25394 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

(OMB) under Executive Order 12866

(Regulatory Planning and Review).

Executive Order 12988

The Department of the Interior has

conducted the reviews required by

section 3 of Executive Order 12988

(Civil Justice Reform) and has

determined that, to the extent allowed

by law, this rule meets the applicable

standards of subsections (a) and (b) of

that section. However, these standards

are not applicable to the actual language

of State regulatory programs and

program amendments since each such

program is drafted and promulgated by

a specific State, not by OSM. Under

sections 503 and 505 of SMCRA (30

U.S.C. 1253 and 1255) and 30 CFR

730.11, 732.15, and 732.17(h)(10),

decisions on proposed State regulatory

programs and program amendments

submitted by the States must be based

solely on a determination of whether the

submittal is consistent with SMCRA and

its implementing Federal regulations

and whether the other requirements of

30 CFR Parts 730, 731, and 732 have

been met.

National Environmental Policy Act

No environmental impact statement is

required for this rule since section

702(d) of SMCRA (30 U.S.C. 1292(d))

provides that agency decisions on

proposed State regulatory program

provisions do not constitute major

Federal actions within the meaning of

section 102(2)(C) of the National

Environmental Policy Act (42 U.S.C.

4332(2)(C)).

Paperwork Reduction Act

This rule does not contain

information collection requirements that

require approval by OMB under the

Paperwork Reduction Act (44 U.S.C.

3507 et seq.).

Regulatory Flexibility Act

The Department of the Interior has

determined that this rule will not have

a significant economic impact on a

substantial number of small entities

under the Regulatory Flexibility Act (5

U.S.C 601 et seq.). The State submittal

which is the subject of this rule is based

upon corresponding Federal regulations

for which an economic analysis was

prepared and certification made that

such regulations would not have a

significant economic effect upon a

substantial number of small entities.

Accordingly, this rule will ensure that

existing requirements previously

promulgated by OSM will be

implemented by the State. In making the

determination as to whether this rule

would have a significant economic

impact, the Department relied upon the

data and assumptions for the

corresponding Federal regulations.

Unfunded Mandates

OSM has determined and certifies

pursuant to the Unfunded Mandates

Reform Act (2 U.S.C. 1502 et seq.) that

this rule will not impose a cost of $100

million or more in any given year on

local, state, or tribal governments or

private entities.

List of Subjects in 30 CFR Part 918

Intergovernmental relations, Surface

mining, Underground mining.

Dated: April 28, 1997.

Brent Wahlquist,

Regional Director, Mid-Continent Regional

Coordinating Center.

For the reasons set out in the

preamble, 30 CFR Part 918 is amended

as set forth below:

PART 918—LOUISIANA

1. The authority citation for Part 918

continues to read as follows:

Authority: 30 U.S.C. 1201 et seq.

2. Section 918.15 is amended in the

table by adding a new entry in

chronological order by ‘‘Date of final

publication’’ to read as follows:

§ 918.15 Approval of Louisiana regulatory

program amendments.

* * * * *

Original amendment submission

date Date of final publication Citation/description

* * * * * * * *

October 24, 1997 ........................... May 8, 1998 ................................... Sections 105.; 2537.A.11.; 2725.A., A.2., A.3., A.3.a., C.1., F;

2907.C.5.; 3705.A.2., A.2a., A.2.b.; 3711.A., B.1. through B.6.;

3717.A., A.2., A.3.; 4501.A.3., A.4.; 5333.A.1. through A.13.;

5411.A.; 5413.A.; 5503.A.2.; 5507.A.4.; 6507.A.2.; 6913 .B.;

6915.B.1.; 6917.A.; 7105.C.

[FR Doc. 98–12249 Filed 5–7–98; 8:45 am]

BILLING CODE 4310–05–M

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.

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
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25395

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).

2See Notice of Proposed Rulemaking, 61 FR

22004 (May 13, 1996); Notice of Proposed

Rulemaking, 62 FR 34035 (June 24, 1997).

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,’’ 1

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. 2 17 U.S.C.

114(d)(2)(A)–(E) and 114(f)(2)–(5).

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) ¶ 33. RIAA also

agreed to be named the single entity to

collect, administer, and distribute the

royalty fees. Report ¶ 184. RIAA

proposed additional terms concerning

the timing of payments, statements of

accounts, retention of records, and

audits. Report ¶ 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 ¶¶ 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 ¶¶ 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.
25396 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

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).

4The Kagan study was prepared by Paul Kagan

Associates, a media research company that tracks

and publishes financial data concerning the media

and entertainment industries.

5Wilkofsky Gruen Associates is an economic

consulting firm that specializes in the

communications and entertainment industries.

The Panel’s Determination of a

Reasonable Rate

The Panel evaluated the four statutory

objectives, 3 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 ¶¶ 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 ¶ 204.

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 ¶

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 ¶ 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 ¶¶ 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 ¶¶ 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) ¶ 62;

RIAA Proposed Conclusions (PC) ¶ 18.

RIAA presented two studies that

illustrate the amount of money cable

television networks pay for their

programming: (1) The Kagan study,4 and

(2) the Wilkofsky Gruen Associates 5

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 ¶ 130.

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

¶¶ 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

¶¶ 133–145.
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 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 ¶¶ 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 ¶¶ 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

¶¶ 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 ¶¶ 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 ¶¶ 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 ¶¶ 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 ¶¶ 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 ¶¶ 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 ¶¶ 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 ¶¶ 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 ¶¶ 192, 209.

9. Interested parties may conduct only

one audit of a digital audio service

during any given year. Report ¶¶ 193,

210(c).

• 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 ¶¶ 193, 210(a)–(b).

• RIAA must retain an auditor’s

report for a period of three years. Report

¶¶ 193, 210(d).

• 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

¶¶ 194, 210(e).

• 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 ¶¶ 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 § 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 ¶¶ 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 ¶ 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
25398 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

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
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25399

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.

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 ¶ 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 ¶ 124.

The parties also agreed that the rates

should be based on gross revenues and

further agreed on the definition of

‘‘gross revenues.’’ Report ¶ 125; RIAA

PF ¶ 55; Services Joint Reply to RIAA’s

Proposed Findings of Fact and

Conclusions of Law (Services’ RF) ¶ 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 ¶ 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 1.6 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:

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
25400 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

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.

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 coinoperated 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.7 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)
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25401

8Negotiated 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).

9Sony 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 ¶ 164.

10Associate Professor of Communications Studies

at Northwestern University and Director of

Northwestern’s program in Telecommunications

Studies, Management, and Policy.

11Senior 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.

12President and Chief Executive Officer of Digital

Cable Radio Associates.

13Senior Vice-President and Chief Financial

Officer of Digital Cable Radio Associates.

14A vice-president at the economic consulting

firm of Charles River Associates, Inc.

(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).

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 8

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.9 Report ¶¶ 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.

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 ¶ 92; Petition at

22; Wildman 10 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 ¶ 84; Tr. 2102 (Vidich); 11

(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 ¶ 9;

Vidich W.R.T. at 7; Tr. 2106–2107

(Vidich); Del Beccaro 12 W.D.T. at 9, and

the most favored nations clause, DCR

Exs. 7, 8 & 15 at ¶ 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); 13 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 ¶ 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 ¶ 82.

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 ¶ 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 ¶¶ 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 14 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 ¶ 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

¶¶ 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).

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
25402 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

15For 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).

16This 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.

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.

18Section 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).’’

19For 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.

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 ¶¶ 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.15 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). 16

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 ¶ 82; RIAA RPF ¶ 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 ¶¶ 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.17 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.

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.18

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.19 Tr. 2123–24

(Vidich); Services PF ¶ 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.

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 ¶ 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
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25403

20An 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.

21An economic consultant with the firm of Barry

M. Massarsky Consulting, Inc.

22The 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 ¶¶ 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).

23CRT 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).

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 ¶ 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 ¶ 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 ¶ 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 ¶ 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 20 W.R.T. at 3;

Tr. 1646, 1669–70, 1674 (Massarsky).21

Using the license fees DMX and

DCR22 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

¶¶ 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 ¶ 167(E); see also

RIAA PF ¶¶ 106–108.23 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.

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
25404 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

24A 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).

25A country music artist who has recorded 14

albums, including five number one songs.

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 ¶ 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 ¶ 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 CoinOperated 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,24 in conjunction with record

evidence, and with regard for the

statutory criteria, to set a reasonable

rate.

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 alreadyestablished 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 ¶ 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 ¶¶ 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 ¶ 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 ¶ 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 25 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 ¶ 169.

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
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25405

26 Interested parties are free to negotiate a rate

below the statutory rate for the mechanical license

and often do. Tr. 1660 (Massarsky).

27Even 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 ¶ 105.

performers and record companies

deserve a larger percentage from the

Services than granted to the music

works,’’ was supported by the record

evidence. Report ¶ 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 ¶¶ 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.26 RIAA

PF ¶¶ 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 ¶ PF 116.

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 ¶¶ 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.27

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 ¶ 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 ¶ 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.
25406 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

28Sony 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 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 ¶¶ 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. ¶ 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 ¶ 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, 28 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.

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.
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25407

29The 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.

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

¶ 87. Its determination credited the

performers and the record companies

for their work in making the musical

work come alive. Id. ¶¶ 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.

¶¶ 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. ¶ 87, a finding supported

by CRT precedent. 29

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 ¶¶ 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.

¶¶ 89–92. In contrast, the Panel found

that the record companies made no

contributions in these areas. Id. ¶ 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 ¶ 95 and cites

therein, whereas RIAA did not suggest

that any capital investment was

required on its part. Id. ¶ 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. ¶¶ 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. ¶¶ 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. ¶¶ 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. ¶¶ 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.

¶ 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. ¶ 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. ¶ 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. ¶ 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. ¶ 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. ¶¶ 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

¶¶ 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 ¶ 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 ¶¶ 107, 111.
25408 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

30Senior Vice-President of Programming at Digital

Cable Radio Associates.

31Executive Vice-President and Chief Technical

Officer of Digital Music Express who oversees

research and development, and technical operations

worldwide.

32Chief Executive Officer and President of Digital

Music Express since July 1997.

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

¶ 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 ¶ 112 citing Simon 30 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) 31; 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’’).

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

¶¶ 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 ¶¶ 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 ¶ 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 ¶¶ 117–118; Troxel 32 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.

¶¶ 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.

¶ 119.

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 ¶¶ 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
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25409

33The 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.

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 ¶ 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.33 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
25410 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

34RIAA 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.

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.

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 ¶¶ 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 ¶¶ 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 ¶¶

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.34 Petition at 7 n. 1.

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

¶¶ 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 ¶¶ 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.
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25411

35S. 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’’).

36Congress 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).

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 ¶ 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 ¶¶ 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

¶ 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 ¶ 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 wellestablished 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).35

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 ¶ 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’’).36

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
25412 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

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 ¶¶ 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 ¶ 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 ¶ 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 ¶ 184.
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 25413

37A 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).

It is common practice, however, for

the government body making such

designations to implement safeguards to

monitor the functions of the collective.37

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.

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 ¶ 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).

§ 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).
25414 Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations

(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.

§ 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.

§ 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.

§ 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 §§ 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.

§ 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.
Federal Register / Vol. 63, No. 89 / Friday, May 8, 1998 /Rules and Regulations 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.

§ 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.

§ 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

ENVIRONMENTAL PROTECTION

AGENCY

40 CFR Part 52

[FRL 325–6]

Approval and Promulgation of State

Implementation Plans

CFR Correction

In title 40 of the Code of Federal

Regulations, part 52 (§ 52.1019 to end),

revised as of July 1, 1997, in appendix

D to part 52, on page 610, in the first

and second columns, equations d–1 and

d–2 were inadvertently omitted.

Additionally, the second line in the

legend for Equation D–2 was incorrectly

printed. The missing equations and

corrected line should read as follows:

Appendix D to Part 52—Determination

of Sulfur Dioxide Emissions From

Stationary Sources by Continuous

Monitors

* * * * *

X

x

n

i

i

n

=

∑

1 Equation D-1

* * * * *

C I

Equation D

. .95

2 = − ( ) ∑ ∑− ( ) t.

n n n i i

975 2

1

χ χ

-2

* * * * *

t

.975 = t1–a/2, and

* * * * *

BILLING CODE 1505–01–D

DEPARTMENT OF COMMERCE

National Oceanic and Atmospheric

Administration

50 CFR Part 648

[Docket No. 980318066–8066–01; I.D.

022698A]

Fisheries of the Northeastern United

States; Northeast Multispecies

Fishery; Framework Adjustment 25;

Correction

AGENCY: National Marine Fisheries

Service (NMFS), National Oceanic and

Atmospheric Administration (NOAA),

Commerce.

ACTION: Final rule; correction.

SUMMARY: This rule removes regulatory

language inadvertently added, clarifies

the raised footrope requirement for

Small Mesh Area 1 & 2, and corrects an