Opinion ID: 187426
Heading Depth: 3
Heading Rank: 2

Heading: Royalty Rates

Text: 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.