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[Federal Register Volume 90, Number 6 (Friday, January 10, 2025)]
[Rules and Regulations]
[Pages 1884-1893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31779]

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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 384

[Docket No. 2012-1 CRB Business Establishments II; Docket No. 2007-1 
CRB DTRA-BE]

Ruling on Regulatory Interpretation for Business Establishment 
Services

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Ruling on regulatory interpretation.

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SUMMARY: The Copyright Royalty Judges publish their ruling on 
regulatory interpretation in a matter that was referred to them by the 
United States District Court for the District of Columbia. The 
regulation at issue is the definition of ``Gross Proceeds'' in the 
rates and terms set forth through settlements in the BES I and BES II 
proceedings in 37 CFR 384.3(a), which is used when calculating royalty 
payments paid to SoundExchange, a collective for copyright owners, in 
relation to digital transmissions of sound recordings pursuant to the 
statutory license in 17 U.S.C. 112.

DATES: January 10, 2025

ADDRESSES: The ruling is posted in eCRB at https://app.crb.gov/. For 
access to the docket, go to eCRB, the Copyright Royalty Board's 
electronic filing and case management system, at https://app.crb.gov/, 
and search for docket numbers 2012-1 CRB Business Establishments II and 
2007-1 CRB DTRA-BES.

FOR FURTHER INFORMATION CONTACT: Anita Brown, CRB Program Specialist, 
at (202) 707-7658 or [email protected].

SUPPLEMENTARY INFORMATION:

Ruling on Regulatory Interpretation Referred by the United States 
District Court for the District of Columbia

Background

    On February 9, 2022, SoundExchange submitted a motion \1\ to the 
Copyright Royalty Judges (Judges) to reopen certain proceedings 
addressing determinations of royalty rates and terms under the 17 
U.S.C. 112 license for making ephemeral copies of sound recordings for 
transmission by a Business Establishment Service (BES) in three 
proceedings, BES I, BES II, and BES III.\2\
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    \1\ Motion of SoundExchange, Inc. to Reopen Business 
Establishment Service Rate Proceedings for the Limited Purpose of 
Interpreting Regulations on Referral from the U.S. District Court 
for the District of Columbia (February 9, 2022) (eCRB no. 26146) 
(Motion).
    \2\ Docket Nos. 2007-1 CRB DTRA-BE (2009-2013) (``BES I''), 
2012-1 CRB Business Establishments II (2014-2018) (``BES II''), and 
17-CRB-0001-BER (2019-2023) (``BES III'').
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    SoundExchange's request arose from litigation before the U.S. 
District Court for the District of Columbia (District Court) in which 
SoundExchange alleged that Music Choice had failed to pay royalties due 
under 17 U.S.C. 112 for the license to reproduce and transmit ephemeral 
copies of sound recordings to business establishments. See 
SoundExchange, Inc. v. Music Choice, No. 19-999 (RBW) (D.D.C. Dec. 20, 
2021) (District Court Action). The District Court determined it was 
appropriate to refer a matter of regulatory interpretation regarding 37 
CFR 384.3(a) to the Judges under the doctrine of primary jurisdiction 
and found that the Judges have continuing jurisdiction to clarify the 
BES regulations, even though those regulations were originally 
formulated by the Copyright Arbitration Royalty Panel (CARP), a rate 
setting body that preceded the Copyright Royalty Board (Board). See 
District Court Action, Memorandum Opinion at 9-10 (Dec. 20, 2021) 
(Memorandum Opinion) (attached to the Motion as Exhibit B) (citing 
Report of the Copyright Arbitration Royalty Panel to the Librarian of 
Congress, Rate Setting for Digital Performance Right in Sound 
Recordings and Ephemeral Recordings, Docket No. 2000-9 CARP DTRA 1 & 2 
at B-7 (Feb. 20, 2002) (Web I CARP Report)).

[[Page 1885]]

    The underlying dispute revolves around the definition of ``Gross 
Proceeds'' in the rates and terms set forth through settlements in the 
BES I and BES II proceedings in 37 CFR 384.3(a). Id. at 4-5.\3\ ``Music 
Choice asserts that `its ``Gross Proceeds'' are only an allocated 
portion of its actual proceeds corresponding to music channels offered 
solely as part of its BES service.''' Id. at 6-7. SoundExchange asserts 
that ```Music Choice must pay BES statutory royalties on fees and 
payments it receives from providing music channels used in its BES 
service, even if Music Choice also provides such channels as part of a 
different service.''' Id. at 7.
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    \3\ Despite the fact that the regulations at issue were not 
drafted by Copyright Royalty Judges, but instead are the result of 
settlements by the settling proceeding participants, which the 
Judges are generally compelled, under 17 U.S.C. 801(b)(7)(a), to 
adopt, the Judges find that the relevant procedural history of these 
and predecessor proceedings does provide adequate basis for referral 
by the District Court under the doctrine of primary jurisdiction and 
the finding that the Judges have continuing jurisdiction. See Final 
rule, Determination of Rates and Terms for Business Establishment 
Services, Docket No. 2007-1 CRB DTRA-BE, 73 FR 16199 (Mar. 27, 2008) 
(BES I Determination) and Final rule, Determination of Rates and 
Terms for Business Establishment Services, Docket No. 2012-1 CRB 
Business Establishments II, 78 FR 66276, 66277 (Nov. 5, 2013) (BES 
II Determination), citing 17 U.S.C. 801(b)(7)(a).
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    Stated differently, the question is whether 37 CFR 384.3(a) 
requires BES providers to calculate royalties using their gross 
proceeds derived from the use of all licensed ephemeral copies used for 
the operation of the BES, or whether a BES may calculate royalties 
using their gross proceeds derived from the use of only those licensed 
ephemeral copies used for the ``sole purpose'' of the operation of the 
BES.
    The Memorandum Opinion stated that ``[a]s a preliminary matter, the 
Court notes that the Board's definition of `Gross Proceeds' in 37 CFR 
384.3(a)(2) is `ambiguous and do[es] not, on [its] face, make clear 
whether [Music Choice's] approaches were permissible under the 
regulations.' '' Id. at 9 n.2.
    On March 22, 2022, after considering the Motion, Music Choice's 
response \4\ and SoundExchange's reply,\5\ the Judges found that the 
claims to be addressed by the District Court only relate to time 
periods addressed by the BES I and BES II determinations and thus 
ordered the reopening of those two proceedings. The Judges ordered 
opening and reply briefing for the limited purpose of addressing the 
meaning of ``Gross Proceeds'' as defined in 37 CFR 384.3(a).\6\
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    \4\ Music Choice's Response in Opposition to SoundExchange's 
Motion to Reopen Business Establishment Service Rate Proceedings 
(Feb. 23, 2022) (eCRB no. 26201).
    \5\ SoundExchange's Reply in Support of its Motion to Reopen 
Business Establishment Service Rate Proceedings (Mar. 2, 2022) (eCRB 
no. 26246).
    \6\ Order Reopening Two Proceedings and Scheduling Briefing 
(Mar. 22, 2022) (eCRB no. 26360) (``Reopening Order''). The Judges 
observe that the Register of Copyrights has previously opined that 
the Judges have jurisdiction to clarify regulations that the Judges 
have adopted. See, Register's Memorandum Opinion on a Novel Question 
of Law (Apr. 8, 2015) (Addressing the re-opened SDARS I proceeding 
and questions referred from the U.S. District Court for the District 
of Columbia).
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    The relevant provision as set forth in the BES I determination 
states:

Sec.  384.3(a)

    For the making of any number of Ephemeral Recordings in the 
operation of a service pursuant to the limitation on exclusive 
rights specified by 17 U.S.C. 114(d)(1)(C)(iv), a Licensee shall pay 
10% of such Licensee's ``Gross Proceeds'' derived from the use in 
such service of musical programs that are attributable to 
copyrighted recordings. ``Gross Proceeds'' as used in this section 
means all fees and payments, including those made in kind, received 
from any source before, during or after the License Period that are 
derived from the use of copyrighted sound recordings during the 
License Period pursuant to 17 U.S.C. 112(e) for the sole purpose of 
facilitating a transmission to the public of a performance of a 
sound recording under the limitation on exclusive rights specified 
in 17 U.S.C. 114(d)(1)(C)(iv). The attribution of Gross Proceeds to 
copyrighted recordings may be made on the basis of:
    (1) For classical programs, the proportion that the playing time 
of copyrighted classical recordings bears to the total playing time 
of all classical recordings in the program, and
    (2) For all other programs, the proportion that the number of 
copyrighted recordings bears to the total number of all recordings 
in the program.

Final rule, Determination of Rates and Terms for Business Establishment 
Services, Docket No. 2007-1 CRB DTRA-BE, 73 FR 16199, 16200 (Mar. 27, 
2008) (BES I Determination).
    The relevant provision as set forth in the BES II determination 
states:

Sec.  384.3(a)

    For the making of any number of Ephemeral Recordings in the 
operation of a Business Establishment Service, a Licensee shall pay 
12.5% of such Licensee's ``Gross Proceeds'' derived from the use in 
such service of musical programs that are attributable to 
copyrighted recordings. ``Gross Proceeds'' as used in this section 
means all fees and payments, including those made in kind, received 
from any source before, during or after the License Period that are 
derived from the use of copyrighted sound recordings during the 
License Period pursuant to 17 U.S.C. 112(e) for the sole purpose of 
facilitating a transmission to the public of a performance of a 
sound recording under the limitation on exclusive rights specified 
in 17 U.S.C. 114(d)(1)(C)(iv). The attribution of Gross Proceeds to 
copyrighted recordings may be made on the basis of:
    (1) For classical programs, the proportion that the playing time 
of copyrighted classical recordings bears to the total playing time 
of all classical recordings in the program, and
    (2) For all other programs, the proportion that the number of 
copyrighted recordings bears to the total number of all recordings 
in the program.

Final rule, Determination of Rates and Terms for Business Establishment 
Services, Docket No. 2012-1 CRB Business Establishments II, 78 FR 
66276, 66277 (Nov. 5, 2013) (BES II Determination).

Summary of Arguments

    Music Choice puts forth the initial arguments that (a) the plain 
meaning of the ``gross proceeds'' definition only requires royalty 
payments from revenue attributable to copies made solely to facilitate 
a BES transmission; (b) the plain meaning of the definition of gross 
proceeds is confirmed by the unique nature of the BES license and the 
Judges' prior rulings; and (c) in the absence of a specific methodology 
in the regulations for apportioning revenues derived from copies made 
for the sole purpose of facilitating a BES transmission, a BES provider 
is entitled to use a reasonable methodology. See generally, Music 
Choice Opening Brief (eCRB no. 26631).
    Music Choice urges the Judges to apply basic principles of 
regulatory interpretation, including that when a regulation is 
unambiguous, one should not look beyond the text of the regulation 
itself unless the plain meaning of the regulation would lead to an 
absurd result (Plain Meaning Rule and Absurdity Doctrine). Id. at 24. 
Music Choice adds that the regulation explicitly calls for the 
inclusion of only those revenues that are derived from copies of sound 
recordings that are made ``for the sole purpose of facilitating a 
transmission to the public of a performance of a sound recording.'' 37 
CFR 384.3(a)(2). Music Choice asserts that the ``sole purpose'' 
language in the definition must place some limitation on the revenues 
that are to be included in ``Gross Proceeds'' or else the ``sole 
purpose'' language would be superfluous--a result that is at odds with 
long-settled cannons of regulatory and statutory interpretation (Rule 
Against Surplusage). Id. at 24-26 (citing e.g. U.S. v. Butler, 297 U.S. 
1, 65 (1936), Lowe v. SEC, 472 U.S. 181, 207 n.53 (1985) (``[W]e must 
give effect to every word that Congress used in the statute.''), and 
Gustafson v. Alloyd Co., 513 U.S. 561, 577 (1995) (``the presence

[[Page 1886]]

of limiting language in [the statute] requires a narrow 
construction.'').
    Music Choice posits that even if one were to conclude that there 
was some ambiguity in the definition of Gross Proceeds, or that it was, 
for some other reason, appropriate to look to other evidence, such 
evidence only confirms that the limitation imposed by the ``for the 
sole purpose'' language serves valid economic and copyright policy 
purposes, and therefore that limitation must be given its full effect. 
In this regard, Music Choice points to its conception that the right to 
make ephemeral copies has no independent value separate and apart from 
the performance right. Id. at 27-28. Music Choice also refers to 
various statements urging copyright and economic policy positions 
calling for an outright exemption for the rights covered by the 112 
license at issue. Id. at 29.
    Music Choice then pointed to several statements by the Judges, made 
in the context of determinations involving different statutory 
licenses, urging that ``it is almost axiomatic'' that revenues 
unrelated to the particular statutory license at issue ``should not be 
included in the revenue base'' used to calculate royalties for a 
license where the royalty is calculated as a percentage of revenue. Id. 
at 29-31 (citing Final rule and order, Determination of Royalty Rates 
and Terms for Making and Distributing Phonorecords (Phonorecords III) 
(Feb. 5, 2019), 84 FR 1918, 1961; Final rule and order, Determination 
of Rates and Terms for Preexisting Subscription Services and Satellite 
Digital Audio Radio Services (PSS/Satellite II), Docket No. 2011-1 CRB 
PSS/Satellite II, 78 FR 23054, 23096 (Apr. 17, 2013) (excluding 
``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'' from 
the definition of ``Gross Revenues.'')).\7\
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    \7\ Music Choice also noted that in the SDARS II determination 
the Judges decided that a downward adjustment to the royalties owed 
was appropriate to account for the performance of any directly 
licensed sound recordings as well as for the performance of any pre-
1972 sound recordings which, at the time, were ``not licensed under 
the statutory royalty regime.'' 78 FR 23072.
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    Music Choice then urges the Judges to go beyond the scope of the 
re-opened proceedings (provide guidance regarding the meaning of the 
``Gross Proceeds'' definition) and provide guidance regarding the 
standard that should be used to evaluate the approach that a BES 
provider has taken to apportion its revenues. Music Choice argues the 
Judges should find that where a regulatory royalty formula at issue 
does not provide a specific approach for allocating revenues between 
those included in Gross Proceeds and those excluded, a 
``reasonableness'' standard should be applied. In making this request 
Music Choice notes that it would be inappropriate to provide such 
guidance if doing so required any fact-finding. Id. at 34-35.
    SoundExchange puts forth the initial arguments that (a) the ``gross 
proceeds'' definition is ambiguous, (b) Music Choice's proposed 
interpretation of 37 CFR 384.3(a)(2) creates incoherence with 37 CFR 
384.3(a)(1), (c) Music Choice's interpretation of 37 CFR 384.3(a) 
produces absurd results, and (d) Music Choice's interpretation of 37 
CFR 384.3(a) is inconsistent with past Determinations concerning that 
provision. See generally, SoundExchange's Opening Legal Brief 
Concerning the Meaning of 37 CFR 384.3(a) (eCRB no. 26639).
    SoundExchange recounts the past proceedings for setting of rates 
and terms for BES, noting that BES rates and terms have been litigated 
in a ratemaking proceeding only once, in the first CARP proceeding 
after enactment of the DMCA. Id. at 7 (citing Web I CARP Report at 111; 
Final order, Designation as a Preexisting Subscription Service, 71 FR 
64639, 64640-41 (Nov. 3, 2006)). SoundExchange notes that subsequent 
statutory royalty rates and terms for BES were settled in 2003, 2007, 
2012, and 2018, using essentially the same wording in the relevant 
regulations. Id. at 12-14 (citing Final rule, Digital Performance Right 
in Sound Recordings and Ephemeral Recordings, 69 FR 5693 (Feb. 6, 
2004); BES I Determination, 73 FR 16199; BES II Determination, 78 FR 
66276; Final rule, Determination of Royalty Rates and Terms for Making 
Ephemeral Copies of Sound Recordings for Transmission to Business 
Establishments (BES III), 83 FR 60362 (Nov. 26, 2018)).
    Regarding the one fully litigated determination of rates and terms 
for BES, SoundExchange observes that the CARP adopted as benchmarks 
existing direct license agreements for BES. Id. at 9 (citing Web I CARP 
Report at 121-23). Additionally, SoundExchange notes that the CARP 
relied upon benchmark agreements not only for the rates but for the 
terms of the statutory license. Id.
    SoundExchange notes that the Librarian of Congress reviewed the Web 
I CARP Report and that the Librarian disagreed with the CARP's 
conclusions about BES rates in one respect relevant to this re-opened 
proceeding, namely the regulations regarding gross proceeds, 
specifically the inclusion of in-kind payments. Id. at 9-11.\8\
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    \8\ The relevant law at the time, section 802(f) of the 
Copyright Act directed 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.'' 
See Determination of Reasonable Rates and Terms for the Digital 
Performance of Sound Recordings and Ephemeral Recordings; Final rule 
and order, Determination of Reasonable Rates and Terms for the 
Digital Performance of Sound Recordings and Ephemeral Recordings, 67 
FR 45240, 45242 (July 8, 2002) (citing 17 U.S.C. 802(f) (2002) (DTRA 
Determination)).
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    SoundExchange argues that the relevant provision at issue is 
ambiguous. Id. at 20-24. In doing so, it cites to the District Court 
Opinion. SoundExchange also points to linguistic and interpretive 
challenges in the regulatory text. SoundExchange focuses specific 
attention to the word ``including'' and to the principle of regulatory 
interpretation known as the ``Presumption of Nonexclusive `Include'.'' 
Id. at 22 (citing Am. Hosp. Ass'n v. Azar, 983 F.3d 528, 534 (D.C. Cir. 
2020) (quoting Puerto Rico Mar. Shipping Auth. v. Interstate Com. 
Comm'n, 645 F.2d 1102, 1112 n.26 (D.C. Cir. 1981) (it is ``hornbook law 
that the word `including' indicates that the specified list . . . that 
follows is illustrative, not exclusive.'')). SoundExchange asserts that 
the regulation is ambiguous as to whether the lengthy matter that 
follows the word ``including'' in paragraph (a)(2) is: (a) a list of 
illustrative examples; (b) just one illustrative example; or (c) one or 
more illustrative examples plus some words that relate back to the 
``all fees and payments'' at the beginning of the definition. Id. at 
22-23. SoundExchange also focuses on the two instances of the phrase 
``derived from'' arguing that both must be given effect, if possible. 
Id. at 24-25.
    SoundExchange argues that these challenges within 37 CFR 384.3(a) 
render the regulation capable of numerous interpretations, which cannot 
all be right. It then offers two interpretations, which it views as 
being plausible.
    Under the first of SoundExchange's proposed interpretations, the 
relevant regulation can be parsed as follows:

all fees and payments

including those made in kind, received from any source before, 
during or after the License Period that are derived from the use of 
copyrighted sound recordings during the License Period pursuant to 
17 U.S.C. 112(e) for the sole purpose of facilitating a transmission 
to the public of a performance of a sound recording under the 
limitation on exclusive rights specified in 17 U.S.C. 
114(d)(1)(C)(iv). 37 CFR 384.3(a)(2).

[[Page 1887]]

Read this way, the clauses following ``including those'' are not meant 
to be exhaustive. SoundExchange argues that neither the CARP nor the 
Librarian intended to include within ``all fees and payments'' only 
``in kind'' revenue. It then asserts that for the same reason and under 
the same logic, the language does not limit ``all fees and payments'' 
to only those derived from the use of ephemeral copies for the ``sole 
purpose'' of BES transmissions. Id at 22-23.
    Under the second of SoundExchange's proposed interpretations, the 
relevant regulation can be parsed as follows:

all fees and payments

including those made in kind, received from any source before, 
during or after the License Period that are derived from the use of 
copyrighted sound recordings during the License Period pursuant to 
17 U.S.C. 112(e) for the sole purpose of facilitating a transmission 
to the public of a performance of a sound recording under the 
limitation on exclusive rights specified in 17 U.S.C. 
114(d)(1)(C)(iv).

37 CFR 384.3(a)(2). Read this way, the regulation means that ``all'' 
``fees and payments'' are included, and then goes on to specify what 
kinds of ``in kind'' consideration count as well--those that come from 
``any source,'' before or after the license period, provided that the 
consideration was offered ``for the sole purpose'' of facilitating a 
BES. Id. at 23-24.
    While offering the two interpretations, SoundExchange also 
maintains that other perhaps superior interpretations exist. Id. at 22-
24. It argues that in light of the apparent ambiguity, the Judges may 
look elsewhere in the regulatory scheme to determine the proper 
interpretation. It urges that here the Judges can and should resolve 
ambiguities in the text of 37 CFR 384.3(a) by examining the history of 
the regulation and the expressed intent of the regulation's drafters. 
Id. at 24.
    SoundExchange next argues that Music Choice's proposed 
interpretation creates incoherence. SoundExchange states that the 
alleged limitation by which ``all fees and payments'' ``derived from 
the use of'' ephemeral copies of sound recordings, is limited to only 
those copies that are used ``for the sole purpose of facilitating a 
transmission'' through a BES is inconsistent with the preceding 
sentence's statement in the regulation indicating that a BES provider 
must pay a percentage of its Gross Proceeds ``derived from the use in 
[a BES] of musical programs that are attributable to recordings subject 
to protection under title 17, United States Code.'' Id. at 23-24 
(citing 37 CFR 384.3(a)(2) (July 8, 2019)).\9\ SoundExchange argues 
that such an interpretation violates the ``endlessly reiterated 
principle of statutory construction . . . that all words in a statute 
are to be assigned meaning, and that nothing therein is to be construed 
as surplusage.'' Id. at 25. SoundExchange then argues that its two 
proposed interpretations of the regulation are internally consistent, 
avoid any obvious redundancy or surplusage and give better effect to 
the clear intent of the regulation's drafters, as evidenced by the CARP 
proceeding record. Id. at 26.
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    \9\ The Judges note that SoundExchange is citing to the BES III 
regulation, which, while structurally and substantively similar, is 
slightly different from the regulations in BES I and BES II, which 
are at issue in this proceeding.
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    SoundExchange also argues that Music Choice's proposed 
interpretation produces absurd results, namely that if Music Choice's 
interpretation of the word ``solely'' were correct, then the only 
copies for which it would owe royalties are those used in either its 
BES or its Preexisting Subscription Service (PSS), but not in both. The 
practical result would then be that Music Choice could deliver both a 
BES and a PSS with a high proportion of dual-use copies, most of the 
copies made by Music Choice would not generate any BES or PSS 
royalties, and Music Choice would pay less in statutory royalties when 
it used and profited off copies more. Id. at 27.
    SoundExchange asserts that Music Choice's proposed interpretation 
is inconsistent with the Web I CARP Decision and the Librarian's review 
of that decision. Id. at 28. SoundExchange observes that the CARP set a 
blanket rate structure, as opposed to setting rates for separate sets 
of rights in multiple mini-licenses for the making of different kinds 
of ephemeral copies. SoundExchange argues that the CARP expressly 
decided not to allow BES providers to pick and choose license coverage 
for different types of ephemeral recordings, or to pay based on usage, 
approaches that the CARP referred to as ``subdivid[ing] this package of 
rights into multiple mini-licenses for the making of different kinds of 
ephemeral copies.'' Id. at 29-30 (citing Web I CARP Report at 119).
    SoundExchange also argues that the benchmark agreements required 
payment of royalties based on a licensee's gross proceeds, and not 
based on a portion of gross proceeds reflecting the extent of the 
licensee's usage. Id. at 31-32. SoundExchange also notes that the CARP 
specifically rejected any deductions from gross proceeds, because in 
``most'' agreements, ``there are no deductions from gross proceeds.'' 
Id. at 33 (citing Web I CARP Report at 125). SoundExchange argues that 
the CARP determined that there should be no deductions from gross 
proceeds, and that therefore Music Choice's proposed interpretation is 
contrary to the benchmark agreements embraced by the CARP. Id.
    SoundExchange then addresses the Librarian's review and 
modification to the CARP recommendations. SoundExchange notes that the 
Librarian largely affirmed the CARP's decision concerning BES rates. It 
argues that the Librarian disagreed with the CARP's conclusions about 
BES rates in only one respect relevant to this proceeding, namely the 
specificity of the regulations as to whether gross proceeds include in-
kind payments. SoundExchange states that the Librarian decided ``to 
expand on the CARP's approach and adopt a definition of `gross 
proceeds' which clarified that `gross proceeds' shall include all fees 
and payments from any source, including those made in kind, derived 
from the use of copyrighted sound recordings to facilitate the 
transmission of the sound recording pursuant to the section 112 
license.'' Id. at 33-34 (citing Final rule and order, Determination of 
Reasonable Rates and Terms for the Digital Performance of Sound 
Recordings and Ephemeral Recordings, 67 FR 45260, 45268 (July 8, 2002) 
(DTRA Determination). SoundExchange argues that the stated purpose of 
the Librarian's new language was to expand rather than contract the 
CARP's approach, to capture in-kind payments. In SoundExchange's view, 
it would be contrary to the Librarian's reasoned decision to attribute 
to the word ``solely'' the effect of drastically refiguring the CARP's 
decision. Id. at 34.
    Music Choice offers reply arguments that (a) any attempt to find 
ambiguity regarding the meaning of gross proceeds do not withstand 
scrutiny; (b) the plain meaning of the definition of gross proceeds set 
forth by Music Choice does not produce absurd results; (c) 
SoundExchange's proposed reading of the definition of gross proceeds is 
at odds with its own discussion of cannons of regulatory 
interpretation; and (d) flawed fact-finding and analysis from the CARP 
proceeding are irrelevant, but in any event are not inconsistent with 
the plain meaning of gross proceeds. See generally, Music Choice Reply 
Brief (eCRB no. 26791).
    Music Choice offers that SoundExchange is incorrect when it argues 
that Music Choice's interpretation of Gross Proceeds would indicate 
``the only copies for which it

[[Page 1888]]

would owe royalties are those used in either its BES or its PSS, but 
not in both.'' Id. at 9. Music Choice notes that the PSS and BES 
regulations are separate and distinct and that the regulations 
applicable to PSS and BES are not analogous. Id. at 10. Music Choice 
argues that neither the word ``solely'' in the PSS regulation, nor the 
rest of the Gross Revenues definition, allows a PSS to make the sort of 
``absurd'' carve-out that SoundExchange is suggesting. Id. at 10-11.
    Music Choice argues that SoundExchange's proposed interpretations 
do not provide any plausible meaning for the ``sole purpose'' limiting 
language. It maintains that SoundExchange's interpretations largely 
reads out the ``sole purpose'' limiting language. However, Music Choice 
allows that SoundExchange offers the view that the ``sole purpose'' 
language is applicable only to ``in kind'' consideration, and that the 
``sole purpose'' language does not apply to any other form of 
consideration. But Music Choice argues that this interpretation from 
SoundExchange is internally inconsistent, stating that if ``all fees 
and payments'' must be included, then it cannot also be the case that 
only a subset of ``in kind'' consideration (those ``offered `for the 
sole purpose' of facilitating a BES transmission'') must be included. 
Id. at 11-12.
    Music Choice asserts that SoundExchange's interpretation is not 
sensical, positing that under SoundExchange's interpretation the ```for 
the sole purpose' of facilitating a BES transmission'' language was 
meant to refer to payments, and not ephemeral copies. Music Choice 
maintains that payments cannot ``facilitate'' a transmission. Id. at 
12.
    Music Choice argues that SoundExchange's interpretation renders 
meaningless 37 CFR 384.3(c), which addresses ephemeral recordings other 
than those governed by 384.3(a). Music Choice reasons that if a BES 
provider is required to pay for all ephemeral copies, whether made 
solely to facilitate a transmission by a BES or not, then all copies 
made by a BES would be covered by section 384.3(a) and there would be 
no copies left for section 384.3(c) to address. Id. at 13.
    Music Choice suggests that the Judges' Order Reopening Two 
Proceedings and Scheduling Briefing, as well as sound practice for 
referrals from a District Court, indicate that it would be 
inappropriate for the Judges to draw any factual conclusions from these 
statements from Music Choice's Answer in the District Court proceeding. 
It adds that it would be inappropriate for the Judges to make factual 
findings regarding the manner and extent to which Music Choice actually 
makes various types of channels or intermediate copies in connection 
with its BES. Id. at 14-20.
    Music Choice then intimates that the Judges should not make factual 
determinations about the record of the CARP proceeding. Id. at 20-24. 
Music Choice suggests that the record in the CARP proceeding was too 
dated, narrow and sparse to provide useful guidance in this proceeding. 
Id. at 21. Music Choice then adds that it is possible that the 
evidentiary records between the CARP and other proceedings may be 
sufficient justifications for the Judges to come to different 
conclusions than those reached by the CARP and Librarian. Id. at 21-23.
    Music Choice further attacks reliance on the CARP proceeding by 
suggesting that it was rife with legal errors, and that the analysis 
within that determination can no longer withstand scrutiny. It argues 
that the benchmarking analysis is insufficient in comparison to more 
recent proceedings. Id. at 26-30. Music Choice then revisits its 
assertion that the CARP proceeding does not consider ephemeral copies 
in a proper manner consistent with the policy views of Music Choice and 
others. Id. at 30-35. Music Choice goes on to suggest that legal 
interpretations now suggest that buffer copies are now per se not 
legally recognizable copies or use of them is per se fair use. Id.
    Music Choice asserts that a blanket license may allow deductions 
from the revenue pool to which a percent of revenue royalty rate is 
applied. Id. at 36-37. Music Choice adds that the benchmarks used by 
the CARP were unreliable, and non-comparable to its BES, and included 
vastly different rights. Id. at 37-38.
    In its Reply Brief, SoundExchange asserts that Music Choice's 
policy-based arguments against statutory recognition of ephemeral 
copies are misplaced. Id. at 3-12. It adds that similar policy-based 
arguments as to the value of ephemeral copies are misplaced. 
SoundExchange's Reply Brief Concerning the Meaning of 37 CFR 384.3(a) 
at 12-13. (eCRB no. 26794).
    SoundExchange reiterates its arguments that the ``gross proceeds'' 
definition is ambiguous. Id. at 17-20. It adds that the Judges should 
interpret the ambiguous provisions based on its context and its 
drafters' intent. Id. at 20-22.
    SoundExchange urges the Judges not to place undue weight on the 
rates and terms for different licenses nor on the structure of such 
regulations for different licenses. Instead, it again urges the Judges 
to look to the intent of the drafters of the provision at issue. Id. at 
23-26.
    SoundExchange then challenges Music Choice's suggestion that the 
Judges should wade into addressing the propriety of a licensee relying 
on a ```reasonableness''' standard that might allow a BES provider to 
apportion revenues in a way that makes sense for their particular 
circumstances. Id. at 27-31.

Analysis

A. Regulatory Analysis

    Several of the arguments put forward by Music Choice proceed from 
the position that the language of 37 CFR 384.3(a) is unambiguous, in 
contrast to the finding of the District Court that the provision ``is 
``ambiguous and do[es] not, on [its] face, make clear whether [Music 
Choice's] approaches were permissible under the regulations.'' 
Memorandum Opinion at 9 n.2. The Judges do not take issue her with the 
District Court's finding of ambiguity, which is also persuasively 
asserted by SoundExchange. Furthermore, the Judges note that the 
parties have put forward various plausible interpretations of the 
provision, which is consistent with the District Court's finding of 
ambiguity. Based on the entirety of the record, including the briefing 
received in response to the Reopening Order as well as the record of 
the underlying proceedings, the Judges find that the relevant language 
of 37 CFR 384.3(a) is at least arguably ambiguous. Based on the 
entirety of that record, the Judges analysis and findings clarify this 
apparent ambiguity.
    The Judges find that resolution of the parties' policy-based 
arguments regarding the provisions of the 112 license and the value of 
ephemeral copies is largely unnecessary with regard to the referred 
question.\10\ The Judges can, and do, find it sufficient to address the 
referred question in light of the regulations in the relevant 
proceedings and the statute, as set forth by Congress, without 
influence of policy positions for alternative statutory provisions.\11\
---------------------------------------------------------------------------

    \10\ Although the Judges find it unnecessary to also address the 
parties' policy-based arguments, the Judges do find it instructive 
to address the parties' incomplete and incorrect economic arguments 
on which they rely in their attempts to buttress their legal and 
policy arguments. The Judges address those arguments infra.
    \11\ The Judges note that the Librarian's review of the Web I 
CARP Report clarified:
    During the proceeding, the Services argued that these 
`ephemeral' copies have no economic value apart from the value of 
the performance they facilitate. Webcasters Petition at 67; 
Broadcasters Petition at 50. In support of this position, the 
Services cite with approval a Copyright Office Report which stated 
that the Office found no rationale for `the imposition of a royalty 
obligation under a statutory license to make copies that have no 
independent economic value, and are made solely to enable another 
use that is permitted under a separate license.''
    Web I CARP Report at 98 citing U.S. Copyright Office, DMCA 
Section 104 Report at 114 n.434 (August 2001).
    The Panel also contended that experts on both sides took this 
view. Webcasters Petition at 66 citing Jaffe W.D.T. 52-54; Tr. at 
6556; Tr. at 2632 (Nagle). Had there been nothing more, the Panel 
might have agreed with the Services and adopted the Office's 
position. In construing the statute, however, the Panel found that 
Congress did not share the Copyright Office's view. Instead, the 
Panel found that Congress required that a rate be set for the making 
of ephemeral copies in accordance with the willing buyer/willing 
seller standard. Report at 98-99.'' 67 FR 45261 (footnote omitted).

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[[Page 1889]]

    Confronted with an apparent ambiguous regulation, the Judges are 
informed by the arguments by Music Choice and SoundExchange regarding 
regulatory interpretation, as well as the history of and analysis 
underlying the regulations at issue from the CARP proceeding.
    The Judges find that Music Choice is incorrect in arguing that the 
CARP findings and analysis from the CARP proceeding are irrelevant.\12\ 
As the Court accurately observed: ``The original formulation of ``Gross 
Proceeds'' was determined by a Copyright Arbitration Royalty Panel 
(``CARP'') in a 2002 royalty-rate setting proceeding.'' Memorandum 
Opinion at 3. The Judges observe that relevant provisions in the CARP 
determination are substantively identical to the language set forth in 
BES I and BES II, which form the basis for Music Choice's asserted 
exclusion from gross proceeds.\13\ The Judges logically look to the 
CARP proceeding's analysis and findings to address the referred 
question. As suggested by the Court, the CARP proceeding findings are 
essential to understand the basis for, and the meaning of, the language 
in the BES I and BES II rates and terms.
---------------------------------------------------------------------------

    \12\ Furthermore, the Judges decline to second guess the 
evidentiary and legal conclusions within the CARP proceeding.
    \13\ Relevant language from each determination states:
    CARP--``for the sole purpose of facilitating a transmission to 
the public of a performance of a sound recording under the 
limitation on the exclusive rights specified in section 
114(d)(1)(c)(iv).'' DTRA Determination, 67 FR at 45268.
    BES I--``for the sole purpose of facilitating a transmission to 
the public of a performance of a sound recording under the 
limitation on exclusive rights specified in 17 U.S.C. 
114(d)(1)(C)(iv.).'' BES I Determination, 73 FR at 16200.
    BES II--``for the sole purpose of facilitating a transmission to 
the public of a performance of a sound recording under the 
limitation on exclusive rights specified in 17 U.S.C. 
114(d)(1)(C)(iv).'' BES II Determination, 78 FR 66277.
---------------------------------------------------------------------------

    The CARP determination of BES rates and terms adopted as benchmarks 
certain direct license agreements for BES. Web I CARP Report at 121-23. 
The CARP noted that the benchmark agreements generally called for a 
royalty payment that was a stated percentage ``of gross proceeds 
derived by the background music company from the licensed service.'' 
Id. at 124. The CARP noted that in most of the benchmark agreements it 
considered, there are no deductions from gross proceeds. Id. at 125. 
The CARP determined that the royalty should simply be 10% ``of the 
Licensee's annual gross proceeds derived from the use in such broadcast 
service of the musical programs which are attributable to copyrighted 
recordings.'' Id. at B-7.\14\
---------------------------------------------------------------------------

    \14\ The Web I CARP Report would have set forth the BES rate as 
follows:
    For the making of unlimited numbers of ephemeral recordings in 
the operation of broadcast services pursuant to the Business 
Establishment exemption contained in 17 U.S.C. 114(d)(l)(C)(iv), a 
Business Establishment Service shall pay a Sec.  112(e) ephemeral 
recording royalty equal to ten percent (10%) of the Licensee's 
annual gross proceeds derived from the use in such broadcast service 
of the musical programs which are attributable to copyrighted 
recordings. The attribution of gross proceeds to copyrighted 
recordings shall be made on the basis of:
    (i) for classical programs, the proportion that the playing time 
of copyrighted classical recordings bears to the total playing time 
of all classical recordings in the program, and
    (ii) for all other programs, the proportion that the number of 
copyrighted recordings bears to the total number of all recordings 
in the program.
---------------------------------------------------------------------------

    The Librarian of Congress, upon and through recommendations of the 
Register of Copyrights, reviewed the CARP's decision. See DTRA 
Determination, 67 FR at 45240. The Librarian rejected the argument 
advanced by a licensee in that proceeding that it was arbitrary for the 
CARP to set a rate for a blanket license covering all ephemeral copies 
used to provide a BES. Id. at 45263. The Librarian found it 
``consistent with the purpose of the section 112 license'' for CARP to 
have set a Section 112(e) rate for a blanket license of ``all the 
rights necessary'' for a BES. Id. The Librarian also affirmed the 
CARP's reliance on existing BES direct license agreements as 
benchmarks, finding the CARP's adoption of a 10% rate based on those 
agreements to be ``well-founded and supported by the record.'' Id. at 
45243.
    The Librarian took issue with aspects of the CARP's regulatory 
language regarding gross proceeds, finding that it ``does not 
necessarily appear to capture in-kind payments of goods, free 
advertising or other similar payments for use of the license.'' Id. at 
45268. The Librarian decided ``to expand on the CARP's approach and 
adopt a definition of `gross proceeds' which clarifies that `gross 
proceeds' shall include all fees and payments from any source, 
including those made in kind, derived from the use of copyrighted sound 
recordings to facilitate the transmission of the sound recording 
pursuant to the section 112 license. Id. (citing RIAA Exhibit No. 60A 
DR \15\).
---------------------------------------------------------------------------

    \15\ See Transcript, 2000-9 CARP DTRA 1&2 (WEB 1998-2002 
(consolidated)) (eCRB no.7947 pp 242-267).
---------------------------------------------------------------------------

    The Librarian added the following definition for ``gross proceeds'' 
to the final rule:

    ``Gross Proceeds'' as used in this section means all fees and 
payments, including those made in kind, received from any source 
before, during or after the License Period that are derived from the 
use of copyrighted sound recordings during the License Period 
pursuant to 17 U.S.C. 112(e) for the sole purpose of facilitating a 
transmission to the public of a performance of a sound recording 
under the limitation on exclusive rights specified in 17 U.S.C. 
114(d)(1)(C)(iv).

See generally, DTRA Determination, 67 FR at 45240.
    The proposed benchmark agreement that the Librarian looked to in 
support of this clarification regarding gross proceeds, RIAA Exhibit 
No. 60A DR, itself includes a notable exclusion from gross proceeds. An 
exclusion in the cited benchmark agreement targets a specific type of 
in-kind payment, namely in-kind payments [REDACTED]. RIAA Exhibit No. 
60A DR.
    The Librarian's decision to adopt the aforementioned regulatory 
definition of ``gross proceeds'' did not specifically address the 
addition of the language ``for the sole purpose of facilitating a 
transmission to the public of a performance of a sound recording under 
the limitation on exclusive rights specified in 17 U.S.C. 
114(d)(1)(C)(iv)'' but the decision to adopt that specific language 
appears to incorporate exclusions from certain in-kind payments that 
may reasonably approximate the exclusions for in-kind payments found in 
RIAA Exhibit No. 60A DR. Interpretation of this exclusion as an 
approximation of exclusions for in-kind payments in the benchmark 
agreements is supported by the Librarian's finding that it would be 
unwise to include even an illustrative list of what specific types of 
revenues should be considered in the calculation of gross proceeds. 
DTRA Determination, 67 FR at 45268. The Library also stated its intent 
to adhere to the revenue streams contemplated by the CARP and

[[Page 1890]]

the relied upon benchmark agreements. Id.
    The expansive exclusion posited by Music Choice does not closely 
adhere to the revenue streams contemplated by the CARP and the 
Librarian and reflected in the relied upon benchmark agreements. As 
previously stated, the CARP noted that in most of the benchmark 
agreements it considered, there are no deductions from gross proceeds. 
Web I CARP Report at 125. The agreements with deductions from gross 
proceeds include only narrow deductions. See, e.g. RIAA Exhibit No. 60A 
DR.
    In light of these findings by the CARP and the Librarian, and 
considering the entirety of the record, the Judges find that the 
Librarian's gross proceeds definition intended a narrow exception for a 
limited scope of in-kind payments, which are narrow to a degree 
corresponding to those in the benchmark agreements. Specifically, the 
Judges find that the meaning of ``Gross Proceeds'' as defined in 37 CFR 
384.3(a) is that ``all'' ``fees and payments'' are included, and that 
following the words ``including those'' the definition then specifies/
limits what kinds of ``in kind'' consideration count as well--those 
that come from ``any source,'' before or after the license period, 
provided that such in-kind consideration was offered ``for the sole 
purpose'' of facilitating a BES. That is, the second interpretation 
offered by SoundExchange is the correct one, under which the relevant 
regulation are to be read as follows:

all fees and payments

including those made in kind, received from any source before, 
during or after the License Period that are derived from the use of 
copyrighted sound recordings during the License Period pursuant to 
17 U.S.C. 112(e) for the sole purpose of facilitating a transmission 
to the public of a performance of a sound recording under the 
limitation on exclusive rights specified in 17 U.S.C. 
114(d)(1)(C)(iv).\16\
---------------------------------------------------------------------------

    \16\ This relevant regulatory text is identical across BES I and 
BES II. The corresponding regulatory text from the underlying Web I 
CARP proceeding is substantively and structurally identical.

    Read this way, the regulation means that ``all'' ``fees and 
---------------------------------------------------------------------------
payments'' are included,

and then goes on to specify what kinds of ``in kind'' consideration 
count as well--those that come from ``any source,'' before or after the 
license period, provided that the consideration was offered ``for the 
sole purpose'' of facilitating a BES.
    In addition to reflecting an appropriately narrow scope of an 
exception approximating those in the benchmark agreements, the Judges 
agree with SoundExchange that this interpretation follows and complies 
with relevant canons of interpretation.
    This proper interpretation adheres to the presumption of the non-
inclusive ``include'' whereby the word ``include'' indicates that the 
specified items that follow are illustrative and not exclusive. See Am 
Hosp. Assoc. v. Azar, 983 F.3d 528, 534 (D.C. Cir. 2020). In this case, 
that which follows ``include'' are those payments made ``in-kind'' 
albeit only if those in-kind payments are derived from the use of 
copyrighted sound recordings during the License Period pursuant to 17 
U.S.C. 112(e) for the sole purpose of facilitating a transmission to 
the public of a performance of a sound recording under the limitation 
on exclusive rights specified in 17 U.S.C. 114(d)(1)(C)(iv). In 
adhering to this approach to the word ``including'' as well as the 
language which follows, the regulation is not ungrammatical.
    This proper interpretation is not in tension with the rule against 
surplusage. See Qi-Zhuo v. Meissner, 70 F.3d 136, 139 (D.C. Cir. 1995). 
The ``for the sole purpose'' limitation has specific and effective 
meaning. Additionally, the proper interpretation does not create 
surplusage with regard to section 384.3(c), regarding ``other royalty 
rates and terms'', because the limitation within the definition of 
gross proceeds in 384.3(a) is an economic limitation on the scope of 
the term gross proceeds, and not a limitation on the scope of rights 
applicable to Licensees or particular types of ephemeral recordings, 
such as ephemeral recordings made under different licenses.
    This proper interpretation is not nonsensical. Contrary to Music 
Choice's assertions, it is those in-kind payments derived from the use 
of copyrighted sound recordings which are subject to the ``for the sole 
purpose'' limitation. The proper interpretation does not indicate that 
payments facilitate a transmission. Rather, it is the use of sound 
recordings that facilitates a transmission.
    This proper interpretation is not internally inconsistent, as it is 
accepted that specific provisions, here those regarding in-kind 
payments, do not govern the general, here a general statement of 
inclusiveness regarding fees and payments. See Nitro-Lift Techs., 
L.L.C. v. Howard, 568 U.S. 17, 21 (2012) (addressing the interpretive 
principle generalia specialibus non derogant). This proper 
interpretation is consistent in that the specific does not govern the 
general with regard to the scope of fees and payments within gross 
proceeds as well as subset of in-kind proceeds, and with regard to the 
term ``derived from'' used to apply generally as well as specifically 
with regard to certain in-kind payments.
    This proper interpretation does not produce absurd results, as it 
adheres to the economic intent of the CARP and the Librarian and is 
consistent with the narrow exclusions from gross proceeds in the 
relevant relied upon benchmark agreements. This interpretation is also 
supported by the Judges' economic analysis of the BES license.

B. Economic Analysis

The Parties' Economic Arguments Fail to Clearly Capture the Legal and 
Economic Value of the Section 112 Ephemeral License Applicable to a 
BES--Value Which Supports the Judges' Construction of the Gross 
Proceeds Definition
    The foregoing regulatory analysis is sufficient to make clear that 
the drafters of the disputed regulatory language did not intend to 
allow a BES to use its PSS ephemeral license to effectuate plays at 
business establishments by a BES without a separate ephemeral license 
and the payment of the section 112 royalties. To buttress that legal 
statutory argument, it is instructive to demonstrate the economic 
unreasonableness of Music Choice's position.
    Music Choice relies on the fact that, when a section 114 service, 
such as a PSS, requires both the section 114 performance license and 
the section 112 ephemeral license, the Judges, SoundExchange and other 
licensees, have traditionally assigned a carved-out 5% of the section 
114 performance license royalty as attributable to the ephemeral 
license. This, Music Choice maintains, is an acknowledgement of the 
absence of any actual value in the ephemeral license. See e.g. Music 
Choice Opening Brief at 16-20.
    By contrast, SoundExchange argues that the ephemeral right under 
section 112 has inherent and independent economic value. See, e.g., 
SoundExchange Reply Brief at 13. Thus, SoundExchange argues that the 
consensual carve-out of the section 112 ephemeral royalty from the 
section 114 royalty is irrelevant. SoundExchange Reply Brief at 15.
    Both of these arguments miss the mark. More particularly, 
SoundExchange's argument is incomplete. That is, although SoundExchange 
is correct in that the ephemeral license has value, provided it can and 
must be used in order to operate a music service, that value is either 
an independent value or a joint

[[Page 1891]]

(perfect complement) value, depending on whether one is evaluating the 
BES license, on the one hand, or the noninteractive license, on the 
other.
    By contrast, Music Choice's position is not simply incomplete, but 
rather clearly incorrect. Music Choice asserts that because 
SoundExchange and others (including the CRB Judges) have noted the 
absence of any independent value in the section 112 ephemeral license 
in other statutory licensing contexts, it therefore has no stand-alone 
value in the BES context. Relying on this assertion, Music Choice 
argues that its statutory duty to pay any royalties under the section 
112 ephemeral license is economically inappropriate. See, e.g., Music 
Choice Opening Brief at 16-20. Music Choice seeks to utilize this 
economic argument as justification for the indication that its BES 
royalty obligation should be zero for sound recordings played on its 
PSS service for which it has already utilized a section 112 ephemeral 
license. As explained infra, in this regard, Music Choice conflates the 
concepts of ``no independent value'' and ``no value.'' For Services 
that by Law Must Utilize the Sections 112 and 114 Licenses, these Two 
Licenses are ``Perfect Complements.''
    Economists define `` `[p]erfect complements' [as] goods that are 
always consumed together in fixed proportions . . . A nice example is 
that of right and left shoes. . . . Having only one out of a pair of 
shoes doesn't do the consumer a bit of good.'' H. Varian, Intermediate 
Microeconomics: A Modern Approach 40 (8th ed. 2010). Thus, a customer 
purchasing a pair of shoes for $80 would be indifferent to any 
allocation of that $80 as between the left and right shoe (which is why 
it is obviously efficient that the shoes are priced as a pair).\17\
---------------------------------------------------------------------------

    \17\ One of the Judges previously taught an intermediate 
microeconomics course, in which he utilized this ``pair of shoes 
example.'' After class, one of the students came up to him, raised 
one pantleg and explained that his left foot had been blown off in 
Afghanistan by an IED while he was serving in combat in the United 
States military. (The Judge was appropriately chagrined, but the 
student/former soldier was quite understanding.) The student's 
economic point was that when he bought shoes, even though he needed 
just one shoe out of a pair, he had to pay the for the complete 
pair, despite the fact that the left shoe provided him no value. 
This anecdote has analogous economic meaning in the context of the 
single-license BES context, discussed herein, because the value of 
the two combined perfect complements was the same as the value of 
only one of the items when the other had no actual value.
---------------------------------------------------------------------------

    In similar fashion, a noninteractive service cannot operate its 
service unless it possesses both the ephemeral and the performance 
licenses for sound recordings. As the Judges have noted, when two 
licensed rights are perfect complements, the licensees are indifferent 
as to how much they pay for each individual license, and instead are 
focused on the total cost of the two licenses. See Final rule and 
order, Determination of Royalty Rates and Terms for Ephemeral Recording 
and Webcasting Digital Performance of Sound Recordings, Docket No. 14-
CRB-0001-WR (2016-2020), 78 FR 26316 (May 2, 2016) (Web IV 
Determination) (``willing buyers and willing sellers would prefer that 
the rates for the [Sections 112 and 114] licenses be bundled and . . . 
would be agnostic with respect to the allocation of those rates to the 
Section 112 and 114 license holders,'' allowing for ``the minimum fee 
for the Section 112 license [to be] subsumed under the minimum fee for 
the Section 114 license, 5% of which shall be allocable to the Section 
112 license holders, with the remaining 95% allocated to the Section 
114 license holders.''), aff'd SoundExchange, Inc. v. Copyright Royalty 
Bd., 904 F.3d 41 (D.C. Cir. 2016).
    However, in the context of a BES service, this perfect 
complementarity is non-existent; indeed, there is no complementarity at 
all. The BES service by law is not required to obtain a section 114 
performance license to transmit sound recordings, but is required to 
obtain the section 112 ephemeral license to do so.
    The foregoing point is actually a subset of a larger point made 
clear in scholarly literature integrating economics and law. A claimed 
``property right'' only has exchange or asset value to its claimant if 
it is protected by law. For tangible and intangible resources to 
generate such economic value that can be appropriated by private 
actors, the resources must be ``excludable,'' i.e., the possessor need 
be able to invoke the law to prevent someone else from misappropriating 
his or her resource or seek compensation for its taking. See, e.g., G. 
Hodgson, Much of the ``Economics of Property Rights'' Devalues Property 
and Legal Rights,11 J. Inst. Econ. 683, 684 (2015) (``The term 
`property' should be reserved for cases of institutionalized possession 
with legal mechanisms of adjudication and enforcement. Property 
involves acknowledged rights granted by legitimate legal 
authority.'').\18\ For example, what value would one's car have if 
anyone could simply steal it without legal consequence or remedy? \19\ 
Legal authority is in accord. See U.S. v. Willow River Power Co., 324 
US 499, 502 (1945) (Jackson, R., J.) (``[N]ot all economic interests 
are `property rights'; . . . We cannot start the process of decision by 
calling such a claim as we have here a `property right' [that] is 
really the question to be answered. Such economic uses are rights only 
when they are legally protected interests.'')
---------------------------------------------------------------------------

    \18\ Cf. Y. Barzel, What are ``Property Rights', and Why do they 
Matter? A Comment on Hodgson's Article, 11 J. Inst. Econ. 719 (2015) 
(distinguishing between ``legal'' and ``economic'' conceptions of 
property rights, but acknowledging that ``[w]hen legal rights are 
granted and enforced, it enhances the corresponding economic 
rights,'' even though the law might not provide the most efficient 
or complete protection of a claim of rightful possession and 
property) (emphasis added); see generally R. Posner, Economic 
Analysis of Law at 34, 529 (6th ed. 2003) ((``It is no surprise that 
property rights are less extensive in primitive societies than in 
advanced societies where there is an ``increase[ ] in the ratio of 
the benefits of property rights to their costs . . . '' ``[T]he . . 
. question [of] what allocation of resources . . . maximize[s] 
efficiency . . . is given to the legal system to decide in 
situations where the costs of a market determination would exceed 
those of a legal determination.'')
    \19\ A music industry analogy is instructive in the context of 
intellectual property goods. There was no adequate ability to 
sufficiently police, prevent and remedy piracy that diminished the 
economic return to the owners of sound recording copyrights. In the 
absence of such protections, the private economic value of music 
copyrights as property rights was significantly diminished. See 
Phonorecords III, Final Determination 84 FR 1918, 1978 (Feb. 5, 
2019) (Strickler, J. dissenting) (``When piracy is uncontrolled, 
copies of sound recordings . . . resemble pure public goods [which] 
ha[ve] a zero marginal production cost (formally, they are `non-
rivalrous in consumption)' [and] the provider of the public good 
cannot prevent consumption of the good by non-payers (formally, 
`non-excludability'). See Nicholson & Snyder, supra, at 679 
(subsequent history omitted)); see also N. Tyler, Music Piracy and 
Diminishing Revenues: How Compulsory Licensing for Interactive 
Webcasters Can Lead the Recording Industry Back to Prominence, 161 
U. Pa. L. Rev. 2101, 2108 (June 2013) (``the labels abandoned 
[their] litigation strategy because of the high costs, the lack of a 
significant deterrent effect on the general public, and the 
judgment-proof status of many of the named defendants.'').
---------------------------------------------------------------------------

    Thus, a necessary element for protecting the intellectual property 
right of sound recording copyright owners is a legal regime that both 
acknowledges that right and prohibits infringement, regardless of which 
license is designated as representing that right and is enforced by 
law. In the present BES context, via the statutory compulsory license, 
Congress has elected to acknowledge that right by attaching it to the 
section 112 ephemeral right only, and to enforce that right by 
requiring a BES to pay royalties as set by the Judges.\20\
---------------------------------------------------------------------------

    \20\ As a matter of law and economics, the statutory and 
compulsory license provides a ``liability'' right as opposed to a 
``property'' right, in that the payment of royalties is sufficient 
for a BES to utilize sound recordings, without first obtaining the 
consent of the owner of the sound recording copyright. (By contrast, 
the performances of sound recording by an interactive (``on-
demand'') streaming service, which are unregulated and subject to 
market forces, are ``property'' rights, in that the streaming 
service can be enjoined from transmitting these performances unless 
it has obtained a license to do so, typically in exchange for the 
service's agreement to pay royalties to the copyright owners.)

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[[Page 1892]]

    Accordingly, a BES's obligation under the section 112 ephemeral 
license, as opposed to the section 114 performance license, as a 
condition for performing sound recordings, does not affect the economic 
value of the required licensing.
    The foregoing analysis undermines Music Choice's attempt to 
narrowly construe the ``gross proceeds'' definition on economic 
grounds. That is, there is insufficient economic predicate to support 
Music Choice's reliance on legislative history, statutory construction, 
regulatory rulings and judicial precedents as bases for limiting 
``gross proceeds'' in the manner Music Choice proposes.
    So, in our Title 17 context, under section 114, the ephemeral right 
and the performance right are perfect complements in the legal and the 
economic sense, in that neither has any value independent of the other. 
This is why SoundExchange is on record in previous non-BES proceedings 
as acknowledging that--in those contexts--the ephemeral license has no 
``independent'' value. Thus, a licensee would be disinterested in how 
the total royalty is legally allocated as between the ephemeral and the 
performance license.
    Pursuant to this analysis, the word ``solely'' cannot rationally be 
construed as disconnected from the fact that the ephemeral license is 
the only license that allows for a BES to legally generate ``Gross 
Proceeds.'' Music Choice is simply trying to unfairly obtain a ``free 
ride'' on the use of the copyrighted sound recordings. The fact that 
Music Choice's use of the ephemeral license also allows it to generate 
further proceeds when used to operate a PSS does not negate this 
fundamental point.\21\
---------------------------------------------------------------------------

    \21\ Indeed, this is an example of an ``absurd'' result that 
Music Choice's statutory interpretation argument would permit if 
followed.
---------------------------------------------------------------------------

    Music Choice's Attempt to Obtain a ``Free Ride'' on the Statutory 
Ephemeral License it Obtained for its PSS--by Extending its Reach to 
Music Choice's BES--is Economically Meritless
    As noted supra, Music Choice's legal argument, if adopted, would 
allow it to `free ride'' on the statutory ephemeral license applicable 
to its PSS service. That is, although the section 112 PSS ephemeral 
license was established in a separate proceeding pursuant to economic 
analyses unrelated to the BES statutory license, there was insufficient 
evidence adduced to account for the value added by the of that 
ephemeral license to facilitate a BES.\22\ Moreover, because the 
section 112 ephemeral license is a perfect complement to the section 
114 performance license for a PSS, the ephemeral license could be--and 
was--set as a percentage (5%) of the section 114 license. Final rule 
and order, Determination of Rates and Terms for Preexisting 
Subscription Services and Satellite Digital Audio Radio Services, 
Docket No. 2011-1 CRB PSS/Satellite II, 78 FR 23054, 23056 (Apr. 17, 
2013) (SDARS II Final Determination); see also 37 CFR 382.12(b). That 
is, as long as the total royalty rate was supported by the evidence, 
the apportionment of the royalty as between the section 112 and 114 
licenses was economically irrelevant, as discussed supra. Thus, there 
was insufficient economic evidence proffered in the PSS actions to 
establish an independent value for the PSS section 112 license. (As 
explained supra, the absence of an independent value for one of two 
perfect complements, does not mean that either has no value.)
---------------------------------------------------------------------------

    \22\ See SDARS II Final Determination 78 FR 23054. Indeed, the 
SDARS regulations have expressly excluded from PSS `Gross 
Revenues'', inter alia, ``[r]evenues recognized by the licensee for 
the provision of . . . [c]hannels, [and]programming, products . . . 
for which . . . the making of Ephemeral Recordings . . . is 
separately licensed, including by a statutory license and, for the 
avoidance of doubt . . . transmissions to business establishments.'' 
37 CFR 382.11 (Definitions . . . Gross Revenues (3)(vi)((D). 
Clearly, no revenue, and no value, attributable to the sound 
recordings transmitted through a BES has been included in the PSS 
royalty base.
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    Of course, it cannot be disputed that, legally, the ephemeral 
license which a BES must obtain has economic value. That is, but for 
the existence of the section 112 license, a BES would not be able to 
operate, absent a separate license such as a direct license. And, as 
explained supra, the sound recording copyright owner's legal right is 
what ensures and generates the economic value in the BES license.
    Music Choice's statutory argument boils down--economically--to the 
claim that the section 112 ephemeral license it obtained in the PSS 
proceedings adds no value to Music Choice in the BES context--or at 
least no value for which Music Choice must compensate sound recording 
copyright owners--for sound recordings also played on Music Choice's 
PSS service. This ``free rider'' argument ignores the relevant 
economics of the matter, as discussed below.
    The economic context of Music Choice's argument lies in what 
economists recognize as involving the concept of ``economies of 
scope.'' Succinctly stated, ``economies of scope'' are cost savings 
realized by a firm that can utilize one of its inputs to produce two 
inputs. See R. Pindyck & D. Rubinfeld, Microeconomics at 258 (8th ed. 
2013).\23\ More particularly, ``economies of scope'' will exist when, 
inter alia, a firm's two products are closely linked to one another, 
and are produced ``from the joint use of inputs . . . .'' Id.
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    \23\ ``Economies of scope'' should be distinguished from 
``economies of scale,'' in that the latter refers to diminishing 
average unit costs for a single product produced by a firm.
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    Before considering the actual statutory context, for pedagogical 
purposes, consider a hypothetical market-based scenario, i.e., absent 
statutorily required compulsory licensing. Music Choice would be 
required to obtain licensing rights--whether bundled or separate--to 
allow it to operate both its PSS subscription service and its BES. In 
this market scenario, Music Choice would need to negotiate with the 
sound recording copyright owners. As a matter of basic economics, 
bargaining and price-setting, the copyright owners would need to 
estimate Music Choice's willingness to pay (``WTP'') for the inputs, 
i.e., the licensing rights to the sound recordings. Applying the 
economic axiom that businesses seek to maximize profits \24\ in the 
negotiations the copyright owners would not ignore the value added to 
Music Choice by a business establishment service when proposing a 
license. This point not only follows from the axiomatic microeconomic 
assumption of profit maximization, but also from the concept of 
``derived demand,'' which holds that the ``upstream demand . . . for . 
. . sound recordings . . . known as `factors' of production or `inputs' 
. . . [is] derived from the downstream demand of listeners . . . and 
users . . . .'' Phonorecords III Determination, 84 FR at 1977 
(Strickler, J. dissenting) (subsequent history omitted).'' See also 
Phonorecords III Final Determination after Remand, Appx. A (Initial 
Ruling and Order after Remand at 111 (restating the foregoing and 
adding: ``[D]emand for the factor is derived from the downstream firm's 
output choice''). Here, the downstream distribution firm is Music 
Choice, and its ``output

[[Page 1893]]

choice'' requires use of licenses as factors of production to 
facilitate its (1) its PSS transmissions and (2) its BES transmissions. 
Thus, a copyright owner would rationally estimate the downstream demand 
for noninteractive and business establishment services, and incorporate 
each separate demand into the royalty it would seek for each respective 
license.\25\
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    \24\ See Varian, supra at 357 (identifying ``profit maximization 
as an economic ``axiom''); C.E. Ferguson & S.C. Maurice, Economic 
Analysis 234 (It is a ``fundamental assumption . . . that 
entrepreneurs try to maximize profits'') 234.
    \25\ Additionally, the copyright owners would want to estimate 
the separate opportunity costs of licensing to the PSS and to the 
BES, i.e., whether licensing to each would be likely to cause 
listeners to leave a different royalty-bearing service that 
generated higher revenues. In this context, a licensor would not 
provide the BES license gratis to a licensee who paid separately for 
the PSS license--especially if a stand-alone BES would pay a market-
based royalty for the BES license.
    One wrinkle in this otherwise standard economic point is that 
additional (marginal) digital copies of a sound recording are 
essentially zero. Basic economics provides that in a competitive 
market for a private good, price will equal marginal cost, but at a 
marginal cost of zero, price cannot equal zero, or else the 
copyright owners would not recover their significant fixed costs and 
earn a profit. Thus, for a licensor of sound recording copyrights, 
ascertaining the demand from various distribution channels is needed 
to generate a schedule of royalty rates. (As the Judges have noted 
on prior occasions, the sound recording copyright owners are 
``complementary oligopolists,'' which affords them substantial 
market power beyond that of ordinary competing oligopolists, but 
that complication is not relevant to the present discussion.)
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    Although the foregoing textbook analysis applies to a world which 
does not include statutory compulsory licenses, that distinction 
neither negates nor alters the applicability of this analysis in the 
present context where statutory compulsory licensing exists. This is so 
because the PSS and BES royalty standards applicable during the BES I 
and BES rate periods (2009-2013 and 2014-2018, respectively) and the 
BES royalty standards themselves invoke the economics of the 
hypothetical unregulated market--before considering any potential 
adjustments.
    More particularly, the PSS rate determinations which applied during 
these BES rate proceeding periods were largely the product of the SDARS 
I and SDARS II proceedings, respectively.\26\ In these proceedings, the 
Judges approach was first to identify marketplace benchmarks between 
willing sellers (licensors) and willing buyers (licensees), and then 
consider whether adjustments to these market-based rates is needed to 
achieve one or more of the four ``objectives'' listed in section 
801(b)(1). See SDARS II Final Determination, 78 FR at 23054-56, 
(explaining that the Judges ``evaluat[ed] the evidence to determine . . 
. reasonable royalty rates based on market benchmarks'' . . . as a 
``useful starting point,'' before weighing the four statutory 
objectives ``required by 17 U.S.C. 801(b) . . . .''). And although the 
PSS rates established via settlement, see Final rule and order, 
Determination of Rates and Terms for Preexisting Subscription Services 
and Satellite Digital Audio Radio Services, Docket No. 2006-1 CRB 
DSTRA, 73, 4080, 4081 & n.8 (Jan. 24, 2008) (SDARS I Final 
Determination), in the companion SDARS rate case which was adjudicated 
under the same section 801(b)(1) rate standard, the Judges likewise 
determined that ``comparable marketplace royalty rates are ``a good 
starting point'' before separately considering the four section 
801(b)(1) factors). Id. at 4088. Thus, marketplace economics were part 
and parcel of the Judge's section 801(b)(1) rate analysis, and 
marketplace conduct includes the fundamental assumption that licensors 
seek to maximize their profits, and, as explained supra, would not 
simply give away their licensing rights to a BES/PSS service merely 
because it had already provided that service a PSS license for separate 
royalty payments.
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    \26\ The PSS rates were set (as is customary) in the same 
proceedings that established the SDARS rates, which is why the 
Determinations are identified as ``SDARS I'' and ``SDARS II.''
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    In the BES context, the applicability of market forces is 
statutorily prescribed (rather than inferred by the Judges, as in the 
section 801(b)(1) proceedings discussed supra). That is, for a BES 
service to access copyrighted sound recordings, it must utilize the 
section 112 ephemeral license and pay royalty rates ``that most clearly 
represent the fees that would have been negotiated in the marketplace 
between a willing buyer [i.e., licensee] and a willing seller [i.e., 
licensor].'' 17 U.S.C. 112(e)(4). Accordingly, any rational profit-
maximizing licensor of a BES license in the marketplace--for the 
reasons set forth supra--would seek the highest royalty it could obtain 
by estimating the maximum WTP of the potential licensee with which it 
is bargaining \27\--and certainly would not irrationally provide the 
BES license for free merely because that potential licensee would like 
to appropriate for itself the entire value of the ``economies of 
scope'' it could realize by using its PSS license for its BES service.
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    \27\ If the market for licenses was competitive and price 
discrimination was absent, the licensor might be compelled by market 
forces to accept a royalty rate lower than the licensee's maximum 
WTP, providing that licensee with what economists term a ``consumer 
surplus.'' On the other hand, if the sound recording licensor had 
complementary oligopoly power in the BES market, the Judges might 
need to adjust downward a marketplace benchmark rate to adjust for 
that specific market-power. See e.g., Web IV Determination, 81 FR at 
26344; Phonorecords III 84 FR at 1953 (subsequent history omitted); 
Web V 86 FR at 59478. However, those potential adjustments do not 
impact the analysis in the text supra, which applies the axiomatic 
assumption of ``profit maximization'' to the economic analysis of 
any market structure.
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Conclusion

    Based on the entirety of the record as well as the foregoing 
findings and reasoning, the Judges answer the District Court by 
concluding that 37 CFR 384.3(a) directs Business Establishment Service 
providers to calculate royalties using their gross proceeds derived 
from all fees and payments for the use of all licensed ephemeral copies 
used for the operation of the Business Establishment Service, except 
that in-kind payments must only be included in gross proceeds when such 
in-kind payments are derived from the use of copyrighted sound 
recordings during the licensing period pursuant to 17 U.S.C. 112(e) for 
the sole purpose of facilitating a transmission to the public of a 
performance of a sound recording under the limitation on exclusive 
rights specified in 17 U.S.C. 114(d)(1)(C)(iv).\28\
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    \28\ Having addressed the referred question regarding the 
meaning of the ``Gross Proceeds'' definition, the Judges decline to 
go beyond the scope of the re-opened proceedings or the directive in 
the Court's Memorandum Opinion. The Judges did not request briefing 
on the standard that should be used to evaluate the approach that a 
BES provider has taken to apportion its revenues, and therefore do 
not address that matter.
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    The Judges issue this decision to the parties in restricted format. 
The Judges will separately order the participants in the proceedings to 
confer and jointly file a notice of proposed redactions, if any are 
needed, no later than December 20, 2024.
    So ordered.

David P. Shaw,
Chief Copyright Royalty Judge.

David R. Strickler,
Copyright Royalty Judge.

Steve Ruwe,
Copyright Royalty Judge.

Dated: December 4, 2024.

    The Judges issued this Ruling on Regulatory Interpretation to the 
parties in interest on December 4, 2024. This publication of the Ruling 
on Regulatory Interpretation redacts confidential information that is 
subject to a protective order in the proceedings.

    Dated: December 31, 2024.
David P. Shaw,
Chief Copyright Royalty Judge.
[FR Doc. 2024-31779 Filed 1-8-25; 8:45 am]
BILLING CODE P
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