Opinion ID: 187426
Heading Depth: 2
Heading Rank: 2

Heading: Commercial Webcasters' Challenges

Text: The Judges are required to determine royalty rates that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. 17 U.S.C. § 114(f)(2)(B). The commercial webcasters argue that an earlier decision by the Librarian, affirmed by this court, requires the Judges to base rates on a perfectly competitive market. See Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings and Ephemeral Recordings (Webcaster I), 67 Fed.Reg. 45,240, 45,244-45 (July 8, 2002) (Because of the diversity among the buyers and the sellers, the [Copyright Arbitration Royalty Panel] noted that one would expect `a range of negotiated rates,' and so interpreted the statutory standard as `the rates to which, absent special circumstances, most willing buyers and willing sellers would agree' in a competitive marketplace.). This claim fails for two reasons. First, the dictum from the prior decision calling for a competitive benchmark does not require rates to be based on a perfectly competitive market. Second, our having affirmed Webcaster I in Beethoven.com lends no additional weight to the commercial webcasters' argument. Far from endorsing a competitive (or perfectly competitive) standard, we specifically refused to  examine the correctness of the Librarian's decision regarding competitiveness. Beethoven.com, 394 F.3d at 952 (emphasis added). Because of the exceptionally deferential review undertaken in that case, our having affirmed the decision of the Librarian cannot be taken to bind the Judges today. Id. The statute speaks only of a willing buyer and a willing seller. This is the standard the Judges were to apply in evaluating whether a market benchmark was an appropriate model on which to base their own rate determinations. The statute does not require that the market assumed by the Judges achieve metaphysical perfection in competitiveness. The Judges, not this court, bear the initial responsibility for interpreting the statute. Applying the lessons of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), we can only assess the reasonableness of the Judges' interpretation of the inherent ambiguity in the statute's mandate. Appellants have pointed to nothing in the Judges' interpretation to establish unreasonableness.
The Judges set a per play royalty rate to be paid by commercial webcasters. This rate will increase, once a year, from $0.0008 per play in 2006 to $0.0019 per play in 2010. See Order, 72 Fed.Reg. at 24,096. The rate schedule was based on the testimony of SoundExchange's expert economist Michael Pelcovits, who modeled his estimates on the market for interactive webcasting covering the digital performance of sound recordings. Id. at 24,092. Interactive webcasting  which is not within the scope of the statutory license  allows a listener to access particular sound recording[s] on request or a program of sound recordings specifically created for the recipient. 17 U.S.C. § 114(j)(7). By contrast, the non-interactive webcasting at issue in this determination does not allow the same degree of user customization. Therefore Dr. Pelcovits proposed, and the Judges adopted, an interactivity adjustment by which to decrease the interactive rates. See Order, 72 Fed.Reg. at 24,092-94. Dr. Pelcovits calculated the adjustment through a process called hedonic regression, a statistical method that tries to isolate the value of a particular variable in a complex set of data. In this case, Dr. Pelcovits tried to isolate the value of interactive service, which he used to reduce his final estimates. The commercial webcasters argue that the market for interactive music services  used by Dr. Pelcovits in his model, which was generally adopted by the Judges  was insufficiently competitive. They claim that the market for interactive music is different than the market for passive, noninteractive webcasting because an interactive music service is not viable unless it can provide music from each of the four major record labels. The commercial webcasters argue that subscribers to interactive webcasting services expect access to recordings from all four major labels in exchange for [the] significant monthly payment that is a condition of their subscription. Commercial Op. Br. 26. Assuming this asymmetry of consumer demand, they conclude that the Judges should not have produced webcasting rates by looking to interactive music rates. To provide music from each major record label, an interactive music service must reach agreement with each major record label independently. According to the commercial webcasters, this competitive dynamic gives record labels disproportionate bargaining power. Any one record label could block an entire service, so each in turn can negotiate higher rates. By looking to this market, they argue, the Judges provided better terms to the copyright owners than they would have earned in the marketplace. Commercial webcasters presented this argument to the Judges, supported by the testimony of their expert witness, economist Adam Jaffe. The Judges considered the argument and found it to be largely unsubstantiated. Id. at 24,093. They further noted that there was testimony that directly contradict[ed] any suggested generalization that the repertoires of all four major[ record labels] are necessary as a prerequisite prior to undertaking the operation of a consumer music service in the various digital music service markets. Id. at 24,093 n. 24. The Judges cited evidence that Yahoo! was able to operate its custom radio channels without one of those record labels for two years, even though the record label accounted for nearly one-third of the market in terms of repertoire. Id. They summarized their assessment of Dr. Jaffe's testimony by calling his concerns that the benchmark market [wa]s not sufficiently competitive... little more than the theoretical speculations of an academic offering a quick outline of possible criticisms without carefully considering the applicable facts or alternative explanations. Id. at 24,093. The Judges assessed Dr. Jaffe's testimony and pointed to contrary evidence in the record. Having evaluated the arguments on both sides, we hold that it was not unreasonable for the Judges to base their webcasting rates in part on the market for interactive music. [2] The standard of review applicable in ratemaking cases is highly deferential. See E. Ky. Power Coop., 489 F.3d at 1306. The deferential standard of review extends to our consideration of arguments by the commercial webcasters about whether a voluntary agreement could be considered comparable to the ratesetting the Judges were undertaking. See 17 U.S.C. § 114(f)(2)(B). When setting rates and terms, the Copyright Royalty Judges may consider the rates and terms for comparable types of digital audio transmission services and comparable circumstances under voluntary license agreements. 17 U.S.C. § 114(f)(2)(B) (emphasis added). The commercial webcasters argue that the Judges committed reversible error by failing to consider a 2003 voluntary agreement between record companies and satellite digital audio services. Nothing in the statute requires the Judges to consider any comparable agreements, let alone particular agreements. It is generally within the discretion of the Judges to assess evidence of an agreement's comparability and to decide whether to look to its rates and terms for guidance. We therefore affirm the Judges' decision not to consider the 2003 agreement when setting rates for webcasting. Apart from the objections to the Judges' assessment of the market and voluntary agreements, the commercial webcasters also dispute the hedonic regression analysis used by Dr. Pelcovits to reduce the rates. In a later determination, setting rates and terms for satellite radio subscription services, the Judges credited a study with an interactivity adjustment much greater than the interactivity adjustment Dr. Pelcovits used in this determination. See Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services (SDARS), 73 Fed.Reg. 4080 (Jan. 24, 2008). If the Judges had used the SDARS adjustment, the final rates would have been two-thirds smaller. Commercial webcasters contend that this was arbitrary. This argument fails for two reasons. First and most obviously, the Judges are not bound by future agency action. The suggestion defies logic. The Judges must act ... on the basis of a written record [and] prior determinations and interpretations of ... the Copyright Royalty Judges. 17 U.S.C. § 803(a)(1). They are not required to act on the basis of future determinations of the Copyright Royalty Judges. Failure to conform with subsequent agency action cannot be a basis for a finding of arbitrariness. See Tesoro Ref. & Mktg. Co. v. FERC, 552 F.3d 868, 873-74 (D.C.Cir.2009) (rejecting futility argument based on subsequent agency action). Second, even if the Judges were so bound, their determination in SDARS specifically criticized the interactivity adjustment, saying it might well be improved through a hedonic regression analysis. See 73 Fed.Reg. at 4093. The Judges' failure to use a similarly inexact adjustment for webcasting was not arbitrary or otherwise contrary to law. Finally, the commercial webcasters argue for setting aside the Judges' proposed rates because they are crushing and disproportionate. Commercial Op. Br. 38. The APA permits us to set aside agency action that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 5 U.S.C. § 706(2)(A). This they have not shown.
The Judges adopted a per-performance usage fee structure for all commercial webcasters. Small commercial webcasters object to this uniform solution, seeking instead to pay a percentage of their revenues. The Judges rejected such an argument because they found no evidence in the record about how [to] delineate between small webcasters and large webcasters and noted that none of the small commercial webcasters ... provided helpful evidence about what demarcates a `small' commercial webcaster from other webcasters at any given point in time. Order, 72 Fed.Reg. at 24,089 & n. 9. The small commercial webcasters now argue that the definition of small commercial webcaster is irrelevant because the percentage-of-revenue approach would apply only to those webcasters that elected to pay a percentage of total gross revenue. The Board and SoundExchange say that this revised argument, which they claim was first raised at rehearing, is waived. See 37 C.F.R. § 351.14(b) (A party waives any objection to a provision in the determination unless the provision conflicts with a proposed finding of fact or conclusion of law filed by the party.). We assume without deciding that the small commercial webcasters' initial proposal, combined with the references to gross revenue they made during the proceedings, are sufficient to avoid waiver. Regardless, their objection fails on the merits. The Judges' determination spelled out five reasons they favored payments based on performances rather than webcaster revenue: (1) performances are more directly tied to the nature of the right being licensed; (2) it is difficult to calculate revenue; (3) it is difficult to define revenue unambiguously; (4) auditing and enforcement would be more difficult; and (5) payments might not increase with increased usage of copyrights. Id. at 24,089-90. An opt-in regime charging a fraction of total gross revenue would address only two of the Judges' five concerns. It might remove some of the difficulty in calculating and defining revenue, because total gross revenue includes all money received by a webcaster. But it would not address the other problems raised by the Judges: that total gross revenue is not directly tied to the right being licensed; that auditing and enforcement would be difficult; and that usage might increase without a corresponding increase in royalty payments. In an attempt to address these problems, the small commercial webcasters point to the Judges' subsequent adoption of a percentage-of-revenue royalty in the SDARS [(i.e., satellite radio)] proceeding. Commercial Op. Br. 47. Because the Judges adopted it for satellite radio, they argue, the Judges should have adopted it for webcasting. Beyond the ordinary problem of trying to hold an agency to action it takes in a subsequent proceeding, see supra Part II.B.2, the Judges were explicitly reluctant to adopt that approach in the satellite radio proceeding: Because we have no true per performance fee proposal before us nor sufficient information from evidence of record to accurately transform any of the parties' proposals into a true per performance fee proposal, the Copyright Royalty Judges conclude that a revenue-based fee structure for the SDARS is the most appropriate fee structure applicable to these licensees. SDARS, 73 Fed.Reg. at 4085. The Judges therefore appear committed to applying per-performance royalties for commercial services, and deviated from that preference for satellite-radio licensing only because the parties presented them with no better options. Finally, it was not error for the Judges to reject the small commercial webcasters' pleas that paying per performance would wreck their inefficient business models. The Judges made clear they could not guarantee a profitable business to every market entrant. Order, 72 Fed.Reg. at 24,088 n. 8. The Judges are not required to preserve the business of every participant in a market. They are required to set rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. 17 U.S.C. § 114(f)(2)(B). If small commercial webcasters cannot pay the same rate as other willing buyers and still earn a profit, then the Judges are not required to accommodate them.
In addition to setting royalty ratesto be paid by webcasters to the owners of sound recording copyrightsthe statute requires there to be a minimum fee for each ... type of service provided. 17 U.S.C. § 114(f)(2)(B). These fees are paid by licensees, like the webcasters, to the collective, to cover administrative costs of the copyright owners in administering the license. Webcaster I, 67 Fed. Reg. at 45,262. The Judges found reasonable a minimum fee of an annual nonrefundable, but recoupable $500 minimum per channel or station payable in advance. Order, 72 Fed.Reg. at 24,097. Commercial webcasters object to the per channel or station phraseology for its failure to set a cap on the number of minimum fees a licensee could be required to pay. In particular, they fear that some of their business models might be deemed to contain thousands or tens of thousands of channels, making the combined fees prohibitively expensive. Anticipating such an interpretation, DiMA and SoundExchange agreed to cap minimum fees at $50,000 per year per licensee in 2007. (Voluntary negotiation by affected parties is given effect in lieu of any ... determination by the Judges. 17 U.S.C. § 114(f)(3).) Because some parties have not contracted around this provision, the issue is not moot and we have power to reach it. The Board argues that the commercial webcasters waived their right to make any objection to the minimum fees because they did not raise it before the Judges. See 37 C.F.R. § 351.14(b). But even if the commercial webcasters failed to specifically object to the omission of a fee cap, they objected to SoundExchange's proposal, which included no fee cap. See DiMA and Radio Broadcasters Proposed Findings of Fact and Conclusions of Law ¶¶ 257-258. They also endorsed a 2003 agreement between SoundExchange and DiMA that contained a fee cap (the 2003 Voluntary Agreement). See DiMA, America Online, Inc., and Yahoo!, Inc. Proposed Findings of Fact and Conclusions of Law ¶¶ 35-38. These proposals conflict[] with the Judges' determination, which lacks any provision relating to a cap on the number of minimum fees that any licensee may be required to pay. 37 C.F.R. § 351.14(b). Therefore, the arguments were not waived. On the merits, commercial webcasters raise several objections. They argue the determination was an arbitrary departure from Webcaster I, which contained a flat minimum fee of $500 per licensee, without any possibility of raising it for additional channels or stations. 67 Fed.Reg. at 45,262. They also argue it was arbitrary for the Judges to fail to limit the number of minimum fees that might be paid by a single licensee, when they relied in part on the 2003 Voluntary Agreement, which had such a limit. That agreement charged licensees a minimum fee of $2,500, or $500 per channel or station ..., whichever is less, per year. 37 C.F.R. § 262.3(d)(2). Finally, they argue that without a cap, the accumulation of minimum fees could become excessively burdensome. The Judges are free to depart from precedent if they provide reasoned explanations for their departures, and they discussed minimum fees in their determination. See Order, 72 Fed.Reg. at 24,096-97. But in only two footnotes do they appear aware of the possibility of individual licensees paying more than $500. See id. at 24,097 nn. 38-39. Even in the Judges' discussion of side channelswhich included an example of one licensee being charged $1000, id. at 24,097 n. 39they do not seem to anticipate the possibility of a webcaster paying hundreds of thousands of dollars or more. The 2003 Voluntary Agreement the Judges quoted, see id. at 24,097 n. 38, capped minimum fees at $2500 per licensee. Depending on future interpretations of channel or station, the Judges' determination might impose enormous fees on some business models and tiny fees on others, based on regulations that have not yet been defined. Such a regime is arbitrary and does not appear to represent what would have been negotiated in the marketplace between a willing buyer and a willing seller. See 17 U.S.C. § 114(f)(2)(B). Therefore we vacate the minimum fee provision for commercial webcasters, and remand for the Judges to reconsider this portion of their determination.
The Judges set a late fee of 1.5% of the royalty payment due for that period, accruing monthly. See Order, 72 Fed.Reg. at 24,107. The commercial webcasters object, arguing that the Judges should have considered course of dealing evidence showing that in practice, rates of such magnitude are very rarely, if ever, imposed. Commercial Op. Br. 41. The Judges did, however, consider course of dealing evidence. See Order, 72 Fed.Reg. at 24,107. They considered it and were not persuaded that contracting parties' ability to waive late fees require[d] rejection of a higher late fee. Id. They noted that some contracts lacked discretion to grant waiver and observed that [w]hile waiving a late fee can promote good feelings in a private agreement ..., it has no bearing for a statutory license where copyright owners and performers cannot ... terminate access to their works under the license. Id. Therefore we affirm the Judges' determination with respect to late fees.
Webcaster I, 67 Fed.Reg. at 45,275, codified at 37 C.F.R. § 261, entitled copyright owners to view certain confidential information of the webcasters, but only as part of their statements of account ... in aggregated form. 37 C.F.R. § 261.5(c). The collective, which held the information, was prohibited from using it for any purpose other than royalty collection and distribution and activities directly related thereto. Id. In the determination under review, the Judges chose to expand access to non-aggregated statements of account, though limit[ing] this right to copyright owners and performers, and their agents and representatives. Order, 72 Fed.Reg. at 24,109. The commercial webcasters object to this change, saying the information is sensitive and pointing to several marketplace agreements with confidentiality agreements similar to the prior regime. The Judges reasonably rejected these arguments. As they made clear in their determination, there was no finding that [disclosure of] the types of information contained in the statements of account ... would harm the business interests of the reporting Services. Id. at 24,108. The commercial webcasters' witness did not articulate how the information contained in the statements ... could injure the competitiveness of a Service, or otherwise negatively affect its operation. Id. The Judges also found that the existing confidentiality arrangement negatively impact[ed] the copyright owners' substantive rights under the section 112 and 114 licenses. Id. Because we ask only whether the Judges acted reasonably based on record evidence, we are easily satisfied that the Judges met their burden on this point.