Court Opinion

ID: 4162953
Source: CourtListenerOpinion
Date Created: 2017-04-25 15:04:27.950817+00
Date Added: 2024-06-11T14:24:17.766426
License: Public Domain

United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 9, 2016               Decided April 25, 2017

                        No. 16-7041

                  SOUNDEXCHANGE, INC.,
                      APPELLANT

                              v.

                        MUZAK LLC,
                         APPELLEE

        Appeal from the United States District Court
                for the District of Columbia
                    (No. 1:15-cv-00476)

     Joshua M. Segal argued the cause for appellant. With him
on the briefs were Michael B. DeSanctis, Emily L. Chapuis, and
Devi M. Rao. David A. Handzo entered an appearance.

     Brian M. Willen argued the cause for appellee. With him
on the brief was Gary R. Greenstein.

    Before: ROGERS and GRIFFITH, Circuit Judges, and
SILBERMAN, Senior Circuit Judge.

    Opinion for the Court filed by Senior Circuit Judge
SILBERMAN.

    Concurring opinion filed by Circuit Judge ROGERS.
                                  2

     SILBERMAN, Senior Circuit Judge: This case pits
SoundExchange, a nonprofit entity, charged with the
responsibility of collecting royalties for performing artists and
copyright owners of music, against Muzak, a company that
supplies digital music channels to satellite television networks
who, in turn, sell to subscribers. SoundExchange sued Muzak
under the Copyright Act in district court, claiming that Muzak
underpaid royalties owed. The district court dismissed
SoundExchange’s complaint. (From the point of view of
classic administrative law, the Register of Copyrights, to which
we normally are obliged to defer, plays a rather unusual role.)
Although the case is close – the controlling statute is dreadfully
ambiguous – we conclude that SoundExchange has the better
position, and therefore reverse the district court.

                                  I.

     Muzak is a curator of copyrighted work. It generates
revenue by packaging sound recordings into digital music-only
channels and providing those channels to individuals who
subscribe to cable and satellite television system operators.
Businesses such as Muzak (called subscription services) at one
time were not required to obtain a license to publicly perform
sound recordings because copyright owners did not have an
exclusive right to publicly perform their work. But, sensing that
emerging technology posed a threat to copyright owners’
interests, Congress stepped in. The Digital Performance Right
in Sound Recordings Act of 1995 gave copyright owners an
exclusive right “to perform the copyrighted work publicly by
means of a digital audio transmission.”1

     1
      See Pub. L. No. 104-39, § 2, 109 Stat. 336, 336 (1995) (codified
at 17 U.S.C. § 106(6)); see also H.R. Rep. No. 104-274, at 13 (1995).
                                 3

      However, entities such as Muzak could obtain a statutory
license that allowed them to play copyrighted music in return for
the payment of “reasonable rates.” These rates are set in
adversarial rule-making proceedings every five years by a
Copyright Royalty Board.2 The first such proceeding began in
1996. Three curator companies participated: Muzak, Digital
Cable Radio Associates (operating as “Music Choice”), and
DMX Music, Inc. The panel set rates that, some argued, favored
the subscription services providers over the copyright holders.
Determination of Reasonable Rates and Terms for the Digital
Performance of Sound Recordings, 63 Fed. Reg. 25,394, 25,406
(May 8, 1998). Congress, persuaded, revisited the issue and
passed the present statute, the Digital Millennium Copyright Act
(the Act), which instructed the Royalty Board’s predecessor to
set rates reflecting those that “would have been negotiated in the
marketplace between a willing buyer and a willing seller,” i.e.,
market rates.3 That standard favored the copyright holders.

     As an obvious compromise, however – in a concession to
the businesses that had invested under the more favorable pre-
1998 rates – the Act provides a grandfather clause. “Preexisting
subscription services” could still pay rates set according to the
old method. “New subscription services,” on the other hand,
were relegated to the new rate-making regime based on a

    2
      See 17 U.S.C. § 114(f). The predecessor to the Copyright
Royalty Board, the Copyright Arbitration Royalty Panel, was phased
out by the Copyright Royalty and Distribution Reform Act of 2004.
See Pub. L. No. 108-419, § 5, 118 Stat. 2341, 2363.
    3
      See Pub. L. No. 105-304, § 405(a), 112 Stat. 2860, 2896 (1998)
(codified at 17 U.S.C. § 114(f)(2)(B)).
                                4

hypothetical free market.4 As should be obvious, a grandfather
status is quite valuable and it is that status – the meaning of
“preexisting subscription service” – at stake in this case.

     At the time Congress acted, Muzak apparently provided its
collection of music channels only to customers of the satellite
television network called the Dish Network (owned by EchoStar
Corporation and then branded as the DiSH Network). Taking the
name of the program from its distributor, the package of music-
only channels was called DishCD. (The Dish Network also
provided its customers other unrelated programming such as
television channels.)

     SoundExchange is designated by regulation as the sole
representative of the copyright holders.5 Its job is to obtain the
royalties owed under the statutory licenses and to distribute
them to performing artists and copyright holders. In this case,
SoundExchange claims that Muzak owes it substantial royalties
because Muzak erroneously applied the grandfather rate to
ineligible transmissions and therefore underpaid.

     The controversy stems from a series of corporate
transactions. In 2011, Mood Media Corporation acquired
Muzak, as well as, in 2012, one of Muzak’s competitors, DMX.
DMX offered a music program called SonicTap, which was
quite similar to Muzak’s DishCD, but was transmitted over a
different satellite television network, DirecTV. Before Mood

    4
       Compare 17 U.S.C. § 114(f)(1)(B) (preexisting subscription
services) with id. § 114(f)(2)(B) (new subscription services).
    5
       See 37 C.F.R. §§ 380.4, 382.2, 382.11, 382.13; see also 17
U.S.C. § 114(g).
                                5

Media bought DMX and put it under the same corporate roof as
Muzak, DMX was not entitled to, nor did it pay, the grandfather
rates for its SonicTap program. (It will be recalled that an entity
called “DMX” participated in the original rate-making
proceedings beginning in 1996. But, due to corporate
restructuring, that legal entity is not the same one as the “DMX”
that Mood acquired in 2011.) After Mood bought both
companies, it arranged to have DMX transfer to Muzak the right
to make transmissions to DirecTV subscribers under the
SonicTap brand.6 When the smoke cleared, Muzak had acquired
DMX’s consumer music customers.

      After the corporate transactions, Muzak paid the
grandfathered rate for all of its subscription service
transmissions, which, as noted, led SoundExchange to sue in
district court under the Copyright Act. SoundExchange claimed
that Muzak was entitled to pay the more favorable rate only for
its transmissions packaged as DishCD, but not for those made
under the SonicTap brand or any others. The district court,
essentially equating the new customers acquired by acquisition
of DMX to new customers Muzak acquired on its own,
dismissed the complaint. See SoundExchange, Inc. v. Muzak,
LLC, 167 F. Supp. 3d 147 (D.D.C. 2016).

                                II.

     The dispute between the parties turns on the language of
the Act, specifically, what does “preexisting subscription
service” (the grandfathered category defined by the Act) mean?
Does it refer to Muzak, the business entity, however it grows?

    6
       Muzak also gained the right to provide music to other
distributors previously served by DMX.
                                  6

Or is that term limited to the program offering, DishCD, that
was marketed by Muzak at the time the statute was passed?

     The Act defines a “preexisting subscription service” as:

           [A] service that performs sound recordings by means
           of noninteractive audio-only subscription digital audio
           transmissions, which was in existence and was making
           such transmissions to the public for a fee on or before
           July 31, 1998. . . .7

      The parties quarrel over the meaning of the phrase “such
transmissions.” SoundExchange seeks a rather less textual
interpretation, i.e., that “such transmissions” refers to more than
the language that precedes it (generic “noninteractive audio-only
subscription digital audio transmissions”), and instead refers
specifically to the program a claimant was offering to the public
at the relevant time. Muzak, by contrast, argues that “such
transmissions” refers to the general category of transmissions
identified in the preceding part of the definition: noninteractive
audio-only subscription digital audio transmissions made by an
entity that was in existence and making that category of
transmissions on or before July 31, 1998.

     Muzak’s reading of “such transmissions” is the more
persuasive. Cf. Middle S. Energy, Inc.v. FERC, 747 F.2d 763,
768 (D.C. Cir. 1984). But we do not think the crucial phrase is
“such transmissions.” Rather, it is the term “service,” which is
also disputed. Does “service” refer only to the business entity,
or does it also include the original program offerings? Put

    7
        17 U.S.C. § 114(j)(11).
                                   7

differently, does the grandfather rate inhere in the business or
the product? Here, we are faced with persistent confusion.

      Unfortunately, the statute is quite unclear. It uses the word
“service” in both senses. Some sentences only make sense if
“service” means business entity. For example, one provision
allows, in some circumstances, that “services . . . submit to the
Copyright Royalty Judges licenses. . . .”8 There, the “service”
must be an entity capable of submitting a license to the Judges;
it makes no sense to talk of a program offering such as DishCD
“submitting” something to anyone. But then in other parts of
the same statute, “service” most logically refers to a program
offering. In the provision immediately preceding the main
disputed language that defines “preexisting satellite digital audio
radio service,” Congress said that term refers to a “service” that
is, among other things, “provided pursuant to a . . . license
issued by the Federal Communications Commission. . . .”9 So
“service” there must indicate a program offering because an
entity would not be “provided pursuant to a . . . license.”
(emphasis added). Perhaps strangest of all, the statute permits
any “preexisting subscription service” to file a petition for an
off-cycle rate-making if a “new type of . . . service” becomes
operational.10 That is to say, a “service” can file a rate-making
petition if it will provide a new “type of service,” which is, of
course, circular.

    8
        Id. § 114(f)(1)(A).
    9
        Id. § 114(j)(10).
    10
         Id. § 114(f)(1)(C) (emphasis added).
                                  8

      The legislative history is no more pellucid; it, too, uses
“service” both ways. For example, when the report discusses
the meaning of preexisting subscription service, it provides an
illustration: “[I]f a cable subscription music service making
transmissions on July 31, 1998, were to offer the same music
service through the Internet, then such Internet service would be
considered part of a preexisting subscription service.” H.R.
Rep. No. 105-796, at 89 (1998), reprinted in 1998 U.S.C.C.A.N.
639, 664. That explanation uses “service” to describe the entity
making the transmissions (cable service) and the transmissions
themselves (the “offered” service), in other words, a “service”
offering a “service.”11

     11
         Our concurring colleague would make more use of the
legislative history when resolving this case. But for each point in the
conference report supporting SoundExchange, there can be found a
countervailing one in support of Muzak. And many of the report’s
observations are susceptible of multiple interpretations – as evidenced
by the pages the parties (and the concurrence) devote to disputing the
significance of individual phrases in that report. During the 2006
Copyright Office proceedings, SoundExchange itself discouraged
over-reliance on the “imprecise language of the legislative history,”
which is “clearly inconsistent with the statute itself.”

      Take the phrase in the report most relied on by the concurrence:
“There [are] only three [preexisting subscription services] that exist:
DMX (operated by TCI Music), Music Choice (operated by Digital
Cable Radio Associates), and the DiSH Network (operated by
Muzak).” The concurrence finds this phrase illuminating, pointing out
that “the Report’s sole reference to ‘Muzak’ is in its connection with
DiSH.” Concur. Op. at 4. But that is incorrect. The Report
confusingly refers to “the DiSH Network (operated by Muzak)”, even
                                 9

     As if this was not puzzling enough, it turns out that the
Register has issued a relevant opinion, which only adds to the
confusion. Although it is the Royalty Board that sets rates every
five years, the statute provides that “[i]n any case in which a
novel material question of substantive law concerning an
interpretation of those provisions of this title that are the subject
of the proceeding is presented, the Copyright Royalty judges
shall request a decision of the Register of Copyrights . . . to
resolve such novel question.” Moreover, the Register “may
review,” on her own motion, any legal error contained in a final
determination of the Copyright Royalty Judges and can correct
the error in the proceeding. It is to be binding precedent. And
a determination of the Copyright Royalty Judges, which
includes any legal determination the Register made as part of the
proceeding, may be appealed directly to our court, the U.S.
Court of Appeals for the D.C. Circuit, by any aggrieved
participant in the proceeding.12

     As it happened, in 2006 the Register was asked by the
Board for, and did deliver, an opinion that affects our case
because it dealt with the scope of the grandfather clause. See
Designation as a Preexisting Subscription Service, 71 Fed. Reg.
64,639 (Nov. 3, 2006). At the time, Sirius Satellite Radio, a
satellite digital audio radio business, claimed that some of its

though the DiSH Network was an entirely separate satellite television
network not “operated by Muzak.”
    12
        17 U.S.C. § 802(f)(1)(B)(i) (referral to Register); id. §
802(f)(1)(D) (Register review); id. § 803(d)(1) (judicial review).
                               10

transmissions were eligible for the grandfather rate –
transmissions that were made over the Dish Network to Dish
Network subscribers (recall that the Dish Network, a satellite
television network, was identified in the conference report as the
satellite network over which Muzak was providing its content at
the time the statute was passed). In short, Sirius asserted the
grandfather status attached to the network, not the curator.

     Although there is no record as to how the Board sought the
Register’s view, we are told by the government that the issue
arose because the Board asked the Register whether Sirius could
participate in the rate-making proceeding. The question put to
the Board was:

         Is the universe of preexisting subscription services –
         defined in [the preexisting subscription services
         provision] – [limited by] law to only Muzak (provided
         over the DiSH Network), Music Choice, and DMX?

Id. at 64,640. The Register in turn characterized the question as
“a controversy over whether the term [“preexisting subscription
service”] applied to the use of the sound recording, or the
business entity that operated under the § 114 statutory license.”
Id. at 64,647.

      The Register did not have an easy time of it. She
recognized, as do we, that the word “service,” as used both in
the statute as well as the legislative history, sometimes referred
to the business entity and sometimes the program offerings. Id.
at 64,646. Nevertheless, she rejected Sirius’s claim, determining
that only three business entities – Muzak, Music Choice, and the
old DMX – were expressly designated in the conference report
                               11

as the companies entitled to pay the grandfather rate. Muzak
insists she therefore determined that it was the business entity
that was entitled to grandfather status. Yet, as Muzak concedes,
the Register’s opinion doesn’t foreclose SoundExchange’s
position. Her opinion did not address whether those three
business entities’ grandfather status was further limited to the
programs they were offering at the time the statute was passed.

      As we examined the Register’s opinion, it occurred to us to
wonder why our case was not before the Register. Indeed, since
Royalty Board decisions are appealed to our court, did the
district court even have jurisdiction?           We asked for
supplemental briefs, including from the Justice Department, and
were persuaded that, under this unusual statute, the legal issues
that go to the Register do so only as part of the every-five-year
rate “proceeding,” and only then can be appealed to our court.
As we explained, the 2006 Register opinion was issued only
because the Board asked whether Sirius could participate in the
rate proceeding, whereas our case is divorced from a rate
proceeding. Of course, since we have held that a Register’s
opinion is entitled to deference under Chevron, see Cablevision
Sys. Dev. Co. v. Motion Picture Ass’n of Am., 836 F.2d 599, 609
(D.C. Cir. 1988), it is conceivable that should this exact issue
come up during a rate proceeding, the Register might
legitimately differ with us, cf. Nat’l Cable & Telecomms. Ass’n
v. Brand X Internet Servs., 545 U.S. 967 (2005).

     In any event, although the Register did not decide our issue,
she did emphasize that the grandfather clause should be
interpreted narrowly. See 71 Fed. Reg. at 64,645. We should
respect her guide to interpretation. The district judge analyzed
Muzak’s acquisition of DMX as analogous to Muzak simply
                                12

acquiring more customers through Dish Network’s expansion
customer by customer. 167 F. Supp. 3d at 151. But we do not
think that is a fair comparison. Indeed, Mood-Muzak’s
acquisition of DMX, if allowed to expand Muzak’s grandfather
eligibility to “services” other than DishCD, threatens the very
purpose of the Act. After all, it was designed to move the
industry to market rates. If Mood-Muzak were permitted to pay
the grandfather rate for transmissions made to customers who
subscribed to a “service” that was previously provided by DMX,
what would prevent – assuming no anti-trust barriers – the
complete elimination of the market-rate regime by Mood-
Muzak’s acquisitions strategy.

     The grandfather provisions were intended to protect prior
investments the three business entities had made during a more
favorable pre-1998 rate-setting regulatory climate. “Muzak was
[a] pioneer music service that incurred both the benefits and
risks that came with its investment,” specifically its investment
in DishCD. 71 Fed. Reg. at 64,646. But when Muzak expands
its operations and provides additional transmissions to
subscribers to a different “service,” (i.e., SonicTap), this is an
entirely new investment.

                              ***

      We conclude, therefore, that the better interpretation of the
statute is that the term “service” contemplates a double
limitation; both the business and the program offering must
qualify before the transmissions are eligible for the favorable
rate.
                                                      So ordered.
    ROGERS, Circuit Judge, concurring: The court describes the
context in which the parties differ on when rates under a
grandfather clause in the Digital Millennium Copyright Act of
1998 (“DMCA”), Pub. L. No. 105-304, 116 Stat. 2860, are
available. I write separately to expand on the reasons for my
concurrence.

    As a general rule, grandfather clauses that operate in
derogation of a statute’s dominant purpose should be narrowly
construed. Patagonia Corp. v. Bd. of Governors, 517 F.2d 803,
811 (9th Cir. 1975). The DMCA defines a “preexisting
subscription service” (“PSS”) as

         a service that performs sound recordings by means of
         noninteractive audio-only subscription digital audio
         transmissions, which was in existence and was making
         such transmissions to the public for a fee on or before
         July 31, 1998, and may include a limited number of
         sample channels representative of the subscription
         service that are made available on a nonsubscription
         basis in order to promote the subscription service.

17 U.S.C. § 114(j)(11).             The parties offer differing
interpretations of the phrase “such transmissions” and the word
“service.” Although the court does not view the former as “the
crucial phrase,” Op. at 6, it considers the word “service” to
present “persistent confusion,” id. at 7. Does it refer only to the
business entity or also to the entity’s original program offerings?
Congress uses words to have their ordinary meaning, absent a
contrary indication, see Engine Manufacturers Ass’n v. South
Coast Air Quality Management District, 541 U.S. 246, 252
(2004), and there is none here; the word “service” can mean
both an entity (such as a branch of the armed services) and the
activity performed by that entity. E.g., RANDOM HOUSE
WEBSTER’S COLLEGE DICTIONARY 1199 (2d ed. 1999) (“the
supplying or supplier of utilities . . . that meet a public need”)
(emphasis added).
                                2

     Where there are two plausible interpretations of the
statutory text, the court has turned to the legislative history to
discover congressional intent. See Am. Bankers Ass’n v. Nat’l
Credit Union Admin., 271 F.3d 262, 271 (D.C. Cir. 2001).
Indeed, the court has done so even when the text is superficially
clear. See Sierra Club v. EPA, 353 F.3d 976, 988 (D.C. Cir.
2004). Today the court is quick to dismiss that history as “no
more pellucid” than the statutory text merely because it too uses
the term “service” both ways. Op. at 8. But this ignores clear
evidence of congressional intent: the conferees gave careful
consideration to the intended extent of PSS eligibility for
grandfather rates, and their analysis resolves the debate over the
meaning of the grandfather clause in favor of SoundExchange.

     The Conference Report of the House and Senate conferees
confirms that Muzak’s non-Dish offerings are ineligible for PSS
rates. The Report states that “[t]he purpose of distinguishing
preexisting subscription services making transmissions in the
same medium as on July 31, 1998, was to prevent disruption of
the existing operations by such services,” and that “[t]here [are]
only three such services that exist: DMX (operated by TCI
Music), Music Choice (operated by Digital Cable Radio
Associates), and the DiSH Network (operated by Muzak).” H.R.
Conf. Rep. 105–796, at 80–81 (1998), reprinted in 1998
U.S.C.C.A.N. 639, 656–57. The Report paraphrased the
statutory definition, stating that a PSS “is a noninteractive
subscription service that was in existence and was making
transmissions to the public on or before July 31, 1998, and
which is making transmissions similar in character to such
transmissions made on or before July 31, 1998.” Id. at 89,
reprinted in 1998 U.S.C.C.A.N. at 665 (emphasis added). The
Report proceeded to illustrate the extent of a PSS’s offerings
that would be eligible for the grandfather rates, explaining the
grandfather clause covered two circumstances only: “In
grandfathering these services [i.e., the three PSSs], the
                                3

conferee’s objective was to limit the grandfather [1] to their
existing services in the same transmission medium and [2] to
any new services in a new transmission medium where only
transmissions similar to their existing service are provided.” Id.
The Report gave examples of the relevant program offerings:
“[I]f a cable subscription music service making transmissions on
July 31, 1998, were to offer the same music service through the
Internet, then such Internet service would be considered part of
a preexisting subscription service.” Id. (emphasis added). But
if “a subscription service making transmissions on July 31,
1998, were to offer a new service either in the same or new
transmission medium . . . , such new service would not quality
as a preexisting subscription service.” Id. (emphasis added).

     The Report thus makes clear that when Congress acted in
1998 there were only three PSS entities (i.e., Muzak, TCI Music,
and Digital Cable Radio Associates) and that eligibility for
grandfather rates did not extend to altogether new program
offerings made by those entities. The Report also makes clear
that identifying grandfathered program offerings requires more
than consideration of whether an entity’s present transmissions
are “noninteractive audio-only subscription digital audio
transmissions,” but see Appellee Br. 16–17 (quoting 17 U.S.C.
§ 114(j)(11)), because the grandfathered program offerings are
limited to those that the entity “made on or before July 31,
1998.” H.R. Conf. Rep. 105–796, at 89. The Report’s use of
the phrase “their existing services” necessarily required a
comparison to the specific services the entity was offering
before July 31, 1998, id., not simply comparison with
“noninteractive audio-only subscription digital audio
transmissions” in the abstract. 17 U.S.C. § 114(j)(11). And the
examples given show that the entity “must ‘offer the same music
service’ as it was offering over cable” in order for that service
to be eligible for the grandfather rate. Appellant Reply Br. 13
(quoting H.R. Conf. Rep. 105–796, at 89). The 2006 decision
                                4

of the Register of Copyrights underscores that PSS eligibility
requires not only that the entity (i.e., the “PSS service”) be the
same as in 1998, but that the music offering (the programmatic
“service”) be the same. See Designation as a Preexisting
Subscription Service, 71 Fed. Reg. 64,639, 64,646 (Nov. 3,
2006). It is undisputed that Muzak began offering SonicTap in
May 2014, and thus the SonicTap offering does not qualify for
the grandfather rate.

     In sum, the Conference Report shows how the multiple
meanings of the word “service” are to apply to the statutory
definition and thereby demonstrates that Muzak’s non-DiSH
offerings were not entitled to the grandfather rates. Although
the Report is imprecise in any suggestion that entities other than
Muzak might be able to pay grandfather rates for transmission
over DiSH, see 71 Fed. Reg. at 64,645–46, that imprecision does
not mean Muzak is entitled to pay PSS rates for its non-DiSH
offerings because the Report’s sole reference to “Muzak” is in
its connection with DiSH. Appellant Reply Br. 1–2. My
colleagues insist that this is “incorrect” simply because the
Report refers to “DiSH Network” rather than to its music
offering “DishCD,” Op. at 8 n.11, without calling into question
the more fundamental point: no matter how the Report refers to
DiSH, “nowhere did the Report [refer to] Muzak qua Muzak as
the relevant PSS.” Appellant Br. 27. Nor do my colleagues
offer any support for their claim that “for every point in the
conference report supporting SoundExchange, there can be
found a countervailing one in support of Muzak,” Op. at 8 n.11,
particularly as regards the passages discussed herein showing
Congress’s intent to impose on PSSs a double limitation (same
entity and same program offering).

    Especially in light of the conferees’ explanation of the
grandfather clause, then, I concur in reversing the dismissal of
SoundExchange’s complaint.