfect in order to be considered in a rate setting 
proceeding. In the 1980 rate adjustment proceeding for coin-operated 
phonorecord players, the Tribunal considered different marketplace 
models and found that each analogy had distinguishing characteristics, 
but nevertheless considered them in conjunction with the record 
evidence and the statutory objectives. 1980 Adjustment of the Royalty 
Rate for Coin-Operated Phonorecord Players, 46 FR 884, 888 (1981) 
(``While acknowledging that our rate cannot be directly linked to 
marketplace parallels, we find that they serve as an appropriate 
benchmark to be weighed together with the entire record and the 
statutory criteria''). The U.S. Court of Appeals for the Seventh 
Circuit approved the Tribunal's approach, stating that:

    We think that the Tribunal could properly take cognizance of the 
marketplace analogies while appraising them to reflect the 
differences in both the respective markets (e.g., with respect to 
volume and industry structure) and the regulatory environment. It is 
quite appropriate and normal in this administrative rate 
determination process to find distinguishing features among various 
analogous situations affecting the weight and appropriate thrust of 
evidence rather than its admissibility. No authority cited by AMOA 
would require the Tribunal to reject the ASCAP/SESAC analogies. 
Comparable rate analogies have been repeatedly endorsed as 
appropriate ratemaking devices.

    AMOA v. CRT, 676 F.2d at 1157. See also San Antonio v. United 
States, 631 F.2d 831, 836-37 (D.C. Cir. 1980), clarified, 655 F.2d 1341 
(D.C. Cir. 1981); Burlington Northern, Inc. v. United States, 555 F.2d 
637, 641-43 (8th Cir. 1977).
    When setting the rates for the statutory performance license in 
sound recordings, the benchmarks are merely the starting point for 
establishing an appropriate rate. The deciding body uses the 
appropriate marketplace analogies,<SUP>24</SUP> in conjunction with 
record evidence, and with regard for the statutory criteria, to set a 
reasonable rate.
---------------------------------------------------------------------------

    \24\ A Panel is free to reject a proposed benchmark that does 
not reflect accurately the characteristics and dynamics of the 
industries subject to the proposed rate. See e.g., Use of Certain 
Copyrighted Works in Connection with Noncommercial Broadcasting, 43 
FR 25068-69 (1978) (CRT found voluntary license between BMI, Inc. 
and the public broadcasters, Public Broadcasting System and National 
Public Radio, of no assistance in setting rate for use of ASCAP 
repertoire); Adjustment of the Royalty Rate for Cable Systems; 
Federal Communications Commission's Deregulation of the Cable 
Industry, 47 FR 52146 (November 12, 1982).
---------------------------------------------------------------------------

    In this proceeding, the Register finds that both the negotiated DCR 
license fee and the marketplace license fee for the performance of the 
musical works are useful at least in circumscribing the possible range 
of values under consideration for the statutory performance license in 
sound recordings. While the DCR license fee purports to represent a 
negotiated value for a right to which, by law, the record companies 
were not entitled (in addition to the recognition that the right should 
exist), the Register acknowledges that the value of the DCR license 
provides minimal information as to the value of the performance right 
ultimately granted in the DPRSRA, although it does provide some 
guidance for assessing the proposed rate. See Adjustment of Royalty 
Payable Under Compulsory License for Making and Distributing 
Phonorecords; Rates and Adjustment of Rates (115 Rate Adjustment 
Proceeding), 46 FR 10466, 10483 (Feb. 3, 1981) (``We find that the 
foreign experience is relevant--because it provides one measure of 
whether copyright owners in the United States are being afforded a fair 
return'').
    On the other hand, the second reference point--the negotiated 
license fees for the performance of music embodied in the sound 
recordings--offers specific information on what the Services actually 
pay for the already-established performance right of one component of 
the sound recording. The Panel recognized this reference point's 
usefulness and used it to further support its choice of a royalty rate. 
Report para. 201. The question, however, is whether this reference 
point is determinative of the marketplace value of the performance 
right in sound recordings; and, as the Panel determined, the answer is 
no. Report Paras. 169, 201.
    Initially, neither the Services nor RIAA placed much weight on this 
marketplace reference point, although RIAA has consistently argued that 
the value of the performance right in sound recordings is greater than 
the value of the performance right in the underlying musical works. 
RIAA RPF para. 16, Petition at 10-16. On the one hand, the Services 
argue that the musical composition is the key to a successful 
recording, Services RF para. 10-12, citing Tr. 1664 (Massarsky), and on 
the other hand, RIAA contends that a song lacks feeling until the 
recording artist breathes life into the song. Morris <SUP>25</SUP> 
W.D.T. at 1-2; Petition at 12-13. Because neither side presented 
conclusive evidence on this point, the Panel observed only that both 
groups are ``parents of the music.'' Report para. 169.
---------------------------------------------------------------------------

    \25\ A country music artist who has recorded 14 albums, 
including five number one songs.
---------------------------------------------------------------------------

    RIAA faults the Panel for its lack of discussion on the question of 
whose rights in the phonorecord are more valuable. Petition at 10-16. 
While the Register agrees that the Panel did not make specific 
citations to record evidence, its finding that ``[t]here was 
insufficient and conflicting evidence to make a determination that the

[[Page 25405]]

performers and record companies deserve a larger percentage from the 
Services than granted to the music works,'' was supported by the record 
evidence. Report para. 169.
    To make its point, RIAA presented an analysis of revenues from 
record sales in support of its argument that the marketplace values the 
contributions of the record companies and the performing artists more 
than it values the contributions of the copyright owners in the musical 
compositions. RIAA's PF Paras. 112-120; Petition at 10-16. This 
evidence showed that copyright owners of the musical composition 
receive between 5-20% of the wholesale price for the sound recordings 
based on sales of CDs and cassette tapes--approximately 5% from the 
average wholesale price for an average CD and 12% from an average 
cassette.<SUP>26</SUP> RIAA PF Paras. 115, 119. Recording artists, on 
the other hand, receive 7-10% of the average wholesale price for a 
typical CD and 15-20% for a typical cassette, leaving approximately 
between 56-88% of the revenues from sales for the record companies. 
RIAA para. PF 116.
---------------------------------------------------------------------------

    \26\ Interested parties are free to negotiate a rate below the 
statutory rate for the mechanical license and often do. Tr. 1660 
(Massarsky).
---------------------------------------------------------------------------

    The Services disagreed with RIAA's interpretation of the 
marketplace data, contending that the reason the ``(r)ecord companies 
receive a bigger percentage of revenues from the sale of sound 
recordings (is) because they have a bigger monetary investment in the 
record production costs, as well as the leverage to minimize the 
royalties paid to songwriters, music publishers, and recording 
artists.'' Services RF Paras. 118-120. They also oppose RIAA's 
implication that the record companies should receive more value from 
the performance right in sound recordings than the songwriters receive 
for a similar right because the record companies garner more revenue 
from the use of the mechanical license than do the songwriters and 
composers.
    The Services accurately note that the mechanical license and the 
digital performance license represent different and distinct rights to 
the copyright holders under the law, and they make no attempt to tie 
the value of the rights associated with the mechanical license to the 
value of the digital performance right, a right newly recognized with 
the passage of the DPRSRA. Even RIAA, the proponent of the assertion, 
fails to explain why the relative value of the mechanical license to 
the various owners and users has any application to the determination 
of the value of a digital performance license in sound recordings. 
Consequently, where no clear nexus exists between the values of 
different rights, the model serves no practical purpose in computing 
the value of the digital performance right.
    Hence, RIAA's contention that the data supports its assertion that 
the marketplace places a higher value on the contributions of the 
record companies and the recording artists in the creation of the 
phonorecord fails, because it does not discuss the constraining effect 
the mechanical license has on the copyright owners in setting a value 
on their reproduction and distribution right. Record companies pay the 
copyright owners of the musical compositions no more than the statutory 
rate for the right to reproduce and distribute the musical composition 
in a phonorecord. The record company then, in turn, sells the 
phonorecord at a fair market price. Because both groups do not share 
equal power to set rates in an unfettered marketplace, it is 
unreasonable to compare the value of the reproduction and distribution 
right of musical compositions--a rate set by the government at a level 
to achieve certain statutory goals--with the revenues flowing to record 
companies from a price set in the marketplace according to the laws of 
supply and demand, and then to declare that the marketplace values the 
sound recording more than the underlying musical composition. 
Consequently, RIAA's evidence sheds no light on the relative value of 
the sound recording performance right and the musical works performance 
right.<SUP>27</SUP>
---------------------------------------------------------------------------

    \27\ Even if there was some value to the comparison, RIAA does 
not appear to factor into its calculations the value of the sound 
recordings in those phonorecords that do not show a profit. 
According to the record, ``approximately 85 percent of all sound 
recordings do not recoup the costs that are spent to make and to 
market those recordings. Indeed, over two-thirds of all sound 
recordings sell less than 1,000 copies.'' Report para. 105.
---------------------------------------------------------------------------

    In addition to the foregoing discussion, the Register notes that 
Congress did not intend for the license fees paid under the new digital 
performance license to ``diminish in any respect the royalties payable 
to copyright owners of musical works for the public performance of 
their works.'' S. Rep. No. 104-128, at 33 (1995) (emphasis added). See 
also 17 U.S.C. 114(i). Although this statement does not express 
Congress' intent that the license be set below the value of the public 
performance right in the musical works, it indicates that Congress 
considered the possibility that such would be the outcome, and sought 
through express legislation to protect the current value of the 
performance right in musical works.
    Based on a review of the record evidence, the Register concurs with 
the Panel's conclusion that there was insufficient evidence to 
determine that the performers and record companies deserve a larger 
percentage from the Services than that received by the copyright 
holders in the musical works. That being so, the Register finds no 
basis for making an upward adjustment to the musical works performance 
license fees to establish a broader range of potential rates.

c. Statutory Objectives

    Section 801(b)(1) of the Copyright Act states that the rates for 
the section 114 license shall be calculated to achieve certain 
statutory objectives. The Panel evaluated each statutory objective and 
made a finding as to whether the Services or RIAA furthered that 
objective. If the Services contributed more to furthering the 
objective, the Panel gave more consideration to setting a rate at the 
lower end of the possible range, and conversely, if the record 
companies made the more significant contribution, the Panel found this 
to favor a rate toward the upper end. Report para. 19((A)-(D).
    The Panel's analysis led it to set a rate toward the low end of its 
range, because a rate set toward the high end would thwart the 
statutory objectives under current market conditions. Id. The Panel 
expressly noted that a future Panel may reach an entirely different 
result based on the then-current economic state of the industry and new 
information on the Services' impact on the marketplace. Report para. 
202.
    RIAA contends that the Panel's findings that all factors favor 
setting a low rate is contrary to CRT precedent. Petition at 32. This 
contention relies on a statement from the D.C. Court of Appeals, which 
upon reviewing the CRT's 1980 Mechanical Rate Adjustment Proceeding 
concluded that the factors ``pull in opposing directions.'' Id., citing 
RIAA v. CRT, 662 F.2d at 9. But in making this statement, the court 
merely made an observation that the statutory objectives required the 
Tribunal to weigh opposing factors in determining how best to achieve 
each objective. It went on to say that the Tribunal had the 
responsibility of reconciling these factors in setting a reasonable 
rate, but the court did not preclude the possibility that the Tribunal 
might find that the application of the factors to the evidence 
consistently supported either a high rate or a low rate. RIAA v. CRT, 
662 F.2d at 9.

[[Page 25406]]

    The Register approves the Panel's basic approach in utilizing the 
factors to determine its rate for the digital performance right and 
adopts the Panel's findings where the evidence supports its 
conclusions.
The Panel's determination that the statutory objectives supported 
setting a rate favoring the Services was not arbitrary
    The Panel's ultimate conclusion that the best way to achieve the 
four statutory objectives was to set a low rate favoring the Services 
is supported by the evidence presented in this proceeding. How much 
weight to accord each objective is within the discretion of the Panel, 
which may accord more weight to one objective over the others so long 
as all objectives are served adequately. See RIAA v. CRT, 662 F.2d at 
9. In RIAA v. CRT, the court reviewed the Tribunal's decision to raise 
the rate for making and distributing phonorecords from two cents to 
four cents. It found the copyright users' argument that the Tribunal 
failed to give adequate consideration to certain factors over others 
unavailing. In discussing the impact of the statutory objectives on the 
ratemaking process, the court stated:

    (T)he Tribunal was not told which factors should receive higher 
priorities. To the extent that the statutory objectives determine a 
range of reasonable royalty rates that would serve all these 
objectives adequately but to differing degrees, the Tribunal is free 
to choose among those rates, and courts are without authority to set 
aside the particular rate chosen by the Tribunal if it lies within a 
``zone of reasonableness.''

Id. at 9 (citations omitted). Hence, the Panel was free to find that a 
rate on the low end was reasonable so long as that rate fell within the 
``zone,'' and the ``zone'' was calculated to achieve the statutory 
objectives.
    The Panel's analysis and application of the statutory objectives, 
however, are not without problems. The Register finds that on occasion, 
the Panel either did not perceive or misinterpreted the precedential 
underpinnings of the statutory objective.
    A full discussion of the Panel's deliberations and the parties' 
responses concerning the evaluation and application of the four 
statutory objectives follows.
    A. Maximize the Availability of Works. (17 U.S.C.801(b)(1)(A)).
    The Panel found that the digital audio services ``substantially 
increase the availability of recordings by providing many channels of 
uninterrupted music of different genres,'' noting the diversity of the 
music offered by the Services. Report Paras. 121-122. Based on this 
finding, the Panel concluded at the end of its report that ``[t]o 
maximize the availability of creative works to the public * * * the 
rate should be set on the low side. A lower rate will hopefully ensure 
the Services' continued existence and encourage competition so that the 
greatest number of recordings will be exposed to the consumers.'' Id. 
para. 198(A).
    RIAA alleges that the Panel misinterpreted this statutory objective 
because it focused on ``whether the Services promote the sale of sound 
recordings,'' rather than ``whether the proposed rate will maximize the 
availability of sound recordings.'' RIAA RPF para. 43; Petition at 37-
41. In support of its position, RIAA recalls the 1980 jukebox rate 
adjustment proceeding, where the CRT concluded, in its discussion of 
section 801(b)(1)(A), that jukeboxes were not crucial to assuring the 
public of the availability of creative works. 1980 Adjustment of the 
Royalty Rate for Coin-Operated Phonorecord Players, 46 FR 884, 889 
(1981). The Tribunal, however, did find that ``reasonable payment for 
jukebox performances will add incrementally to the encouragement of 
creation by songwriters and exploitation by music publishers, and so 
maximize availability of musical works to the public.'' Id. On the 
strength of past CRT precedent and the courts' recurring observation 
that compensation to the author or artist stimulates the creative 
force, <SUP>28</SUP> RIAA disputes the Panel's conclusion, contending 
that the best way to maximize the availability to the public is to 
ensure that copyright owners receive fair compensation for their works. 
Petition at 38.
---------------------------------------------------------------------------

    \28\ Sony Corp. of America v. Universal City Studios, Inc., 464 
U.S. 417, 429 (1984), quoting United States v. Paramount Pictures, 
334 U.S. 131, 158 (1948). (```[R]eward to the author or artist 
serves to induce release to the public of the products of his 
creative genius.'''); Twentieth Century Music Corp. v. Aiken, 422 
U.S. 151, 156 (1975) (compensating authors ``serve[s] the cause of 
promoting broad public availability of literature, music, and the 
other arts''); 115 Rate Adjustment Proceeding, 46 FR 10479 (1981) 
(In discussing section 801(b)(1)(A), the CRT looked to the purpose 
of the section 115 license which was ``intended to encourage the 
creation and dissemination of musical compositions.'' Therefore, the 
Tribunal set the rate to ``afford songwriters a financial and not 
merely a psychic reward for their creative efforts'' as a way to 
maximize the availability of creative works).
---------------------------------------------------------------------------

    The Services support the Panel's findings and conclusion but offer 
no legal support for their position except to note that ``[t]he Courts 
have long held that under copyright law, reward to copyright owners is 
a `secondary consideration' that ultimately serves the cause of 
promoting public availability of copyrighted works.'' Reply to Petition 
at 27 (citations omitted). The Services assert rightfully that the 
primary rationale for the copyright law is to stimulate the creation of 
artistic works for the benefit of the public. Twentieth Century Music 
v. Aiken, 422 U.S. 151, 156 (1975), citing Fox Film Corp. v. Doyal, 286 
U.S. 123, 127 (1932) (``The sole interest of the United States and the 
primary object in conferring this monopoly * * * lie in the general 
benefits derived by the public from the labors of authors''). But in 
underscoring the primary purpose for the copyright law, the Court in 
Aiken acknowledges that this aim is achieved by allowing the copyright 
owners to receive a fair return for their labor, the position advanced 
by RIAA. ld. (``The immediate effect of our copyright law is to secure 
a fair return for an `author's' creative labor. But the ultimate aim 
is, by this incentive, to stimulate artistic creativity for the general 
public good''). See also Sony Corp. America v. Universal City Studios, 
Inc., 464 U.S. 417 (1984); United States v. Paramount Pictures, 334 
U.S. 131 (1948). The positive interplay between compensation and 
creation is a basic tenet of copyright law, and as such, its 
contribution to stimulating the creation of additional works cannot be 
set aside lightly.
    In such matters where the Panel failed to discuss any relevant case 
law or past precedent construing the statutory objective before 
rendering its determination, the Register finds the Panel acted in an 
arbitrary manner. The finding is based on the Panel's failure to 
consider CRT precedent and to provide a rational basis for its 
departure from prior proceedings construing the same statutory 
objective. See Pontchartrain Broad. v. FCC, 15 F.3d 183, 185 (D.C. Cir. 
1994) (``an unexplained departure from Commission precedent would have 
to be overturned as arbitrary and capricious''). Motor Vehicle Mfrs. 
Ass'n v. State Farm Mutual Auto. Insurance Co., 463 U.S. 29 (1983); 
Celcom Communications Corp. v. FCC, 789 F.2d 67 (D.C. Cir. 1986); 
Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985).
    There is no record evidence to support a conclusion that the 
existence of the digital transmission services stimulates the creative 
process. Instead, the Panel made observations concerning the 
development of another method for disseminating creative works to the 
public--a valid and vital consideration addressed in the statutory 
objective concerning relative contributions from each party--but fails 
to discuss how the creation of a new mode of distribution will itself 
stimulate the creation of additional works.

[[Page 25407]]

    Because the Panel failed to reconcile its determination with past 
CRT precedent and case law, the Register rejects both the Panel's 
findings and conclusions on this point as arbitrary. Instead, the 
Register concludes that the record companies and the performers make 
the greater contribution in maximizing the availability of the creative 
works to the public, a conclusion consistent with past CRT precedent.
    B. Relative Roles of the Copyright Owners and the Copyright Users 
in Making Product Available to the Public. (17 U.S.C. 801(b)(1)(C)).
    The statutory objective addressing the relative roles of the 
parties contains five different factors, which the Panel evaluated 
independently. In analyzing the first component of this objective, the 
relative creative contribution, the Panel found that both the recording 
companies and the performers make substantial creative contributions to 
the release of a sound recording. Report para. 87. Its determination 
credited the performers and the record companies for their work in 
making the musical work come alive. Id. Paras. 81-83. The Services were 
found to make no such significant contribution to the creation of the 
sound recording. Instead, their contribution was seen as more limited, 
since it merely enhanced the presentation of the final work through 
unique programming concepts. Id. Paras. 84-86. On balance, the Panel 
found ``that the artists and the record companies provide greater 
creative contributions to the release of sound recordings to the public 
than do the Services,'' id. para. 87, a finding supported by CRT 
precedent. <SUP>29</SUP>
---------------------------------------------------------------------------

    \29\ The CRT refused to award broadcasters a share of the cable 
royalties for their role in formatting radio stations. The Tribunal 
construed the claim as one for compilation which had a de minimis 
value. The U.S. Court of Appeals for the D.C. Circuit upheld the 
Tribunal's determination. NAB v. CRT, 772 F.2d at 931.
---------------------------------------------------------------------------

    The Panel continued its consideration of the relative contribution 
of the owners vis-a-vis the users in making the product available to 
the public and determined that the Services made the greater 
contribution with respect to the four remaining factors: technological 
contributions, capital investment, costs and risks to industry, and the 
opening of new markets. Report Paras. 88, 93, 94, 97, 98, and 109.
    In making this determination, the Panel focused on the 
technological developments made by the Services in opening a new avenue 
for transmitting sound recordings to a larger and more diverse 
audience, including the creation of technology to uplink the signals to 
satellites and transmit them via cable; technology to identify the name 
of the sound recording and the artist during the performance; and 
technology for programming, encryption, and transmission of the sound 
recording. Id. Paras. 89-92. In contrast, the Panel found that the 
record companies made no contributions in these areas. Id. para. 93.
    The Panel also weighed the evidence presented in support of the 
parties' relative roles in making capital investments in equipment and 
technology, the third factor. The Panel determined that the Services 
made a substantial showing of their $10 million investment in equipment 
and technology, Report para. 95 and cites therein, whereas RIAA did not 
suggest that any capital investment was required on its part. Id. para. 
97.
    And finally, the Panel found that the fourth factor, the relative 
costs and risks incurred by the parties in making the product available 
to the public, was greater for the Services than for the record 
companies and the performing artists, even though the record companies 
do incur substantial costs and risks in producing the product used by 
the Services. Id. Paras. 98-108. In making its determination, the Panel 
balanced the costs and risks involved in producing the sound recordings 
against the cost and risks associated with bringing the creative 
product to market in a new and novel way. Id. Paras. 99-107. In support 
of its findings, the Panel noted that the Services have invested 
significant start-up costs and are currently undergoing a shift in how 
they market their services. Id. Paras. 55, 73-78, 99, and 102. In 
addition, the Services contend, and the Panel agrees, that the Services 
face new competition from the internet and digital radio. Consequently, 
it is far from clear whether the Services can survive. Id. Paras. 72, 
99.
    The Panel also found that record companies face tremendous risks 
when producing new sound recordings, citing the record companies' 
submissions showing that record companies fail to recover the 
production costs for approximately 85% of sound recordings, much less 
show a profit. Id. para. 105. The Panel, however, went on to find that 
the record companies have adapted to the vagaries of the music 
business, and as an industry, have shown consistent growth in units 
shipped and dollar value of records, CDs, and music videos from 1982-
1996. Id. para. 108.
    The Panel's key finding from its analysis of the third objective 
was that the Services contribute more to the opening of new markets for 
creative expression through the development of the digital audio 
services. Id. para. 109. The Panel credited the Services with opening 
new markets for creative expression because they expose the public to a 
broader range of music than does traditional over-the-air radio. Unlike 
traditional radio, the Services offer multiple channels for classical, 
jazz, traditional, alternative, and ethnic formats. Id. para. 110. 
Because subscribers frequently purchase new music heard for the first 
time on the service, the Panel found that record companies arguably 
benefit directly from the expanded musical formats offered by the 
Services. Id. para. 112. The Panel also found that the Services' future 
plans to offer subscribers an opportunity to purchase the sound 
recordings directly will ``undoubtedly'' open new markets for the 
record companies. Id. Paras. 114-115.
    The record companies do not accept the Panel's findings concerning 
this statutory objective, and once again, take issue with the Panel's 
interpretation, positing that the Panel impermissively focused on 
``whether recording companies had made a particular contribution to the 
Services operations--and wholly ignored the contributions that the 
recording industry had made to the sound recordings themselves.'' 
Petition at 45-46. RIAA's predicate for its argument is its 
interpretation that the statutory phrase, ``in the product made 
available to the public,'' 17 U.S.C. 801(b)(1)(C), refers only to the 
creation of the sound recordings and not to the Services' creation of a 
new means for bringing the sound recordings to the listener. Petition 
at 46.
    In addition to this alleged fundamental flaw in interpretation, 
RIAA contends that the Panel ``improperly collapsed (its cost/risk 
analysis) into a risk only (analysis)'' and ignored empirical evidence 
in the record discounting the promotional value of the Services' 
offerings. Id. at 47-48. RIAA, however, fails to note that the Panel 
did acknowledge that the record companies incur significant costs and 
risks in their business. Report Paras. 105-107. But the Panel also 
found that the Services presented no additional risk to the record 
companies ``unless the customers of the Services record the sound 
transmissions in lieu of purchasing these products at a retail store.'' 
Report para. 107 (emphasis added). Because the record companies 
introduced no evidence showing decreased overall sales of records and 
CDs, the Panel reasonably found that the record companies did not incur 
additional risk from lost sales due to the Services' activities. Report 
Paras. 107, 111.

[[Page 25408]]

    If anything, the Panel believed that the Services decreased the 
risk to the recording companies because the digital audio services have 
substantial promotional value. The promotional value comes from the 
constant airplay of new types of music not readily accessible in the 
marketplace, which in turn stimulates record sales. Report para. 110. 
In making this finding, the Panel relied on Simon's and Rubinstein's 
testimony that ``subscribers frequently purchase new music precisely 
because they heard it on one of the Services,'' Report para. 112 citing 
Simon <SUP>30</SUP> W.D.T. at 1; Rubinstein W.D.T. at 34; Tr. 1442 
(Rubinstein), and on the record industries' practice of supplying 
complimentary copies of their products to the Services for use on the 
air to promote the sales of an album. Tr. 1291 (Rubinstein); Tr. 1182-
83, 1201 (Talley) <SUP>31</SUP>; DMX Ex. 3. See also Tr. 2248 (Wildman) 
(``Is there a benefit to the record company from getting music exposed 
that might become a hit that wouldn't get exposed otherwise? Of course 
there is'').
---------------------------------------------------------------------------

    \30\ Senior Vice-President of Programming at Digital Cable Radio 
Associates.
    \31\ Executive Vice-President and Chief Technical Officer of 
Digital Music Express who oversees research and development, and 
technical operations worldwide.
---------------------------------------------------------------------------

    Furthermore, RIAA's reliance on the preliminary DCR survey for the 
proposition that the Services do not promote sound recording sales is 
untenable where the record clearly shows that the record companies 
provide promotional copies to the Services. In fact, RIAA's own expert 
acknowledges ``there (are) promotional benefits to recording companies 
from having their music played on radio stations or the digital music 
services.'' Tr. 2220 (Wildman).
    In contrast to RIAA's fundamental objection to the Panel's 
interpretation of this statutory objective, the Services contend that 
the Panel made a reasonable determination that the phrase, ``the 
product made available to the public,'' applied to both the sound 
recordings and the entire digital music service. Reply to Petition at 
29. This finding is consistent with the 1980 rate adjustment proceeding 
for the mechanical license, where the CRT credited the record 
companies, the users of the musical compositions for purposes of the 
mechanical license, with developing new markets through technological 
innovations, and through the creation of record clubs, mail order 
sales, and television advertising campaigns. 46 FR 10480-81 (1981).
    In making her determination on this point, the Register reflects on 
the statutory responsibilities of the Panel which is to set reasonable 
rates and terms for the public performance of sound recordings by 
certain digital audio services. (emphasis added). ``In deciding to 
grant a new exclusive right to perform copyrighted sound recordings 
publicly by means of digital audio transmission, the Committee was 
mindful of the need to strike a balance among all of the interests 
affected thereby.'' S. Rep. No. 104-128, at 15-16 (1995). By its very 
nature, the section 114 license contemplates weighing the contributions 
of the users in creating and expanding the market for the performance 
of the sound recording in a digital technological environment. Without 
dispute, the evidence reveals a large investment of capital by the 
Services to create a new industry that expands the offerings of the 
types of music beyond that which one receives over the radio, through 
live performances, and other traditional means of public performance. 
Report Paras. 44, 49, 52, 99, 102-104, 110, 113; Simon W.D.T. at 3-4; 
Rubinstein W.D.T. at 13-14; Tr. 853-54 (Del Beccaro); Tr. 1237-40 
(Rubinstein); Tr. 1476-78 (Funkhouser); DMX Ex. 32. Conversely, the 
record companies offered little or no evidence on their contributions 
relating to the key factors. Report Paras. 93, 97, 111.
    From the foregoing analysis, the Panel concluded that the record 
companies contributed more in only one of the five areas under 
consideration in evaluating this statutory objective, and consequently, 
the rate should be set at a minimum level in favor of the Services. 
Report para. 198(C).
    C. To Minimize Any Disruptive Impact on the Structure of the 
Industries Involved. (17 U.S.C. 801(b)(1)(D)).
    The Panel determined that a rate set too high could cause one or 
all of the Services to abandon the business. Report Paras. 117-118; 
Troxel <SUP>32</SUP> W.R.T. 1, 5-6; Tr. 2553-2554; DMX Ex. 49(b). The 
Panel considered the nature of the Services' business, noting its need 
to increase its subscriber base just to reach a break-even point 
without the added obligation of paying an additional fee for a digital 
performance right. Id. Paras. 119(a)-(d). The Panel also calculated 
that the record companies would receive substantially less than a 1% 
increase in their gross revenues even if the rate were set at the 
highest proposed level (41.5% of gross revenues), underscoring the 
lesser impact of the license fees on the record industry. Id. para. 
119.
---------------------------------------------------------------------------

    \32\ Chief Executive Officer and President of Digital Music 
Express since July 1997.
---------------------------------------------------------------------------

    RIAA implies that a low statutory rate for the digital performance 
right will have a negative impact on their future negotiations with 
other digital services. RIAA RPF Paras. 58, 105; Petition at 43. They 
also object to the Panel's constant reference to revenues generated 
from the distribution and reproduction rights and its alleged lack of 
consideration of CRT precedent. Petition at 43-44.
    In support of the Panel's evaluation, the Services note that RIAA 
failed to introduce any evidence concerning the impact a low rate would 
have on the record companies and performing artists, in direct contrast 
to the abundance of financial information submitted by the Services in 
support of their assertion that a high rate could devastate the 
industry. Reply to Petition at 28.
    While RIAA correctly states that the Panel considered the record 
companies' revenues generated from the exercise of other rights granted 
to them under the Copyright Act, the Panel's purpose was merely to 
demonstrate the financial health of the industries. The Panel never 
implied that the record companies should receive anything less than 
reasonable compensation under the DPRSRA, nor that their revenues from 
the exercise of the distribution and reproduction rights are meant to 
compensate them for the use of their creative works under the new 
statutory license. Rather, it determined that a reasonable rate for the 
digital performance right should be set at a level to allow the three 
companies currently doing business to continue to do so. This balance 
in favor of the Services supports both the statutory objective to 
consider the impact on the industries and Congressional intent not to 
hamper the arrival of new technologies. S. Rep. No. 104-128, at 15-16 
(1995). The law requires the Panel, and ultimately the Librarian, to 
set a reasonable rate that minimizes the disruptive impact on the 
industry. It does not require that the rate insure the survival of 
every company. See 115 Rate Adjustment Proceeding, 46 FR 10486 (1981) 
(``We conclude that while the Tribunal must seek to minimize disruptive 
impacts, in trying to set a rate that provides a fair return it is not 
required to avoid all impacts whatsoever'').
    The Register acknowledges RIAA's uneasiness with the possibility 
that the rate which is ultimately adopted may have precedential value 
for their negotiations with other digital services, but such concern is 
misplaced. The rate under consideration applies only to the non-
interactive digital audio subscription services, provided, of

[[Page 25409]]

course, that they are eligible under the law and comply with all legal 
requirements. See 17 U.S.C. 114(d)(2). Congress, fully recognizing the 
threat that interactive services pose to the record companies, crafted 
the law so that they were ineligible for the compulsory license. The 
result of this decision is that record companies have an opportunity to 
negotiate an appropriate marketplace rate for a digital performance 
license with these services.

    Interactive services, which allow listeners to receive sound 
recordings ``on-demand,'' pose the greatest threat to traditional 
record sales, as to which sound recording copyright owners (of sound 
recordings) must have the right to negotiate the terms of licenses 
granted to interactive services.

S. Rep. No. 104-128, at 24 (1995). Congress also included provisions in 
the DPRSRA to establish different rates for different types of digital 
audio subscription services. Section 114(f)(1) states that ``(s)uch 
terms and rates shall distinguish among the different types of digital 
audio transmissions then in operation.'' This language gives the Panel 
and the parties broad discretion in setting rates for different types 
of digital audio services, when such distinction is warranted. Nor must 
the record companies accept the final rate from this determination for 
a new type of digital audio service which emerges before the next 
regularly scheduled rate adjustment proceeding. The law expressly 
allows for another rate-setting proceeding upon the filing of a 
petition. 17 U.S.C. 114(f)(4)(A)(i). Together, these provisions provide 
an opportunity to the record companies to make their case for a higher 
rate, where circumstances support such a determination.
    In addition, as the market conditions change and the industry shows 
significant growth and profitability, another Panel will have an 
opportunity to make adjustments to the rate, and may well find that the 
changed circumstances favor an upward adjustment. In any event, the 
Register must make her recommendation based on the evidence in the 
current record before the Panel, which supports the Panel's 
determination that the best way to minimize the disruptive impact on 
the structure of the industries is to adopt a rate from the low range 
of possibilities. Report para. 198(D).
    D. To afford the copyright owner a fair return for his creative 
work and the copyright user a fair income under existing economic 
conditions. (17 U.S.C. 801(b)(1)(B)).
    Usually this balance is struck in the marketplace through arms-
length negotiations; and even in the case of a statutory license, 
Congress encourages interested parties to negotiate among themselves 
and set a reasonable rate which inevitably affords fair compensation to 
all parties. 17 U.S.C. 114(f)(1), (4); 115(c)(3); 116(b); 118(b); and 
119(c). A statutory rate, however, need not mirror a freely negotiated 
marketplace rate--and rarely does--because it is a mechanism whereby 
Congress implements policy considerations which are not normally part 
of the calculus of a marketplace rate. See 115 Rate Adjustment 
Proceeding, 46 FR 10466 (1981) (determining that the mechanical license 
regulates the price of music to lower the entry barriers for potential 
users of that music).
    The creation of the digital performance right embodied similar 
considerations. It affords the copyright owners some control over the 
distribution of their creative works through digital transmissions, 
then balances the owners' right to compensation against the users' need 
for access to the works at a price that would not hamper their growth.
    In the current proceeding, the Panel considered proposed 
marketplace benchmarks, including all the economic data, and weighed 
the record evidence in light of the statutory objectives. This process 
is structured so that it affords the copyright owners reasonable 
compensation and the users a fair income--the purpose of the second 
statutory objective. See 17 U.S.C. 801(b)(1)(B). Accordingly, a 
recommended rate so calculated achieves this final statutory objective, 
in that it reflects the balance between fair compensation for the 
owners and a fair return to the users. As fully discussed above, the 
Register supports the Panel's methodology in reaching its determination 
(although she rejects as arbitrary the Panel's application of that 
methodology in some respects) and has adopted the Panel's overall 
approach in making her recommendation to the Librarian.

d. The Register's Recommended Rate

    Rate setting is not a precise science. National Cable Television 
Assoc. Inc., 724 F.2d 176, 182 (D.C. Cir. 1983). (``Ratemaking 
generally `is an intensely practical affair.' The Tribunal's work 
particularly, in both ratemaking and royalty distributions, necessarily 
involves estimates and approximations. There has never been any 
pretense that the CRT's rulings rest on precise mathematical 
calculations; it suffices that they lie within a `zone of 
reasonableness' ''). It requires evaluating the marketplace points of 
reference and tempering the choice of any proposed rate with the policy 
considerations underpinning the objectives of Congress in creating the 
license. Because this process requires the consideration of numerous 
factors, the CARPs, as the Tribunal before them, have considerable 
discretion in setting rates designed to achieve specific statutory 
objectives. See RIAA v. CRT, 662 F.2d at 9 (``To the extent that the 
statutory objectives determine a range of reasonable royalty rates that 
would serve all these objectives adequately but to differing degrees, 
the Tribunal is free to choose among those rates, and courts are 
without authority to set aside the particular rate chosen by the 
Tribunal if it lies within a `zone of reasonableness' '').
    Discretion in setting rates, however, assumes that the underlying 
rationale for making a determination is sound--a finding which the 
Register could not make in this proceeding because the Panel's undue 
reliance on the rate in the DCR license agreement, and its subsequent 
manipulation of the license fee, were arbitrary actions. See Permian 
Basin Area Rate Cases, 390 U.S. 747 (1968) (Rate setting agency allowed 
to use a variety of regulatory methods in setting rates provided that 
the result is not arbitrary or unreasonable). Consequently, the 
Register recommended that the Librarian reject the Panel's 
determination, which he did, and set a new rate.
    In formulating her recommendation as to the appropriate rate for 
the digital performance license, the Register, like the Panel, 
considered the relevant marketplace points of reference offered into 
evidence.<SUP>33</SUP> These reference points guided the Register in 
her task of setting a reasonable rate for the performance of digital 
sound recordings. But unlike the Panel, the Register gave more 
consideration to the rates paid for the performance right in the 
musical compositions, because these rates represent an actual 
marketplace value for a public performance right in the digital arena, 
albeit not the digital performance right in sound recordings. The 
Register took this approach after finding that the DCR negotiated 
license fee could not reflect accurately the

[[Page 25410]]

marketplace value of the digital performance right since no such legal 
right existed at the time the rate was negotiated, and the negotiating 
parties were unwilling to enter a licensing agreement for the digital 
performance right absent a partnership agreement.
---------------------------------------------------------------------------

    \33\ The values of the relevant marketplace reference points, 
the DCR negotiated license fee and the license fee for the 
performance of the musical works, are subject to a protective order, 
and hence, their numerical values have been omitted. Nevertheless, 
the values of the performance rights embodied in these licenses 
figure prominently in the determination of the value for the digital 
performance right in sound recordings. In fact, the sum of these 
license fees establishes the outer boundary of the ``zone of 
reasonableness'' for this proceeding.
---------------------------------------------------------------------------

    Nevertheless, the Register did take into account the negotiated 
value of the digital performance right in the DCR license in making her 
determination that the statutory rate should be less than the value of 
the performance rights of the musical compositions. This determination 
followed from a review of the evidence on the relative value of the 
sound recording component and the musical works component of a 
phonorecord, which failed to support the record industry's assertion 
that the marketplace valued the sound recording component more than the 
musical works component. This being so, the Register evaluated the only 
other relevant marketplace point of reference, the negotiated DCR 
license fee. Because this fee is considerably lower than the total 
value of the marketplace license fees which each Service pays for the 
right to publicly perform the musical works, and while not a true 
marker for the value of the digital performance right, it supports a 
determination that the value of the performance right in the sound 
recording does not exceed the value of the performance right in the 
musical works.
    In addition to these factors, the Register considered the statutory 
criteria and Congress' intent in creating the license. Unlike the 
Panel, which found that all four factors support a low rate, the 
Register found that the copyright owners did more ``[t]o maximize the 
availability of creative works to the public,'' see 17 U.S.C. 
801(b)(1)(A), and should receive fair compensation for their 
contributions in this area. However, the three remaining factors, 
especially the fourth factor, which requires that the rate be set 
``[t]o minimize any disruptive impact on the structure of the 
industries involved,'' see 17 U.S.C. 801(b)(1)(D), compels the Register 
to consider the economic health of the digital audio transmission 
industry.
    The evidence clearly shows that the Services have been facing an 
uphill battle in their struggle to achieve profitability. At this time, 
the digital audio industry is still struggling to create a sustainable 
subscriber base, and as yet, no digital audio transmission service has 
shown a profit nor does any service expect to reach profitability in 
the near future. Unfortunately, the actual state of financial health 
within the industry is difficult to ascertain from the projected 
budgets put forward by the Services. Nevertheless, the 5% rate proposed 
by the Panel did not draw an objection from the Services, indicating a 
reasonable state of financial health to absorb at least a rate set at 
this level.
    For the foregoing reasons, the Register recommends a rate that will 
not harm the industry at this critical point in its development and 
finds that a 6.5% rate achieves this aim and meets all other statutory 
objectives. This rate reflects the deference the Register accorded the 
value of the performance right in the musical works, the consideration 
of the financial health of the industry, and the recognition that 
copyright owners contribute the lion share's to the creation of new 
works for the public's enjoyment.

e. Terms

    On June 2, 1997, the Services submitted general comments concerning 
proposed terms and conditions for the digital performance license 
pursuant to the March 28, 1997, Order of the Copyright Office. They 
later proposed specific terms concerning how the Services would make 
payment, how often they would pay, and procedures for verifying the 
accuracy of those payments, including terms on confidentiality, 
recordkeeping, and audits. Services PF Paras.  122-128; 284-304. 
Included in their submissions were proposed terms establishing a 
payment schedule for the distribution of royalties to the featured 
artists and the nonfeatured musicians and vocalists. Services PF Paras.  
287-289. The Panel refused to adopt these terms because the Services 
failed to present any evidence or testimony to support their proposal, 
but more importantly, because the Panel found that ``the issue of the 
timing of payments from the RIAA Collective to artists and other 
performers is not within the scope of this proceeding.'' Report at 56 
n.21.
    RIAA made similar proposals on how to administer the royalty 
payments, but offered two additional considerations, a minimum fee 
``equivalent to the rate adopted in this proceeding'' and a late fee 
for untimely payments. RIAA PF Paras.  125-160. The Panel rejected the 
proposal to impose a minimum fee, see discussion supra, but accepted 
the RIAA proposal to impose a 1.5% late fee.
    The Register supports and adopts the Panel's decision to reject the 
Services' proposed terms concerning further distribution of royalties 
to certain copyright owners by RIAA on the grounds that no evidence was 
introduced in support of the terms. Because this is a sufficient ground 
on which to reject the Services' proposed term, the Register need not 
address the Panel's determination that it lacked the authority to 
consider a payment schedule for the performing artists. The Register 
also need not address the Panel's rejection of the minimum fee because 
no party chose to challenge the Panel's decision. See n. 7, supra.
The parties' reactions to the terms adopted by the Panel
    The Services did not file a post-panel motion to modify or set 
aside the Panel's determination, thereby signaling their acceptance of 
the Panel's resolution of any conflict between the parties concerning 
the terms. However, RIAA has raised two key items for further review by 
the Librarian: The adoption of a term which defines when copyright 
infringement occurs for purposes of the statutory digital performance 
license and the creation of a payment schedule that allows the Services 
to spread out their payment for the performances made between February 
1996, the effective date of the Act, and November 1997, the month the 
Panel filed its report with the Librarian of Congress.<SUP>34</SUP> 
Petition at 7 n. 1.
---------------------------------------------------------------------------

    \34\ RIAA did not object to the Panel's refusal to grant its 
request for a minimum fee in its petition, nor does the Register 
find any reason to question the Panel's determination. As discussed 
supra, the Register finds the Panel's disposition on this issue to 
be well reasoned and supported by the evidence.
---------------------------------------------------------------------------

The Panel's adoption of two of its terms was either arbitrary or 
contrary to law
    The Register has determined that the Panel had no authority to set 
terms which attempt to delineate the scope of copyright infringement 
for the digital performance license, or alter a payment schedule 
already set by law. See Report Paras. 187-189, 206(a), (b).
    1. Payment of arrears. The Panel adopted a term which allowed the 
Services to make back payments over a 30-month period for use of the 
sound recordings between February 1, 1996, and the end of the month in 
which the royalty rate is set and to delay the first payment for six 
months. Report Paras. 187, 206(a). The Register has determined, 
however, that adoption of this term is contrary to law.
    Section 114(f)(5)(B) of the Copyright Act states that ``(a)ny 
royalty payments in arrears shall be made on or before the twentieth 
day of the month next succeeding the month in which the royalty fees 
are set.'' The ``arrears'' referenced in the statute refers to the 
copyright liability that accrued to the Services for those performances 
made since February 1, 1996, the effective date of the Act, and the end 
of the month in which the royalty rate is set.

[[Page 25411]]

In spite of the express statutory language, the Panel fashioned a 
payment schedule to ease the burden on the Services in meeting this 
obligation.
    The Panel found support for its action in the 1980 jukebox rate 
adjustment proceeding, in which the CRT raised the rate from $8 to $50, 
but did so in a progressive fashion. Report para. 186. The 
determination required the jukebox operators to make the first 
increased payment of $25 per jukebox per year on January 1, 1982, and a 
second $25 annual payment the following year. The CRT did not require 
the full $50 annual rate to be paid until January 1, 1984, 
approximately three years after setting the rate. 46 FR 884, 888, 890 
(1981). The Tribunal adopted the phase-in payment schedule relying on 
its duty to set rates in accordance with the statutory objectives. It 
found that the gradual increase in payments furthered the objective 
concerned with minimizing the disruptive impact on the industries. Id. 
at 889. The Panel relied upon this CRT decision in adopting its phase-
in program for payment of the arrears over a 30-month period.
    The Services embrace the Panel's reliance on past CRT precedent for 
the inclusion of the phase-in payment term and claim that RIAA also 
agreed to allow the Services to make the ``back payments'' over a 
period of time. Reply to Petition at 14 n. 5. This assertion, however, 
is inaccurate. RIAA agreed that a phase-in schedule would be 
appropriate for the minimum fee, but never posited such a payment 
schedule for the arrears. See Tr. 2829 (RIAA closing argument). By 
comparing RIAA's statement on the proposal for making payments of a 
minimal fee,

    The recording industry proposes that the minimum fee be phased 
in to help minimize any disruptive effect from the fact that, for 
the first time, the services are going to be paying a fair fee--in 
fact, any fee at all for the performance of sound recordings,

    Id. at 2829, see also RIAA PF Paras. 150-152, with its statement 
concerning the timing of the payment of arrears,

    In terms of the timing of the back payment, the statute leaves 
absolutely no question as to when the back payment from the services 
is due for the period from the Act's effective date through the date 
on which the Panel issues its decision.
    Section 114(f)(5)(B) says that ``any royalty payment in arrears 
shall be made on or before the 20th day of the month next succeeding 
the month in which the royalty fees are set.''

    Id. at 2829-2830, see also RIAA PF para. 157, it is absolutely 
clear that RIAA never agreed to a payment scheme for the arrears that 
would allow the Services to make partial payments over a 30-month 
period.
    In another attempt to support the Panel's conclusion, the Services 
construe the statutory provision broadly and argue that arrears refers 
to ``any royalty payment in arrears'' and ``does not specifically cover 
the back payment for the extended period between the 1995 Act's 
February 1, 1996, effective date and the time the Panel sets the 
performance rate.'' Services RF para. 157. This assertion, however, is 
inconsistent with the legislative history and the plain language of the 
statute.
    Thus, the Panel had no authority to create a graded payment 
schedule for the payment of the arrears because the statute expressly 
stated when payment was to occur. Section 114(f)(5)(B) states, without 
qualification, that ``[a]ny royalty payments in arrears shall be made 
on or before the twentieth day of the month next succeeding the month 
in which the royalty fees are set.'' (emphasis added). It is a well-
established principle that, in interpreting the meaning of a statute, 
the language of the law is the best evidence of its meaning. United 
States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989); Norman 
S. Singer, Sutherland Statutory Construction sec. 46.01 (5th ed. 1992 
rev.) Because the statutory language is clear on its face, the Register 
finds that the Panel's and the Services' reliance on the CRT 1980 
jukebox decision is arbitrary and contrary to well-established 
principles of law. And even if the statutory language were ambiguous, 
the legislative history supports the Register's and RIAA's 
interpretation of section 114(f)(5)(B).<SUP>35</SUP>
---------------------------------------------------------------------------

    \35\ S. Rep. No. 104-128, at 30 (1995) (``If the royalty fees 
have not been set at the time of performance, the performing entity 
must agree to pay the royalty fee to be determined under this 
subsection by the twentieth day of the month following the month in 
which the rates are set'').
---------------------------------------------------------------------------

    Because the Panel's action exceeded its authority, the Register 
recommends that the Librarian reject the proposed term because its 
adoption would be contrary to law.
    2. Copyright infringement. The Panel adopted a term which stated 
that ``[i]f a Service fails to make timely payments, it will be subject 
to liability for copyright infringement. Such liability will only come 
about, however, for knowing and willful acts which materially breach 
the statutory license terms.'' Report para. 206(b). The Register has 
determined that this term is contrary to law.
    RIAA contends that the Panel ``usurped the authority of Article III 
courts by attempting to define the circumstances where the Services are 
liable for copyright infringement.'' Petition at 7 n.1. In response, 
the Services argue that the DPRSRA supports the Panel's suggestion that 
minor technical violations should not result in an infringement action. 
Services Reply to Petition at 14 n.5. Specifically, the Services point 
to section 114(j)(7)(B) which limits complement to the performance of 
sound recordings from a single album, which Congress included ``[t]o 
avoid imposing liability for programming that unintentionally may 
exceed the complement.'' S. Rep. No. 104-128, at 35 (1995).
    The Register acknowledges that Congress made provisions to protect 
users from copyright liability for programming that unintentionally 
exceeds the complement, see 17 U.S.C. 114(j)(7), but she finds it 
impermissible to expand a particular provision of the copyright law 
which limits copyright liability under one set of circumstances to 
include additional limitations not contemplated by Congress. Fame 
Publishing Co. v. Alabama Custom Tape, Inc., 507 F.2d 667, 670 (5th 
Cir.) cert. denied, 423 U.S. 841 (1975) (``We begin by noting that the 
compulsory license provision is a limited exception to the copyright 
holder's exclusive right to decide who shall make use of his 
composition. As such, it must be construed narrowly, lest the exception 
destroy, rather than prove, the rule. Thus we should neither expand the 
scope of the compulsory license provision beyond what Congress intended 
in 1909, nor interpret it in such a way as to frustrate that 
purpose'').<SUP>36</SUP>
---------------------------------------------------------------------------

    \36\ Congress defined the scope of the digital performance right 
granted to the copyright owner and under what circumstances a 
digital audio service infringes that right. See, e.g., 17 U.S.C. 114 
(d) and (e)(5).
---------------------------------------------------------------------------

    But more importantly, in examining the legislative history, it is 
clear that Congress meant for the CARP to have limited authority in 
adopting reasonable terms.

    By terms, the Committee means generally such details as how 
payments are to be made, when, and other accounting matters (such as 
are prescribed in section 115). In addition, the Librarian is to 
establish related terms under section 114(f)(2). Should additional 
terms be necessary to effectively implement the statutory license, 
the parties may negotiate such provisions or the CARPs may prescribe 
them.

S. Rep. No. 104-128, at 30 (1995). This language clearly indicates that 
the CARP had authority to set reasonable terms only so far as those 
terms insured the smooth administration of the license. There is no 
indication in the statutory language or in the legislative history that 
the scope of the terms should go

[[Page 25412]]

beyond the creation of a workable administrative system and reach 
substantive issues, such as defining the scope of copyright 
infringement for those availing themselves of the statutory license.
    Congress carefully delineated the scope of the digital performance 
right and the limitations on that right within the provisions of the 
statute. Section 114(d), entitled ``Limitations on Exclusive Right,'' 
states with specificity when a performance by means of a digital audio 
transmissions is not an infringement, just as section 114(f)(5) defines 
when a public performance of a sound recording by means of a nonexempt 
subscription digital transmission is not an infringement. For the Panel 
to fashion a term further delineating the issue of copyright 
infringement when Congress has already acted is an improper exercise of 
authority beyond that granted under the statute.
    Accordingly, the Register finds that the Panel had no authority to 
set a term construing the meaning of copyright infringement for 
purposes of section 114. See Report Paras. 188, 206(b). Because the 
Panel's action exceeded its authority, the Register recommends that the 
Librarian reject the proposed term because its adoption would be 
contrary to law.

f. Other Issues

    1. Effective date. Section 114(f)(5)(B) states that payments in 
arrears for the performance of sound recordings prior to the setting of 
a royalty rate are due on a date certain in the month following the 
month in which the rate is set. Both the Panel and RIAA assume that the 
``date the royalty rate is set'' is the date the Panel submits its 
report to the Librarian of Congress. See Report para. 186; Petition at 
7 n.1. The Register disagrees with this assessment.
    Section 802(g) governs judicial review of the Librarian's decision 
with respect to CARP determinations. The section allows an aggrieved 
party 30 days to file an appeal with the United States Court of Appeals 
for the District of Columbia Circuit, but does not relieve a party of 
his or her obligation to make royalty payments during the pendency of 
the appeal. In the event that no appeal is taken, the section states 
that ``the decision of the Librarian is final, and the royalty fee * * 
* shall take effect as set forth in the decision.'' 17 U.S.C. 802(g). 
Neither section 114 nor chapter 8 makes further reference to the 
possible effective date of royalty rates.
    As discussed in an earlier order setting a rate for the satellite 
compulsory license, 17 U.S.C. 119, the Register interprets the decision 
referenced in section 802(g) ``to mean the decision of the Librarian, 
and not the decision of the CARP, since section 802(g) only refers to 
the decision of the Librarian. Consequently, the Register concludes 
that only the Librarian of Congress has the authority to set the 
effective dates of the royalty rates in this proceeding.'' Rate 
Adjustment for the Satellite Carrier Compulsory License, 62 FR 55754 
(1997). See also RIAA v. CRT, 662 F.2d at 14 (``When the statute 
authorizing agency action fails to specify a timetable for 
effectiveness of decisions, the agency normally retains considerable 
discretion to choose an effective date'') (footnote omitted). This 
reasoning applies equally to the current proceeding, since no other 
guidance for setting the effective date is to be found in the statute 
or the legislative history.
    The Register has pondered the question of an appropriate effective 
date and believes that the Panel's concern with minimizing the 
disruptive impact on the structure of the industries involved was well 
founded. See discussion supra concerning the economic health of the 
Services. Consequently, the Register proposes an effective date of June 
1, 1998, which would require the Services to make full payment of the 
arrears on July 20, 1998, in addition to the payment for the month of 
June 1998, with subsequent payments to RIAA on the 20th day of each 
subsequent month. This date provides the Services with a measured 
amount of time to provide for any necessary adjustments in their 
business operations to meet their copyright obligations.
    The Tribunal took a similar course when it set the effective date 
for implementing the rate increase for making and distributing 
phonorecords approximately six months after publication of its final 
rule. Section 115 Rate Adjustment Proceeding, 46 FR 10486 (1981). The 
Tribunal chose not to implement the rate change immediately in order to 
minimize the effect of the upward adjustment on the copyright users. 
The United States Court of Appeals for the District of Columbia Circuit 
upheld the Tribunal's decision to postpone the effective date because:

    The Tribunal's opinion demonstrates its concern ``to minimize 
disruptive impacts'' on the recording industry, and its view that 
the effective date of a royalty adjustment should be arranged so as 
to be ``less disruptive to the industries.'' Although the Tribunal 
concluded that a single increase to the full four-cent rate would 
not be unduly disruptive, it was within the Tribunal's discretion to 
give the industry adequate lead time to prepare for the increase.

RIAA v. CRT, 662 F.2d at 14 (citations omitted).
    2. Value of an individual performance of a sound recording.
    The Register notes that the Panel stopped prematurely in its 
consideration of the value of the public performance of a sound 
recording. Its entire inquiry focused on the value of the ``blanket 
license'' for the right to perform the sound recording, without once 
considering the value of the individual performance--a value which must 
be established in order for the collecting entity to perform its 
function not only to collect, but also to distribute royalties. 
Consequently, the Register has made a determination that each 
performance of each sound recording is of equal value and has included 
a term that incorporates this determination.
    To do otherwise requires the parties to establish criteria for 
establishing differential values for individual sound recordings or 
various categories of sound recordings. Neither the Services nor RIAA 
proposed any methodology for assigning different values to different 
sound recordings. In the absence of an alternative method for assessing 
the value of the performance of the sound recording, the Register has 
no alternative but to find that the value of each performance of a 
sound recording has equal value. Furthermore, the structure of the 
statute contemplates direct payment of royalty fees to individual 
copyright owners when negotiated license agreements exist between one 
or more copyright owner and one or more digital audio service. To 
accommodate this structure in the absence of any statutory language or 
legislative intent to the contrary, each performance of each sound 
recording must be afforded equal value.
    This determination does not alter the statutory provision that 
specifies how the copyright owner of the right to publicly perform the 
sound recording must allocate the statutory fees among the recording 
artists. See 17 U.S.C. 114(f)(2).
    3. Audit of the designated collective. Although the membership of 
the collective represented by RIAA includes over 275 record labels 
which create more than 90 percent of all legitimate sound recordings 
sold in the United States, it does not represent the record companies 
responsible for the creation of the remaining 10% of the sound 
recordings. Report para. 20. Nevertheless, the Panel found, and the 
Register concurs, that the parties' suggestion to designate a single 
entity to collect and to distribute the royalty fees creates an 
efficient administrative mechanism. Report para. 184.

[[Page 25413]]

    It is common practice, however, for the government body making such 
designations to implement safeguards to monitor the functions of the 
collective.<SUP>37</SUP> To this end, the Register recommends new terms 
that afford the copyright holders a right to audit the collective's 
practices in handling the royalty fees. The Register takes this step to 
insure copyright holders access to the records of the organization 
charged with the fiduciary responsibility of making an equitable 
distribution among those entitled to receive a portion of the funds, 
while at the same time preserving the confidentiality of the 
organization's business records. These terms mirror those formulated by 
the parties and adopted by the Panel which allow the collective to 
audit the business records of the Services to insure proper payment of 
the royalties.
---------------------------------------------------------------------------

    \37\ A government's general policy toward the regulation of 
collective administration should be to limit government intervention 
to only ``that which is necessary to facilitate the effective 
operations of the collective administration organization, consistent 
with the private character of the rights involved, while checking 
possible abuses by that collective in the least intrusive manner 
possible within'' the overall context of the society involved. David 
Sinacore-Guinn, Collective Administration of Copyrights and 
Neighboring Rights, 544 (1993).
---------------------------------------------------------------------------

    4. Deduction of administrative costs. Neither the parties nor the 
Panel gave any consideration to the manner in which the collecting 
entity would deduct from payments to copyright owners its costs of 
administering the funds it receives and disburses. Nevertheless, the 
Panel should have addressed this key term of the compulsory license. 
Therefore, the Register finds it necessary to establish an additional 
term that permits the collecting entity to deduct from the royalties it 
pays to copyright owners the costs it incurs in administering the 
funds, so long as the costs deducted are reasonable and are no more 
than the actual costs incurred by the collecting entity.
    5. Unknown copyright owners. The digital audio services will pay 
royalties on all sound recording performances without regard to the 
further disbursement of these fees to the numerous copyright holders. 
The collective will have little difficulty in identifying and locating 
the overwhelming majority of the copyright holders entitled to receive 
a portion of the fees, since the membership of the collective 
represents the interests of the copyright holders in over 90% of all 
sound recordings. Problems may arise, however, as RIAA attempts to 
identify and locate the copyright holders to the remaining 10% of the 
sound recordings. In anticipation of the likelihood that RIAA will not 
be able to locate all copyright holders, the Register recommends the 
adoption of a term that segregates the fees for unknown copyright 
owners into a separate trust account for future distribution to the 
rightful owner, or in the event that the owner is not found, allows the 
collective to use the funds after a period of three years, see 17 
U.S.C. 507(b), to offset its administrative costs associated only with 
the collection and distribution of royalty fees collected under the 
statutory license.
    6. Rates for other types of digital audio services. The rates and 
terms announced in this notice apply to DCR, DMX, and Muzak, the three 
digital audio transmission services participating in this proceeding, 
and to any other digital audio transmission service that avails itself 
of the compulsory license, provided that the service is of the same 
type. The Register raises this point to avoid any confusion over the 
Panel's statement which implies that the rates and terms set in this 
proceeding ``shall be binding on all copyright owners of sound 
recordings and entities performing sound recording[s].'' Report para. 
1, citing 17 U.S.C. 114(f)(2). A general provision, however, must be 
read in conjunction with more specific statutory language; in this 
case, section 114(f)(4)(A), which provides for additional rate 
adjustment proceedings upon petition from any copyright owner or entity 
performing sound recordings when a new type of digital audio 
transmission becomes or is about to become operational.

VI. Conclusion

    In considering the evidence in the record, the contentions of the 
parties, and the statutory objectives, the Register of Copyrights 
recommends that the Librarian adopt a statutory rate for the digital 
performance of sound recordings, pursuant to 17 U.S.C. 114, of 6.5% of 
gross revenues from subscribers residing within the United States.
    In addition, the Register recommends that the Librarian adopt the 
reasonable terms propounded by the Panel except for those terms 
concerning the payment schedule for arrears and potential limitations 
on the scope of copyright infringement. The Register also recommends 
setting June 1, 1998, as the effective date for implementing the new 
rate and terms in order to ease the burden on each Service on meeting 
its initial obligations under the statutory license.

VII. The Order of the Librarian of Congress

    Having duly considered the recommendations of the Register of 
Copyrights regarding the Report of the Copyright Arbitration Royalty 
Panel in the matter to set reasonable terms and rates for the digital 
performance right in sound recordings, 17 U.S.C. 114, the Librarian of 
Congress fully endorses and adopts her recommendation to set the rate 
for the statutory license at 6.5% of gross revenues from U.S. 
residential subscribers. This rate shall apply to those digital audio 
services represented in this proceeding and any other eligible digital 
audio service of the same type that subsequently enters the market and 
makes use of the statutory license. The Librarian of Congress also 
adopts the Register's recommendation to reject the terms concerning 
potential limits on what constitutes copyright infringement and the 
proposed schedule for the payment of the arrears.
    For the reasons stated in the Register's recommendation, the 
Librarian is exercising his authority under 17 U.S.C. 802(f) and is 
issuing this order which adopts new Copyright Office regulations 
setting reasonable terms and rates for the digital performance right in 
sound recordings.

List of Subjects in 37 CFR Part 260

    Copyright, Digital Audio Transmissions, Performance Right, Sound 
Recordings

Final Regulation

    In consideration of the foregoing, part 260 of 37 CFR is added to 
read as follows:

PART 260--USE OF SOUND RECORDINGS IN A DIGITAL PERFORMANCE

Sec.
260.1  General.
260.2  Royalty fees for the digital performance of sound recordings.
260.3  Terms for making payment of royalty fees.
260.4  Confidential information and statements of account.
260.5  Verification of statements of account.
260.6  Verification of royalty payments.
260.7  Unknown copyright owners.

    Authority: 17 U.S.C. 114, 801(b)(1).


Sec. 260.1  General.

    (a) This part 260 establishes terms and rates of royalty payments 
for the public performance of sound recordings by nonexempt 
subscription digital transmission services in accordance with the 
provisions of 17 U.S.C. 114 and 801(b)(1).

[[Page 25414]]

    (b) Upon compliance with 17 U.S.C. 114 and the terms and rates of 
this part, a nonexempt subscription digital transmission service may 
engage in the activities set forth in 17 U.S.C. 114.


Sec. 260.2  Royalty fees for the digital performance of sound 
recordings.

    (a) Commencing June 1, 1998, the royalty fee for the digital 
performance of sound recordings by nonexempt subscription digital 
services shall be 6.5% of gross revenues resulting from residential 
services in the United States.
    (b) A nonexempt subscription digital transmission service (the 
``Licensee'') shall pay a late fee of 1.5% per month, or the highest 
lawful rate, whichever is lower, for any payment received after the due 
date. Late fees shall accrue from the due date until payment is 
received.
    (c)(1) For purposes of this section, gross revenues shall mean all 
monies derived from the operation of the programming service of the 
Licensee and shall be comprised of the following:
    (i) Monies received by Licensee from Licensee's carriers and 
directly from residential U.S. subscribers for Licensee's programming 
service;
    (ii) Licensee's advertising revenues (as billed), or other monies 
received from sponsors if any, less advertising agency commissions not 
to exceed 15% of those fees incurred to recognized advertising agency 
not owned or controlled by Licensee;
    (iii) Monies received for the provision of time on the Programming 
Service to any third party;
    (iv) Monies received from the sale of time to providers of paid 
programming such as infomercials;
    (v) Where merchandise or anything or service of value is received 
by licensee in lieu of cash consideration for the use of Licensee's 
programming service, the fair market value thereof or Licensee's 
prevailing published rate, whichever is less;
    (vi) Monies or other consideration received by Licensee from 
Licensee's carriers, but not including monies received by Licensee's 
carriers from others and not accounted for by Licensee's carriers to 
Licensee, for the provision of hardware by anyone and used in 
connection with the Programming Service;
    (vii) Monies or other consideration received for any references to 
or inclusion of any product or service on the programming service; and
    (viii) Bad debts recovered regarding paragraphs (c)(1) (i) through 
(vii) of this section.
    (2)Gross revenues shall include such payments as are in paragraphs 
(c)(1) (i) through (viii) of this section to which Licensee is entitled 
but which are paid to a parent, subsidiary, division, or affiliate of 
Licensee, in lieu of payment to Licensee but not including payments to 
Licensee's carriers for the programming service. Licensee shall be 
allowed a deduction from ``gross revenues'' as defined in paragraph 
(c)(1) of this section for affiliate revenue returned during the 
reporting period and for bad debts actually written off during 
reporting period.
    (d) During any given payment period, the value of each performance 
of each digital sound recording shall be the same.


Sec. 260.3  Terms for making payment of royalty fees.

    (a) All royalty payments shall be made to a designated agent(s), to 
be determined by the parties through voluntary license agreements or by 
a duly appointed Copyright Arbitration Royalty Panel pursuant to the 
procedures set forth in subchapter B of 37 CFR, part 251.
    (b) Payment shall be made on the twentieth day after the end of 
each month for that month, commencing with the month succeeding the 
month in which the royalty fees are set.
    (c) The agent designated to receive the royalty payments and the 
statements of account shall have the responsibility of making further 
distribution of these fees to those parties entitled to receive such 
payment according to the provisions set forth at 17 U.S.C. 114(g).
    (d) The designated agent may deduct reasonable costs incurred in 
the administration of the distribution of the royalties, so long as the 
reasonable costs do not exceed the actual costs incurred by the 
collecting entity.
    (e) Commencing June 1, 1998, and until such time as a new 
designation is made, the Recording Industry Association of America, 
Inc. shall be the agent receiving royalty payments and statements of 
accounts.


Sec. 260.4  Confidential information and statements of account.

    (a) For purposes of this part, confidential information shall 
include statements of account and any information pertaining to the 
statements of account designated as confidential by the nonexempt 
subscription digital transmission service filing the statement. 
Confidential information shall also include any information so 
designated in a confidentiality agreement which has been duly executed 
between a nonexempt subscription digital transmission service and an 
interested party, or between one or more interested parties; Provided 
that all such information shall be made available, for the verification 
proceedings provided for in Secs. 260.5 and 260.6 of this part.
    (b) Nonexempt subscription digital transmission services shall 
submit monthly statements of account on a form provided by the agent 
designated to collect such forms and the monthly royalty payments.
    (c) A statement of account shall include only such information as 
is necessary to verify the accompanying royalty payment. Additional 
information beyond that which is sufficient to verify the calculation 
of the royalty fees shall not be included on the statement of account.
    (d) Access to the confidential information pertaining to the 
royalty payments shall be limited to:
    (1) Those employees of the designated agent who are not also 
employees or officers of a sound recording copyright owner or 
performing artist, and who, for the purpose of performing their 
assigned duties during the ordinary course of business, require access 
to the records; and
    (2) An independent and qualified auditor who is not an employee or 
officer of a sound recording copyright owner or performing artist, but 
is authorized to act on behalf of the interested copyright owners with 
respect to the verification of the royalty payments.
    (e) The designated agent shall implement procedures to safeguard 
all confidential financial and business information, including but not 
limited to royalty payments, submitted as part of the statements of 
account. Confidential information shall be maintained in locked files.
    (f) Books and records relating to the payment of the license fees 
shall be kept in accordance with generally accepted accounting 
principles for a period of three years. These records shall include, 
but are not limited to, the statements of account, records documenting 
an interested party's share of the royalty fees, and the records 
pertaining to the administration of the collection process and the 
further distribution of the royalty fees to those interested parties 
entitled to receive such fees.


Sec. 260.5  Verification of statements of account.

    (a) General. This section prescribes general rules pertaining to 
the verification of the statements of account by interested parties 
according to terms promulgated by a duly appointed copyright 
arbitration royalty panel, under its authority to set reasonable terms 
and rates pursuant to 17 U.S.C.

[[Page 25415]]

114 and 801(b)(1), and the Librarian of Congress under his authority 
pursuant to 17 U.S.C. 802(f).
    (b) Frequency of verification. Interested parties may conduct a 
single audit of a nonexempt subscription digital transmission service 
during any given calendar year.
    (c) Notice of intent to audit. Interested parties must submit a 
notice of intent to audit a particular service with the Copyright 
Office, which shall publish in the Federal Register a notice announcing 
the receipt of the notice of intent to audit within 30 days of the 
filing of the interested parties' notice. Such notification of intent 
to audit shall also be served at the same time on the party to be 
audited.
    (d) Retention of records. The party requesting the verification 
procedure shall retain the report of the verification for a period of 
three years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent auditor, shall serve as an acceptable verification 
procedure for all parties.
    (f) Costs of the verification procedure. The interested parties 
requesting the verification procedure shall pay for the cost of the 
verification procedure, unless an independent auditor concludes that 
there was an underpayment of five (5) percent or more; in which case, 
the service which made the underpayment shall bear the costs of the 
verification procedure.
    (g) Interested parties. For purposes of this section, interested 
parties are those copyright owners who are entitled to receive royalty 
fees pursuant to 17 U.S.C. 114(g), their designated agents, or the 
entity designated by the copyright arbitration royalty panel in 37 CFR 
260.3 to receive and to distribute the royalty fees.


Sec. 260.6  Verification of royalty payments.

    (a) General. This section prescribes general rules pertaining to 
the verification of the payment of royalty fees to those parties 
entitled to receive such fees, according to terms promulgated by a duly 
appointed copyright arbitration royalty panel, under its authority to 
set reasonable terms and rates pursuant to 17 U.S.C. 114 and 801(b)(1), 
and the Librarian of Congress under his authority pursuant to 17 U.S.C. 
802(f).
    (b) Frequency of verification. Interested parties may conduct a 
single audit of the entity making the royalty payment during any given 
calendar year.
    (c) Notice of intent to audit. Interested parties must submit a 
notice of intent to audit the entity making the royalty payment with 
the Copyright Office, which shall publish in the Federal Register a 
notice announcing the receipt of the notice of intent to audit within 
30 days of the filing of the interested parties' notice. Such 
notification of interest shall also be served at the same time on the 
party to be audited.
    (d) Retention of records. The party requesting the verification 
procedure shall retain the report of the verification for a period of 
three years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent auditor, shall serve as an acceptable verification 
procedure for all parties.
    (f) Costs of the verification procedure. The interested parties 
requesting the verification procedure shall pay for the cost of the 
verification procedure, unless an independent auditor concludes that 
there was an underpayment of five (5) percent or more; in which case, 
the entity which made the underpayment shall bear the costs of the 
verification procedure.
    (g) Interested parties. For purposes of this section, interested 
parties are those copyright owners who are entitled to receive royalty 
fees pursuant to 17 U.S.C. 114(g), or their designated agents.


Sec. 260.7  Unknown copyright owners.

    If the designated collecting agent is unable to identify or locate 
a copyright owner who is entitled to receive a royalty payment under 
this part, the collecting agent shall retain the required payment in a 
segregated trust account for a period of three years from the date of 
payment. No claim to such payment shall be valid after the expiration 
of the three year period. After the expiration of this period, the 
collecting agent may use the unclaimed funds to offset the cost of the 
administration of the collection and distribution of the royalty fees.

    Dated: April 17, 1998.
Marybeth Peters,
Register of Copyrights.
James H. Billington,
The Librarian of Congress.
[FR Doc. 98-12266 Filed 5-7-98; 8:45 am]
BILLING CODE 1410-33-U